10-Q 1 d10q.txt FORM 10-Q 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, 2001 ------------------ 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 7,147,211 ---------------------------- ------------------------- (class) (November 5, 2001) Page 2 of 15 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Index Page No. -------- Part l. Financial Information --------------------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2001 and June 30, 2001 3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2001 and September 30, 2000 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2001 and September 30, 2000 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 Part ll. Other Information ----------------- Item 6. Exhibits and Reports on Form 8-K 13 Page 3 of 15 Part l. Financial Information ----------------------------- Item 1. Financial Statements. D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands)
Assets September 30, June 30, ------ 2001 2001 -------------- ------------- (Unaudited) Cash $ 6,895 $ 7,516 Receivables 54,291 45,131 Inventories 270,967 214,739 Other current assets 3,609 2,664 ----------- ------------- Total current assets 335,762 270,050 ----------- ------------- Net property and equipment 10,023 9,703 Investment in PBI - 4,552 Other assets 2,896 3,920 Intangible assets 52,170 41,979 ----------- ------------- Total assets $ 400,851 $ 330,204 =========== ============= Liabilities and Stockholders Equity ----------------------------------- Current maturities of long-term debt $ 1,159 $ 320 Accounts payable 184,710 158,930 Accrued expenses 13,995 13,267 ----------- ------------- Total current liabilities 199,864 172,517 ----------- ------------- Long-term liabilities 3,074 2,300 Revolving line of credit 51,374 93,151 Long-term debt, excluding current maturities 868 1,338 Deferred income taxes 2,587 3,388 ----------- ------------- Total liabilities 257,767 272,694 ----------- ------------- Stockholders' equity: Common stock 74 47 Paid-in capital 116,722 34,006 Accumulated other comprehensive loss (936) (356) Retained earnings 32,770 29,359 Less treasury stock (5,546) (5,546) ----------- ------------- Total stockholders' equity 143,084 57,510 ----------- ------------- Total liabilities and stockholders' equity $ 400,851 $ 330,204 =========== =============
See notes to condensed consolidated financial statements. 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 September 30, September 30, 2001 2000 ------------- ------------- Net sales $ 529,091 $ 350,902 Cost of sales 507,233 336,301 ----------- ----------- Gross profit 21,858 14,601 Operating expenses 13,782 9,219 ----------- ----------- Income from operations 8,076 5,382 Other income (expense): Interest expense, net (1,876) (3,063) Other, net (271) 209 ----------- ----------- (2,147) (2,854) ----------- ----------- Income before income tax provision 5,929 2,528 Income tax provision 2,342 986 ----------- ----------- Net income $ 3,587 $ 1,542 =========== =========== Earnings per common share: Basic earnings per share $ 0.52 $ 0.37 Diluted earnings per share $ 0.50 $ 0.36 Basic common shares outstanding 6,929,409 4,199,907 Diluted common shares outstanding 7,172,439 4,469,838 See notes to condensed consolidated financial statements. Page 5 of 15 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Three Months Ended September 30, September 30, 2001 2000 ------------- ------------- Cash flows from operating activities: Net income $ 3,587 $ 1,542 Adjustments to reconcile net income to net cash flows from operating activities: Amortization of debt issuance costs 212 253 Depreciation and amortization 1,113 830 Gain from sale of assets (162) - Deferred income taxes (379) - Equity in net income of PBI - (230) Changes in operating assets and liabilities, net of acquisitions: Increase in receivable, net (7,873) (21,460) Decrease (increase) in inventories (56,228) 25,616 Decrease (increase) in other current assets (1,059) 89 Increase in accounts payable 25,715 16,308 Increase (decrease) in accrued expenses 137 (198) Other, net 1,117 2 --------- --------- Cash flows from operating activities (33,820) 22,752 Cash flows from investing activities: Cash from acquired company, net of cash paid 1,299 - Cash invested in affiliate - (100) Purchases of property and equipment (973) (770) --------- --------- Cash flows from investing activities 326 (870) Cash flows from financing activities: Borrowings under revolving line of credit 187,785 107,640 Repayments under revolving line of credit (232,935) (125,996) Proceeds from secondary stock offering 76,888 - Principal payments on long-term debt (66) (36) Proceeds from exercise of stock options 1,379 92 Payment of dividends (178) - Debt issuance costs - (398) --------- --------- Cash flows from financing activities 32,873 (18,698) (Decrease) increase in cash (621) 3,184 Cash, beginning of period 7,516 3,661 --------- --------- Cash, end of period $ 6,895 $ 6,845 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid (refunded) during the period for: Interest $ 2,188 $ 3,407 Income taxes (30) (535) Non-cash transactions: Issuance of equity for PBI acquisition $ 4,477 $ -
