UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 29, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-7090
PHARMHOUSE CORP.
(Exact name of registrant as specified in its charter)
New York 13-2634868
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
860 Broadway, New York, New York 10003
(Address of principal executive offices) (Zip Code)
Registrant's 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 twelve months 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
As of August 31, 1995, there were outstanding 2,233,077 of Registrant's common
shares, par value $.01 per share.
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
July 29,
1995 January 28,
(Unaudited) 1995
Current assets:
Cash $ 3,568 $ 1,313
Trade and other receivables 3,322 2,428
Merchandise inventories 53,666 16,867
Prepayments and other 1,129 812
Total current assets 61,685 21,420
Property, fixtures and equipment, net 5,144 4,806
Video inventory held for rental, net 692 451
Total assets $ 67,521 $ 26,677
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 9,411 $ 7,181
Accounts payable 16,423 7,600
Accrued liabilities 4,765 1,789
Total current liabilities 30,599 16,570
Long term loans 28,377 300
Other liabilities 805 803
Total liabilities 59,781 17,673
SHAREHOLDERS' EQUITY:
Preferred shares, $.10 par; authorized and
unissued 2,500,000 shares
Common shares, $.01 par; authorized
25,000,000 shares; issued 2,233,077
and 2,235,631, respectively 22 22
Capital in excess of par,net of unearned
compensation of $387 and $350 at July 29,
and January 28, 1995, respectively 21,057 20,978
Accumulated deficit (13,338) (11,995)
Total shareholders' equity 7,741 9,005
Less - 16,734 treasury shares, at cost 1 1
Total liabilities and shareholders' equity $ 67,521 $ 26,677
See accompanying Notes to Consolidated Financial Statements.
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
(Unaudited)
Six Months Ended Three Months Ended
July 29, July 30, July 29, July 30,
1995 1994 1995 1994
Revenues:
Net store sales $ 76,870 $ 41,974 $ 55,923 $ 21,151
Video rental, leased department
and other income 2,522 1,396 1,877 689
79,392 43,370 57,800 21,840
Costs and expenses:
Cost of merchandise sold
61,466 33,359 44,920 16,822
Selling, general and
administrative 18,375 11,022 12,807 5,460
Interest expense 1,511 425 1,209 228
81,352 44,806 58,936 22,510
Loss before extraordinary
item $ (1,960) $ (1,436) $ (1,136) $ (670)
Extraordinary item 618 618
Net loss $ (1,342) $ (1,436) $ (518) $ (670)
Per common share:
Loss before extraordinary
item $ (.88) $ (.64) $ (.51) $ (.30)
Extraordinary
item $ .28 .28
Net loss $ (.60) $ (.64) $ (.23) $ (.30)
Average shares
outstanding 2,233,077 2,232,290 2,233,081 2,233,343
Dividends per
common share None None None None
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
July 29, July 30,
1995 1994
Cash flows from operating activities:
Net loss $ (1,342) $ (1,436)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 687 643
Increase in operating lease obligations 2 (110)
Gain on early extinguishment of Debt (618)
Changes in assets and liabilities:
Trade and other receivables (894) 366
Merchandise inventories (36,799) 2,033
Prepayments and other (319) (2)
Accounts payable 8,824 (1,378)
Accrued liabilities 2,977 (174)
Reserve for restructure and store
closure costs (142)
Net cash used for operating activities (27,482) (200)
Cash flows from investing activities:
Capital expenditures (1,230) (333)
Net cash used for investing activities (1,230) (333)
Cash flows from financing activities:
Borrowings under debt agreements 30,925 625
Proceeds from sale of stock options 42 74
Net cash provided by financing activities 30,967 699
Net increase in cash 2,255 166
Cash at beginning of period 1,313 512
Cash at end of period $ 3,568 $ 678
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
PHARMHOUSE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 29, 1995
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Pharmhouse
Corp. ("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 January 28, 1995 ("Fiscal 1995") included in the
Company's Annual Report on Form 10-K heretofore filed with the Securities and
Exchange Commission. The results of operations for the periods reported upon
herein reflect sales and expenses for the two day period of April 28 - April
29, 1995 as well as for the entire second quarter of Fiscal 1996 of 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
yWoolworth Corporation (collectively, "Woolworth"), pursuant to the terms of
an Asset Purchase Agreement (as amended, the "Acquisition Agreement"). The
current period results of operations for the three and six month periods ended
July 29, 1995 are not necessarily indicative of results which ultimately will
be reported for the full fiscal year ending February 3, 1996 ("Fiscal 1996").
