<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30,1997
Commission File Number 2-96510-N.Y.
DRUG GUILD DISTRIBUTORS, INC.
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(Exact name of Registrant as specified in its Charter)
New Jersey 11-2269958
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Meadowland Parkway , Secaucus, N.J. 07096
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 201-348-3700
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 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. YES X NO______
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock as of the most recent practicable date:
As of April 30, 1997 there were outstanding 10,038,334 shares of the
Registrant's Common Stock, par value $1, and 21,054.31 shares of the
Registrant's Preferred Stock, $100 par value.
Page 1 Of 12 Pages
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Part 1- Financial Information
Item 1.Financial Statements
DRUG GUILD DISTRIBUTORS INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
April-30 July 31
1997 1996
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(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 230 $ 200
Trade Receivables-Stockholders 24,900 27,913
Nonstockholders 42,397 39,361
Allowance for doubtful accounts (1,709) (1,203)
Merchandise Inventory 32,460 29,440
Tax refund receivable -- 1,036
Prepaid expenses and other current assets 590 805
--------- ---------
Total Current Assets 98,868 97,552
--------- ---------
Property and equipment, net 3,280 3,331
OTHER ASSETS:
Trade Receivables-noncurrent portion-Stockholders 1,481 1,593
Nonstockholders 2,523 2,288
Allowance for doubtful accounts (438) (438)
Deferred income tax benefit 1,359 1,426
Various other assets 75 222
--------- ---------
Total Other Assets 5,000 5,091
--------- ---------
TOTAL ASSETS $ 107,148 $ 105,974
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable, bank $ 49,349 $ 53,104
Notes payable 375 527
Accounts payable 40,513 34,590
Accrued expenses and taxes 1,188 1,475
--------- ---------
Total Current Liabilities 91,425 89,696
--------- ---------
LONG TERM LIABILITIES
Notes payable 72 237
Deferred rent payable 342 263
Deferred compensation payable 542 570
--------- ---------
Total Long-Term Liabilities 956 1,070
--------- ---------
TOTAL LIABILITIES 92,381 90,766
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REDEEMABLE PREFERRED STOCK, $100 PAR VALUE
Authorized-250,000 shares
Issued and outstanding 21,054.31 and 25,893.44 shares 2,105 2,589
--------- ---------
STOCKHOLDERS' EQUITY
Common stock- $1 par value
Authorized 25,000,000 shares
Issued and outstanding-10,038,334 and 10,022,667 shares 10,038 10,023
Subscribed and unissued -- 412
Additional paid-in capital 3,409 3,628
Retained earnings (785) (805)
--------- ---------
Total,before subscriptions receivable 12,662 13,258
Less: Subscriptions receivable -- 639
--------- ---------
Total Stockholders' Equity 12,662 12,619
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 107,148 $ 105,974
========= =========
</TABLE>
See accompanying Notes to the Financial Statements
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<PAGE>
STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share information)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- -------- ---------
(reclassified)
<S> <C> <C> <C> <C>
NET SALES
Stockholders $ 44,846 $ 48,635 $ 144,211 $ 158,160
Nonstockholders 76,149 71,282 225,175 220,469
--------- --------- --------- ---------
TOTAL NET SALES 120,995 119,917 369,386 378,629
--------- --------- --------- ---------
COST OF SALES:
Inventory, beginning of period 33,399 23,875 29,440 38,896
Purchases 113,296 113,783 350,779 342,136
--------- --------- --------- ---------
146,695 137,658 380,219 381,032
Less: Inventory, end of period 32,460 27,664 32,460 27,664
--------- --------- --------- ---------
COST OF SALES 114,235 109,994 347,759 353,368
ESTIMATED LOSS ON DEFALCATION (Note 2) -- 2,457 -- 6,819
--------- --------- --------- ---------
GROSS PROFIT 6,760 7,466 21,627 18,442
--------- --------- --------- ---------
OPERATING EXPENSES 5,534 5,395 17,695 16,739
INTEREST EXPENSE 1,276 1,307 3,894 4,131
--------- --------- --------- ---------
TOTAL EXPENSES 6,810 6,702 21,589 20,870
--------- --------- --------- ---------
INCOME BEFORE CORPORATE TAXES (50) 764 38 (2,428)
--------- --------- --------- ---------
PROVISION (CREDIT) FOR CORPORATE TAXES:
Current -- 260 -- (826)
Deferred (17) -- 18 --
--------- --------- --------- ---------
-- --
Total Provision (Credit) for Corporate Taxes (17) 260 18 (826)
--------- --------- --------- ---------
NET INCOME (33) 504 20 (1,602)
Less: Stock Dividend on Preferred Stock (A) 42 24 126 144
--------- --------- --------- ---------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (75) $ 480 $ (106) $ (1,746)
========= ========= ========= =========
LOSS PER COMMON SHARE ($0.01) $0.05 ($0.01) ($0.17)
========= ========= ========= =========
AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 10,038 10,089 10,031 10,058
--------- --------- --------- ---------
</TABLE>
(A) Gives effect to pro-rata portion of 8% Preferred dividend
payable each July 31.
