-----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, UR/To8DuXsGIfckJxyy1PHDBiKJpOO5zniKOtQC/fLSJTj5uQ6mFai8+9Gv+SkLK q7oAs66R3/3vhbDVW6zsJw== 0000950114-98-000433.txt : 19981116 0000950114-98-000433.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950114-98-000433 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20348 FILM NUMBER: 98746942 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 FORM 10-Q 1 Page 1 of 15 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, 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 3,765,775 ---------------------------- ------------------ (class) (October 31, 1998) 2 Page 2 of 15 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Index
Page No. -------- Part I. Financial Information --------------------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1998 and June 30, 1998 3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 1998 and September 30, 1997 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1998 and September 30, 1997 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 13 Part II. Other Information ----------------- Item 6. Exhibits and Reports on Form 8-K 14
3 Page 3 of 15 Part I. Financial Information - ------------------------------- Item 1. Financial Statements. D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands)
Assets September 30, June 30, ------ 1998 1998 ------------- --------- (Unaudited) Cash $ 2,255 $ 4,051 Receivables 19,417 50,496 Inventories 112,884 90,413 Other current assets 981 532 -------- -------- Total current assets 135,537 145,492 -------- -------- Net property and equipment 5,212 5,924 Investment in PBI 4,290 4,129 Deferred income taxes 2,842 2,842 Other assets 593 228 Intangible assets 13,563 11,735 -------- -------- Total assets $162,037 $170,350 ======== ======== Liabilities and Stockholders' Equity ------------------------------------ Current maturities of long-term debt $ 1,217 $ 6,448 Accounts payable 109,525 80,659 Deferred income taxes 2,906 2,974 Accrued expenses 4,390 3,161 -------- -------- Total current liabilities 118,038 93,242 -------- -------- Revolving line of credit 26,039 60,185 Long-term debt, excluding current maturities 686 971 -------- -------- Total liabilities 144,763 154,398 -------- -------- Stockholders' equity: Common stock 38 37 Paid-in capital 15,266 15,074 Retained Earnings 1,970 841 -------- -------- Total stockholders' equity 17,274 15,952 -------- -------- Total liabilities and stockholders' equity $162,037 $170,350 ======== ======== See notes to condensed consolidated financial statements.
4 Page 4 of 15 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data)
Three Months Ended Sept. 30, Sept. 30, 1998 1997 --------- ---------- Net sales $179,374 $149,024 Cost of sales 170,970 142,645 -------- --------- Gross profit 8,404 6,379 Operating expenses 5,728 4,954 -------- --------- Income from operations 2,676 1,425 Other income (expense): Interest expense, net (1,003) (689) Other, net 209 142 -------- --------- (794) (547) -------- --------- Income before income tax provision 1,882 878 Income tax provision 753 369 -------- --------- Net income $1,129 $509 ======== ========= Earnings per common share: Basic earnings per share $0.30 $0.17 Diluted earnings per share $0.29 $0.15 Basic common shares outstanding 3,747,704 3,060,478 Diluted common shares outstanding 3,922,820 3,665,768 See notes to condensed consolidated financial statements.
5 Page 5 of 15 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Three Months Ended Sept. 30, Sept. 30, 1998 1997 --------- --------- Cash flows from operating activities: Net income $1,129 $509 Adjustments to reconcile net income to net cash flows from operating activities: Amortization of debt issuance costs 98 74 Depreciation and amortization 359 386 Gain from sale of assets (36) (3) Equity in net income of PBI (161) (119) Changes in operating assets and liabilities, net of acquisitions: Decrease in accounts receivable, net 31,229 6,819 Increase in inventories (22,472) (12,007) Increase in other current assets (319) (81) Increase in accounts payable 28,865 13,885 Increase in accrued expenses 1,098 476 Other, net (142) 1 ------- ------- Cash flows from operating activities 39,648 9,940 Cash flows from investing activities: Cash paid for acquired company (1,988) -- Proceeds from sale of fixed assets 746 3 Purchases of property and equipment (216) (223) ------- ------- Cash flows from investing activities (1,458) (220) Cash flows from financing activities: Borrowings under revolving line of credit 105,608 85,059 Repayments under revolving line of credit (139,754) (96,065) Net borrowings (repayments) under revolving accounts receivable credit facility (5,139) -- Principal payments on long-term debt (378) (3) Proceeds from exercise of stock options 122 23 Debt issuance costs (445) -- -------- ------- Cash flows from financing activities (39,986) (10,986) Increase (decrease) in cash (1,796) (1,266) Cash, beginning of period 4,051 1,646 -------- ------- Cash, end of period $2,255 $380 ======== ======= Supplemental Disclosure of Cash Flow Information: Cash paid (refunded) during the period for Interest $1,208 $613 Income taxes (12) 261 See notes to condensed consolidated financial statements.
