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 August 3, 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 September 1,1996
Common Shares,
$.01 par value 2,245,539
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Unaudited
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Net store sales $108,688 $ 76,870 $ 53,371 $ 55,923
Video rental, service
and other income 3,773 2,522 1,972 1,877
-------- -------- -------- --------
112,461 79,392 55,343 57,800
-------- -------- -------- --------
Costs and Expenses:
Cost of merchandise and
services sold 84,706 61,466 41,499 44,920
Selling, general and
administrative 27,344 18,375 13,481 12,807
-------- -------- -------- --------
112,050 79,841 54,980 57,727
-------- -------- -------- --------
Income (loss) from
operations 411 (449) 363 73
Interest expense 2,213 1,511 1,173 1,209
-------- -------- -------- --------
Loss before extraordinary
item $ (1,802) $ (1,960) $ (810) $ (1,136)
Extraordinary item - 618 - 618
-------- -------- -------- --------
Net loss $ (1,802) $ (1,342) $ (810) $ (518)
======== ======== ======== ========
Per common share:
Loss before extraordinary
item $ (0.81) $ (0.88) $ (0.36) $ (0.51)
Extraordinary item $ - $ 0.28 $ - $ 0.28
-------- -------- -------- --------
Net loss per Common Share $ (0.81) $ (0.60) $ (0.36) $ (0.23)
======== ======== ======== ========
Average shares
outstanding 2,231,902 2,233,077 2,234,006 2,233,081
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
August 3, February 3,
1996 1996
<S> <C> <C>
ASSETS
Current assets
Cash $ 3,193 $ 2,884
Accounts receivable, net of
allowances of $951 and $652,
respectively 5,373 5,837
Merchandise inventory 53,515 53,778
Prepaid expenses and other 1,681 1,650
-------- --------
Total Current Assets 63,762 64,149
Property, fixtures and
equipment, net 5,895 5,733
Video inventory held for
rental, net 2,270 2,123
Other assets 932 1,205
-------- --------
Total assets $ 72,859 $ 73,210
======== ========
LIABILI IES AND SHAREHO DERS' EQUITY
Current liabilities
Current portion of long
debt $ 13,117 $ 12,510
Accounts payable 24,346 22,149
Accrued expenses and other 3,949 4,749
-------- --------
Total current liabilities 41,412 39,408
Long-term debt, net of
current portion 25,650 25,950
Other liabilities 769 1,028
-------- --------
Total liabilities 67,831 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 2,247,70 and 2,245,715,
respectively 22 22
Addition paid-in capital 21,311 21,305
Accumulated deficit (16,304) (14,502)
-------- --------
5,029 6,825
Treasury stock, at cost 1 1
-------- --------
Total shareholders' equity 5,028 6,824
-------- --------
Total liabilities and
shareholder equity $ 72,859 $ 73,210
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Six Months Ended
August 3, July 29,
1996 1995
<S> <C> <C>
Cash Flows provided by Operating Activities:
Net Loss $ (1,802) $ (1,342)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 1,267 687
(Decrease) increase in deferred rent (13) 2
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 464 (894)
Merchandise inventory 263 8
Prepaid expenses and other (31) (319)
Other assets 273 -
Increase (decrease) in:
Accounts payable 2,198 8,824
Accrued expenses and other liabilities (1,047) 1,855
--------- ---------
Net Cash flows provided by Operating Activities 1,572 8,203
--------- ---------
Cash FLows used by Inesting Activities:
Acquired business, net of store cash acquired - (35,685)
Purchase of property & equipment (704) (810)
Purchase of video inventory held for rental (872) (420)
--------- ---------
Net Cash Flows used by Investing Activities (1,576) (36,915)
--------- ---------
Cash FLows provided by Financing Activities:
Revolver borrowings, net 608 964
Borrowings to finance acquisition - 41,560
Retirement of debt - (7,481)
Prepayment of Purchase Money Note - (4,118)
Paydown of Subordinated Loan (300) -
Proceeds from issuance of common stock
and stock options and exercise of warrants 5 42
--------- ---------
Net Cash Flows provided by Financing Activities 313 30,967
--------- ---------
Net increase in cash 309 2,255
Cash, beginning of period 2,884 1,313
--------- ---------
Cash, end of period $ 3,193 $ 3,568
========= =========
Supplemental information:
Interest payments $ 1,641 $ 1,509
</TABLE>
See accompanying notes to consolidated financial statements.
