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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
-------------------------
OR
(X) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from March 29, 1997 to June 30, 1997
-------------- -------------
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 920, ST. LOUIS, MISSOURI
(Address of principal executive offices)
63105
(Zip Code)
(314) 727-3485
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X YES NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value 3,056,217
---------------------------- -----------------
(class) (July 31, 1997)
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D & K WHOLESALE DRUG, INC. A SUBSIDIARIES
<TABLE>
Index
<CAPTION>
Page No.
--------
<S> <C>
Part l. Financial Information
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1997
and March 28, 1997 3
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
Part ll. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 12-13
</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 28,
- ------ 1997 1997
-------- ---------
(Unaudited)
<S> <C> <C>
Cash $ 1,646 $ 2,213
Receivables 29,332 22,247
Inventories 41,391 49,991
Other current assets 1,152 882
------- --------
Total current assets 73,521 75,333
------- --------
Net property and equipment 5,419 6,242
Investment in affiliated company 4,090 4,039
Deferred income taxes 889 889
Other assets 317 338
Intangible assets 14,521 14,625
------- --------
Total assets $98,757 $101,466
======= ========
Liabilities and Stockholders' Equity
------------------------------------
Current maturities of long-term debt $ 3,127 $ 3,138
Accounts payable 48,074 41,410
Deferred income taxes 3,842 3,842
Accrued expenses 2,675 2,673
------- --------
Total current liabilities 57,718 51,063
------- --------
Revolving line of credit 30,147 40,000
Long-term debt, excluding current maturities 1,529 1,530
------- --------
Total liabilities 89,394 92,593
------- --------
Stockholders' equity:
Common stock 30 30
Paid-in capital 11,819 11,693
Accumulated deficit (2,486) (2,850)
------- --------
Total stockholders' equity 9,363 8,873
------- --------
Total liabilities and stockholders' equity $98,757 $101,466
======= ========
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,
1997 1996
-------- --------
<S> <C> <C>
Net sales $ 144,473 $ 106,409
Cost of sales 138,457 101,213
--------- ---------
Gross profit 6,016 5,196
Operating expenses 4,769 4,170
--------- ---------
Income from operations 1,247 1,026
Other income (expense):
Interest expense, net (820) (835)
Other, net 216 34
--------- ---------
(604) (801)
--------- ---------
Income before income tax provision 643 225
Income tax provision 280 112
--------- ---------
Net income $ 363 $ 113
========= =========
Earnings per common share:
Primary earnings per share $0.12 $0.04
Fully diluted earnings per share $0.11 $0.04
Primary common shares outstanding 3,117,451 3,093,875
Fully diluted common shares outstanding 3,654,416 3,093,875
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,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 363 $ 113
Adjustments to reconcile net income
to net cash flows from operating activities:
Amortization of debt issuance costs 20 18
Depreciation and amortization 384 395
Stock option and warrant expense 77 1
Gain from sale of assets (217) --
Equity in net income of affiliated company (51) (34)
Increase in accounts receivable, net (7,069) (522)
Decrease in inventories 8,600 3,136
(Increase) decrease in other current assets (295) 64
Increase (decrease) in accounts payable 6,664 (1,268)
Increase in accrued expenses 52 726
Other, net (6) 11
-------- --------
Cash flows from operating activities 8,522 2,640
Cash flows from investing activities:
Proceeds from sale of assets 956 --
Purchases of property and equipment (180) (152)
-------- --------
Cash flows from investing activities 776 (152)
Cash flows from financing activities:
Borrowings under revolving line of credit 82,138 69,816
Repayments under revolving line of credit (91,990) (73,062)
Payments of long-term debt (2) --
Payments of capital lease obligations (10) (22)
Proceeds from exercise of stock options -- 30
-------- --------
Cash flows from financing activities (9,864) (3,238)
Decrease in cash (566) (750)
Cash, beginning of period 2,212 1,947
-------- --------
Cash, end of period $ 1,646 $ 1,197
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for
Interest $ 1,029 $ 782
Income taxes 31 10
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 20 states. The Company focuses primarily on a target
market sector, which includes independent retail, institutional,
mail-order, franchise, chain store and alternate site pharmacies in the
Midwest and South. The Company operates in one business segment. The
Company also owns a 50% equity interest in Pharmaceutical Buyers, Inc.
