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
<TABLE>
Consolidated Statements of Operations and Accumulated Deficit (Unaudited)
<CAPTION>
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)
<S> <C> <C> <C> <C>
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<PAGE>
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
</TABLE>
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)<PAGE>