See notes to condensed consolidated financial statements. 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, supplying customers from facilities in Missouri, Florida, Kentucky, Minnesota, and South Dakota. The Company distributes a broad range of pharmaceuticals and related products to its customers in more than 24 states primarily in the Midwest and South. The Company focuses primarily on a target market sector, which includes independent retail, institutional, franchise, chain store and alternate site pharmacies. The Company also develops and markets sophisticated pharmacy systems software through two wholly owned subsidiaries, Tykon, Inc., and Viking Computer Services. In addition, the Company owns a 70% equity interest in Pharmaceutical Buyers, Inc. (PBI), a leading alternate site group purchasing organization (see Note 4). 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, 2001 are not necessarily indicative of the results to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company's 2001 Annual Report to Stockholders. Note 2. SFAS No. 128, "Earnings Per Share", requires dual presentation of basic and diluted earnings per share and requires a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculation. The reconciliation of the numerator and denominator of the basic and diluted earnings per share computations are as follows (in thousands, except for shares and per share amounts): Page 7 of 15
Quarter Ended September 30, 2001 Quarter Ended September 30, 2000 -------------------------------------------- ----------------------------------------- Per- Per- Income Shares Share Income Shares Share (Numerator) (Denominator) (1) Amount (Numerator) (Denominator) (1) Amount ------------- --------------- -------- ------------ --------------- ------- Basic Earnings Per Share: Net income available to Common stockholders $3,587 6,929,409 $0.52 $1,542 4,199,907 $0.37 Effect of Diluted Securities: Options and warrants 220,856 69,931 Convertible PBI securities (15) 22,172 63 200,000 ----------- -------------- ------------ -------------- Diluted EPS: Net Income available to Common stockholder plus assumed conversions $3,572 7,172,439 $0.50 $1,606 4,469,838 $0.36 ----------- -------------- ------------ ----------------
(1) - Outstanding shares computed on a weighted average basis Note 3. The Company's comprehensive income consists of net earnings and net change in value of cash flow hedge instruments as follows:
For the three months ended (in thousands) September 30, 2001 2000 ---- ---- Net income $ 3,587 $1,542 Change in value of cash flow hedge, net of tax benefit (580) - ------- ------ Total comprehensive income $ 3,007 $1,542 ======= ======
Note 4. On July 5, 2001, the Company completed a secondary offering of approximately 2.4 million shares of common stock. In connection with the secondary stock offering, the Company increased its ownership in Pharmaceutical Buyers (PBI) to 68% and an additional 2% was acquired in a subsequent transaction in August 2001. Prior to the completion of the offering, PBI was accounted for under the equity method. Upon the completion of the offering, PBI has been consolidated. For the period prior to consolidation, certain other shareholders of PBI had the option to exchange their combined 20% ownership interests in PBI for a fixed number of shares of the Company's common stock under the terms of the original purchase agreement. The impact of the PBI convertible securities are included in the reconciliation of the basic and diluted earnings per share computation in Note 2 above. Note 5. Pursuant to Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", 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 interest in PBI 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 Page 8 of 15 PC-based order entry/order confirmation system to the drug distribution industry. These two additional 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, 2001 2000 -------------- -------------- Sales to unaffiliated customers - Wholesale drug distribution $ 526,638 $ 350,266 Other 2,453 636 -------------- -------------- Total $ 529,091 $ 350,902 Intersegment sales - Wholesale drug distribution $ -- $ -- Other 319 187 Intersegment eliminations (319) (187) -------------- -------------- Total $ -- $ -- Net sales - Wholesale drug distribution $ 526,638 $ 350,266 Other 2,772 823 Intersegment eliminations (319) (187) -------------- -------------- Total $ 529,091 $ 350,902 Gross profit - Wholesale drug distribution $ 19,490 $ 14,105 Other 2,368 496 -------------- -------------- Total $ 21,858 $ 14,601 Pre-tax income (loss) - Wholesale drug distribution $ 5,028 $ 2,275 Other 901 253 -------------- -------------- Total $ 5,929 $ 2,528
