<PAGE> 1
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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 December 31, 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 3,044,717
---------------------------- -------------------------
(class) (January 31, 1997)
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D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
Page No.
----------
<S> <C>
Part I. Financial Information
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December
31, 1996 and March 29, 1996 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended December 31, 1996 and
December 31, 1995 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 1996 and
December 31, 1995 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Part II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 13-14
</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 December 31, March 29,
------ 1996 1996
------------ ---------
(Unaudited)
<S> <C> <C>
Cash $1,617 $1,947
Receivables 32,294 25,150
Inventories 52,197 39,500
Income tax receivable 1,029 1,430
Other current assets 1,252 911
---------- ----------
Total current assets 88,389 68,938
---------- ----------
Net property and equipment 6,142 5,162
Investment in affiliated company 4,208 3,929
Deferred income taxes 1,147 1,147
Other assets 421 723
Intangible assets 14,728 15,038
---------- ----------
Total assets $115,035 $94,937
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current maturities of long-term debt $2,870 $1,209
Accounts payable 45,041 35,805
Accrued expenses 2,733 2,663
Deferred income taxes 3,737 3,737
---------- ----------
Total current liabilities 54,381 43,414
---------- ----------
Revolving line of credit 50,040 40,000
Long-term debt, excluding current maturities 1,823 3,190
Other long-term liabilities 300 300
---------- ----------
Total liabilities 106,544 86,904
---------- ----------
Stockholders' equity:
Common stock 30 30
Paid-in capital 11,688 11,592
Accumulated deficit (3,227) (3,589)
---------- ----------
Total stockholders' equity 8,491 8,033
---------- ----------
Total liabilities and stockholders' equity $115,035 $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 Nine Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $130,555 $108,268 $350,510 $321,715
Cost of sales 125,314 103,462 335,404 306,793
-------------- -------------- -------------- --------------
Gross profit 5,241 4,806 15,106 14,922
Operating expenses 4,205 4,075 12,256 12,949
-------------- -------------- -------------- --------------
Income from operations 1,036 731 2,850 1,973
Other income (expense):
Interest expense, net (805) (799) (2,410) (2,440)
Other, net 154 82 280 268
-------------- -------------- -------------- --------------
(651) (717) (2,130) (2,172)
-------------- -------------- -------------- --------------
Income before income tax provision
(benefit) 385 14 720 (199)
Income tax provision (benefit) 191 (15) 358 (119)
-------------- -------------- -------------- --------------
Net income (loss) $194 $29 $362 ($80)
============== ============== ============== ==============
Earnings per common share:
Primary earnings (loss) per share $0.06 $0.01 $0.12 ($0.03)
Fully diluted earnings (loss) per share $0.06 $0.01 $0.12 ($0.03)
Primary common shares outstanding 3,050,938 3,051,152 3,080,555 3,040,056
Fully diluted common shares outstanding 3,050,938 3,051,152 3,080,555 3,040,056
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>
Nine Months Ended
Dec. 31, Dec. 31,
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $362 ($80)
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Amortization of debt issuance costs 53 53
Depreciation and amortization 1,129 1,283
Stock option and warrant expense 2 14
Gain from sale of assets (5) (2)
Equity in net income of affiliated company (279) (26)
(Increase) decrease in accounts receivable, net (6,876) 1,601
(Increase) in inventories (12,697) (4,969)
Decrease in income tax receivable 403 -
Increase in other current assets (342) (323)
Increase in accounts payable 8,386 7,992
Increase (decrease) in accrued expenses 918 (1,661)
Other, net (7) (147)
------------ ------------
Cash flows from operating activities (8,953) 3,735
Cash flows from investing activities:
Investment in affiliated company - (3,841)
Purchases of property and equipment (1,806) (728)
------------ ------------
Cash flows from investing activities (1,806) (4,569)
Cash flows from financing activities:
Borrowings under revolving line of credit 218,178 231,942
Repayments under revolving line of credit (208,138) (228,968)
Proceeds from equipment loan 1,495 -
Payments of long-term debt (1,132) (1,563)
Payments of capital lease obligations (68) (158)
Proceeds from exercise of stock options 94 26
------------ ------------
Cash flows from financing activities 10,429 1,279
Increase in cash (330) 445
Cash, beginning of period 1,947 843
------------ ------------
Cash, end of period $1,617 $1,288
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for
Interest $2,740 $2,999
Income taxes 212 425
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 Missouri, 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, mail-order, 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 nine-month periods ended December
31, 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, under the provisions of its 1993 Stock Option Plan,
the Company granted non-qualified stock options for an aggregate
of 82,833 shares of common stock 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.
