-----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, AsvpNz5dI/CNvZCwzXDJr058afxC6W1qjDI96ifwHLXwyHvKqpVIV3VQKiPNyxpV iszD1Zm2DNZ035aV7WSNaQ== 0000823883-94-000011.txt : 19940722 0000823883-94-000011.hdr.sgml : 19940722 ACCESSION NUMBER: 0000823883-94-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940531 FILED AS OF DATE: 19940715 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: 94538957 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 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 May 31, 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 June 30, 1994 20,938,195 shares were outstanding. The total number of pages included in this filing is 19. The exhibit index is located on page 18. HOOK-SUPERX, INC. INDEX PAGE NUMBER PART I. Financial Information Item 1. - Financial Statements Consolidated Balance Sheets at May 31, 1994 and August 31, 1993 1 Consolidated Statements of Operations and Accumulated Deficit for the three months and nine months ended May 31, 1994 and 1993 3 Consolidated Statements of Cash Flows for the nine months ended May 31, 1994 and 1993 4 Notes to Consolidated Financial Statements 5 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. Other Information 14 Signature 15 HOOK-SUPERX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands) May 31, 1994 August 31, 1993 ASSETS Current Assets Cash $ 3,970 Accounts receivable, less allowances for doubtful accounts of $12,348 and $11,786, respectively 43,433 $ 73,660 Inventories 367,371 337,185 Prepaid expenses and other current assets 20,240 8,532 Total current assets 435,014 419,377 Property and Equipment Land 8,285 8,285 Buildings 41,862 42,666 Store improvements 65,627 65,108 Fixtures and equipment 142,312 141,830 Leased property under capital leases 37,569 27,637 Leasehold interests 164,285 162,360 459,940 447,886 Less allowances for accumulated depreciation and amortization (208,130) (192,463) 251,810 255,423 Other Assets 41,325 42,799 $ 728,149 $ 717,599 See Notes to Consolidated Financial Statements. 1 HOOK-SUPERX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands, except per share amounts) May 31, 1994 August 31, 1993 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable under revolving credit commitment $ 20,000 $ 81,000 Current portion of long-term debt 15,042 17,642 Current portion of obligations under capital leases 3,303 1,910 Accounts payable Trade 131,858 106,406 Related parties 718 10,166 Accrued liabilities Payroll and related taxes 52,636 50,305 State and local taxes other than income 18,854 17,861 Restructuring costs 6,544 18,851 Other 42,575 28,543 Total current liabilities 291,530 332,684 Long-term debt 247,358 247,358 Obligations under capital leases 29,922 23,606 Deferred credits and other liabilities 67,255 26,497 Total liabilities 636,065 630,145 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: May 31, 1994-20,933,125 August 31, 1993-20,839,930 209 208 Additional paid in capital 135,344 134,831 Accumulated deficit ( 43,330) ( 47,440) Stockholders' notes receivable ( 21) ( 127) Treasury stock, at cost (May 31, 1994-49,166 shares; August 31, 1993-15,833 shares) ( 118) ( 18) Total stockholders' equity 92,084 87,454 $ 728,149 $ 717,599 See Notes to Consolidated Financial Statements. HOOK-SUPERX, INC. AND SUBSIDIARIES 2 Consolidated Statements of Operations and Accumulated Deficit (Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE THREE MONTHS AND NINE MONTHS ENDED MAY 31, 1994 AND 1993 (UNAUDITED) (dollars in thousands, except per share amounts) Three Months Ended Nine Months Ended May 31, May 31, 1994 1993 1994 1993 (Restated) (Restated) Net sales $ 595,562 $ 571,134 $1,777,296 $1,720,530 Cost of merchandise sold including distribution costs 418,857 399,758 1,249,933 1,200,708 Gross profit 176,705 171,376 527,363 519,822 Costs and Expenses Selling, general and administrative 139,049 132,550 410,400 401,316 Rent 17,563 16,668 51,395 49,760 Depreciation and amortization 9,815 8,666 28,549 25,518 Interest 6,782 7,577 21,515 23,752 Income before income taxes, extraordinary item and cumulative effect of accounting change 3,496 5,915 15,504 19,476 Income taxes 1,398 2,254 6,202 7,663 Income before extraordinary item and cumulative effect of accounting change 2,098 3,661 9,302 11,813 Extraordinary item resulting from income tax benefit from util- izing net operating loss carryforward 1,467 6,141 Cumulative effect of a change in method of accounting for for income taxes ( 5,192) Cumulative effective of a change in method of accounting for postretirement benefits other than pensions ( 18,612) Net income (loss) $ 2,098 $ 5,128 $ 4,110 $( 658) Income (loss) per share: Before extraordinary item and cumulative effect of accounting change $.10 $.17 $ .43 $ .55 Per share effect of extraordinary item resulting from net operating loss carryforward .07 .29 Per share effect of cumulative effect of accounting change (.24) (.87) Net income (loss) per share $.10 $.24 $ .19 $(.03) Weighted average number of shares outstanding 21,677,703 21,595,529 21,489,037 21,514,372 3 Accumulated deficit Beginning of period $( 45,428) $( 30,995) $( 47,440) $( 25,209) Net income (loss) $ 2,098 $ 5,128 $ 4,110 $( 658) End of period $( 43,330) $( 25,867) $( 43,330) $( 25,867) See Notes to Consolidated Financial Statements. 