-----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, SqXloTSDD3U45osoQZFq30dEsgJk7JjzL2iHNOZxtI4aNKf4cgSz2O77kfXLqPS9 JSWauWNmGsaGA+LZodjw1g== 0000950114-99-000069.txt : 19990517 0000950114-99-000069.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950114-99-000069 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99624593 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 19 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, 1999 -------------- 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 3,857,775 ---------------------------- ------------------ (class) (April 30, 1999) 2 Page 2 of 19 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, 1999 and June 30, 1998 3 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended March 31, 1999 and March 31, 1998 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1999 and March 31, 1998 5 Notes to Condensed Consolidated Financial Statements 6 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 17 Part II. Other Information ----------------- Item 6. Exhibits and Reports on Form 8-K 18
3 Page 3 of 19 Part I. Financial Information - ------------------------------- Item 1. Financial Statements. D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands)
March 31, June 30, 1999 1998 ----------- -------- (Unaudited) Assets ------ Cash $456 $4,051 Receivables 36,508 50,496 Inventories 104,856 90,413 Other current assets 583 532 -------- -------- Total current assets 142,403 145,492 -------- -------- Net property and equipment 5,042 5,924 Investment in PBI 4,074 4,129 Deferred income taxes 2,842 2,842 Other assets 720 228 Intangible assets 13,244 11,735 -------- -------- Total assets $168,325 $170,350 ======== ======== Liabilities and Stockholders' Equity ------------------------------------ Current maturities of long-term debt $280 $6,448 Accounts payable 103,446 80,659 Deferred income taxes 2,906 2,974 Accrued expenses 6,439 3,161 -------- -------- Total current liabilities 113,071 93,242 -------- -------- Revolving line of credit 33,137 60,185 Long-term debt, excluding current maturities 31 971 -------- -------- Total liabilities 146,239 154,398 -------- -------- Stockholders' equity: Common stock 39 37 Paid-in capital 16,640 15,074 Retained earnings 5,407 841 -------- -------- Total stockholders' equity 22,086 15,952 -------- -------- Total liabilities and stockholders' equity $168,325 $170,350 ======== ======== See notes to condensed consolidated financial statements.
4 Page 4 of 19 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 31, March 31, March 31, 1999 1998 1999 1998 --------- --------- --------- --------- Net sales $213,984 $155,314 $591,703 $442,908 Cost of sales 201,779 147,240 561,318 421,639 --------- --------- --------- --------- Gross profit 12,205 8,074 30,385 21,269 Operating expenses 7,505 5,386 19,661 15,176 --------- --------- --------- --------- Income from operations 4,700 2,688 10,724 6,093 Other income (expense): Interest expense, net (1,395) (1,031) (3,602) (2,576) Other, net 95 113 363 359 --------- --------- --------- --------- (1,300) (918) (3,239) (2,217) --------- --------- --------- --------- Income before income tax provision 3,400 1,770 7,485 3,876 Income tax provision 1,326 708 2,919 1,593 --------- --------- --------- --------- Net income $2,074 $1,062 $4,566 $2,283 ========= ========= ========= ========= Earnings per common share: Basic earnings per share $0.54 $0.29 $1.21 $0.70 Diluted earnings per share $0.49 $0.27 $1.11 $0.62 Basic common shares outstanding 3,841,253 3,603,448 3,785,259 3,244,501 Diluted common shares outstanding 4,215,747 3,873,494 4,162,421 3,789,946 See notes to condensed consolidated financial statements.
