-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, nTSgxLNKevWKVTL52QWaDB/wxhEK/mqnGm8GkqXUKzPBfzdPvDWwW84uV3ye8Brq mctFiAliIbJmNgco4Nm33Q== 0000823883-94-000007.txt : 19940415 0000823883-94-000007.hdr.sgml : 19940415 ACCESSION NUMBER: 0000823883-94-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940228 FILED AS OF DATE: 19940414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOOK SUPERX INC CENTRAL INDEX KEY: 0000823883 STANDARD INDUSTRIAL CLASSIFICATION: 5912 IRS NUMBER: 311186877 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11122 FILM NUMBER: 94522718 BUSINESS ADDRESS: STREET 1: 175 TRI COUNTY PKWY CITY: CINCINNATI STATE: OH ZIP: 45246 BUSINESS PHONE: 5137823000 MAIL ADDRESS: STREET 1: 175 TRI-COUNTY PARKWAY CITY: CINCINNATI STATE: OH ZIP: 45246-3222 10-Q 1 Q2 1994 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarter Ended Commission File Number 1-11122 February 28, 1994 Hook-SupeRx, Inc. A Delaware Corporation Employer Identification Number 31-1186877 175 Tri-County Parkway Cincinnati, Ohio 45246-3222 513-782-3000 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At March 31, 1994 20,873,104 shares were outstanding. The total number of pages included in this filing is 21. The exhibit index is located on page 20. HOOK-SUPERX, INC. INDEX PAGE NUMBER PART I. Financial Information Item 1. - Financial Statements Consolidated Balance Sheets at February 28, 1994 and August 31, 1993 1 Consolidated Statements of Operations and Accumulated Deficit for the three months and six months ended February 28, 1994 and 1993 3 Consolidated Statements of Cash Flows for the six months ended February 28, 1994 and 1993 4 Notes to Consolidated Financial Statements 5 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. Other Information 15 Signature 17 HOOK-SUPERX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands) February 28, 1994 August 31, 1993 ASSETS Current Assets Cash $ 4,169 Accounts receivable, less allowances for doubtful accounts of $11,476 and $11,786, respectively 44,217 $ 73,660 Inventories 372,481 337,185 Prepaid expenses and other current assets 18,348 8,532 Total current assets 439,215 419,377 Property and Equipment Land 8,285 8,285 Buildings 41,758 42,666 Store improvements 65,979 65,108 Fixtures and equipment 144,111 141,830 Leased property under capital leases 36,636 27,637 Leasehold interests 165,764 162,360 462,533 447,886 Less allowances for accumulated depreciation and amortization (206,027) (192,463) 256,506 255,423 Other Assets 46,196 42,799 $ 741,917 $ 717,599 See Notes to Consolidated Financial Statements. 1 HOOK-SUPERX, INC. AND SUBSIDIAIRES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands, except per share amounts) February 28, 1994 August 31, 1993 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable under revolving credit commitment $ 40,000 $ 81,000 Current portion of long-term debt 15,042 17,642 Current portion of obligations under capital leases 3,025 1,910 Accounts payable Trade 113,978 106,406 Related parties 4,876 10,166 Accrued liabilities Payroll and related taxes 52,022 50,305 State and local taxes other than income 18,535 17,861 Restructuring costs 11,404 18,851 Other 46,182 28,543 Total current liabilities 305,064 332,684 Long-term debt 247,358 247,358 Obligations under capital leases 30,021 23,606 Deferred credits and other liabilities 69,618 26,497 Total liabilities 652,061 630,145 Commitments and contingency Stockholders' Equity Preferred stock, par value $.01; 10,000,000 shares authorized, none issued Common stock, par value $.01; Authorized 100,000,000 shares; Issued: February 28, 1994-20,912,578 August 31, 1993-20,839,930 209 208 Additional paid in capital 135,214 134,831 Accumulated deficit ( 45,428) ( 47,440) Stockholders' notes receivable ( 21) ( 127) Treasury stock, at cost (February 28, 1994 - 49,166 shares August 31, 1993 - 15,833 shares) ( 118) ( 18) Total stockholders' equity 89,856 87,454 $ 741,917 $ 717,599 See Notes to Consolidated Financial Statements. 2 Consolidated Statements of Operations and Accumulated Deficit (Unaudited)
HOOK-SUPERX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 28, 1994 AND 1993 (UNAUDITED) (dollars in thousands, except per share amounts) Three Months Ended Six Months Ended February 28, February 28, 1994 1993 1994 1993 (Restated) (Restated) Net sales $613,856 $605,267 $1,181,733 $1,149,396 Cost of merchandise sold, including distribution costs 428,264 419,393 831,075 800,950 Gross profit 185,592 185,874 350,658 348,446 Costs and Expenses Selling, general and administrative 136,836 136,337 271,352 268,766 Rent 17,064 17,051 33,832 33,091 Depreciation and amortization 9,644 8,568 18,733 16,852 Interest 7,194 8,332 14,733 16,175 Income before income taxes, extraordinary item and cumulative effect of accounting change 14,854 15,586 12,008 13,562 Income taxes 5,936 5,409 4,804 5,409 Income before extraordinary item and cumulative effect of accounting change 8,918 10,177 7,204 8,153 Extraordinary item resulting from income tax benefit from utilizing net operating loss carryforward 4,674 4,674 Cumulative effect of change in method of accounting for income taxes ( 5,192) Cumulative effect of a change in method of accounting for post- retirement benefits other than pensions ( 18,612) Net income (loss) $ 8,918 $ 14,851 $ 2,012 $( 5,785) Income (loss) per share: Before extraordinary item and cumulative effect of accounting change $ .42 $ .47 $ .33 $ .38 Per share effect of extraordinary item resulting from net operating loss carryforward .22 .22 Per share effect of cumulative effect of accounting change (.24) (.87) Net income (loss) per share $ .42 $ .69 $ .09 $(.27) Weighted average number of shares outstanding 21,433,864 21,638,600 21,392,974 21,501,631 Accumulated deficit Beginning of period $(54,346) $(45,845) $(47,440) $(25,209) Net income (loss) 8,918 14,851 2,012 (5,785) End of period $(45,428) $(30,994) $(45,428) $(30,994) See Notes to Consolidated Financial Statements. 