20
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 1996
Commission File #1-7090
PHARMHOUSE CORP.
(Exact name of registrant as specified in its charter)
New York 13-2634868
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
860 Broadway, New York, New York 10003
(Address of principal executive offices) (Zip
Code)
Registrants telephone number, including area code (212) 477-
9400
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 Section 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
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock as of the latest
practicable date.
Outstanding as of
Class December 1, 1996
- --------------------------- ---------------------
Common Shares,$.01 par value 2,332,069
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
November 2, February 3,
1996 1996
----------- -----------
ASSETS
------
<S> <C> <C>
Current assets:
Cash $ 3,334 $ 2,884
Accounts receivable, net of allowances of
$1,064 and $652, respectively 6,928 5,837
Merchandise inventory 59,350 53,778
Prepaid expenses and other 2,075 1,650
-------- --------
Total current assets $ 71,687 $ 64,149
Property, fixtures and equipment, net 5,795 5,733
Video inventory held for rental, net 2,209 2,123
Other assets 894 1,205
-------- --------
Total assets $ 80,585 $ 73,210
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 15,585 $ 12,510
Accounts payable 30,600 22,149
Accrued expenses and other 5,265 4,749
-------- --------
Total current liabilities 51,450 39,408
Long-term debt, net of current portion 25,500 25,950
Other liabilities 613 1 028
-------- --------
Total liabilities 77,563 66,386
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.10 par; authorized and
unissued 2,500,000 shares
Common stock, $.01 par; authorized
25,000,000 shares; issued 2,311,670 and
2,245,715 shares, respectively 22 22
Additional paid-in capital 21,395 21,305
Accumulated deficit (18,394) (14,502)
-------- --------
3,023 6,825
Treasury stock, at cost 1 1
-------- --------
Total shareholders' equity 3,022 6,824
-------- --------
Total liabilities and shareholdlers' equity $ 80,585 $ 73,210
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- ------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Net store sales $ 163,563 $ 134,682 $ 54,875 $ 57,812
Video rental, service
and other income 5,655 4,486 1,882 1,964
--------- --------- --------- ---------
169,218 139,168 56,757 59,776
--------- --------- --------- ---------
Costs and expenses:
Cost of merchandise and
services sold 128,449 107,362 43,742 45,896
Selling, general and
administrative 41,329 32,537 13,986 14,162
--------- --------- --------- ---------
169,778 139,899 57,728 60,058
--------- --------- --------- ---------
Loss from operations (560) (731) (971) (282)
Interest expense 3,332 2,513 1,119 1,002
--------- --------- --------- ----------
Loss before extraordinary
item $ (3,892) $ (3,244) $ (2,090) $ (1,284)
Extraordinary item - 618 - -
--------- --------- --------- ---------
Net loss $ (3,892) $ (2,626) $ (2,090) $ (1,284)
========= ========= ========= =========
Per common share:
Loss before extraordinary
item $ (1.73) $ (1.46) $ (0.91) $ (0.58)
Extraordinary item $ - $ 0.28 $ - $ -
--------- -------- -------- --------
Net loss per Common Share $ (1.73) $ (1.18) $ (0.91) $ (0.58)
======== ======== ======== ========
Average shares outstanding 2,251,603 2,233,084 2,289,288 2,233,090
</TABLE>
See accompanying Notes to Consolidated Financial Statements
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
November 2, October 28,
1996 1995
<S> <C> <C>
Cash Flows provided (used) by Operating Activities:
Net loss $ (3,892) $ (2,626)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 2,052 1,134
Decrease in deferred rent (20) (7)
Gain on early extinguishment of debt - (618)
Changes in operating assets and liabilities
exclusive of amounts arising from Acquisition:
(Increase) decrease in:
Accounts receivable, net (1,091) (2,194)
Merchandise inventory (5,572) (6,198)
Prepaid expenses and other (425) 79
Other assets 311 -
Increase (decrease) in:
Accounts payable 8,451 16,392
Accrued expenses and other liabilities 121 2,119
-------- -------
Net Cash Flows provided (used) by Operating
Activities (65) 8,081
-------- -------
Cash Flows used by Investing Activities:
Acquired business, net of store cash acquired - (37,734)
