-----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, KvgISXZKNv1dHTH0v1Cmc1JdJfKHrzFrVDWpV/WLJB4ZMLHDxyjNpEM4nlVdpTdW nGobXe5GQd5c+uypQKYv+w== 0000950114-98-000256.txt : 19980515 0000950114-98-000256.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950114-98-000256 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: D & K HEALTHCARE RESOURCES INC CENTRAL INDEX KEY: 0000888914 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 431465483 STATE OF INCORPORATION: DE FISCAL YEAR END: 0328 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20348 FILM NUMBER: 98621504 BUSINESS ADDRESS: STREET 1: 8000 MARYLAND AVENUE STREET 2: SUITE 920 CITY: ST. LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3147273485 MAIL ADDRESS: STREET 1: 8000 MARYLAND AVENUE STREET 2: SUITE 920 CITY: ST. LOUIS STATE: MO ZIP: 63105 FORMER COMPANY: FORMER CONFORMED NAME: D & K WHOLESALE DRUG INC/DE/ DATE OF NAME CHANGE: 19930328 10-Q 1 D&K HEALTHCARE RESOURCES, INC. FORM 10-Q 1 Page 1 of 17 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 March 31, 1998 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 HEALTHCARE RESOURCES, 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 920, 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 3,610,395 ---------------------------- ---------------- (class) (April 30, 1998) 2 Page 2 of 17 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Index
Page No. -------- Part I. Financial Information --------------------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 1998 and June 30, 1997 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 1998 and March 28, 1997 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1998 and March 28, 1997 5 Notes to Condensed Consolidated Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 Part II. Other Information ----------------- Item 6. Exhibits and Reports on Form 8-K 16-17
3 Page 3 of 17 Part I. Financial Information - ------------------------------- Item 1. Financial Statements. D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands)
Assets March 31, June 30, ------ 1998 1997 ----------- ----------- (Unaudited) (Unaudited) Cash $ 893 $ 1,646 Receivables 36,729 29,332 Inventories 76,722 41,391 Other current assets 2,349 1,152 -------- ------- Total current assets 116,693 73,521 -------- ------- Net property and equipment 6,041 5,419 Investment in affiliated company 4,021 4,090 Deferred income taxes 4,071 889 Other assets 223 317 Intangible assets 11,812 14,521 -------- ------- Total assets $142,861 $98,757 ======== ======= Liabilities and Stockholders' Equity ------------------------------------ Current maturities of long-term debt $ 2,794 $ 3,127 Accounts payable 65,211 48,074 Deferred income taxes 2,749 3,842 Accrued expenses 3,749 2,675 -------- ------- Total current liabilities 74,503 57,718 -------- ------- Revolving line of credit 52,840 30,147 Long-term debt, excluding current maturities 1,994 1,529 -------- ------- Total liabilities 129,337 89,394 -------- ------- Stockholders' equity: Common stock 36 30 Paid-in capital 13,691 11,819 Accumulated deficit (203) (2,486) -------- ------- Total stockholders' equity 13,524 9,363 -------- ------- Total liabilities and stockholders' equity $142,861 $98,757 ======== ======= See notes to condensed consolidated financial statements.
4 Page 4 of 17 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data)
Three Months Ended Nine Months Ended March 31, March 28, March 31, March 28, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net sales $ 155,314 $ 128,454 $ 442,908 $ 373,114 Cost of sales 147,240 122,394 421,639 356,670 ---------- ---------- ---------- ---------- Gross profit 8,074 6,060 21,269 16,444 Operating expenses 5,442 4,664 15,344 13,245 ---------- ---------- ---------- ---------- Income from operations 2,632 1,396 5,925 3,199 Other income (expense): Interest expense, net (975) (987) (2,408) (2,562) Other, net 113 150 359 418 ---------- ---------- ---------- ---------- (862) (837) (2,049) (2,144) ---------- ---------- ---------- ---------- Income before income tax provision 1,770 559 3,876 1,055 Income tax provision 708 181 1,593 428 ---------- ---------- ---------- ---------- Net income $ 1,062 $ 378 $ 2,283 $ 627 ========== ========== ========== ========== Earnings per common share: Basic earnings per share $ 0.29 $ 0.12 $ 0.70 $ 0.21 Diluted earnings per share $ 0.27 $ 0.11 $ 0.62 $ 0.20 Basic common shares outstanding 3,603,448 3,044,717 3,244,501 3,039,195 Diluted common shares outstanding 3,873,494 3,617,942 3,789,946 3,597,451 See notes to condensed consolidated financial statements.