3 HOOK-SUPERX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1994 AND 1993 (UNAUDITED) (dollars in thousands) 1994 1993 (Restated) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 2,012 $( 5,785) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Cumulative effect of change in accounting for income taxes 5,192 Cumulative effect of change in accounting for postretirement benefits other than pensions 18,612 Depreciation and amortization 18,733 16,852 Loss on sale of equipment 1,725 158 Proceeds from vendor contract 40,153 Increase in deferred income taxes ( 6,109) ( 5,103) Other, net ( 879) ( 508) Changes in operating assets and liabilities: Increase in accounts receivable ( 9,056) ( 17,517) Increase in inventories ( 35,296) ( 8,921) Increase in prepaid expenses and other current assets ( 4,370) ( 3,808) Increase in accounts payable 2,282 2,030 Increase in accrued liabilities 4,553 1,262 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 18,940 ( 2,728) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment ( 6,790) ( 19,112) Proceeds from sale of receivables 36,000 Proceeds from sale of equipment 8 334 Other, net 813 ( 5,168) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 30,031 ( 23,946) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings 283,000 285,000 Reduction of short-term borrowings (324,000) (257,000) Repayments of obligations under capital leases ( 1,469) ( 797) Proceeds from increase in term loan 15,000 Repayments of long-term debt ( 2,600) ( 15,125) Other, net 267 198 NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ( 44,802) 27,276 INCREASE IN CASH 4,169 602 CASH, BEGINNING OF PERIOD CASH, END OF PERIOD $ 4,169 $ 602 See Notes to Consolidated Financial Statements. 4 HOOK-SUPERX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands, except per share amounts) NOTE A -- Consolidated Financial Statements The consolidated financial statements have been prepared by the Company, without audit, in accordance with generally accepted accounting principles and in the opinion of management include all adjustments necessary for a fair presentation of the results of operations for the periods presented. Pursuant to the rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted or condensed. It is management's belief that the disclosures made are adequate to make the information presented not misleading. It is recommended that these consolidated financial statements be read in conjunction with the consolidated financial statements for the year ended August 31, 1993, and the notes thereto. Inventories are stated at the lower of LIFO cost or market utilizing the retail and average cost methods. If these inventories had been valued on the first-in, first-out method of inventory valuation, the inventory values would have been approximately $70,292 and $67,287 higher at February 28, 1994 and August 31, 1993, respectively. The LIFO charge to operations was $605 and $1,600 for the three months and $3,005 and $4,763 for the six months ended February 28, 1994 and 1993, respectively. The Company considers all liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash paid for interest was $11,083 and $11,908 for the three months and $14,339 and $15,815 for the six months ended February 28, 1994 and 1993, respectively. During the six months ended February 28, 1994, the Company entered into capital lease obligations of $9,000, relating to equipment leased in connection with the Company's expansion to the Midwestern distribution facility. For the same six month period of the prior year the Company entered into capital lease obligations amounting to $1,150. During the fourth quarter of Fiscal 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 106 - Employers' Accounting for Postretirement Benefits Other than Pensions. Consistent with the provisions of this statement, when adoption of this statement is in any quarter other than the first, the adoption is effective as of the beginning of the fiscal year of adoption. Accordingly, the Company has restated the operating results for the three months and six months ended February 28, 1993 to give effect to this adoption as of the beginning of the fiscal year. The result of this restatement on the three months and six months ended February 28, 1993 was a reduction of $327 and $19,266, respectively, in the previously reported net income for these periods. The amount for the six months then ended principally reflects the cumulative effect of the accounting change. 