Purchase of property and equipment, net (888) (1,243)
Purchase of video inventory held for rental, net (1,312) (1,013)
-------- --------
Net Cash Flows used by Investing Activities (2,200) (39,990)
-------- --------
Cash Flows provided by Financing Activities:
Revolver borrowings, net 3,075 4,108
Borrowings to finance Acquisition - 41,560
Retirement of debt - (7,481)
Prepayment of Purchase Money Note - (4,118)
Paydown of Subordinated Loan (450) (150)
Proceeds from issuance of common stock
and exercise of stock options and warrants 90 -
-------- --------
Net Cash Flows provided by Financing Activities 2,715 33,919
-------- --------
Net increase in cash 450 2,010
Cash, beginning of period 2,884 1,313
-------- --------
Cash, end of period $ 3,334 $ 3,323
======== ========
Supplemental information:
Interest payments $ 2,483 $ 2,280
</TABLE>
See accompanying Notes to Consolidated Financial Statements
PHARMHOUSE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended November 2, 1996
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Pharmhouse
Corp. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements of the Company and the notes
thereto for the fiscal year ended February 3, 1996 ("Fiscal 1996") included
in the Company's Annual Report on Form 10-K heretofore filed with the
Securities and Exchange Commission. The results of operations reported upon
herein for the three month and nine month periods ended November 2, 1996
(representing the Fiscal 1997 third quarter and first nine months,
respectively) and the three month period ended October 28, 1995 (representing
the Fiscal 1996 third quarter) reflect revenues and expenses for the 24
"The Rx Place" deep discount drug stores (the "Rx Place Stores") acquired on
April 28, 1995 (the "Acquisition") from F.W. Woolworth Co., a subsidiary of
Woolworth Corporation (collectively, "Woolworth"), pursuant to the terms of
an Asset Purchase Agreement (as amended, the "Acquisition Agreement").
The results of operations reported upon herein for the nine month period
ended October 28, 1995 reflect revenues and expenses of the Rx Place Stores
for the two day period of April 28 - April 29, 1995 (representing the last
two days of the Fiscal 1996 first quarter) as well as for the entire Fiscal
1996 second quarter and third quarter.
Certain amounts in the Fiscal 1996 third quarter consolidated financial
statements have been reclassified to be consistent with the Fiscal 1997 third
quarter presentation.
NOTE 2 - ACQUISITION
On April 28, 1995, the Company acquired, and accounted for as a purchase,
the assets and business of 24 "The Rx Place" discount drug stores (the
"Rx Place Stores"). The total acquisition cost, net of store cash acquired,
amounted to approximately $39.5 million and consisted of the following items:
$23.5 million in cash; notes issued to Woolworth amounting to $12.5 million
with maturity dates ranging from January 1996 to April 1998 (the "Purchase
Money Notes"); $2.9 million for the related costs of acquisition (includes
cost of issuance of warrants, see Note 4) and $0.6 million in other
liabilities. In June 1995, the Company prepaid approximately $4.1 million
of the Purchase Money Note due in January 1996 at a discount and recorded
an extraordinary gain of $618,000. The Company has elected to withhold
payment of the remaining installments of principal and interest payable under
the Purchase Money Notes, pending resolution of the Company's claims against
Woolworth (See Note 6 - Woolworth Lawsuit; Pending Settlement).
The assets acquired by the Company from Woolworth consisted of merchandise
inventory and cash in the Rx Place Stores (and certain specified merchandise
inventory held in one of Woolworth's distribution centers) plus furniture,
fixtures and equipment, store supplies and related items. In connection with
the Acquisition, the Company assumed Woolworth's obligations under the leases
of the Rx Place Stores as well as certain other obligations of Woolworth
specified in the Acquisition Agreement. Pursuant to the Acquisition
Agreement, the Company did not assume Woolworth's obligations for trade
payables of the Rx Place Stores, subject to certain minor exceptions, and was
granted a three year non-exclusive license to use the registered service mark
"The Rx Place" in its operation of the Rx Place Stores.
