<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 June 30, 1998 Commission File Number 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 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 Section 12(g) of the Act: Common Stock, par
value $.01
(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 $40,903,904 as of September 17,
1998.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date: As of
September 17, 1998, 3,756,775 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 II - Registrant's 1998 Annual Report to Stockholders
Part III - B Registrant's Proxy Statement for its 1998 Annual Meeting of
Stockholders
<PAGE> 2
PART II
Item 8. Financial Statements and Supplementary Data
The following financial statements and supplementary data,
included in the registrant's 1998 Annual Report to Stockholders, are
incorporated herein by this reference.
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCE
-----------------------
<C> <C>
Report of Independent Public Accountants Page 22
Consolidated Balance Sheets at June 30, 1998 and March 28, 1997 Page 23
Consolidated Statements of Operations for the years ended
June 30, 1998, March 28, 1997, and March 29, 1996 and for the Page 24
three months ended June 30, 1997
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1998, March 28, 1997, and March 29, 1996 and Page 25
for the three months ended June 30, 1997
Consolidated Statements of Cash Flows for the years ended
June 30, 1998, March 28, 1997, and March 29, 1996 and for the Page 26
three months ended June 30, 1997
Notes to Consolidated Financial Statements Page 27
</TABLE>
-9-
<PAGE> 3
PART III
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form
8-K
(a)(1) Financial statements: Incorporated herein by
reference, are listed in Item 8 of this report.
(2) The following financial statement schedule and
auditors' report thereon are included in Part IV of this report:
Page
Report of Independent Public Accountants on Schedule 12
Schedule II - Valuation and Qualifying Accounts 13
The Financial Statements of Pharmaceutical Buyers, Inc. for the years ended
December 31, 1998 and 1997 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.*
(d) See Item 14(a)(2) above.*
* Previously filed with Form 10-K for the year ended June 30, 1998.
-10-
<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
and Chief Executive Officer
Date: March 30, 1999
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
- --------- ----- ----
<C> <C> <C>
/s/ J. Hord Armstrong, III Chairman of the Board and Chief March 30, 1999
- ------------------------------------ Executive officer
J. Hord Armstrong, III
/s/ Martin D. Wilson President, Chief Operating Officer,
- ------------------------------------ Secretary and Director March 30, 1999
Martin D. Wilson
/s/ Thomas S. Hilton Senior Vice President, March 30, 1999
- ------------------------------------ Chief Financial Officer,
Thomas S. Hilton (Principal Financial and Accounting Officer)
/s/ Richard F. Ford Director March 30,1999
- ------------------------------------
Richard F. Ford
/s/ Bryan H. Lawrence Director March 30, 1999
- ------------------------------------
Bryan H. Lawrence
/s/ Elliot H. Stein Director March 30, 1999
- ------------------------------------
Elliot H. Stein
/s/ Robert E. Korenblat Director March 30, 1999
- ------------------------------------
Robert E. Korenblat
/s/ Thomas F. Patton Director March 30, 1999
- ------------------------------------
Thomas F. Patton
/s/ James M. Usdan Director March 30, 1999
- ------------------------------------
James M. Usdan
/s/ Louis B. Susman Director March 30, 1999
- ------------------------------------
Louis B. Susman
</TABLE>
-11-
<PAGE> 5
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
2.1 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 filed as Exhibit
2.4 to the registrant's Annual Report on Form 10-K for
the year ended March 28, 1997 is incorporated herein by
this reference.
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.
3.1a* Certificate of Amendment to the Restated Certificate of
Incorporation of D&K Wholesale Drug, Inc.
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.
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.
</TABLE>
-14-
<PAGE> 6
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
33-48730) is incorporated herein by this reference.
10.3 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.
10.4 Wholesale Distribution Agreement, by and between registrant and
GLAXO INC., filed as Exhibit 10.14 to the registrant's
Registration Statement on Form S-1 (Reg. No. 33-48730) is
incorporated herein by this reference.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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
</TABLE>
-15-
<PAGE> 7
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
the year ended March 31, 1995 is incorporated herein by
this reference.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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
</TABLE>
-16-
<PAGE> 8
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
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 reference.