5 Page 5 of 19 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Nine Months Ended March 31, March 31, 1999 1998 -------- -------- Cash flows from operating activities: Net income $4,566 $2,283 Adjustments to reconcile net income to net cash flows from operating activities: Amortization of debt issuance costs 349 212 Depreciation and amortization 1,148 1,163 Gain from sale of assets (9) (17) Equity in net income of PBI (295) (281) Changes in operating assets and liabilities, net of acquisitions: Decrease (increase) in accounts receivable, net 14,139 (2,848) Increase in inventories (14,444) (34,152) Increase in other current assets (66) (1,183) Increase in accounts payable 22,787 16,042 Increase in accrued expenses 3,824 685 Other, net (12) 247 -------- -------- Cash flows from operating activities 31,987 (17,849) Cash flows from investing activities: Cash paid for acquired company (2,176) (1,255) Cash dividend from affiliate 350 350 Proceeds from sale of fixed assets 752 17 Purchases of property and equipment (545) (726) -------- -------- Cash flows from investing activities (1,619) (1,614) Cash flows from financing activities: Borrowings under revolving line of credit 332,748 306,694 Repayments under revolving line of credit (364,935) (284,002) Principal payments on long-term debt (1,970) (3,777) Proceeds from exercise of stock options 810 83 Debt issuance costs (616) (288) -------- -------- Cash flows from financing activities (33,963) 18,710 Decrease in cash (3,595) (753) Cash, beginning of period 4,051 1,646 -------- -------- Cash, end of period $456 $893 ======== ======== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for Interest $3,544 $2,465 Income taxes 1,281 1,045 See notes to condensed consolidated financial statements.
6 Page 6 of 19 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 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 and nine-month periods ended March 31, 1999 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 19 effect of outstanding stock options and warrants (calculated using the treasury stock method); (2) common shares issuable upon conversion of certain convertible PBI stock; and (3) common shares issuable upon conversion of all convertible subordinated notes. The diluted computation for the quarter and nine months ended March 31, 1998 adds 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 its 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 diluted computation for the quarter and nine months ended March 31, 1999 adds to income the earnings that would be included in the Company's consolidated net income for the periods as if the convertible PBI stock had been converted to the Company's common stock at the beginning of the period. The reconciliation of the numerator and denominator of the basic and diluted earnings per common share computations is as follows:
Quarter Ended March 31, 1999 Quarter Ended March 31, 1998 --------------------------------------- -------------------------------------- Income Shares Per- Income Shares Per- (Denominator) Share (Denominator) Share (Numerator) Amount (Numerator) Amount ----------- ------------- ------ ----------- ------------- ------ BASIC EARNINGS PER SHARE: Net income available to Common shareholders 2,073,581 3,841,253 $0.54 1,062,071 3,603,448 $0.29 EFFECT OF DILUTED SECURITIES: Options and warrants 174,494 260,068 Convertible PBI stock (1,063) 200,000 -- -- Convertible subordinated notes -- -- 1,750 9,978 --------- --------- --------- --------- DILUTED EPS: Net Income available to Common stockholder plus assumed conversions 2,072,518 4,215,747 $0.49 1,063,821 3,873,494 $0.27 --------- --------- --------- --------- Nine Months Ended March 31, 1999 Nine Months Ended March 31, 1998 --------------------------------------- -------------------------------------- Income Shares Per- Income Shares Per- (Denominator) Share (Denominator) Share (Numerator) Amount (Numerator) Amount ----------- ------------- ------ ----------- ------------- ------ BASIC EARNINGS PER SHARE: Net income available to Common shareholders 4,565,961 3,785,259 $1.21 2,283,498 3,244,501 $0.70 EFFECT OF DILUTED SECURITIES: Options and warrants 177,162 189,475 Convertible PBI stock 47,193 200,000 -- -- Convertible subordinated notes -- -- 59,500 355,970 --------- --------- --------- --------- DILUTED EPS: Net Income available to Common stockholder plus assumed conversions 4,613,154 4,162,421 $1.11 2,343,998 3,789,946 $0.62 - Outstanding shares computed on a weighted average basis - Impact of PBI stock conversion has been determined not to be dilutive for this period
