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 August 2, 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 August 31,1997
Class
Common Shares,
$.01 par value 2,598,635
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at August 2, 1997
and February 1, 1997. 2
Consolidated Statements of Operations
for the three month and six month periods ended
August 2, 1997 and August 3, 1996, respectively. 3
Consolidated Statements of Cash Flows
for the six month periods ended August 2, 1997
and August 3, 1996. 4
Notes to Consolidated Financial Statements. 5-8
Item 2. Management's Discussion and Analysis
of Operations 9-15
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
August 2, February 1,
1997 1997
---------- ----------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Current assets
- ---------------------------------------------
Cash $ 3,475 $ 2,915
Accounts receivable, net of
allowances of $1,003 and
$987, respectively 6,106 7,564
Merchandise inventory 46,334 49,796
Prepaid expenses and other current assets 2,091 1,861
--------- ---------
Total current assets 58,006 62,136
Property, fixtures and equipment, net 5,276 5,580
Video inventory held for rental, net 2,230 2,531
Other assets 770 256
--------- ---------
Total assets $66,282 $70,503
========= =========
LIABILITIES AND SHAREHOLDRES' EQUITY
Current liabilities
- ----------------------------------------------
Current portion of long-term debt $26,706 $ 7,640
Accounts payable 25,095 24,412
Provision for store closure 561 1,615
Accrued expenses and other current liabilities 3,364 3,586
--------- ---------
Total current liabilities 55,726 37,253
Long-term debt, net of current portion 1,000 24,400
Other liabilities 1,531 498
--------- ---------
Total liabilities 58,257 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 2,598,635
and 2,359,064 shares, respectively 26 23
Additional paid-in capital 21,651 21,498
Accumulated deficit (13,651) (13,168)
--------- ---------
8,026 8,353
Treasury stock, 16,734 shares, at cost 1 1
--------- ---------
Total shareholders' equity 8,025 8,352
--------- ---------
Total liabilities and shareholders' equity $66,282 $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
<TABLE>
Six Months Ended Three Months Ended
---------------------- ------------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
<CAPTION>
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 96,572 $108,688 $ 46,743 $ 53,371
Video rental, service
and other income 3,188 3,773 1,607 1,972
--------- --------- --------- ---------
99,760 112,461 48,350 55,343
--------- --------- --------- ---------
Costs and Expenses:
Cost of merchandise and
and services sold 75,624 84,706 36,601 41,499
Selling, general and
administrative expenses 23,038 27,344 11,279 13,481
--------- --------- --------- ---------
98,662 112,050 47,880 54,980
--------- --------- --------- ---------
Operating income 1,098 411 470 363
Interest expense 1,581 2,213 767 1,173
--------- --------- --------- ---------
Net loss $ (483) $ (1,802) $ (297) $ (810)
========= ========= ========= =========
Net loss per Common Share $ (0.20) $ (0.81) $ (0.12) $ (0.36)
========= ========= ========= =========
Average shares outstanding 2,414,061 2,231,902 2,499,203 2,234,006
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 4
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
Six Months Ended
August 2, August 3,
1997 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Cash Flows provided by Operating Activities:
Net loss $ (483) $ (1,802)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 580 542
Amortization of video inventory 968 725
Increase in deferred revenue 1,415 -
Decrease in deferred rent (129) (13)
Changes in operating assets and liabilities:
(Increase)decrease in:
Accounts receivable, net 1,458 464
Merchandise inventory 3,462 263
Prepaid expenses and other current assets (230) (31)
Other assets (514) 273
Increase (decrease) in:
Accounts payable 683 2,198
Provision for store closure (1,054) -
Accrued expenses and other current liabilities (475) (1,047)
--------- ---------
Net Cash Flows provided by Operating Activities 5,681 1,572
--------- ---------
Cash Flows used by Investing Activities:
Purchase of property and equipment, net (270) (704)
Purchase of video inventory held for rental (673) (872)
--------- ---------
Net Cash Flows used by Investing Activities (943) (1,576)
--------- ---------
Cash Flows provided (used) by Financing Activities:
Revolver borrowings, net (3,984) 608
Pay-down of Subordinated Loan (350) (300)
Proceeds from exercise of stock options and warrants 156 5
--------- ---------
Net Cash Flows provided (used) by Financing Activities (4,178) 313
--------- ---------
Net increase in cash 560 309
Cash, beginning of period 2,915 2,884
--------- ---------
Cash, end of period $ 3,475 $ 3,193
========= =========
Supplemental information:
Interest payments $ 1,601 $ 1,641
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 5
PHARMHOUSE CORP. AND SUSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended August 2, 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 3 month and 6 month periods
August 2, 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.
