<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, 1999
------------------
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 4,281,581
---------------------------- ------------------
(class) (October 31, 1999)
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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, 1999 and June 30, 1999 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 1999
and September 30, 1998 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1999 and
September 30, 1998 5
Notes to Condensed Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 15
Part II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 16
</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>
September 30, June 30,
1999 1999
------------- --------
(Unaudited)
<S> <C> <C>
Assets
------
Cash $ 3,891 $ 708
Receivables 16,174 14,889
Inventories 164,304 157,171
Other current assets 1,113 599
-------- --------
Total current assets 185,482 173,367
-------- --------
Net property and equipment 6,293 6,205
Investment in affiliates 4,857 4,111
Deferred income taxes 1,547 1,547
Other assets 956 1,041
Intangible assets 43,675 43,809
-------- --------
Total assets $242,810 $230,080
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current maturities of long-term debt $ 237 $ 403
Accounts payable 122,923 142,360
Deferred income taxes 2,285 2,285
Accrued expenses 9,863 8,251
-------- --------
Total current liabilities 135,308 153,299
-------- --------
Long-term liabilities 483 482
Revolving line of credit 69,163 39,453
Long-term debt, excluding current maturities 964 996
-------- --------
Total liabilities 205,918 194,230
-------- --------
Stockholders' equity:
Common stock 45 44
Paid-in capital 30,120 29,555
Retained earnings 8,781 7,195
Less treasury stock (2,054) (944)
-------- --------
Total stockholders' equity 36,892 35,850
-------- --------
Total liabilities and stockholders' equity $242,810 $230,080
======== ========
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
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Net sales $ 323,565 $ 179,374
Cost of sales 311,745 170,970
---------- ----------
Gross profit 11,820 8,404
Operating expenses 7,678 5,728
---------- ----------
Income from operations 4,142 2,676
Other income (expense):
Interest expense, net (1,816) (1,003)
Other, net 250 209
---------- ----------
(1,566) (794)
---------- ----------
Income before income tax provision 2,576 1,882
Income tax provision 992 753
---------- ----------
Net income $ 1,584 $ 1,129
========== ==========
Earnings per common share:
Basic earnings per share $ 0.36 $ 0.30
Diluted earnings per share $ 0.35 $ 0.29
Basic common shares outstanding 4,377,227 3,747,704
Diluted common shares outstanding 4,731,649 3,922,820
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Three Months Ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,584 $ 1,129
Adjustments to reconcile net income
to net cash flows from operating activities:
Amortization of debt issuance costs 165 98
Depreciation and amortization 745 359
Gain from sale of assets -- (36)
Equity in net income of PBI (235) (161)
Changes in operating assets and liabilities, net
of acquisitions:
Decrease (increase) in accounts receivable, net (1,286) 31,229
Increase in inventories (7,133) (22,472)
Increase in other current assets (207) (319)
(Decease) increase in accounts payable (19,438) 28,865
Increase in accrued expenses 1,736 1,098
Other, net (121) (142)
-------- ---------
Cash flows from operating activities (24,190) 39,648
Cash flows from investing activities:
Cash paid for acquired company -- (1,988)
Cash invested in affiliate (500) --
Proceeds from sale of fixed assets -- 746
Purchases of property and equipment (380) (216)
-------- ---------
Cash flows from investing activities (880) (1,458)
Cash flows from financing activities:
Borrowings under revolving line of credit 117,777 105,608
Repayments under revolving line of credit (88,067) (139,754)
Principal payments on long-term debt (197) (378)
Net borrowings (repayments) under revolving
accounts receivable credit facility -- (5,139)
Proceeds from exercise of stock options 269 122
Purchase of treasury stock (1,110) --
Debt issuance costs (419) (445)
-------- ---------
Cash flows from financing activities 28,253 (39,986)
Increase (decrease) in cash 3,183 (1,796)
Cash, beginning of period 708 4,051
-------- ---------
Cash, end of period $ 3,891 $ 2,255
======== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid (refunded) during the period for:
Interest $ 1,487 $ 1,208
Income taxes (109) (12)
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, Minnesota, and South Dakota,
the Company distributes a broad range of pharmaceuticals and related
products to its customers in more than 24 states. The Company
focuses primarily on a target market sector, which includes
independent retail, institutional, franchise, chain store and
alternate site pharmacies in the Midwest and South. 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 consolidated 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, 1999 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 1999 Annual Report to
Stockholders.
