<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 September 30, 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 3,765,775
---------------------------- ------------------
(class) (October 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
September 30, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 1998 and
September 30, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1998 and
September 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 13
Part II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 14
</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 September 30, June 30,
------ 1998 1998
------------- ---------
(Unaudited)
<S> <C> <C>
Cash $ 2,255 $ 4,051
Receivables 19,417 50,496
Inventories 112,884 90,413
Other current assets 981 532
-------- --------
Total current assets 135,537 145,492
-------- --------
Net property and equipment 5,212 5,924
Investment in PBI 4,290 4,129
Deferred income taxes 2,842 2,842
Other assets 593 228
Intangible assets 13,563 11,735
-------- --------
Total assets $162,037 $170,350
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current maturities of long-term debt $ 1,217 $ 6,448
Accounts payable 109,525 80,659
Deferred income taxes 2,906 2,974
Accrued expenses 4,390 3,161
-------- --------
Total current liabilities 118,038 93,242
-------- --------
Revolving line of credit 26,039 60,185
Long-term debt, excluding current maturities 686 971
-------- --------
Total liabilities 144,763 154,398
-------- --------
Stockholders' equity:
Common stock 38 37
Paid-in capital 15,266 15,074
Retained Earnings 1,970 841
-------- --------
Total stockholders' equity 17,274 15,952
-------- --------
Total liabilities and stockholders' equity $162,037 $170,350
======== ========
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
Sept. 30, Sept. 30,
1998 1997
--------- ----------
<S> <C> <C>
Net sales $179,374 $149,024
Cost of sales 170,970 142,645
-------- ---------
Gross profit 8,404 6,379
Operating expenses 5,728 4,954
-------- ---------
Income from operations 2,676 1,425
Other income (expense):
Interest expense, net (1,003) (689)
Other, net 209 142
-------- ---------
(794) (547)
-------- ---------
Income before income tax provision 1,882 878
Income tax provision 753 369
-------- ---------
Net income $1,129 $509
======== =========
Earnings per common share:
Basic earnings per share $0.30 $0.17
Diluted earnings per share $0.29 $0.15
Basic common shares outstanding 3,747,704 3,060,478
Diluted common shares outstanding 3,922,820 3,665,768
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 5
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<TABLE>
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Three Months Ended
Sept. 30, Sept. 30,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,129 $509
Adjustments to reconcile net income
to net cash flows from operating activities:
Amortization of debt issuance costs 98 74
Depreciation and amortization 359 386
Gain from sale of assets (36) (3)
Equity in net income of PBI (161) (119)
Changes in operating assets and liabilities, net
of acquisitions:
Decrease in accounts receivable, net 31,229 6,819
Increase in inventories (22,472) (12,007)
Increase in other current assets (319) (81)
Increase in accounts payable 28,865 13,885
Increase in accrued expenses 1,098 476
Other, net (142) 1
------- -------
Cash flows from operating activities 39,648 9,940
Cash flows from investing activities:
Cash paid for acquired company (1,988) --
Proceeds from sale of fixed assets 746 3
Purchases of property and equipment (216) (223)
------- -------
Cash flows from investing activities (1,458) (220)
Cash flows from financing activities:
Borrowings under revolving line of credit 105,608 85,059
Repayments under revolving line of credit (139,754) (96,065)
Net borrowings (repayments) under revolving
accounts receivable credit facility (5,139) --
Principal payments on long-term debt (378) (3)
Proceeds from exercise of stock options 122 23
Debt issuance costs (445) --
-------- -------
Cash flows from financing activities (39,986) (10,986)
Increase (decrease) in cash (1,796) (1,266)
Cash, beginning of period 4,051 1,646
-------- -------
Cash, end of period $2,255 $380
======== =======
Supplemental Disclosure of Cash Flow Information:
Cash paid (refunded) during the period for
Interest $1,208 $613
Income taxes (12) 261
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 more than 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 condensed 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 September 30, 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 1998 Annual
Report to Stockholders.
Note 2. 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.
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
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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 September 30, 1998 Three Months Ended September 30, 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 $1,129,219 3,747,704 $0.30 $509,411 3,060,478 $0.17
Effect of Diluted Securities:
Options and warrants 175,116 74,312
Convertible subordinated notes -- -- 28,875 530,978
---------- --------- -------- ---------
Diluted Earnings Per Share:
Net income available to
Common shareholders plus
assumed conversions $1,129,219 3,922,820 $0.29 $538,286 3,665,768 $0.15
---------- --------- -------- ---------
<FN>
<F1>-Outstanding shares computed on a weighted
average basis
</TABLE>
Note 3. In August 1998, the Company, through a bankruptcy remote
subsidiary, D & K Receivables Corp. ("D&KRC"), entered into a
sales agreement that provides the Company with a three-year $45
million revolving accounts receivable securitization facility
(the "Securitization"). Under this facility and pursuant to a
purchase and contribution agreement between the Company and
D&KRC, the Company sells to D&KRC, on a non-recourse basis, all
rights and interests in its accounts receivable. Pursuant to the
receivables purchase agreement, D&KRC in turn sells certain
interests in the accounts receivable pool owned by D&KRC under
similar terms to a third party purchaser.