5 HOOK-SUPERX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands, except per share amounts) (Continued) NOTE B -- Income Taxes In February 1992, the Financial Accounting Standards Board issued SFAS No. 109 - Accounting for Income Taxes. This statement requires a change from the deferred method of accounting for income taxes (as previously required by Accounting Principles Board Opinion ("APB") No. 11) to the liability method. Under the liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the carrying amount of assets and liabilities for financial reporting purposes and the tax bases of these assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date. The Company adopted the provisions of SFAS No. 109 on September 1, 1993, and recorded the change in accounting for income taxes as the cumulative effect of an accounting change in the Consolidated Statements of Operations for the six months ended February 28, 1994. The cumulative effect of this adoption was a charge of $5,192 or $.24 per share. Prior year financial statements have not been restated to apply the provisions of SFAS No. 109. The Company's effective income tax rate was 40% for the three months and six months ended February 28, 1994, as compared with 35.5% and 39.7% for the three months and six months ended February 28, 1993, respectively. The effective rate differs from the Federal statutory rate of 35% primarily due to state and local income taxes. During the three months and six months ended February 28, 1993, the Company utilized approximately $13,500 of net operating loss carryforwards for financial reporting purposes and the related tax benefit of approximately $4,912 was reflected as an extraordinary item in the Consolidated Statements of Operations and Accumulated Deficit. Cash paid for income taxes (Federal, state and local) was $1,387 and $1,006 for the three months ended and $1,512 and $1,012 for the six months ended February 28, 1994 and 1993, respectively. During the six months ended February 28, 1994 the Company received a state income tax refund of $150 and during the six months ended February 28, 1993 a Federal income tax refund of $1,500, due to the overpayment of estimated income taxes. 6 HOOK-SUPERX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands, except per share amounts) (Continued) NOTE C -- Subsequent Event On April 1, 1994, the Company entered into a definitive merger agreement with Revco D.S., Inc. ("Revco") pursuant to which Revco has agreed to acquire all of the outstanding common stock of the Company for $13.75 per share. Stockholders of HSI owning approximately 49% of the outstanding common stock of HSI have agreed to vote in favor of the transaction. Revco's obligation to consummate this transaction is subject to Revco raising up to $175 million through the issuance of senior subordinated debentures. This transaction is also subject to certain conditions under the above referenced definitive merger agreement. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations for Hook-SupeRx, Inc. and Subsidiaries for the six months and three months ended February 28, 1994, compared to Results of Operations for the six months and three months ended February 28, 1993. At February 28, 1994, the Company operated 1,118 drug stores and 33 home health care centers ("HHC"), as compared with 1,165 drug stores and 34 HHCs at February 28, 1993. Net sales of $1,181.7 million for the six months ended February 28, 1994 were approximately $32.3 million or 2.8% above net sales for the same period of the prior year. Sales increases from stores opened one year or more were 3.3% over the same period of the prior year. The net sales for this period were adversely affected by the large number and severity of winter storms in many of the states where the Company operates. The increase in net sales of 2.8% is less than the comparable store sales increase as a result of the Company operating forty-eight fewer stores this fiscal year as compared to the same time of the prior year. During the six months ended February 28, 1994, the Company opened twenty-one new stores and closed twenty-seven (sixteen of which were closed in connection with the Asset Divestiture Program implemented during Fiscal 1993 and the remaining stores were closed in the normal course of business), as compared with forty-seven new store openings and fifteen store closings during the same period of the prior year. Prescription sales, as a percentage of net sales, continued to increase during the six months ended February 28, 1994. For this period, prescription sales increased 7.5% over the prior year to $612.2 million, which represented 51.8% of net sales, as compared with $569.5 million or 49.5% of net sales for the prior year. This sales growth in prescription sales is a trend which the Company expects will continue because of the (a) aging of the U.S. population and the corresponding increased use of prescription drugs by the elderly, (b) continued pursuit of new customer segments such as mail order, nursing home and third party payor arrangements, (c) development of new pharmaceutical products and new applications of existing drugs and, (d) to a lesser extent price inflation for pharmaceuticals. For the six months ended February 28, 1994, the Company experienced