6 Page 6 of 15 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 more than 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 condensed 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 period ended September 30, 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 1998 Annual Report to Stockholders. Note 2. 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. 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 7 Page 7 of 15 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 September 30, 1998 Three Months Ended September 30, 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 $1,129,219 3,747,704 $0.30 $509,411 3,060,478 $0.17 Effect of Diluted Securities: Options and warrants 175,116 74,312 Convertible subordinated notes -- -- 28,875 530,978 ---------- --------- -------- --------- Diluted Earnings Per Share: Net income available to Common shareholders plus assumed conversions $1,129,219 3,922,820 $0.29 $538,286 3,665,768 $0.15 ---------- --------- -------- --------- -Outstanding shares computed on a weighted average basis
Note 3. In August 1998, the Company, through a bankruptcy remote subsidiary, D & K Receivables Corp. ("D&KRC"), entered into a sales agreement that provides the Company with a three-year $45 million revolving accounts receivable securitization facility (the "Securitization"). Under this facility and pursuant to a purchase and contribution agreement between the Company and D&KRC, the Company sells to D&KRC, on a non-recourse basis, all rights and interests in its accounts receivable. Pursuant to the receivables purchase agreement, D&KRC in turn sells certain interests in the accounts receivable pool owned by D&KRC under similar terms to a third party purchaser. The maximum allowable amount of receivables eligible to be sold is $45 million. The amount available at any settlement date varies based upon the level of eligible receivables. Under this agreement, $34.5 million of accounts receivable were sold as of September 30, 1998. This sale is reflected as a reduction in accounts receivable in the accompanying condensed consolidated balance sheets and as operating cash flows in the accompanying condensed 8 Page 8 of 15 consolidated statements of cash flows for the three-month period ended September 30, 1998. Accordingly, the Company's trade accounts receivable at September 30, 1998 are net of $34.5 million, which represent accounts receivable that were sold under the Securitization. The Securitization bears interest at the 30-day London Interbank Offer Rate (LIBOR) plus program and liquidity fees of 0.71%. At September 30, 1998 the unused portion of the Securitization amounted to $10.5 million. In addition, in August 1998, the Company amended the terms of its revolving line of credit to provide a maximum borrowing capacity of $75 million based upon eligible inventories and to extend its maturity through August 2001. The advances bear interest at the daily LIBOR plus 1.25%. The Company also has the option to pay interest on the obligation at prime plus .5% per annum. At September 30, 1998 and June 30, 1998, the unused portion of the line of credit amounted to $41.9 million and $14.8 million, respectively. The Company also has an interest rate collar agreement, whereby the LIBOR rate on $10.0 million of the outstanding revolving line of credit balance shall not exceed 6.75% per annum. If the LIBOR rate is less than 5.25% per annum, then the LIBOR rate on $7.5 million of the outstanding revolving line of credit balance shall not be less than 5.25% per annum. Note 4. The Company accounts for its 50% 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 its interest in PBI over the fair value of PBI's underlying net assets at the date of the original investment. The Company's equity in the net income of PBI totaled $161,000 and $119,000 for the three-month periods ended September 30, 1998 and September 30, 1997, respectively ($230,000 and $188,000, respectively, before goodwill amortization). The remaining PBI shareholders have the option to convert their ownership interests in PBI into shares of the Company's common stock under the terms of the original purchase agreement. The potential impact of any such conversion has been determined not to be dilutive in all periods presented. Note 5. During the three months ended September 30, 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 50,000 and 34,200 shares, respectively, of common stock to certain executives and key employees at an exercise price of $16.88 per share. 9 Page 9 of 15 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:
Number of Weighted Average Shares Exercise Price ------------------------------- Outstanding at June 30, 1998 441,998 $ 7.13 Granted 84,200 $16.88 Exercised (19,500) $ 6.50 ------- Outstanding at September 30, 1998 506,698 $ 8.77 =======
10 Page 10 of 15 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 September 30, 1998 and June 30, 1998, and in the condensed consolidated statements of operations for the three-month periods ended September 30, 1998 and September 30, 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 1998 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 $30.4 million, or 20.4%, for the --------- quarter ended September 30, 1998, compared to the corresponding period of the prior year. Institutional sales increased $6.5 million primarily due to increased sales to a prescription benefit management company. Independent pharmacy sales increased by $15.7 million due to new and existing retail accounts, including an $11.3 million increase from the prior year in sales made to an independent retail purchasing association and $1.0 million from independent retail pharmacies formerly associated with an acquired drug wholesaler. Chain store sales increased $8.1 million due to higher sales to existing and new chain store customers of approximately $34.5 million during the current quarter partially offset by the termination of the Company's relationship with a large regional chain customer on September 30, 1997 (an impact of approximately $26.4 million). Excluding sales made to the former large regional chain customer from the three-month period in the prior year, net sales effectively increased 45.0% for the current quarter. In addition, the quarter ended September 30, 1998 contained $34.6 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. 