The maximum allowable amount of receivables eligible to be sold
is $45 million. The amount available at any settlement date
varies based upon the level of eligible receivables. Under this
agreement, $34.5 million of accounts receivable were sold as of
September 30, 1998. This sale is reflected as a reduction in
accounts receivable in the accompanying condensed consolidated
balance sheets and as operating cash flows in the accompanying
condensed
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consolidated statements of cash flows for the three-month period
ended September 30, 1998. Accordingly, the Company's trade
accounts receivable at September 30, 1998 are net of $34.5
million, which represent accounts receivable that were sold under
the Securitization.
The Securitization bears interest at the 30-day London Interbank
Offer Rate (LIBOR) plus program and liquidity fees of 0.71%. At
September 30, 1998 the unused portion of the Securitization
amounted to $10.5 million.
In addition, in August 1998, the Company amended the terms of its
revolving line of credit to provide a maximum borrowing capacity
of $75 million based upon eligible inventories and to extend its
maturity through August 2001. The advances bear interest at the
daily LIBOR plus 1.25%. The Company also has the option to pay
interest on the obligation at prime plus .5% per annum. At
September 30, 1998 and June 30, 1998, the unused portion of the
line of credit amounted to $41.9 million and $14.8 million,
respectively.
The Company also has an interest rate collar agreement, whereby
the LIBOR rate on $10.0 million of the outstanding revolving line
of credit balance shall not exceed 6.75% per annum. If the LIBOR
rate is less than 5.25% per annum, then the LIBOR rate on $7.5
million of the outstanding revolving line of credit balance shall
not be less than 5.25% per annum.
Note 4. The Company accounts for its 50% 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
its interest in PBI over the fair value of PBI's underlying net
assets at the date of the original investment. The Company's
equity in the net income of PBI totaled $161,000 and $119,000 for
the three-month periods ended September 30, 1998 and September
30, 1997, respectively ($230,000 and $188,000, respectively,
before goodwill amortization).
The remaining PBI shareholders have the option to convert their
ownership interests in PBI into shares of the Company's common
stock under the terms of the original purchase agreement. The
potential impact of any such conversion has been determined not
to be dilutive in all periods presented.
Note 5. During the three months ended September 30, 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 50,000 and 34,200 shares, respectively, of common
stock to certain executives and key employees at an exercise
price of $16.88 per share.
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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>
Number of Weighted Average
Shares Exercise Price
-------------------------------
<S> <C> <C>
Outstanding at June 30, 1998 441,998 $ 7.13
Granted 84,200 $16.88
Exercised (19,500) $ 6.50
-------
Outstanding at September 30, 1998 506,698 $ 8.77
=======
</TABLE>
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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 September 30, 1998 and June 30,
1998, and in the condensed consolidated statements of operations
for the three-month periods ended September 30, 1998 and
September 30, 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 1998 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 $30.4 million, or 20.4%, for the
---------
quarter ended September 30, 1998, compared to the corresponding
period of the prior year. Institutional sales increased $6.5
million primarily due to increased sales to a prescription
benefit management company. Independent pharmacy sales increased
by $15.7 million due to new and existing retail accounts,
including an $11.3 million increase from the prior year in sales
made to an independent retail purchasing association and $1.0
million from independent retail pharmacies formerly associated
with an acquired drug wholesaler. Chain store sales increased
$8.1 million due to higher sales to existing and new chain store
customers of approximately $34.5 million during the current
quarter partially offset by the termination of the Company's
relationship with a large regional chain customer on September
30, 1997 (an impact of approximately $26.4 million).
Excluding sales made to the former large regional chain customer
from the three-month period in the prior year, net sales
effectively increased 45.0% for the current quarter. In
addition, the quarter ended September 30, 1998 contained $34.6
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.
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Gross Profit Gross profit increased 31.7% to $8.4 million for
------------
the quarter ended September 30, 1998, compared to the
corresponding period of the prior year. As a percentage of net
sales, gross margin increased from 4.28% to 4.69% for the quarter
ended September 30, 1998, compared to the corresponding period 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 4.41% to 4.78% for the quarter ended
September 30, 1998, compared to the corresponding period of the
prior year.
Operating Expenses Operating expenses increased $0.8 million,
------------------
or 15.7%, to $5.7 million for the quarter ended September 30,
1998, compared to the corresponding period of the prior year. As
a percentage of net sales, operating expenses decreased from
3.32% to 3.19% for the quarter ended September 30, 1998, compared
to the corresponding period of the prior year. The increase in
operating expenses for the quarter ended September 30, 1998
resulted primarily from incremental warehouse and distribution
costs associated with increased sales activity, and higher
personnel and occupancy costs related to additional managerial
positions in several major functional areas of the Company.
