-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KfZAwktAWIW6c6XQ14KghM9Cb0zm+kVqdRNPwQVpERzIp9RoGZWwsL+nsaAus2nt LbxL5eyQn8vdUdNx3m+fiA== 0000950114-96-000308.txt : 19961118 0000950114-96-000308.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950114-96-000308 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: D & K WHOLESALE DRUG INC/DE/ CENTRAL INDEX KEY: 0000888914 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 431465483 STATE OF INCORPORATION: DE FISCAL YEAR END: 0327 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20348 FILM NUMBER: 96663658 BUSINESS ADDRESS: STREET 1: 8000 MARYLAND AVE STE 1190 CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3147273485 MAIL ADDRESS: STREET 1: 8000 MARYLAND AVE STE 1190 CITY: ST LOUIS STATE: MO ZIP: 63105 10-Q 1 D & K WHOLESALE DRUG, INC. FORM 10-Q 1 Page 1 of 13 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 ------------------ OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from----------------to---------------------------- Commission File No. 0-20348 ------- D & K WHOLESALE DRUG, INC. (Exact name of registrant as specified in its charter) DELAWARE 43-1465483 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8000 MARYLAND AVENUE, SUITE 1190, ST. LOUIS, MISSOURI (Address of principal executive offices) 63105 (Zip Code) (314) 727-3485 (Registrant's telephone number, including area code) 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. X YES NO ------------- ------------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 3,043,717 ---------------------------- -------------------- (class) (October 31, 1996) 2 Page 2 of 13 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES Index
Page No. -------- Part I. Financial Information --------------------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1996 and March 29, 1996 3 Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 1996 and September 30, 1995 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 1996 and September 30, 1995 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Part II. Other Information ----------------- Item 6. Exhibits and Reports on Form 8-K 12-13
3 Page 3 of 13 Part I. Financial Information - ------------------------------- Item 1. Financial Statements. D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands)
Assets September 30, March 29, ------ 1996 1996 ------------- --------- (Unaudited) Cash $ 3,304 $ 1,947 Receivables 29,011 25,150 Inventories 35,378 39,500 Income tax receivable 1,029 1,430 Other current assets 1,219 911 ------- ------- Total current assets 69,941 68,938 ------- ------- Net property and equipment 4,942 5,162 Investment in affiliated company 4,047 3,929 Deferred income taxes 1,147 1,147 Other assets 488 723 Intangible assets 14,831 15,038 ------- ------- Total assets $95,396 $94,937 ======= ======= Liabilities and Stockholders' Equity ------------------------------------ Current maturities of long-term debt $ 1,150 $ 1,209 Accounts payable 43,259 35,805 Deferred income taxes 3,737 3,737 Accrued expenses 2,474 2,663 ------- ------- Total current liabilities 50,620 43,414 ------- ------- Revolving line of credit 33,000 40,000 Long-term debt, excluding current maturities 3,180 3,190 Other long-term liabilities 300 300 ------- ------- Total liabilities 87,100 86,904 ------- ------- Stockholders' equity: Common stock 30 30 Paid-in capital 11,687 11,592 Accumulated deficit (3,421) (3,589) ------- ------- Total stockholders' equity 8,296 8,033 ------- ------- Total liabilities and stockholders' equity $95,396 $94,937 ======= ======= See notes to condensed consolidated financial statements.
4 Page 4 of 13 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data)
Three Months Ended Six Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Net sales $113,721 $102,983 $219,955 $213,446 Cost of sales 108,895 98,125 210,090 203,331 --------- --------- --------- --------- Gross profit 4,826 4,858 9,865 10,115 Operating expenses 4,037 4,418 8,050 8,873 --------- --------- --------- --------- Income from operations 789 440 1,815 1,242 Other income (expense): Interest expense, net (770) (819) (1,606) (1,642) Other, net 91 105 126 187 --------- --------- --------- --------- (679) (714) (1,480) (1,455) --------- --------- --------- --------- Income before income tax provision (benefit) 110 (274) 335 (213) Income tax provision (benefit) 55 (131) 167 (104) --------- --------- --------- --------- Net income (loss) $55 ($143) $168 ($109) ========= ========= ========= ========= Earnings per common share: Primary earnings (loss) per share $0.02 ($0.05) $0.05 ($0.04) Fully diluted earnings (loss) per share $0.02 ($0.05) $0.05 ($0.04) Primary common shares outstanding 3,069,958 3,041,812 3,077,917 3,036,192 Fully diluted common shares outstanding 3,069,958 3,041,812 3,077,917 3,036,192 See notes to condensed consolidated financial statements.
