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 1, 1998
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 August 31, 1998
------- ---------------
Common Shares,
$.01 par value 2,594,830
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at August 1, 1998
and January 31, 1998 2
Consolidated Statements of Operations
for the three month and six month periods ended
August 1, 1998 and August 2, 1997, respectively. 3
Consolidated Statements of Cash Flows
for the three month and six month periods ended
August 1, 1998 and August 2, 1997, respectively. 4
Notes to Consolidated Financial Statements. 5 - 7
Item 2. Management's Discussions and Analysis
of Operations 8 - 13
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>
<CAPTION>
<S> <C> <C>
August 1, 1998 January 31, 1998
------------- ---------------
ASSETS
Current Assets
Cash $ 2,932 $ 3,296
Accounts receivable, net of allowances
of $1,162 and $1,075, respectively 2,987 4,518
Merchandise inventory 37,204 37,332
Prepaid expenses and other 2,101 1,292
-------- --------
Total current assets 45,224 46,438
Property, fixtures and equipment, net 4,717 4,795
Video rental inventory, net 1,875 1,972
Other assets 1,049 487
-------- --------
Total assets $52,865 $53,692
======== ========
LIABILITIES AND SHAREHOLDRES' EQUITY
Current Liabilities
Current portion of long-term debt $ 1,720 $ 4,647
Accounts payable 19,492 20,713
Provision for store closure - 284
Accrued expenses and other
current liabilities 2,433 2,628
-------- --------
Total current liabilities 23,645 28,272
Long-term debt, net of current portion 24,787 19,154
Other liabilities 1,212 1,372
-------- --------
Total liabilities 49,644 48,798
-------- --------
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 2,594,830
and 2,594,841 shares, respectively 26 26
Additional paid-in capital 21,728 21,728
Accumulated deficit (18,532) (16,859)
-------- --------
3,222 4,895
Treasury stock, at cost 1 1
-------- --------
Total shareholders' equity 3,221 4,894
-------- --------
Total liabilities and shareholders' equity $52,865 $53,692
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statement
<Page 3>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Unaudited
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Six Months Ended Three Months Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
Revenues:
Net sales $87,690 $96,572 $43,415 $46,743
Video rental, service
and other income 2,594 3,188 1,351 1,607
-------- -------- -------- --------
90,284 99,760 44,766 48,350
-------- -------- -------- --------
Costs and Expenses:
Cost of merchandise and
services sold 68,676 75,624 33,965 36,601
Selling, general and
administrative expense 22,343 23,038 11,208 11,279
-------- -------- -------- --------
91,019 98,662 45,173 47,880
-------- -------- -------- --------
Operating income (loss) (735) 1,098 (407) 470
Interest expense (1,325) (1,581) (707) (767)
-------- -------- -------- --------
Loss before extraordinary items (2,060) (483) (1,114) (297)
Extraordinary items, net 387 - 387 -
-------- -------- -------- --------
Net loss $(1,673) $ (483) $ (727) $ (297)
======== ======== ======== ========
Basic earnings (loss) per share:
Loss before extraordinary items $ (0.80) $ (0.20) $ (0.43) $ (0.12)
Extraordinary items, net 0.15 - 0.15 -
-------- -------- -------- --------
Net loss per Common Share $ (0.65) $ (0.20) $ (0.28) $ (0.12)
======== ======== ======== ========
Average shares outstanding 2,578 2,414 2,578 2,499
======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<Page 4>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended
August 1, August 2,
1998 1997
--------- ---------
Cash Flows provided (used) by Operating Activities:
Net loss (1,673) (483)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 1,327 1,548
Decrease in deferred rent (33) (129)
Increase (decrease) in deferred revenue (127) 1,415
Extraordinary items (911) -
Changes in operating assets and liabilities:
(Increase)decrease in:
Accounts receivable, net 1,531 1,458
Merchandise inventory 128 3,462
Prepaid expenses and other current assets (936) (230)
Other assets (562) (514)
Increase (decrease) in:
Accounts payable (1,221) 683
Provision for store closure (284) (475)
Accrued expenses and other liabilities (202) (1,054)
------- -------
Net cash flows provided (used) by Operating Activities (2,963) 5,681