lower levels of price inflation on pharmaceuticals than in the same period of the prior year. The Company expects this lower level of price inflation to continue, at least for the foreseeable future, as a result of the increased emphasis placed on limiting price increases by the pharmaceutical manufacturers, thereby adversely affecting the rate of the Company's sales growth. For the six months ended February 28, 1994, prescription sales to third party payors increased 16% over the prior year to $311.1 million or 50.8% of total prescription sales, as compared with $268.1 million or 47.1% of total prescription sales for the same period of the prior year. Excluded from the third party sales 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) amounts above are amounts received directly from customers pursuant to third party arrangements which require the customer to contribute a portion of the sales price. The Company expects prescription sales to third party payors to continue to increase, both in absolute terms and as a percentage of total prescription sales, as a result of anticipated new third party payor arrangements and the continued migration of non-third party pharmacy customers to third party plans. The Company cannot predict when or if any health care reform will be enacted by the Federal government, or the form that such reform would take. However, the Company believes that market forces will cause prescription sales to third party payors to continue to increase as a percentage of total prescription sales and any legislated health care reform may accelerate that trend. The increasing levels of third party prescription sales have resulted in a decline in gross profit margin, as gross profit margins on prescription sales to third party payors are typically lower than those on non-third party prescription sales. In addition, increased competition has led to declining gross profit margins on third party prescription sales. The Company expects the trend of gross profit margin erosion on third party prescription sales to continue, at least for the foreseeable future. The Company continues to develop strategies to mitigate this erosion. In addition to the adverse effect third party prescription sales have on gross profit margin, these sales are predominately sales on credit. In November 1993, the Company implemented a program to sell, on a continuous basis, certain of its third party accounts receivable. The proceeds from these sales will be utilized to reduce borrowings under the Company's revolving line of credit. At February 28, 1994, third party accounts receivable, net of allowance, amounted to $15.8 million, as compared with $57.0 million, net of allowance at February 28, 1993. The primary reason for the decline in third party accounts receivable from February 28, 1993 to February 28, 1994 is the accounts receivable sales program discussed above. Net sales for the three months ended February 28, 1994 of $613.9 million increased 1.4% over the same three month period of the prior year. Sales increases from drug stores opened one year or more were 2.1% for the same time period. The net sales for the three month period were adversely affected by the large number and severity of winter storms in many of the states where the Company operates. The increase in net sales of 1.4% is less than the comparable store sales increase for the reason cited above. For the three month period ended February 28, 1994, prescription sales increased 5.6% over the prior year to $309.9 million, which represented 50.5% of net sales, as compared with $293.5 million or 48.5% of net sales for the same three month period of the prior year. Prescription sales, as a percentage of net sales, during this three month period were below the year to date percentage 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) discussed above primarily due to increased general merchandise sales attributable to the Christmas selling season. For the three months ended February 28, 1994, sales to third party payors increased 13.4% over the prior year to $158.4 million or 51.1% of total prescription sales, as compared with $139.8 million or 47.6% for the same three month period of the prior year. Cost of merchandise sold, as a percentage of net sales, for the six months ended February 28, 1994 was 70.3%, as compared with 69.7% for the same period of the prior year. One of the principal reasons for the decline in gross profit margin, from 30.3% to 29.7%, was the duplicate warehouse and distribution expenses incurred by the Company arising from the transition away from its warehouse and distribution arrangement with Peyton's, Inc. ("Peyton") for the Company's SupeRx stores into the enlarged Midwestern warehouse and distribution center operated by the Company. Beginning in September 1993, the Company began providing seasonal and promotional product to all its SupeRx stores from the Midwestern distribution facility while still utilizing Peyton as the product source, to the SupeRx stores, for everyday products. Beginning January 1994, the Company commenced a gradual transition away from Peyton for everyday product shipment. Currently, all SupeRx stores are being serviced, for seasonal and promotional products as well