The Acquisition was financed through (a) a senior secured revolving credit
facility (the "Senior Credit Facility") provided by a financial institution,
(b) a $3.0 million secured subordinated term loan (the "Subordinated Loan")
provided by an unaffiliated trade supplier which is evidenced and governed by a
Promissory Note and a Security Agreement (the "Subordinated Loan Agreements")
and (c) the Purchase Money Notes. The Senior Credit Facility is secured by a
first priority security interest in the Company's inventory, accounts
receivable and other assets, including a mortgage on the Company's owned
store premises located in Winchester, Virginia. All of the Company's
indebtedness to the trade supplier is secured by a second priority security
interest in the assets (not including real property) of the Company. Each of
the Senior Credit Facility and the Subordinated Loan has a term of three
years, subject to extension upon terms and conditions referred to in the
Senior Credit Facility Agreement and the Subordinated Loan Agreements,
respectively.
Pro Forma Information
The following unaudited pro forma summary information for the first nine
months of Fiscal 1996 has been prepared giving effect to the Acquisition and
the related financing as if the Acquisition and related financing had
occurred on the first day of Fiscal 1996. The unaudited pro forma results,
however, are not necessarily indicative of the actual results that may have
been obtained had the Acquisition and the related financing actually occurred
on the first day of Fiscal 1996 nor are they indicative of future operating
results of the Company.
Nine Months Ended
October 28, 1995
(000's omitted)
Revenues $183,367
Net loss $(15,553)*
Net loss per common share $ ( 6.96)
* Approximately 76% of the loss is directly attributable to the operation of
the Rx Place Stores during the period January 29, 1995 to April 28, 1995 as
reported by Woolworth.
THE FOREGOING UNAUDITED PRO FORMA SUMMARY INFORMATION REFLECTS THE RESULTS OF
OPERATIONS OF THE 24 RX PLACE STORES FOR THE PERIOD PRIOR TO THE ACQUISITION
BASED UPON FINANCIAL STATEMENTS PROVIDED TO THE COMPANY BY WOOLWORTH. THE
COMPANY HAS INSTITUTED LEGAL PROCEEDINGS AGAINST WOOLWORTH WHICH PERTAIN,
AMONG OTHER MATTERS, TO THE RESULTS OF OPERATIONS AND CERTAIN ASSETS OF THE
RX PLACE STORES ACQUIRED BY THE COMPANY FROM WOOLWORTH (SEE NOTE 6 -
WOOLWORTH LAWSUIT; PENDING SETTLEMENT).
NOTE 3 - BORROWINGS
A summary of the Company's borrowings at November 2, 1996 is as follows
(000's omitted):
Current Non-current
Total portion portion
-------- --------- --------
Senior Credit Facility $ 30,562 $ 6,562* $ 24,000
Subordinated Loan 2,100 600 1,500
Purchase Money Notes-Woolworth 8,422** 8,422
-------- -------- --------
$ 41,084 $ 15,584 $ 25,500
======== ======== ========
* This amount is classified as "current" for financial reporting purposes and
is subject to the same terms and conditions as the portion which is
classified as "non-current".
** In January 1996, the Company instituted legal proceedings against
Woolworth asserting several causes of action arising out of the Acquisition.
Pending resolution or settlement of such legal proceedings, the Company is
withholding payment of all remaining installments of principal and interest
arising under the Purchase Money Notes. As a result of management's decision
to withhold all remaining installments of principal and interest to
Woolworth, the Purchase Money Notes have been classified as current
liabilities in these financial statements. (For further information, see
Note 6 - Woolworth Lawsuit; Pending Settlement.)
Senior Credit Facility
The borrowing availability under the Senior Credit Facility is based on the
lesser of 60% of eligible inventory (at cost) or $45.0 million, requires that
the Company satisfy minimum net worth levels and restricts the Company from
paying cash dividends. The three year term of the agreement expires in April
1998 and provides for borrowing rates at prime plus 1.5% or LIBOR plus 3.5%
and facility fees.
During the Fiscal 1997 third quarter, the Company's net worth fell below the
required minimum level established under the Senior Credit Facility. By
amendment to the Senior Credit Facility, the Company's senior secured lender
has, for a fee, waived the Company's non-compliance with the prior minimum
net worth requirement for the period prior to February 1, 1997 and has agreed
to a new minimum adjusted net worth requirement of $3.0 million. In
determining the Company's future compliance with that new adjusted net worth
minimum requirement, however, any non-cash gains (or losses) resulting from
the cancellation or forgiveness of the indebtedness owing by the Company to
Woolworth evidenced by the Purchase Money Notes (which is contemplated by the
settlement agreed upon in principle by the Company and Woolworth and reported
upon elsewhere in this Report) will be excluded.
