DRAFT 06/09/97 6:22 PM
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 May 3, 1997
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 May 31, 1997
----- ------------
Common Shares,
$.01 par value 2,374,442
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at May 3, 1997
and February 1, 1997. 2
Consolidated Statements of Operations
for the three months ended May 3, 1997 and
and May 4, 1996. 3
Consolidated Statements of Cash Flows
for the three months ended May 3, 1997 and
May 4, 1996. 4
Notes to Consolidated Financial Statements. 5-8
Item 2. Management's Discussions and Analysis
of Operations 9-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Default Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K *
* Not applicable in this filing
<PAGE> 2
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Unaudited
May 3, February 1,
1997 1997
--------- ---------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Current assets
- -----------------------------------
Cash $ 3,616 $ 2,915
Accounts receivable, net of
allowances of $1,003 and
$987, respectively 5,581 7,564
Merchandise inventory 49,151 49,796
Prepaid expenses and other 1,908 1,861
------- -------
Total current assets 60,256 62,136
Property, fixtures and equipment, net 5,383 5,580
Video inventory held for rental, net 2,532 2,531
Other assets 794 256
------- -------
Total assets $68,965 $70,503
======= =======
LIABILITIES AND SHAREHOLDRES' EQUITY
Current liabilities
- ------------------------------------
Current portion of long-term debt $30,008 $ 7,640
Accounts payable 24,120 24,412
Accrued expenses and other liabilities 3,739 3,586
Provision for store closure 1,500 1,615
------- -------
Total current liabilities 59,367 37,253
Long-term debt, net of current portion 1,000 24,400
Other liabilities 384 498
------- -------
Total liabilities 60,751 62,151
------- -------
COMMITMENTS AND CONTIGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par; authorized
and unissued 2,500,000 shares
Common stock, $.01 par; authorized
25,000,000 shares; issued 2,374,442
and 2,359,064 shares, respectively 24 23
Additional paid-in capital 21,545 21,498
Accumulated deficit (13,354) (13,168)
------- -------
8,215 8,353
Treasury stock, at cost 1 1
------- -------
Total shareholders' equity 8,214 8,352
------- -------
Total liabilities and shareholders'
equity $68,965 $70,503
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE> 3
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
Unaudited
Three Months Ended
May 3, May 4,
1997 1996
--------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Revenues:
Net sales $ 49,829 $ 55,317
Video rental, service
and other income 1,581 1,801
-------- --------
51,410 57,118
-------- --------
Costs and Expenses:
Cost of merchandise and
services sold 39,023 43,207
Selling, general and
administrative expense 11,759 13,863
-------- --------
50,782 57,070
-------- --------
Income from operations 628 48
Interest expense 814 1,040
-------- --------
Net loss $ (186) $ (992)
======== ========
Net loss per Common Share $ (0.08) $ (0.45)
======== ========
Average shares outstanding 2,350,204 2,229,183
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 4
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
May 3, May 4,
1997 1996
--------------------------
<S> <C> <C>
Cash Flows provided by Operating Activities:
Net loss $ (186) $ (992)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 771 611
Decrease in deferred rent (122) (7)
Changes in operating assets and liabilities;
(Increase)decrease in:
Accounts receivable, net 1,983 812
Merchandise inventory 645 (3,242)
Prepaid expenses and other current assets (47) (288)
Other assets (538) 21
Increase (decrease) in:
Accounts payable (292) 4,446
Accrued expenses and other liabilities 161 (1,106)
Provision for store closure (115) -
------- -------
Net cash flows provided by Operating Activities 2,260 255
------- -------
Cash Flows used by Investing Activities:
Purchase of property and equipment, net (92) (418)
Purchase of video inventory held for rental, net (483) (319)
------- -------
Net Cash Flows used by Investing Activities (575) (737)
------- -------
Cash Flows provided (used) by Financing Activities:
Revolver borrowings, net (832) 1,384
Pay-down of Subordinated Loan (200) (150)
Proceeds from exercise of stock options 48 -
------- -------
Net Cash Flows provided (used) by Financing Activities (984) 1,234
------- -------
Net increase in cash 701 752
Cash, beginning of period 2,915 2,884
------- -------
Cash, end of period $3,616 $3,636
======= =======
Supplemental information:
Interest payments $ 833 $ 794
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 5
PHARMHOUSE CORP. AND SUSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended May 3, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of
Pharmhouse Corp. (the "Company") have been prepared in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-
X and, therefore, omit or condense certain footnotes and other
information normally included in financial statements prepared in
accordance with generally accepted accounting principles. The
accounting policies followed for interim financial reporting are
the same as those disclosed in Note 1 of the Notes to
Consolidated Financial Statements included in the Company's
audited Consolidated Financial Statements for the fiscal year
ended February 1, 1997 ("fiscal 1997") which are included in the
Company's Annual Report (the "1997 Form 10-K") heretofore filed
with the Securities and Exchange Commission. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the
financial information for the interim periods reported have been
made. Results of operations for the 13 weeks ended May 3, 1997
are not necessarily indicative of the results to be expected for
the entire fiscal year ending January 31, 1998 ("fiscal 1998").
