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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 June 30, 1996
-------------
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 WHOLESALE DRUG, 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 1190, 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 3,042,717
---------------------------- -----------------
(class) (July 31, 1996)
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D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES
<TABLE>
Index
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30,
1996 and March 29, 1996 3
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 1996 and June 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 1996 and June 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
Part II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
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Part l. Financial Information
Item 1. Financial Statements.
<TABLE>
D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
Assets June 30, March 29,
- ------ 1996 1996
----------- ---------
(Unaudited)
<S> <C> <C>
Cash $1,197 $1,947
Receivables 25,760 25,150
Inventories 36,363 39,500
Income tax receivable 1,430 1,430
Other current assets 848 911
----------- ---------
Total current assets 65,598 68,938
----------- ---------
Net property and equipment 5,022 5,162
Investment in affiliated company 3,963 3,929
Deferred income taxes 1,147 1,147
Other assets 608 723
Intangible assets 14,935 15,038
----------- ---------
Total assets $91,273 $94,937
=========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Current maturities of long-term debt $1,197 $1,209
Accounts payable 35,386 35,805
Deferred income taxes 3,737 3,737
Accrued expenses 2,541 2,663
----------- ---------
Total current liabilities 42,861 43,414
=========== =========
Revolving line of credit 36,755 40,000
Long-term debt, excluding current maturities 3,180 3,190
Other long-term liabilities 300 300
----------- ---------
Total liabilities 83,096 86,904
----------- ---------
Stockholders' equity:
Common stock 30 30
Paid-in capital 11,623 11,592
Accumulated deficit (3,476) (3,589)
----------- ---------
Total stockholders' equity 8,177 8,033
----------- ---------
Total liabilities and stockholders' equity $91,273 $94,937
=========== =========
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
<CAPTION>
Three Months Ended
June 30, June 30,
1996 1995
----------- ----------
<S> <C> <C>
Net sales $106,234 $110,463
Cost of sales 101,196 105,205
----------- ----------
Gross profit 5,038 5,258
Operating expenses 4,013 4,453
----------- ----------
Income from operations 1,025 805
Other income (expense):
Interest expense, net (835) (824)
Other, net 35 80
----------- ----------
(800) (744)
----------- ----------
Income before income tax provision 225 61
Income tax provision 112 27
----------- ----------
Net income $113 $34
=========== ==========
Earnings per common share:
Primary earnings per share $0.04 $0.01
Fully diluted earnings per share $0.04 $0.01
Primary common shares outstanding 3,093,875 3,030,571
Fully diluted common shares outstanding 3,093,875 3,030,571
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Three Months Ended
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $113 $34
Adjustments to reconcile net income
to net cash flows from operating activities:
Amortization of debt issuance costs 18 18
Depreciation and amortization 393 417
Stock option and warrant expense 1 11
Equity in net income of affiliated company (34) -
(Increase) decrease in accounts receivable, net (522) 1,790
(Increase) decrease in inventories 3,136 (776)
(Increase) decrease in other current assets 64 (303)
Increase (decrease) in accounts payable (1,268) 1,842
Increase (decrease) in accrued expenses 726 (982)
Other, net 13 (31)
---------- ----------
Cash flows from operating activities 2,640 2,020
Cash flows from investing activities:
Purchases of property and equipment (152) (226)
---------- ----------
Cash flows from investing activities (152) (226)
Cash flows from financing activities:
Borrowings under revolving line of credit 69,816 86,056
Repayments under revolving line of credit (73,062) (87,690)
Payments of long-term debt - (25)
Payments of capital lease obligations (22) (54)
Proceeds from exercise of stock options 30 -
---------- ----------
Cash flows from financing activities (3,238) (1,713)
Increase (decrease) in cash (750) 81
Cash, beginning of period 1,947 843
---------- ----------
Cash, end of period $1,197 $924
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for
Interest $782 $1,205
Income taxes 10 281
See notes to condensed financial statements.
</TABLE>
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D & K WHOLESALE DRUG, 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 Illinois, Kentucky and
Minnesota, the Company distributes a broad range of
pharmaceuticals and related products to its customers in
19 states. The Company focuses primarily on a target
market sector which includes independent retail,
institutional, franchise and chain store pharmacies in
the Midwest and Mid-South. The Company is currently
operating in one business segment. The Company also owns
a 50% equity interest in Pharmaceutical Buyers, Inc., a
group purchasing organization with approximately 1,800
members in 49 states.
The accompanying unaudited 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 June 30,
1996 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 of the Company
for the fiscal year ended March 29, 1996 contained in
the Company's 1996 Annual Report to Stockholders.