Note 2. Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128), requires the computation of basic and diluted
earnings per share. 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
certain convertible PBI stock. The diluted computation for the
quarter ended September 30, 1999 adds to income the earnings that
would be included in the Company's consolidated net income for the
periods as if the convertible PBI stock had been converted to the
Company's common stock at the beginning of the period.
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The reconciliation of the numerator and denominator of the basic and
diluted earnings per common share computations is as follows:
<TABLE>
<CAPTION>
Quarter Ended September 30, 1999 Quarter Ended September 30,
1998
------------------------------------------ -------------------------------
- ---------
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 $1,584,000 4,377,227 $0.36 $1,129,219 3,747,704
$0.30
EFFECT OF DILUTED SECURITIES:
Options and warrants 154,422 175,116
Convertible PBI stock 66,080 200,000 -- --
<F2>
---------- --------- ---------- ---------
DILUTED EPS:
Net Income available to
Common stockholder plus
assumed conversions $1,650,080 4,731,649 $0.35 $1,129,219 3,922,820
$0.29
---------- --------- ---------- ---------
<FN>
<F1> - Outstanding shares computed on a weighted average basis
<F2> - Impact of PBI stock conversion has been determined to be anti-
dilutive for this period
</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 provided the Company with a three-year 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.
At September 30, 1999, the maximum allowable amount of receivables
eligible to be sold is $60 million. The amount available at any
settlement date varies based upon the level of eligible receivables.
Under this agreement, $55 million of accounts receivable were sold as
of September 30, 1999. 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 consolidated statements of cash flows for the three-month
period ended September 30, 1999. Accordingly, the Company's trade
accounts receivable and long-term debt at September 30, 1999 are net
of $55 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%.
In addition, the Company has a revolving line of credit which, as of
June 30, 1999, provided a maximum borrowing capacity of $95 million
based upon
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eligible inventories. The advances bear interest at the daily LIBOR
plus 1.75%. The Company also has the option to pay interest on the
obligation at prime plus .25% per annum. At September 30, 1999 and
June 30, 1999, the unused portion of the line of credit amounted to
$25.8 million and $55.5 million, respectively.
The Company also has an interest rate collar agreement, whereby the
LIBOR on $10 million of the outstanding revolving line of credit
balance shall not exceed 6.75%. If the LIBOR is less than 5.25%,
then the LIBOR rate on $7.5 million of the outstanding revolving line
of credit balance shall not be less than 5.25%. On March 31, 1999,
the Company executed an additional interest rate collar agreement on
$40 million of the outstanding revolving line of credit, whereby the
LIBOR shall not exceed 6.85% nor be less than 4.93%. At September
30, 1999, the LIBOR was 5.38%.
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 $235,000 and $161,000 for the three-month
periods ended September 30, 1999 and September 30, 1998 ($304,000 and
$230,000, respectively, before goodwill amortization).
Certain other shareholders of PBI have the option to exchange their
combined 20% ownership interests in PBI for shares of the Company's
common stock under the terms of the original purchase agreement.
Those options, which have been determined to be dilutive at September
30, 1999, are included in the reconciliation of the basic and diluted
earnings per share computation in Note 2 above.
Note 5. During the fourth quarter of fiscal 1999, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS
No. 131). This statement establishes standards for the way public
companies report information about operating segments that is
consistent with that made available to the management of the Company
in allocating resources and assessing performance.
