<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended March 28, 1997 Commission File Number 0-20348
D & K HEALTHCARE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1464583
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8000 Maryland Avenue, Suite 920, St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 727-3485
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Common Stock, par value $.01
Section 12(g) of the Act: (Title of Class)
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. Yes X . No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: approximately $11,833,668 as of June 25,
1997.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of June 25,
1997, 3,056,217 shares of Common Stock, par value $.01, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
the Part of this report indicated below:
Part III - Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders
<PAGE> 2
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
- ------- -----------------------------------------------------------------
D & K Wholesale Drug, Inc.
- --------------------------
(a)(1) Financial statements: The following consolidated
financial statements are submitted in response to Item 14(a)(1):
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
D & K Wholesale Drug, Inc
Report of Independent Public Accountants 14
Consolidated Balance Sheets at March 28, 1997
and March 29, 1996 15
Consolidated Statements of Operations for the years ended
March 28, 1997, March 29, 1996 and March 31, 1995 16
Consolidated Statements of Stockholders' Equity for the years ended
March 28, 1997, March 29, 1996 and March 31, 1995 17
Consolidated Statements of Cash Flows for the years ended
March 28, 1997, March 29, 1996 and March 31, 1995 18
Notes to Consolidated Financial Statements 19
</TABLE>
(2) The following financial statement schedule and auditors'
report thereon are included in Part IV of this report:
- 31 -
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants on
Schedule 33
Schedule II--Valuation and Qualifying Accounts 34
</TABLE>
The Financial Statements of Pharmaceutical Buyers, Inc.
for the years ended December 31, 1997 and 1996 included as Exhibit 99 to this
Annual Report on Form 10-K/A are incorporated herein by this reference.
Schedules other than those listed above have been omitted because
they are either not required or not applicable, or because the information is
presented in the consolidated financial statements or the notes thereto.
(3) Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K.
None.
(c) See Item 14(a)(3) above.<F*>
(d) See Item 14(a)(2) above.<F*>
[FN]
- -------
<F*>Previously filed with Form 10-K for the year ended March 28, 1997.
- 32 -
<PAGE> 4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By /s/ J. Hord Armstrong, III
-------------------------------------------------
J. Hord Armstrong, III, Chairman of the Board,
Chief Executive Officer and Treasurer
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <S> <C>
/s/ J. Hord Armstrong, III Chairman, Chief Executive Officer, March 30, 1998
- -------------------------------- Treasurer and Director
J. Hord Armstrong, III (Principal Financial Officer)
/s/ Martin D. Wilson President, Chief Operating Officer, March 30, 1998
- -------------------------------- Secretary and Director
Martin D. Wilson
/s/ Daniel E. Kreher Vice President, Finance & Administration March 30, 1998
- -------------------------------- (Principal Accounting Officer)
Daniel E. Kreher
/s/ Bryan H. Lawrence Director March 30, 1998
- --------------------------------
Bryan H. Lawrence
/s/ Elliot H. Stein Director March 30, 1998
- --------------------------------
Elliot H. Stein
/s/ Robert E. Korenblat Director March 30, 1998
- --------------------------------
Robert E. Korenblat
/s/ Thomas F. Patton Director March 30, 1998
- --------------------------------
Thomas F. Patton
</TABLE>
- 33 -
<PAGE> 5
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
<C> <S>
2.1 Asset Purchase Agreement, by and between registrant and Malone & Hyde,
Inc., filed as Exhibit 2.4 to registrant's Annual Report on Form
10-K for the year ended April 1, 1994 is incorporated herein by this
reference.
2.2 Stock Purchase Agreement, dated October 25, 1994, by and among
registrant, Northern Drug Company, G. Jay Coughlin, Amy Goldfine, Dan
W. Goldfine, Erwin L. Goldfine, John J. Goldfine, Manley M. Goldfine,
Steven B. Goldfine, Gene W. Halverson and William D. Watters, filed
as Exhibit 2 to registrant's Current Report on Form 8-K dated October
25, 1994 is incorporated herein by this reference.
2.3 Agreement and Plan of Merger, dated February 13, 1995, by and among
Krelitz Industries, Inc., Barry M. Krelitz, Annetta J. Krelitz,
Annetta J. Krelitz Trustee under certain trusts FBO Lori M. Krelitz,
Michael J. Krelitz and Steven A. Krelitz, The Estate of Philip J.
