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 November 1, 1997
Commission File #1-7090
PHARMHOUSE CORP.
(Exact name of registrant as specified in its charter)
New York 13-2634868
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
860 Broadway, New York, New York 10003
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code (212) 477-9400
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15 (d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
YES X NO
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock as of the latest practicable
date.
Outstanding as of
Class
November 30, 1997
Common Shares,
$.01 par value 2,577,395
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at November 1, 1997
and February 1, 1997. 2
Consolidated Statements of Operations
for the three month and nine month periods ended
November 1, 1997 and November 2, 1996, respectively. 3
Consolidated Statements of Cash Flows
for the nine month periods ended November 1, 1997
and November 2, 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
<TABLE>
<S> <C> <C>
November 1, February 1,
1997 1997
ASSETS
========================================
Current assets
- --------------
Cash $ 3,195 $ 2,915
Accounts receivable, net of allowances
of $1,070 and $1,064, respectively 3,647 7,564
Merchandise inventory 47,413 49,796
Prepaid expenses and other current assets 2,218 1,861
-------- --------
Total current assets 56,473 62,136
Property, fixtures and equipment, net 5,079 5,580
Video inventory held for rental, net 2,066 2,531
Other assets 494 256
-------- --------
Total assets $64,112 $70,503
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
=========================================
Current liabilities
- -------------------
Current portion of long-term debt $ 8,050 $ 7,640
Accounts payable 24,320 24,412
Provision for store closure 108 1,615
Accrued expenses and other current liabilities 3,078 3,586
-------- --------
Total current liabilities 35,556 37,253
Long-term debt, net of current portion 20,154 24,400
Other non-current liabilities 1,461 498
-------- --------
Total liabilities 57,171 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 2,594,129
and 2,359,064 shares, respectively 26 23
Additional paid-in capital 21,727 21,498
Accumulated deficit (14,811) (13,168)
-------- --------
6,942 8,353
Treasury stock, 16,734 shares, at cost 1 1
-------- --------
Total shareholders' equity 6,941 8,352
-------- --------
Total liabilities and shareholders' equity $64,112 $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>
<S> <C> <C> <C> <C>
Nine Months Ended Three Months Ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
Revenues:
Net sales $ 142,089 $ 163,563 $ 45,517 $ 54,875
Video rental, service
and other income 4,692 5,655 1,504 1,882
---------- ---------- --------- ---------
146,781 169,218 47,021 56,757
---------- ---------- --------- ---------
Costs and Expenses:
Cost of merchandise and
and services sold 111,573 128,449 35,949 43,742
Selling, general and
administrative expenses 34,534 41,329 11,496 13,986
---------- ---------- --------- ---------
146,107 169,778 47,445 57,728
---------- ---------- --------- ---------
Operating income (loss) 674 (560) (424) (971)
Interest expense 2,317 3,332 736 1,119
---------- ---------- --------- ---------
Net loss $ (1,643) $ (3,892) $ (1,160) $ (2,090)
========== ========== ========= =========
Net loss per Common Share $ (0.67) $ (1.73) $ (0.45) $ (0.91)
========== ========== ========= =========
Weighted average Common
Shares outstanding 2,463,062 2,251,603 2,574,774 2,289,288
========== ========== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<Page 4>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
Nine Months Ended
November 1, November 2,
1997 1996
<S> <C> <C>
Cash Flows provided by Operating Activities:
Net loss $ (1,643) $ (3,892)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 983 939
Amortization of video inventory held for rental 1,423 1,226
Increase in deferred revenue 1,352 -
Decrease in deferred rent (133) (20)
Changes in operating assets and liabilities:
(Increase)decrease in:
Accounts receivable, net 3,917 (1,091)
Merchandise inventory 2,383 (5,572)
Prepaid expenses and other current assets (470) (538)
Other assets (238) 311
Increase (decrease) in:
Accounts payable (92) 8,451
Provision for store closure (1,507) -
Accrued expenses and other liabilities (764) 121
------- -------
Net Cash Flows provided (used) by Operating Activities 5,211 (65)
------- -------
Cash Flows used by Investing Activities:
Purchase of property, fixtures and equipment, net (369) (965)
Purchase of video inventory held for rental (958) (1,235)