After application of the aggregation criteria, the Company has three
identifiable business segments, only one of which, Wholesale drug
distribution, meets the quantitative thresholds for separate
disclosure prescribed in SFAS No. 131. This segment is described in
Note 1. The Company's equity investment in PBI (see Note 4) is a
second segment. Two wholly owned software subsidiaries, VC Services,
Inc. (dba Viking Computer Services, Inc.) and Tykon, Inc. Constitute
the third segment. Viking markets a pharmacy management software
system and Tykon developed and markets a proprietary PC-based
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order entry/order confirmation system to the drug distribution
industry. These two segments are combined as Other in the table
below.
Though the Wholesale drug distribution segment operates from several
different facilities, the nature of its products and services, the
types of customers and the methods used to distribute its products
are similar and thus they have been aggregated for presentation
purposes. The Company operates principally in the United States.
Intersegment sales have been recorded at amounts approximating
market.
<TABLE>
<CAPTION>
(in thousands) FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Sales to unaffiliated customers -
Wholesale drug distribution $322,888 $179,176
Other 677 198
-------- --------
Total $323,565 $179,374
Intersegment sales -
Wholesale drug distribution $ -- $ --
Other 68 --
Intersegment eliminations (68) --
-------- --------
Total $ -- $ --
Net sales -
Wholesale drug distribution $322,888 $179,176
Other 745 198
Intersegment eliminations (68) --
-------- --------
Total $323,565 $179,374
Gross profit -
Wholesale drug distribution $ 11,214 $ 8,222
Other 606 182
-------- --------
Total $ 11,820 $ 8,404
Pre-tax income (loss) -
Wholesale drug distribution $ 2,395 $ 1,918
Other 181 (36)
-------- --------
Total $ 2,576 $ 1,882
</TABLE>
There has been no material change in total assets from the amount
disclosed in the last annual report. There are no differences from
the last annual report in the basis of segmentation or in the basis
of measurement of segment profit or loss.
<PAGE> 10
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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, 1999 and June 30, 1999, and in the
condensed consolidated statements of operations for the three-month
period ended September 30, 1999 and September 30, 1998, 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 1999 Annual Report to Stockholders.
Certain statements in this document regarding future events,
prospects, projections or financial performance are forward looking
statements. Such forward looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform
Act of 1995 and may also be identified by words such as
"anticipates," "believes," "estimates," "expects," "intends" and
similar expressions. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially
from those described in or suggested by such forward looking
statements. These risks and uncertainties include the Company's
ability to compete in a competitive industry, with many competitors
having substantially greater resources than the Company and the
Company's customers generally having the right to terminate their
contracts with the Company or reduce purchasing levels on relatively
short notice without penalty, the Company's ability to maintain or
improve its operating margin with the industry's competitive pricing
pressures, the changing business and regulatory environment,
including possible changes in reimbursement for healthcare products
and in manufacturers' pricing or distribution policies, the continued
availability of investment buying opportunities, the loss of one or
more key suppliers for which alternative sources may not be
available, the ability to integrate recently acquired businesses and
the ability of the Company's suppliers and customers to successfully
achieve a Year 2000 conversion for computer systems and applications.
Readers are cautioned not to place undue reliance on these
forward-looking statements which reflect the Company's views as of
the date hereof. The Company undertakes no obligation to publicly
update or revise any forward-looking statements.
Results of Operations:
----------------------
Net Sales Net sales increased $144.2 million, or 80.4%, for the
---------
quarter ended September 30, 1999, compared to the corresponding
period of the prior year.
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This increase in net sales is attributed to increases at all locations
and the acquisition of the Jewett operations in June 1999. The growth
was spread among the chain, independent pharmacy and mail order trade
classes as a result of new customers and increased sales to existing
customers. Including the impact of the Jewett sales, institutional
sales increased $53.9 million, independent pharmacy sales increased by
$41.7 million and chain store sales increased $48.6 million.
In addition, the quarter ended September 30, 1999 contained $9.7
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 statements of operations. "Dock-to-dock" sales were
$34.6 million for the quarter ended September 30, 1998.