------- -------
Cash Flows used by Investing Activities:
Purchase of property and equipment, net (441) (270)
Purchase of video rental inventory, net (465) (673)
------- -------
Net Cash Flows used by Investing Activities (906) (943)
------- -------
Cash Flows provided (used) by Financing Activities:
Net borrowings from New Senior Credit Facility 24,390 -
Pay-off of Prior Senior Credit Facility (21,600) -
Net borrowing from Prior Senior Credit Facility - (3,984)
Proceeds from Subordinated Loan 1,000 -
Pay-down of Subordinated Loan (285) (350)
Proceeds from exercise of stock options and warrants - 156
------- -------
Net Cash Flows provided (used) by Financing Activities 3,505 (4,178)
------- -------
Net (decrease) increase in cash (364) 560
Cash, beginning of period 3,296 2,915
------- -------
Cash, end of period $2,932 $3,475
======= =======
Supplemental information:
Interest payments $1,099 $1,601
Income taxes paid $ 14 $ 43
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<Page 5>
PHARMHOUSE CORP. AND SUSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended August 1, 1998
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 conformity 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 January 31, 1998 ("fiscal 1998") which
are included in the Company's Annual Report (the "1998 Form 10-K") heretofore
filed with the Securities and Exchange Commission. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation of the financial information for
the interim periods reported have been made. Results of operations for the 13
week and 26 week periods ended August 1, 1998 are not necessarily indicative of
the results to be expected for the entire fiscal year ending January 30, 1999
("fiscal 1999"). These Consolidated Financial Statements should be read in
conjunction with the Company's fiscal 1998 audited Consolidated Financial
Statements and Notes thereto. Certain amounts in the fiscal 1998 second
quarter financial statements have been reclassified to be consistent with
the fiscal 1999 second quarter presentation.
NOTE 2 - CONCLUSION OF THE WOOLWORTH SETTLEMENT
On January 31, 1997, the Company and F. W. Woolworth Co., a subsidiary of
Woolworth Corporation (collectively "Woolworth") entered into a Mutual Release
and Settlement Agreement, subsequently amended on June 24, 1997 (collectively,
the "Woolworth Settlement"), resolving all outstanding disputes and settling
all legal proceedings arising out of the Company's purchase of 24 Rx Place
discount drug stores (the "Acquisition") from Woolworth in April 1995.
The major aspects of the Woolworth Settlement included:
Debt and interest cancellation of $9.5 million, $8.5 million of which
amount was forgiven by Woolworth during fiscal 1997 and $1 million of which
amount was converted into a Contingent Note obligation and subsequently
forgiven by Woolworth as of July 30, 1998 (the Company recorded a $1 million
extraordinary gain in its fiscal 1999 second quarter related to the debt
cancellation).
An option to return to Woolworth up to seven of the Rx Stores purchased in
the Acquisition (the "Affected Stores"), including receiving rent and
occupancy subsidies for such stores through stipulated dates. The Company
had previously closed five of the Affected Stores and reassigned to
Woolworth the leases for such stores. The lease for one other Affected
Store, which expired during fiscal 1998, was re-negotiated by the Company
with the landlord of the property for this store and the Company has
continued to operate such store without any further subsidy or other
obligation from Woolworth. During the fiscal 1999 second quarter, Woolworth
exercised its option to require the Company to return to Woolworth the premises
for the last Affected Store, pursuant to which the Company vacated the
premises of such store at the end of July 1998 and reassigned the store lease
to Woolworth. The Company subsequently transferred the merchandise inventory,
equipment and certain fixtures of this store to another location within the
same mall under a new lease with the landlord of the property and re-opened
the store in late August 1998.
<Page 6>
As a result of the cancellation of the Contingent Note and the return of the
last Affected Store to Woolworth, substantially all of the terms of the
Woolworth Settlement have been performed by the parties.