4 HOOK-SUPERX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MAY 31, 1994 AND 1993 (UNAUDITED) (dollars in thousands) 1994 1993 (Restated) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 4,110 $( 658) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Cumulative effect of a change in accounting for income taxes 5,192 Cumulative effect of a change in accounting for postretirement benefits other than pensions 18,612 Depreciation and amortization 28,549 25,518 Loss on sale of equipment 3,308 256 Proceeds from vendor contract 40,153 Increase in deferred income taxes ( 8,269) ( 7,781) Other, net ( 3,832) ( 746) Changes in operating assets and liabilities: Increase in accounts receivable ( 8,272) ( 13,154) Increase in inventories ( 30,186) ( 7,215) Increase in prepaid expenses and other current assets ( 5,502) ( 4,474) Increase (decrease) in accounts payable 16,003 ( 15,595) (Decrease) increase in accrued liabilities ( 2,982) 1,206 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 38,272 ( 4,031) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment ( 9,871) ( 24,099) Proceeds from sale of receivables 36,000 Proceeds from sale of equipment 89 337 Other, net 4,966 ( 3,290) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 31,184 ( 27,052) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings 370,000 368,000 Reduction of short-term borrowings (431,000) (333,000) Repayments of long-term debt ( 2,600) ( 15,125) Proceeds from increase in term loan 15,000 Repayments of obligations under capital leases ( 2,224) ( 1,243) Other, net 338 281 NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ( 65,486) 33,913 INCREASE IN CASH 3,970 2,830 CASH, BEGINNING OF PERIOD CASH, END OF PERIOD $ 3,970 $ 2,830 See Notes to Consolidated Financial Statements. 5 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 $71,292 and $67,287 higher at May 31, 1994 and August 31, 1993, respectively. The LIFO charge to operations was $1,000 and $1,000 for the three months and $4,005 and $5,764 for the nine months ended May 31, 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 $3,689 and $4,326 for the three months and $18,029 and $20,141 for the nine months ended May 31, 1994 and 1993, respectively. During the nine months ended May 31, 1994 the Company entered into capital lease obligations of $9,933, principally relating to equipment leased in connection with the Company's expansion to the Midwestern distribution facility. For the same nine 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 nine months ended May 31, 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 nine months ended May 31, 1993 was a reduction of $327 and $19,593, respectively, in the previously reported net income for these periods. The amount for the nine months then ended principally reflects the cumulative effect of this accounting change. 6 HOOK-SUPERX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands, except per share amounts) 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 nine months ended May 31, 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 nine months ended May 31, 1994, as compared with 38% and 39% for the three months and nine months ended May 31, 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 nine months ended May 31, 1993, the Company utilized $3,470 and $16,970, respectively, of net operating loss carryforwards for financial reporting purposes and the related tax benefits of $1,467 and $6,141 were reflected as an extraordinary item in the Consolidated Statements of Operations for the three months and nine months ended May 31, 1993, respectively. Cash paid for income taxes (Federal, state and local) was $7,704 and $4,170 for the three months ended and $9,216 and $5,182 for the nine months ended May 31, 1994 and 1993, respectively. During the nine months ended May 31, 1994, the Company received a state income tax refund of $150 and during the nine months ended May 31, 1993 a Federal income tax refund of $1,500 due to the overpayment of estimated income taxes. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations for Hook-SupeRx, Inc. and Subsidiaries for the nine months and three months ended May 31, 1994, compared to Results of Operations for the nine months and three months ended May 31, 1993. At May 31, 1994, the Company operated 1,116 drug stores and 33 home health care centers ("HHC"), as compared with 1,159 drug stores and 34 HHCs at May 31, 1993. Net sales of $1,777.3 million for the nine months ended May 31, 1994 were approximately $56.8 million or 3.3% above net sales for the same period of the prior year. Sales increases from stores opened one year or more were 4.2% over the same period of the prior year. The increase in net sales of 3.3% is less than the comparable store sales increase as a result of the Company operating forty-four fewer stores this fiscal year as compared to the same time