See accompanying Notes to the Financial Statements
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<PAGE>
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
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1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 20 $ (1,602)
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Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 709 671
Deferred compensation payable (28) (39)
(Increase) decrease in:
Tax refund receivable 1,036 --
Deferred income taxes 67 --
Trade receivables, net 360 (7,418)
Merchandise inventory (3,020) 11,232
Prepaid expenses and other current assets 215 (521)
Increase (decrease) in:
Accounts payable 5,923 (1,229)
Deferred rent payable 79 --
Accrued expenses and taxes (287) (262)
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Total adjustments 5,054 2,434
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Net Cash Provided by (Used In) Operating Activities 5,074 832
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (659) (727)
(Increase) decrease in other assets 147 (1)
-------- --------
Net Cash Used In Investing Actitvities (512) (728)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (317) (328)
Net increase (decrease) in short-term bank debt (3,755) (452)
Collections on common stock subscriptions 24 195
Preferred stock redeemed (484) (1,532)
-------- --------
Net Cash Used In Financing Activities (4,532) (2,117)
-------- --------
NET INCREASE (DECREASE) IN CASH 30 (2,013)
CASH:
Beginning of period 200 2,022
-------- --------
End of period $ 230 $ 9
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid in the period for:
Interest $ 3,894 $ 4,131
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING & FINANCING ACTIVITIES:
Reduction of accrued expenses due to issuance of notes payable $ 5 $ 31
Accounts receivable reduced for redemptions of preferred stock $ -- $ --
Accounts receivable reduced for cancellation of common stock $ -- $ --
Common stock subscriptions cancelled $ 601 $ --
</TABLE>
See accompanying Notes to Financial Statements
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<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - FINANCIAL STATEMENTS:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for the interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended April 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending July 31, 1997. For further information, refer to
the financial statements and footnotes thereto incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1996.
NOTE 2 - INVENTORY DEFALCATION:
At the end of May 1996, based on information obtained from the April 30,
1996 inventory, the company determined that an inventory defalcation had
occurred. Upon further investigation, it was determined that such defalcations
had occurred during the periods prior to May 1996 presented in the accompanying
financial statements
The company believes it may have insurance coverage totaling $2,000,000 as
a possible recovery against the inventory theft. The company has not provided
for any recovery since, at this time, such recovery cannot be assured.
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<PAGE>
NOTE 3 - COMMON STOCK SUBSCRIPTIONS:
On November 1, 1996 the Company called for the payment of all outstanding common
stock subscriptions by December 31, 1996 or they would be canceled. As a result,
$601,000 of common stock subscriptions were canceled during the period.
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<PAGE>
DRUG GUILD DISTRIBUTORS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition at April 30,1997 Compared to Financial Condition at
July 31, 1996. From July 31, 1996 to April 30, 1997, the Company's current
assets increased to $98,868,000 from $97,552,000 and its current liabilities
increased to $91,425,000 from $89,696.000. Such increase was attributable to the
Company's higher inventory offset by collection of the tax refund receivable.
The Company's ratio of current assets to current liabilities remained
substantially the same during the period at 1:1 to 1.
The Company has an accounts receivable and inventory financing arrangement
with a bank under which it can borrow up to 70% of its eligible accounts
receivable and up to 50% of its eligible inventory, as defined.