Certain amounts in the fiscal 1997 second quarter financial
statements have been reclassified to be consistent with the
fiscal 1998 second quarter presentation.
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
<PAGE> 6
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.
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 had an option to terminate
its occupancy and obligations under the leases governing seven
(the "Affected Stores") of the Rx Stores subject to certain
conditions, which expired on July 31, 1997. The Company
previously exercised its option with respect to two of the
Affected Stores which were closed and returned to Woolworth.
On June 24, 1997, the Company and Woolworth amended the
Woolworth Settlement to provide for the further disposition of
the then remaining five Affected Stores as follows: one of the
Affected Stores was closed during the Company's fiscal 1998
second quarter and has subsequently been returned to
Woolworth; three of the Affected Stores will be operated by
the Company on a month-to-month basis and Woolworth will
provide a partial rental reimbursement for these stores.
Either party may terminate the Company's lease for any or all
of these three stores upon 75 days prior notice; the last
Affected Store, for which the related lease expires on
September 30, 1997, will continue to be operated by the
Company and Woolworth will provide a partial rental
reimbursement for this store through such date. The Company is
currently negotiating a new lease with this store's landlord
which would become effective on October 1, 1997. Effective
October 1, 1997 Woolworth will have no further obligations
related to this store.
Reimbursement of Rental and Occupancy Costs - Woolworth
reimbursed the Company for the rental and other occupancy costs
under the leases governing the Affected Stores during the period
<PAGE> 7
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. Pursuant to a recent amendment to the Woolworth
Settlement, dated June 24, 1997, Woolworth has agreed to provide
a partial reimbursement for rental and occupancy costs for
certain of the remaining Affected Stores subsequent to July 31,
1997, as heretofore described.
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
Annual Report on Form 10-K for its fiscal year ended February 1,
1997 (the "1997 Form 10-K") and its Form 8-K Report dated
February 6, 1997.
NOTE 3 - BORROWINGS
A summary of the Company's borrowings at August 2, 1997 and
February 1, 1997 is as follows (000's omitted):
August 2, 1997 February 1, 1997
Current Noncurrent Current Noncurrent
Total portion portio n Total portion portion
Senior Credit
Facility $25,056 $25,056 - $29,040 $7,040 $22,000
Subordinated Loan 1,650 1,650 - 2,000 600 1,400
Contingent Note 1,000 - 1,000 1,000 - 1,000
------------------------ ------------------------
$27,706 $26,706 $1,000 $32,040 $7,640 $24,400
======================== ========================
At August 2, 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 in
late 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 and the Company 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
<PAGE> 8
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 is to be forgiven by Woolworth
on July 30, 1998, subject to certain conditions.
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. In June 1997, the
Company filed a Registration Statement under the Securities Act
of 1933 relating to the offer and sale of such securities by that
lender. As of August 2, 1997, all of such warrants had been
exercised. The exercise of the warrants resulted in an increase
to paid-in capital of $113,218, net of related expenses.
NOTE 5 - SUBSEQUENT EVENT
On September 4, 1997, the Company and McKesson Corporation
consummated an agreement, the Receivables and Purchase Credit
Agreement (Recourse), whereby McKesson purchased (a) as of such
date, a major portion of the Company's outstanding third party
pharmacy plan receivables which was funded on such date, with
recourse by McKesson after 90 days and (b) subsequent to such
date, the on-going receivables generated through the pharmacies
and provide such funding within two (2) business days.
<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 34
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 21 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 closing of four under-
performing stores consisting of one Pharmhouse store and two Rx
Stores closed during the fiscal 1998 first quarter and one Rx
Store closed during the fiscal 1998 second quarter. The three Rx
Stores that were closed have been returned to Woolworth pursuant
to the Woolworth Settlement.
On June 24, 1997, the Company and Woolworth amended the Woolworth
Settlement to provide for the further disposition of the then
remaining five Rx Stores subject to the Woolworth Settlement
under the following terms and conditions:
One Rx Store was closed during the fiscal 1998 second
quarter and was subsequently returned to Woolworth, as noted
above.