For further information concerning the Woolworth Settlement, reference is made
to Item 1 and Note 2 of Notes to the Consolidated Financial Statements
included in the Company's 1998 Form 10-K.
NOTE 3 - BORROWINGS
A summary of the Company's borrowings at August 1, 1998 and January 31, 1998
is as follows (000's omitted):
August 1, 1998 January 31, 1998
------------------------- -----------------------
Current Non-current Current Non-current
Total portion portion Total portion portion
------------------------- ------------------------
New Senior Credit $24,390 1,300(*) $23,090 $ - $ - $ -
Facility (i)
Prior Senior Credit
Facility (ii) - - - 21,401 2,247 19,154
Subordinated Loan (iii) 2,117 420 1,697 1,400 1,400 -
Contingent Note - - 1,000 1,000 -
------------------------- ------------------------
$26,507 $1,720 $24,787 $23,801 $4,647 $19,154
========================= ========================
(*) 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".
(i) New Senior Credit Facility
On May 14, 1998, the Company and Foothill Capital Corporation ("Foothill")
entered into a Loan and Security Agreement (the "New Senior Credit Facility"
or "New Facility") providing for aggregate credit to the Company of up to $40
million. The New Facility consists of the following items: (i) a Term Loan up
to $3 million; and (ii) revolving advances equal to the lesser of: (a) 65% of
eligible inventory (at cost); or (b) $35 million (which may be increased to
$40 million upon certain conditions) less the outstanding principal amount of
the Term Loan. Under the New Facility, subject to the foregoing formula, the
maximum revolving advances could increase up to an aggregate of $35 million
($40 million upon certain conditions) as the outstanding principal amount of
the Term Loan is reduced. As of August 1, 1998, the outstanding borrowings
under the New Senior Credit Facility consisted of revolving advances amounting
to $21.4 million and a $3 million Term Loan. The revolving and term loans
under the New Senior Credit Facility have a five year term, subject to minor
amortization of the Term Loan during that period. The initial funds advanced
to the Company under the New Facility were used to pay outstanding borrowings,
charges, fees and a temporary $1 million cash collateral account, aggregating
$22.6 million owing by the Company to its prior senior secured lender ("Prior
Lender"). The $1 million cash collateral was subsequently returned to the
Company by the Prior Lender. In addition, the Company incurred other
transaction fees of approximately $1 million.
Indebtedness under the New Senior Credit Facility is secured by a first
priority lien on substantially all of the Company's assets and, among other
conditions, restricts the payment of dividends and requires that the Company
maintain specified quarterly minimum tangible net worth and EBITDA levels.
The Company did not meet the specified minimum tangible net worth and EBITDA
levels at the end of the fiscal 1999 second quarter, subsequent to which the
Company's senior lender waived the Company's non-compliance with such
covenants for the fiscal 1999 second quarter. The borrowing rates for the New
Facility are prime plus 1.125% for the revolving advances (subject to decrease
if the Company reaches certain EBITDA levels during the term of the facility)
and 11.75% for the Term Loan.
<Page 7>
(ii) Prior Senior Credit Facility
The borrowing availability with the Company's Prior Lender under the Prior
Senior Credit Facility was based on the lesser of 60% of eligible inventory
(at cost) or $45 million. On May 14, 1998, the Company repaid all outstanding
indebtedness to the Prior Lender from the proceeds of the New Senior Credit
Facility.
(iii) Subordinated Loan
During the fiscal 1999 second quarter, the Company and the subordinated lender
negotiated an extension of the payment terms for the balloon payment that was
due on August 1, 1998 and to provide additional financing to the Company. The
following agreement was concluded: (i) the Company received an additional $1
million subordinated loan from the subordinated lender; and (ii) such
additional $1 million plus the balloon payment of $1.1 million due on August
1, 1998, totaling $2.1 million in the aggregate, is to be paid by the Company
to the subordinated lender at the rate of $35,000 per month, plus interest,
for a period of 60 months. The subordinated lender has been granted a second
priority lien on substantially all of the Company's assets.