5 Page 5 of 17 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Nine Months Ended March 31, 1998 March 28, 1997 -------------- -------------- Cash flows from operating activities: Net income $ 2,283 $ 627 Adjustments to reconcile net income to net cash flows from operating activities: Amortization of debt issuance costs 45 55 Depreciation and amortization 1,163 1,135 Gain from sale of assets (17) (5) Equity in net income of affiliated company (281) (376) Changes in operating assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable, net (2,848) 3,736 Increase in inventories (34,152) (13,628) Decrease in income tax receivable - 1,431 Increase in other current assets (1,183) (10) Increase in accounts payable 16,042 5,987 Increase in accrued expenses 685 391 Other, net 126 2 --------- --------- Cash flows from operating activities (18,137) (655) Cash flows from investing activities Cash paid for acquired companies (1,255) - Cash dividend from affiliated company 350 300 Proceeds from sale of assets 17 6 Purchases of property and equipment (726) (2,045) --------- --------- Cash flows from investing activities (1,614) (1,739) Cash flows from financing activities: Borrowings under revolving line of credit 306,694 236,654 Repayments under revolving line of credit (284,002) (233,409) Proceeds from equipment loan - 1,495 Principal payments on long-term debt (3,777) (1,394) Proceeds from exercise of stock options 83 64 --------- --------- Cash flows from financing activities 18,998 3,410 Increase (decrease) in cash (753) 1,016 Cash, beginning of period 1,646 1,197 --------- --------- Cash, end of period $ 893 $ 2,213 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid (refunded) during the period for Interest $ 2,465 $ 2,907 Income taxes 1,045 (1,099) See notes to condensed consolidated financial statements.
6 Page 6 of 17 D & K HEALTHCARE RESOURCES, 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 Missouri, Kentucky and Minnesota, the Company distributes a broad range of pharmaceuticals and related products to its customers in 20 states. The Company focuses primarily on a target market sector, which includes independent retail, institutional, mail-order, franchise, chain store and alternate site pharmacies in the Midwest and South. The Company operates in one business segment. The Company also owns a 50% equity interest in Pharmaceutical Buyers, Inc. (PBI), a group purchasing organization with approximately 2,200 members nationwide. 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 nine-month periods ended March 31, 1998 are not necessarily indicative of the results to be expected for the full fiscal year. Certain reclassifications have been made to the prior period's financial statements to conform to the current year presentation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company's 1997 Annual Report to Stockholders. Note 2. As discussed in the Company's Proxy Statement dated July 11, 1997, the Company's Board of Directors unanimously approved a proposed amendment to its articles of incorporation to change the Company's corporate name from D & K Wholesale Drug, Inc. to "D & K Healthcare Resources, Inc". On August 14, 1997 the Company's stockholders approved the amendment. The amendment was effective on August 22, 1997 after being approved by the Secretary of State of the State of Delaware. 7 Page 7 of 17 Note 3. On June 30, 1997, the Company filed a Current Report on Form 8-K announcing that it would change from a fiscal year ending the Friday closest to March 31 in each year to a fiscal year ending June 30 of each year. The Company began its first full fiscal year on the new basis on July 1, 1997. The Company presented the unaudited financial statements for the period of March 29, 1997 to June 30, 1997 on its Form 10-Q Transition Report dated August 13, 1997. Accordingly, the unaudited Condensed Consolidated Balance Sheet at June 30, 1997 has been included on this Form 10-Q. Note 4. During the first nine months of fiscal 1998, under the provisions of its Long-Term Incentive Plan and its 1993 Stock Option Plan, the Company granted non-qualified stock options for an aggregate of 76,999 and 61,000 shares, respectively, of common stock to certain executives and key employees at exercise prices ranging from $6.625 to $13.875 per share. The exercise price of all options granted pursuant to the two plans was equal to the fair market value of the stock on the date of grant. Stock options granted under the Long-Term Incentive Plan are generally not exercisable earlier than six months from the date of grant, nor later than ten years from the date of grant. Stock options granted under the 1993 Stock Option 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 Company's Long-Term Incentive Plan and the 1993 Stock Option Plan:
WEIGHTED AVERAGE NUMBER OF -------------------- SHARES EXERCISE PRICE ----------------------------------- OUTSTANDING AT JUNE 30, 1997 295,199 $4.36 GRANTED 137,999 $8.22 EXERCISED (20,700) $4.01 ----------- OUTSTANDING AT MARCH 31, 1998 412,498 $5.66 ===========
