<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, 1997
-----------------
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 HEALTHCARE RESOURCES, 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 3,603,195
---------------------------- ---------------------
(class) (January 31, 1998)
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D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
<TABLE>
Index
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1997 and June 30, 1997 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Part II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 16-17
</TABLE>
<PAGE> 3
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Part I. Financial Information
---------------------
Item 1. Financial Statements.
<TABLE>
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
Assets Dec. 31, June 30,
------ 1997 1997
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash $1,576 $1,646
Receivables 25,081 29,332
Inventories 77,915 41,391
Other current assets 1,793 1,152
------------- ------------
Total current assets 106,365 73,521
------------- ------------
Net property and equipment 6,061 5,419
Investment in 50% owned company 4,290 4,090
Deferred income taxes 769 889
Other assets 279 317
Intangible assets 14,779 14,521
------------- ------------
Total assets $132,543 $98,757
============= ============
Liabilities and Stockholders' Equity
------------------------------------
Current maturities of long-term debt $893 $3,127
Accounts payable 55,926 48,074
Deferred income taxes 3,678 3,842
Accrued expenses 3,094 2,675
------------- ------------
Total current liabilities 63,591 57,718
------------- ------------
Revolving line of credit 55,403 30,147
Long-term debt, excluding current maturities 1,156 1,529
------------- ------------
Total liabilities 120,150 89,394
------------- ------------
Stockholders' equity:
Common stock 36 30
Paid-in capital 13,622 11,819
Accumulated deficit (1,265) (2,486)
------------- ------------
Total stockholders' equity 12,393 9,363
------------- ------------
Total liabilities and stockholders' equity $132,543 $98,757
============= ============
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
<CAPTION>
Three Months Ended Six Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $138,570 $130,756 $287,594 $244,660
Cost of sales 131,754 125,351 274,399 234,276
------------ ------------ ------------ ------------
Gross profit 6,816 5,405 13,195 10,384
Operating expenses 4,892 4,390 9,902 8,581
------------ ------------ ------------ ------------
Income from operations 1,924 1,015 3,293 1,803
Other income (expense):
Interest expense, net (800) (804) (1,433) (1,575)
Other, net 104 175 246 268
------------ ------------ ------------ ------------
(696) (629) (1,187) (1,307)
------------ ------------ ------------ ------------
Income before income tax provision 1,228 386 2,106 496
Income tax provision 516 192 885 247
------------ ------------ ------------ ------------
Net income $712 $194 $1,221 $249
============ ============ ============ ============
Earnings per common share:
Basic earnings per share $0.23 $0.06 $0.40 $0.08
Diluted earnings per share $0.20 $0.06 $0.34 $0.08
Basic common shares outstanding 3,076,733 3,043,717 3,068,560 3,038,195
Diluted common shares outstanding 3,789,608 3,581,916 3,748,242 3,057,988
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Six Months Ended
Dec. 31, Dec. 31,
1997 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,221 $249
Adjustments to reconcile net income
to net cash flows from operating activities:
Amortization of debt issuance costs 36 35
Depreciation and amortization 780 736
Gain from sale of assets (6) (5)
Equity in net income of 50% owned company (200) (245)
(Increase) decrease in accounts receivable, net 4,497 (6,354)
Increase in inventories (35,556) (15,834)
Decrease in income tax receivable - 402
Increase in other current assets (652) (405)
Increase in accounts payable 7,616 9,654
Increase in accrued expenses 120 192
Other, net 96 (19)
------------ ------------
Cash flows from operating activities (22,048) (11,594)
Cash flows from investing activities:
Acquisition of subsidiary (755) -
Proceeds from sale of assets 6 -
Purchases of property and equipment (497) (1,653)
------------ -------------
Cash flows from investing activities (1,246) (1,653)
Cash flows from financing activities:
Borrowings under revolving line of credit 210,264 148,362
Repayments under revolving line of credit (185,008) (135,076)
Proceeds from equipment loan - 1,495
Principal payments on long-term debt (2,073) (1,178)
Proceeds from exercise of stock options 41 64
------------ -------------
Cash flows from financing activities 23,224 13,667
Increase (decrease) in cash (70) 420
Cash, beginning of period 1,646 1,197
------------ -------------
Cash, end of period $1,576 $1,617
============ =============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for
Interest $1,398 $1,958
Income taxes 876 202
See notes to condensed consolidated financial statements.
</TABLE>
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D & K HEALTHCARE RESOURCES, 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 and six-month periods ended December 31,
1997 are not necessarily indicative of the results to be
expected for the full fiscal year.