------- -------
Net Cash Flows used by Investing Activities (1,327) (2,200)
------- -------
Cash Flows provided (used) by Financing Activities:
Revolver borrowings, net (3,386) 3,075
Pay-down of Subordinated Loan (450) (450)
Proceeds from exercise of stock options and warrants 232 90
------- -------
Net Cash Flows provided (used) by Financing Activities (3,604) 2,715
------- -------
Net increase in cash 280 450
Cash, beginning of period 2,915 2,884
------- -------
Cash, end of period $3,195 $3,334
======= =======
Supplemental information:
Interest payments $ 2,323 $ 2,483
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<Page 5>
PHARMHOUSE CORP. AND SUSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended November 1, 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 9 month periods
ended November 1, 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 third quarter financial
statements have been reclassified to be consistent with the
fiscal 1998 third 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,
<Page 6>
representations and warranties made by Woolworth in connection
with the Acquisition (the "Legal Proceedings"). Pending
resolution of the Company's claims, the Company withheld payment
of all further installments of principal and interest arising out
of the Purchase Money Notes held by Woolworth.
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
in principal amounts 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 received 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 option was to expire on
July 31, 1997. Such option was extended pursuant to an
amendment to the Woolworth Settlement dated June 24, 1997.
The current disposition of all of the Affected Stores is as
follows:
Three of the Affected Stores were closed by the Company
and returned to Woolworth during the first six months of fiscal
1998; a fourth Affected Store, for which the related lease
expired on September 30, 1997, is being operated by the
Company under a new lease which was negotiated with the
landlord. Woolworth had previously provided a partial
reimbursement for rental and other occupancy costs for this
store which ceased on September 30, 1997, subsequent to which
date Woolworth has no further obligation to the Company with
respect to this store; the three remaining Affected Stores
will be operated by the Company on a month-to-month basis and
Woolworth is providing a partial reimbursement of the rental
and occupancy costs for each of these stores through the
earlier of the respective lease expiration dates or the
dates on which such stores, if any, are returned to
Woolworth. Either party may terminate the Company's lease for
any or all of these three stores upon 75 days prior notice. The
Company intends to give notice to Woolworth of its
intent to return two of the three remaining Affected Stores
to Woolworth during the first quarter of fiscal 1999.
<Page 7>
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
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 an amendment to the Woolworth Settlement,
dated June 24, 1997, Woolworth agreed to provide a partial
reimbursement for rental and occupancy costs for certain of the
remaining Affected Stores subsequent to July 31, 1997 described
above.
Use of "The Rx Place" Name - Woolworth agreed to extend the
Company's license to use the service mark "The Rx Place" for an
additional three year period through April 28, 2001, subject to
the Company's right to extend such license for one additional
year upon proper notification, as defined in the agreement.
For further information concerning the Woolworth Settlement,
reference is made to Item 1 and Note 12 of Notes to the
Consolidated Financial Statements included in the Company's 1997
Form 10-K and its Form 8-K Report dated February 6, 1997.
NOTE 3 - BORROWINGS
A summary of the Company's borrowings at November 1, 1997 and
February 1, 1997 is as follows (000's omitted):
November 1, 1997 February 1, 1997
---------------------------- --------------------------
Current Noncurrent Current Noncurrent
Total portion portion Total portion portion
---------------------------- --------------------------
Senior Credit
Facility $25,654 $6,500* $19,154 $29,040 $7,040* $22,000
Subordinated Loan 1,550 1,550 - 2,000 600 1,400
Contingent Note 1,000 - 1,000 1,000 - 1,000
------------------------- -----------------------
$28,204 $8,050 $20,154 $32,040 $7,640 $24,400
========================= =======================
* This amount is classified as "current" for financial reporting
purposes only and is subject to the same terms and conditions as
the portion which is classified as "noncurrent".