Subordinated Loan
The Subordinated Loan payable to an unaffiliated supplier, originally in the
amount of $3.0 million, is being repaid in monthly installments of $50,000
with a $1.2 million balloon payment due in April 1998. The loan has a
borrowing rate of prime plus 3% and a commitment fee.
Under the terms of the agreements governing the Senior Credit Facility and
the Subordinated Loan, the lenders thereunder have been granted security
interests in substantially all of the Company's assets.
NOTE 4 - WARRANTS
In Fiscal 1996, in connection with the Acquisition, the Company issued
warrants to Brenner Securities Corporation ("Brenner"), the Company's
investment banking firm in such transaction, to purchase 85,867 of the
Company's Common Shares (such amount being equal to 3% of the Company's then
issued and outstanding shares, including Common Share equivalents), subject
to certain anti-dilution protection, for a per share exercise price of $0.94.
The difference between the fair market value of the Company's Common Shares
on the date of grant and the exercise price was included in the acquisition
cost of the Rx Place Stores. On behalf of Brenner, the Company filed a
registration statement under the Securities Act of 1933 covering all such
warrants and the Common Shares issuable upon exercise thereof. As of
December 1, 1996, all of such warrants were exercised by Brenner and the
underlying Common Shares sold pursuant to such Registration Statement.
In December 1991, the Company issued warrants to its then secured lender to
purchase 209,195 of its Common Shares at varying exercise prices ranging from
$.19 to $1.91. These warrants were still outstanding as at December 1, 1996.
A major portion of such warrants expire on December 31, 1997 and the balance
expire on December 31, 1998.
NOTE 5 - LOSS PER COMMON SHARE
Loss per Common Share for each period presented is based on the weighted
average number of Common Shares outstanding during the respective periods.
Common Shares issuable with respect to outstanding warrants and stock options
were not included in the computations since the inclusion of such shares
would be anti-dilutive.
NOTE 6 - WOOLWORTH LAWSUIT; PENDING SETTLEMENT
In January 1996, the Company instituted legal proceedings against Woolworth
in the Supreme Court of the State of New York seeking, among other relief,
damages and indemnification arising out of Woolworth's alleged fraud and
breach of certain covenants, representations and warranties made by Woolworth
in connection with the Acquisition.
Pending resolution of the Company's claims in the above-described action, the
Company has withheld payment of all further installments of principal and
interest arising under the Purchase Money Notes. The Company's senior
secured and subordinated secured lenders have consented to the withholding by
the Company of payment of the installments of principal and interest under
the Purchase Money Note due in January 1996 and granted waivers of the
relevant cross-default provisions of the agreements evidencing the Company's
indebtedness to such lenders which are effective through February 1, 1997.
For further information concerning the Company's claims and the current
status of the proceedings, reference is made to Note 6 to the financial
statements included in the Company's Form 10-Q Report for the fiscal quarter
ended August 3, 1996.
As of the date of this Report, the Company and Woolworth have agreed in
principle to settle the pending litigation previously initiated by the
Company in connection with its purchase of 24 Rx Place stores from Woolworth
in April 1995. Although a settlement agreement has not been finalized as of
this date, the major aspects of the settlement include Woolworth's
forgiveness of indebtedness (including $8.4 million in Purchase Money Notes
arising out of the April 1995 acquisition of 24 Rx Place stores) and the
return of certain underperforming stores to Woolworth during the early part
of Fiscal 1998. Although the terms of settlement with Woolworth remain to be
finalized and documented and there can be no assurance that the settlement
will ultimately be consummated, management of Pharmhouse Corp. is optimistic
that this settlement will be accomplished during the Company's Fiscal 1997
fourth quarter.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
General
Pharmhouse Corp. (the "Company" ) currently operates a chain of 38 deep
discount drug stores, 14 of which are operated under the name Pharmhouse (the
"Pharmhouse Stores") and 24 of which are operated under the name The Rx Place
(the "Rx Place Stores").
Based upon the terms of the agreement in principle with Woolworth to settle
certain pending litigation arising out of the Acquisition and assuming the
settlement is consummated in the immediate future, as to which there can be
no assurance, the Company will return certain under-performing Rx Place
stores to Woolworth during the early part of Fiscal 1998.