Gross Profit Gross profit increased 40.6% to $11.8 million for the
------------
quarter ended September 30, 1999, compared to the corresponding
period of the prior year. As a percentage of net sales, gross margin
decreased from 4.69% to 3.65% for the quarter ended September 30,
1999, compared to the corresponding period of the prior year. The
decrease in gross margin percentage was due to sales mix. Higher
mail order sales as a result of the Jewett acquisition and increased
sales to large chains, which carry a lower margin percentage, account
for this decrease. The gross margin computed on a first-in, first-out
(FIFO) basis decreased from 4.78% to 3.67% for the quarter ended
September 30, 1999, compared to the corresponding period of the prior
year.
Operating Expenses Operating expenses increased $2.0 million, or
------------------
34.0%, to $7.7 million for the quarter ended September 30, 1999,
compared to the corresponding period of the prior year. The ratio of
operating expenses to net sales for the quarter decreased to 2.37%
from 3.19% when compared to the fiscal quarter of fiscal 1999 as a
result of the increased sales and efficiencies realized from this
higher activity . The increase in operating expenses for the quarter
ended September 30, 1999 resulted primarily from the addition of the
Jewett operations.
Interest Expense, Net Net interest expense increased $813,000 or
---------------------
81.1% for the quarter ended September 30, 1999, compared to the
corresponding period of the prior year. As a percentage of net sales,
net interest expense remained constant at 0.56% of net sales for the
quarter ended September 30, 1999, 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 timing of payments associated with accounts
payable.
Other Income, Net Other income, net increased from $209,000 to
-----------------
$250,000 for the quarter ended September 30, 1999, compared to the
corresponding period
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of the prior year. The increase in other income, net for the quarter
was primarily due to higher equity in the net income of PBI during
the quarter.
Effects of Inflation and LIFO Accounting The effects of price
----------------------------------------
inflation, measured by the excess of LIFO costs over FIFO costs, were
approximately $45,000 and $177,000, respectively, for the quarter
ended September 30, 1999 and September 30, 1998.
Provision for Income Taxes The Company's effective income tax rate
--------------------------
of 38.5% is the rate expected to be applicable for the full fiscal
year ending June 30, 2000. 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 offset by the reduced impact of state income
taxes. The overall rate is lower than the corresponding period of
last year due to the impact of the Jewett acquisition on the blended
state income tax rate.
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 measures are utilized by the Company as key indicators
of the Company's liquidity and working capital management:
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------
<S> <C> <C>
Working capital (000's) $50,174 $20,068
Current ratio 1.37 to 1 1.13 to 1
</TABLE>
Working capital and the current ratio have increased as a result of
seasonal increases in accounts receivable and inventories combined
with a reduction in accounts payable as fiscal year end inventory
purchases were paid for.
The Company invested $380,000 in capital assets in the three-month
period ended September 30, 1999, as compared to $216,000 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 inflows from financing activities totaled $28.3 million for the
three-month period ended September 30, 1999 as compared to cash
outflows of $40.0 million for the corresponding period in the prior
year. The current year increase
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in cash inflows is primarily due to the increase in the revolver as a
result of the reduction in accounts payable. The prior year outflows
were primarily related to repayments under the revolving line of
credit as a result of the funds made available from the initial
Securtization that occurred during the corresponding quarter of last
year. At September 30, 1999, the revolving line of credit provided a
maximum borrowing capacity of $95.0 million. At September 30, 1999 and
June 30, 1999, the unused portion of the line of credit amounted to
$25.8 million and $55.5 million, respectively. In addition, at
September 30, 1999, the Securitization provided a maximum capacity of
$60.0 million. At September 30, 1999, $55.0 million was utilized.
Management believes that, together with internally generated funds,
the Company's available capital resources will be sufficient to meet
its foreseeable capital requirements.
Year 2000:
----------
Certain aspects of the Company's business (including that of its
subsidiaries) could be affected by what has commonly become known as
the Year 2000 or Y2K problem. Specifically, the problem derives from
computer software, hardware and embedded chips which recognize,
receive, process and store date data using only 2-digit years, and
therefore, may malfunction when they encounter dates which are from
the 21st century, rather than the 1900's. Computerized systems are
fundamental to several key functions of the Company and its
subsidiaries. The following discussion includes the Company and its
subsidiaries. The Company operates its business using a network of
distributed AS/400, Unix, local area network (LAN) and PC systems.