PHARMHOUSE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended August 3, 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 six month
periods ended August 3, 1996 (representing the Fiscal 1997
second quarter and first six months, respectively) and the three month
period ended July 29, 1995 (representing the Fiscal 1996 second
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 six month period ended July 29, 1995 reflect
revenues and expenses of the Rx Place Stores for the two day
period of April 28 - April 29, 1995 (representing the last 2 days
of the Fiscal 1996 first quarter) as well as for the entire
Fiscal 1996 second quarter.
Certain amounts in the Fiscal 1996 second quarter consolidated
financial statements have been reclassified to be consistent with
the Fiscal 1997 second 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).
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 six 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.
Six Months Ended
July 29, 1995
(000's omitted)
Revenues $ 123,591
Net loss $ (14,269)*
Net loss per common s ($6.39)
* Approximately 82% 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 AS FURNISHED 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).
NOTE 3 - BORROWINGS:
A summary of the Company's borrowings at August 3, 1996 is as
follows (000's omitted):
Current Noncurrent
Total portion portion
--------- --------- ----------
Senior Credit Facility $28,095 $ 4,095* $24,000
Subordinated Loan 2,250 600 1,650
Purchase Money Notes-Woolworth 8,422** 8,422 -
------- ------- -------
$38,767 $13,117 $26,650
======= ======= =======
* 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 of such legal
proceedings, the Company is withholding payment of all remaining
installments of principal and interest arising under the Purchase
Money Notes (See Note 6 - Woolworth Lawsuit). 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.
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.
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 September 1, 1996, 24,065 of such warrants were exercised by
Brenner and the underlying Common Shares sold pursuant to such
Registration Statement and 61,802 warrants remain outstanding.
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 September 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 the second quarter and first six months of
Fiscal 1997 and for the second quarter and first six months of Fiscal
1996 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 anti-dilutive.
NOTE 6 - WOOLWORTH LAWSUIT:
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. The Company's claims in such action are
based upon its belief that material misrepresentations were made
by Woolworth regarding the inventory as well as the results of
operations and gross profit margins of the acquired stores and
that the Company has been damaged as a result thereof.
Pending resolution of the Company's claims in the above-described
action, the Company is withholding 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 have granted
waivers of the relevant cross-default provisions of the
agreements evidencing the Company's indebtedness to such lenders
which are effective through October 26, 1996. Management has no
reason to believe that, upon expiration of the waivers now in
effect, the senior secured and subordinated secured lenders will
not grant further waivers.
In May 1996, a stay of the lawsuit was issued by a judge of New
York State Supreme Court who ruled that the Company's complaint
should be resolved through arbitration. The Company's management
believes that arbitration applies only to the "post-closing"
adjustment portion of the Acquisition Agreement and that
arbitration does not apply to the broader issues of fraud,
misrepresentation and breach of contract. Accordingly,
management appealed the arbitration decision and moved to stay
the arbitration pending determination of the appeal. In August
1996, the court granted a permanent stay of the arbitration
pending the outcome of such appeal. As of the date of this
Report, the Company and Woolworth are engaged in settlement
discussions. However, management cannot predict the ultimate
outcome of the pending legal proceedings against Woolworth or the
results of the settlement discussion currently in progress.
Whether or not the Company prevails in its claims against
Woolworth in these proceedings, the ultimate disposition of such
proceedings could have a material impact upon the Company's
financial condition.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
General
Pharmhouse Corp. (the "Company" ) 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"). 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 whereby, for
certain slower moving merchandise, the Company can distribute
smaller quantities rather than full case quantities.
During August 1996, the Company began the relocation of its
invoice processing function from its administrative headquarters
located in New York City to the new distribution facility.
Management anticipates completing this relocation by November
1996 which includes the hiring and training of a new accounts
payable staff.
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 six month and three month periods ended
August 3, 1996 and for the six month and three month periods
ended July 29, 1995, respectively:
Six months ended Three months ended
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of merchandise and
services sold 75.3 74.4 75.0 77.7
----- ----- ----- -----
Gross profit 24.7 22.6 25.0 22.3
Selling, general and
administrative expense 24.3 23.2 24.4 22.2
----- ----- ---- -----
Income (loss)
from operations 0.4 (0.6) 0.6 0.1
Interest expense 2.0 1.9 2. 2.1
----- ----- ----- -----
Loss before extraordinary
item (1.6) (2.5) (1.5) (2.0)
Extraordinary item - 0.8 - 1.1
----- ----- ----- -----
Net loss (1.6%) (1.7%) (1.5%) (0.9%)
===== ===== ===== =====
SECOND QUARTER OF FISCAL 1997 VS. SECOND QUARTER OF FISCAL 1996
Revenues
In the second quarter of Fiscal 1997, revenues (including video
rental, service and other income) were $55.3 million compared
with $57.8 million in the second quarter of Fiscal 1996, a
decrease of $2.5 million, or 4.3%. The lower revenues resulted
primarily from the disappointing performance of the Rx Place
Stores. Same-store revenue during the Fiscal 1997 second quarter
decreased 1.6% for the Pharmhouse Stores and 5.7% 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 0.2%
during the Fiscal 1997 second quarter compared with the
corresponding quarter in the prior year.