Senior Credit Facility
Pursuant to an amendment to the Senior Credit Facility, dated
October 31, 1997, the initial three year term of such facility
(expiring on April 28, 1998) was extended for two additional
years through April 28, 2000, under substantially the same terms
and conditions.
The Senior Credit Facility provides for borrowing availability
equal to the lesser of 60% of eligible inventory (at cost) or $45
million. During the fiscal 1998 third quarter, the Company's
senior secured lender extended a seasonal advance to the Company
in the amount of $1.5 million which is to be repaid in stages
until repaid in full by mid-January 1998.
<Page 8>
The indebtedness under the Facility is secured by a first
priority lien on substantially all of the Company's assets,
restricts the payment of dividends and requires that the Company
maintain minimum net worth levels. Effective February 2, 1997,
the Company's senior secured lender amended the minimum net worth
requirement to $6 million (determined at the close of each fiscal
quarter) which will increase to $7 million upon cancellation of
the remaining $1 million contingent note obligation to Woolworth
described in Note 2.
Subordinated Loan
The Subordinated Loan is payable to an unaffiliated supplier and
is being repaid in monthly installments of $50,000 with a $1.2
million balloon payment due in April 1998. The subordinated
lender has been granted a second priority lien on substantially
all of the Company's assets.
Contingent Note
In connection with the Woolworth Settlement, the Purchase Money
Note due in April 1998 (in the original principal amount of $2.9
million) was modified so that such Note constitutes a $1 million
non-interest bearing contingent obligation which is to be
forgiven by Woolworth on July 30, 1998, subject to certain
conditions.
NOTE 4 - WARRANTS
The Company issued warrants in December 1991 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 - ACCOUNTS RECEIVABLE
During the fiscal 1998 third quarter, the Company and McKesson
Corporation consummated an agreement, the Receivables and
Purchase Credit Agreement (Recourse) whereby, effective on
September 4, 1997, McKesson purchased a major portion of the
Company's pharmaceutical third party plan receivables outstanding
as of such date and the on-going third party plan receivables
generated by the Company subsequent to such date. The funding by
McKesson under this agreement is made available to the Company
two business days after the third party plan receivables are
generated. The funding provided under this agreement is subject
to recourse with respect to third party plan receivables not
collected within 90 days. The Company previously provided, and
continues to provide, reserves for third party plan receivables
not collected within 90 days. In the opinion of management, such
reserves appear to be adequate to cover anticipated uncollectible
amounts.
<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 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.
The total number of stores operated by the Company as of the date
of this Report reflects 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 (for further information concerning
the Woolworth Settlement, see Note 2 to the Consolidated
Financial Statements included in Item 1 of this Report). The
Woolworth Settlement was amended on June 24, 1997 to provide for
the further disposition of the remaining Rx Stores subject to the
settlement agreement. The current disposition of the four
remaining Rx Stores subject to the Woolworth Settlement is as
follows:
One Rx Store, for which the related lease expired on
September 30, 1997, is being operated under a new lease which
was negotiated with the landlord. Woolworth had previously
provided a partial reimbursement for rental and other occupancy
costs for this store which ceased on September 30, 1997,
subsequent to which date Woolworth has no further obligation to
the Company with respect to this store.
The three remaining Rx Stores subject to the Woolworth
Settlement will be operated by the Company on a month-to-month
basis and Woolworth is providing a partial reimbursement of
a portion of the rental and other occupancy costs for each of
these stores through the earlier of the respective lease
expiration dates or the dates on which such stores, if any,
are returned to Woolworth. Either party may terminate
the Company's occupancy in any or all of these three stores
upon 75 days prior notice. The Company intends to give
notice to Woolworth of its intent to return two of the three
remaining Affected Stores to Woolworth during the first quarter
of fiscal 1999.