The Company's financial, distribution and operational systems reside
on the AS/400 and Unix. LAN's are used primarily for file sharing.
PC's are used primarily as terminals to the AS/400 systems, with the
exception of financial reporting and banking functions. Several of
the Company's warehouse operations are automated using radio
frequency (RF) equipment. The Company receives customer orders
electronically, either from PC's, data files or hand held devices.
The Company also provides software to pharmacies and drug
distributors to help them automate functions within their businesses.
The Company began its Year 2000 efforts in the summer of 1997 and has
worked since then to identify and remediate potential Y2K issues.
The Company's Y2K project is being executed in phases, beginning with
assessment, followed by prioritization, remediation, testing,
implementation and contingency planning. Assessment, prioritization
and remediation work on all known Y2K issues is complete. Testing is
complete for LAN, PC, AS/400 and Unix systems, which includes
financial, operational, banking and financial reporting systems.
Testing has indicated that LAN and PC systems are Year 2000 compliant
and the Company is not aware, at this point, of any further work
required with these systems. The remaining AS/400, Unix, RF and hand
held ordering systems, which support distribution and internal
operations functions, have undergone rigorous testing procedures
before being implemented in production in all of the Company's
locations. The Company's
<PAGE> 14
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software products have been remediated and tested and the results
have been positive, leading the Company to believe that these
products are, in all material respects, Y2K compliant. The Company
has substantially completed its Y2K software implementation in
customer sites and the Company expects to fully complete
implementations in November 1999. Software upgrades to enable the
Company's software products to handle Year 2000 date processing are
being provided to customers free of charge through electronic
transmissions of the upgrade to customer computers. Customers who
use the Company's Resource software product to place electronic
orders and the Company's Scriptmaster software product to fill
prescriptions have been notified regarding potential hardware issues
and given alternatives to resolve the issue.
The Company does not sell (non-IT) embedded systems, but does use
non-IT embedded systems in the normal course of its business in areas
such as alarm systems, time clocks, etc. As does virtually every
other company, the Company does rely on third parties in the conduct
of its business. The Company has surveyed suppliers, customers,
transportation companies, alarm system providers, utilities, banks
and other third parties it does business with, or who provide
products or services the Company uses containing non-IT embedded
systems, on a regular basis in an effort to determine these third
parties' Y2K state of readiness. At the present time, it appears
that the majority of third parties the Company does business with are
reasonably certain they will be able to conduct business without
significant interruption at the century date change.
The Company has essentially completed its Y2K contingency plan. The
Company's contingency planning efforts focused on identifying the
entities that are critical to the Company's business functions,
determining which entities have the largest potential for impact if
there are Y2K issues, determining the likelihood of the potential
problem, ranking the entities by criticality and likelihood of
potential problems, and developing work-around plans to handle any
potential emergency situation. The Company expects to monitor
critical situations on an ongoing basis, revising contingency plans
if necessary.
The costs of the Company's Y2K project have been incurred in the
areas of IT systems and contingency planning. The Company had spent
approximately $635,000 as of September 30, 1999 in its Year 2000
project and expects to spend an additional $65,000 by November 1999.
The Company believes the greatest potential risks in connection with
the Year 2000 issue would be the inability of its suppliers to
provide product in a timely manner, the inability to obtain payments
from its customers and the inability of transportation companies to
deliver product to its customers, which could have a material adverse
impact on the Company's operations, liquidity or financial condition.
Also, the issue of customer stockpiling in anticipation of the Year
2000 poses a dilemma, which potentially could have an impact on the
Company and other distributors of pharmaceuticals. Many industry
commentators have noted the likelihood that some patients, fearing
Y2K
<PAGE> 15
Page 15 of 19
disasters, will attempt to stockpile prescriptions, thus causing
supply chain problems for manufacturers, distributors and retailers.