Same-store revenue for the Pharmhouse Stores decreased 1.6% in
the Fiscal 1997 second quarter compared to the corresponding
quarter in the prior year and decreased 2.9% in the Fiscal 1997
first quarter compared to the corresponding quarter in the prior
year. This represents an improvement in same-store revenues in
the Fiscal 1997 second quarter compared to the first quarter.
Management believes that this improvement has resulted from
several factors including better in-stock position and the
continuing installation of plan-o-grams.
Gross Profit
The Fiscal 1997 second quarter gross profit (total revenues less
costs of merchandise and services sold and freight/distribution
costs) was $13.9 million compared to $12.9 million in the prior
year, an increase of approximately $1.0 million, or 7.8%, and was
achieved despite same-store revenue declines previously noted.
As a percentage of revenues, the Company's gross profit during
the Fiscal 1997 second quarter increased to 25.0% from 22.3% for
the same quarter in the prior year, primarily resulting from a
significant improvement in the gross profit percentage generated
by the Rx Place Stores (24.5% versus 20.9%) and, to a lesser
extent, improvement in the gross profit percentage generated by
the Pharmhouse Stores (26.0% versus 25.0%). The increase in
gross profit margin is the result of several factors, including
increased initial markups on merchandise purchases through better
buying opportunities and the selective increase of prices within
certain merchandise categories. In addition, the large
improvement in gross profit percentage for the Rx Place Stores
resulted from carrying categories of higher margin goods not
previously sold in these stores.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was
approximately $13.5 million for the Fiscal 1997 second quarter
compared to $12.8 million in the prior year's second quarter, an
increase of approximately $0.7 million, or 5.5%. As a percentage
of revenues, SG&A expense was 24.4% for the second quarter of
Fiscal 1997 compared to 22.2% for the comparable quarter of the
prior year. The increase in SG&A expense during the current
quarter is attributable to the following: increased rent, real
estate taxes and common area maintenance charges; increased costs
to operate the new distribution facility; and, increased general
and administrative salaries (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).
Included in the prior year's second quarter SG&A expense is a
$150,000 reversal of overaccrued vacation pay. During the Fiscal
1997 second quarter, store payroll decreased approximately
$170,000, or 3.0%, compared to the Fiscal 1996 second quarter.
The decrease is the result of payroll reductions which were
phased-in beginning in the Fiscal 1997 first quarter and
completed during the Fiscal 1997 second quarter.
Operating Income
Operating income generated by the Company in the second quarter
of Fiscal 1997 was $363,000 compared with operating income of
$73,000 for the comparable quarter in Fiscal 1996, an improvement
of $290,000. The improvement in operating income is attributable
to increased gross profit partially offset by higher SG&A
expense.
Interest Expense
Interest expense in the second quarter of Fiscal 1997 was
$1,173,000 compared with $1,209,000 in the comparable quarter of
the prior year. The reduction in the current quarter reflects
slightly lower average outstanding borrowings compared to the
corresponding quarter in the prior year.
Provision for Income Taxes
Although the Company is not subject to federal income taxes due
to the loss incurred in the second quarter of Fiscal 1997 (the
Company also has significant net operating loss carry-forwards),
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.
Net Loss
The Company's net loss in the second quarter of Fiscal 1997 was
$810,000, or $.36 per share, compared with a net loss of
$518,000, or $.23, per share, in the second quarter of Fiscal
1996. However, the Fiscal 1996 second quarter net loss reflected
an extraordinary gain of $618,000 from the early retirement of a
portion of the Woolworth debt.
FIRST SIX MONTHS OF FISCAL 1997 VS. SIX MONTHS OF FISCAL 1996
Revenues
During the first six months of Fiscal 1997, revenues (including
video rental, service and other income) were $112.5 million
compared with revenues of $79.4 million for the first six months
of the prior year, an increase of $33.1 million, or 41.7%. 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 2 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 $0.9 million, or 2.3%, in the first
six months of the Fiscal 1997 compared with the first six months
of Fiscal 1996. However, as previously noted, same-store revenue
performance for the Pharmhouse Stores in the Fiscal 1997 second
quarter improved compared to the Fiscal 1997 first quarter.