8 Page 8 of 19 Note 3. In August 1998, the Company, through a bankruptcy remote subsidiary, D & K Receivables Corp. ("D&KRC"), entered into a sales agreement that provided 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. In December 1998, this facility was increased from $45 million to $60 million to provide greater access to working capital. The maximum allowable amount of receivables eligible to be sold is $60 million. The amount available at any settlement date varies based upon the level of eligible receivables. Under this agreement, $60.0 million of accounts receivable were sold as of March 31, 1999. 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 consolidated statements of cash flows for the nine-month period ended March 31, 1999. Accordingly, the Company's trade accounts receivable at March 31, 1999 are net of $60.0 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%. In addition, in August 1998, the Company amended the terms of its revolving line of credit to provide a maximum borrowing capacity of 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 March 31, 1999 and June 30, 1998, the unused portion of the line of credit amounted to $34.7 million and $14.8 million, respectively. The Company also has an interest rate collar agreement, whereby the LIBOR on $10.0 million of the outstanding revolving line of credit balance shall not exceed 6.75%. If the LIBOR is less than 5.25%, then the LIBOR rate on $7.5 million of the outstanding revolving line of credit balance shall not be less than 5.25%. On March 31, 1999, the Company executed an additional interest rate collar agreement on $40.0 million of the outstanding revolving line of credit, whereby the LIBOR shall not exceed 6.85% nor be less than 4.93%. 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 9 Page 9 of 19 PBI's underlying net assets at the date of the original investment. The Company's equity in the net income of PBI totaled $52,000 and $81,000 for the three-month periods ended March 31, 1999 and March 31, 1998 ($121,000 and $150,000, respectively, before goodwill amortization). The Company's equity in the net income of PBI totaled $294,000 and $281,000 for the nine-month periods ended March 31, 1999 and March 31, 1998, respectively ($501,000 and $488,000, respectively, before goodwill amortization). The remaining PBI shareholders have options to convert their ownership interests in PBI into shares of the Company's common stock under the terms of the original purchase agreement. Those options which have been determined to be dilutive are included in the reconciliation of the basic and diluted earnings per share computation in Note 2 above. Note 5. During the nine months ended March 31, 1999, 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 85,000 and 69,200 shares, respectively, of common stock to certain executives and key employees at exercise prices ranging from $16.88 to $25.50 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, 1998 441,998 $7.13 Granted 154,200 $19.40 Exercised (108,500) $7.37 Cancelled (3,000) $11.25 -------- Outstanding at March 31, 1999 484,698 $10.95 ========
Note 6. On November 12, 1998, the Company filed a Current Report on 8-K announcing the adoption of a shareholder rights plan. The shareholder rights plan provides for a dividend distribution of one right for each share of the Company's common stock to holders as of the close of business on November 23, 1998. Each right will entitle the holder to buy, under certain circumstances, 10 Page 10 of 19 one one-thousandth of a share of preferred stock for $100. The rights will become exercisable only in the event, with certain exceptions, a person or group acquires 15 percent or more of the Company's common stock or commences a tender or exchange offer for 15 percent or more of the Company's common stock. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either the Company's common stock or preferred stock or shares in an acquiring entity at half of market value. The Company will generally be entitled to redeem the rights in whole, but not in part, at a price of $0.005 per right, at any time up to and including the tenth day after the time that a person or group has acquired 15 percent or more of the Company's common stock or announced a tender offer to purchase at least 15 percent of the outstanding common stock of the Company, subject to extension of the redemption period by the Company's Board of Directors. Unless earlier redeemed, the rights will expire on November 12, 2008. Note 7. On February 16, 1999, the Company announced the signing of a letter of intent to acquire Jewett Drug Co., Inc., ("Jewett") a privately owned pharmaceutical distribution company based in Aberdeen, South Dakota. The consideration will be a combination of cash and the Company's common stock totaling $34 million, which is $2 million less than originally announced. Jewett provides comprehensive pharmaceutical distribution services to over 250 customers in South Dakota, North Dakota, Minnesota and four north central states. The Company expects the transaction to be closed in its fourth fiscal quarter subject to execution of a definitive agreement, satisfactory completion of due diligence and required regulatory approvals. 11 Page 11 of 19 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, 1999 and June 30, 1998, and in the condensed consolidated statements of operations for the three-month and nine-month periods ended March 31, 1999 and March 31, 1998, 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 $58.7 million, or 37.8%, for the --------- quarter ended March 31, 1999, compared to the corresponding period of the prior year. Institutional sales increased $8.7 million primarily due to increased sales to a prescription benefit management company. Independent pharmacy sales increased by $19.7 million due to new and existing retail accounts, including a $10.4 million increase from the prior year in sales made to an independent retail purchasing association and independent retail pharmacies formerly associated with an acquired drug wholesaler. Chain store sales increased $29.9 million due to higher sales to existing and new chain store