Note 5. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which establishes standards for computing and presenting earnings per share. SFAS 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations. The Company was required to adopt the provisions of SFAS 128 during the quarter ended December 31, 1997 and all prior period earnings per share data presented have been restated. 8 Page 8 of 17 Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed using the component mentioned above for the basic computation with the addition of: (1) the dilutive effect of outstanding stock options and warrants (calculated using the treasury stock method); and (2) common shares issuable upon conversion of all convertible subordinated notes. The diluted computation adds back to income interest on all convertible subordinated notes and deducts the related income tax effect as if such notes had been converted into common stock at the beginning of the period. On December 29, 1997, the holder of 11% convertible subordinated notes converted their remaining $1,750,000 of notes into 530,978 shares of the Company's common stock. The conversion ratio was approximately $3.30 per share. The reconciliation of the numerator and denominator of the basic and diluted earnings per common share computations is as follows:
Three Months Ended March 31, 1998 Three Months Ended March 28, 1997 ---------------------------------------- ------------------------------------------ Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ----------------- --------- ----------- ----------------- --------- BASIC EARNINGS PER SHARE: Net income available to Common shareholders $1,062,071 3,603,448 $0.29 $378,114 3,044,717 $0.12 EFFECT OF DILUTED SECURITIES: Options and warrants 260,068 42,247 Convertible subordinated notes 1,750 9,978 28,875 530,978 ---------- --------- -------- --------- DILUTED EARNINGS PER SHARE: Net income available to Common shareholders plus assumed conversions $1,063,821 3,873,494 $0.27 $406,989 3,617,942 $0.11 ---------- --------- -------- --------- - Outstanding shares computed on a weighted average basis
9 Page 9 of 17
Nine Months Ended March 31, 1998 Nine Months Ended March 28, 1997 ---------------------------------------- ---------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ----------------- --------- ----------- ----------------- --------- BASIC EARNINGS PER SHARE: Net income available to Common shareholders $2,283,498 3,244,501 $0.70 $627,114 3,039,195 $0.21 EFFECT OF DILUTED SECURITIES: Options and warrants 189,475 27,278 Convertible subordinated notes 59,500 355,970 86,625 530,978 ---------- --------- -------- --------- DILUTED EARNINGS PER SHARE: Net income available to Common shareholders plus Assumed conversions $2,342,998 3,789,946 $0.62 $713,739 3,597,451 $0.20 ---------- --------- -------- --------- - Outstanding shares computed on a weighted average basis
Note 6. In November 1997, the Company amended the terms of its revolving line of credit to provide a maximum borrowing capacity of $70,000,000 plus a supplemental facility of up to $5,000,000 during the months of November through June of each year. In December 1997, the Company amended the terms of its revolving line of credit such that advances bear interest at the daily London Interbank Offer Rate (LIBOR) plus 1.5%. The Company also has the option to pay interest on the obligation at prime plus .5% per annum. At March 31, 1998 and June 30, 1997, the borrowing base formula amounted to $75,000,000 and $49,996,000, respectively. At March 31, 1998 and June 30, 1997, the unused portion of the line of credit amounted to $22,161,000 and $19,349,000, respectively. On April 24, 1998, the Company received an additional 0.25% reduction in the interest rate as a result of improved financial performance. Effective on April 24, 1998, advances on the Company's revolving line of credit will bear interest at the daily LIBOR plus 1.25%. Note 7. On September 30, 1997, the Company was advised that a third party had acquired substantially all of the assets of its then largest customer and that the third party has secured a new supplier. On September 30, 1997, the Company collected the entire amount of its accounts receivable due from this customer, which amounted to approximately $9.5 million. The funds were used to pay down the Company's revolving line of credit. On October 1, 1997, the Company filed a current report on Form 8-K relating to this development. 10 Page 10 of 17 This customer had represented 16.8% of the Company's net sales for the three-month period ended September 30, 1997 and 19.1% of the Company's net sales for the nine-month period ended March 28, 1997. Despite the revenues the Company had derived from such customer, it had represented a below average profit contribution to the Company as well as above average extended payment terms compared to other large customers of the Company. Since the successful termination of this relationship, the Company's working capital needs and borrowings related to this customer have been reduced significantly and interest expense related to such borrowings has decreased accordingly. Growth in higher margin sales to existing and new customers in all trade classes have replaced all of the lost revenues. Also, a portion of the improvement in the Company's gross