(iv) Contingent Note
Pursuant to the terms of the Woolworth Settlement, a Contingent Note in the
amount of $1 million was surrendered by Woolworth for cancellation as of July
30, 1998. Accordingly, the Company recorded a $1 million extraordinary gain
in its fiscal 1999 second quarter with respect to such cancellation. For
further information concerning the Woolworth Settlement, see "Conclusion of
the Woolworth Settlement" in Note 2.
<Page 8>
ITEM 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
General
The Company currently operates a chain of 32 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 19
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. In January
1997, the Company and Woolworth entered into a settlement agreement, amended
in June 1997 (collectively, the "Woolworth Settlement"), resolving all
outstanding disputes arising out of the Company's purchase of 24 Rx Stores
from Woolworth. Pursuant to the Woolworth Settlement, the Company has closed
and returned six Rx Stores to Woolworth, including one store that was closed
and returned to Woolworth during the fiscal 1999 second quarter. (The Company
subsequently transferred the merchandise inventory, equipment and certain
fixtures of this store to a new space in the same mall under a new lease with
the landlord of the property and re-opened the store in late August 1998).
Also in connection with the Woolworth Settlement, Woolworth surrendered for
cancellation, as of July 30, 1998, a $1 million Contingent Note pursuant to
which the Company recorded a $1 million extraordinary gain in its fiscal 1999
second quarter. Accordingly, as of the date of this Report, substantially all
of the major terms of the Woolworth Settlement have been performed by the
parties.
In prior years, the Company has characterized its stores as "deep discount
stores", but management has recently determined that the term "discount
stores" more accurately describes its current store operations. The Company's
stores emphasize a pricing policy of everyday 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.
Results of Operations
The following table sets forth, as a percentage of revenues, in the Company's
Consolidated Statements of Operations for the six month and three month periods
ended August 1, 1998 and August 2, 1997, respectively:
Six Months Ended Three Months Ended
---------------- -----------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of merchandise and
services sold 76.1 75.8 75.9 75.7
--------- --------- --------- ---------
Gross profit 23.9 24.2 24.1 24.3
Selling, general and
administrative expense 24.7 23.1 25.0 23.3
--------- --------- --------- ---------
Operating income (loss) (0.8) 1.1 (0.9) 1.0
Interest expense (1.5) (1.6) (1.6) (1.6)
--------- --------- --------- ---------
Loss before extraordinary
items (2.3) (0.5) (2.5) 0.6
Extraordinary items, net 0.4 - 0.9 -
--------- --------- --------- ---------
Net loss (1.9)% (0.5)% (1.6)% (0.6)%
========= ========= ========= =========
<Page 9>
SECOND QUARTER OF FISCAL 1999 VS. SECOND QUARTER OF FISCAL 1998
Overall Quarterly Results
The Company reported a net loss of $.7 million, or $.28 per share, in the
fiscal 1999 second quarter compared with a net loss of $.3 million, or $.12
per share, in the fiscal 1998 second quarter. Results for the fiscal 1999
second quarter include a $1 million extraordinary gain related to Woolworth's
cancellation of a Contingent Note in connection with the Woolworth Settlement
and a $.6 million extraordinary charge for costs related to the Company's
early termination of the Prior Senior Credit Facility. Exclusive of
extraordinary items, the Company reported a loss of $1.1 million during the
fiscal 1999 second quarter compared to a loss of $.3 million during the fiscal
1998 second quarter, reflecting a same-store revenue decline, an increase in
the Company's monthly shrink accrual rate partially offset by price increases
and the loss of profit from the closure of four Rx Stores which had been
subject to a 100% rental reimbursement under the Woolworth Settlement
provisions. During the fiscal 1999 second quarter, the Company had reduced
interest expense compared with the prior year's second quarter.