NOTE 2 - ACQUISITION:
On April 28, 1995, the Company acquired the assets and business of 24 "The Rx
Place" deep discount drug stores (the "Rx Place Stores") from Woolworth for
approximately $37 million, of which approximately $21.9 million was paid in
cash at the closing, $1.7 million was paid shortly after delivery of
merchandise to the Company from a Woolworth warehouse and approximately $.5
million remains to be paid upon delivery of the balance of the merchandise
being purchased, and the balance is represented by promissory notes (the
"Purchase Money Notes") with maturity dates ranging from January 1996 to April
1998. The assets acquired consist of merchandise inventories, furniture,
fixtures and equipment, store supplies and related items, all subject to post-
closing review and potential adjustments. In addition, 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.
The Acquisition was financed through (a) a senior secured revolving credit
facility (the "Senior Credit Facility") provided by Congress Financial
Corporation ("Congress"), pursuant to which the Company has borrowing
availability equal to the lesser of 60% of its eligible inventories or $45
million, (b) a $3 million secured subordinated term loan (the "Subordinated
Loan") provided by an unaffiliated trade supplier, and (c) the above noted
promissory notes. The Company and the unaffiliated trade supplier also entered
into a three-year merchandise Supply Agreement governing future purchases of
merchandise by the Company and providing for deferred payment by the Company
of $1 million of existing trade payables over a period of 12 to 18 months
commencing April 28, 1995. The terms and conditions of the Senior Credit
Facility are described in Note 3.
NOTE 3 - BORROWINGS:
In December 1991, the Company entered into a Revolving Credit Agreement with
a secured lender to provide $5 million of secured financing for a two year
period which was subsequently extended through June 1996. At January 28, 1995,
such Revolving Credit Agreement (as amended, the "Pre-Acquisition Credit
Agreement") provided for borrowing availability to the Company at the lower of
$8,250,000 or 40% of eligible inventory as defined in the Credit Agreement.
On April 28, 1995, the Company obtained the Senior Credit Facility from
Congress Financial Corporation and obtained the Subordinated Loan. The
proceeds of these new secured credit facilities were used at the closing of the
Acquisition as follows:
(1) to pay Woolworth an aggregate of $21.9 million, representing the cash
portion of the purchase price paid by the Company for the inventories,
furniture, fixtures and equipment and other related assets in the Rx Place
Stores;
(2) to repay in full and retire all of the then outstanding indebtedness under
the Pre-Acquisition Credit Agreement and to its subordinated secured lenders
in the aggregate of approximately $7.5 million;
(3) to pay approximately $1.9 million (exclusive of expense attributable to
warrants issued to the Company's financial advisor discussed in Note 6) in
transaction costs incurred in connection with the Acquisition and the
refinancing of the Company's previously outstanding secured indebtedness.
The remaining available balance of the Senior Credit Facility immediately
following the Acquisition equalled approximately $6.0 million, which was
available for use by the Company to finance its increased working capital
requirements in connection with the operation of 38 deep discount drug stores.
Pursuant to the terms of the agreements governing the Senior Credit Facility
and the Subordinated Loan, the lenders thereunder have been granted security
interests in the inventories, receivables and other assets of the Company. In
addition, the borrowing availability under the Senior Credit Facility also
requires that the Company satisfy minimum net worth requirements and restricts
the Company from paying cash dividends. Both the Senior Credit Facility and
the Subordinated Loan have initial terms of three years, subject to extensions
upon terms and conditions described in the respective agreements governing
same. The amount borrowed under the Senior Credit Facility at July 29, 1995
totaled $25,738,000, of which $20,000,000 has been classified as non-current.
NOTE 4 - EXTRAORDINARY ITEM:
On June 28, 1995, the Company prepaid a portion of the Purchase Money Note due
on January 28, 1996 to Woolworth and retired approximately $4.1 million of the
outstanding debt. Extraordinary income of $618,000 in the second quarter
results reflecting the discount realized by early retirement of this debt.
NOTE 5 - LOSS PER COMMON SHARE:
Loss per Common Share is based on the weighted average number of shares issued
during each period which were 2,233,081 and 2,233,343 in the second quarter of
Fiscal 1996 and Fiscal 1995, respectively, and 2,233,077 and 2,232,290 in the
first half of Fiscal 1996 and Fiscal 1995, respectively. Shares issuable with
respect to outstanding warrants, convertible debentures and stock options were
not included in the computations since the inclusion of such shares would be
anti-dilutive.
NOTE 6 - WARRANTS:
In connection with the Acquisition, the Company became obligated to issue
warrants to its financial advisor to purchase shares of the Company's Common
Stock equal to 3% of the Company's issued and outstanding shares, subject to
certain anti-dilution protection, for a per share exercise price of
approximately $.94. The final terms of such warrants are subject to further
negotiation between the Company and such financial advisor.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Pharmhouse Corp. operates a chain of 38 deep discount drug stores of which 14
are operated under the "Pharmhouse" name and 24 are temporarily operating under
the "The Rx Place" name. The stores are located in eight states in the Mid-
Atlantic and New England areas. A wide variety of branded health and beauty
care products, cosmetics, prescription drugs, stationery, housewares, pet
supplies, greeting cards, food, snacks, beverages and other merchandise,
including seasonal products, are sold in the stores at everyday low prices.
