<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 March 31, 1998
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 3,610,395
---------------------------- ----------------
(class) (April 30, 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
March 31, 1998 and June 30, 1997 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended March 31, 1998 and
March 28, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and March 28, 1997 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 March 31, June 30,
------ 1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash $ 893 $ 1,646
Receivables 36,729 29,332
Inventories 76,722 41,391
Other current assets 2,349 1,152
-------- -------
Total current assets 116,693 73,521
-------- -------
Net property and equipment 6,041 5,419
Investment in affiliated company 4,021 4,090
Deferred income taxes 4,071 889
Other assets 223 317
Intangible assets 11,812 14,521
-------- -------
Total assets $142,861 $98,757
======== =======
Liabilities and Stockholders' Equity
------------------------------------
Current maturities of long-term debt $ 2,794 $ 3,127
Accounts payable 65,211 48,074
Deferred income taxes 2,749 3,842
Accrued expenses 3,749 2,675
-------- -------
Total current liabilities 74,503 57,718
-------- -------
Revolving line of credit 52,840 30,147
Long-term debt, excluding current maturities 1,994 1,529
-------- -------
Total liabilities 129,337 89,394
-------- -------
Stockholders' equity:
Common stock 36 30
Paid-in capital 13,691 11,819
Accumulated deficit (203) (2,486)
-------- -------
Total stockholders' equity 13,524 9,363
-------- -------
Total liabilities and stockholders' equity $142,861 $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 Nine Months Ended
March 31, March 28, March 31, March 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 155,314 $ 128,454 $ 442,908 $ 373,114
Cost of sales 147,240 122,394 421,639 356,670
---------- ---------- ---------- ----------
Gross profit 8,074 6,060 21,269 16,444
Operating expenses 5,442 4,664 15,344 13,245
---------- ---------- ---------- ----------
Income from operations 2,632 1,396 5,925 3,199
Other income (expense):
Interest expense, net (975) (987) (2,408) (2,562)
Other, net 113 150 359 418
---------- ---------- ---------- ----------
(862) (837) (2,049) (2,144)
---------- ---------- ---------- ----------
Income before income tax provision 1,770 559 3,876 1,055
Income tax provision 708 181 1,593 428
---------- ---------- ---------- ----------
Net income $ 1,062 $ 378 $ 2,283 $ 627
========== ========== ========== ==========
Earnings per common share:
Basic earnings per share $ 0.29 $ 0.12 $ 0.70 $ 0.21
Diluted earnings per share $ 0.27 $ 0.11 $ 0.62 $ 0.20
Basic common shares outstanding 3,603,448 3,044,717 3,244,501 3,039,195
Diluted common shares outstanding 3,873,494 3,617,942 3,789,946 3,597,451
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>
Nine Months Ended
March 31, 1998 March 28, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,283 $ 627
Adjustments to reconcile net income
to net cash flows from operating activities:
Amortization of debt issuance costs 45 55
Depreciation and amortization 1,163 1,135
Gain from sale of assets (17) (5)
Equity in net income of affiliated company (281) (376)
Changes in operating assets and liabilities, net
of acquisitions:
(Increase) decrease in accounts receivable, net (2,848) 3,736
Increase in inventories (34,152) (13,628)
Decrease in income tax receivable - 1,431
Increase in other current assets (1,183) (10)
Increase in accounts payable 16,042 5,987
Increase in accrued expenses 685 391
Other, net 126 2
--------- ---------
Cash flows from operating activities (18,137) (655)
Cash flows from investing activities
Cash paid for acquired companies (1,255) -
Cash dividend from affiliated company 350 300
Proceeds from sale of assets 17 6
Purchases of property and equipment (726) (2,045)
--------- ---------
Cash flows from investing activities (1,614) (1,739)
Cash flows from financing activities:
Borrowings under revolving line of credit 306,694 236,654
Repayments under revolving line of credit (284,002) (233,409)
Proceeds from equipment loan - 1,495
Principal payments on long-term debt (3,777) (1,394)
Proceeds from exercise of stock options 83 64
--------- ---------
Cash flows from financing activities 18,998 3,410
Increase (decrease) in cash (753) 1,016
Cash, beginning of period 1,646 1,197
--------- ---------
Cash, end of period $ 893 $ 2,213
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid (refunded) during the period for
Interest $ 2,465 $ 2,907
Income taxes 1,045 (1,099)
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 nine-month periods ended March 31, 1998 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 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 nine 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 76,999 and 61,000 shares, respectively, of common stock to
certain executives and key employees at exercise prices ranging
from $6.625 to $13.875 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>
<CAPTION> WEIGHTED AVERAGE
NUMBER OF --------------------
SHARES EXERCISE PRICE
-----------------------------------
<S> <C> <C>
OUTSTANDING AT JUNE 30, 1997 295,199 $4.36
GRANTED 137,999 $8.22
EXERCISED (20,700) $4.01
-----------
OUTSTANDING AT MARCH 31, 1998 412,498 $5.66
===========