customers during the current quarter. Net sales increased $148.8 million, or 33.6% for the nine months ended March 31, 1999, compared to the corresponding period of the prior year. Institutional sales increased $22.2 million primarily due to increased sales to a prescription benefit management company. Independent pharmacy sales increased by $52.4 million due to new and existing retail accounts, including a $33.4 million increase from the corresponding period of prior year in sales made to an independent retail purchasing association and independent retail pharmacies formerly associated with an acquired drug wholesaler. Chain store sales increased $73.6 million due to higher sales to existing and new chain 12 Page 12 of 19 store customers of approximately $100.0 million during the nine-month period 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 nine-month period in the prior year, net sales effectively increased 42.1% for the nine months ended March 31, 1999. In addition, the quarter and nine months ended March 31, 1999 contained $92.6 million and $171.0 million, respectively, 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 statements of operations. "Dock-to-dock" sales were $11.1 million and $25.2 million, respectively, for the quarter and nine months ended March 31, 1998. Gross Profit Gross profit increased 51.2% to $12.2 million for the ------------ quarter ended March 31, 1999, compared to the corresponding period of the prior year. As a percentage of net sales, gross margin increased from 5.20% to 5.70% for the quarter ended March 31, 1999, compared to the corresponding period of the prior year. The increase in gross margin percentage was due mainly to benefits from inventory investment buying initiatives and to higher penetration of profitable generic sales, partially offset by higher sales to large customers, which typically carry a lower margin percentage. The gross margin computed on a first-in, first-out (FIFO) basis increased from 5.55% to 6.14% for the quarter ended March 31, 1999, compared to the corresponding period of the prior year. Gross profit increased 42.9% to $30.4 million for the nine months ended March 31, 1999, compared to the corresponding period of the prior year. As a percentage of net sales, gross margin increased from 4.80% to 5.14% for the nine months ended March 31, 1999, compared to the corresponding period of the prior year. The increase in gross margin percentage was due mainly to benefits from changes in the Company's procurement strategies and higher penetration of profitable generic sales, partially offset by higher sales to large customers, which typically carry a lower margin percentage. The gross margin computed on a first-in, first-out (FIFO) basis increased from 5.01% to 5.37% for the nine months ended March 31, 1999, compared to the corresponding period of the prior year. Operating Expenses Operating expenses increased $2.1 million, or ------------------ 39.3%, to $7.5 million for the quarter and increased $4.5 million, or 29.6%, to $19.7 million for the nine months ended March 31, 1999, compared to the corresponding period of the prior year. The ratio of operating expenses to net sales for the quarter remained essentially stable compared to the third quarter of fiscal 1998, while the ratio for the first nine months of fiscal 1999 was 3.32%, an 11 basis point decrease from the comparable period of the prior year. The increase in operating expenses for the quarter and nine months ended March 31, 1999 resulted primarily from incremental warehouse and distribution 13 Page 13 of 19 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. The decrease in the operating expense percentages for the nine months ended March 31, 1999 was due mainly to the increase in chain store sales, which typically carry a lower operating expense to net sales percentage than other trade classes. Interest Expense, Net Net interest expense increased $364,000 or --------------------- 35.3% for the quarter and increased $1,026,000 or 39.8% for the nine months ended March 31, 1999, compared to the corresponding periods of the prior year. As a percentage of net sales, net interest expense decreased from 0.66% of net sales to 0.65% of net sales for the quarter and increased from 0.58% to 0.61% of net sales for the nine months ended March 31, 1999, 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 decreased from $113,000 to ----------------- $95,000 for the quarter and increased from $359,000 to $363,000 for the nine months ended March 31, 1999, compared to the corresponding period of the prior year. The decrease in other income, net for the quarter was primarily due to slightly lower equity in the net income of PBI during the quarter. Effects of Inflation and LIFO Accounting The effects of price ---------------------------------------- inflation, measured by the excess of LIFO costs over FIFO costs, were approximately $930,000 and $549,000, respectively, for the quarter ended March 31, 1999 and March 31, 1998 and approximately $1,382,000 and $909,000, respectively, for the nine months ended March 31, 1999 and March 31, 1998. Provision for Income Taxes The Company's effective income tax rate -------------------------- of 39.0% 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 measures are utilized by the Company as key indicators of the Company's liquidity and working capital management: 14 Page 14 of 19