The Company's stores are located primarily in the mid-Atlantic and New
England states and emphasize a pricing policy of everyday deep discount
prices on all merchandise which includes health and beauty care products,
cosmetics, prescription drugs, stationery, housewares, pet supplies, greeting
cards, food, snacks, beverages and other merchandise, including seasonal
products. The Pharmhouse Stores are approximately 35,000 square feet in size
and the Rx Place Stores are approximately 25,000 square feet.
During February 1996, the Company moved its distribution operation to a
100,000 square foot cross-docking distribution facility, located in
Pottstown, Pennsylvania, which has certain advantages compared to the prior
facility. First, the new facility is geographically closer to a greater
number of the Company's stores and, as a result, management anticipates a
substantial savings in freight costs. Second, freight can be processed more
quickly and shipped to stores within 48 to 72 hours of receipt due to the
larger size and more efficient layout compared to the previous facility.
Management has also set up break-pack capability in the distribution facility
which permits the Company to distribute smaller quantities of merchandise to
its stores for certain slower moving merchandise categories.
During November 1996, the Company substantially completed the relocation of
its invoice processing function from its administrative headquarters located
in New York City to the new distribution facility. This relocation began in
August 1996.
During September 1996, the Company instituted a new procedure for returning
merchandise to vendors. Under the new procedure, damaged and expired goods
are accumulated at a central reclamation center and then returned to vendors
or disposed of, in accordance with instructions received from vendors.
Management believes that this will result in a more timely return of
merchandise to vendors, a reduction of handling costs at the store level and
reduced paperwork.
Results of Operations
The following table sets forth, as a percentage of revenues, certain items
appearing in the Company's Consolidated Statements of Operations for the nine
month and three month periods ended November 2, 1996 and for the nine month
and three month periods ended October 28, 1995, respectively:
Nine months ended Three months ended
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of
merchandise and
services sold 75.9 77.2 77.0 76.8
---- ---- ---- ----
Gross profit 24.1 22.8 23.0 23.2
Selling, general
and administrative
expense 24.4 23.3 24.6 23.7
---- ---- ---- ----
Loss from
operations (0.3) (0.5) (1.6) (0.5)
Interest expense 2.0 1.8 2.0 1.7
---- ---- ---- ----
Loss before
extraordinary
item (2.3) (2.3) (3.6) (2.2)
Extraordinary item - 0.4 - -
---- ---- ---- ----
Net loss (2.3%) (1.9%) (3.6%) (2.2%)
====== ====== ====== ======
THIRD QUARTER OF FISCAL 1997 VS. THIRD QUARTER OF FISCAL 1996
Revenues
During the Fiscal 1997 third quarter, revenues (including video rental,
service and other income) were $56.8 million compared with $59.8 million
during the third quarter of Fiscal 1996, a decrease of $3.0 million, or 5.0%.
The lower revenues resulted primarily from the disappointing performance of
the Rx Place Stores. Same-store revenue during the Fiscal 1997 third quarter
decreased 0.2% for the Pharmhouse Stores and 7.5% for the Rx Place Stores.
Excluding one Pharmhouse store which has been negatively affected by new
competition since November 1995, same-store revenues for the other 13
Pharmhouse stores increased 1.4% during the Fiscal 1997 third quarter
compared with the corresponding quarter in the prior year.
Same-store revenues for the Pharmhouse Stores have improved during each
successive quarter during Fiscal 1997 compared to the corresponding periods
in the prior fiscal year as follows: a decrease of 4.2% during Fiscal 1996;
a decrease of 2.9% during the Fiscal 1997 first quarter; a decrease of 1.6%
during the Fiscal 1997 second quarter; and a decrease of 0.2% during the
Fiscal 1997 third quarter. Management believes that the continuing
improvement has resulted from several factors including better in-stock
position and the continuing installation of new merchandise modules including
plan-o-grams and automatic replenishment systems.
Gross Profit
The Fiscal 1997 third quarter gross profit (total revenues less costs of
merchandise and services sold and freight/distribution costs) was $13.0
million compared to $13.9 million in the prior year, a decrease of $0.9
million, or 6.2%. The decrease in the current quarter is primarily
attributable to lower revenues compared to the prior year's third quarter.