Certain reclassifications have been made to the prior period's
financial statements to conform to the current year 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. As discussed in the Company's Proxy Statement dated July 11, 1997,
the Company's Board of Directors unanimously approved a proposed
amendment to its articles of incorporation to change the
Company's corporate name from D & K Wholesale Drug, Inc. to "D &
K Healthcare Resources, Inc". On August 14, 1997 the Company's
stockholders approved the amendment. The amendment was effective
on August 22, 1997 after being approved by the Secretary of State
of the State of Delaware.
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Note 3. 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 began its first full fiscal
year on the new basis on July 1, 1997. The Company presented the
unaudited financial statements for the period of March 29, 1997
to June 30, 1997 on its Form 10-Q Transition Report dated August
13, 1997. Accordingly, the unaudited Condensed Consolidated
Balance Sheet at June 30, 1997 has been included on this Form
10-Q.
Note 4. During the first six months of fiscal 1998, 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 66,999 and 33,000 shares, respectively, of common stock to
certain executives and key employees at exercise prices ranging
from $6.625 to $8.125 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.
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> WEIGHTED AVERAGE
NUMBER OF ----------------
SHARES EXERCISE PRICE
--------------------------------------
<S> <C> <C>
OUTSTANDING AT JUNE 30, 1997 292,699 $4.36
GRANTED 99,999 $6.67
EXERCISED (11,500) $3.57
----------------
OUTSTANDING AT DECEMBER 31, 1997 381,198 $4.99
================
</TABLE>
Note 5. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128), which establishes standards for computing
and presenting earnings per share. SFAS 128 replaces the
presentation of primary earnings per share with a presentation of
basic earnings per share. It also requires dual presentation of
basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the
basic and diluted earnings per share computations. The Company
was required to adopt the provisions of SFAS 128 during the
quarter ended December 31, 1997 and all prior period earnings per
share data presented have been restated.
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Basic earnings per common share are computed by dividing net
income by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share
are computed using the component mentioned above for the basic
computation with the addition of: (1) the dilutive effect of
outstanding stock options and warrants (calculated using the
treasury stock method); and (2) common shares issuable upon
conversion of the Company's 11% convertible subordinated notes.
The 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. On December 29, 1997, the
holder of the 11% convertible subordinated notes converted their
remaining $1,750,000 of notes to 530,978 shares of the
Company's common stock. The conversion ratio was approximately
$3.30 per share.
The reconciliation of the numerator and denominator of the basic
and diluted earnings per common share computations is as follows:
<TABLE>
<CAPTION>
Three Months Ended Dec. 31, 1997 Three Months Ended Dec. 31, 1996
------------------------------------------- ---------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator)<F1> Amount (Numerator) (Denominator)<F1> Amount
----------- ----------------- --------- ----------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to
Common shareholders $ 712,181 3,076,733 $0.23 $ 193,594 3,043,717 $0.06
EFFECT OF DILUTED SECURITIES:
Options and warrants 193,440 7,221
Convertible subordinated debt 28,875 519,435 28,875 530,978
---------- --------- ---------- ---------
DILUTED EARNINGS PER SHARE:
Net Income available to
Common shareholders plus
assumed conversions $ 741,056 3,789,608 $0.20 $ 222,469 3,581,916 $0.06
---------- --------- ---------- ---------
<FN>
<F1> - Outstanding shares computed on a weighted average basis
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<CAPTION>
Six Months Ended Dec. 31, 1997 Six Months Ended Dec. 31, 1996
------------------------------------------- ---------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator)<F1> Amount (Numerator) (Denominator)<F1> Amount
----------- ----------------- --------- ----------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to
Common shareholders $1,221,492 3,068,560 $0.40 $ 248,772 3,038,195 $0.08
EFFECT OF DILUTED SECURITIES:
Options and warrants 154,178 19,793
Convertible subordinated debt 57,750 525,504 - <F2> - <F2>
---------- --------- ---------- ---------
DILUTED EARNINGS PER SHARE:
Net Income available to
Common shareholders plus
assumed conversions $1,279,242 3,748,242 $0.34 $ 248,772 3,057,988 $0.08
---------- --------- ---------- ---------
<FN>
<F1> - Outstanding shares computed on a weighted average basis
<F2> - Effect of convertible subordinated debt was antidilutive for the six
month period ended Dec. 31, 1996
</TABLE>
Note 6. In November 1997, the Company amended the terms of its revolving
line of credit to provide a maximum borrowing capacity of
$70,000,000 plus a supplemental facility of up to $5,000,000
during the months of November through June of each year. In
December 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 1.5%. The Company also
has the option to pay interest on the obligation at prime plus
.5% per annum. At December 31, 1997 and June 30, 1997, the
borrowing base formula amounted to $66,316,000 and $49,996,000,
respectively. At December 31, 1997 and June 30, 1997, the
unused portion of the line of credit amounted to $10,413,000 and
$19,349,000, respectively.