Krelitz, Andrew C. Krelitz, Bennett A. Krelitz, Ellen B. Krelitz,
Pearl G. Krelitz, Okabena Partnership K, DKWD Acquisition Corp. and
registrant, filed as Exhibit 2 to registrant's Current Report on Form
8-K dated March 2, 1995 is incorporated herein by this reference.
2.4 Stock Purchase and Redemption Agreement, dated as of November 30, 1995,
by and among Pharmaceutical Buyers, Inc., J. David McCay, The J.
David McCay Living Trust, Robert E. Korenblat and the registrant is
filed herewith.<F*>
3.1 Restated Certificate of Incorporation, filed as Exhibit 3.2 to
registrant's Registration Statement on Form S-1 (Reg. No. 33-48730)
is incorporated herein by this reference.
3.2 By-laws of the registrant, as currently in effect, filed as Exhibit 3.3
to registrant's Registration Statement on Form S-1 (Reg. No.
33-48730) is incorporated herein by this reference.
4.1 Form of certificate for Common Stock, filed as Exhibit 4.1 to
registrant's Registration Statement on Form S-1 (Reg. No. 33-48730)
is incorporated herein by this reference.
- 36 -
<PAGE> 6
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<C> <S>
10.1 Note Agreement, dated December 29, 1987, regarding $3,250,000.00 11%
Joint and Several Subordinated Notes due December 29, 1997, and
$1,750,000.00 11% Joint and Several Convertible Subordinated Notes
due December 29, 1997, by and among registrant, Delta Wholesale Drug,
Inc., W. Kelly Company, Wholesale Management Services, Inc. and
Massachusetts Mutual Life Insurance Company, and amendments thereto,
filed as Exhibit 10.3 to the registrant's Registration Statement on
Form S-1 (Reg. No. 33-48730) is incorporated herein by this
reference.
10.2 Note Agreement, dated December 29, 1987, regarding $3,250,000.00 11%
Joint and Several Subordinated Notes due December 29, 1997, and
$1,750,000.00 11% Joint and Several Convertible subordinated Notes
due December 29, 1997, by and among registrant, Delta Wholesale Drug,
Inc., W. Kelly Company, Wholesale Management Services, Inc. and
MassMutual Corporate Investors, and amendments thereto, filed as
Exhibit 10.4 to the registrant's Registration Statement on Form S-1
(Reg. No. 33-48730) is incorporated herein by this reference.
10.3 Preferred Stock Purchase Agreement, dated December 29, 1987, by and
among registrant, Gateway Venture Partners III, L.P., J. Hord
Armstrong, III and W. VanMeter Alford, Jr., filed as Exhibit 10.5 to
the registrant's Registration Statement on Form S-1 (Reg. No.
33-48730) is incorporated herein by this reference.
10.4 Preferred Stock Purchase Agreement, dated December 29, 1987, by and
among registrant, Elliott H. Stein, Robert A. Geddes, Bryan H.
Lawrence, W.G. Heckman, Robert R. Hermann, Inmann Brandon, J. Hord
Armstrong, III and W. VanMeter Alford, Jr., filed as Exhibit 10.4 to
the registrant's Registration Statement on Form S-1 (Reg. No.
33-48730) is incorporated herein by this reference.
10.5 D & K Wholesale Drug, Inc. Amended and Restated 1992 Long Term
Incentive Plan, filed as Annex A to the registrant's 1995 Proxy
Statement is incorporated herein by this reference.
10.6 Wholesale Distribution Agreement, by and between registrant and GLAXO
INC., filed as Exhibit 10.14 to the registrant's
- 37 -
<PAGE> 7
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<C> <S>
Registration Statement on Form S-1 (Reg. No. 3348730) is incorporated
herein by this reference.
10.7 Wholesale Distribution Agreement, dated January 1, 1995, by and between
registrant and SmithKline Beecham Pharmaceuticals, filed as Exhibit
10.7 to registrant's Annual Report on Form 10-K for the year ended
March 29, 1996 is incorporated herein by this reference.
10.8 Wholesale Prime Vendor Agreement, dated September 27, 1993, by and
between registrant and Pfizer Inc., filed as Exhibit 10.16 to the
registrant's Annual Report on Form 10-K for the year ended April 1,
1994 is incorporated herein by this reference.
10.9 Warehousing and Distribution Service Agreement, dated July 1, 1994, by
and between registrant and Eli Lilly and Company, filed as Exhibit
10.17 to the registrant's Annual Report on Form 10-K for the year
ended April 1, 1994 is incorporated herein by this reference.