of the prior year. During the nine months ended May 31, 1994, the Company opened twenty-nine new stores and closed thirty-seven (seventeen 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 fifty-five new store openings and twenty-eight store closings during the same period of the prior year. Prescription sales, as a percentage of net sales, continued to increase during the nine months ended May 31, 1994. For this period, prescription sales increased 7.4% over the prior year to $929.1 million, which represented 52.3% of net sales, as compared with $865.3 million or 50.3% 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 nine months ended May 31, 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 nine months ended May 31, 1994, prescription sales to third party payors increased 16% over the prior year to $478.6 million or 51.5% of total prescription sales, as compared with $412.5 million or 47.7% of total prescription sales for the same period of the prior year. Excluded from the third party sales 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 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. 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 May 31, 1994, third party accounts receivable, net of allowance, amounted to $18.2 million, as compared with $56.5 million, net of allowance at May 31, 1993. The primary reason for the decline in third party accounts receivable from May 31, 1993 to May 31, 1994 is the accounts receivable sales program discussed above. The aforementioned accounts receivable sales program is being terminated effective as of the consummation of the merger of the Company with Revco D.S. Inc. See "Liquidity and Capital Resources." Net sales for the three months ended May 31, 1994 of $595.6 million increased 4.3% over the same three month period of the prior year. Sales increases from drug stores opened one year or more were 4.9% for the same time period. The increase in net sales of 4.3% is less than the comparable store sales increase for the reason cited above. For the three month period ended May 31, 1994, prescription sales increased 7.1% over the prior year to $316.8 million, which represented 53.2% of net sales, as compared with $295.8 million or 51.8% of net sales for the same three month period of the prior year. For the three months ended May 31, 1994, sales to third party payors increased 15.9% over the prior year to $167.5 million or 52.9% of total prescription sales, as compared with $144.4 million or 48.8% for the same three month period of the prior year. Cost of merchandise sold, as a percentage of net sales, for the nine months ended May 31, 1994 was 70.3%, as compared with 69.8% for the same period of the prior year. One of the principal reasons for the decline in gross profit margin, from 30.2% 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 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. Effective April 1, 1994, 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 nine 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 nine months ended May 31, 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 nine months ended May 31, 1994, the Company recorded a LIFO charge to operations of $4.0 million, as compared with $5.8 million for the same period of the prior year. 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 May 31, 1994 and 1993, LIFO inventories were approximately $71.3 million and $66.8 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 May 31, 1994 amounted to 70.3% as compared to 70.0% for the same three month period of the prior year. For each of the three months ended May 31, 1994 and 1993, the Company recorded a LIFO charge of $1.0 million. Selling, general and administrative expenses, as a percentage of net sales, for the nine months and three months ended May 31, 1994 were 23.1% and 23.4% respectively, as compared with 23.3% and 23.2% for the nine months and three months ended May 31, 1993, respectively. The decline in selling, general and administrative expenses as a percentage of net sales, for the nine month period, was primarily due to more stringent cost control measures combined with the benefits derived from 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) the Company's 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 nine month period ended May 31, 1993, the Company opened significantly more stores than were opened during the nine month period ended May 31, 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 nine months ended May 31, 1993. Interest expense, as a percentage of net sales, for both the nine month and three month periods ended May 31, 1994 was 1.2% and 1.1%, respectively, as compared with 1.4% and 1.3% for the nine months and three months ended May 31, 1993, respectively. 