-----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, WYhJfG4uBEghwoeZx4o3U0PtMMwidJ2py9rWEdClgo9d8jxGQeFREFq77HtBY6wO bR1JlmCo+IQOvJYE+8RNUQ== 0000950114-99-000115.txt : 19991115 0000950114-99-000115.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950114-99-000115 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99747845 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 September 30, 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 4,281,581 ---------------------------- ------------------ (class) (October 31, 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 September 30, 1999 and June 30, 1999 3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 1999 and September 30, 1998 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1999 and September 30, 1998 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 15 Part II. Other Information ----------------- Item 6. Exhibits and Reports on Form 8-K 16
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)
September 30, June 30, 1999 1999 ------------- -------- (Unaudited) Assets ------ Cash $ 3,891 $ 708 Receivables 16,174 14,889 Inventories 164,304 157,171 Other current assets 1,113 599 -------- -------- Total current assets 185,482 173,367 -------- -------- Net property and equipment 6,293 6,205 Investment in affiliates 4,857 4,111 Deferred income taxes 1,547 1,547 Other assets 956 1,041 Intangible assets 43,675 43,809 -------- -------- Total assets $242,810 $230,080 ======== ======== Liabilities and Stockholders' Equity ------------------------------------ Current maturities of long-term debt $ 237 $ 403 Accounts payable 122,923 142,360 Deferred income taxes 2,285 2,285 Accrued expenses 9,863 8,251 -------- -------- Total current liabilities 135,308 153,299 -------- -------- Long-term liabilities 483 482 Revolving line of credit 69,163 39,453 Long-term debt, excluding current maturities 964 996 -------- -------- Total liabilities 205,918 194,230 -------- -------- Stockholders' equity: Common stock 45 44 Paid-in capital 30,120 29,555 Retained earnings 8,781 7,195 Less treasury stock (2,054) (944) -------- -------- Total stockholders' equity 36,892 35,850 -------- -------- Total liabilities and stockholders' equity $242,810 $230,080 ======== ======== 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 September 30, September 30, 1999 1998 ------------- ------------- Net sales $ 323,565 $ 179,374 Cost of sales 311,745 170,970 ---------- ---------- Gross profit 11,820 8,404 Operating expenses 7,678 5,728 ---------- ---------- Income from operations 4,142 2,676 Other income (expense): Interest expense, net (1,816) (1,003) Other, net 250 209 ---------- ---------- (1,566) (794) ---------- ---------- Income before income tax provision 2,576 1,882 Income tax provision 992 753 ---------- ---------- Net income $ 1,584 $ 1,129 ========== ========== Earnings per common share: Basic earnings per share $ 0.36 $ 0.30 Diluted earnings per share $ 0.35 $ 0.29 Basic common shares outstanding 4,377,227 3,747,704 Diluted common shares outstanding 4,731,649 3,922,820 See notes to condensed consolidated financial statements.
5 Page 5 of 19 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Statements of Cash Flows (Unaudited) (In thousands)
Three Months Ended September 30, September 30, 1999 1998 ------------- ------------- Cash flows from operating activities: Net income $ 1,584 $ 1,129 Adjustments to reconcile net income to net cash flows from operating activities: Amortization of debt issuance costs 165 98 Depreciation and amortization 745 359 Gain from sale of assets -- (36) Equity in net income of PBI (235) (161) Changes in operating assets and liabilities, net of acquisitions: Decrease (increase) in accounts receivable, net (1,286) 31,229 Increase in inventories (7,133) (22,472) Increase in other current assets (207) (319) (Decease) increase in accounts payable (19,438) 28,865 Increase in accrued expenses 1,736 1,098 Other, net (121) (142) -------- --------- Cash flows from operating activities (24,190) 39,648 Cash flows from investing activities: Cash paid for acquired company -- (1,988) Cash invested in affiliate (500) -- Proceeds from sale of fixed assets -- 746 Purchases of property and equipment (380) (216) -------- --------- Cash flows from investing activities (880) (1,458) Cash flows from financing activities: Borrowings under revolving line of credit 117,777 105,608 Repayments under revolving line of credit (88,067) (139,754) Principal payments on long-term debt (197) (378) Net borrowings (repayments) under revolving accounts receivable credit facility -- (5,139) Proceeds from exercise of stock options 269 122 Purchase of treasury stock (1,110) -- Debt issuance costs (419) (445) -------- --------- Cash flows from financing activities 28,253 (39,986) Increase (decrease) in cash 3,183 (1,796) Cash, beginning of period 708 4,051 -------- --------- Cash, end of period $ 3,891 $ 2,255 ======== ========= Supplemental Disclosure of Cash Flow Information: Cash paid (refunded) during the period for: Interest $ 1,487 $ 1,208 Income taxes (109) (12) 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, Minnesota, and South Dakota, the Company distributes a broad range of pharmaceuticals and related products to its customers in more than 24 states. The Company focuses primarily on a target market sector, which includes independent retail, institutional, 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 consolidated 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, 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 1999 Annual Report to Stockholders. Note 2. Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), requires the computation of basic and diluted earnings per share. 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 certain convertible PBI stock. The diluted computation for the quarter ended September 30, 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. 7 Page 7 of 19 The reconciliation of the numerator and denominator of the basic and diluted earnings per common share computations is as follows:
Quarter Ended September 30, 1999 Quarter Ended September 30, 1998 ------------------------------------------ ------------------------------- - --------- Income Shares Per-Share Income Shares Per- Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- - ----- BASIC EARNINGS PER SHARE: Net income available to Common shareholders $1,584,000 4,377,227 $0.36 $1,129,219 3,747,704 $0.30 EFFECT OF DILUTED SECURITIES: Options and warrants 154,422 175,116 Convertible PBI stock 66,080 200,000 -- -- ---------- --------- ---------- --------- DILUTED EPS: Net Income available to Common stockholder plus assumed conversions $1,650,080 4,731,649 $0.35 $1,129,219 3,922,820 $0.29 ---------- --------- ---------- --------- - Outstanding shares computed on a weighted average basis - Impact of PBI stock conversion has been determined to be anti- dilutive for this period
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 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. At September 30, 1999, 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, $55 million of accounts receivable were sold as of September 30, 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 three-month period ended September 30, 1999. Accordingly, the Company's trade accounts receivable and long-term debt at September 30, 1999 are net of $55 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, the Company has a revolving line of credit which, as of June 30, 1999, provided a maximum borrowing capacity of $95 million based upon 8 Page 8 of 19 eligible inventories. The advances bear interest at the daily LIBOR plus 1.75%. The Company also has the option to pay interest on the obligation at prime plus .25% per annum. At September 30, 1999 and June 30, 1999, the unused portion of the line of credit amounted to $25.8 million and $55.5 million, respectively. The Company also has an interest rate collar agreement, whereby the LIBOR on $10 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 million of the outstanding revolving line of credit, whereby the LIBOR shall not exceed 6.85% nor be less than 4.93%. At September 30, 1999, the LIBOR was 5.38%. 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 $235,000 and $161,000 for the three-month periods ended September 30, 1999 and September 30, 1998 ($304,000 and $230,000, respectively, before goodwill amortization). Certain other shareholders of PBI have the option to exchange their combined 20% ownership interests in PBI for shares of the Company's common stock under the terms of the original purchase agreement. Those options, which have been determined to be dilutive at September 30, 1999, are included in the reconciliation of the basic and diluted earnings per share computation in Note 2 above. Note 5. During the fourth quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). This statement establishes standards for the way public companies report information about operating segments that is consistent with that made available to the management of the Company in allocating resources and assessing performance. After application of the aggregation criteria, the Company has three identifiable business segments, only one of which, Wholesale drug distribution, meets the quantitative thresholds for separate disclosure prescribed in SFAS No. 131. This segment is described in Note 1. The Company's equity investment in PBI (see Note 4) is a second segment. Two wholly owned software subsidiaries, VC Services, Inc. (dba Viking Computer Services, Inc.) and Tykon, Inc. Constitute the third segment. Viking markets a pharmacy management software system and Tykon developed and markets a proprietary PC-based 9 Page 9 of 19 order entry/order confirmation system to the drug distribution industry. These two segments are combined as Other in the table below. Though the Wholesale drug distribution segment operates from several different facilities, the nature of its products and services, the types of customers and the methods used to distribute its products are similar and thus they have been aggregated for presentation purposes. The Company operates principally in the United States. Intersegment sales have been recorded at amounts approximating market.