10.10 Amendment to Note Agreements, filed as Exhibit 10.21 to the
registrant's Registration Statement on Form S-1 (Reg. No. 33-48730)
is incorporated herein by this reference.
10.11 Letter Agreement, dated March 31, 1992, between registrant, Delta,
Kelly, WMSI, Massachusetts Mutual Life Insurance Company and
MassMutual Corporate Investors, filed as Exhibit 10.26 to
registrant's Annual Report on Form 10-K for the year ended April 2,
1993 is incorporated herein by this reference.
10.12 Letter Agreement dated May 24, 1994, between registrant, Massachusetts
Mutual Life Insurance Company and MassMutual Corporate Investors,
filed as Exhibit 10.30 to the registrant's Annual Report on Form 10-K
for the year ended April 1, 1994 is incorporated herein by this
reference.
10.13 Letter Agreement dated February 14, 1995, between registrant,
Massachusetts Mutual Life Insurance Company and MassMutual Corporate
Investors, filed as Exhibit 10.15 to the registrant's Annual Report
on Form 10-K for the year ended March 31, 1995 is incorporated herein
by this reference.
- 38 -
<PAGE> 8
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<C> <S>
10.14 Letter Agreement dated January 18, 1995, between registrant,
Massachusetts Mutual Life Insurance Company and MassMutual Corporate
Investors, filed as Exhibit 10.16 to the registrant's Annual Report
on Form 10-K for the year ended March 31, 1995 is incorporated herein
by this reference.
10.15 Letter Agreement dated June 10, 1994, between registrant, Massachusetts
Mutual Life Insurance Company and MassMutual Corporate Investors,
filed as Exhibit 10.17 to the registrant's Annual Report on Form 10-K
for the year ended March 31, 1995 is incorporated herein by this
reference.
10.16 Letter Agreement dated October 10, 1994 between registrant,
Massachusetts Mutual Life Insurance Company and MassMutual Corporate
Investors, filed as Exhibit 10.18 to the registrant's Annual Report
on Form 10-K for the year ended March 31, 1995 is incorporated
herein by this reference.
10.17 Supply Agreement dated April 18, 1995 by and between registrant and M &
H Drugs, Inc., filed as Exhibit 10.19 to the registrant's Annual
Report on Form 10-K for the year ended March 31, 1995 is incorporated
herein by this reference.
10.18 Letter Agreement, dated August 31, 1993, by and between registrant and
W. VanMeter Alford, Jr. filed as Exhibit 10.28 to the registrant's
Annual Report on Form 10-K for the year ended April 1, 1994 is
incorporated herein by this reference.
10.19 Third Amended and Restated Loan and Security Agreement, dated as of
March 3, 1995, by and among registrant, Northern Drug Company,
Krelitz Industries, Inc. and Shawmut Capital Corporation, filed as
Exhibit 10.21 to the registrant's Annual Report on Form 10-K for the
year ended March 31, 1995 is incorporated herein by this reference.
10.20 First Amendment to Third Amended and Restated Loan and Security
Agreement, dated as of June 9, 1995, by and among registrant,
Northern Drug Company, Krelitz Industries, Inc. and Shawmut Capital
Corporation, filed as Exhibit 10.22 to the registrant's Annual Report
on Form 10-K for the year ended March 31, 1995 is incorporated herein
by this
- 39 -
<PAGE> 9
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<C> <S>
reference.
10.21 Release of All Claims, dated as of June 6, 1995, by and between
registrant and George P. Bray, filed as Exhibit 10.23 to the
registrant's Annual Report on Form 10-K for the year ended March 31,
1995 is incorporated herein by this reference.
10.22 Second Amendment to Third Amended and Restated Loan and Security
Agreement and Consent, dated as of November 29, 1995 by and among
Shawmut Capital Corporation, the registrant, Northern Drug Company
and Krelitz Industries, Inc., filed as Exhibit 10.22 to the
registrant's Annual Report on Form 10-K for the year ended March 29,
1996 is incorporated herein by this reference.
10.23 Third Amendment to Third Amended and Restated Loan and Security
Agreement, Amendment to Pledge Agreement and Waiver, dated as of July
1996, by and among Fleet Capital Corporation, the registrant and
Krelitz Industries, Inc., filed as Exhibit 10.23 to the registrant's
Annual Report on Form 10-K for the year ended March 29, 1996 is
incorporated herein by this reference.
10.24 Amendment to and Restatement of Employment Agreement, dated as of
January 2, 1996, by and between the registrant and Steven B.