margin percentage during the periods subsequent to September 30, 1997 is attributable to this shift in sales mix. Accordingly, the Company does not believe that the loss of such customer has had or will have a material adverse effect on its consolidated results of operations or financial condition. Note 8. The Company accounts for its investment in PBI under the equity method. Equity income is recorded net, after reduction of goodwill amortization based on the excess of the amount paid for PBI over the fair value of its underlying net assets at the date of the original investment. The Company's equity in the net income of PBI totaled $81,000 and $131,000 for the three-month periods ended March 31, 1998 and March 28, 1997, respectively ($150,000 and $200,000, respectively, before goodwill amortization). The Company's equity in the net income of PBI totaled $281,000 and $376,000 for the nine-month periods ended March 31, 1998 and March 28, 1997, respectively ($488,000 and $583,000, respectively, before goodwill amortization). Summarized balance sheet information (unaudited) for PBI at March 31, 1998 included current assets of $2.4 million, noncurrent assets of $0.8 million, current liabilities of $1.4 million and noncurrent liabilities of $6.3 million. Summarized income statement information (unaudited) for PBI for the nine-month periods ended March 31, 1998 and 1997 included net revenues of $4.4 million and $4.4 million, respectively, and net income of $1.0 million and $1.1 million, respectively. The remaining PBI shareholders have the option to convert their ownership interests in PBI into shares of the Company's common stock. The potential impact of any such conversion has been determined to be anti-dilutive in all periods presented. 11 Page 11 of 17 D & K HEALTHCARE RESOURCES, 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 March 31, 1998 and June 30, 1997, and in the condensed consolidated statements of operations for the three-month and nine-month periods ended March 31, 1998 and March 28, 1997, respectively. The Company recommends that this discussion be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's 1997 Annual Report to Stockholders. Statements contained in this Report that state the Company's or management's intentions, expectations, beliefs or predictions about future events, including expected Year 2000 compliance costs, tax rates and capital resources, are forward-looking statements and are inherently subject to risks and uncertainties. The Company's actual results could differ materially from those contained in such forward-looking statements due to a number of factors, including without limitation, higher than anticipated software modification costs, changes in the level of Company borrowings, changes in tax laws, the nature of the wholesale pharmaceutical drug distribution industry, the evolving business and regulatory environment of the healthcare industry and changes in the Company's business and capital needs. Results of Operations: --------------------- Net Sales Net sales increased $26.9 million, or 20.9%, for the --------- quarter ended March 31, 1998, compared to the corresponding period of the prior year. Mail-order sales increased $2.8 million due to increased sales volume of a mail-order service and prescription management customer, while hospital sales and independent pharmacy sales improved by $3.9 million and $21.4 million, respectively. The hospital sales increase was realized from new and existing hospital, clinic and nursing home accounts. The independent pharmacy sales improvement was realized from new and existing retail accounts, including $14.7 million from an independent retail purchasing association added as a customer in May 1997 and $2.5 million from independent retail pharmacies formerly associated with an acquired drug wholesaler. Partially offsetting these sales increases was a net decrease in chain store sales of $1.5 million, primarily due to the termination of the Company's relationship with a large regional chain customer on September 30, 1997 (an impact of approximately $23.5 million) offset by increased sales to other existing and new chain store customers of approximately $22.0 million during the current quarter. 12 Page 12 of 17 Excluding sales made to the former large regional chain customer from the three-month period in the prior year, net sales effectively increased 47.9% for the current quarter. In addition, the quarter ended March 31, 1998 contained $11.1 million in "dock-to-dock" sales, which are not included in net sales due to the Company's accounting policy of recording only the commission on such transactions as a component of cost of sales in its consolidated statement of operations. Net sales increased $69.8 million, or 18.7%, for the nine-month period ended March 31, 1998, compared to the corresponding period of the prior year. Mail-order sales increased $16.1 million due to increased sales volume of a mail-order service and prescription management customer added in August 1996, while hospital sales and independent pharmacy sales improved by $14.4 million and $51.5 million, respectively. The hospital sales increase was realized from new and