5 Page 5 of 13 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Six Months Ended Sept. 30, Sept. 30, 1996 1995 ---------- ---------- Cash flows from operating activities: Net income (loss) $168 ($109) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Amortization of debt issuance costs 36 36 Depreciation and amortization 759 838 Stock option and warrant expense 2 12 Gain from sale of assets (4) (2) Equity in net income of affiliated company (118) - (Increase) decrease in accounts receivable, net (3,675) 2,414 Decrease in inventories 4,121 2,454 Decrease in income tax receivable 403 - Increase in other current assets (309) (299) Increase (decrease) in accounts payable 6,604 (193) Increase (decrease) in accrued expenses 660 (744) Other, net 21 (32) -------- -------- Cash flows from operating activities 8,668 4,375 Cash flows from investing activities: Purchases of property and equipment (336) (593) -------- -------- Cash flows from investing activities (336) (593) Cash flows from financing activities: Borrowings under revolving line of credit 131,751 159,685 Repayments under revolving line of credit (138,751) (162,274) Payments of long-term debt (24) (25) Payments of capital lease obligations (45) (109) Proceeds from exercise of stock options 94 23 -------- -------- Cash flows from financing activities (6,975) (2,700) Increase in cash 1,357 1,082 Cash, beginning of period 1,947 843 -------- -------- Cash, end of period $3,304 $1,925 ======== ======== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for Interest $1,823 $1,953 Income taxes 164 376 See notes to condensed consolidated financial statements.
6 Page 6 of 13 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. The Company is a full-service, regional wholesale drug distributor. From facilities in Illinois, Kentucky and Minnesota, the Company distributes a broad range of pharmaceuticals and related products to its customers in 19 states. The Company focuses primarily on a target market sector which includes independent retail, institutional, franchise and chain store pharmacies in the Midwest and Mid-South. The Company is currently operating in one business segment. The Company also owns a 50% equity interest in Pharmaceutical Buyers, Inc., a group purchasing organization with approximately 1,800 members in 49 states. The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim reporting, which are less than those required for annual reporting. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair representation have been included. The results of operations for the three-month and six-month periods ended September 30, 1996 are not necessarily indicative of the results to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes of the Company for the fiscal year ended March 29, 1996 contained in the Company's 1996 Annual Report to Stockholders. Note 2. In May 1996, the Company granted non-qualified stock options for an aggregate of 82,833 shares to certain key employees at an exercise price of $6.375 per share. The exercise price of all options granted pursuant to the 1993 Stock Option Plan was equal to the fair market value of the stock on the date of grant. Stock options granted under the plan are immediately exercisable from the date of grant and expire not later than ten years from the date of grant. The following sets forth a summary of the options outstanding under the Companys Long Term Incentive Plan and the 1993 Stock Option Plan:
OPTION PRICE NUMBER OF ------------------------------ SHARES PER SHARE TOTAL --------- ------------ ------- (000'S) OUTSTANDING AT MARCH 29, 1996 189,197 $3.375-7.00 $1,011 GRANTED MAY 1996 82,833 6.375 528 EXERCISED MAY 1996 (8,000) $3.375-3.875 (30) EXERCISED AUGUST 1996 (17,666) $3.375-3.875 (64) CANCELED AUGUST 1996 (36,666) $5.85-7.00 (234) ------- ------ OUTSTANDING AT SEPTEMBER 30, 1996 209,698 $3.375-$7.00 $1,211 ======= ======
7 Page 7 of 13 Note 3. Primary earnings (loss) per common share are computed by dividing net income by the sum of: (1) the weighted average number of common shares outstanding during the period; and (2) the dilutive effect of outstanding stock options and warrants (calculated using the treasury stock method). Fully diluted earnings (loss) per common share are computed using the components mentioned above for the primary computation with the addition of common shares issuable upon conversion of the Companys 11% convertible subordinated notes. The fully diluted computation adds back to income interest on the 11% convertible subordinated notes and deducts the income tax effect as if such notes had been converted into common stock at the beginning of the period. For the three-month and six- month periods ended September 30, 1996, and September 30, 1995 fully diluted earnings (loss) per share is antidilutive. Note 4. The Company has buildings held for sale in Cairo, Illinois and Duluth, Minnesota. The buildings are for sale as a result of relocations of operations and have September 30, 1996 carrying values of $1,000 and $558,000, respectively, and are included in net property and equipment on the condensed consolidated balance sheet. The buildings are expected to be sold during fiscal year 1997. Note 5. On July 2, 1996, the Company announced that it had been selected as the primary pharmaceutical supplier for a mail