These Consolidated Financial Statements should be read in
conjunction with the Company's fiscal 1997 audited Consolidated
Financial Statements and Notes thereto.
NOTE 2 - ACQUISITION, LITIGATION AND WOOLWORTH SETTLEMENT
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 "Acquisition") from F. W. Woolworth Co., a
subsidiary of Woolworth Corporation (collectively "Woolworth").
The total cost of the Acquisition was $39.5 million, including
$23.5 million in cash and $12.5 million in notes issued
to Woolworth (the "Purchase Money Notes"). The Company also
assumed Woolworth's obligations under the leases of the 24
acquired stores (the "Rx Stores"). The Acquisition, consisting
primarily of merchandise inventory and store property and
equipment, was financed through a senior secured revolving credit
facility (the "Senior Credit Facility") provided by a financial
institution, a $3 million secured subordinated term loan (the
"Subordinated Loan") provided by an unaffiliated trade supplier
and the Purchase Money Notes.
Litigation
In January 1996, the Company instituted legal action 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 (the "Legal Proceedings"). Pending
resolution of the Company's claims, the Company withheld payment
of all further installments of principal and interest arising out
of the Purchase Money Notes held by Woolworth.
<PAGE> 6
Woolworth Settlement
On January 31, 1997, the Company and Woolworth entered into an
agreement (the "Woolworth Settlement"), resolving all outstanding
disputes arising out of the Acquisition. The major aspects of
the Woolworth Settlement include:
Debt and Interest Forgiveness - Woolworth surrendered for
cancellation two of the three outstanding Purchase Money Notes
totaling $5.5 million and modified the third such Note (in the
original principal amount of $2.9 million, and originally due
April 1998) so that such Note constitutes a non-interest bearing
contingent note obligation of $1 million which will be
surrendered by Woolworth for cancellation on July 30, 1998,
subject to certain conditions. Woolworth also released the
Company from its $1.1 million accrued interest obligation on the
Purchase Money Notes. In the fourth quarter of fiscal 1997, by
reason of the foregoing, the Company recorded an extraordinary
gain of $7.1 million consisting of $8.5 million in debt and
interest forgiveness less certain costs and provisions (including
a $1 million store closure provision related to two Rx Stores
returned to Woolworth - see Return of Stores, below).
Return of Stores - The Company has an option to terminate
its occupancy and obligations under the leases governing seven
(the "Affected Stores") of the Rx Stores subject to certain
conditions and within certain stipulated periods of time. The
Company has exercised its option with respect to two of the
Affected Stores and, as of June 10, 1997, the Company has closed
and returned to Woolworth these two stores. As of the date of
this Report, the Company has not made a determination as to
whether any or all of the five remaining Affected Stores will be
returned to Woolworth.
Reimbursement of Rental and Occupancy Costs - Woolworth
agreed to assume the Company's rental and other occupancy costs
under the leases governing the Affected Stores during the period
from January 15, 1997 through the earlier of July 31, 1997 or
the date of reassignment of the leases of the Affected Stores to
Woolworth.
Use of "The Rx Place" Name - Woolworth agreed to extend the
Company's license to use the service mark "The Rx Place" for an
additional three year period through April 28, 2001, subject to
the Company's right to extend such license for one additional
year upon proper notification, as defined in the agreement.