</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 all convertible subordinated notes. The diluted
computation adds back to income interest on all 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 11%
convertible subordinated notes converted their remaining
$1,750,000 of notes into 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 March 31, 1998 Three Months Ended March 28, 1997
---------------------------------------- ------------------------------------------
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 $1,062,071 3,603,448 $0.29 $378,114 3,044,717 $0.12
EFFECT OF DILUTED SECURITIES:
Options and warrants 260,068 42,247
Convertible subordinated notes 1,750 9,978 28,875 530,978
---------- --------- -------- ---------
DILUTED EARNINGS PER SHARE:
Net income available to
Common shareholders plus
assumed conversions $1,063,821 3,873,494 $0.27 $406,989 3,617,942 $0.11
---------- --------- -------- ---------
<FN>
<F1> - Outstanding shares computed on a weighted average basis
</TABLE>
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<TABLE>
<CAPTION>
Nine Months Ended March 31, 1998 Nine Months Ended March 28, 1997
---------------------------------------- ----------------------------------------
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 $2,283,498 3,244,501 $0.70 $627,114 3,039,195 $0.21
EFFECT OF DILUTED SECURITIES:
Options and warrants 189,475 27,278
Convertible subordinated notes 59,500 355,970 86,625 530,978
---------- --------- -------- ---------
DILUTED EARNINGS PER SHARE:
Net income available to
Common shareholders plus
Assumed conversions $2,342,998 3,789,946 $0.62 $713,739 3,597,451 $0.20
---------- --------- -------- ---------
<FN>
<F1> - Outstanding shares computed on a weighted average basis
</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 March 31, 1998 and June 30, 1997, the
borrowing base formula amounted to $75,000,000 and $49,996,000,
respectively. At March 31, 1998 and June 30, 1997, the unused
portion of the line of credit amounted to $22,161,000 and
$19,349,000, respectively.
On April 24, 1998, the Company received an additional 0.25%
reduction in the interest rate as a result of improved financial
performance. Effective on April 24, 1998, advances on the
Company's revolving line of credit will bear interest at the
daily LIBOR plus 1.25%.
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 19.1% of
the Company's net sales for the nine-month period ended March 28,
1997. 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 in all trade classes
have replaced all of the lost revenues. Also, a portion of the
improvement in the Company's gross margin percentage during the
periods subsequent to September 30, 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. Equity income is recorded net, after reduction of
goodwill amortization based on the excess of the amount paid for
PBI over the fair value of its underlying net assets at the date
of the original investment. The Company's equity in the net
income of PBI totaled $81,000 and $131,000 for the three-month
periods ended March 31, 1998 and March 28, 1997, respectively
($150,000 and $200,000, respectively, before goodwill
amortization). The Company's equity in the net income of PBI
totaled $281,000 and $376,000 for the nine-month periods ended
March 31, 1998 and March 28, 1997, respectively ($488,000 and
$583,000, respectively, before goodwill amortization).
Summarized balance sheet information (unaudited) for PBI at March
31, 1998 included current assets of $2.4 million, noncurrent
assets of $0.8 million, current liabilities of $1.4 million and
noncurrent liabilities of $6.3 million. Summarized income
statement information (unaudited) for PBI for the nine-month
periods ended March 31, 1998 and 1997 included net revenues of
$4.4 million and $4.4 million, respectively, and net income of
$1.0 million and $1.1 million, respectively.
The remaining PBI shareholders have the option to convert their
ownership interests in PBI into shares of the Company's common
stock. The potential impact of any such conversion has been
determined to be anti-dilutive in all periods presented.
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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 March 31, 1998 and June 30,
1997, and in the condensed consolidated statements of operations
for the three-month and nine-month periods ended March 31, 1998
and March 28, 1997, 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 $26.9 million, or 20.9%, for the
---------
quarter ended March 31, 1998, compared to the corresponding
period of the prior year. Mail-order sales increased $2.8
million due to increased sales volume of a mail-order service and
prescription management customer, while hospital sales and
independent pharmacy sales improved by $3.9 million and $21.4
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 $14.7 million from an
independent retail purchasing association added as a customer in
May 1997 and $2.5 million from independent retail pharmacies
formerly associated with an acquired drug wholesaler. Partially
offsetting these sales increases was a net decrease in chain
store sales of $1.5 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 $23.5 million)
offset by increased sales to other existing and new chain store
customers of approximately $22.0 million during the current
quarter.