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. Note 6. The Financial Accounting Standards Board has issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS Page 9 of 15 141 is effective for all business combinations completed after June 30, 2001. Adoption of SFAS No. 141 is not expected to impact our consolidated financial position. The Financial Accounting Standards Board has issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under the new standard, we will no longer be required or permitted to amortize goodwill reflected on our balance sheet. We will, however, be required to evaluate goodwill reflected on our balance sheet to determine whether the goodwill is impaired under the guidelines of the proposed standard. If we determine that the goodwill is impaired, we will be required to write-off a portion of the goodwill. As of September 30, 2001, we had approximately $51.9 million of goodwill on our balance sheet. During fiscal 2001, goodwill amortization amounted to approximately $1.9 million, which is expected to remain approximately the same for fiscal 2002. Under the standard we will not be required to adopt these rules until July 2002, which is the beginning of our fiscal year 2003. We have not yet performed valuations or appraisals to evaluate any potential goodwill impairment, and therefore no impairment, if any, is currently determinable. If a goodwill impairment exists at the date of adoption, it will be recorded as a cumulative change in accounting principles. The Financial Accounting Standards Board has issued SFAS No. 143, "Asset Retirement Obligations." The new standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002. Adoption of SFAS No. 143 is not expected to impact our consolidated financial position. The Financial Accounting Standards Board has issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The new standard replaces FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The primary objectives of this statement were to develop one accounting model, based on the framework established in Statement 121, for long-lived assets to be disposed of by sale and to address significant implementation issues. Statement 144 requires that all long-lived assets, including discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The standard is effective for fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144 is not expected to impact our consolidated financial position. 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, 2001 and June 30, 2001, and in the condensed consolidated statements of operations for the three-month period ended September 30, 2001 and September 30, 2000, respectively. We recommend that this discussion be read in conjunction with the audited consolidated financial statements and accompanying notes included in our 2001 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 our ability to compete in a competitive industry, with many competitors having substantially greater resources than ours and our customers generally having the right to terminate their contracts with us or reduce purchasing levels on relatively short notice without penalty, changes in interest rates, our 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, and the ability to integrate recently acquired businesses. Readers are cautioned not to place undue reliance on these forward-looking statements that reflect our views as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements. Results of Operations: --------------------- Net Sales Net sales increased $178.2 million, or 50.8%, to $529,091 --------- for the quarter ended September 30, 2001, compared to the corresponding period of the prior year. Sales growth was in both the independent and regional pharmacies and national pharmacy chain groups. Independent and regional pharmacy sales increased $88.3 million over the first quarter of fiscal 2000 due to new accounts, increased sales to existing Page 11 of 15 customers and the inclusion of Diversified Healthcare acquired in June 2001. Sales to national pharmacy chains increased $86.7 million in part due to our ability to deploy the capital secured in our July secondary equity offering. Gross Profit Gross profit increased 49.7% to $21.9 million for the ------------ quarter ended September 30, 2001, compared to the corresponding period of the prior year. This increase was primarily due to the increase in net sales. As a percentage of net sales, gross margin declined slightly from 4.16% to 4.13% for the quarter ended September 30, 2001, compared to the corresponding period of the prior