Although the Company's Fiscal 1997 comparative third quarter gross profit
percentage decreased slightly from the corresponding quarter in the prior
year (23.0% versus 23.2%), the Fiscal 1997 third quarter gross profit
percentage was substantially below the 24.7% result achieved during the first
six months of Fiscal 1997. The shortfall in the Company's Fiscal 1997 third
quarter gross profit percentage compared with the first six months of Fiscal
1997 resulted from additional markdowns taken during the third quarter which
were related to the final sale of Rx Place merchandise originally purchased
from Woolworth (which was substantially completed during the third quarter).
In addition, higher than normal markdowns for summer merchandise were taken
during the Fiscal 1997 third quarter because of unseasonably cool summer
weather.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense was approximately $14.0
million for the Fiscal 1997 third quarter compared to $14.2 million in the
prior year's third quarter, a decrease of approximately $0.2 million, or
1.2%. A decrease in store expenses of $803,000 (consisting primarily of a
$343,000 reduction in store payroll and a $539,000 net reduction in
advertising expense (resulting from a significant increase in coop
advertising allowances) was substantially offset by the following items:
$153,000 of increased occupancy costs related to certain Rx Place stores
(approximately 60% of the increased occupancy costs relate to the Closing
Stores); $225,000 of increased costs to operate the new distribution facility
(partially attributable to this facility performing additional functions such
as operating a break-pack department); increased general and administrative
salaries of $194,000 (primarily for two additional senior level executives
hired during the Fiscal 1996 fourth quarter in connection with the
Acquisition and additional accounts payable staff hired in connection with the
relocation of the Company's invoice processing department to the distribution
facility); and, a $111,000 gain from the sale of fully depreciated store
fixtures and equipment which was included in the prior year's third quarter
SG&A expense. As previously noted, store payroll decreased $343,000,
or 5.9%, during the Fiscal 1997 third quarter compared with the prior fiscal
year's third quarter. Additional store payroll reductions were phased-in
during the latter part of the Fiscal 1997 third quarter. As a percentage of
revenues, SG&A expense was 24.4% for the current quarter compared with 23.3%
for the Fiscal 1996 third quarter. The percentage increase in SG&A expense
during the current quarter is primarily attributable to lower revenues.
Operating Loss
The Company's Fiscal 1997 third quarter operating loss was $971,000 compared
with an operating loss of $282,000 for the comparable quarter in Fiscal 1996.
The increase in the operating loss is attributable to poor same-store
revenue generated by the Rx Place stores and to a lower gross profit percentage
resulting from higher than normal markdowns. As previously noted, a
significant portion of the additional markdowns resulted from the final sale
of Rx Place merchandise originally purchased from Woolworth as well as from
markdowns taken throughout the 38 store chain in order to sell the remaining
summer merchandise.
Interest Expense
Interest expense during the Fiscal 1997 third quarter was $1.1 million
compared with $1.0 million during the comparable quarter of Fiscal 1996.
The increase in the current quarter reflects higher average outstanding
borrowings compared to the corresponding quarter in the prior year and
interest on the Purchase Money Notes which has been accrued at default rates
since the date of the commencement of the lawsuit against Woolworth (See
Note 6 - Woolworth Lawsuit; Pending Settlement).
Provision for Income Taxes
Although the Company is not subject to federal income taxes due to the loss
incurred in the third quarter of Fiscal 1997 (the Company also has
significant net operating loss carry-forwards attributable to prior fiscal
years), in certain states the Company is subject to state and local taxes
which are computed on a basis other than income (e.g., capital stock, etc.).
Such state and local taxes are not material and are included in SG&A expense.
FIRST NINE MONTHS OF FISCAL 1997 VS. NINE MONTHS OF FISCAL 1996
Revenues
During the first nine months of Fiscal 1997, revenues (including video
rental, service and other income) were $169.2 million compared with revenues
of $139.2 million for the first nine months of the prior year, an increase of
$30.0 million, or 21.6%. The revenue growth is attributable to the Company's
operation of 24 additional stores throughout the Fiscal 1997 first quarter
compared to the corresponding quarter in the prior year (the Company operated
the Rx Place Stores for only two days during the Fiscal 1996 first quarter,
having acquired such stores on April 28, 1995). On a same-store basis
(consisting of the Pharmhouse Stores), revenues decreased $982,000, or 1.6%,
during the first nine months of the Fiscal 1997 compared with the first nine
months of Fiscal 1996. Excluding one Pharmhouse store which has been
negatively affected by new competition since November 1995, same-store
revenues for the other 13 Pharmhouse stores increased 0.1% during the first
nine months of Fiscal 1997 compared with the first nine months of Fiscal 1996.
