SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 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 May 31, 1998
------- --------------
Common Shares,
$.01 par value 2,594,837
<Page 1>
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at May 2, 1998
and January 31, 1997. 2
Consolidated Statements of Operations
for the three months ended May 2, 1998 and
May 3, 1997. 3
Consolidated Statements of Cash Flows
for the three months ended May 2, 1998 and
May 3, 1997. 4
Notes to Consolidated Financial Statements. 5 - 7
Item 2. Management's Discussions and Analysis
of Operations 8 - 12
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>
May 2, 1998 January 31, 1998
------------ ----------------
ASSETS
Current Assets
Cash $ 3,072 $3,296
Accounts receivable, net of allowances
of $1,118 and $1,045, respectively 4,891 4,518
Merchandise inventory 39,127 37,332
Prepaid expenses and other 1,913 1,292
-------- --------
Total current assets 49,003 46,438
Property, fixtures and equipment, net 4,754 4,795
Video rental inventory, net 2,091 1,972
Other assets 405 487
-------- --------
Total assets $56,253 $53,692
======== ========
LIABILITIES AND SHAREHOLDRES' EQUITY
Current liabilities
Current portion of long-term debt $ 3,200 $ 4,647
Accounts payable 25,045 20,713
Provision for store closure - 284
Accrued expenses and other
current liabilities 2,333 2,628
-------- --------
Total current liabilities 30,578 28,272
Long-term debt, net of current portion 20,433 19,154
Other liabilities 1,294 1,372
-------- --------
Total liabilities 52,305 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 2,594,837
and 2,594,841 shares, respectively 26 26
Additional paid-in capital 21,728 21,728
Accumulated deficit (17,805) (16,859)
-------- --------
3,949 4,895
Treasury stock, at cost 1 1
-------- --------
Total shareholders' equity 3,948 4,894
-------- --------
Total liabilities and shareholders' equity $56,253 $53,692
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<Page 3>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Unaudited
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
May 2, May 3,
1998 1997
------------- -------------
Revenues:
Net sales $ 44,275 $ 49,829
Video rental, service
and other income 1,243 1,581
---------- ----------
45,518 51,410
---------- ----------
Costs and Expenses:
Cost of merchandise and services sold 34,711 39,023
Selling, general and
administrative expense 11,135 11,759
---------- ----------
45,846 50,782
---------- ----------
Operating income (loss) (328) 628
Interest expense 618 814
---------- ----------
Net loss $ (946) $ (186)
========== ==========
Basic earnings (loss) per share:
Net loss per Common Share $ (0.37) $ (0.08)
========== ==========
Average shares outstanding 2,578 2,350
========== ==========
</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>
Three MonthsEnded
May 2, May 3,
1998 1997
------ ------
Cash Flows provided by Operating Activities:
Net loss (946) (186)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 660 771
Decrease in deferred rent (12) (122)
Changes in operating assets and liabilities;
(Increase)decrease in:
Accounts receivable, net (373) 1,983
Merchandise inventory (1,795) 645
Prepaid expenses and other current assets (659) (47)
Other assets 82 (538)
Increase (decrease) in:
Accounts payable 4,332 (292)
Accrued expenses and other liabilities (568) 161
Provision for store closure (284) (115)
------- -------
Net cash flows provided by Operating Activities 437 2,260
------- -------
Cash Flows used by Investing Activities:
Purchase of property and equipment, net (189) (92)
Purchase of video rental inventory, net (304) (483)
------- -------
Net Cash Flows used by Investing Activities (493) (575)
------- -------
Cash Flows provided (used) by Financing Activities:
Revolver borrowings, net 32 (832)
Pay-down of Subordinated Loan (200) (200)
Proceeds from exercise of stock options - 48
------- -------
Net Cash Flows provided (used) by Financing Activities (168) (984)
------- -------
Net (decrease) increase in cash (224)
701
Cash, beginning of period 3,296 2,915
------- -------
Cash, end of period $3,072 $3,616
======= =======
Supplemental information:
Interest payments $ 682 $833
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 Months Ended May 2, 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
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 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 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 weeks ended May 2, 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 first quarter financial
statements have been reclassified to be consistent with the
fiscal 1999 first quarter presentation.
NOTE 2 - FINAL DISPOSITION OF THE WOOLWORTH DISPUTE
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 $8.5
million ($1 million of which was converted into a non-interest
bearing Contingent Note to be canceled by Woolworth on July 30,
1998, subject to certain conditions, as described below) and
provided the Company with the ability 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
significant remaining aspects of the Woolworth Settlement are
as follows:
Cancellation of Contingent Note - On July 30, 1998, unless
the Registrant either liquidates substantially all of its
assets, ceases to conduct substantially all of its operations
(except in the event of a merger, consolidation or sale of
assets with or to third parties) or files for bankruptcy
prior to that date, the $1 million non-interest-bearing
Contingent Note is scheduled to be canceled by Woolworth.