year. Operating Expenses Operating expenses increased $4.6 million, or ------------------ 49.5%, to $13.8 million for the quarter ended September 30, 2001, compared to the corresponding period of the prior year. The ratio of operating expenses to net sales for the quarter was comparable to last year with a slight decrease to 2.60% from 2.63%. The increase in operating expenses for the quarter ended September 30, 2001 resulted from the increase in sales during the period as well as the inclusion of operating expenses related to Diversified Healthcare and PBI. Interest Expense, Net Net interest expense decreased $1.2 million or --------------------- 38.8% for the quarter ended September 30, 2001, compared to the corresponding period of the prior year. As a percentage of net sales, net interest expense decreased from 0.87% to 0.35% of net sales for the quarter ended September 30, 2001, compared to the corresponding period of the prior year. The decrease in net interest expense is primarily the result of lower average borrowings as the result of our secondary equity offering and declining interest rates. Our rates declined approximately 250 basis points in the first quarter of fiscal 2002 compared to the same quarter of fiscal 2001. Provision for Income Taxes Our effective income tax rate of 39.5% is -------------------------- the rate expected to be applicable for the full fiscal year ending June 30, 2002. This rate is greater than the federal income tax rate of 34% primarily because of the amortization of intangible assets that are not deductible for income tax purposes and state tax rates. The overall rate is slightly higher than the corresponding period of last year due to the impact of the sales mix on the blended state income tax rate. Page 12 of 15 Financial Condition: ------------------- Liquidity and Capital Resources Our working capital requirements are ------------------------------- generally met through a combination of internally generated funds, borrowings under our revolving line of credit and the Securitization facility, and trade credit from our suppliers. We utilize the following measures as key indicators of our liquidity and working capital management: September 30, June 30, 2001 2001 ---- ---- Working capital (000's) $ 135,898 $ 97,533 Current ratio 1.68 to 1 1.57 to 1 Working capital and the current ratio have increased as a result of an increase in inventory and the timing of receipts and payments. We invested $973,000 in capital assets in the three-month period ended September 30, 2001, as compared to $770,000 in the corresponding period in the prior year. The increase was primarily related to the new Enterprise Resource Planning computer system being implemented during fiscal 2002. This system integrates sales order management, inventory management, transportation management, customer service, accounts payable, accounts receivable, general ledger and financial reporting. We believe that continuing investment in capital assets is necessary to achieve our goal of improving operational efficiency, thereby enhancing its productivity and profitability. Cash inflows from financing activities totaled $32.9 million for the three-month period ended September 30, 2001 as compared to cash outflows of $18.7 million for the corresponding period in the prior year. The current year increase in cash inflows is primarily a result of the proceeds for our secondary equity offering completed in July 2001 offset by repayments of the revolving credit facility from these proceeds. The prior year outflows were primarily related to decrease in the revolving credit facility as a result of increases in accounts payable. At September 30, 2001, $130 million of the possible $150 million of the Securitization facility was utilized and approximately $48 million of the possible $150 million of the revolving credit facility was utilized. Management believes that, together with internally generated funds, our available capital resources will be sufficient to meet foreseeable capital requirements. Page 13 of 15 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Part ll. Other Information ------- ----------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on page 15. (b) Reports on Form 8-K None Page 14 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 9, 2001 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) Page 15 of 15 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* Certificate of Designations for Series B Junior Participating Preferred Stock of D&K Healthcare Resources, Inc. filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 3.4* 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** Lease Agreement, dated February 7, 2001, by and between Industrial Property Fund III, L.P. and the registrant. * Incorporated by reference. ** Filed herewith