as everyday products, from the enlarged Midwestern distribution center. The duplicate warehouse and distribution expenses incurred during this six month period represent the cost of continuing the Peyton arrangement for distribution of everyday products to the SupeRx stores during the above referenced transition. The Company does not expect to incur these duplicate warehouse and distribution expenses in subsequent quarters now that the transition away from Peyton is complete. The remaining decline in gross profit margin was primarily due to the continuing shift of prescription sales to lower gross margin third party prescription sales. The Company believes that as the absolute and percentage amount of prescription sales to third party payors continues to increase, gross margins will continue to be under downward pressures. Also included in gross profit for the three months and six months ended February 28, 1994 is income recognized in connection with the cash prepayment received from one of the Company's vendors in January 1994. See "Liquidity and Capital Resources." For the six months ended February 28, 1994, the Company recorded a LIFO charge to operations of $3 million, as compared with $4.8 million for the same period of the prior year. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The smaller LIFO charge, this year when compared to the same time period of the prior year, is the result of declining rates of inflation on the Company's inventory purchases, primarily pharamceuticals. At February 28, 1994 and 1993, LIFO inventories were approximately $70.3 million and $65.8 million, respectively, less than the amount of such inventories valued on a FIFO basis. Cost of merchandise sold, as a percentage of net sales, for the three months ended February 28, 1994 amounted to 69.8%, as compared to 69.3% for the same three month period of the prior year. As was cited earlier, one of the principal reasons for the decline in gross profit margin (from 30.7% to 30.2%) was the duplicate warehouse and distribution expenses incurred during the three months ended February 28, 1994. For the three months ended February 28, 1994 and 1993, the Company recorded LIFO charges of $.6 million and $1.6 million, respectively. Selling, general and administrative expenses, as a percentage of net sales, for the six months and three months ended February 28, 1994 were 23.0% and 22.3%, respectively, as compared with 23.4% and 22.5% for the six months and three months ended February 28, 1993, respectively. The decline in selling, general and administrative expenses as a percentage of net sales, for both the six month and three month period, was primarily due to more stringent cost control measures combined with the benefits derived from the Company's ongoing consolidation efforts, as well as the elimination of costs previously incurred by stores which were closed as part of the Company's Asset Divestiture Program undertaken in Fiscal 1993. In addition, during the six month and three month periods ended February 28, 1993, the Company opened significantly more stores than were opened during the six month and three month periods ended February 28, 1994, resulting in increased advertising and store pre-opening expenses, which adversely affected selling, general and administrative expenses, as a percentage of net sales, for the six months and three months ended February 28, 1993. Interest expense, as a percentage of net sales, for both the six month and three month periods ended February 28, 1994 was 1.2%, as compared with 1.4% for both the six months and three months ended February 28, 1993. This improvement was primarily the result of lower amounts outstanding under the Company's revolving line of credit and lower rates of interest on both the Company's bank term debt and the revolving line of credit. As was previously discussed, on November 2, 1993, the Company implemented a four year program to sell up to $75 million of its health care receivables on a continuous basis. The proceeds from these sales are applied to reduce the level of borrowings under the Company's revolving line of credit. As of February 28, 1994, the Company has received $36 million in proceeds from such sales. In addition, on January 14, 1994, the Company received a cash p r e p a y m e n t o f $ 4 0 m i l l i o n f r o m a 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) vendor. See "Liquidity and Capital Resources." This cash prepayment was applied to reduce the level of borrowings outstanding under the revolving line of credit. As was previously indicated, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109 - Accounting for Income Taxes, as of September 1, 1993. See "Notes to Consolidated Financial Statements." For the six months ended February 28, 1994, the Company has recorded income tax expense of $4.8 million, which was based upon the estimated annual effective tax rate for both Federal and state tax purposes of approximately 40%. For the six months ended February 28, 1993, the Company recorded income tax expense of $5.4 million, which was also based upon the estimated annual effective tax rate for both Federal and state tax purposes of approximately 40%. Also, during the six month period ended February 28, 