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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 September 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 3,043,717
---------------------------- --------------------
(class) (October 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 September 30,
1996 and March 29, 1996 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended September 30, 1996 and
September 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 1996 and September 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 8-11
Part II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 12-13
</TABLE>
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Part I. Financial Information
- -------------------------------
Item 1. Financial Statements.
<TABLE>
D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
Assets September 30, March 29,
------ 1996 1996
------------- ---------
(Unaudited)
<S> <C> <C>
Cash $ 3,304 $ 1,947
Receivables 29,011 25,150
Inventories 35,378 39,500
Income tax receivable 1,029 1,430
Other current assets 1,219 911
------- -------
Total current assets 69,941 68,938
------- -------
Net property and equipment 4,942 5,162
Investment in affiliated company 4,047 3,929
Deferred income taxes 1,147 1,147
Other assets 488 723
Intangible assets 14,831 15,038
------- -------
Total assets $95,396 $94,937
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current maturities of long-term debt $ 1,150 $ 1,209
Accounts payable 43,259 35,805
Deferred income taxes 3,737 3,737
Accrued expenses 2,474 2,663
------- -------
Total current liabilities 50,620 43,414
------- -------
Revolving line of credit 33,000 40,000
Long-term debt, excluding current maturities 3,180 3,190
Other long-term liabilities 300 300
------- -------
Total liabilities 87,100 86,904
------- -------
Stockholders' equity:
Common stock 30 30
Paid-in capital 11,687 11,592
Accumulated deficit (3,421) (3,589)
------- -------
Total stockholders' equity 8,296 8,033
------- -------
Total liabilities and stockholders' equity $95,396 $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 Six Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $113,721 $102,983 $219,955 $213,446
Cost of sales 108,895 98,125 210,090 203,331
--------- --------- --------- ---------
Gross profit 4,826 4,858 9,865 10,115
Operating expenses 4,037 4,418 8,050 8,873
--------- --------- --------- ---------
Income from operations 789 440 1,815 1,242
Other income (expense):
Interest expense, net (770) (819) (1,606) (1,642)
Other, net 91 105 126 187
--------- --------- --------- ---------
(679) (714) (1,480) (1,455)
--------- --------- --------- ---------
Income before income tax provision
(benefit) 110 (274) 335 (213)
Income tax provision (benefit) 55 (131) 167 (104)
--------- --------- --------- ---------
Net income (loss) $55 ($143) $168 ($109)
========= ========= ========= =========
Earnings per common share:
Primary earnings (loss) per share $0.02 ($0.05) $0.05 ($0.04)
Fully diluted earnings (loss) per share $0.02 ($0.05) $0.05 ($0.04)
Primary common shares outstanding 3,069,958 3,041,812 3,077,917 3,036,192
Fully diluted common shares outstanding 3,069,958 3,041,812 3,077,917 3,036,192
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>
Six Months Ended
Sept. 30, Sept. 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $168 ($109)
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Amortization of debt issuance costs 36 36
Depreciation and amortization 759 838
Stock option and warrant expense 2 12
Gain from sale of assets (4) (2)
Equity in net income of affiliated company (118) -
(Increase) decrease in accounts receivable, net (3,675) 2,414
Decrease in inventories 4,121 2,454
Decrease in income tax receivable 403 -
Increase in other current assets (309) (299)
Increase (decrease) in accounts payable 6,604 (193)
Increase (decrease) in accrued expenses 660 (744)
Other, net 21 (32)
-------- --------
Cash flows from operating activities 8,668 4,375
Cash flows from investing activities:
Purchases of property and equipment (336) (593)
-------- --------
Cash flows from investing activities (336) (593)
Cash flows from financing activities:
Borrowings under revolving line of credit 131,751 159,685
Repayments under revolving line of credit (138,751) (162,274)
Payments of long-term debt (24) (25)
Payments of capital lease obligations (45) (109)
Proceeds from exercise of stock options 94 23
-------- --------
Cash flows from financing activities (6,975) (2,700)
Increase in cash 1,357 1,082
Cash, beginning of period 1,947 843
-------- --------
Cash, end of period $3,304 $1,925
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for
Interest $1,823 $1,953
Income taxes 164 376
See notes to condensed consolidated 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 and six-month periods
ended September 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 Companys 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)
EXERCISED AUGUST 1996 (17,666) $3.375-3.875 (64)
CANCELED AUGUST 1996 (36,666) $5.85-7.00 (234)
------- ------
OUTSTANDING AT SEPTEMBER 30, 1996 209,698 $3.375-$7.00 $1,211
======= ======
</TABLE>
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Note 3. Primary earnings (loss) 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 (loss) 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 Companys 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 and six-
month periods ended September 30, 1996, and September 30,
1995 fully diluted earnings (loss) 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 relocations of operations and have
September 30, 1996 carrying values of $1,000 and
$558,000, respectively, and are included in net property
and equipment on the condensed consolidated balance
sheet. 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. 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 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 September
30, 1996 and March 29, 1996, and in the condensed
consolidated statements of operations for the three-
month and six-month periods ended September 30, 1996
and September 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 increased 10.4% or $10.7
---------
million for the second quarter and 3.1% or $6.5 million
for the six-month period. The addition of a mail-order
service and prescription management customer in August
1996 accounted for increased sales of $9.4 million
during the second quarter ended September 30, 1996.
Chain drug stores sales and independent pharmacies
sales improved by $1.1 million and $4.8 million,
respectively, during the recently completed quarter.