As of April 30, 1997, there were $57,600,000 of such eligible accounts
receivable out of a total of $64,269,000, or 90%, and $36,139,000 of eligible
FIFO inventory, an amount in excess of 99% of total inventory. The maximum
amount of borrowing with respect to its inventory pursuant to such Agreements is
$30,000,000. The combined borrowing limit for accounts receivable and inventory
is $80,000,000. Such limit is determined by the bank and may be raised or
lowered by the bank at its discretion.
Total borrowings upon the line of credit equaled $49,349,000 on April
30,1997. On such date the interest rate with respect to such financing was the
prime rate plus 1-1/4% (9 3/4 %).
Inflation. The Company attempts to pass along price increases from its
suppliers as soon as it is notified of those increases so as to preserve its
gross profit margin and, subject to competitive pressures on particular
products, is generally successful in doing so. Accordingly, the historical
effect of inflation has been to increase the Company's revenues and profits.
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<PAGE>
Three Months Ended April 30,1997 Compared to Three Months Ended April 30,1996
Net sales for the three months ended April 30, 1997 increased 1.0% from the
1996 period. This increase is attributable to higher prices offset by the sale
of a number of our independent pharmacy customers to chain store non-customers.
Gross profit for the three months, before the defalcation in the 1996
period, decreased by 31.9% in the 1997 period as a result of the reduction of
$3,150,000 in the LIFO reserve in the 1996 quarter. Gross profit, before the
defalcation, as a percentage of sales decreased to 5.6% in 1997 from 8.3% in the
1996 period.
Gross profit for the three months, after the defalcation in the 1996
period, decreased by 9.5% in the 1997 period. Gross profit, after the
defalcation, as a percentage of sales decreased to 5.6% in 1997 from 6.2% in the
1996 period.
Operating expenses increased 2.6% over the same period in 1996. This
increase was attributable to higher security costs. Both periods contain
significant professional fees in connection with the proposed transaction with
Neuman Health Services.
Interest expenses decreased 2.4% due to lower average borrowings for lower
average inventory levels and reduction of other debt.
The effect of the foregoing factors was that the Company had a net loss
before corporate taxes for the three months ended April 30,1997 versus net
income for the same period in 1996. Income taxes were lower than the same period
in 1996 resulting from the loss.
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<PAGE>
Nine Months Ended April 30, 1997 Compared to Nine Months Ended April 30, 1996
Net sales for the nine months ended April 30, 1997 decreased 2.4% from the
1996 period. This decrease is attributable to many factors, primarily the sale
of a number of our independent pharmacy customers to chain store non-customers
and a limitation on acquiring new customers until the transaction with Neuman
Health Services is completed.
Gross profit for the nine months ended April 30,1997 decreased by 14.4% as
compared to the same period, before the defalcation, in 1996. This was a result
of lower sales and lower margins due to competitive pressures and the reduction
of LIFO reserve in the 1996 period by $3,150,000. Gross profit, before the
defalcation, as a percentage of sales decreased to 5.9% in 1997 from 6.7% in the
1996 period.
Gross profit for the nine months, after the defalcation in the 1996 period,
increased by 17.9% in the 1997 period. Gross profit, after the defalcation, as a
percentage of sales increased to 5.9% in 1997 from 4.9% in the 1996 period.
Operating expenses increased 5.7% over the same period in 1996. This
increase was attributable to higher professional fees in connection with the
Neuman transaction and to security and investigative costs incurred as a result
of the inventory defalcation.
Interest expenses decreased 2.3% due to lower average bank borrowings
because of lower average inventory levels and reduction of other debt.
The effect of the foregoing factors was that the Company had net income
before corporate taxes for the nine months ended April 30, 1997 versus a loss
for the same period in 1996. Income taxes were higher as a result of the net
income.
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<PAGE>
Item 5. Other Materially Important Events.
On June 6, 1997 the Board of Directors of Drug Guild Distributors,
Inc. (the "Company") approved an asset purchase agreement (the "Agreement"),
subject to shareholder approval, by and among the Company, Neuman Health
Services, Inc. and Neuman Distributors, Inc. (hereinafter collectively referred
to as "Neuman") pursuant to which Neuman will acquire substantially all of the
assets, business and goodwill of the Company, including the exclusive right for
use of the name "Drug Guild." The Agreement specifically excludes any tax
refunds, any claims the Company may have against its officers, employees and
third parties, certain insurance policies, certain motor vehicles, any net
operating loss carry forward and any other assets or claims of the Company, not
involving its inventory, that are not specified on the Company's closing
balance sheet.