(PBI), a group purchasing organization with approximately 2,200 members
nationwide.
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, 1997 are not necessarily
indicative of the results to be expected for a full twelve month
fiscal year.
The financial results for the Company's wholly-owned subsidiary, Viking
Computer Services (Viking), for the three month period ended June 30,
1996, previously included in other, net in the condensed consolidated
statements of operations, have been reclassified to the appropriate
line items to be consistent with the current period presentation.
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 28, 1997
contained in the Company's 1997 Annual Report to Stockholders.
Note 2. In May 1997, under the provisions of its Long-Term Incentive Plan
and its 1993 Stock Option Plan, the Company granted non-qualified stock
options for an aggregate of 34,000 and 52,000 shares of common stock to
certain executives and key employees at an exercise price of $5.625 per
share. The exercise price of all options granted pursuant to the two
plans was equal to the fair market value of the stock on the date of
grant. Stock options granted under the Long-Term Incentive Plan are
generally not exercisable earlier than six months from the date of
grant, nor later than ten years from the date of grant. Stock options
granted under the 1993 Stock Option 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>
WEIGHTED AVERAGE
NUMBER OF ----------------
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
OUTSTANDING AT MARCH 28, 1997 206,699 $3.84
GRANTED MAY 1997 86,000 $5.625
-------
OUTSTANDING AT JUNE 30, 1997 292,699 $4.36
=======
</TABLE>
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 related income tax effect as if such notes had been
converted into common stock at the beginning of the period.
Note 4. In May 1997, the Company amended the terms of its revolving
line of credit such that advances bear interest at the daily London
Interbank Offer Rate (LIBOR) plus 1.7%. Prior to this amendment,
interest was charged at either LIBOR plus 2.5% on a specified portion
of the debt for one-, three- or six-month periods or at the prime rate
plus .75%. The Company now also has an option to pay interest on the
obligation at prime plus .5% per annum. At June 30, 1997 and March 28,
1997, the borrowing base formula amounted to $49,996,000 and
$50,712,000, respectively. At June 30, 1997 and March 28, 1997, the
unused portion of the line of credit amounted to $19,349,000 and
$10,212,000, respectively.
Note 5. In June 1997, the Company sold a former distribution facility in
Duluth, MN, with a carrying value of approximately $717,000, for cash
proceeds of approximately $934,000. The net gain on the transaction of
$217,000 was included in other, net in the condensed consolidated
statements of operations for the three-month period ended June
30, 1997.
Note 6. In June 1997, the Company extended its supply agreement with
its largest customer through September 15, 1997. This customer
represented 18.3% and 21.3%, respectively, of the Company's net sales
for the three-month periods ended June 30, 1997 and 1996. The Company
is uncertain as to the likelihood of the supply agreement being
extended beyond the current expiration date. In addition, the Company
has been advised that a third party has agreed to purchase
substantially all of the assets of such customer and, if such purchase
is completed, that such purchaser would secure a new supplier.
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The Company believes that all amounts payable by the customer, which
represented 35.4% of the Company's net accounts receivable balance at
June 30, 1997, will be fully collectible. However, the inability to
collect amounts due from this customer in the future could have a
material adverse effect on the Company's results of operations and
financial position.