Gross Profit
The Company's gross profit (total revenues less costs of merchandise and
services sold and freight/distribution costs) for the first nine months of
Fiscal 1997 was $40.8 million, or 24.1% of revenues, compared with $31.8
million, or 22.8% of revenues, for the first nine months of the prior year,
an increase of $9.0 million. The increase in gross profit resulted from a
higher gross profit percentage achieved during the first nine months of
Fiscal 1997 compared with the first nine months of Fiscal 1996 (24.1%
versus 22.8%) and from the operation of 24 additional stores during the
Fiscal 1997 first quarter compared to the corresponding quarter in the prior
year. (The Company operated the Rx Place Stores for only two days during the
Fiscal 1996 first quarter, having acquired such stores on April 28, 1995).
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expense in the first nine months
of Fiscal 1997 was $41.3 million, or 24.4% or revenues, compared to
$32.5 million, or 23.3% of revenues, during the prior year comparable period,
an increase of $8.8 million, or 27.1%. The increase in SG&A expense is
attributable to the Company's operation of 24 additional stores during the
Fiscal 1997 first quarter compared to the prior year's first quarter. (The
Company operated the Rx Place Stores for only two days during the Fiscal 1996
first quarter, having acquired such stores on April 28, 1995). The increase
in SG&A expense as a percentage of revenue is attributable to lower revenues
generated during the Company's Fiscal 1997 second and third quarters,
compared with the corresponding quarters in the prior year.
Operating Loss
The Company's operating loss during the first nine months of Fiscal 1997 was
$171,000 less than that incurred during the first nine months of Fiscal 1996.
The improvement is attributable to increased gross profit of $9.0 million
(primarily from increased revenues generated from operating a greater number
of stores and improved gross profit percentage for the entire chain) offset by
increased SG&A expense of approximately $8.8 million (which resulted from
operating a greater number of stores).
Interest Expense
Interest expense during the first nine months of Fiscal 1997 was $3.3 million
compared with $2.5 million during the first nine months of Fiscal 1996. The
increase is attributable to the following: higher levels of borrowing under
the credit facility based upon increased working capital requirements for 24
additional stores during the first nine months of Fiscal 1997 versus the
first nine months of Fiscal 1996 (the Company operated the Rx Place Stores
for only two days during the Fiscal 1996 first quarter, having acquired such
stores on April 28, 1995); substantially increased borrowings incurred in
connection with the acquisition of the Rx Place Stores; and to interest on
the Purchase Money Notes which has been accrued at default rates since the
date of the commencement of the lawsuit against Woolworth in January 1996
(See Note 6 - Woolworth Lawsuit; Pending Settlement).
Net Loss
For the first nine months of Fiscal 1997, the Company reported a net loss
of $3.9 million, or $1.73 per share, compared with a net loss of
$2.6 million, or $1.18 per share, for the first nine months of Fiscal 1996.
The net loss for the first nine months of Fiscal 1996 reflected an
extraordinary gain of $0.6 million from the early retirement of a portion of
the Woolworth debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
During the first nine months of Fiscal 1997, the Company's operating
activities used cash of $65,000. An increase in accounts payable of
$8.5 million and depreciation and amortization charges of $2.1 million were
offset by increased investment in merchandise inventory of $5.6 million (the
Company's inventory peaks during the October/November period in
anticipation of the holiday selling season), increased investment in
accounts receivable of $1.1 million (attributable to the continuing increase
in the proportion of pharmacy revenues generated by insurance plans) and the
funding of the $3.9 million net loss.
Investing Activities
During the first nine months of Fiscal 1997, capital expenditures amounted to
approximately $2.2 million, consisting of $1.3 million for the purchase of
video inventory held for rental and $0.9 million for property and equipment
(consisting primarily of enhancements to store level receiving and support
systems and fixtures for the Rx Place Stores). During the first quarter of
Fiscal 1997, a temporary hold for substantially all major capital
improvements was instituted until such time as the Company achieves
profitability.
Financing Activities
Net borrowings under the Company's Senior Credit Facility increased
approximately $3.1 million during the Fiscal 1997 third quarter. As of
November 2, 1996, outstanding borrowings under the Senior Credit Facility
were approximately $30.6 million.