Significant Line Items
Revenues
Fiscal 1999 second quarter revenues decreased $3.6 million, or 7.4%, to $44.8
million compared with revenues of $48.4 million in the second quarter of
fiscal 1998. The decline in revenues resulted from the following factors: the
operation of a reduced number of stores in the second quarter of fiscal 1999
compared with the same quarter in fiscal 1998; the closing of a pharmacy
during fiscal 1998 in a store which continues to operate; and a 3.3% same-
store revenue decline compared with the fiscal 1998 second quarter (based on
30 stores - excluding one store which was undergoing major renovation during
the fiscal 1999 second quarter and one store whose pharmacy was closed in
fiscal 1998, as noted).
The decline in same-store revenues is attributed to increased competition in
certain markets and inadequate inventory levels in certain merchandise
categories. Inventory levels in the Company's stores during the fiscal 1999
second quarter was negatively affected by a combination of: (i) the impact on
the vendor community of the delayed release of the Company's 1998 Form 10-K in
connection with the refinancing of the senior debt facility with Foothill; and
(ii) the previous unresolved status of a $1.1 million balloon payment to the
subordinated lender which was originally due on April 28, 1998. By virtue of
the financing transactions with Foothill in May 1998 and the subordinated
lender in June 1998, both of which transactions are described elsewhere
herein, and the dissemination of this information to the vendor community, the
flow of merchandise into the Company's stores began to improve during July
1998. Management believes that the improved merchandise flow has contributed
to the improvement in same-store revenues during July 1998 compared with
results that had been achieved earlier in the quarter.
Gross Profit
Fiscal 1999 second quarter gross profit (total revenues less costs of
merchandise and services sold and freight/distribution services provided) was
$10.8 million compared to $11.7 million in the prior year's second quarter, a
decrease of $.9 million, resulting from the operation of a reduced number of
stores and a decline in same-store revenues. As a percentage of revenues, the
gross profit was 24.1% compared with 24.3% during the prior year's fiscal
second quarter. The current quarter's gross profit includes an increase in
the Company's monthly shrink accrual rate (based on the prior fiscal year's
shrink results), partially offset by the effect of price increases, both of
which measures were instituted by the Company in March 1998. As the price
increases are being phased-in over a period of months, management believes
such increases may not be sufficient to fully offset the effect of the
increased monthly shrink accrual rate until, at the earliest, the fiscal 1999
third quarter.
<Page 10>
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense declined $.1 million to
$11.2 million in the fiscal 1999 second quarter compared with the prior year's
second quarter. As a percentage of revenues, SG&A expense increased 1.7%
during the fiscal 1999 second quarter to 25.0% from 23.3% during the prior
year's second quarter. This increase is primarily attributable to lower
revenues from which to absorb certain SG&A expenses and to reduced rental
reimbursements received from Woolworth for certain Rx Stores which were
previously subject to the provisions of the Woolworth Settlement. During the
fiscal 1998 second quarter, the Company operated five of such stores with the
assistance of a 100% rental and occupancy reimbursement from Woolworth
whereas, during the fiscal 1999 second quarter, the Company received only a
partial reimbursement for the one such Rx Store which remained subject to that
settlement.
Operating Income
The Company reported an operating loss of $.4 million during the fiscal 1999
second quarter compared with operating income of $.5 million during the fiscal
1998 second quarter, a decrease of $.9 million. Results for the fiscal 1999
second quarter were negatively affected by a 3.3% decrease in same-store
revenues, a .2% decrease in the gross profit percentage and reduced profit
from five stores (previously subject to a 100% rental and occupancy
reimbursement from Woolworth) which were closed and returned to Woolworth in
connection with the Woolworth Settlement.
Interest Expense
Interest expense during the fiscal 1999 second quarter decreased $.1 million
compared to the fiscal 1998 second quarter resulting primarily from lower
borrowing requirements related to the operation of a reduced number of stores
and to significantly lower average store inventory levels during the current
quarter compared with the prior year's second quarter.