The Company competes with other retail outlets selling similar merchandise by
offering its customers broad selections of merchandise in its product
categories at deep discount prices. The stores average 35,000 square feet in
the Pharmhouse locations and 25,000 square feet in The Rx Place locations. The
Company maintains one distribution center to support its store operations.
On April 28, 1995 Pharmhouse Corp. acquired the assets and business of 24 Rx
Place deep discount drug stores from Woolworth as described in Note 2 of the
Notes to the Consolidated Financial Statements. By reason of the Acquisition
the results for the second quarter of Fiscal 1996 as well as the first six
months of Fiscal 1996 are not comparable to the results for the second quarter
or first six months of Fiscal 1995. The historical and proforma financial
statements of the Rx Place Stores for the three fiscal years ended January 28,
1995 and the first fiscal quarter ended April 29, 1995 are also not comparable
to the Company's results of operations for the fiscal quarter and six months
ended July 29, 1995 since the Rx Place Stores' historical and proforma
financial statements do not include allocations for corporate or divisional
expenses, including, but not limited to, expenses for income taxes, interest,
workers' compensation and general liability insurance, and accounting and
administration. See "The Rx Place Division, Notes to Financial Statements" as
filed by the Company on Form 10-K/A dated July 10, 1995.
The second quarter and first half of Fiscal 1996 constitute part of a
transition period for the Company as management integrates the 24 Rx Place
stores into its store operations as well as implements new sales and
merchandising strategies and systems for all 38 stores. The store-for-store
results for the 14 Pharmhouse stores also do not reflect management's
implementation of these new strategies and the results of their operations have
been affected by the Acquisition as well. A further discussion of the 14
Pharmhouse stores is included below.
Results of Operations
Second quarter of Fiscal 1996 vs. second quarter of Fiscal 1995
Revenues. During the second quarter of Fiscal 1996, the Company's revenues
(including video rental, leased department and other income) totaled
$57,800,000, an increase of $35,960,000 (or 164.6%) compared to revenues of
$21,840,000 for the second quarter of the prior year. On a store-for-store
comparable basis with Fiscal 1995, the revenues decreased $1,950,000 or 8.9%
in the current fiscal year. The lower same store sales resulted from increased
competition in several markets and sporadic merchandise shortages due to some
tightening of vendor credit during the early part of this fiscal quarter.
Vendor credit has since increased significantly and the Company is currently
receiving a free flow of merchandise except in a few isolated cases. In
addition, computer generated reordering systems are being implemented for all
stores which will ensure better merchandise replenishment; some replenishment
of merchandise for the original fourteen stores did not occur in the second
quarter due to buyer focus on the merchandise requirements of the newly
acquired stores.
Gross Profit. The Company's gross profit (total revenues less costs of
merchandise and services sold) for the second quarter of Fiscal 1996 was
$12,880,000 or 22.3% compared to $5,018,000 or 23.1% of revenues for the second
quarter of Fiscal 1995, an increase of $7,862,000 (or 156.7%) compared to gross
profit for the second quarter of the prior year. On a store-for-store
comparable basis with Fiscal 1995, the gross profit increased $33,000 (or 6.6%)
in the second quarter of the current fiscal period even though revenues
declined.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of the Company in the second quarter of Fiscal 1996
were $12,807,000 compared to $5,460,000 for the second quarter of Fiscal 1995,
an increase of $7,347,000 (or 134.7%).
Interest Expense. The Company's interest expense for the second quarter of
Fiscal 1996 was $1,209,000 an increase of $981,000 (or 430.3%) compared to
$228,000 for the second quarter of fiscal 1995. The increase is due to higher
levels of borrowing under the credit facility, based upon increased working
capital requirements for 24 additional stores this year versus last year as
well as to substantially increased borrowings incurred in connection with the
acquisition of such stores.
Net Loss. The Company's net loss in the second quarter of Fiscal 1996 was
$518,000 or $.23 per share compared to $670,000 or $.30 per share in the second
quarter of Fiscal 1995. However, the Fiscal 1996 net loss reflected an
extraordinary gain of $618,000 from the early retirement of a portion of the
Woolworth debt. Eliminating this extraordinary item would have resulted in the
net loss reported in the second quarter of Fiscal 1996 of $1,136,000 or $.51
per share.