Note 2. In May 1996, the Company granted non-qualified stock
options for an aggregate of 82,833 shares to certain key
employees at an exercise price of $6.375 per share. The
exercise price of all options granted pursuant to the
1993 Stock Option Plan was equal to the fair market
value of the stock on the date of grant. Stock options
granted under the 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:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF ----------------------------
SHARES PER SHARE TOTAL
--------- ------------ --------
(000'S)
<S> <C> <C> <C>
OUTSTANDING AT MARCH 29, 1996 189,197 $3.375-7.00 $1,011
GRANTED MAY 1996 82,833 6.375 528
EXERCISED MAY 1996 (8,000) $3.375-3.875 (30)
--------- --------
OUTSTANDING AT JUNE 30, 1996 264,030 $3.375-$7.00 $1,509
========= ========
</TABLE>
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Note 3. Primary earnings per common share are computed by
dividing net income by the sum of: (1) the weighted
average number of common shares outstanding during the
period; and (2) the dilutive effect of outstanding
stock options and warrants (calculated using the
treasury stock method). Fully diluted earnings per
common share are computed using the components
mentioned above for the primary computation with the
addition of common shares issuable upon conversion of
the Company's 11% convertible subordinated notes. The
fully diluted computation adds back to income interest
on the 11% convertible subordinated notes and deducts
the income tax effect as if such notes had been
converted into common stock at the beginning of the
period. For the three-month periods ended June 30,
1996,and June 30, 1995 fully diluted earnings per share
is antidilutive.
Note 4. The Company has buildings held for sale in Cairo,
Illinois and Duluth, Minnesota. The buildings are for
sale as a result of operation relocations and have June
30, 1996 carrying values of $40,000 and $561,000,
respectively. The buildings are expected to be sold
during fiscal year 1997.
Note 5. On July 2, 1996, the Company announced that it had been
selected as the primary pharmaceutical supplier for a
mail service pharmacy and prescription management
company. Once operational, the Company anticipates that
this account will become one of its largest customers.
The agreement became effective on August 1, 1996 and
will be for a base period of two years with an option
by the customer to renew for a third year.
Note 6. In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed
Of." The standard establishes accounting standards for
the impairment of long-lived assets, certain
intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. The Company
adopted the statement in the first quarter of fiscal
1997 with no impact on the consolidated financial
statements of the Company.
Note 7. In June 1996, the Company entered into a lease agreement
with a local developer for the development and
construction of a 60,000 square foot distribution
center on a 6.5-acre tract of land in Cape Girardeau,
Missouri. In order to facilitate growth and other
operational efficiencies, the Company intends to
relocate its Cairo, Illinois operations to this new
facility in December 1996 or January 1997. The term of
the lease is for a period of ten years with two five-
year renewal options. The Company expects the lease to
be accounted for as an operating lease.
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D & K WHOLESALE DRUG, 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 June 30,
1996 and March 29, 1996, and in the condensed
consolidated statements of operations for the three-
month periods ended June 30, 1996 and June 30, 1995.
The Company recommends that this discussion be read in
conjunction with the audited consolidated financial
statements and accompanying notes included in the
Company's 1996 Annual Report to Stockholders.
Results of Operations:
---------------------
Net Sales Net sales decreased 3.8% or $4.2 million for
---------
the first quarter. Chain drug stores sales and
independent pharmacies sales improved during the
quarter by $3.6 million and $1.7 million, respectively.
The increase in chain sales was realized primarily from
increased sales to a large drug store chain and other
drug store chain accounts. The independent pharmacy
sales improvement was realized from new and existing
retail accounts. Franchise sales decreased by $9.5
million primarily due to the decision of a regional
group of franchise pharmacies not to renew the
Companys status as the groups primary supplier
effective as of July 1, 1995.
Gross Profit Gross profit decreased 4.2% to $5.0
------------
million for three-month period. As a percentage of net
sales, gross margin decreased from 4.8% to 4.7% for the
three-month period compared to the corresponding period
of the previous fiscal year. The decrease in gross
margin percentage was due to the increase in the
proportion of sales to lower margin chain drug store
and institutional accounts.
Operating Expenses Operating expenses decreased 9.9%
------------------
or $.4 million to $4.0 million for the first quarter of
fiscal 1997. As a percentage of net sales, operating
expenses decreased in the recently completed quarter
from 4.0% in fiscal 1996 to 3.8% in fiscal 1997. The
significant decrease in operating expenses for the
three-month period was attributable primarily to the
Companys consolidation of the operations of NDC and
KII in Minneapolis, Minnesota in fiscal year 1996. This
consolidation eliminated significant duplicate overhead
expenses associated with the former NDC facility. In
addition, implementation of various cost cutting
measures contributed to the decline of the first
quarter operating expenses compared to the same period
of the prior fiscal year.
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Interest Expense, Net Net interest expense decreased
---------------------
1.0% or $10,000 for the first quarter of fiscal 1997.