This eventuality could, of course, directly affect the Company's
operations, liquidity or financial condition. The Company's
contingency plans are designed with the goal of minimizing the
potential impact caused by any Year 2000 problems of its suppliers
and other third parties. Therefore, the Company does not now believe
that any external Y2K problems will have a material adverse impact on
its operations, liquidity or financial condition.
While the Company believes it has taken a comprehensive and
reasonable approach towards anticipating and addressing the potential
impact of the century date change on its business, there can be no
assurance that the Company internally, or any third party upon which
the Company depends, will avoid successfully all Y2K malfunctions.
As part of the foregoing Y2K discussion, the Company has used a
significant number of forward looking statements (i.e. "expects",
"believes", and similar phrases). These are based on the Company's
present knowledge and informed expectations which may change in the
future based on new developments, facts and circumstances.
<PAGE> 16
Page 16 of 19
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Part II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page 19.
(b) Reports on Form 8-K
None
<PAGE> 17
Page 17 of 19
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, 1999 By: /s/ J. Hord Armstrong, III
----------------- --------------------------------
J. Hord Armstrong, III
Chairman of the Board and
Chief Executive Officer
By: /s/ Thomas S. Hilton
--------------------------------
Thomas S. Hilton
Senior Vice President
Chief Financial Officer
(Principal Financial & Accounting
Officer)
<PAGE> 18
Page 18 of 19
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, 1999 By:
----------------- J. Hord Armstrong, III
Chairman of the Board and
Chief Executive Officer
By:
Thomas S. Hilton
Senior Vice President
Chief Financial Officer
(Principal Financial & Accounting
Officer)
<PAGE> 19
Page 19 of 19
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1<F*> Restated Certificate of Incorporation, filed as an exhibit
to registrant's Registration Statement on Form S-1 (Reg. No.
33-48730).
3.2<F*> Certificate of Amendment to the Restated Certificate of
Incorporation of D&K Wholesale Drug, Inc filed as an exhibit to
the registrant's Annual Report on Form 10-K for the year ended
June 30, 1998.
3.3<F*> By-laws of the registrant, as currently in effect, filed as an
exhibit to registrant's Registration Statement on Form S-1
(Reg. No. 33-48730).
4.1<F*> Form of certificate for Common Stock, filed as an exhibit
to registrant's Registration Statement on Form S-1 (Reg. No.
33-48730).
4.2<F*> Form of Rights Agreement dated as of November 12, 1998 between
registrant and Harris Trust and Savings Bank as Rights Agent,
which includes as Exhibit B the form of Right Certificate,
filed as an exhibit to Form 8-K dated November 17, 1998.
10.1<F*> Warehousing and Distribution Service Agreement, dated
September 21, 1999, by and between registrant and Eli Lilly and
Company filed as an exhibit to the registrant's Annual Report
on Form 10-K for the year ended June 30, 1999.
10.2<F**> Prime Vendor Agreement dated as of August 25, 1999, between
Tennessee Pharmacy Purchasing Alliance and the registrant filed
as an exhibit to the registrant's Annual Report on Form 10-K
for the year ended June 30, 1999.
27<F***> Financial data schedule.
<FN>
<F*> Incorporated by reference.
<F**> Incorporated by reference. Confidential portion omitted and filed
separately with the Securities and Exchange Commission.
<F***> Filed herewith
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,891
<SECURITIES> 0
<RECEIVABLES> 16,174
<ALLOWANCES> 1,134
<INVENTORY> 164,304
<CURRENT-ASSETS> 185,482
<PP&E> 13,226
<DEPRECIATION> 6,933
<TOTAL-ASSETS> 242,810
<CURRENT-LIABILITIES> 135,308
<BONDS> 0
<COMMON> 45
0
0
<OTHER-SE> 36,847
<TOTAL-LIABILITY-AND-EQUITY> 242,810
<SALES> 323,565
<TOTAL-REVENUES> 323,815
<CGS> 311,745
<TOTAL-COSTS> 319,423
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,816
<INCOME-PRETAX> 2,576
<INCOME-TAX> 992
<INCOME-CONTINUING> 1,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,584
<EPS-BASIC> .36
<EPS-DILUTED> ,35
</TABLE>