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Excluding sales made to the former large regional chain customer
from the three-month period in the prior year, net sales
effectively increased 47.9% for the current quarter. In
addition, the quarter ended March 31, 1998 contained $11.1
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 $69.8 million, or 18.7%, for the nine-month
period ended March 31, 1998, compared to the corresponding period
of the prior year. Mail-order sales increased $16.1 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 $14.4
million and $51.5 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
$38.6 million from an independent retail purchasing association
added as a customer in May 1997 and $4.9 million from independent
retail pharmacies formerly associated with an acquired drug
wholesaler. Partially offsetting these sales increases was a net
decrease in chain store sales of $12.8 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 $45.9 million) offset by increased sales to other
existing and new chain store customers of approximately $33.1
million. Excluding sales made to the former large regional chain
customer from the nine-month period in the prior year, net sales
effectively increased 38.3% for the nine months ended March 31,
1998. In addition, the current nine-month period contained $25.2
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 33.2% to $8.1 million for
------------
the quarter and increased 29.3% to $21.3 million for the nine-
month period ended March 31, 1998, compared to the corresponding
periods of the prior year. As a percentage of net sales, gross
margin increased from 4.72% to 5.20% for the quarter and
increased from 4.41% to 4.80% for the nine-month period ended
March 31, 1998, 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 5.32% to 5.56% for the quarter and
increased
<PAGE> 13
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from 4.69% to 5.01% for the nine-month period ended March 31,
1998, 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 $0.8 million,
------------------
or 16.7%, to $5.4 million for the quarter and increased $2.1
million, or 15.8%, to $15.3 million for the nine-month period
ended March 31, 1998, compared to the corresponding periods of
the prior year. As a percentage of net sales, operating expenses
decreased from 3.63% to 3.50% for the quarter and decreased from
3.55% to 3.46% for the nine-month period ended March 31, 1998,
compared to the corresponding periods of the prior year. The
increase in operating expenses for the quarter and for the nine-
month period ended March 31, 1998 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 $12,000 or
---------------------
1.2% for the quarter and decreased $154,000 or 6.0% for the nine-
month period ended March 31, 1998, compared to the corresponding
period of the prior year. As a percentage of net sales, net
interest expense decreased from 0.77% to 0.63% for the quarter
and decreased from 0.69% and to 0.54% for the nine-month period
ended March 31, 1998, compared to the corresponding period of the
prior year. The decrease in net interest expense for the nine-
month period ended March 31, 1998 is primarily the result of
previous 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 LIBOR plus 1.5%. Also, the
receipt of the approximate $9.5 million accounts receivable
balance from the Company's formerly largest customer at September
30, 1997 has reduced working capital requirements, which
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.
Also, as noted in the Notes to the Condensed Consolidated
Financial Statements, on April 24, 1998 the Company received an
additional 0.25% reduction in the interest rate charged on its
senior revolving credit facility.
<PAGE> 14
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Other Income, Net Other income, net decreased from $150,000 to
-----------------
$113,000 for the quarter and decreased from $418,000 to $359,000
for the nine-month period ended March 31, 1998, 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 and nine-month periods ended March 31,
1998.
Effects of Inflation and LIFO Accounting The effects of price
----------------------------------------
inflation, measured by the excess of LIFO costs over FIFO costs,
were $549,000 and $772,000, respectively, for the three months
ended March 31, 1998 and March 28, 1997, and $909,000 and
$1,048,000, respectively, for the nine-month periods ended March
31, 1998 and March 28, 1997. The decrease in the provision for
LIFO is 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 partially offsetting inflation in
overall inventories.
Provision for Income Taxes The Company's effective income tax
--------------------------
rate of 41.0%, which was applied to pretax income in the nine-
month period ended March 31, 1998, 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>
March 31, June 30,
1998 1997
---- ----
<S> <C> <C>
Working capital (000's) $42,190 $15,803
Current ratio 1.57 to 1 1.27 to 1
Working capital to assets .30 to 1 .16 to 1
Net debt to FIFO equity .22 to 1 .54 to 1
</TABLE>
<PAGE> 15
Page 15 of 17
The $26.4 million increase in working capital was due primarily
to an increase in inventories of $35.3 million and an increase in
accounts receivable of $7.4 million, offset by an increase in
accounts payable of $17.1 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 increase in accounts receivable was primarily due to
an increase in net sales, offset by the collection of the $9.5
million accounts receivable due from the Company's previously
largest customer at September 30, 1997. The increase in accounts
payable reflects the timing of cash disbursements and higher
inventory levels.
The Company invested $726,000 in capital assets in the nine-month
period ended March 31, 1998 as compared to $2,045,000 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 $19.0 million in the
nine-month period ended March 31, 1998 as compared to $3.4
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 $34.2 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
March 31, 1998, 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 March 31, 1998 and June 30, 1997, the unused
portion of the line of credit amounted to $22,161,000 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
None
<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: May 13, 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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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 893
<SECURITIES> 0
<RECEIVABLES> 37,529
<ALLOWANCES> 800
<INVENTORY> 76,722
<CURRENT-ASSETS> 116,693
<PP&E> 11,856
<DEPRECIATION> 5,815
<TOTAL-ASSETS> 142,861
<CURRENT-LIABILITIES> 74,503
<BONDS> 0
<COMMON> 36
0
0
<OTHER-SE> 13,488
<TOTAL-LIABILITY-AND-EQUITY> 142,861
<SALES> 442,908
<TOTAL-REVENUES> 443,267
<CGS> 421,639
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