As a percentage of net sales, net interest expense
increased from 0.8% to 0.9% in the quarter ended June
30, 1996. The decrease in net interest expense resulted
primarily from the Company's payment of $424,000 of
unsecured notes in October 1995 plus interest at prime
plus 1%. Such unsecured notes were issued in October
1994 to former shareholders of NDC replacing
outstanding debt obligations of NDC.
Other, Net Other income decreased to $35,000 for the
----------
three-month period ended June 30, 1996 compared to
$81,000 for the corresponding period of the prior
fiscal year. The decrease in other income was primarily
due toreduced computer service income realized by the
Company's Viking Computer Services subsidiary, compared
to the corresponding period of the prior fiscal year.
Income from the 50% investment in PBI was also included
in the current three-month period ended June 30, 1996.
Effects of Inflation and LIFO Accounting The effects of
----------------------------------------
price inflation, measured by the excess of LIFO costs
over FIFO costs, were $122,000 and $43,000 for the
three months ended June 30, 1996 and 1995,
respectively. The increase in LIFO charges in the
recent three-month period were due primarily to the
higher rate of product price inflation in the Companys
pharmaceutical inventories.
Provision for Income Taxes The Company's estimate of
--------------------------
the effective tax rate expected to be applicable for
the full year, of 49.8%, which was applied to pretax
income in the period ended June 30, 1996, was greater
than the federal income tax rate of 35% primarily
because of the amortization of intangible assets that
are not deductible for federal and state income tax
purposes and 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 trade credit
from its suppliers. The following ratios are utilized
by the Company as key indicators of the Company's
liquidity and working capital management:
<TABLE>
<CAPTION>
June 30, March 29,
1996 1996
---- ----
<S> <C> <C>
Working capital (000's) $22,737 $25,524
Current ratio 1.53 to 1 1.59 to 1
Working capital to assets .25 to 1 .27 to 1
</TABLE>
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The decrease in working capital was due primarily to a
decrease in cash and a $3.1 million decrease in inventory in
excess the Company's increase in accounts receivable and
decrease in accounts payable. The decrease in inventories
was due to the consolidation of NDC and KII in fiscal 1996
and the continued working capital synergies realized from
combining the two operations into one facility. Also
contributing to the decrease in inventory was the depletion
of seasonal purchases of inventory made prior to the end of
fiscal year 1996. Such purchases were in excess of normal
replenishment quantities and are typical during the December
and March quarters each year.
The Company invested $153,000 in capital assets in the
three-month period ended June 30, 1996. Included in this
total is a $52,000 investment in D & K FOCUS software, a PC-
based information management system for Group Purchasing
Organization and Chain drug store headquarters. The Company
believes that its investment in capital assets is necessary
to achieve its goal of improving operational efficiency,
thereby enhancing its productivity and ratio of expenses to
net sales.
At June 30, 1996, the revolving line of credit provided a
maximum borrowing capacity of $50,000,000 plus a
supplemental facility of up to $10,000,000 during the months
of November through June of each year. At June 30, 1996 and
March 29, 1996, the unused portion of the line of credit
amounted to $6,097,000 and $3,880,000, respectively.
Management believes that, together with internally generated
funds, the Company's capital resources will be sufficient to
meet the Company's foreseeable capital requirements.
Approximately $1,000 has been credited to paid-in-capital
during the three-month period ended June, 1996 to reflect
compensation expense arising from the vesting of stock
warrants. In addition, $30,000 has been credited to paid-in-
capital during the three-month period as a result of
employee stock options that were exercised.
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D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES
Part II. Other Information
- ------- -----------------
Item 6. Exhibits:
(a) Exhibit 27 - Financial Data Schedule
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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 WHOLESALE DRUG, INC.
Date: August 13, 1996 By: /s/ J. Hord Armstrong, III
------------------ --------------------------------
J. Hord Armstrong, III
Chairman of the Board and
Chief Executive Officer
(Principal Financial Officer)
By: /s/ Martin D. Wilson
--------------------------------
Martin D. Wilson
President, Chief Operating
Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW OF D&K WHOLESALE DRUG,
INC. AND SUBSIDIARIES FOR THE THREE MONTHS ENDED JUNE 30, 1996, AND THE
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1996. SUCH INFORMATION
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,197
<SECURITIES> 0
<RECEIVABLES> 26,550
<ALLOWANCES> 790
<INVENTORY> 36,363
<CURRENT-ASSETS> 65,598
<PP&E> 9,318
<DEPRECIATION> 4,296
<TOTAL-ASSETS> 91,273
<CURRENT-LIABILITIES> 42,861
<BONDS> 0
<COMMON> 30
0
0
<OTHER-SE> 8,147
<TOTAL-LIABILITY-AND-EQUITY> 91,273
<SALES> 106,234
<TOTAL-REVENUES> 106,269
<CGS> 101,196
<TOTAL-COSTS> 105,209
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 835
<INCOME-PRETAX> 225
<INCOME-TAX> 112
<INCOME-CONTINUING> 113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