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 May 31, 1994, the Company has received $36 million in proceeds from such sales. In addition, on January 14, 1994, the Company received a cash prepayment of $40 million from a 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 nine months ended May 31, 1994, the Company has recorded income tax expense of $6.2 million, which was based upon the estimated annual effective tax rate for both Federal and state tax purposes of approximately 40%. For the nine months ended May 31, 1993, the Company recorded income tax expense of $7.7 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 nine month period ended May 31, 1993, the Company utilized approximately $17.0 million of net operating loss carryforwards for financial reporting purposes and the related tax benefit of $6.1 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." 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The results of operations for any nine 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 nine months ended May 31, 1994, the Company had additions to property and equipment of approximately $9.9 million, as compared with approximately $24.1 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 nine months ended May 31, 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, for which construction was completed in September 1993. For the nine months ended May 31, 1994, the Company opened twenty-nine new stores and closed thirty-seven (seventeen of which were closed in connection with the Asset Divestiture Program), compared with fifty-five new store openings and twenty-eight closings for the same time period of the prior year. As of May 31, 1994, the Company has closed or otherwise disposed of the majority of the 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 $12.3 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 May 31, 1994, the balance in the restructuring reserve approximates $6.5 million. At May 31, 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 nine months ended May 31, 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 nine months ended May 31, 1994, borrowings under the Company's revolving line of credit have ranged from $10 million to $98 million, with an average amount outstanding for this nine month period of $52.2 million, as compared with a range of $90 million to $101 million and an average balance outstanding of $95.3 million for the comparable nine month period of the prior year. On July 12, 1994, the balance outstanding under the revolving line of credit was $21 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 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 from such sales during the nine months ended May 31, 1994 were $36 million. The aforementioned account receivable sales program is being terminated in connection with the merger of the Company with Revco D.S. Inc. 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 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 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 May 31, 1994, the amount of unamortized deferred revenue is $36.8 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. 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, 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. On July 8, 1994, a special meeting of the stockholders of Hook-SupeRx, Inc. was convened for the purpose of approving and adopting the Agreement and Plan of Merger, dated March 31, 1994, between HSI, Revco and HSX Acquisition Corp. and the transactions contemplated thereby (the "Special Meeting"). At the Special Meeting, a majority of the stockholders of record as of June 7, 1994 (the record date) voted for the approval and adoption of the above referenced Agreement and Plan of Merger and the transactions contemplated thereby. The Company expects that the merger will be consummated as soon as possible after the expiration of the waiting period under the Hart- Scott-Rodino Antitrust Improvements Act of 1976, which waiting period is scheduled to expire on July 14, 1994. 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 None 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. 15 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) July 14, 1994 /s/ Timothy M. Mooney (date) Timothy M. Mooney Senior Vice President Chief Financial Officer 16
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 Nine Months Ended May 31, May 31, 1994 1993 1994 1993 (Restated) (Restated) Income before extraordinary item and cumulative effect of accounting change $2,098 $ 3,661 $ 9,302 $ 11,813 Extraordinary item resulting from income tax benefit from utilizing net operating loss carryforward 1,467 6,141 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) $2,098 $ 5,128 $ 4,110 $( 658) COMPUTATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (UNAUDITED) Three Months Ended Nine Months Ended May 31, May 31, 1994 1993 1994 1993 Weighted average number of shares outstanding 20,877,379 20,817,095 20,842,769 20,700,070 Common stock equivalents 800,324 778,434 646,268 814,302 21,677,703 21,595,529 21,489,037 21,514,372 Income (loss) per share: Before extraordinary item and cumulative effect of accounting change $.10 $.17 $ .43 $ .55 Per share effect of extra- ordinary item .07 .29 Per share effect of cumulative effect of accounting change (.24) (.87) Net income (loss) $.10 $.24 $ .19 $(.03) -----END PRIVACY-ENHANCED MESSAGE-----