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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
------------ ----------------- -----------
<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)
CANCELED OCTOBER 1996 (27,499) $6.375-$7.00 (187)
CANCELED DECEMBER 1996 (17,000) $6.375 (108)
------------- -----------
OUTSTANDING AT DECEMBER 31, 1996 165,199 $916
============= ===========
</TABLE>
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
Company's 11% convertible subordinated notes. The fully diluted
computation adds back to income interest on the 11% convertible
subordinated notes and deducts the related income tax effect as
if such notes had been converted into common stock at the
beginning of the period. For the three-month and nine-month
periods ended December 31, 1996 and 1995, fully diluted earnings
(loss) per share was substantially equivalent to primary
earnings (loss) per share.
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. At December 31, 1996, the Cairo
facility is fully depreciated while the Duluth building has a
$558,000 carrying value. Both buildings are included in net
property and equipment on the condensed consolidated balance
sheet. The buildings are expected to be sold during calendar 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.
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Note 6. In June 1996, the Company entered into an operating 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 relocated its Cairo, Illinois operations to this new
facility in December 1996. The term of the lease is for a period
of ten years with two five-year renewal options.
Note 7. In December 1996, the Company entered into a $1,495,000 loan
agreement with Magna Bank ("Magna loan"), under the Missouri
First Linked Deposit Job Creation Program. The proceeds of the
loan were used for various equipment additions and leasehold
improvements at the Company's new Cape Girardeau, Missouri
facility. For the first year of the agreement, the Magna loan
bears interest at the State Deposit Rate as determined by the
State of Missouri plus 3% (5.95% at December 31, 1996). In
addition, unless certain conditions are met by the Company at
the end of the first year of the agreement, the Magna loan
interest rate will become prime plus one-half percent. The Magna
loan requires monthly interest payments for the first year of
the agreement but may require monthly principal and interest
payments after that time until maturity unless certain
conditions are met by the Company.
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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 December 31,
1996 and March 29, 1996, and in the condensed consolidated
statements of operations for the three-month and nine-month
periods ended December 31, 1996 and December 31, 1995,
respectively. The Company recommends that this discussion
be read in conjunction with the audited consolidated
financial statements and accompanying notes included in the
Company's 1996 Annual Report to Stockholders.
Results of Operations:
---------------------
Net Sales Net sales increased 20.6% or $22.3 million for
---------
the third quarter of fiscal 1997 ended December 31, 1996.
During the most recent three month period, mail-order sales
increased $15.2 million due to the addition of a mail-order
service and prescription management customer in August 1996
while chain drug sales and independent pharmacy sales
improved by $2.2 million and $6.5 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. Third quarter franchise store
sales decreased by $1.2 million. Hospital sales decreased
during the same period by $.4 million.
Net sales increased 9.0% or $28.8 million for the nine-month
period ended December 31, 1996. The addition of the
mail-order service and prescription management customer
accounted for increased sales of $24.7 million during the
nine-month period ended December 31, 1996. During the same
period, chain drug sales and independent pharmacy sales
improved by $6.9 million and $13.0 million, respectively.