Note 7. On September 30, 1997, the Company was advised that a third party
had acquired substantially all of the assets of its then largest
customer and that the third party has secured a new supplier. On
September 30, 1997, the Company collected the entire amount of
its accounts receivable due from this customer, which amounted to
approximately $9.5 million. The funds were used to pay down the
Company's revolving line of credit. On October 1, 1997, the
Company filed a current report on Form 8-K relating to this
development.
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This customer had represented 16.8% of the Company's net sales for
the three-month period ended September 30, 1997 and 19.5% of the
Company's net sales for the six-month period ended December 31,
1996. Despite the revenues the Company had derived from such
customer, it had represented a below average profit contribution
to the Company as well as above average extended payment terms
compared to other large customers of the Company. Since the
successful termination of this relationship, the Company's
working capital needs and borrowings related to this customer
have been reduced significantly and interest expense related to
such borrowings has decreased accordingly. Growth in higher
margin sales to existing and new customers, including
approximately 20 independent retail pharmacies (formerly
shareholders of Associated Pharmacies, Inc. - see Note 9 below)
and a large grocery store pharmacy chain, have replaced a
substantial portion of the lost revenues. Also, a portion of
the improvement in the Company's gross margin percentage during
the three-month period ended December 31, 1997 is attributable to
this shift in sales mix. Accordingly, the Company does not
believe that the loss of such customer has had or will have a
material adverse effect on its consolidated results of operations
or financial condition.
Note 8. The Company accounts for its investment in PBI under the equity
method. The Company's equity in the net income of PBI totaled
$81,000 and $161,000 for the three-month periods ended December
31, 1997 and 1996, respectively. The Company's equity in the net
income of PBI totaled $200,000 and $245,000 for the six-month
periods ended December 31, 1997 and 1996, respectively.
Summarized balance sheet information (unaudited) for PBI at
December 31, 1997 included current assets of $3.0 million,
noncurrent assets of $0.9 million, current liabilities of $1.1
million and noncurrent liabilities of $7.0 million. Summarized
income statement information (unaudited) for PBI for the
six-month periods ended December 31, 1997 and 1996 included net
revenues of $3.0 million and $3.0 million, respectively, and net
income of $0.7 million and $0.8 million, respectively.
Note 9. On October 14, 1997, the Company completed the acquisition of 100%
of the capital stock of Associated Pharmacies, Inc. (API), a
Little Rock, Arkansas based wholesale pharmaceutical distributor
which was owned by approximately 38 shareholders, including
approximately 20 independent retail pharmacies. In connection
with the acquisition, the Company entered into multi-year supply
agreements with the majority of the former shareholders of API.
The purchase price of the transaction was $1.1 million,
consisting of cash of $0.8 million and subordinated promissory
notes of $0.3 million issued by the Company.
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D & K HEALTHCARE RESOURCES, 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, 1997 and June 30,
1997, and in the condensed consolidated statements of operations
for the three-month and six-month periods ended December 31,
1997 and 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.
Statements contained in this Report that state the Company's or
management's intentions, expectations, beliefs or predictions
about future events, including expected Year 2000 compliance
costs, tax rates and capital resources, are forward-looking
statements and are inherently subject to risks and
uncertainties. The Company's actual results could differ
materially from those contained in such forward-looking
statements due to a number of factors, including without
limitation, higher than anticipated software modification costs,
changes in the level of Company borrowings, changes in tax laws,
the nature of the wholesale pharmaceutical drug distribution
industry, the evolving business and regulatory environment of
the healthcare industry and changes in the Company's business
and capital needs.
Results of Operations:
---------------------
Net Sales Net sales increased $7.8 million, or 6.0%, for the
---------
quarter ended December 31, 1997, compared to the corresponding
period of the prior year. Mail-order sales increased $4.4
million due to increased sales volume of a mail-order service and
prescription management customer, while hospital sales and
independent pharmacy sales improved by $5.6 million and $15.3
million, respectively. The hospital sales increase was realized
from new and existing hospital, clinic and nursing home accounts.