service pharmacy and prescription management company. The Company anticipates that this account will become one of its largest customers. The agreement became effective on August 1, 1996 and will be for a base period of two years with an option by the customer to renew for a third year. Note 6. In June 1996, the Company entered into a lease agreement with a local developer for the development and construction of a 60,000 square foot distribution center on a 6.5-acre tract of land in Cape Girardeau, Missouri. In order to facilitate growth and other operational efficiencies, the Company intends to relocate its Cairo, Illinois operations to this new facility in December 1996 or January 1997. The term of the lease is for a period of ten years with two five-year renewal options. The Company expects the lease to be accounted for as an operating lease. 8 Page 8 of 13 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The discussion below is concerned with material changes in financial condition and results of operations in the condensed consolidated balance sheets as of September 30, 1996 and March 29, 1996, and in the condensed consolidated statements of operations for the three- month and six-month periods ended September 30, 1996 and September 30, 1995. The Company recommends that this discussion be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's 1996 Annual Report to Stockholders. Results of Operations: --------------------- Net Sales Net sales increased 10.4% or $10.7 --------- million for the second quarter and 3.1% or $6.5 million for the six-month period. The addition of a mail-order service and prescription management customer in August 1996 accounted for increased sales of $9.4 million during the second quarter ended September 30, 1996. Chain drug stores sales and independent pharmacies sales improved by $1.1 million and $4.8 million, respectively, during the recently completed quarter. The increase in chain sales was realized primarily from increased sales to a large drug store chain and other drug store chain accounts. The independent pharmacy sales improvement was realized from new and existing retail accounts. Second quarter franchise store sales decreased by $2.6 million primarily due to the decision of a regional group of franchise pharmacies not to renew the Companys status as the groups primary supplier effective as of July 1, 1995. Hospital sales decreased during the same period by $2.0 million primarily as a result of the loss of certain customers when the two Minnesota facilities were consolidated during fiscal 1996. Gross Profit Gross profit decreased .6% to $4.8 ------------ million for the three-month period and 2.5% to $9.9 million for the six-month period. As a percentage of net sales, gross margin decreased from 4.7% to 4.2% for the three-month period and from 4.7% to 4.5% during the six-month period ended September 30, 1996, compared to the corresponding periods of the previous fiscal year. The decrease in gross margin percentage was due to the increase in the proportion of sales to lower margin chain drug store accounts and the sales to the new mail-order customer which yield lower gross margins percentages but generate favorable working capital benefits. 9 Page 9 of 13 Operating Expenses Operating expenses decreased ------------------ 8.6% or $.4 million to $4.0 million for the three- month period and 9.3% or $.8 million to $8.0 million for the six-month period ended September 30, 1996, compared to the corresponding periods of the previous fiscal year. As a percentage of net sales, operating expenses decreased from 4.3% to 3.6% and from 4.2% to 3.7% for the three-month and six-month periods, respectively. The significant decrease in operating expenses for the three-month and six-month periods was attributable primarily to the Companys consolidation of the operations of Northern Drug Company (NDC) and Krelitz Industries, Inc. (KII) in Minneapolis, Minnesota in fiscal year 1996. This consolidation eliminated significant duplicate overhead expenses associated with the former NDC facility. In addition, implementation of various cost management measures contributed to the decline of the first and second quarter operating expenses compared to the same periods of the prior fiscal year. Interest Expense, Net Net interest expense --------------------- decreased 5.9% or $49,000 and 2.2% or $35,000 for the three-month and six-month periods, respectively. As a percentage of net sales, net interest expense decreased from 0.8% to 0.7% for both the three-month and six- month periods, respectively. The current year decrease in interest expense resulted from overall lower borrowing rates compared to the prior year and from the working capital benefits realized from the relationship with the Company's new mail-order account. Also contributing to the decrease in net interest expense was the Company's payment of $424,000 of unsecured notes in October 1995, which had interest at prime plus 1%. Such unsecured notes were issued in October 1994 to former shareholders of NDC replacing outstanding debt obligations of NDC. Other, Net Other income decreased to $91,000 for ---------- the three-month period and $126,000 for the six-month period ended September 30, 1996 compared to $105,000 and $186,000 for the corresponding periods of the prior