<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 nine month and three month periods ended
November 1, 1997 and November 2, 1996:
Nine Months Ended Three Months Ended
------------------------ ------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
------- ------- ------- -------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of merchandise and
services sold 76.0 75.9 76.4 77.0
------- ------- ------- -------
Gross profit 24.0 24.1 23.6 23.0
Selling, general and
administrative expenses 23.5 24.4 24.5 24.6
------- ------- ------- -------
Operating income (loss) 0.5 (0.3) (0.9) (1.6)
Interest expense 1.6 2.0 1.6 2.0
------- ------- ------- -------
Net loss (1.1)% (2.3)% (2.5%) (3.6%)
======= ======= ======= =======
THIRD QUARTER OF FISCAL 1998 VS. THIRD QUARTER OF FISCAL 1997
Overall Quarterly Results
The Company reported a net loss of $1.2 million, or $.45 per
share, in the fiscal 1998 third quarter compared with a net loss
of $2.1 million, or $.91 per share, in the fiscal 1997 third
quarter. The improved results are attributable to the following
factors: increased gross profit percentage; reduced selling,
general and administrative ("SG&A") expenses arising from the
Company's cost reduction program 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 and
lower borrowing costs in connection with operating a reduced
number of stores and pharmacies.
Significant Line Items
Revenues
Fiscal 1998 third quarter revenues (including video rental,
service and other income) were $47 million compared with $56.8
million in the fiscal 1997 third quarter, a decrease of $9.8
million, or 17.2%. Approximately $4.3 million of the revenue
decrease, or 43.9%, is attributable to the operation of a reduced
number of stores (34 stores were operated by the Company during
the fiscal 1998 third quarter vs. 38 stores during the fiscal
1997 third quarter) as well as to the operation of one less
pharmacy in one of the stores which remains subject to the
Woolworth Settlement agreement. On a same-store basis for 31
stores (excluding the three Rx Stores which remain subject to the
Woolworth Settlement), revenues decreased 9.2% compared with the
prior year's third quarter and is attributed by the Company's
<Page 11>
management to the following: increased competition in certain
markets; supply interruptions for certain merchandise categories;
price deflation in generic pharmacy and grocery merchandise
product; and an increase in the proportion of unit sales of
generic over-the-counter and pharmacy merchandise (sold at lower
prices, but at a higher gross profit percentage, compared to
equivalent brand-name merchandise); and other factors.
Management has responded to the revenue decline by implementing
programs to increase customer counts and revenues. The main
thrust of these programs has been to improve the value image
throughout the Company's stores in the following respects: first,
a substantial number of highly consumable and price sensitive
items have been priced very aggressively in a new "Low Low
Everyday Price Program". These items have been signed and
displayed prominently in the Company's stores thereby heightening
customer awareness of the exceptional everyday merchandise
values; second, the Company has increased its efforts to seek out
opportunistic merchandise purchases to enhance the excitement
and price/value component of store merchandise offerings. These
opportunistic purchases have been featured in promotional
circulars at prices well below "sale or ad" prices offered by
other retailers; and third, two stores have been re-merchandised
with a heavy emphasis on aggressive price/item display techniques.
Gross Profit
The fiscal 1998 third quarter gross profit (total revenues less
costs of merchandise and services sold and freight/distribution
services provided) was $11.1 million compared with $13 million in
the prior year's third quarter, a decrease of $1.9 million, or
14.6%. The decrease in gross profit resulted from the operation
of a reduced number of stores and one less pharmacy during the
current quarter compared with the prior year's third quarter and
from a decrease in same-store revenues. The decrease in same-
store revenues was partially offset by a .6% increase in the
gross profit percentage (the gross profit was 23.6% during the
fiscal 1998 third quarter vs. 23% in the prior year's third
quarter).