Interest Expense, Net Net interest expense increased $314,000 or
---------------------
45.6% for the quarter ended September 30, 1998, compared to the
corresponding period of the prior year. As a percentage of net
sales, net interest expense increased from 0.46% of net sales to
0.56% of net sales for the quarter ended September 30, 1998,
compared to the corresponding period of the prior year. The
increase in net interest expense is primarily the result of an
increase in the average outstanding balance on the Company's
working capital credit facilities due to expanded business and
changes in the Company's inventory procurement strategies, offset
by the lower interest rates on these facilities.
Other Income, Net Other income, net increased from $140,000 to
-----------------
$208,000 for the quarter ended September 30, 1998, compared to
the corresponding period of the prior year. The increase in
other income, net was primarily due to higher recorded earnings
from the Company's equity interest in the net income of PBI
during the current quarter and the gain on a fixed asset
disposal.
Effects of Inflation and LIFO Accounting The effects of price
----------------------------------------
inflation, measured by the excess of LIFO costs over FIFO costs,
were $177,000 and $190,000, respectively, for the three months
ended September 30, 1998 and September 30, 1997.
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Provision for Income Taxes The Company's effective income tax
--------------------------
rate of 40.0% is the rate expected to be applicable for the full
fiscal year ending June 30, 1999. 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 the Securitization facility, and trade credit from
its suppliers. The following ratios are utilized by the Company
as key indicators of the Company's liquidity and working capital
management:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
---- ----
<S> <C> <C>
Working capital (000's) $17,500 $52,250
Current ratio 1.15 to 1 1.56 to 1
</TABLE>
Working capital and the current ratio have declined as a result
of the Securitization, since a portion of the Company's trade
accounts receivables are no longer included in the Company's
current assets. The reduction in trade accounts receivable as a
result of the Securitization at September 30, 1998 amounted to
$34.5 million. Adjusting for the Securitization, working capital
and the current ratio would have been $52.0 million and 1.44 to
1, respectively.
The Company invested $216,000 in capital assets in the three-
month period ended September 30, 1998, as compared to $223,000 in
the corresponding period in the prior year. 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 $39.6 million for
the three-month period ended September 30, 1998 as compared to
$9.9 million for the corresponding period in the prior year. The
current year increase is primarily due to the decrease in
accounts receivable of $34.5 million as a result of the sale of
receivables to a third party under the Securitization. At
September 30, 1998, the revolving line of credit provided a
maximum borrowing capacity of $75.0 million. At September 30,
1998 and June 30, 1998, the unused portion of the line of credit
amounted to $41.9 million and $14.8 million, respectively. In
addition, at September 30, 1998, the Securitization provided a
maximum borrowing capacity of $45.0 million. At September 30,
1998, the unused
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portion of the Securitization amounted to $10.5 million.
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 dependent upon its software programs and operating
systems for internal operations (e.g., inventory and warehouse
management) and for processing product orders with its customers
and suppliers. The Company has determined that it will not incur
any significant costs to make the Company's software programs and
operating systems Year 2000 compliant and is making inquiries
regarding the magnitude of any Year 2000 problems that may be
resident in the software programs and operating systems of its
customers and suppliers, or the impact that any such problems
could have on the sales made and services provided by the Company
to such customers or suppliers. The Company is in the process of
modifying and testing its affected software programs and
operating systems to make them Year 2000 compliant and is
developing a contingency plan to address the possibility of Year
2000-related failures. The Company expects these processes to be
completed by the end of fiscal 1999. The occurrence of Year
2000-related failures in the software programs and operating
systems of any of the Company's significant customers or
suppliers could have a material adverse effect on the Company's
business, results of operations, or financial condition.
<PAGE> 14
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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> 15
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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 HEALTHCARE RESOURCES, INC.
Date: November 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)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,255
<SECURITIES> 0
<RECEIVABLES> 20,117
<ALLOWANCES> 700
<INVENTORY> 112,884
<CURRENT-ASSETS> 135,537
<PP&E> 11,304
<DEPRECIATION> 6,092
<TOTAL-ASSETS> 162,037
<CURRENT-LIABILITIES> 118,038
<BONDS> 0
<COMMON> 38
0
0
<OTHER-SE> 17,236
<TOTAL-LIABILITY-AND-EQUITY> 162,037
<SALES> 179,374
<TOTAL-REVENUES> 179,583
<CGS> 170,970
<TOTAL-COSTS> 176,698
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,003
<INCOME-PRETAX> 1,882
<INCOME-TAX> 753
<INCOME-CONTINUING> 1,129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,129
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
</TABLE>