11 Page 11 of 15 Gross Profit Gross profit increased 31.7% to $8.4 million for ------------ the quarter ended September 30, 1998, compared to the corresponding period of the prior year. As a percentage of net sales, gross margin increased from 4.28% to 4.69% for the quarter ended September 30, 1998, compared to the corresponding period 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 4.41% to 4.78% for the quarter ended September 30, 1998, compared to the corresponding period of the prior year. Operating Expenses Operating expenses increased $0.8 million, ------------------ or 15.7%, to $5.7 million for the quarter ended September 30, 1998, compared to the corresponding period of the prior year. As a percentage of net sales, operating expenses decreased from 3.32% to 3.19% for the quarter ended September 30, 1998, compared to the corresponding period of the prior year. The increase in operating expenses for the quarter ended September 30, 1998 resulted primarily from incremental warehouse and distribution costs associated with increased sales activity, and higher personnel and occupancy costs related to additional managerial positions in several major functional areas of the Company. Interest Expense, Net Net interest expense increased $314,000 or --------------------- 45.6% for the quarter ended September 30, 1998, compared to the corresponding period of the prior year. As a percentage of net sales, net interest expense increased from 0.46% of net sales to 0.56% of net sales for the quarter ended September 30, 1998, compared to the corresponding period of the prior year. The increase in net interest expense is primarily the result of an increase in the average outstanding balance on the Company's working capital credit facilities due to expanded business and changes in the Company's inventory procurement strategies, offset by the lower interest rates on these facilities. Other Income, Net Other income, net increased from $140,000 to ----------------- $208,000 for the quarter ended September 30, 1998, compared to the corresponding period of the prior year. The increase in other income, net was primarily due to higher recorded earnings from the Company's equity interest in the net income of PBI during the current quarter and the gain on a fixed asset disposal. Effects of Inflation and LIFO Accounting The effects of price ---------------------------------------- inflation, measured by the excess of LIFO costs over FIFO costs, were $177,000 and $190,000, respectively, for the three months ended September 30, 1998 and September 30, 1997. 12 Page 12 of 15 Provision for Income Taxes The Company's effective income tax -------------------------- rate of 40.0% is the rate expected to be applicable for the full fiscal year ending June 30, 1999. 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 the Securitization facility, 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, June 30, 1998 1998 ---- ---- Working capital (000's) $17,500 $52,250 Current ratio 1.15 to 1 1.56 to 1
Working capital and the current ratio have declined as a result of the Securitization, since a portion of the Company's trade accounts receivables are no longer included in the Company's current assets. The reduction in trade accounts receivable as a result of the Securitization at September 30, 1998 amounted to $34.5 million. Adjusting for the Securitization, working capital and the current ratio would have been $52.0 million and 1.44 to 1, respectively. The Company invested $216,000 in capital assets in the three- month period ended September 30, 1998, as compared to $223,000 in the corresponding period in the prior year. 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 $39.6 million for the three-month period ended September 30, 1998 as compared to $9.9 million for the corresponding period in the prior year. The current year increase is primarily due to the decrease in accounts receivable of $34.5 million as a result of the sale of receivables to a third party under the Securitization. At September 30, 1998, the revolving line of credit provided a maximum borrowing capacity of $75.0 million. At September 30, 1998 and June 30, 1998, the unused portion of the line of credit amounted to $41.9 million and $14.8 million, respectively. In addition, at September 30, 1998, the Securitization provided a maximum borrowing capacity of $45.0 million. At September 30, 1998, the unused 13 Page 13 of 15 portion of the Securitization amounted to $10.5 million. 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 dependent upon its software programs and operating systems for internal operations (e.g., inventory and warehouse management) and for processing product orders with its customers and suppliers. The Company has determined that it will not incur any significant costs to make the Company's software programs and operating systems Year 2000 compliant and is making inquiries regarding the magnitude of any Year 2000 problems that may be resident in the software programs and operating systems of its customers and suppliers, or the impact that any such problems could have on the sales made and services provided by the Company to such customers or suppliers. The Company is in the process of modifying and testing its affected software programs and operating systems to make them Year 2000 compliant and is developing a contingency plan to address the possibility of Year 2000-related failures. The Company expects these processes to be completed by the end of fiscal 1999. The occurrence of Year 2000-related failures in the software programs and operating systems of any of the Company's significant customers or suppliers could have a material adverse effect on the Company's business, results of operations, or financial condition. 14 Page 14 of 15 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 15 Page 15 of 15 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: November 12, 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-30-1999 JUL-01-1998 SEP-30-1998 2,255 0 20,117 700 112,884 135,537 11,304 6,092 162,037 118,038 0 38 0 0 17,236 162,037 179,374 179,583 170,970 176,698 0 0 1,003 1,882 753 1,129 0 0 0 1,129 .30 .29
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