For further information concerning the Woolworth Settlement,
reference is made to Item 1 and Note 12 of Notes to the
Consolidated Financial Statements included in the Company's 1997
Form 10-K.
<PAGE> 7
NOTE 3 - BORROWINGS
A summary of the Company's borrowings at May 3, 1997 and February
1, 1997 is as follows (000's omitted):
May 3, 1997 February 1,1997
Current Noncurrent Current Noncurrent
Total portion portion Total portion portion
Senior Credit
Facility $28,208 $28,208 - $29,040 $7,040 $22,000
Subordinated Loan 1,800 1,800 - 2,000 600 1,400
Contingent Note 1,000 - 1,000 1,000 - 1,000
------- ------- ------ ------- ------ -------
$31,008 $30,008 $1,000 $32,040 $ 7,640 $24,400
At May 3, 1997, all outstanding borrowings under the Senior
Credit Facility and the Subordinated Loan have been classified as
current liabilities as both of these credit facilities expire
during April 1998. The three-year term of the Senior Credit
Facility expires in late April 1998, subject to renewal at the
option of the secured lender for successive one-year terms. The
senior secured lender may agree to extend that facility for an
additional one year or other period or the Company may seek to
refinance the Senior Credit Facility upon the most favorable
terms and conditions available to it at the time. However, there
can be no assurance concerning the extension of the term of the
Senior Credit Facility or the terms and conditions upon which the
Company will be able to refinance that Senior Credit Facility.
Senior Credit Facility
The Senior Credit Facility provides for borrowing availability
equal to the lower of 60% of eligible inventory (at cost) or $45
million. The indebtedness under the Senior Credit Facility is
secured by a first priority lien on substantially all of the
Company's assets, restricts the payment of dividends and requires
that the Company maintain minimum net worth levels. Effective
February 2, 1997, the Company's senior secured lender amended the
minimum net worth requirement to $6 million (determined at the
close of each fiscal quarter) which will increase to $7 million
upon cancellation of the remaining $1 million contingent note
obligation to Woolworth described in Note 2.
Subordinated Loan
The Subordinated Loan is payable to an unaffiliated supplier and
is being repaid in monthly installments of $50,000 with a $1.2
million balloon payment due in April 1998. The subordinated
lender has been granted a second priority lien on substantially
all of the Company's assets.
Contingent Note
In connection with the Woolworth Settlement, the Purchase Money
Note due in April 1998 (in the original amount of $2.9 million)
was modified so that such Note constitutes a $1 million non-
interest bearing obligation which will be forgiven by Woolworth
on July 30, 1998, subject to certain conditions.
<PAGE> 8
NOTE 4 - WARRANTS
The Company issued warrants to its previous secured lender to
purchase 209,195 of its Common Shares at varying exercise prices
ranging from $.19 to $1.91 per Common Share. Such warrants were
outstanding at May 3, 1997 and expire on December 31, 1997. The
Company recently filed a Registration Statement under the
Securities Act of 1933 relating to the proposed offer and sale of
such securities by that lender.
<PAGE> 9
ITEM 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition
General
As of the date of this Report, the Company operates a chain of 35
deep discount drug stores located in eight states in the mid-
Atlantic and New England regions of the United States, 13 of
which operate under the name Pharmhouse (the "Pharmhouse Stores")
and 22 of which operate under the name The Rx Place (the "Rx
Stores"), the latter stores having been acquired from F. W.
Woolworth Co., a subsidiary of Woolworth Corporation
(collectively "Woolworth") in April 1995. The foregoing total
number of stores gives effect to the recent closing of three
under-performing stores, two of which are Rx Stores that were
returned to Woolworth in connection with the Woolworth
Settlement. Pursuant to the Woolworth Settlement, the Company
has an option, exercisable by July 31, 1997, to return up to five
additional under-performing Rx Stores to Woolworth. In the event
that the Company exercises such option with respect to all five
stores, the Company will operate 30 deep discount drug stores
thereafter.
The Company's stores 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 sq. ft. in size and
the Rx Stores are approximately 25,000 sq. ft. in size.