First half of Fiscal 1996 vs. first half of Fiscal 1995
Revenues. During the first half of Fiscal 1996, the Company's revenues
(including video rental, leased department and other income) totaled
$79,392,000, an increase of $36,022,000 (or 83.1%) compared with revenues of
$43,370,000 for the first six months of the prior year. On a store-for-store
comparable basis with Fiscal 1995, the revenues decreased by $2,898,000 (or
6.7%) in the first half of the current fiscal year. The lower same store sales
resulted from increased competition in several markets and sporadic merchandise
shortages due to some tightening of vendor credit during the most this fiscal
period. Vendor credit has since increased significantly and the Company is
currently receiving a free flow of merchandise except in a few isolated cases.
In addition, computer generated reordering systems are being implemented for
all stores which will ensure better merchandise replenishment; some
replenishment of merchandise for the original fourteen stores did not occur in
the second quarter due to buyer focus on the merchandise requirements of the
newly acquired Rx Place Stores.
Gross Profit. The Company's gross profit (total revenues less costs of
merchandise and services sold) for the first half of Fiscal 1996 was
$17,926,000 or 22.6% compared to $10,011,000 or 23.1% of revenues for the first
half of Fiscal 1995, an increase of $7,915,000 (or 79.1%) compared to gross
profit for the first half of the prior year. On a store-for-store comparable
basis with Fiscal 1995, the gross profit decreased by $118,000 compared to the
first half of the prior year while the gross profit margin percentages
increased to 24.4% from 23.1% in the prior year. The Rx Place stores have
historically generated lower gross profit than the Pharmhouse stores. Plans
are in place and are will be executed over the course of the remained of this
fiscal year and the next fiscal year to raise the Rx Place store profit
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of the Company in the first half of Fiscal 1996 were
$18,375,000 compared to $11,022,000, an increase of $7,503,000 (or 137.3%) for
the first half of Fiscal 1995.
Interest Expense. The Company's interest expense for the first half of Fiscal
1996 was $1,511,000 an increase of $1,086,000 (or 255.5%) compared to $425,000
for the first half of fiscal 1995. The increase is due to higher levels of
borrowing under the credit facility, based upon increased working capital
requirements for 24 additional stores this year versus last year as well as to
substantially increased borrowings incurred in connection with the acquisition
of such stores.
Net Loss. The Company's net loss in the first half of Fiscal 1996 was
$1,342,000 or $.60 per share compared to $1,436,000 or $.64 per share in the
first half of Fiscal 1995. However, the Fiscal 1996 net loss reflected an
extraordinary gain of $618,000 from the early retirement of a portion of the
Woolworth debt. Eliminating this extraordinary item would have resulted in the
net loss reported in the second quarter of Fiscal 1996 of $1,960,000 or $.88
per share.
Liquidity and Capital Resources
The Company had working capital of $30,936,000 at July 29, 1995 compared to
working capital of $5,975,000 at July 30, 1994, an increase of $24,961,000.
The increase in working capital was attributable to the acquisition of the 24
Rx Place stores on April 28, 1995 utilizing the Congress borrowing facility,
a substantially portion of which is due after one year.
In April 1995, the Company entered into the Senior Credit Facility with
Congress Financial Corporation which provides for borrowing availability equal
to the lower of sixty percent (60%) of eligible inventory or $45,000,000 at a
rate of Prime plus 1.5%. Borrowings under this Senior Credit Facility were
used to finance a portion of the acquisition on April 28, 1995 of 24 The Rx
Place Stores from F. W. Woolworth Co. (the "Acquisition"), to repay in full
indebtedness of the Company under its then existing senior and subordinated
secured loans in the aggregate amount of approximately $7.5 million, and to
provide working capital to the Company for the operation of its 38 stores. In
addition, in connection with the Acquisition, the Company received a $3,000,000
Subordinated Loan from one of its unaffiliated suppliers as well as $1,000,000
in extended dating terms payable in 12 to 18 months as of April 28, 1995 and
issued promissory notes to F. W. Woolworth Co. in an aggregate principal amount
of approximately $12.4 million, of which $4.1 million was retired on June 28,
1995 at a discount, all of which borrowings were used by the Company to pay the
balance of the Acquisition purchase price.
The combination of the financing made available through the Senior Credit
Facility, the increased trade credit and the cash generated by the Company's
increased sales should, in the opinion of management, enable the Company to
meet its estimated working capital requirements for the balance of the current
fiscal year.
PHARMHOUSE CORP. AND SUBSIDIARY
PART II
OTHER INFORMATION
None.
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.
PHARMHOUSE CORP.
(Registrant)
/s/ Marcie B. Davis
Marcie B. Davis
Senior Vice President-Finance
and Chief Financial Officer
Dated: September 12, 1995
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