The independent pharmacy sales improvement was realized from new
and existing retail accounts, including $14.1 million from an
independent, retail purchasing association added as a customer in
May 1997 and $2.4 million from the independent retail pharmacies
formerly associated with API. Partially offsetting these sales
increases was a decrease in chain store sales of $17.7 million,
primarily due to the termination of the Company's relationship
with a large regional chain customer on September 30, 1997 (an
impact of approximately $24.9 million) offset by increased sales
to other existing and new chain store customers of approximately
$7.2 million. Excluding sales made to the former large regional
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chain customer from the three-month period in the prior year, net
sales effectively increased 30.9% for the current quarter. In
addition, the quarter ended December 31, 1997 contained $10.5
million in "dock-to-dock" sales, which are not included in net
sales due to the Company's accounting policy of recording only
the commission on such transactions as a component of cost of
sales in its consolidated statement of operations.
Net sales increased $42.9 million, or 17.6%, for the six-month
period ended December 31, 1997, compared to the corresponding
period of the prior year. Mail-order sales increased $13.2
million due to increased sales volume of a mail-order service and
prescription management customer added in August 1996, while
hospital sales and independent pharmacy sales improved by $10.5
million and $30.1 million, respectively. The hospital sales
increase was realized from new and existing hospital, clinic and
nursing home accounts. The independent pharmacy sales improvement
was realized from new and existing retail accounts, including
$24.0 million from an independent, retail purchasing association
added as a customer in May 1997 and $2.4 million from the
independent retail pharmacies formerly associated with API.
Partially offsetting these sales increases was a decrease in
chain store sales of $11.3 million, primarily due to the
termination of the Company's relationship with a large regional
chain customer on September 30, 1997 (an impact of approximately
$22.4 million) offset by increased sales to other existing and
new chain store customers of approximately $11.1 million.
Excluding sales made to the former large regional chain customer
from the six-month period in the prior year, net sales
effectively increased 33.2% for the six months ended December 31,
1997. In addition, the current six-month period contained $14.0
million in "dock-to-dock" sales, which are not included in net
sales due to the Company's accounting policy of recording only
the commission on such transactions as a component of cost of
sales in its consolidated statement of operations.
Gross Profit Gross profit increased 26.1% to $6.8 million for the
------------
quarter and increased 27.1% to $13.2 million for the six-month
period ended December 31, 1997, compared to the corresponding
periods of the prior year. As a percentage of net sales, gross
margin increased from 4.13% to 4.92% for the quarter and
increased from 4.24% to 4.59% for the six-month period ended
December 31, 1997, compared to the corresponding periods of the
prior year. The increase in gross margin percentage was due
mainly to a shift in customer mix to higher margin business,
higher penetration of profitable generic pharmaceutical sales,
and benefits from changes in the Company's procurement
strategies. The gross margin computed on a first-in, first-out
(FIFO) basis increased from 4.33% to 5.04% for the quarter and
increased
<PAGE> 13
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from 4.36% to 4.71% for the six-month period ended December 31,
1997, compared to the corresponding periods of the prior year,
which reflects the favorable impact of changes in the Company's
sales mix toward higher margin products, such as generic
pharmaceuticals, and the expansion of investment buying
opportunities.
Operating Expenses Operating expenses increased $0.5 million, or
------------------
11.5%, to $4.9 million for the quarter and increased $1.3
million, or 15.4%, to $9.9 million for the six-month period ended
December 31, 1997, compared to the corresponding periods of the
prior year. As a percentage of net sales, operating expenses
increased from 3.36% to 3.53% for the quarter and decreased from
3.51% to 3.44% for the six-month period ended December 31, 1997,
compared to the corresponding periods of the prior year. The
increase in operating expenses for the quarter and for the
six-month period ended December 31, 1997 resulted primarily from
incremental warehouse and distribution costs associated with
increased sales activity, higher personnel and occupancy costs
related to additional managerial positions in several major
functional areas of the Company, and legal fees associated with
the conclusion of the Company's relationship with its previously
largest customer.
Interest Expense, Net Net interest expense decreased $4,000 or
---------------------
0.5% for the quarter and decreased $142,000 or 9.0% for the
six-month period ended December 31, 1997, compared to the
corresponding period of the prior year. As a percentage of net
sales, net interest expense decreased from 0.61% to 0.58% for the
quarter and decreased from 0.64% and to 0.50% for the six-month
period ended December 31, 1997, compared to the corresponding
period of the prior year. The decrease in net interest expense
for the six-month period ended December 31, 1997 is primarily the
result of the recent amendments in the terms of the Company's
senior debt agreement which reduced the interest rate on its line
of credit from LIBOR plus 2.5% down to its present level of LIBOR
plus 1.5%. Also, the receipt of the approximate $9.5 million
accounts receivable balance from the Company's former largest
customer at September 30, 1997 contributed to the reduction of
interest expense. During the current quarter, decreases in
interest expense as a result of the above were largely offset by
an increase in the average outstanding balance on the Company's
revolving line of credit due to expanded business and changes in
the Company's inventory procurement strategies.