As of the date of this Report, management is not aware of
any conditions which will prevent such note cancellation
from occurring. Upon the scheduled cancellation of the
Contingent Note, the Company will report other income of $1
million in its second quarter of fiscal 1999. The
Contingent Note is included in the current portion of
long-term debt as of May 2, 1998.
Return of Stores and Reimbursement of Rental/Occupancy Costs-
The Company is currently operating one of the Affected Stores
with the assistance of a rental and occupancy subsidy from
Woolworth subject to short term cancellation. The Company
previously closed five of the Affected Stores and reassigned
to Woolworth the leases for such stores. With respect to the
lease for one other Affected Store, which expired during
fiscal 1997, the Company negotiated a new lease with the
landlord of the property for this store and has continued to
operate such store without any further subsidy or other
obligation from Woolworth.
<Page 6>
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 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net includes $1.5 million representing the
outstanding balance due from a landlord for one of the Company's
stores in connection with a litigation settlement agreement
between the Company and such landlord dated January 31, 1998 (as
amended on May 1, 1998). The balance, plus accrued interest, was
paid by the landlord on June 1, 1998.
NOTE 4 - BORROWINGS
A summary of the Company's borrowings at May 2, 1998 and January
31, 1998 is as follows (000's omitted):
May 2, 1998 January 31, 1998
------------------------- -----------------------
Current Noncurrent Current Noncurrent
Total portion portion Total portion portion
------------------------- ------------------------
New Senior Credit $ - $ - $ - $ - $ - $ -
Facility (i)
Prior Senior Credit
Facility (ii) 21,433 1,000 20,433 21,401 2,247 19,154
Subordinated Loan (iii) 1,200 1,200 - 1,400 1,400 -
Contingent Note (iv) 1,000 1,000 - 1,000 1,000 -
------------------------- ------------------------
$23,633 $3,200 $20,433 $23,801 $4,647 $19,154
========================= ========================
(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 revol-
ving 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. The duration of
both the revolving and term loans under the New Senior Credit
Facility is five years. The initial funds advanced to the
Company under the New Facility were used to pay outstanding
borrowings, charges, fees and a temporary cash collateral account
aggregating $22.6 million owing by the Company to its prior
senior secured lender ("Prior Lender"). The $1 million cash
collateral has been 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 minimum tangible
net worth and EBITDA levels. 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,
including the repayment of an over-advance extended by the Prior
Lender to the Company during the first quarter of fiscal 1999.
(iii) Subordinated Loan
The Subordinated Loan, payable to an unaffiliated trade supplier,
is being repaid in monthly installments of $50,000 and a balloon
payment of $1.1 million due on August 1, 1998. During the past
several months, the Company and the subordinated lender have
negotiated an extension of the payment terms for the balloon
payment and for the subordinated lender to provide additional
financing to the Company. The parties currently have reached the
following agreement in principle with regard to these matters:
(i) the Company is to receive 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 for a period of 60 months. Management
anticipates that the documentation of these agreements between
the parties will be finalized on or before June 30, 1998. The
subordinated lender has been granted a second priority lien on
substantially all of the Company's assets.
(iv) Contingent Note
The Contingent Note represents a $1 million non-interest bearing
obligation to Woolworth which arose in connection with the
Woolworth Settlement and which will be surrendered by Woolworth
for cancellation on July 30, 1998, unless the Registrant either
liquidates substantially all of its assets, ceases to conduct
substantially all of its operations (except in the event of a
merger, consolidation or sale of assets with or to third parties)
or files for bankruptcy prior to that date. As of the date of
this Report, management is unaware of any conditions that will
prevent such note cancellation from occurring. Upon the
scheduled cancellation of such note by Woolworth, the
Company will report other income of $1 million in its fiscal 1999
second quarter. For further information concerning the Woolworth
Settlement, see "Final Disposition of the Woolworth Dispute" in
Note 2.
Note 5 - SUBSEQUENT EVENTS
On May 14, 1998, the Company and Foothill entered into a $40
million New Senior Credit Facility which replaced the Prior
Senior Credit Facility with the Company's Prior Lender. The New
Senior Credit Facility has a five year term and provides the
Company with additional borrowing availability. For further
information concerning the terms and provisions of the New Senior
Credit Facility, see Note 4 - Borrowings ((i) New Senior Credit
Facility).
During the past several months, the Company and the subordinated
lender have negotiated an extension of the maturity date of the
$1.1 million balloon payment due on August 1, 1998 and to provide
additional financing to the Company. The Company and the
subordinated lender currently have reached an agreement in
principle to extend the payment terms for the balloon payment and
for the subordinated lender to provide $1 million of additional
financing to the Company. For further information concerning
these matters, see Note 4 - Borrowings ((iii) Subordinated Loan).