Selling, General and Administrative Expenses
SG&A expenses were $11.5 million in the fiscal 1998 third quarter
compared to $14 million in the fiscal 1997 third quarter, a
decrease of $2.5 million, or 17.9%, resulting from the operation
of a reduced number of stores and one less pharmacy during the
fiscal 1998 third quarter compared with the fiscal 1997 third
quarter and from chain-wide cost reductions. As a percentage of
revenues, SG&A expenses decreased to 24.5% during the fiscal 1998
third quarter compared with 24.6% during the fiscal 1997 third
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 despite a decrease in same-store revenues during the
period.
Operating Income (Loss)
The Company reported an operating loss of $424,000 during the
fiscal 1998 third quarter compared with an operating loss of
$971,000 during the fiscal 1997 third quarter, an improvement of
$547,000 primarily resulting from significantly reduced SG&A
expenses.
<Page 12>
Interest Expense
Interest expense during the fiscal 1998 third quarter decreased
$383,000 compared with the fiscal 1997 third quarter, resulting
from the cancellation of the Purchase Money Notes in connection
with the Woolworth Settlement and reduced borrowing requirements
attributable to the operation of a reduced number of stores and
one less pharmacy during the fiscal 1998 third quarter compared
to the fiscal 1997 third quarter. The benefit of a decrease in
average outstanding borrowings during the fiscal 1998 third
quarter was partially offset by a slightly higher average
borrowing rate compared with the prior year's third quarter.
FIRST NINE MONTHS OF FISCAL 1998 VS. FIRST NINE MONTHS OF FISCAL 1997
Revenues
During the first nine months of fiscal 1998, revenues (including
video rental, service and other income) were $146.8 million
compared with $169.2 million during the first nine months of the
prior year, a decrease of $22.4 million, or 13.2%. Approximately
$8.7 million of the revenue decrease, or 38.8%, is attributable
to the closing during the fiscal 1998 first quarter of three
stores and pharmacies in two Rx stores (both of such Rx stores
remaining subject to the Woolworth Settlement) and to the closing
during the fiscal 1998 second quarter of one of the above-noted
Rx store's whose pharmacy had previously been closed. On a same-
store basis for 31 stores (excluding the three Rx Stores which
remain subject to the Woolworth Settlement), revenues decreased
5.7% during the first nine months of fiscal 1998 compared with
the first nine months of the prior year. In response to the
decline in same-store revenues during the first nine months of
fiscal 1998, the Company has implemented certain programs
designed to increase customer counts and revenues, as more fully
described in the discussion of revenues for the fiscal 1998 third
quarter contained in this Item 2.
Gross Profit
The Company's gross profit (total revenues less costs of
merchandise and services sold and freight/distribution services
provided) during the first nine months of fiscal 1998 was $35.2
million compared with $40.8 million during the first nine months
of fiscal 1997, a decrease of $5.6 million, or 13.7%. The
decrease in gross profit resulted from the operation of a reduced
number of stores and pharmacies during the first nine months of
fiscal 1998 compared with the same period during fiscal 1997 and
to a decrease in same-store revenues. As a percentage of
revenues, the gross profit during the first nine months of fiscal
1998 remained virtually unchanged compared with the prior year's
comparable period (24% vs. 24.1%).
Selling, General and Administrative Expenses
SG&A expenses during the first nine months of fiscal 1998 were
$34.5 million compared with $41.3 million in the prior year's
comparable period, a decrease of approximately $6.8 million, or
16.5%. As a percentage of revenues, SG&A expenses decreased .9%
during the first nine months of fiscal 1998 compared with the
prior year's comparable period (23.5% vs. 24.4%) and is
attributable to the Company's cost reduction program. The
percentage reduction in SG&A expenses during the first nine
months of fiscal 1998 was achieved despite a decrease in same-
store revenues during the period.
<Page 13>
Operating Income (Loss)
Operating income was $674,000 during the first nine months of
fiscal 1998 compared with an operating loss of $560,000 during
the prior year's comparable period, an improvement of $1,234,000
which is attributable to a significant reduction in SG&A
expenses, partially offset by lower gross profit.