existing hospital, clinic and nursing home accounts. The independent pharmacy sales improvement was realized from new and existing retail accounts, including $38.6 million from an independent retail purchasing association added as a customer in May 1997 and $4.9 million from independent retail pharmacies formerly associated with an acquired drug wholesaler. Partially offsetting these sales increases was a net decrease in chain store sales of $12.8 million, primarily due to the termination of the Company's relationship with a large regional chain customer on September 30, 1997 (an impact of approximately $45.9 million) offset by increased sales to other existing and new chain store customers of approximately $33.1 million. Excluding sales made to the former large regional chain customer from the nine-month period in the prior year, net sales effectively increased 38.3% for the nine months ended March 31, 1998. In addition, the current nine-month period contained $25.2 million in "dock-to-dock" sales, which are not included in net sales due to the Company's accounting policy of recording only the commission on such transactions as a component of cost of sales in its consolidated statement of operations. Gross Profit Gross profit increased 33.2% to $8.1 million for ------------ the quarter and increased 29.3% to $21.3 million for the nine- month period ended March 31, 1998, compared to the corresponding periods of the prior year. As a percentage of net sales, gross margin increased from 4.72% to 5.20% for the quarter and increased from 4.41% to 4.80% for the nine-month period ended March 31, 1998, compared to the corresponding periods of the prior year. The increase in gross margin percentage was due mainly to a shift in customer mix to higher margin business, higher penetration of profitable generic pharmaceutical sales, and benefits from changes in the Company's procurement strategies. The gross margin computed on a first-in, first-out (FIFO) basis increased from 5.32% to 5.56% for the quarter and increased 13 Page 13 of 17 from 4.69% to 5.01% for the nine-month period ended March 31, 1998, compared to the corresponding periods of the prior year, which reflects the favorable impact of changes in the Company's sales mix toward higher margin products, such as generic pharmaceuticals, and the expansion of investment buying opportunities. Operating Expenses Operating expenses increased $0.8 million, ------------------ or 16.7%, to $5.4 million for the quarter and increased $2.1 million, or 15.8%, to $15.3 million for the nine-month period ended March 31, 1998, compared to the corresponding periods of the prior year. As a percentage of net sales, operating expenses decreased from 3.63% to 3.50% for the quarter and decreased from 3.55% to 3.46% for the nine-month period ended March 31, 1998, compared to the corresponding periods of the prior year. The increase in operating expenses for the quarter and for the nine- month period ended March 31, 1998 resulted primarily from incremental warehouse and distribution costs associated with increased sales activity, higher personnel and occupancy costs related to additional managerial positions in several major functional areas of the Company, and legal fees associated with the conclusion of the Company's relationship with its previously largest customer. Interest Expense, Net Net interest expense decreased $12,000 or --------------------- 1.2% for the quarter and decreased $154,000 or 6.0% for the nine- month period ended March 31, 1998, compared to the corresponding period of the prior year. As a percentage of net sales, net interest expense decreased from 0.77% to 0.63% for the quarter and decreased from 0.69% and to 0.54% for the nine-month period ended March 31, 1998, compared to the corresponding period of the prior year. The decrease in net interest expense for the nine- month period ended March 31, 1998 is primarily the result of previous amendments in the terms of the Company's senior debt agreement, which reduced the interest rate on its line of credit from LIBOR plus 2.5% down to LIBOR plus 1.5%. Also, the receipt of the approximate $9.5 million accounts receivable balance from the Company's formerly largest customer at September 30, 1997 has reduced working capital requirements, which contributed to the reduction of interest expense. During the current quarter, decreases in interest expense as a result of the above were largely offset by an increase in the average outstanding balance on the Company's revolving line of credit due to expanded business and changes in the Company's inventory procurement strategies. Also, as noted in the Notes to the Condensed Consolidated Financial Statements, on April 24, 1998 the Company received an additional 0.25% reduction in the interest rate charged on its senior revolving credit facility. 