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. Second quarter franchise store sales
decreased by $2.6 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. Hospital sales
decreased during the same period by $2.0 million
primarily as a result of the loss of certain customers
when the two Minnesota facilities were consolidated
during fiscal 1996.
Gross Profit Gross profit decreased .6% to $4.8
------------
million for the three-month period and 2.5% to
$9.9 million for the six-month period. As a
percentage of net sales, gross margin decreased
from 4.7% to 4.2% for the three-month period and
from 4.7% to 4.5% during the six-month period
ended September 30, 1996, compared to the
corresponding periods 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 accounts and the sales to
the new mail-order customer which yield lower
gross margins percentages but generate favorable
working capital benefits.
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Operating Expenses Operating expenses decreased
------------------
8.6% or $.4 million to $4.0 million for the three-
month period and 9.3% or $.8 million to $8.0
million for the six-month period ended September
30, 1996, compared to the corresponding periods of
the previous fiscal year. As a percentage of net
sales, operating expenses decreased from 4.3% to
3.6% and from 4.2% to 3.7% for the three-month and
six-month periods, respectively. The significant
decrease in operating expenses for the three-month
and six-month periods was attributable primarily
to the Companys consolidation of the operations
of Northern Drug Company (NDC) and Krelitz
Industries, Inc. (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
management measures contributed to the decline of
the first and second quarter operating expenses
compared to the same periods of the prior fiscal
year.
Interest Expense, Net Net interest expense
---------------------
decreased 5.9% or $49,000 and 2.2% or $35,000 for the
three-month and six-month periods, respectively. As a
percentage of net sales, net interest expense decreased
from 0.8% to 0.7% for both the three-month and six-
month periods, respectively. The current year decrease
in interest expense resulted from overall lower
borrowing rates compared to the prior year and from the
working capital benefits realized from the relationship
with the Company's new mail-order account. Also
contributing to the decrease in net interest expense
was the Company's payment of $424,000 of unsecured
notes in October 1995, which had 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 $91,000 for
----------
the three-month period and $126,000 for the six-month
period ended September 30, 1996 compared to $105,000
and $186,000 for the corresponding periods of the prior
fiscal year, respectively. The decrease in other
income was primarily due to reduced computer service
income realized by the Company's Viking Computer
Services subsidiary, compared to the corresponding
periods of the prior fiscal year. Also contributing to
the decrease was the realization of a $42,500 lawsuit
settlement which was included in the prior year's three
and six-month totals. Income from the 50% investment
in Pharmaceutical Buyers, Inc. was included in the
current three and six-month periods ended September
30,1996.
Effects of Inflation and LIFO Accounting The
----------------------------------------
effects of price inflation, measured by the excess of
LIFO costs over FIFO costs, were $15,000 and $63,000
for the three months ended September 30, 1996 and 1995,
respectively, and $137,000 and $106,000 for the six-
month periods ended September 30, 1996 and 1995,
respectively. The decrease in LIFO charges in the
recent three-month period was due primarily to the
lower rate of product price inflation in the Company's
pharmaceutical inventories as opposed to the higher
rate of product price inflation experienced during the
first three-month period of the current fiscal year.
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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 September 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>
September 30, March 29,
1996 1996
---- ----
<S> <C> <C>
Working capital (000's) $19,321 $25,524
Current ratio 1.38 to 1 1.59 to 1
Working capital to assets .20 to 1 .27 to 1
</TABLE>
The decrease in working capital was due primarily to a
$4.1 million decrease in inventory and a $7.5 million
increase in accounts payable in excess of a $1.4
million increase in cash and a $3.9 million increase in
accounts receivable. The decrease in inventories was
due to continued working capital synergies realized
from the consolidation of NDC and KII in fiscal 1996
and the depletion of seasonal purchases of inventory
made prior to the end of fiscal year 1996. The
increase in accounts payable in light of the decrease
in inventories corresponds to the timing of purchases
and reflects the working capital benefits from the new
mail-order customer as inventory for this customer is
liquidated sooner than the corresponding trade accounts
payable. The increase in accounts receivable was due
to the increase in sales during the quarter ended
September 1996.
The Company invested $336,000 in capital assets in the
six-month period ended September 30, 1996. The
majority of the additions were related to either
management information systems or equipment for the new
Cape Girardeau, Missouri facility. 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.
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At September 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 September 30, 1996 and March 29, 1996, the
unused portion of the line of credit amounted to
$11,768,000 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 $2,000 has been credited to paid-in-
capital during the six-month period ended September,
1996 to reflect compensation expense arising from the
vesting of stock warrants. In addition, $94,000 has
been credited to paid-in-capital during the six-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:
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: November 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,304
<SECURITIES> 0
<RECEIVABLES> 29,801
<ALLOWANCES> 790
<INVENTORY> 35,378
<CURRENT-ASSETS> 69,941
<PP&E> 9,489
<DEPRECIATION> 4,547
<TOTAL-ASSETS> 95,396
<CURRENT-LIABILITIES> 50,620
<BONDS> 0
<COMMON> 30
0
0
<OTHER-SE> 8,266
<TOTAL-LIABILITY-AND-EQUITY> 95,396
<SALES> 219,955
<TOTAL-REVENUES> 220,081
<CGS> 210,090
<TOTAL-COSTS> 218,140
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,606
<INCOME-PRETAX> 335
<INCOME-TAX> 167
<INCOME-CONTINUING> 168
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 168
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