Interest Expense
Interest expense during the first nine months of fiscal 1998 was
$2.3 million compared with $3.3 million during the first nine
months of fiscal 1997, a decrease of $1 million which resulted
primarily from the cancellation of the Purchase Money Notes in
connection with the Woolworth Settlement and, to a lesser extent,
to a decrease in borrowing requirements attributable to the
Company's operation of a reduced number of stores and pharmacies
during the period. The benefit of a decrease in average
outstanding borrowings during the first nine months of fiscal
1998 was partially offset by a slightly higher average borrowing
rate compared with the same period in the prior year.
Liquidity and Capital Resources
Operating Activities
The Company generated operating cash flows of $5.2 million during
the first nine months of fiscal 1998, attributable primarily to
reductions in accounts receivable of $3.9 million and inventory
of $2.4 million. A substantial portion of the reduction in
accounts receivable resulted from the sale of a significant
portion of the Company's third-party accounts receivable, as more
fully described below. A substantial portion of the inventory
reduction resulted from the store and pharmacy closings described
elsewhere herein.
During the fiscal 1998 third quarter, the Company and McKesson
Corporation consummated an agreement, the Receivables and
Purchase Credit Agreement (Recourse) whereby, effective on
September 4, 1997, McKesson purchased a major portion of the
Company's pharmaceutical third party plan receivables outstanding
as of such date and the on-going third party plan receivables
generated by the Company subsequent to such date. The funding by
McKesson under this agreement is made available to the Company
two business days after the third party plan receivables are
generated. The funding provided under this agreement is subject
to recourse with respect to third party plan receivables not
collected within 90 days.
Capital Expenditures
Capital expenditures amounted to $1.3 million during the first
nine months of fiscal 1998, a substantial portion of which
related to video inventory held for rental. Capital expenditures
include approximately $187,000 which was devoted during the
fiscal 1998 third quarter to restructuring two stores in
conjunction with the Company's re-merchandising program.
Management believes that per-store restructuring expenditures for
other stores in connection with the Company's re-merchandising
program will be significantly less than amounts expended for the
first two stores. The Company has continued to defer other major
<Page 14>
capital improvements until such time as the Company achieves
profitability.
Financing Activities
Net borrowings under the Company's Senior Credit Facility
decreased $3.4 million during the first nine months of fiscal
1998. As of November 1, 1997, outstanding borrowings under the
Senior Credit Facility were $25.7 million.
Summary of Borrowings
Senior Credit Facility
Pursuant to an amendment to the Senior Credit Facility dated
October 31, 1997, the initial three year term of the Senior
Credit Facility (expiring on April 28, 1998) was extended for two
additional years through April 28, 2000, under substantially the
same terms and conditions.
The Senior Credit Facility provides for borrowing availability
equal to the lesser of 60% of eligible inventory (at cost) or $45
million. During the fiscal 1998 third quarter, the Company's
senior secured lender extended a seasonal advance to the Company
in the amount of $1.5 million which is to be repaid in stages
until repaid in full by mid-January 1998.
The indebtedness under the 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.
Subordinated Loan
The Subordinated Loan payable to an unaffiliated supplier is
being repaid in monthly installments of $50,000 with a $1.2
million balloon payment due in April 1998. The subordinated
lender has been granted a second priority lien on substantially
all of the Company's assets.
Working Capital and Current Ratio
Working capital was $20.9 million at November 1, 1997 compared
with $24.9 million at February 1, 1997. The ratio of current
assets to current liabilities was 1.6 at November 1, 1997 and 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 (as extended for an
additional two-year period) 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 forthcoming twelve months.
<Page 15>
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.
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: December 16, 1997 By:/s/ Kenneth A. Davis
Kenneth A. Davis
President, Chief Executive
Officer and Chief Operating
Officer
Date: December 16, 1997 By:/s/ Richard A. Davis
Richard A. Davis
Senior Vice President-Finance
and Chief Financial Officer
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