Note 7. The Company accounts for its investment in PBI under the equity
method. The Company's equity in the net income of PBI totaled $51,000
and $34,000, respectively, for the three-month periods ended June 30,
1997 and 1996. Summarized balance sheet information (unaudited) for PBI
for the three-month period ended March 31, 1997 included current assets
of $2.7 million, noncurrent assets of $1.1 million, current liabilities
of $1.7 million and noncurrent liabilities of $7.1 million. Summarized
income statement information (unaudited) for PBI for the three-month
periods ended March 31, 1997 and 1996 included net revenues of $1.4
million and $1.2 million, respectively, and net income of $0.3 million
and $0.2 million, respectively.
Note 8. In June 1997, the exercise period of 70,000 vested stock purchase
warrants previously issued to an independent research firm was extended
to June 1998 as consideration for the issuance of an updated research
report. The remaining terms of the warrants were unchanged. The
Company recorded expenses of $77,000 and credited additional paid-in
capital to reflect the incremental fair market value of the warrants
for the change in exercise period.
Note 9. On June 30, 1997, the Company filed a Current Report on Form 8-K
announcing that it would change from a fiscal year ending the Friday
closest to March 31 in each year to a fiscal year ending June 30 of
each year. The Company has included the unaudited financial statements
for the transition period from March 29, 1997 to June 30, 1997 on this
Form 10-Q, and began its first full fiscal year on the new basis on
July 1, 1997.
Note 10. On August 11, 1997, the Company announced that it had signed a
letter of intent to acquire Associated Pharmacies, Inc. (API), a Little
Rock, Arkansas based wholesale pharmaceutical distributor which is
owned by approximately 35 independent retail pharmacies. The purchase
price of the transaction is approximately $1.7 million, consisting of
cash and subordinated promissory notes of the Company. In connection
with the transaction, the Company will enter into multi-year supply
agreements with each of the former shareholders of API. The closing of
the transaction is subject to execution of a definitive purchase
agreement and the completion of due diligence by the parties.
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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, 1997 and March 28, 1997, and in the
condensed consolidated statements of operations for the three-month
periods ended June 30, 1997 and June 30, 1996, 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 1997 Annual Report to Stockholders.
Results of Operations:
---------------------
Net Sales Net sales increased $38.1 million or 35.8% for the quarter.
---------
Mail-order sales increased $18.7 million due to the addition of a
mail-order service and prescription management customer in the second
quarter of the prior year, while chain drug sales, hospital sales and
independent pharmacy sales improved by $5.8 million, $3.0 million and
$10.4 million, respectively. The increase in chain sales was realized
primarily from increased sales to a large drug store chain and, to a
lesser extent, other drug store chain accounts. The hospital sales
increase was realized from new and existing hospital and clinic and
nursing home accounts. The independent pharmacy sales improvement was
realized from new and existing retail accounts, including $3.0 million
from an independent, retail purchasing association added as a customer
in the June quarter. First quarter franchise store sales increased by
$.2 million.
Gross Profit Gross profit increased 15.8% to $6.0 million for the
------------
quarter. As a percentage of net sales, gross margin decreased from
4.88% to 4.16% for the three-month period compared to the corresponding
period in 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 hospitals coupled with sales to
the new mail-order customer which yield lower gross margin
percentages but generate favorable working capital benefits. The
Company believes the trend towards reduced gross margin percentages
has been driven by continuing price competition in the wholesale drug
distribution industry.
Operating Expenses Operating expenses increased $0.6 million or 14.4%
------------------
to $4.8 million for the quarter. As a percentage of net sales,
operating expenses decreased from 3.92% to 3.30% for the current
three-month period as compared to the corresponding period of the prior
year. The increase in operating expenses for the three-month period
resulted primarily from the additional costs associated with the
increased sales activity at each division, higher employee benefits
costs and incremental stock purchase warrant expense.
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Interest Expense, Net Net interest expense decreased $15,000 or 1.9%
---------------------
for the quarter ended June 30, 1997. As a percentage of net sales, net
interest expense decreased from 0.78% to 0.57% for the three-month
period. The decrease in net interest expense was primarily the result
of average reduced borrowings compared to the corresponding period of
the prior fiscal year coupled with the amended terms of the Company's
senior debt agreement in May, 1997 which reduced the interest rate on
the line of credit to the LIBO rate plus 1.7%.