Goldfine, filed as Exhibit 10.24 to the registrant's Annual Report
on Form 10-K for the year ended March 29, 1996 is incorporated
herein by this reference.
10.25 D & K Wholesale Drug, Inc. 401(k) Profit Sharing Plan and Trust, dated
January 1, 1995, filed as Exhibit 10.25 to the registrant's Annual
Report on Form 10-K for the year ended March 29, 1996 is incorporated
herein by this reference.
10.26 Amended and Restated Lease Agreement, dated as of January 16, 1996, by
and between Morhaert Development, L.L.C. and the registrant's, filed
as Exhibit 10.26 to the registrant's Annual Report on Form 10-K for
the year ended March 29, 1996 is incorporated herein by this
reference.
10.27 First Amendment to Amended and Restated Lease Agreement, dated as of
June 6, 1996, by and between Morhaert Development, L.L.C. and the
registrant's, filed as Exhibit 10.27 to the registrant's Annual
Report on Form 10-K for the
- 40 -
<PAGE> 10
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<C> <S>
year ended March 29, 1996 is incorporated herein by this reference.
10.28 Fourth Amendment to Third Amended and Restated Loan and Security
Agreement, dated as of May 1997, by an among Fleet Capital
Corporation, the registrant and Krelitz Industries, Inc. is filed
herewith.<F*>
10.29 Pharmaceutical Services Agreement between Anthem Prescription
Management, Inc. and D&K Wholesale Drug, Inc. dated July 16, 1996,
filed as Exhibit 10.1 to the registrant's Quarterly Report of Form
10-Q for the quarterly period ended June 30, 1996 is incorporated
herein by this reference.
10.30 Loan Agreement dated as of December 23, 1996, by and among registrant,
Krelitz Industries, Inc. and Magna Bank, N.A. is filed herewith.<F*>
13 Registrant's 1997 Annual Report to Stockholders is filed herewith.<F*>
21 Subsidiaries of the registrant, filed as Exhibit 21 to the registrant's
Annual Report on Form 10-K for the year ended March 29, 1996 is
incorporated herein by this reference.
23 Consent of Arthur Andersen LLP is filed herewith.<F*>
99 Pharmaceutical Buyers, Inc. Financial Statements as of December 31,
1997 and 1996 together with Report of Independent Public Accountants
are filed herewith.
<FN>
- -------
<F*>Previously filed with Form 10-K for the year ended March 28, 1997.
</TABLE>
- 41 -
<PAGE> 1
PHARMACEUTICAL BUYERS, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Pharmaceutical Buyers, Inc.:
We have audited the accompanying balance sheets of PHARMACEUTICAL BUYERS,
INC. (an Arkansas corporation) as of December 31, 1997 and 1996, and the
related statements of operations, stockholders' deficit and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pharmaceutical Buyers, Inc.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 6, 1998.
<PAGE> 3
PHARMACEUTICAL BUYERS, INC.
---------------------------
<TABLE>
BALANCE SHEETS
--------------
DECEMBER 31, 1997 AND 1996
--------------------------
<CAPTION>
ASSETS 1997 1996
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 1,190,409 $ 2,077,511
Available-for-sale investments (Note 2) 506,085 485,922
Receivables (Note 2) 1,290,784 1,257,239
Other current assets 33,313 54,816
------------ ------------
Total current assets 3,020,591 3,875,488
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $206,724 and $154,194, respectively 155,213 159,172
DEFERRED INCOME TAXES (Note 5) 107,721 43,863
OTHER ASSETS, net (Note 2) 719,017 982,568
------------ ------------
Total assets $ 4,002,542 $ 5,061,091
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 20,163 $ 48,897
Accrued expenses 243,547 207,878
Deferred revenue (Note 2) 293,338 245,909
Income taxes payable 31,977 666,957
Current deferred income taxes (Note 5) 293,559 283,380
Current portion of other long-term payables (Note 4) 185,290 204,736
------------ ------------
Total current liabilities 1,067,874 1,657,757
NOTES PAYABLE AND OTHER LONG-TERM PAYABLES (Note 4) 6,985,320 8,160,649
------------ ------------
Total liabilities 8,053,194 9,818,406
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' DEFICIT (Note 3) :
Class A common stock, $.01 par value, 500 shares authorized,
66 shares issued and outstanding 1 1
Class B common stock, $.01 par value, 500 shares authorized,
84 shares issued and outstanding 1 1
Additional paid-in capital 5,766,681 5,766,681
Retained earnings 2,782,665 2,076,002
Treasury stock (12,600,000) (12,600,000)
------------ ------------
Total stockholders' deficit (4,050,652) (4,757,315)
------------ ------------
Total liabilities and stockholders' deficit $ 4,002,542 $ 5,061,091
============ ============
The accompanying notes to financial statements
are an integral part of this balance sheet.