(in thousands) FOR THE THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 ------------- ------------- Sales to unaffiliated customers - Wholesale drug distribution $322,888 $179,176 Other 677 198 -------- -------- Total $323,565 $179,374 Intersegment sales - Wholesale drug distribution $ -- $ -- Other 68 -- Intersegment eliminations (68) -- -------- -------- Total $ -- $ -- Net sales - Wholesale drug distribution $322,888 $179,176 Other 745 198 Intersegment eliminations (68) -- -------- -------- Total $323,565 $179,374 Gross profit - Wholesale drug distribution $ 11,214 $ 8,222 Other 606 182 -------- -------- Total $ 11,820 $ 8,404 Pre-tax income (loss) - Wholesale drug distribution $ 2,395 $ 1,918 Other 181 (36) -------- -------- Total $ 2,576 $ 1,882
There has been no material change in total assets from the amount disclosed in the last annual report. There are no differences from the last annual report in the basis of segmentation or in the basis of measurement of segment profit or loss. 10 Page 10 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 September 30, 1999 and June 30, 1999, and in the condensed consolidated statements of operations for the three-month period ended September 30, 1999 and September 30, 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 1999 Annual Report to Stockholders. Certain statements in this document regarding future events, prospects, projections or financial performance are forward looking statements. Such forward looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and may also be identified by words such as "anticipates," "believes," "estimates," "expects," "intends" and similar expressions. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in or suggested by such forward looking statements. These risks and uncertainties include the Company's ability to compete in a competitive industry, with many competitors having substantially greater resources than the Company and the Company's customers generally having the right to terminate their contracts with the Company or reduce purchasing levels on relatively short notice without penalty, the Company's ability to maintain or improve its operating margin with the industry's competitive pricing pressures, the changing business and regulatory environment, including possible changes in reimbursement for healthcare products and in manufacturers' pricing or distribution policies, the continued availability of investment buying opportunities, the loss of one or more key suppliers for which alternative sources may not be available, the ability to integrate recently acquired businesses and the ability of the Company's suppliers and customers to successfully achieve a Year 2000 conversion for computer systems and applications. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect the Company's views as of the date hereof. The Company undertakes no obligation to publicly update or revise any forward-looking statements. Results of Operations: ---------------------- Net Sales Net sales increased $144.2 million, or 80.4%, for the --------- quarter ended September 30, 1999, compared to the corresponding period of the prior year. 11 Page 11 of 19 This increase in net sales is attributed to increases at all locations and the acquisition of the Jewett operations in June 1999. The growth was spread among the chain, independent pharmacy and mail order trade classes as a result of new customers and increased sales to existing customers. Including the impact of the Jewett sales, institutional sales increased $53.9 million, independent pharmacy sales increased by $41.7 million and chain store sales increased $48.6 million. In addition, the quarter ended September 30, 1999 contained $9.7 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 statements of operations. "Dock-to-dock" sales were $34.6 million for the quarter ended September 30, 1998. Gross Profit Gross profit increased 40.6% to $11.8 million for the ------------ quarter ended September 30, 1999, compared to the corresponding period of the prior year. As a percentage of net sales, gross margin decreased from 4.69% to 3.65% for the quarter ended September 30, 1999, compared to the corresponding period of the prior year. The decrease in gross margin percentage was due to sales mix. Higher mail order sales as a result of the Jewett acquisition and increased sales to large chains, which carry a lower margin percentage, account for this decrease. The gross margin computed on a first-in, first-out (FIFO) basis decreased from 4.78% to 3.67% for the quarter ended September 30, 1999, compared to the corresponding period of the prior year. Operating Expenses Operating expenses increased $2.0 million, or ------------------ 34.0%, to $7.7 million for the quarter ended September 30, 1999, compared to the corresponding period of the prior year. The ratio of operating expenses to net sales for the quarter decreased to 2.37% from 3.19% when compared to the fiscal quarter of fiscal 1999 as a result of the increased sales and efficiencies realized from this higher activity . The increase in operating expenses for the quarter ended September 30, 1999 resulted primarily from the addition of the Jewett operations. Interest Expense, Net Net interest expense increased $813,000 or --------------------- 81.1% for the quarter ended September 30, 1999, compared to the corresponding period of the prior year. As a percentage of net sales, net interest expense remained constant at 0.56% of net sales for the quarter ended September 30, 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 timing of payments associated with accounts payable. Other Income, Net Other income, net increased from $209,000 to ----------------- $250,000 for the quarter ended September 30, 1999, compared to the corresponding period 12 Page 12 of 19 of the prior year. The increase in other income, net for the quarter was primarily due to higher 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 $45,000 and $177,000, respectively, for the quarter ended September 30, 1999 and September 30, 1998. Provision for Income Taxes The Company's effective income tax rate -------------------------- of 38.5% is the rate expected to be applicable for the full fiscal year ending June 30, 2000. 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 offset by the reduced impact of state income taxes. The overall rate is lower than the corresponding period of last year due to the impact of the Jewett acquisition on the blended state income tax rate. 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:
September 30, June 30, 1999 1999 ------------- -------- Working capital (000's) $50,174 $20,068 Current ratio 1.37 to 1 1.13 to 1
Working capital and the current ratio have increased as a result of seasonal increases in accounts receivable and inventories combined with a reduction in accounts payable as fiscal year end inventory purchases were paid for. The Company invested $380,000 in capital assets in the three-month period ended September 30, 1999, as compared to $216,000 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 inflows from financing activities totaled $28.3 million for the three-month period ended September 30, 1999 as compared to cash outflows of $40.0 million for the corresponding period in the prior year. The current year increase 13 Page 13 of 19 in cash inflows is primarily due to the increase in the revolver as a result of the reduction in accounts payable. The prior year outflows were primarily related to repayments under the revolving line of credit as a result of the funds made available from the initial Securtization that occurred during the corresponding quarter of last year. At September 30, 1999, the revolving line of credit provided a maximum borrowing capacity of $95.0 million. At September 30, 1999 and June 30, 1999, the unused portion of the line of credit amounted to $25.8 million and $55.5 million, respectively. In addition, at September 30, 1999, the Securitization provided a maximum capacity of $60.0 million. At September 30, 1999, $55.0 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. 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 and its subsidiaries. The Company operates its business using a network of distributed AS/400, Unix, local area network (LAN) and PC systems. The Company's financial, distribution and operational systems reside on the AS/400 and Unix. 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 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, AS/400 and Unix systems, which includes financial, operational, 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, Unix, RF and hand held ordering systems, which support distribution and internal operations functions, have undergone rigorous testing procedures before being implemented in production in all of the Company's locations. The Company's 14 Page 14 of 19 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 has substantially completed its Y2K software implementation in customer sites and the Company expects to fully complete implementations in November 1999. Software upgrades to enable the Company's software products to handle Year 2000 date processing are 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 have been notified regarding potential hardware issues and given alternatives to resolve the issue. 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, customers, 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. The Company has essentially completed its Y2K contingency plan. The Company's contingency planning efforts focused on identifying the entities that are critical to the Company's business functions, determining which entities have the largest potential for impact if there are Y2K issues, determining the likelihood of the potential problem, ranking the entities by criticality and likelihood of potential problems, and developing work-around plans to handle any potential emergency situation. The Company expects to monitor critical situations on an ongoing basis, 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 $635,000 as of September 30, 1999 in its Year 2000 project and expects to spend an additional $65,000 by November 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 15 Page 15 of 19 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. 16 Page 16 of 19 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Part II. Other Information - --------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on page 19. (b) Reports on Form 8-K None 17 Page 17 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: November 12, 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) 18 Page 18 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: November 12, 1999 By: ----------------- J. Hord Armstrong, III Chairman of the Board and Chief Executive Officer By: Thomas S. Hilton Senior Vice President Chief Financial Officer (Principal Financial & Accounting Officer) 19 Page 19 of 19 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 3.1 Restated Certificate of Incorporation, filed as an exhibit to registrant's Registration Statement on Form S-1 (Reg. No. 33-48730). 3.2 Certificate of Amendment to the Restated Certificate of Incorporation of D&K Wholesale Drug, Inc filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1998. 3.3 By-laws of the registrant, as currently in effect, filed as an exhibit to registrant's Registration Statement on Form S-1 (Reg. No. 33-48730). 4.1 Form of certificate for Common Stock, filed as an exhibit to registrant's Registration Statement on Form S-1 (Reg. No. 33-48730). 4.2 Form of Rights Agreement dated as of November 12, 1998 between registrant and Harris Trust and Savings Bank as Rights Agent, which includes as Exhibit B the form of Right Certificate, filed as an exhibit to Form 8-K dated November 17, 1998. 10.1 Warehousing and Distribution Service Agreement, dated September 21, 1999, by and between registrant and Eli Lilly and Company filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1999. 10.2 Prime Vendor Agreement dated as of August 25, 1999, between Tennessee Pharmacy Purchasing Alliance and the registrant filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1999. 27 Financial data schedule. Incorporated by reference. Incorporated by reference. Confidential portion omitted and filed separately with the Securities and Exchange Commission. Filed herewith
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 3,891 0 16,174 1,134 164,304 185,482 13,226 6,933 242,810 135,308 0 45 0 0 36,847 242,810 323,565 323,815 311,745 319,423 0 0 1,816 2,576 992 1,584 0 0 0 1,584 .36 ,35
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