Extraordinary Items, Net
Extraordinary items, net, totaling $.4 million, consist of the cancellation by
Woolworth of a $1 million Contingent Note in connection with the Woolworth
Settlement and $.6 million of fees and expenses related to the early
termination of the Prior Senior Credit Facility, including a charge to
write-off the balance of deferred financing costs related to such facility.
FIRST SIX MONTHS OF FISCAL 1999 VS. FIRST SIX MONTHS OF FISCAL 1998
Overall Results
The Company reported a net loss of $1.7 million, or $.65 per share, during the
first six months of fiscal 1999 compared with a net loss of $.5 million, or
$.20 per share, during the first six months of fiscal 1998. Results for the
first six months of fiscal 1999 include a $1 million extraordinary gain
related to Woolworth's cancellation of a Contingent Note in connection with
the Woolworth Settlement and a $.6 million extraordinary charge for costs
incurred in connection with the Company's early termination of the Prior
Senior Credit Facility. Exclusive of extraordinary items, the Company
reported a loss of $2.1 million during the first six months of fiscal 1999
compared with a loss of $.5 million during the first six months of fiscal
1998. Operating results during the first six months of fiscal 1999 were
affected by a same-store revenue decline, an increase in the Company's monthly
shrink accrual rate partially offset by price increases and the loss of profit
from five stores (previously subject to a 100% rental reimbursement from
Woolworth) which were closed and returned to Woolworth in connection with the
Woolworth Settlement. The Company had reduced interest expense during the
first six months of fiscal 1999 compared with the prior year's comparable
period.
<page 11>
Significant Line Items
Revenues
Revenues decreased $9.5 million, or 9.5%, to $90.3 million during the first
six months of fiscal 1999 compared with revenues of $99.8 million during the
first six months of fiscal 1998. This decrease resulted from the following
factors: the operation of a reduced number of stores during the first six
months of fiscal 1999 compared the first six months of fiscal 1998; the
closing of a pharmacy during fiscal 1998 in a store which continues to
operate; and a 4.7% same-store revenue decline (based on 30 stores-excluding
one store which was undergoing major renovation during the period and one
store whose pharmacy was closed in fiscal 1998, as noted).
The decline in same-store revenues is attributed to increased competition in
certain markets and inadequate inventory levels in certain merchandise
categories. Inventory levels in the Company's stores during the first six
months of fiscal 1999 was adversely affected by a combination of: (i) the
effect on the vendor community of the delayed release of the Company's 1998
Form 10-K in connection with the refinancing of the senior debt facility with
Foothill; and (ii) the previous unresolved status of a $1.1 million balloon
payment to the subordinated lender which was originally due on April 28, 1998.
By virtue of the financing transactions with Foothill in May 1998 and the
subordinated lender in June 1998, both of which are described elsewhere
herein, and the dissemination of this information to the vendor community, the
flow of merchandise into the Company's stores began to improve during July
1998.
Gross Profit
During the first six months of fiscal 1999, the gross profit (total revenues
less costs of merchandise and services sold and freight/distribution services
provided) was $21.6 million compared to $24.1 million in the prior year's
comparable period, a decrease of $2.5 million, resulting primarily from the
operation of a reduced number of stores and a decline in same-store revenues.
The gross profit, as a percentage of revenues, decreased .3% to 23.9% during
the first six months of fiscal 1999 from 24.2% in the prior year's comparable
period, reflecting an increase in the shrink accrual rate (based on the prior
fiscal year's shrink results), partially offset by the effect of price
increases, both of which measures were instituted during March 1998. As the
price increases are being phased-in over a period of months, management
believes such increases may not be sufficient to fully offset the cumulative
effect of the increased monthly shrink accrual rate until, at the earliest,
the fiscal 1999 third quarter.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense decreased $.7 million to
$22.3 million during the first six months of fiscal 1999 from $23.0 million in
the prior year's comparable period. This decrease resulted primarily from
operating a reduced number of stores during the first six months of fiscal
1999 and from cost reductions which were phased-in during fiscal 1998. As a
percentage of revenues, SG&A expense increased 1.6% during the current period
to 24.7% from 23.1% during the first six months of fiscal 1998. The increase
is attributable to lower revenues from which to absorb certain SG&A expenses
and to reduced rental and occupancy reimbursements received from Woolworth for
certain Rx Stores which were subject to the provisions of the Woolworth
Settlement. During the first six months of fiscal 1998, the Company operated
five of such Rx Stores with the assistance of a 100% rental and occupancy
reimbursement from Woolworth whereas, during the first six months of fiscal
1999, the Company received only a partial reimbursement for one such Rx Store.