</TABLE>
<PAGE> 4
PHARMACEUTICAL BUYERS, INC.
---------------------------
<TABLE>
STATEMENTS OF OPERATIONS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
REVENUE:
Administrative fees $4,893,479 $4,815,708
Membership fees 745,462 686,542
---------- ----------
Total revenue 5,638,941 5,502,250
---------- ----------
EXPENSES:
Operating 1,436,791 1,270,420
Selling, general and administrative 1,115,404 1,159,538
Depreciation and amortization 289,136 289,497
---------- ----------
Total expenses 2,841,331 2,719,455
---------- ----------
Income from operations 2,797,610 2,782,795
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (787,318) (899,352)
Other income, net 105,285 145,379
---------- ----------
Total other expense, net (682,033) (753,973)
---------- ----------
INCOME BEFORE INCOME TAX PROVISION 2,115,577 2,028,822
INCOME TAX PROVISION (Note 5) (808,914) (810,881)
---------- ----------
NET INCOME $1,306,663 $1,217,941
========== ==========
The accompanying notes to financial statements
are an integral part of this statement.
</TABLE>
<PAGE> 5
PHARMACEUTICAL BUYERS, INC.
---------------------------
<TABLE>
STATEMENTS OF STOCKHOLDERS' DEFICIT
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<CAPTION>
Common Stock Additional
-------------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
December 31, 1995 150 $2 $5,766,681 $ 858,061 $(12,600,000) $(5,975,256)
Net income - - - 1,217,941 - 1,217,941
--- -- ---------- ---------- ------------ -----------
BALANCES,
December 31, 1996 150 2 5,766,681 2,076,002 (12,600,000) (4,757,315)
Net income - - - 1,306,663 - 1,306,663
Dividends paid - - - (600,000) - (600,000)
--- -- ---------- ---------- ------------ -----------
BALANCES,
December 31, 1997 150 $2 $5,766,681 $2,782,665 $(12,600,000) $(4,050,652)
=== == ========== ========== ============ ===========
The accompanying notes to financial statements
are an integral part of this statement.
</TABLE>
<PAGE> 6
PHARMACEUTICAL BUYERS, INC.
---------------------------
<TABLE>
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,306,663 $1,217,941
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 289,136 289,497
Gain on sales of investments, net - (11,446)
Deferred income tax benefit (53,679) (55,187)
Other (20,163) -
Changes in assets and liabilities-
Increase in receivables (33,545) (154,919)
Decrease (increase) in other assets 51,207 (44,790)
Decrease in accounts payable (28,734) (3,688)
Increase (decrease) in accrued expenses 35,669 (46,216)
Increase in deferred revenue 47,429 112,259
(Decrease) increase in income taxes payable (634,980) 602,317
----------- ----------
Net cash provided by operating activities 959,003 1,905,768
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (51,330) (60,823)
Proceeds from sales of investments - 69,249
Purchase of investments - (543,455)
----------- ----------
Net cash used in investing activities (51,330) (535,029)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (600,000) -
Payments on notes payable and other long-term payables (1,194,775) (168,850)
----------- ----------
Net cash used in financing activities (1,794,775) (168,850)
----------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (887,102) 1,201,889
CASH AND CASH EQUIVALENTS, at beginning of year 2,077,511 875,622
----------- ----------
CASH AND CASH EQUIVALENTS, at end of year $ 1,190,409 $2,077,511
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 798,550 $ 897,164
=========== ==========
Cash paid for income taxes $ 1,497,573 $ 129,200
=========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
In 1996, the Company contributed to Vista Purchasing Partners, L.L.C.
the balance of its accounts receivable from Vista of $40,379 as its
initial contribution to the joint venture (Note 6).
The accompanying notes to financial statements
are an integral part of this statement.
</TABLE>
<PAGE> 7
PHARMACEUTICAL BUYERS, INC.
---------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
AS OF DECEMBER 31, 1997 AND 1996
--------------------------------
(1) ORGANIZATION
------------
Pharmaceutical Buyers, Inc. ("PBI" or the "Company"), is a group purchasing
organization. PBI aggregates buying power for its members in order to
negotiate favorable contracts with pharmaceutical and medical supply
manufacturers and distributors. PBI's members include long-term care
providers, home infusion providers, home medical equipment dealers, medical
distributors and other healthcare providers. The Company's revenue is
derived from membership fees paid by members and administrative fees paid by
manufacturers and distributors.