March 31, June 30, 1999 1998 -------- -------- Working capital (000's) $29,332 $52,250 Current ratio 1.26 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 March 31, 1999 amounted to $60.0 million. Adjusting for the Securitization, working capital and the current ratio would have been $89.3 million and 1.79 to 1, respectively. The Company invested $545,000 in capital assets in the nine-month period ended March 31, 1999, as compared to $726,000 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 outflows from financing activities totaled $34.0 million for the nine-month period ended March 31, 1999 as compared to cash inflows of $18.7 million for the corresponding period in the prior year. The current year increase in cash outflows is primarily due to the reduction in the revolver that resulted from the application of the receivable Securitization proceeds. At March 31, 1999, the revolving line of credit provided a maximum borrowing capacity of $75.0 million. At March 31, 1999 and June 30, 1998, the unused portion of the line of credit amounted to $34.7 million and $14.8 million, respectively. In addition, at March 31, 1999, the Securitization provided a maximum capacity of $60.0 million. At March 31, 1999, the entire Securitization of $60.0 million was utilized. Management believes that, together with internally generated funds, the Company's available capital resources will be sufficient to meet its foreseeable capital requirements. On March 31, 1999, the Company paid off the entire remaining balance of the Missouri First Link loan in an effort to reduce higher interest bearing debt. The principal amount outstanding on this loan was $ 875,000. Year 2000: --------- Certain aspects of the Company's business (including that of its subsidiaries) could be affected by what has commonly become known as the Year 2000 or Y2K problem. Specifically, the problem derives from computer software, hardware and embedded chips which recognize, receive, process and store date data using only 2-digit years, and therefore, may malfunction when they encounter dates which are from the 21st century, rather than the 1900's. Computerized systems are fundamental to several key functions of the Company and its subsidiaries. The following discussion includes the Company 15 Page 15 of 19 and its subsidiaries. The Company operates its business using a network of distributed AS/400, local area network (LAN) and PC Systems. The Company's financial, distribution and operational systems reside on the AS/400. LAN's are used primarily for file sharing. PC's are used primarily as terminals to the AS/400 systems, with the exception of financial reporting and banking functions. Several of the Company's warehouse operations are automated using radio frequency (RF) equipment. The Company also receives customer orders electronically, either from PC's, data files or hand held devices. The Company also provides software to pharmacies and drug distributors to help them automate functions within their businesses. The Company began its Year 2000 efforts in the summer of 1997 and has worked since then to identify and remediate potential Y2K issues. The Company's Y2K project is being executed in phases, beginning with assessment, followed by prioritization, remediation, testing, implementation and contingency planning. Assessment, prioritization and remediation work on all known Y2K issues is complete. Testing is complete for LAN, PC and approximately 50% of AS/400 systems, which includes financial, banking and financial reporting systems. Testing has indicated that LAN and PC systems are Year 2000 compliant and the Company is not aware, at this point, of any further work required with these systems. The remaining AS/400, RF and hand held ordering systems, which support distribution and internal operations functions, are undergoing rigorous testing procedures before being implemented in production in late summer 1999. The Company's software products have been remediated and tested and the results have been positive, leading the Company to believe that these products are, in all material respects, Y2K compliant. The Company is in the process of completing its Y2K software implementation in customer sites, which it expects to complete in the summer of 1999. Software upgrades to enable the Company's software products to handle Year 2000 date processing is being provided to customers free of charge through electronic transmissions of the upgrade to customer computers. Customers who use the Company's Resource software product to place electronic orders and the Company's Scriptmaster software product to fill prescriptions are being notified regarding potential hardware issues and given alternatives to resolve the issue. The Company expects this effort to be completed in the summer of 1999. The Company does not sell (non-IT) embedded systems, but does use non-IT embedded systems in the normal course of its business in areas such as alarm systems, time clocks, etc. As does virtually every other company, the Company does rely on third parties in the conduct of its business. The Company has surveyed suppliers, transportation companies, alarm system providers, utilities, banks and other third parties it does business with, or who provide products or services the Company uses containing non-IT embedded systems, on a regular basis in an effort to determine these third parties' Y2K state of readiness. At the present time, it appears that the majority of third parties the Company does business with are reasonably certain they will be able to conduct business without significant interruption at the century date change. 