Operating Income
The Company reported an operating loss of $.7 million during the first six
months of fiscal 1999 compared with operating income of $1.1 million during
the first six months of fiscal 1998, a decrease of $1.8 million. Results for
the current period were affected by a 4.7% decrease in same-store revenues, a
.3% decrease in the gross profit percentage and reduced profit from certain Rx
Stores (previously subject to a 100% rental and occupancy reimbursement from
Woolworth during the comparable period in fiscal 1998) which were closed and
returned to Woolworth in connection with the Woolworth Settlement, partially
offset by a reduction in certain store expenses.
<Page 12>
Interest Expense
Interest expense during the first six months of fiscal 1999 decreased $.3
million compared with the first six months of fiscal 1998 resulting primarily
from lower borrowing requirements related to the operation of a reduced number
of stores and to lower average store inventory levels during the first six
months of fiscal 1999 compared with the prior year's comparable period.
Extraordinary Items, Net
Extraordinary items, net, totaling $.4 million, consist of the cancellation
by Woolworth of a $1 million Contingent Note in connection with the Woolworth
Settlement and $.6 million of fees and expenses related to the early
termination of the Prior Senior Credit Facility, including a charge to
write-off the balance of deferred financing costs related to such facility.
Both of the extraordinary items pertained to transactions which occurred
during the fiscal 1999 second quarter.
Liquidity and Capital Resources
Operating Activities
During the first six months of fiscal 1999, operating activities used cash
amounting to $3 million consisting of the following significant items: a
decrease in accounts payable and accrued expenses of $1.4 million; transaction
fees related to the early termination of the Prior Senior Credit Facility and
closing fees in connection with the New Senior Credit Facility aggregating $1
million; and the funding of the loss before extraordinary items totaling $2.1
million. The Company's operating cash flows were positively affected by the
collection of $1.5 million from a landlord in connection with the settlement
of certain litigation for one of the Company's Pharmhouse stores.
Investing Activities
During the first six months of fiscal 1999, net expenditures for property and
equipment of $.4 million were made primarily in connection with the Company's
store relay and re-merchandising program. The Company previously completed
seven stores under this program and presently has five additional stores under
renovation.
Financing Activities
Outstanding borrowings under the Company's New Senior Credit Facility at
August 1, 1998 were $24.4 million. The New Senior Credit Facility became
effective during May 1998 and the initial proceeds from this credit facility,
amounting to $22.6 million, were used to repay in full the borrowings
outstanding under the Prior Senior Credit Facility, including a $1 million
temporary cash collateral (subsequently returned to the Company by the Prior
Lender) and $1 million in fees related to the closing of the refinancing
transaction. During the fiscal 1999 second quarter, the Company received an
additional $1 million loan from the subordinated lender and negotiated a
revised payment schedule for the total outstanding $2.1 million balance of
that subordinated loan. Under the amended subordinated loan agreement, as of
August 1, 1998, the Company is required to make sixty monthly principal
payments of $35,000, plus interest, as compared with monthly payments of
$50,000, plus interest, which were required previously (see Summary of
Borrowings, (iii) Subordinated Loan, below).