fiscal year, respectively. The decrease in other income was primarily due to reduced computer service income realized by the Company's Viking Computer Services subsidiary, compared to the corresponding periods of the prior fiscal year. Also contributing to the decrease was the realization of a $42,500 lawsuit settlement which was included in the prior year's three and six-month totals. Income from the 50% investment in Pharmaceutical Buyers, Inc. was included in the current three and six-month periods ended September 30,1996. Effects of Inflation and LIFO Accounting The ---------------------------------------- effects of price inflation, measured by the excess of LIFO costs over FIFO costs, were $15,000 and $63,000 for the three months ended September 30, 1996 and 1995, respectively, and $137,000 and $106,000 for the six- month periods ended September 30, 1996 and 1995, respectively. The decrease in LIFO charges in the recent three-month period was due primarily to the lower rate of product price inflation in the Company's pharmaceutical inventories as opposed to the higher rate of product price inflation experienced during the first three-month period of the current fiscal year. 10 Page 10 of 13 Provision for Income Taxes The Company's estimate -------------------------- of the effective tax rate expected to be applicable for the full year, of 49.8%, which was applied to pretax income in the period ended September 30, 1996, was greater than the federal income tax rate of 35% primarily because of the amortization of intangible assets that are not deductible for federal and state income tax purposes and state income taxes. Financial Condition: ------------------- Liquidity and Capital Resources The Company's ------------------------------- working capital requirements are generally met through a combination of internally generated funds, borrowings under its revolving line of credit, and trade credit from its suppliers. The following ratios are utilized by the Company as key indicators of the Company's liquidity and working capital management:
September 30, March 29, 1996 1996 ---- ---- Working capital (000's) $19,321 $25,524 Current ratio 1.38 to 1 1.59 to 1 Working capital to assets .20 to 1 .27 to 1
The decrease in working capital was due primarily to a $4.1 million decrease in inventory and a $7.5 million increase in accounts payable in excess of a $1.4 million increase in cash and a $3.9 million increase in accounts receivable. The decrease in inventories was due to continued working capital synergies realized from the consolidation of NDC and KII in fiscal 1996 and the depletion of seasonal purchases of inventory made prior to the end of fiscal year 1996. The increase in accounts payable in light of the decrease in inventories corresponds to the timing of purchases and reflects the working capital benefits from the new mail-order customer as inventory for this customer is liquidated sooner than the corresponding trade accounts payable. The increase in accounts receivable was due to the increase in sales during the quarter ended September 1996. The Company invested $336,000 in capital assets in the six-month period ended September 30, 1996. The majority of the additions were related to either management information systems or equipment for the new Cape Girardeau, Missouri facility. The Company believes that its investment in capital assets is necessary to achieve its goal of improving operational efficiency, thereby enhancing its productivity and ratio of expenses to net sales. 11 Page 11 of 13 At September 30, 1996, the revolving line of credit provided a maximum borrowing capacity of $50,000,000 plus a supplemental facility of up to $10,000,000 during the months of November through June of each year. At September 30, 1996 and March 29, 1996, the unused portion of the line of credit amounted to $11,768,000 and $3,880,000, respectively. Management believes that, together with internally generated funds, the Company's capital resources will be sufficient to meet the Company's foreseeable capital requirements. Approximately $2,000 has been credited to paid-in- capital during the six-month period ended September, 1996 to reflect compensation expense arising from the vesting of stock warrants. In addition, $94,000 has been credited to paid-in-capital during the six-month period as a result of employee stock options that were exercised. 12 Page 12 of 13 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES Part II. Other Information - ------- ----------------- Item 6. Exhibits: 27 - Financial Data Schedule 13 Page 13 of 13 SIGNATURES 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. D & K WHOLESALE DRUG, INC. Date: November 13, 1996 By: /s/ J. Hord Armstrong, III ----------------------- -------------------------------- J. Hord Armstrong, III Chairman of the Board and Chief Executive Officer (Principal Financial Officer) By: /s/ Martin D. Wilson -------------------------------- Martin D. Wilson President, Chief Operating Officer and Secretary EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS MAR-28-1997 MAR-30-1996 SEP-30-1996 3,304 0 29,801 790 35,378 69,941 9,489 4,547 95,396 50,620 0 30 0 0 8,266 95,396 219,955 220,081 210,090 218,140 0 0 1,606 335 167 168 0 0 0 168 0.05 0.05
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