Neuman has agreed to assume and to pay, perform or discharge certain
specified liabilities of the Company including trade accounts payable, accrued
expenses as reflected on the closing balance sheet, the collective agreement
with Local 815, each of the Company's leases, all expenses incurred in the
ordinary course of business, the bank debt and long term notes. However, Neuman
will not assume severance or termination payments, worker compensation claims,
liability for any federal, state or income taxes, environmental claims,
undisclosed or contingent liabilities, penalties, fines that may be assessed by
the Drug Enforcement Administration or liabilities with respect to the
preferred stock of the Company.
The purchase price will consist of cash and promissory notes and will
be equal to $1,000,000 plus the net asset value of the Company, which is
defined as the assets being purchased by Neuman less the value of the assumed
liabilities, as determined by an audit of such assets and liabilities as of the
closing date, subject to adjustment until the first anniversary of the closing
for items effecting accounts payable and accrued expenses.
At the closing, Neuman will provide the Company with the following
consideration in addition to the assumption of liabilities described above:
(a) a cash payment of $4,000,000;
(b) a four-year interest-bearing promissory note for the
balance of the purchase price, secured by a letter of credit in form and
substance satisfactory to the Company, bearing interest at a rate determined
quarterly equal to the higher of 1% plus the 180-day Libor rate or the rate
specified for U.S. Treasury Notes with maturities equal to the remaining term
of the note, but no lower than the Federal Rate as disseminated by the Internal
Revenue Service from time to time (the "Secured Note");
(c) an unsecured promissory note for $1,000,000 payable four
years after the closing without interest (the "Unsecured Note"); and
(d) an option in favor of the Company's shareholders to
purchase, under certain conditions, an aggregate amount of Neuman shares equal
to 10% of Neuman shares to be made available in a public offering in the event
Neuman files a registration statement with the Securities and
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<PAGE>
Exchange Commission prior to the fourth anniversary of the closing date for the
purpose of an initial public offering of Neuman shares, at a purchase price
equal to 85% of the per share offering price.
The Secured Note is to be paid as follows:
(a) $500,000 in quarterly payments during the first year
together with interest on the $500,000 being paid;
(b) Interest for the first year on the Secured Note, shall be
paid on the adjusted principal amount thereof after the first anniversary date
of such note and after all such adjustments have been made; and
(c) the remaining principal of the Secured Note shall be paid
over the following three years in 12 equal quarterly principal payments, with
interest on the unpaid balance.
At the end of the first year following the closing, Neuman will have
the right to reassign uncollected accounts receivable and notes to the Company
and have the principal of the Secured Note reduced by an amount equal to the
reassigned receivables and notes, less certain credits to which the Company may
be entitled. Neuman is prohibited from doing business with any customer whose
indebtedness has been reassigned for a period of two years. Neuman has also
agreed to various provisions preserving the payment terms of current customers
of the Company and providing employment offers to the Company's current
employees.
Consummation of the transaction is subject to the satisfaction of
customary conditions of closing and to receipt of financing by Neuman in an
amount sufficient to assume, refinance or pay the Company's bank debt.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be executed
on its behalf by the undersigned, thereunto duly authorized. Date: June 13, 1997
DRUG GUILD DISTRIBUTORS, INC.
By /s/ Jay Reba
------------------------------------------
Jay Reba, Vice President of Finance
(Duly authorized officer and principal
financial officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> APR-30-1997
<CASH> 230
<SECURITIES> 0
<RECEIVABLES> 67297
<ALLOWANCES> 1709
<INVENTORY> 32460
<CURRENT-ASSETS> 98868
<PP&E> 14946
<DEPRECIATION> 11666
<TOTAL-ASSETS> 107148
<CURRENT-LIABILITIES> 91425
<BONDS> 0
2105
0
<COMMON> 10038
<OTHER-SE> 2624
<TOTAL-LIABILITY-AND-EQUITY> 107148
<SALES> 120995
<TOTAL-REVENUES> 120995
<CGS> 114235
<TOTAL-COSTS> 114235
<OTHER-EXPENSES> 5534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1276
<INCOME-PRETAX> (50)
<INCOME-TAX> (17)
<INCOME-CONTINUING> (33)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 42
<NET-INCOME> (75)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