Summary of Borrowings
(i) New Senior Credit Facility
On May 14, 1998, the Company and Foothill Capital Corporation ("Foothill")
entered into a Loan and Security Agreement (the "New Senior Credit Facility"
or "New Facility"). The New Facility consists of: (i) a Term Loan up to $3
million; and (ii) revolving advances equal to the lesser of: (a) 65% of
eligible inventory (at cost); or (b) $35 million (which may be increased to
$40 million under certain conditions) less the outstanding principal amount of
the Term Loan. Under the New Facility, subject to the foregoing formula, the
maximum revolving advances could increase up to an aggregate of $35 million
($40 million under certain conditions) as the outstanding principal amount of
the term loan is reduced. The revolving and term loans under the New Senior
Credit Facility have a five year term, subject to minor amortization of the
Term Loan during that period. The initial funds advanced under the New
Facility were used to pay outstanding borrowings, charges, fees and a
temporary $1 million cash collateral account aggregating $22.6 million owing
by the Company to its Prior Lender. The $1 million cash collateral was
subsequently returned to the Company by the Prior Lender. In addition, the
Company incurred other transaction fees of approximately $1 million.
<Page 13>
Indebtedness under the New Senior Credit Facility is secured by a first
priority lien on substantially all of the Company's assets and, among other
conditions, restricts the payment of dividends and requires that the Company
maintain specified minimum tangible net worth and EBITDA (earnings before
interest, taxes, depreciation and amortization) levels. The Company did not
meet the specified minimum tangible net worth and EBITDA levels at the end of
the fiscal 1999 second quarter, subsequent to which the Company's senior
lender waived the Company's non-compliance with such covenants for the fiscal
1999 second quarter. The borrowing rates for the New Facility are prime plus
1.125% for the revolving advances (subject to decrease if the Company reaches
certain EBITDA levels during the term of the facility) and 11.75% for the Term
Loan.
(ii) Prior Senior Credit Facility
Borrowing availability under the Prior Senior Credit Facility was based on the
lesser of 60% of eligible inventory (at cost) or $45 million. On May 14,
1998, the Company repaid all outstanding indebtedness to the Prior Lender from
the proceeds of the New Senior Credit Facility.
(iii) Subordinated Loan
Pursuant to an agreement between the Company and the Subordinated Lender which
was consummated during the fiscal 1999 second quarter: (i) the Company
received an additional $1 million subordinated loan from the subordinated
lender; and (ii) such additional $1 million plus the existing balloon payment
of $1.1 million which was due on August 1, 1998, totaling $2.1 million in the
aggregate, will be paid by the Company to the subordinated lender at the rate
of $35,000 per month, plus interest, for a period of 60 months commencing in
August 1998. The subordinated lender has been granted a second priority lien
on substantially all of the Company's assets.
(iv) Contingent Note
The $1 million Contingent Note was canceled and surrendered by Woolworth as of
July 30, 1998 pursuant to the provisions of the Woolworth Settlement.
Accordingly, the Company recorded a $1 million extraordinary gain in its
fiscal 1999 second quarter with respect to such note cancellation.
Working Capital and Current Ratio
Working capital increased $3.4 million to $21.6 million during the first six
months of fiscal 1999 and the ratio of current assets to current liabilities
was 1.9 at the end of the fiscal 1999 second quarter compared with 1.6 at the
end of fiscal 1998. The increase in both working capital and the current
ratio during the first six months of fiscal 1999 resulted from Woolworth's
cancellation of a $1 million Contingent Note and the recent agreement
consummated with the subordinated lender which provided an additional $1
million loan and revised the payment terms of the outstanding subordinated
loan balance, as reported above (see Summary of Borrowings,
(iii) Subordinated Loan and (iv) Contingent Note, respectively).
Assuming (i) the continuing availability of trade credit at the current level
and (ii) the combination of the additional borrowing availability made
available through the New Senior Credit Facility and the additional loan from
the Subordinated Lender (including the revised payment terms for the
outstanding subordinated loan balance) 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.
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 1998 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 14>
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 15, 1998 By:/s/ Kenneth A. Davis
Kenneth A. Davis
President, Chief Executive
Officer and Chief Operating Officer
Date: September 15, 1998 By:/s/ Richard A. Davis
Richard A. Davis
Senior Vice President-Finance
and Chief Financial Officer
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