16 Page 16 of 19 The Company is concurrently developing its Y2K contingency plan and expects to complete this phase of the project in the summer 1999. The Company's contingency planning efforts are focused to identify the entities that are critical to the Company's business functions, determine which entities have the largest potential for impact if there are Y2K issues, determine the likelihood of the potential problem, rank the entities by criticality and likelihood of potential problems, and develop work-around plans to handle any potential emergency situation. The Company expects to implement contingency plans in the summer of 1999 and to monitor critical situations thereafter, revising contingency plans if necessary. The costs of the Company's Y2K project have been incurred in the areas of IT systems and contingency planning. The Company had spent approximately $500,000 as of March 31, 1999 in its Year 2000 project from internally generated funds and expects to spend approximately another $200,000 from internally generated funds to complete the project by late summer 1999. The Company believes the greatest potential risks in connection with the Year 2000 issue would be the inability of its suppliers to provide product in a timely manner, the inability to obtain payments from its customers and the inability of transportation companies to deliver product to its customers, which could have a material adverse impact on the Company's operations, liquidity or financial condition. Also, the issue of customer stockpiling in anticipation of the Year 2000 poses a dilemma, which potentially could have an impact on the Company and other distributors of pharmaceuticals. Many industry commentators have noted the likelihood that some patients, fearing Y2K disasters, will attempt to stockpile prescriptions, thus causing supply chain problems for manufacturers, distributors and retailers. This eventuality could, of course, directly affect the Company's operations, liquidity or financial condition. The Company's contingency plans are designed with the goal of minimizing the potential impact caused by any Year 2000 problems of its suppliers and other third parties. Therefore, the Company does not now believe that any external Y2K problems will have a material adverse impact on its operations, liquidity or financial condition. While the Company believes it has taken a comprehensive and reasonable approach towards anticipating and addressing the potential impact of the century date change on its business, there can be no assurance that the Company internally, or any third party upon which the Company depends, will avoid successfully all Y2K malfunctions. As part of the foregoing Y2K discussion, the Company has used a significant number of forward looking statements (i.e. "expects", "believes", and similar phrases). These are based on the Company's present knowledge and informed expectations which may change in the future based on new developments, facts and circumstances. 17 Page 17 of 19 Other: ----- On February 16, 1999, the Company announced the signing of a letter of intent to acquire Jewett Drug Co., Inc., ("Jewett") a privately owned pharmaceutical distribution company based in Aberdeen, South Dakota. The consideration will be a combination of cash and the Company's common stock totaling $34 million, which is $2 million less than originally announced. Jewett provides comprehensive pharmaceutical distribution services to over 250 customers in South Dakota, North Dakota, Minnesota and four north central states. The Company expects the transaction to be closed in its fourth fiscal quarter subject to execution of a definitive agreement, satisfactory completion of due diligence and required regulatory approvals. 18 Page 18 of 19 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Part II. Other Information - ------- ----------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.29 - Employment agreement for Senior Vice President and Chief Financial Officer dated December 18, 1998 10.30 - Employment Agreement for Vice President, General Council and Secretary dated March 17, 1999 27 - Financial Data Schedule 99 - Press Release (b) Reports on Form 8-K None 19 Page 19 of 19 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 14, 1999 By: /s/ J. Hord Armstrong, III ------------ -------------------------------- J. Hord Armstrong, III Chairman of the Board and Chief Executive Officer By: /s/ Thomas S. Hilton -------------------------------- Thomas S. Hilton Senior Vice President Chief Financial Officer (Principal Financial & Accounting Officer) EX-10.29 2 1 CONFIDENTIAL December 18, 1998 Mr. Thomas S. Hilton 602 Carman View Ct. Ballwin, MO 63021 Dear Tom: Thank you for taking the time to visit with Hord and me on December 16. We are very excited about having you join D&K as the Senior Vice President and Chief Financial Officer. Outlined below are the significant points of the terms of employment that I believe we mutually agreed upon: Title: Senior Vice President and Chief Financial Officer General Job Description: Senior officer in charge of the successful leadership and execution of all financial planning and management, accounting, and administration functions. Such functions include, but are not limited to: * External and internal financial reporting * Merger and acquisition projects * Budgeting, forecasting and planning * Income taxes * Risk management and insurance programs * Employee benefits and 401(k) plans * Working capital management Your position reports directly to the President and COO. Salary: $165,000 per annum Bonus: 30% of base salary upon achieving net income targets as established at the discretion of the Board of Directors. For fiscal 1999, your bonus may or may not be prorated based on your performance. 