<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
subsequently returned five Rx Stores to Woolworth and, as of the
date of this Report, one Rx Store remains subject to the
Woolworth Settlement pursuant to which either party may terminate
the lease for such store under certain notice provisions.
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,
certain items appearing in the Company's Consolidated Statements
of Operations for the first quarters of fiscal 1999 and fiscal
1998, respectively:
First Quarter
-------------
Fiscal Fiscal
1999 1998
------ ------
Revenues 100.0% 100.0%
Cost of merchandise and
services sold 76.3 75.9
------ ------
Gross profit 23.7 24.1
Selling, general and
administrative expense 24.4 22.9
------ ------
Operating income (loss) (0.7) 1.2
Interest expense 1.4 1.6
------ ------
Net loss (2.1)% (0.4)%
====== ======
FIRST QUARTER OF FISCAL 1999 VS. FIRST QUARTER OF FISCAL 1998
Overall Quarterly Results
The Company reported a net loss of $946,000, or $.37 per share,
in the fiscal 1999 first quarter compared with a net loss of
$186,000, or $.08 per share, in the fiscal 1998 first quarter, an
increase in net loss of $760,000. Results for the fiscal 1999
first quarter reflect the following items: an increase in the
Company's monthly shrink accrual rate which became effective
during March 1998 (the estimated impact on the current quarter's
results is a reduction in gross profit of approximately
<Page 9>
$250,000); the loss of profit from the closure of three Rx Stores
which were subject to a 100% rental and occupancy reimbursement
under the Woolworth Settlement provisions; and a reduction or
termination in the rental and occupancy reimbursement provided
under the Woolworth Settlement provisions for two Rx Stores which
remain in operation. In addition, fiscal 1999 first quarter
results were negatively affected by a 7% decrease in same-store
revenue which was partially offset by price increases instituted
in April 1998. Certain store level cost savings and reduced
interest expense also favorably affected fiscal 1999 first
quarter results.
Significant Line Items
Revenues
Fiscal 1998 first quarter revenues decreased $5.9 million, or
11.5%, to $45.5 million compared with revenues of $51.4 million
in the first quarter of fiscal 1998. The decrease in revenues
resulted from operating a reduced number of stores (32 stores
were in operation at the end of fiscal 1999 first quarter
compared with 35 stores at the end of the fiscal 1998 first
quarter) and from a 7% same-store revenue decline compared with
the prior year's first quarter. The decline in same-store
revenues is attributed to increased competition in certain
markets and inadequate inventory levels in certain merchandise
categories. By virtue of the recent refinancing of the Company's
senior debt facility with Foothill, described elsewhere herein,
the Company's management believes that it will be able to improve
the flow of merchandise to the Company's stores, thereby
favorably affecting store revenue performance. In addition, the
Company began phasing-in price increases during April 1998 which
management believes will have a favorable affect on revenue
performance.
Gross Profit
Fiscal 1999 first quarter gross profit (total revenues less costs
of merchandise and services sold and freight/distribution
services provided) was $10.8 million compared to $12.4 million in
the prior year's first quarter, a decrease of $1.6 million,
resulting from the operation of a reduced number of stores in the
current quarter and a .4% decline in the gross profit percentage
to 23.7% in the current quarter from 24.1% in the prior year's
first fiscal quarter. The gross profit percentage during the
fiscal 1999 first quarter was negatively affected by the
Company's shrink accrual rate (which was increased from 2% to 3%
of sales during the quarter), partially offset by the effect of
price increases instituted in April 1998. Since the price
increases are being phased-in over a period of months, management
believes such price increases may not be sufficient to fully
offset the increased monthly shrink accrual rate until at least
the fiscal 1999 third quarter.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense decreased
$.7 million to $11.1 million in the fiscal 1999 first quarter
from $11.8 million in the prior year's first quarter resulting
from operating a reduced number of stores and from cost
reductions which were phased-in during fiscal 1998. As a
percentage of revenues, SG&A expense increased 1.5% during the
fiscal 1999 first quarter to 24.4% from 22.9% during the prior
year's first quarter and is attributed 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 prior year's first fiscal quarter, the
Company operated five of such Rx Stores subject to the Woolworth
Settlement for which a 100% rental and occupancy reimbursement
was received from Woolworth whereas, during the fiscal 1999 first
quarter, the Company received only a partial reimbursement for
one such Rx Store which currently remains subject to that
settlement. (The rental and occupancy reimbursements for six Rx
Stores subject to the Woolworth Settlement were previously
terminated, five of which stores were returned to Woolworth
during the past twelve months).