In November 1995, in connection with the Stock Purchase and Redemption
Agreement (Note 3), the Company restated and amended its Articles of
Incorporation to authorize 500 shares of $.01 par value Class A voting common
stock and 500 shares of $.01 par value Class B non-voting common stock. On
November 30, 1995, as discussed in Note 3, the Company was recapitalized (the
"Recapitalization") by way of the issuance of debt and equity, and the
repurchase of common stock for the Company's treasury.
(2) SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Basis of Accounting
-------------------
The accompanying financial statements have been prepared using the accrual
method of accounting. Investment in joint venture is accounted for using the
equity method (Note 6).
<PAGE> 8
- 2 -
Cash and Cash Equivalents and Available-For-Sale Investments
------------------------------------------------------------
Cash and cash equivalents include cash and investments with original
maturities of three months or less and which are not subject to significant
risk from changes in interest rates. Available-for-sale investments include
those investments expected to be held between three and twelve months. At
December 31, 1997 and 1996, all investments were classified as
available-for-sale and, therefore, were accounted for at fair market value.
The carrying value of all investments approximated fair market value.
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation and amortization are
charged to operations using primarily accelerated depreciation methods over
the estimated useful lives of the various classes of assets, which vary from
5 to 39 years.
Non-Compete Agreements
----------------------
Non-compete agreements have been recorded by the Company as a result of the
Recapitalization discussed in Note 3. Such intangible assets are being
amortized over a four-year period from the date of the Recapitalization
(November 30, 1995). At December 31, 1997 and 1996, non-compete agreements
of $783,965 are recorded, net of accumulated amortization of $391,983 and
$195,991, respectively. The noncompete agreements are included in other
assets in the accompanying balance sheets.
Debt Issuance Costs
-------------------
Costs associated with the debt transactions discussed in Note 4 are being
amortized over the term of the related debt, which approximates the effective
interest method of amortization. At December 31, 1997 and 1996, deferred
debt issuance costs of $388,584 is recorded, net of accumulated amortization
of $77,712 and $42,094, respectively, and is included in other assets in the
accompanying balance sheets.
<PAGE> 9
- 3 -
Income Taxes
------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective basis for income tax
purposes. The Company files their income tax returns under the cash basis.
Deferred tax assets and liabilities are measured and recorded using enacted
tax rates in effect for the year in which those temporary difference are
expected to be recorded or settled.
Receivables and Deferred Revenue
--------------------------------
The Company derives its revenue primarily from two sources. The Company
charges annual membership dues to its members. Membership dues are billed in
advance throughout the year depending on the member's anniversary date. The
Company also receives contract administrative fees from medical supply and
pharmaceutical manufacturers and distributors. These fees are usually paid
monthly or quarterly, in arrears, depending on the supplier. The amounts
paid to the Company by manufacturers and distributors are based on the volume
of purchases by the Company's members.
At December 31, 1997 and 1996, the Company had recorded approximately
$1,279,000 and $1,257,000, respectively, of administrative fees receivable.
This amount is based on Company estimates of the volume of purchases by its
members based on information provided by manufacturers and distributors.
Management believes that all administrative fees receivable are fully
collectible. Additionally, as of December 31, 1997 and 1996, approximately
$293,000 and $246,000, respectively, of membership dues have been received in
advance, and are recorded in the accompanying balance sheets as deferred
revenue, to be recognized ratably over their one year membership period.
<PAGE> 10
- 4 -
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Asset Impairment
----------------
The Company reviews its assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For assets which are held and used in operations, the asset
would be impaired if the undiscounted future cash flows related to the asset
did not exceed the net book value.
(3) RECAPITALIZATION
----------------
On November 30, 1995, the Company completed the Recapitalization. As a
result of this Recapitalization, the Company: (1) sold shares of its Class A
common stock and Class B common stock for $6,000,000, (2) repurchased shares
of its Class A common stock for $12,600,000, and (3) borrowed $6,450,000
through Senior Secured Notes and $1,300,000 through Senior Secured
Convertible Notes from Massachusetts Mutual Life Insurance Company and
affiliates ("Mass Mutual"), due in November 2005 (Note 4).
Also as part of the Agreement, the Company entered into non-compete
agreements with the two original stockholders to be paid over a period ending
October 1999 (Note 4).