1993, the Company utilized approximately $13.5 million of net operating loss carryforwards for financial reporting purposes and the related tax benefit of $4.7 million was reflected as an extraordinary item in the Consolidated Statement of Operations and Accumulated Deficit. During the fourth quarter of Fiscal 1993, the Company adopted SFAS No. 106 - Employers' Accounting for Postretirement Benefits Other Than Pensions. Consistent with the provisions of this statement, when adoption of this statement is in any quarter other than the first, the adoption is effective as of the beginning of the fiscal year, September 1, 1992 in this instance. See "Notes to Consolidated Financial Statements." The results of operations for any six month or three month period are not necessarily indicative of the results of operations for a full fiscal year. Liquidity and Capital Resources For the six months ended February 28, 1994, the Company had additions to property and equipment of approximately $6.8 million, as compared with approximately $19.1 million for the same period of the prior year. These additions consisted primarily of capital expenditures for new store openings and remodeling of existing stores. The amount reflected for the six months ended February 28, 1993 includes not only amounts for new store openings and remodels, but also amounts related to the construction of the enlarged Midwestern warehouse and distribution facility (approximately $4.4 million), for which construction was completed in September 1993. For the six months ended February 28, 1994, the Company opened twenty-one new stores and closed twenty-seven (sixteen of which were closed in connection with the Asset Divestiture Program), compared with forty-seven new store openings and fifteen closings for the same time period of the prior year. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) As of February 28, 1994, the Company has closed or otherwise disposed of 53 stores out of the total 60 stores identified as part of the Asset Divestiture Program initiated in Fiscal 1993. The remaining stores will be closed during the balance of calendar 1994 as those leases expire. The Company has reduced the reserve established at the time of the divestiture program by approximately $7.4 million, which primarily represents charges relating to lease and other occupancy related payments related to these closed stores, the write-off of the net book value of fixtures, equipment and certain intangible assets related to these closed stores, severance and relocation costs for affected employees and markdowns incurred relating to inventory in these closed stores. At February 28, 1994, the balance in the restructuring reserve approximates $11.4 million. At February 28, 1994, the Company had $117.4 million outstanding under the bank term loan, of which $15 million is reflected as current portion of long-term debt and due on July 31, 1994. During the six months ended February 28, 1994, the Company made a required prepayment of $2.6 million on this bank term debt based upon Available Cash Flow with respect to Fiscal 1993 cash flow. For the six months ended February 28, 1994, borrowings under the Company's revolving line of credit have ranged from $30 million to $98 million, with an average amount outstanding for this six month period of $66.5 million, as compared with a range of $74 million to $115 million and an average balance outstanding of $94.8 million for the comparable six month period of the prior year. On April 13, 1994, the balance outstanding under the revolving line of credit was $10 million. There are two principal reasons for the significant change in the range of the outstanding balance and the average balance outstanding under the revolving line of credit from the prior year. The first is the health care receivable sales program implemented by the Company. As was previously discussed, on November 2, 1993, the Company implemented a four year program to sell, on a continuous basis, up to $75 million of its health care receivables. Proceeds for these such sales during the six months ended February 28, 1994 were $36 million. The second reason for the significant decline in the outstanding balance and the average balance of the revolving line of credit is the $40 million cash prepayment received by the Company from a vendor in January 1994. As was discussed in the Notes to the Consolidated Financial Statements included in the Form 10-Q for the three months ended November 30, 1993, the Company entered into an agreement with one of its vendors which will have exclusive rights to provide products and services to the Company for a period of at least five years. This agreement requires the Company to purchase a minimum dollar amount of products and/or 13 services from the vendor. In the event that the Company has not met this minimum purchase amount by the end of five years, the term of the agreement is extended in one year increments until the end of the year in which the minimum purchase is met. Pursuant to this agreement, the Company received MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) the above mentioned $40 million in cash. For financial reporting purposes the Company has reflected this cash prepayment as deferred