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 first quarters of fiscal 1998 and fiscal
1997, respectively:
First Quarter
Fiscal Fiscal
1998 1997
------ ------
Revenues 100.0% 100.0%
Cost of merchandise and
services sold 75.9 75.6
------ ------
Gross profit 24.1 24.4
Selling, general and
administrative expense 22.9 24.3
------ ------
Income from operations 1.2 0.1
Interest expense 1.6 1.8
------ ------
Net loss (0.4)% (1.7)%
====== ======
<PAGE> 10
FIRST QUARTER OF FISCAL 1998 VS. FIRST QUARTER OF FISCAL 1997
Overall Quarterly Results
The Company reported a net loss of $186,000, or $.08 per share,
in the fiscal 1998 first quarter compared with a net loss of
$992,000, or $.45 per share, in the fiscal 1997 first quarter.
The improved results are attributable to the following factors:
reduced store (selling) expense arising from the Company's cost
reduction program initiated at the end of the fiscal 1997 first
quarter and the occupancy reimbursement provided by Woolworth;
the closing of three under-performing stores (including two Rx
Stores which were returned to Woolworth); and reduced interest
expense resulting from Woolworth's cancellation of the Purchase
Money Notes.
As noted, the Company's fiscal 1998 first quarter results
benefited from certain aspects of the Woolworth Settlement. For
further information concerning the provisions of the Woolworth
Settlement, reference is made to Note 2 of Notes to the
Consolidated Financial Statements of this Report, the Company's
Annual Report on Form 10-K for the fiscal year ended February 1,
1997 and Current Report on Form 8-K dated February 6, 1997.
Significant Line Items
Revenues
Fiscal 1998 first quarter revenues (including video rental,
service and other income) were $51.4 million compared with
revenues of $57.1 million in the first quarter of fiscal 1997, a
decrease of $5.7 million, or 10.0%. Approximately one-half of the
revenue decrease is attributable to the closing of three stores
during the current quarter. On a same-store basis, fiscal 1998
first quarter revenues decreased 4.9% compared with the prior
year's first quarter (the decrease was 3.3% excluding the five
additional Rx stores that may be returned to Woolworth).
Gross Profit
The fiscal 1998 first quarter gross profit (total revenues less
costs of merchandise and services sold and freight/distribution
services provided) was $12.4 million compared to $13.9 million in
the prior year, a decrease of $1.5 million, or 11.0 %, primarily
resulting the closing of three stores during the fiscal 1998
first quarter. As a percentage of revenues, gross profit during
the fiscal 1998 first quarter was 24.1% compared with 24.4% in
the fiscal 1997 first quarter.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense was $11.8
million in the fiscal 1998 first quarter compared to $13.9
million in the prior year, a decrease of $2.1 million, or 15.1%,
resulting from the closing of three stores during the fiscal 1998
first quarter and cost reductions which were phased-in during
fiscal 1997. As a percentage of revenues, SG&A expense was 22.9%
during the fiscal 1998 first quarter compared to 24.3% in the
fiscal 1997 first quarter, reflecting cost reductions (including
payroll and certain operating expenses) and the rent
reimbursement provided by Woolworth.
<PAGE> 11
Operating Income
Operating income increased $.6 million in the fiscal 1998 first
quarter compared with the fiscal 1997 first quarter, primarily
resulting from reduced SG&A expense as noted above.
Interest Expense
Interest expense during the fiscal 1998 first quarter decreased
$.2 million compared to the fiscal 1997 first quarter resulting
from reduced interest expense owing to the cancellation of the
Purchase Money Notes in connection with the Woolworth Settlement.
Liquidity and Capital Resources
Operating Activities
The Company generated cash flows from operating activities of
$2.3 million in the fiscal 1998 first quarter, attributable
primarily to a $2 million decrease in accounts receivable (from
third-party insurance plans).
Investing Activities
Capital expenditures amounted to $.6 million in the fiscal 1998
first quarter and consisted primarily of video inventory held for
rental. The Company has continued to defer major capital
improvements until such time as the Company achieves
profitability.
Financing Activities
Net borrowings under the Company's Senior Credit Facility
decreased $.8 million during the first quarter of fiscal 1998.