Increased sales to a large drug store chain and other drug
store chains accounted for the chain drug sales improvement,
while the independent pharmacy sales increase was realized
from new and existing retail accounts. Franchise store
sales decrease by $13.3 million during the nine-months
ended December 31, 1996 primarily due to the decision of a
regional group of franchise pharmacies not to renew the
Company's status as the group's primary supplier effective
as of July 1, 1995. Hospital sales decreased during the
same period by $2.5 million primarily as a result of the
loss of certain customers when the Company's two Minnesota
facilities were consolidated during fiscal 1996.
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Gross Profit Gross profit increased 9.1% to $5.2 million
------------
for the most recent three-month period and increased 1.2%
to $15.1 million for the nine-month period ended December
31, 1996. As a percentage of net sales, gross margin
decreased from 4.4% to 4.0% for the most recent three-month
period and decreased from 4.6% to 4.3% during the nine-month
period ended December 31, 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 margin percentages but generate
favorable working capital benefits which reduce the Company's
borrowing costs.
Operating Expenses Operating expenses increased 3.2% or
------------------
$0.1 million to $4.2 million for the most recent three-month
period and decreased 5.4% or $0.7 million to $12.2 million
for the nine-month period ended December 31, 1996, compared
to the corresponding periods of the previous fiscal year.
As a percentage of net sales, operating expenses decreased
from 3.8% to 3.2% and from 4.0% to 3.5% for the three-month
and nine-month periods, respectively. The modest increase
in operating expenses for the most recent three-month period
resulted primarily from the additional costs associated with
the increased sales activity at the Lexington warehouse and
expenses related to the relocation of the Cairo facility.
The operating expense decrease for the nine-month period
ended December 31, 1996 was primarily attributable to the
Company's consolidation of the operations of Northern Drug
Company (NDC) and Krelitz Industries, Inc. (KII) in
Minneapolis, Minnesota in fiscal 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 operating expenses during the
nine-month period ended December 31, 1996 compared to the
same period of the prior fiscal year.
Interest Expense, Net Net interest expense increased 0.8%
---------------------
or $6,000 and decreased 1.2% or $30,000, respectively, for
the three-month and nine-month periods ended December 31,
1996. As a percentage of net sales, net interest expense
decreased from 0.7% to 0.6% for the most recent three-month
period and from 0.8% to 0.7% for the nine-month period ended
December 31, 1996. The increase in net interest expense
during the most recent three-month period was primarily the
result of reductions of interest income in excess of the
reductions of interest expense. For the nine months ended
December 31, 1996, the decrease in net interest expense was
primarily the result of the reduction of interest expense
in excess of the reduction of interest income. The decrease
in interest expense for both the three and nine-month
periods ended December 31, 1996 was primarily the result of
the December 1995 scheduled principal payment to the
Company's subordinated note holder and a slight reduction in
the interest rates on the Company's revolving line of
credit.
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Other, Net Other income, net increased to $154,000 for the
----------
most recent three-month period and increased to $280,000 for
the nine-month period ended December 31, 1996, compared to
$82,000 and $268,000, respectively, for the corresponding
periods in the prior fiscal year. The increase in other
income, net for the most recent three and nine-month periods
was primarily due to the inclusion of the Company's 50%
equity interest in the net earnings of Pharmaceutical
Buyers, Inc. (PBI) in its condensed consolidated statements
of operations for the entire periods. The corresponding
periods in the prior fiscal year only included the Company's
portion of the net earnings of PBI for the month of December
1995 since the Company's investment in PBI was made on
November 30, 1995. The increase in other income, net for
the three and nine-month periods ended December 31, 1996 was
partially offset by reduced computer services income
realized by Viking Computer Services Inc., a wholly-owned
subsidiary, compared to the corresponding periods in the
prior fiscal year.