Three Rx Stores will be operated by the Company on a month-
to-month basis and either party may terminate the Company's
occupancy in any or all of these three stores upon 75 days prior
notice. Woolworth will provide a partial reimbursement for
rental and other occupancy costs for these stores.
One Rx Store will be operated through September 30, 1997,
this store's lease expiration date, and Woolworth will provide a
partial reimbursement for rental and other occupancy costs
through such date. Effective October 1, 1997, the Company may
operate this store under a new lease which is being negotiated
with the landlord, and Woolworth will have no further obligations
related to this store.
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 average approximately 35,000 sq. ft. in size
and the Rx Stores average approximately 25,000 sq. ft. in size.
<PAGE> 10
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 2, 1997 and August 3, 1996:
Six Months Ended Three Months Ended
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues 100.0% 100.0% 100.0% 100.0
Cost of merchandise and
services sold 75.8 75.3 75.7 75.0
------ ------ ------ ------
Gross profit 24.2 24.7 24.3 25.0
Selling, general and
administrative expense 23.1 24.3 23.3 24.4
------ ------ ------ ------
Income from operations 1.1 0.4 1.0 0.6
Interest expense 1.6 2.0 1.6 2.1
------ ------ ------ ------
Net loss (0.5)% (1.6)% (0.6%) (1.5%)
====== ====== ====== ======
SECOND QUARTER OF FISCAL 1998 VS. SECOND QUARTER OF FISCAL 1997
Overall Quarterly Results
The Company reported a net loss of $297,000, or $.12 per share,
in the fiscal 1998 second quarter compared with a net loss of
$810,000, or $.36 per share, in the fiscal 1997 second quarter.
The improved results are attributable to the following factors:
reduced store (selling) expense arising from the Company's cost
reduction program initiated during fiscal 1997 and the on-going
occupancy reimbursement provided by Woolworth; the closing of
four under-performing stores (including three Rx Stores which
have been returned to Woolworth); and reduced interest expense
resulting from Woolworth's cancellation of the Purchase Money
Notes.
Significant Line Items
Revenues
Fiscal 1998 second quarter revenues (including video rental,
service and other income) were $48.4 million compared with
revenues of $55.3 million in the second quarter of fiscal 1997, a
decrease of $6.9 million, or 12.5%. Approximately 60% of the
revenue decrease, or $4.2 million, is attributable to the
operation of four fewer stores during the current quarter (34
stores were operated by the Company during the fiscal 1998 second
quarter vs. 38 stores during the fiscal 1997 second quarter) and
to the operation of one less pharmacy in one of the ongoing stores
during the current quarter. On a same-store basis for 30 stores
<PAGE> 11
(excluding the four remaining Rx Stores subject to the Woolworth
Settlement), fiscal 1998 second quarter revenues decreased 4.5%
compared with the prior year's second quarter.
Gross Profit
The fiscal 1998 second quarter gross profit (total revenues less
costs of merchandise and services sold and freight/distribution
services provided) was $11.7 million compared with $13.8 million
in the prior year's second quarter, a decrease of $2.1 million,
or 15.2%. The decrease primarily resulted from the operation of
four fewer stores during the fiscal 1998 second quarter compared
with the prior year's second quarter. As a percentage of
revenues, gross profit during the fiscal 1998 second quarter was
24.3% compared with 25.0% in the fiscal 1997 second quarter.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $11.3
million in the fiscal 1998 second quarter compared to $13.5
million in the fiscal 1997 second quarter, a decrease of $2.2
million, or 16.3%, resulting from the closing of four stores and
one pharmacy in another store during fiscal 1998 and from chain-
wide cost reductions which were phased-in during fiscal 1997. As
a percentage of revenues, SG&A expenses were 23.3% during the
fiscal 1998 second quarter compared to 24.4% in the fiscal 1997
second quarter, reflecting cost reductions (including payroll and
certain operating expenses) and the rental reimbursements
provided by Woolworth. The percentage reduction in SG&A expenses
was achieved on a same-store revenue decline during the period,
as previously described.
Operating Income
Operating income increased approximately $.1 million during the
fiscal 1998 second quarter compared with the fiscal 1997 second
quarter, principally resulting from reduced SG&A expenses, as
previously noted, substantially offset by lower gross profit.
Interest Expense
Interest expense during the fiscal 1998 second quarter decreased
$.4 million compared with the fiscal 1997 second quarter,
principally resulting from the cancellation of the Purchase Money
Notes in connection with the Woolworth Settlement and reduced
borrowing requirements owing to the closure of four stores during
fiscal 1998.