revenue and is recognizing income on a pro-rata basis over the 60 month term of the agreement. At February 28, 1994, the amount of unamortized deferred revenue is $38.8 million. The terms relating to the Company's purchase of products and services from the vendor under this agreement, in the opinion of management, are no less favorable to the Company than the Company's arrangements with the vendor prior to entering into this agreement. The Company from time to time, reviews the terms of its senior credit facility to determine whether changes should be sought in light of changing circumstances or to take advantage of opportun- ities in the market place. In November 1992, the Financial Accounting Standards Board issued SFAS No. 112 - Employers' Accounting for Postemployment Benefits. This statement establishes accounting standards for employers who provide benefits to former or inactive employees, their beneficiaries or covered dependents, after employment but before retirement. Postemployment benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers compensation), job training and counseling and health and welfare benefit continuation. This statement requires employers to recognize the obligation to provide postemployment benefits if the obligation is attributable to employees' services already rendered, employees' rights to these benefits vest or accumulate, payment is probable and the amount of the benefit is reasonably estimated. Currently, the Company is not required to adopt the provisions of SFAS No. 112 until its fiscal year ending August 31, 1995, however, it will consider early adoption in accordance with the provisions of this statement. The Company has completed its initial review of this statement and believes it will not have a material effect on the results of operations upon adoption. On April 1, 1994, the Company entered into a definitive merger agreement with Revco D.S., Inc. ("Revco") pursuant to which Revco has agreed, subject to certain conditions, to acquire all of the outstanding common stock of the Company for $13.75 per share. See "Notes to Consolidated Financial Statements". 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On January 20, 1994, the registrant conducted its Annual Meeting of Stockholders. There were two issues brought before the stockholders for vote at this meeting. They were as follows: . To elect two directors for a term of three years. The following directors were nominated and elected: Votes "For" Votes "Withheld" Michael H. Coles 17,470,974 208,401 Robert F. Longbine 17,444,290 235,085 The following directors' term of office continues after this meeting, and therefore they were not up for election: Philip E. Beekman Patrick A. Thiele Thomas J. Kelly Howard A. Silverstein . Ratification of the Board of Directors' selection of Coopers & Lybrand to serve as the registrant's independent accountant for the fiscal year ending August 31, 1994. Affirmative votes 17,466,741 Negative votes 180,185 Abstain 32,449 No other issues were brought before the stockholders for a vote. 15 PART II - OTHER INFORMATION (Continued) Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Statement Regarding Computation of Per Share Earnings (b) Reports on Form 8-K Form 8-K dated as of April 1, 1994. This current report disclosed that a definitive merger agreement with Revco D.S. Inc. ("Revco") was entered into by the Company, pursuant to which Revco has agreed to acquire all of the outstanding common stock of the Company for $13.75 per share. 16 SIGNATURE Pursuant to the requirements 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. Hook-SupeRx, Inc. (Registrant) April 14, 1994 /s/ Timothy M. Mooney (date) Timothy M. Mooney Senior Vice President Chief Financial Officer 17
EX-1 2 EPS EXHIBIT Exhibit Index Exhibit Number Description Location 11.1 Statement Regarding Computation of Per Share Earnings Exhibit 11.1 HOOK-SUPERX, INC. AND SUBSIDIARIES COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE (UNAUDITED) (dollars in thousands, except per share amounts) Three Months Ended Six Months Ended February 28, February 28, 1994 1993 1994 1993 (Restated) (Restated) Income before extraordinary item and cumulative effect of accounting change $8,918 $10,177 $ 7,204 $ 8,153 Extraordinary item resulting from income tax benefit from utilizing net operating loss carryforward 4,674 4,674 Cumulative effect of a change in accounting for income taxes (5,192) Cumulative effect of a change in accounting for post- retirement benefits other than pensions (18,612) Net income (loss) $8,918 $14,851 $ 2,012 $( 5,785) COMPUTATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (UNAUDITED) Three Months Ended Six Months Ended February 28, February 28, 1994 1993 1994 1993 Weighted average number of shares outstanding 20,832,170 20,773,806 20,825,179 20,640,588 Common stock equivalents 601,694 864,794 567,795 861,043 21,433,864 21,638,600 21,392,974 21,501,631 Income (loss) per share: Before extraordinary item and cumulative effect of accounting change $.42 $.47 $. 33 $ .38 Per share effect of extra- ordinary item .22 .22 Per share effect of cumulative effect of accounting change (.24) (.87) Net income (loss) $.42 $.69 $ .09 $(.27) -----END PRIVACY-ENHANCED MESSAGE-----