2 Page Two Change in Control: During the first 24 months of your employment a Change in Control occurs, defined as the acquisition of 51% or more of the then outstanding voting shares of the Company by an outsider, and your position is terminated due to the Change in Control, you will be eligible for severance compensation equal to one times your current annual base salary. Company Car: Level I automobile (executive level) per D&K's Auto Lease Program, or an auto allowance to be mutually agreed upon. Stock Options: Subject to Board of Director approval, an initial award of 45,000 options that would vest in three equal increments over a three-year period (15,000/year) upon the successful completion of mutually-defined goals and objectives at the end of years one, two and three. Option price will be the fair market value of the Company's Common Stock on the date of each award. Benefits: After 60 days, you will qualify for D&K's health coverage and participation in D&K's 401(k) plan and long-term disability plan. In addition, you will be eligible for the Executive Deferred Compensation Plan established for retirement income. Other: The Company will reimburse you for other reasonable business related expenses including but not limited to: * Monthly dues for Greenbriar Country Club * Cellular phone expenses * Professional association dues * Other out-of-pocket expenses related to performing your responsibilities. In addition, in the first year of your employment, you will be eligible for three weeks of vacation. 3 Page Three Tom, I hope I have adequately explained our job offer to you, and I hope we have addressed any issues or questions you have regarding employment with D&K. Per our discussion, we anticipate your starting date to be on or about January 11, 1999. We are extremely excited about your joining D&K's corporate team, and we think you will play an integral part in D&K's future growth and success. Please keep in touch in the interim. Sincerely, /s/ Martin D. Wilson - -------------------- Martin D. Wilson President and Chief Operating Officer MDW/ejb cc: J.H. Armstrong, III Accepted by: /s/ Thomas S. Hilton Date: January 7, 1999 ----------------------- --------------- EX-10.30 3 1 CONFIDENTIAL March 17, 1999 Mr. Leonard R. Benjamin 14 Abby Drive Lawrenceville, NJ 08648 VIA FACSIMILE 609-896-0987 Dear Len: Thank you for taking the time to visit with us on March 12. We are very excited about having you join D&K as the Vice President, General Counsel and Secretary. Outlined below are the significant points of the terms of employment that we are offering you: Title: Vice President, General Counsel and Secretary General Job Description: Senior officer in charge of the successful leadership and execution of all the Company's legal affairs and outside counsel activities. Such functions include, but are not limited to: * Managing outside counsel engagements * Merger and acquisition counseling * SEC and NASDAQ filings * In-house policies and compliance * Customer and supplier agreements * Insider trading * Proxies * Certain Human Resource functions Your position reports directly to the President and COO or the CEO when appropriate. Salary: $160,000 per annum 2 Page Two Bonus: 30% of base salary upon achieving net income targets as established at the discretion of the Board of Directors. For fiscal 1999, your bonus will be prorated based on your starting date. Change in Control: From the date of your acceptance through the first 24 months of your employment a Change in Control occurs, defined as the acquisition of 51% or more of the then outstanding voting shares of terminated due to the Change in Control, you will be eligible for severance compensation equal to one times your current annual base salary. Company Car: Level I automobile (executive level) per D&K's Auto Lease Program, or an auto allowance to be mutually agreed upon. Stock Options: Subject to Board of Director approval, an initial award of 45,000 options that would vest in three equal increments over a three-year period (15,000/year) upon the successful completion of mutually-defined goals and objectives at the end of years one, two and three. Option price will be the fair market value of the Company's Common Stock on the date of each award. If during the first 24 months of your employment with D&K, a Change of Control occurs as defined above, all ungranted stock options will accelerate and be granted at the most recent exercise price of the prior grant. Relocation: All moving and relocation expenses will be the Company's responsibility in accordance with D&K's policy. Temporary residence costs will also be provided by D&K until which time your Lawrenceville home is sold. Benefits: After 60 days, you will qualify for D&K's health coverage and participation in D&K's 401(k) plan and long-term disability plan. In addition, you will be eligible for the Executive Deferred Compensation Plan established for retirement income. During the 60 days, D&K will reimburse you for the difference between your current COBRA payment amount and D&K's current premium amount. 