Other Income, Net Other income, net decreased from $175,000 to
-----------------
$104,000 for the quarter and decreased from $268,000 to $246,000
for the six-month period ended December 31, 1997, compared to the
corresponding periods of the prior year. The decrease in other
income, net was primarily due to slightly lower recorded earnings
from the Company's equity interest in the net income of PBI
during the current quarter.
<PAGE> 14
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Effects of Inflation and LIFO Accounting The effects of price
----------------------------------------
inflation, measured by the excess of LIFO costs over FIFO costs,
were $170,000 and $261,000, respectively, for the three months
ended December 31, 1997 and 1996, and $360,000 and $276,000,
respectively, for the six-month periods ended December 31, 1997
and 1996. The decrease in the provision for LIFO in the recent
three-month period was due primarily to benefits from the changes
in the Company's inventory procurement strategies. These include
the expansion of investment buying opportunities and relatively
higher levels of generic pharmaceutical inventories which
experienced price deflation in the period. The increase in the
provision for LIFO for the six-month period was due primarily to
the increase in sales levels for the period as compared to the
corresponding period in the prior year.
Provision for Income Taxes The Company's effective income tax
--------------------------
rate of 42.0%, which was applied to pretax income in the period
ended December 31, 1997, is the rate expected to be applicable
for the full fiscal year ending June 30, 1998. 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, June 30,
1997 1997
---- ----
<S> <C> <C>
Working capital (000's) $42,774 $15,803
Current ratio 1.67 to 1 1.27 to 1
Working capital to assets .32 to 1 .16 to 1
Net debt to FIFO equity .32 to 1 .54 to 1
</TABLE>
The $27.0 million increase in working capital was due primarily to
an increase in inventories of $36.5 million, a decrease in the
current portion of long-term debt of $2.2 million, offset by a
reduction in accounts receivable of $4.3 million and an increase
in accounts payable of $7.9 million. The increase in inventories
was due to the increased level of business and the expansion of
inventory procurement opportunities during the current fiscal
period. The decrease in the current portion of long-term debt is
due mainly to the payoff of
<PAGE> 15
Page 15 of 17
$1,083,000 of the Company's 11% subordinated debt and the
conversion to common stock of $1,750,000 of the Company's 11%
convertible subordinated debt on December 29, 1997. The decrease
in accounts receivable was primarily due to the collection of the
$9.5 million accounts receivable due from the Company's
previously largest customer at September 30, 1997 offset by an
increase in net sales. The increase in accounts payable reflects
the timing of cash disbursements and higher inventory levels.
The Company invested $497,000 in capital assets in the six-month
period ended December 31, 1997 as compared to $1,653,000 in the
corresponding period in the prior year. Investment in capital
assets in the prior year primarily related to equipment and
leasehold improvements for the Company's then new Cape Girardeau,
Missouri distribution facility. 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.
Cash flows from financing activities totaled $23.2 million in the
six-month period ended December 31, 1997 as compared to $13.7
million in the corresponding period in the prior year. The
current year increase is primarily due to increased borrowings
as a result of an increase in inventory levels of $35.6 million,
offset by the September 30, 1997 receipt, and subsequent paydown
on the line of credit, of the $9.5 million outstanding accounts
receivable balance from a former customer as noted above. At
December 31, 1997, the revolving line of credit provided a
maximum borrowing capacity of $70,000,000 plus a supplemental
facility of up to $5,000,000 during the months of November
through June of each year. At December 31, 1997 and June 30,
1997, the unused portion of the line of credit amounted to
$10,413,000 and $19,349,000, respectively. Management believes
that, together with internally generated funds, the Company's
available capital resources will be sufficient to meet its
foreseeable capital requirements.
The Company is currently in the process of evaluating several
information system improvement initiatives. These initiatives
include the conversion of certain Company computer systems to be
Year 2000 compliant. The Company does not believe that these
Year 2000 costs will have a significant impact on its
consolidated results of operations or financial condition.
<PAGE> 16
Page 16 of 17
D & K HEALTHCARE RESOURCES, 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
Current Report on Form 8-K relating to a development
regarding a major customer, dated October 1, 1997.
<PAGE> 17
Page 17 of 17
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 HEALTHCARE RESOURCES, INC.
Date: February 12, 1998 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)
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,576
<SECURITIES> 0
<RECEIVABLES> 25,910
<ALLOWANCES> 829
<INVENTORY> 77,915
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0
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