<Page 10>
Operating Income
The Company reported a $.3 million operating loss during the
fiscal 1999 first quarter compared with operating income of $.6
million during the fiscal 1998 first quarter, a decrease of $.9
million. Results for the fiscal 1999 first quarter were
adversely affected by a 7% decrease in same-store revenues, a .4%
decrease in the gross profit percentage (which includes the
effect of a 1%
<Page 12>
increase in the shrink accrual compared with the shrink accrual
rate used in the fiscal 1998 first quarter, partially offset by
price increases instituted in April 1998) and reduced rental and
occupancy reimbursements provided under the Woolworth Settlement
provisions, partially offset by a reduction in certain store
expenses.
Interest Expense
Interest expense during the fiscal 1999 first quarter decreased
$.2 million compared to the fiscal 1998 first quarter resulting
from lower borrowing requirements related to the operation of a
reduced number of stores and to lower average store inventory
levels during the current quarter compared with the prior year's
first fiscal quarter.
Liquidity and Capital Resources
Operating Activities
The Company generated cash flows from operating activities of $.4
million during the fiscal 1999 first quarter. An increase in
accounts payable of $4.3 million funded an increase in inventory
during the current quarter of $1.8 million and the fiscal 1999
first quarter net loss of $.9 million.
Investing Activities
During the fiscal 1999 first quarter, net expenditures for
property and equipment of $189,000 were made primarily in
connection with the Company's store re-merchandising program.
Based on the results of the re-merchandising program for stores
previously completed, the Company has expanded its efforts in
this area and currently has seven additional stores under varying
degrees of restructuring.
Financing Activities
Outstanding borrowings under the Company's Prior Senior Credit
Facility at May 2, 1998 were unchanged from the fiscal 1998 year-
end level of $21.4 million. Subsequent to the end of the fiscal
1999 first quarter, the Company replaced and refinanced the
Senior Credit Facility out of the proceeds of the New Senior
Credit Facility. The New Senior Credit Facility has a five year
term and provides the Company with additional borrowing
availability, described 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 duration of both the revolving and term loans
under the New Senior Credit Facility is five years. The initial
funds advanced under the New Facility were used to pay
outstanding borrowings, charges, fees and 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 11>
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 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
The borrowing availability under this 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, including the repayment of an
over-advance extended by the Prior Lender to the Company during
the first quarter of fiscal 1999.
(iii) Subordinated Loan
The Subordinated Loan, payable to an unaffiliated trade supplier,
is being repaid in monthly installments of $50,000 and a balloon
payment of $1.1 million due on August 1, 1998. During the past
several months, the Company and the subordinated lender have
negotiated an extension of the maturity date of the balloon
payment and to provide additional financing to the Company. The
parties currently have reached the following agreement in
principle with regard to these matters: (i) the Company is to
receive 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 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 for a period of 60 months. Management anticipates that the
documentation of these arrangements between the parties will be
finalized on or before June 30, 1998. The subordinated lender has
been granted a second priority lien on substantially all of the
Company's assets.
(iv) Contingent Note
The Contingent Note represents a $1 million non-interest bearing
obligation to Woolworth which arose in connection with the
Woolworth Settlement and which will be surrendered by Woolworth
for cancellation on July 30, 1998, unless the Registrant either
liquidates substantially all of its assets, ceases to conduct
substantially all of its operations (except in the event of a
merger, condsolidation or sale of assets with or to third parties)
or files for bankruptcy prior to that date. As of the date of
this Report, management is unaware of any conditions that will
prevent such note cancellation from occurring. Upon the
scheduled cancellation of such note by Woolworth, the Company will
report other income of $1 million in its fiscal 1999 second quarter.
Working Capital and Current Ratio
Working capital at the end of the fiscal 1999 first quarter
amounted to $18.4 million and was virtually unchanged from the
fiscal 1998 year-end level. The ratio of current assets to
current liabilities was 1.6 at the end of the fiscal 1999 first
quarter and was also unchanged compared with the fiscal 1998
year-end amount. Included in the computation of working capital
at the end of each of these periods are the following items:
a $1.1 million balloon payment under the Subordinated Loan
due on August 1, 1998 (with respect to which the Company and
the subordinated lender currently have an agreement in principle
to extend the repayment of such amount over a period of 60
months) and a $1 million Contingent Note (which is scheduled
to be canceled on July 30, 1998 subject to certain
conditions as described above), each of which items is
described in Summary of Borrowings (see (iii) Subordinated Loan
and (iv) Contingent Note, respectively), above.
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 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 12>
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.
PART II.
OTHER INFORMATION
None.
<Page 15>
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: June 16, 1998 By:/s/ Kenneth A. Davis
Kenneth A. Davis
President, Chief Executive
Officer and Chief Operating
Officer
Date: June 16, 1998 By:/s/ Richard A. Davis
Richard A. Davis
Senior Vice President-Finance
and Chief Financial Officer
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