Other, Net Other income, net increased to $216,000 for the most recent
----------
three-month period ended June 30, 1997 compared to $34,000 for the
corresponding period in the prior fiscal year. The increase in other
income, net was primarily due to the $217,000 gain realized from the
sale of a former distribution facility in Duluth, Minnesota in June,
1997.
Effects of Inflation and LIFO Accounting The effects of price
----------------------------------------
inflation, measured by the excess of LIFO costs over FIFO costs, were
$60,000 and $122,000, respectively, for the three months ended June 30,
1997 and 1996. The decrease in the provision for LIFO in the recent
three-month period was due primarily to the lower rate of product price
inflation experienced in the Company's pharmaceutical inventories and
the reduction in inventory levels for the period.
Provision for Income Taxes The Company's effective income tax rate of
--------------------------
43.5%, which was applied to pretax income in the three month-period
ended June 30, 1997, is the rate expected to be applicable for the
short fiscal year ended that date. 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>
June 30, March 28,
1997 1997
---- ----
<S> <C> <C>
Working capital (000's) $15,803 $24,270
Current ratio 1.27 to 1 1.48 to 1
Working capital to assets .22 to 1 .24 to 1
Net debt to FIFO equity .54 to 1 .65 to 1
</TABLE>
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The decrease in working capital was due primarily to a net increase in
cash and accounts receivable of $6.5 million offset by an $8.6 million
decrease in inventories coupled with a $6.7 million increase in
accounts payable. The increase in accounts receivable was due to
higher net sales during the current quarter and the impact of a
temporary paydown of $5 million received from the Company's largest
customer in late March, 1997 pursuant to the Company's supply
agreement. The account receivable from such customer subsequently was
increased in April, 1997. The decrease in inventories was due to the
depletion of seasonal purchases of inventory made prior to the end of
fiscal year 1997. The increase in accounts payable reflects the
timing of cash disbursements.
The Company invested $180,000 in capital assets in the three-month
period ended June 30, 1997. Management information systems enhancements
accounted for $93,000 of this total. The Company believes that
continuing investment in capital assets is necessary to achieve its
goal of improving operational efficiency, thereby enhancing its
productivity and profitability.
At June 30, 1997, 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, 1997 and March 28, 1997, the unused portion of the line of
credit amounted to $19,349,000 and $10,212,000, 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 $77,000 has been credited to paid-in-capital during the
three-month period ended June 30, 1997 to reflect incremental expense
arising from the extension of the exercise period of previously issued
and fully vested stock purchase warrants. In addition, stockholders'
equity for the current period reflects the issuance of 11,500 shares of
Company common stock valued at approximately $50,000 contributed to the
Company's 401(K) plan as the employer's matching obligation for plan
year 1996.
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D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES
Part II. Other Information
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
See Note 9 in Item 1 of this Form 10-Q.
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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, 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
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> MAR-29-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,646
<SECURITIES> 0
<RECEIVABLES> 30,029
<ALLOWANCES> 697
<INVENTORY> 41,391
<CURRENT-ASSETS> 73,521
<PP&E> 10,613
<DEPRECIATION> 5,194
<TOTAL-ASSETS> 98,757
<CURRENT-LIABILITIES> 57,718
<BONDS> 0
<COMMON> 30
0
0
<OTHER-SE> 9,333
<TOTAL-LIABILITY-AND-EQUITY> 98,757
<SALES> 144,473
<TOTAL-REVENUES> 144,689
<CGS> 138,457
<TOTAL-COSTS> 143,226
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 820
<INCOME-PRETAX> 643
<INCOME-TAX> 280
<INCOME-CONTINUING> 363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 363
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
</TABLE>