FIRST SIX MONTHS OF FISCAL 1998 VS. FIRST SIX MONTHS OF FISCAL
1997
Revenues
During the first six months of fiscal 1998, revenues (including
video rental, service and other income) were $99.8 million
compared with revenues of $112.5 million for the first six months
of the prior year, a decrease of $12.7 million, or 11.3%.
Approximately 62% of the revenue decrease, or $7.9 million, is
attributable to the closing of three stores and two pharmacies
<PAGE> 12
in the ongoing stores during the fiscal 1998 first quarter and to
the closing of one additional store during the fiscal 1998 second
quarter. Both of the pharmacy closings occurred in Rx Stores
subject to the Woolworth Settlement. On a same-store basis
for 30 stores (excluding the four remaining Rx Stores subject to
the Woolworth Settlement), revenues decreased 3.6% during the first
six months of fiscal 1998 compared with the first six months of the
prior year.
Gross Profit
The Company's gross profit (total revenues less costs of
merchandise and services sold and freight/distribution services
provided) for the first six months of fiscal 1998 was $24.1
million, or 24.2% of revenues, compared with $27.8 million, or
24.7% of revenues, for the six months of fiscal 1997, a decrease
of $3.7 million, or 13.3%. The $3.7 million decrease in gross
profit is primarily attributable to the operation of a reduced
number of stores and pharmacies during the first six months of
fiscal 1998 compared with the prior year's comparable period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses during the first six
months of fiscal 1998 were $23 million, or 23.1% or revenues,
compared with $27.3 million, or 24.3% of revenues, in the prior
year's comparable period, a decrease of approximately $4.3
million, or 15.8%. As a percentage of revenues, the decrease in
SG&A expenses was 1.2% and is attributable to the Company's cost
reduction program. The percentage reduction in SG&A expenses
during the first six months of fiscal 1998 was achieved on a
same-store revenue decline during this period, as previously
described.
Operating Income
Operating income during the first six months of fiscal 1998 was
$1.1 million compared with $.4 million in the prior year, an
improvement of $.7 million. The improvement in operating income
is attributable to a significant reduction in SG&A expenses,
partially offset by lower gross profit.
Interest Expense
Interest expense during the first six months of fiscal 1998 was
$1.6 million compared with $2.2 million for the first six months
of fiscal 1997. The decrease is primarily due to the cancellation
of the Purchase Money Notes in connection with the Woolworth
Settlement and to lower borrowing levels related to the operation
of four fewer stores during fiscal 1998 compared with fiscal
1997.
Liquidity and Capital Resources
Operating Activities
The Company generated operating cash flows of $5.7 million during
the first six months of fiscal 1998, attributable primarily to
reductions in inventory of $3.5 million and accounts receivable
of $1.5 million. A substantial portion of the inventory
reduction resulted from the store closings described elsewhere
herein.
<PAGE> 13
On September 4, 1997, the Company and McKesson Corporation
consummated an agreement, the Receivables and Purchase Credit
Agreement (Recourse), whereby McKesson purchased (a) as of such
date, a major portion of the Company's outstanding third party
pharmacy plan receivables which was funded on such date, with
recourse by McKesson after 90 days and (b) subsequent to such
date, the on-going receivables generated through the pharmacies
and provide such funding within two (2) business days.
Investing Activities
Capital expenditures amounted to $.9 million during the first six
months of fiscal 1998, a substantial portion of which related to
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 $4.0 million during the first six months of fiscal
1998. As of August 2, 1997, outstanding borrowings under the
Senior Credit Facility were $25.1 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
and the Company 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.
<PAGE> 14
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 financial statements owing
to their 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 $2.3 million at August 2, 1997 from $24.9
million at February 1, 1997 and (b) the ratio of current assets
to current liabilities decreased to 1.0 at August 2, 1997 from
1.7 at February 1, 1997.
Assuming the continuing availability of (a) trade credit at
current levels and (b) the combination of financing made
available through the Senior Credit Facility and the extension or
refinancing thereof with 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 ensuing twelve months.
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> 15
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: September 12, 1997 By:/s/ Kenneth A. Davis
Kenneth A. Davis
President, Chief Executive
Officer and Chief Operating
Officer
Date: September 12, 1997 By:/s/ Richard A. Davis
Richard A. Davis
Senior Vice President-Finance
and Chief Financial Officer
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