<PAGE> 11
- 5 -
(4) NOTES PAYABLE AND OTHER LONG-TERM PAYABLES
------------------------------------------
Notes payable and other long-term payables at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Senior Secured Notes, payable to a stockholder (Mass Mutual);
collateralized by substantially all assets of the Company;
interest payable semi-annually at 10.5%; annual principal
payments commencing November 30, 1999, of $921,429 until
paid in full by November 2005; available for prepayment
subject to a maximum annual and aggregate prepayment
amount, as defined. $5,450,000 $6,450,000
Senior Secured Convertible Notes, payable to a stockholder
(Mass Mutual); collateralized by substantially all assets of
the Company; interest payable semi-annually at 10.5%; due
November 30, 2005; available for prepayment subject to a
maximum annual and aggregate prepayment amount, as defined;
convertible into 26 Class A common shares at
$50,000 per share. 1,300,000 1,300,000
Non-compete agreements payable; noninterest bearing
installments (discounted using 10.5% rate); due in
semi-annual installments through 1999. 420,610 615,385
---------- ----------
7,170,610 8,365,385
Less: Current portion (185,290) (204,736)
---------- ----------
$6,985,320 $8,160,649
========== ==========
</TABLE>
<PAGE> 12
- 6 -
Principal repayments of notes payable and other long-term payables at
December 31, 1997, are summarized as follows:
1998 $ 185,290
1999 1,156,749
2000 921,429
2001 921,429
2002 921,429
Thereafter 3,064,284
----------
$7,170,610
==========
(5) INCOME TAXES
------------
The income tax provision consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current:
Federal $735,661 $776,183
State 126,932 89,885
-------- --------
862,593 866,068
-------- --------
Deferred:
Federal (50,824) (52,428)
State (2,855) (2,759)
-------- --------
(53,679) (55,187)
-------- --------
Income tax provision $808,914 $810,881
======== ========
</TABLE>
The significant components of the Company's net deferred liability at
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current deferred tax assets (liabilities):
Administrative fees receivable $(477,155) $(468,950)
Accounts payable 7,521 18,239
Accruals 85,993 77,538
Deferred revenue 109,415 91,724
Other (19,333) (1,931)
--------- ---------
Net current deferred tax liabilities $(293,559) $(283,380)
========= =========
Long-term deferred tax assets:
Amortization of non-compete agreements $ 107,721 $ 43,863
========= =========
</TABLE>
<PAGE> 13
- 7 -
The following table reconciles the federal statutory income tax rate to
the Company's effective income tax rate:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Provision for income taxes at federal statutory rate 34.0% 34.0%
Nondeductible expenses 0.7 1.5
Nontaxable investment income (0.5) (2.2)
State income taxes, net of federal benefit 3.6 3.3
Other 0.4 3.4
---- ----
Effective income tax rate 38.2% 40.0%
==== ====
</TABLE>
(6) RELATED PARTY TRANSACTIONS
--------------------------
The Company leases certain office space from a stockholder. The Company's
management believes that the transaction is arms length and reflects market
rates for similar space. Payments made for this lease were $90,231 and
$89,635 for the years ended December 31, 1997 and 1996, respectively. The
lease is noncancellable and expires May 31, 2000.
During 1996, the Company paid fees of $35,008 to DASCO, an entity related by
common ownership, for administrative activities. Also, prior to April 1996,
the Company had a $50,000 certificate of deposit with a bank. This
certificate of deposit served as security for a loan made by the bank to
DASCO. In April 1996, DASCO defaulted on the loan and the certificate of
deposit was used by the bank to pay down the loan. Both amounts have been
reflected as selling, general and administrative expenses in the accompanying
1996 statement of operations. DASCO ceased operations during 1997.
In May 1995, PBI and an entity owned by certain of the Company's officers
(the "Officers") entered into a joint venture agreement and formed Vista
Purchasing Partners, L.L.C. ("Vista"). Vista is owned 50% by PBI and 50% by
this other entity. Vista was formed to pursue related aggregate purchasing
opportunities with hospital-affiliated alternative sites. Vista had
insignificant activity during 1995 and 1997. In 1996, Vista reimbursed PBI
for contract labor costs of $62,000. PBI accounts for its investment in
Vista under the equity method. The Company has recognized $32,378 as its
share of Vista's net losses through December 31, 1997. Subsequent to
yearend, Vista's management decided to cease operations in 1998.