14 Page 14 of 17 Other Income, Net Other income, net decreased from $150,000 to ----------------- $113,000 for the quarter and decreased from $418,000 to $359,000 for the nine-month period ended March 31, 1998, compared to the corresponding periods of the prior year. The decrease in other income, net was primarily due to slightly lower recorded earnings from the Company's equity interest in the net income of PBI during the current quarter and nine-month periods ended March 31, 1998. Effects of Inflation and LIFO Accounting The effects of price ---------------------------------------- inflation, measured by the excess of LIFO costs over FIFO costs, were $549,000 and $772,000, respectively, for the three months ended March 31, 1998 and March 28, 1997, and $909,000 and $1,048,000, respectively, for the nine-month periods ended March 31, 1998 and March 28, 1997. The decrease in the provision for LIFO is due primarily to benefits from the changes in the Company's inventory procurement strategies. These include the expansion of investment buying opportunities and relatively higher levels of generic pharmaceutical inventories, which experienced price deflation partially offsetting inflation in overall inventories. Provision for Income Taxes The Company's effective income tax -------------------------- rate of 41.0%, which was applied to pretax income in the nine- month period ended March 31, 1998, is the rate expected to be applicable for the full fiscal year ending June 30, 1998. This rate was greater than the federal income tax rate of 34% primarily because of the amortization of intangible assets that are not deductible for federal and state income tax purposes and the effect of 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:
March 31, June 30, 1998 1997 ---- ---- Working capital (000's) $42,190 $15,803 Current ratio 1.57 to 1 1.27 to 1 Working capital to assets .30 to 1 .16 to 1 Net debt to FIFO equity .22 to 1 .54 to 1
15 Page 15 of 17 The $26.4 million increase in working capital was due primarily to an increase in inventories of $35.3 million and an increase in accounts receivable of $7.4 million, offset by an increase in accounts payable of $17.1 million. The increase in inventories was due to the increased level of business and the expansion of inventory procurement opportunities during the current fiscal period. The increase in accounts receivable was primarily due to an increase in net sales, offset by the collection of the $9.5 million accounts receivable due from the Company's previously largest customer at September 30, 1997. The increase in accounts payable reflects the timing of cash disbursements and higher inventory levels. The Company invested $726,000 in capital assets in the nine-month period ended March 31, 1998 as compared to $2,045,000 in the corresponding period in the prior year. Investment in capital assets in the prior year primarily related to equipment and leasehold improvements for the Company's then new Cape Girardeau, Missouri distribution facility. The Company believes that continuing investment in capital assets is necessary to achieve its goal of improving operational efficiency, thereby enhancing its productivity and profitability. Cash flows from financing activities totaled $19.0 million in the nine-month period ended March 31, 1998 as compared to $3.4 million in the corresponding period in the prior year. The current year increase is primarily due to increased borrowings as a result of an increase in inventory levels of $34.2 million, offset by the September 30, 1997 receipt, and subsequent paydown on the line of credit, of the $9.5 million outstanding accounts receivable balance from a former customer as noted above. At March 31, 1998, the revolving line of credit provided a maximum borrowing capacity of $70,000,000 plus a supplemental facility of up to $5,000,000 during the months of November through June of each year. At March 31, 1998 and June 30, 1997, the unused portion of the line of credit amounted to $22,161,000 and $19,349,000, respectively. Management believes that, together with internally generated funds, the Company's available capital resources will be sufficient to meet its foreseeable capital requirements. The Company is currently in the process of evaluating several information system improvement initiatives. These initiatives include the conversion of certain Company computer systems to be Year 2000 compliant. The Company does not believe that these Year 2000 costs will have a significant impact on its consolidated results of operations or financial condition. 16 Page 16 of 17 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Part II. Other Information - ------- ----------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 - Financial Data Schedule (b) Reports on Form 8-K None 17 Page 17 of 17 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 HEALTHCARE RESOURCES, INC. Date: May 13, 1998 By: /s/ J. Hord Armstrong, III ------------------ ------------------------------ J. Hord Armstrong, III Chairman of the Board and Chief Executive Officer (Principal Financial Officer) By: /s/ Daniel E. Kreher ------------------------------ Daniel E. Kreher Vice President Finance and Administration (Principal Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUN-30-1998 JUL-01-1997 MAR-31-1998 893 0 37,529 800 76,722 116,693 11,856 5,815 142,861 74,503 0 36 0 0 13,488 142,861 442,908 443,267 421,639 436,983 0 0 2,408 3,876 1,593 2,283 0 0 0 2,283 .70 .62
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