As of May 3, 1997, outstanding borrowings under the Senior Credit
Facility were $28.2 million.
Summary of Borrowings
Senior Credit Facility
The Company's Senior Credit Facility provides for borrowing
availability equal to the lower of sixty percent (60%) of
eligible inventory (at cost) or $45 million. The indebtedness
under the Senior Credit Facility is secured by a first priority
lien on substantially all of the Company's assets, restricts the
payment of dividends and requires that the Company maintain
minimum net worth levels. Effective February 2, 1997, the
Company's senior secured lender amended the minimum net worth
requirement to $6 million (determined at the close of each fiscal
quarter) which will increase to $7 million upon cancellation of
the remaining $1 million contingent note obligation to Woolworth.
The three-year term of the Senior Credit Facility expires in late
April 1998, subject to renewal at the option of the secured
lender for successive one-year terms. The senior secured lender
<PAGE> 12
may agree to extend the facility for an additional one year or
other period or the Company may seek to refinance the Senior
Credit Facility upon the most favorable terms and conditions
available to it at the time. However, there can be no assurance
concerning the extension of the term of the Senior Credit
Facility or the terms and conditions upon which the Company will
be able to refinance that Senior Credit Facility.
Subordinated Loan
The Subordinated Loan payable to an unaffiliated supplier is
being repaid in monthly installments of $50,000 with a $1.2
million balloon payment due in April 1998. The subordinated
lender has been granted a second priority lien on substantially
all of the Company's assets.
Working Capital and Current Ratio
All of the outstanding borrowings under the Senior Credit
Facility and the Subordinated Loan have been classified as
current liabilities in the fiscal 1998 first quarter financial
statements owing to the April 1998 expiration dates. The
classification of that facility and loan has negatively impacted
certain financial measurements and ratios including working
capital and the current ratio. Primarily by reason of that
classification, (a) working capital decreased to $.9 million at
May 3, 1997 from $24.9 million at February 1, 1997 and (b), the
ratio of current assets to current liabilities decreased to 1.0
at May 3, 1997 from 1.7 at February 1, 1997.
Assuming the continuing availability of trade credit at the
current level 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
for at least the balance of fiscal 1998.
Forward-Looking Statements
This Report contains certain "forward-looking statements", which
are based largely on the Company's expectations and are subject
to risks and uncertainties, certain of which are beyond the
Company's control. Discussion of factors that could cause the
Company's actual results or performance to differ materially from
those set forth in such statements, estimates and expectations is
contained in the 1997 Form 10-K including, among others,
competitive, regulatory and economic influences and product
acceptance and availability. In light of these risks and
uncertainties, there can be no assurance that the forward-looking
information contained in this Report will in fact transpire. The
Company assumes no obligation to update publicly any forward-
looking statements, whether as a result of new information,
future events or otherwise.
<PAGE> 13
PART II.
OTHER INFORMATION
None.
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: June 10, 1997 By:/s/ Kenneth A. Davis
Kenneth A. Davis
President, Chief Executive
Officer and Chief Operating
Officer
Date: June 10, 1997 By:/s/ Richard A. Davis
Richard A. Davis
Senior Vice President-Finance
and Chief Financial Officer
</TABLE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> MAY-03-1997
<CASH> 3,616
<SECURITIES> 0
<RECEIVABLES> 5,581
<ALLOWANCES> 0
<INVENTORY> 49,151
<CURRENT-ASSETS> 60,256
<PP&E> 7,915
<DEPRECIATION> 771
<TOTAL-ASSETS> 68,965
<CURRENT-LIABILITIES> 59,367
<BONDS> 0
0
0
<COMMON> 25
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<TOTAL-LIABILITY-AND-EQUITY> 68,965
<SALES> 49,829
<TOTAL-REVENUES> 51,410
<CGS> 39,023
<TOTAL-COSTS> 50,782
<OTHER-EXPENSES> 11,759
<LOSS-PROVISION> 1,500
<INTEREST-EXPENSE> 814
<INCOME-PRETAX> (186)
<INCOME-TAX> 0
<INCOME-CONTINUING> (186)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (186)
<EPS-PRIMARY> 0
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