Effective June 1, 1995, the Company entered into an agreement to purchase the
operations of Parental Alimentation Providers Association ("PAPA"). In
accordance with the agreement, PAPA was entitled to all membership dues of
existing PAPA members until June 1, 1996. At June 1, 1996, the Company
<PAGE> 14
- 8 -
exercised its option to purchase the operations of PAPA for no additional
consideration. The operations of PAPA were merged with those of the Company
from that date. During 1996, the Company reimbursed approximately $41,000 to
PAPA for certain costs incurred prior to June 1, 1996, which are classified
as selling, general and administrative expenses in the accompanying 1996
statement of operations.
During November 1995, in connection with the Recapitalization discussed in
Note 3, the Company entered into a consulting agreement with one of the
Officers for two years with annual payments of $150,000. This agreement
expired on November 30, 1997.
(7) EMPLOYEE BENEFIT PLANS
----------------------
Deferred Contribution Plan
--------------------------
In August 1996, the Company adopted a 401(k) plan for its employees,
effective January 1, 1996. Under this plan, employees, who are at least 21
years old and have completed one year of service, as defined, are eligible to
participate in the plan. The Company may contribute a discretionary matching
contribution equal to a percentage of each employee's contribution plus an
additional discretionary amount as determined by the Company. The Company
matched 100% of the employees' contributions totaling approximately $45,000
and $24,000 during 1997 and 1996, respectively. No additional discretionary
payments were made.
<PAGE> 15
- 9 -
Defined Benefit Plan
--------------------
In August 1996, the Company terminated its defined benefit pension plan, and
in June 1997, all of the plan's obligations were settled. Prior to its
termination, the terms of the plan stated that in order to be eligible for
benefits under the plan, the employee must be 21 years of age or older, have
completed 20 months of service, and recorded 1,000 hours of service during
each year. The plan was subject to the provisions of the Employee Retirement
Income Security Act of 1974. The Company made contributions to the plan in
accordance with actuarial projections, subject to the requirements of the
Internal Revenue Code, as amended.
In accordance with Statement of Financial Accounting Standards No. 88,
"Employer's Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," the plan's termination triggered
a curtailment gain of approximately $46,000, which is included in other
income, net in the accompanying 1996 statement of operations. The plan's
settlement triggered a settlement loss of approximately $18,000, which is
included in other income, net in the accompanying 1997 statement of
operations.
<PAGE> 16
- 10 -
The following table reconciles the funded status of the plan with the amount
reflected in the Company's December 31, 1997 and 1996 balance sheets:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated benefit obligation $ - $(453,233)
========= =========
Projected benefit obligation $ - $(453,233)
Fair value of plan assets - 507,021
--------- ---------
Funded status - 53,788
Unrecognized liability - 102,673
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions - (141,549)
--------- ---------
Prepaid pension asset $ - $ 14,912
========= =========
</TABLE>
Net pension (income) cost in 1997 and 1996 is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Service cost $ - $ 36,796
Interest cost 16,996 32,534
Return on assets (16,111) (56,846)
Other (3,596) 24,817
-------- --------
$ (2,711) $ 37,301
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5%. The expected long-term
rate of return on assets was 7.5%.
(8) SIGNIFICANT CUSTOMERS
---------------------
PBI's significant customers which individually comprised more than 10% of
total administrative fees for the years ended December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Customer A 26% 24%
Customer B 6% 11%
</TABLE>
<PAGE> 17
- 11 -
(9) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company leases office space and other equipment through noncancellable
operating leases. Certain of the leases are with related parties (Note 6).
Rental expense under operating leases was approximately $115,000 and $106,000
for the years ended December 31, 1997 and 1996, respectively.
Minimum rental payments under these leases with initial or remaining terms of
one year or more at December 31, 1997 are as follows:
1998 $ 94,080
1999 89,288
2000 33,210
--------
$216,578
========
The Company is currently a defendant in a lawsuit which arose in the normal
course of business, whereby the Company, a pharmaceutical manufacturer and
other group purchasing organizations have been accused of damaging certain
retail pharmacies by not allowing them memberships in buying organizations
such as the Company, which would allow them to receive reduced prices on
pharmaceuticals. Management believes that the outcome of this matter will
have no material impact on the financial position of the Company or its
results of operations.
(10) SUBSEQUENT EVENT
----------------
On February 11, 1998, the Company's board of directors authorized and
declared a $700,000 cash dividend to the shareholders of record on that date.
The dividend was paid on February 25, 1998. The Company's board of directors
also authorized a $612,500 prepayment on its Senior Secured Notes Payable to
Mass Mutual. The prepayment is to be made during March 1998.