Summary of Borrowings
In late April 1995, the Company entered into the Senior Credit Facility which
provides for borrowing availability equal to the lower of sixty percent (60%)
of eligible inventory (at cost) or $45.0 million at borrowing rates of prime
plus 1.5% or LIBOR plus 3.5% and facility fees. The initial borrowings under
the Senior Credit Facility were used to finance a portion of the Acquisition,
as previously described, to repay in full the indebtedness of the Company
under its then existing senior and subordinated secured loans in the amount
of approximately $7.5 million and to provide working capital to the Company
for the operation of its 38 stores. The indebtedness under the Senior Credit
Facility is secured by substantially all of the Company's assets, prohibits
the payment of dividends and requires that the Company maintain minimum net
worth levels.
In connection with the Acquisition, the Company received a $3.0 million
Subordinated Loan from an unaffiliated supplier and $1.0 million in extended
dating of certain accounts payable for 12 to 18 months, $333,333 of which was
paid in April 1996, $333,333 of which was paid in July 1996 and the final
$333,334 of which was paid in October 1996. Furthermore, the Company issued
Purchase Money Notes to Woolworth in an aggregate principal amount of $12.5
million, of which $4.1 million were was prepaid on June 28, 1995 at a
discount in the amount of approximately $0.6 million for which the Company
recorded an extraordinary gain. In light of its pending legal action against
Woolworth, the Company has elected to withhold payment of the remaining
installments of principal and interest payable under the Purchase Money Notes
pending resolution of the Company's claims therein. The Company's senior
secured and subordinated secured lenders have consented to the withholding by
the Company of payment of the installments of principal and interest under
the Purchase Money Note due in January 1996 and have granted waivers of the
relevant cross-default provisions of the agreements evidencing the Company's
indebtedness to such lenders through February 1, 1997. Assuming any such
waivers are required, management has no reason to believe that, upon
expiration of such waivers now in effect, the senior secured and subordinated
secured lenders will not grant further waivers.
During the Fiscal 1997 third quarter, the Company's net worth fell below the
required minimum level established under the Senior Credit Facility. By
amendment to the Senior Credit Facility, the Company's senior secured lender
has, for a fee, waived the Company's non-compliance with the prior minimum
net worth requirement for the period prior to February 1, 1997 and has agreed
to a new minimum adjusted net worth requirement of $3.0 million. In
determining the Company's future compliance with the new adjusted net worth
minimum requirement, however, any non-cash gains (or losses) resulting from
the forgiveness of the indebtedness owing by the Company to Woolworth
evidenced by the Purchase Money Notes (which is contemplated by the
settlement agreed upon in principle by the Company and Woolworth and reported
upon elsewhere in this Report) will be excluded.
Working Capital
Working capital amounted to $20.2 million at November 2, 1996 compared to
$24.7 million at February 3, 1996. The ratio of current assets to current
liabilities was 1.4 at the end of the third quarter of Fiscal 1997 and 1.6 at
the end of Fiscal 1996.
Assuming the continuing availability of trade credit at current levels and
the combination of the financing made available through the Senior Credit
Facility and cash generated by the Company's operations, in the opinion of
management, the Company will be able to meet its estimated working capital
requirements through the next fiscal year. In addition, the pending
settlement with Woolworth reported upon elsewhere in this Report, accomplished
in the future as to which there can be no assurance, is likely to have a
materially favorable impact on the Company's financial condition. See Note 6
to the Company's Consolidated Financial Statements contained elsewhere in this
Report.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 to the Registrant's Consolidated Financial Statements included in
Part 1 of this Report for a description of recent developments in the
Registrant's pending legal proceedings against Woolworth.
Item 3. Default Upon Senior Securities
Reference is made to Notes 3 and 6 to the Registrant's Consolidated Financial
Statements included in Part I of this Report with regard to certain defaults
under the Registrant's Senior Credit Facility and Subordinated Loan which
have been waived by its senior secured and subordinated lenders upon the
terms therein described.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pharmhouse Corp.
(Registrant)
Date: December 23, 1996 By:/s/ Kenneth A. Davis
Kenneth A. Davis
President, Chief Executive
Officer and Chief Operating
Officer
Date: December 23, 1996 By:/s/ Richard A. Davis
Richard A. Davis
Senior Vice President-Finance
and Chief Financial Officer
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