Effects of Inflation and LIFO Accounting The effects of price
----------------------------------------
inflation, measured by the excess of LIFO costs over FIFO costs, were
$261,000 and $311,000, respectively, for the three months ended
December 31, 1996 and 1995, and $398,000 and $417,000, respectively,
for the nine-month periods ended December 31, 1996 and 1995. The
decrease in the provision for LIFO in the three-month and nine-month
periods ended December 31, 1996 was due primarily to the lower rate of
product price inflation experienced in the Company's pharmaceutical
inventories.
Provision for Income Taxes The Company's effective income tax rate of
--------------------------
49.8%, which was applied to pretax income in the period ended December
31, 1996, is the rate expected to be applicable for the full fiscal
year of 1997. This rate was greater than the federal income tax rate
of 34% primarily because of the amortization of intangible assets that
are not deductible for federal and state income tax purposes and the
effect of 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>
December 31, March 29,
1996 1996
---- ----
<S> <C> <C>
Working capital (000's) $34,008 $25,524
Current ratio 1.63 to 1 1.59 to 1
Working capital to assets .30 to 1 .27 to 1
</TABLE>
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Page 12 of 14
The increase in working capital in the current nine-month
period was due to increases in accounts receivable and
inventories of $7.1 million and $12.7 million, respectively,
which were in excess of increases in accounts payable and
current maturities of long-term debt of $9.2 million and $1.7
million, respectively. The increase in accounts receivable
was due to a significant increase in net sales during the
quarter ended December 31, 1996. The increases in inventories
and accounts payable were due to a planned seasonal build-up
of inventory levels occurring throughout the latter part of
the quarter which allow the Company to take advantage of
buying opportunities as suppliers' price increases typically
occur in the beginning of the calendar year. In addition,
inventory levels also increased due to the Company's
relocation to the new Cape Girardeau, Missouri facility
during the latter part of the most recent three-month period.
The increase in current maturities of long-term debt reflects
the reclassification to current liabilities of the $1,750,000
11% convertible subordinated note due on December 29, 1997.
The Company invested $1,806,000 in capital assets in the
nine-month period ended December 31, 1996. Equipment
additions and leasehold improvements for the new Cape
Girardeau, Missouri facility accounted for $1,304,000 of this
total and were financed by the $1,495,000 Magna loan. The
majority of the remaining additions were related to
management information systems enhancements. The Company
believes that its investment in capital assets is necessary
to achieve its goal of improving operational efficiency,
thereby enhancing its productivity and profitability.
At December 31, 1996, the revolving line of credit provided
a maximum borrowing capacity of $60,000,000 which includes
a supplemental facility of up to $10,000,000 during the
months of November through June of each year. At
December 31, 1996 and March 29, 1996, the unused portion of
the line of credit amounted to $7,307,000 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 nine-month period ended December 31, 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 nine-month period as a result of
employee stock options that were exercised.
<PAGE> 13
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D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES
Part II. Other Information
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K:
27 - Financial Data Schedule
<PAGE> 14
Page 14 of 14
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: February 13, 1997 By: /s/ J. Hord Armstrong, III
------------------------- ----------------------------------
J. Hord Armstrong, III
Chairman of the Board and
Chief Executive Officer
(Principal Financial Officer)
By: /s/ Daniel E. Kreher
----------------------------------
Daniel E. Kreher
Vice President
Finance and Administration
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,617
<SECURITIES> 0
<RECEIVABLES> 33,084
<ALLOWANCES> 790
<INVENTORY> 52,197
<CURRENT-ASSETS> 88,389
<PP&E> 10,938
<DEPRECIATION> 4,796
<TOTAL-ASSETS> 115,035
<CURRENT-LIABILITIES> 54,381
<BONDS> 0
<COMMON> 30
0
0
<OTHER-SE> 8,460
<TOTAL-LIABILITY-AND-EQUITY> 115,035
<SALES> 350,510
<TOTAL-REVENUES> 350,790
<CGS> 335,404
<TOTAL-COSTS> 347,660
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,410
<INCOME-PRETAX> 720
<INCOME-TAX> 359
<INCOME-CONTINUING> 361
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 361
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