3 Page Three Other: The Company will reimburse you for other reasonable business related expenses including but not limited to: * Cellular phone expenses * Professional association dues * Other out-of-pocket expenses related to performing your responsibilities. In addition, in the first year of your employment, you will be eligible for three weeks of vacation. Len, I hope I have adequately explained our job offer to you, and I hope we have addressed any issues or questions you have regarding employment with D&K. We anticipate your starting date to be April 12, 1999. We are extremely excited about your joining D&K's corporate team, and we think you will play an integral part in D&K's future growth and success. Please call me with any questions or comments. Sincerely, /s/ Martin D. Wilson - -------------------- Martin D. Wilson President and Chief Operating Officer MDW/ejb cc: J.H. Armstrong, III Accepted by: /s/ Leonard R. Benjamin Date: March 17, 1999 ----------------------- -------------- EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUN-30-1999 JUL-01-1998 MAR-31-1999 456 0 36,508 1,102 104,856 142,403 11,424 6,382 168,325 113,071 0 39 0 0 22,047 168,325 591,703 592,066 561,318 580,979 0 400 3,602 7,485 2,919 4,566 0 0 0 4,566 1.21 1.11
EX-99 5 1 D&K HEALTHCARE RESOURCES, INC. ANNOUNCES LETTER OF INTENT TO ACQUIRE JEWETT DRUG CO., INC. ST. LOUIS, MISSOURI, FEBRUARY 16, 1999 - D&K Healthcare Resources, Inc. (NASDAQ:DKWD) today announced the signing of a letter of intent to acquire Jewett Drug Co., Inc., ("Jewett") a privately owned pharmaceutical distribution company based in Aberdeen, South Dakota for $36 million in a combination of cash and D&K common stock. D&K expects the acquisition of Jewett to be immediately accretive to earnings. Jewett will be operated as a wholly owned subsidiary of D&K under its own name from its existing facilities. Jewett provides comprehensive pharmaceutical distribution services to over 250 customers in South Dakota, North Dakota, Minnesota and four north central states. Jewett recorded 1998 sales of approximately $250 million. D&K expects the transaction to be closed in its fourth fiscal quarter subject to execution of a definitive agreement, satisfactory completion of due diligence and required regulatory approvals. "The acquisition of Jewett will further our goal of developing strong regional pharmaceutical distribution services throughout the Midwest," said J. Hord Armstrong, III, D&K's Chairman and Chief Executive Officer. "Jewett complements our existing distribution operations in the Northern Midwest, permitting expansion of geographic coverage and creation of economies of scale that will allow D&K to leverage its operating costs. A highly respected 115-year-old regional pharmaceutical distribution business, Jewett will provide an excellent opportunity for access to a broader base of clients in these markets. We are determined to execute a seamless transition for all stakeholders involved including employees, customers and suppliers. We believe an integral component of this transaction is Jewett's network in the Northern Midwest, which we intend to maintain in order to capitalize on its strong customer relationships. Following the conclusion of the transaction, we expect Harvey C. Jewett IV to join D&K's Board of Directors, and we extend a warm welcome to Jewett's customers and employees." In commenting on the transaction, Harvey C. Jewett IV, Chairman of Jewett, remarked "D&K Healthcare is a company very much like Jewett Drug Company. We believe that this transaction will allow our customers more options in products, better pricing and the same extremely high quality of service. D&K is a company that realizes that the customer and the wholesale house are very much in a partnership. We think this will be good news for Jewett Drug Co., its employees and customers. I look forward to a long and successful relationship with D&K." The forward-looking statements contained in this press release are inherently subject to risks and uncertainties. D&K's actual results could differ materially from those currently anticipated due to a number of factors, including without limitation, the competitive nature of the wholesale pharmaceutical drug distribution industry, the evolving business and regulatory environment of the healthcare industry in which D&K operates and other factors set forth in reports and other documents filed by D&K with the Securities and Exchange Commission from time to time. D&K Healthcare Resources, Inc., of St. Louis, Missouri, is a full-service regional wholesale drug distributor supplying customers from facilities in Lexington, Kentucky; Minneapolis, Minnesota; and Cape Girardeau, Missouri. D&K owns a 50 percent interest in Pharmaceutical Buyers, Inc., of Boulder, Colorado, one of the nation's leading alternate site group purchasing organizations. D&K also invites all interested parties to visit its Web site at http://www.dkwd.com. ------------------- -----END PRIVACY-ENHANCED MESSAGE-----