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