Gross Profit
The Company's gross profit (total revenues less costs of
merchandise and services sold and freight/distribution costs) for
the first six months of Fiscal 1997 was approximately $27.8
million, or 24.7% of revenues, compared with approximately $17.9
million, or 22.6% of revenues, for the six months of Fiscal 1996,
an increase of $9.9 million. The increase in gross profit
resulted from a higher gross profit percentage achieved during
the first six months of Fiscal 1997 compared to the corresponding
period in the prior year (24.7% versus 22.6%) and to 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 2 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
six months of Fiscal 1997 was $27.3 million, or 24.3% or
revenues, compared to $18.4 million, or 23.2% of revenues, in
the prior year comparable period, an increase of approximately
$8.9 million, or 48.4%. The increase is primarily 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 2
days during the Fiscal 1996 first quarter, having acquired such
stores on April 28, 1995).
Operating Income
Operating income generated by the Company during the first six
months of Fiscal 1997 was $411,000 compared with an operating
loss of $449,000 in the prior year, an improvement of $860,000.
The improvement in operating income is attributable to increased
gross profit of $9,829,000 (primarily from increased revenues
generated by the Rx Place Stores and improved gross profit
percentage for the entire chain) offset by increased SG&A expense
of approximately $8,969,000 which resulted from operating a
greater number of stores.
Interest Expense
Interest expense during the first six months of Fiscal 1997 was
$2.2 million compared with $1.5 million for the first six months
of Fiscal 1996. The increase is due to higher levels of borrowing
under the credit facility, based upon increased working capital
requirements for 24 additional stores during the first six months
of Fiscal 1997 versus the first six months of Fiscal 1996 (the
Company operated the Rx Place Stores for only 2 days during the
Fiscal 1996 first quarter, having acquired such stores on April
28, 1995) as well as to substantially increased borrowings
incurred in connection with the acquisition of such stores.
Net Loss
For the first six months of Fiscal 1997, the Company reported a
net loss of $1.8 million, or $0.81 per share, compared with a
net loss of $1.3 million, or $0.60 per share, for the first six
months of Fiscal 1996. However, the net loss for the first six
months of Fiscal 1996 reflected an extraordinary gain of $618,000
from the early retirement of a portion of the Woolworth debt.
LIQUIDITY AND CAPITAL RESOURCES
There was no material change to the Company's cash flows during
the first six months of Fiscal 1997 as cash generated from
operating activities approximated cash used for investing
activities.
Operating Activities
The Company generated cash flows from operating activities of
$1.6 million during the first six months of Fiscal 1997
consisting of an increase in accounts payable of $2.2 million,
depreciation and amortization charges of $1.3 million and
reductions in accounts receivable and inventory which were
partially offset by a $1.0 million decrease in accrued expenses
and the funding of the net loss of $1.8 million.
Investing Activities
Capital expenditures amounted to approximately $1.6 million,
consisting of $0.9 million for the purchase of video inventory
held for rental and $0.7 million for property and equipment
(primarily enhancement to store level receiving and support
systems, fixtures for the Rx Place Stores and a $0.2 million
expenditure for the replacement of a roof for one store). 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
decreased approximately $0.8 million during the second quarter of
Fiscal 1997. As of August 3, 1996, outstanding borrowings under
the Senior Credit Facility were approximately $28.1 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 amount was paid in April 1996 and
$333,333 of which was paid in July 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
retired 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 October 26, 1996. Management has no reason to believe
that, upon expiration of the waivers now in effect, the senior
secured and subordinated secured lenders will not grant further
waivers.
Working Capital
Working capital amounted to $22.4 million at August 3, 1996
compared to $24.7 million at February 3, 1996. The ratio of
current assets to current liabilities was 1.5 at the end of the
second 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
for at least the balance of Fiscal 1997. However, the ultimate
disposition of the Company's pending legal proceedings against
Woolworth could have a material 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
See Notes 3 and 6 to the Registrant's Consolidated Financial
Statements included in Part I of this Report with regard to the
Registrant's withholding of certain payments to Woolworth under
the Purchase Money Notes.
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: September 17, 1996 By:/s/ Kenneth A. Davis
Kenneth A. Davis
President, Chief Executive
Officer and Chief Operating
Officer
Date: September 17, 1996 By:/s/ Richard A. Davis
Richard A. Davis
Senior Vice President-Finance
and Chief Financial Officer
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