10.18 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.
10.19 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.
10.20 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.
10.21 Amended and Restated Lease Agreement, dated as of January
16, 1996, by and between Morhaert Development, L.L.C. and
the registrant, 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.
10.22 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. filed as Exhibit 10.28 to the
registrant's Annual Report on Form 10-K for the year
ended March 28, 1997 is incorporated herein by this
reference.
</TABLE>
-17-
<PAGE> 9
<TABLE>
<CAPTION>
EXHIBIT No. Description Page
- ----------- ----------- ----
<S> <C> <C>
10.23 Loan Agreement dated as of December 23, 1996, by and
among registrant, Krelitz Industries, Inc. and Magna
Bank, N.A., filed as Exhibit 10.30 to the registrant's
Annual Report on Form 10-K for the year ended March 28,
1997 is incorporated herein by this reference.
10.24* Pharmaceutical Services Agreement between Anthem Prescription
Management, Inc. and D&K Wholesale Drug, Inc. dated July 16, 1996.
10.25* Renewal dated June 26, 1998, to Pharmaceutical Services Agreement
between Anthem Prescription Management, Inc. and D&K Wholesale
Drug, Inc. dated July 16, 1996.
10.26* Purchase and Sale Agreement dated as of August 7, 1998 between D&K
Healthcare Resources, Inc., certain of its subsidiaries and D&K
Receivables Corporation.
10.27* Receivables Purchase Agreement dated as of August 7, 1998
among D&K Receivables Corporation, D&K Healthcare
Resources, Inc., Blue Keel Funding, LLC and Fleet
National Bank.
10.28* Fourth Amended and Restated Loan and Security Agreement dated as
of August 7, 1998 among D&K Healthcare Resources, Inc., Jaron
Inc., and Fleet Capital Corporation.
13* Registrant's 1998 Annual Report to Stockholders.
21* Subsidiaries of the registrant.
23* Consent of Arthur Andersen LLP.
99 Pharmaceutical Buyers, Inc. Financial Statements as of December
31, 1998 and 1997 together with Report of Independent Public
Accounts are filed herewith.
</TABLE>
* Previously Filed with Form 10-K for the year ended June 30, 1998.
-18-
<PAGE> 1
Exhibit 99
PHARMACEUTICAL BUYERS, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
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, 1998 and 1997, and the related
statements of income, 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 audit 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, 1998 and 1997, 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 5, 1999.
<PAGE> 3
PHARMACEUTICAL BUYERS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 1,653,112 $ 1,190,409
Available-for-sale investments (Note 2) - 506,085
Receivables (Note 2) 1,239,571 1,290,784
Income taxes receivable 13,214 -
Other current assets 41,460 33,313
------------ -----------
Total current assets 2,947,357 3,020,591
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $183,803 and $215,842, respectively (Note 2) 144,514 161,976
DEFERRED INCOME TAXES (Note 5) 25,148 107,721
OTHER ASSETS, net (Note 2) 468,607 712,254
------------ -----------
Total assets $ 3,585,626 $ 4,002,542
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 41,449 $ 20,163
Accrued expenses 212,026 243,547
Deferred revenue (Note 2) 287,752 293,338
Income taxes payable - 31,977
Current deferred income taxes (Note 5) 68,061 293,559
Current portion of notes payable and other long-term payables (Note 4) 1,125,802 185,290
------------ -----------
Total current liabilities 1,735,090 1,067,874
NOTES PAYABLE AND OTHER LONG-TERM PAYABLES (Note 4) 5,216,071 6,985,320
------------ -----------
Total liabilities 6,951,161 8,053,194
------------ -----------
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 3,467,782 2,782,665
Treasury stock (12,600,000) (12,600,000)
------------ -----------
Total stockholders' deficit (3,365,535) (4,050,652)
------------ -----------
Total liabilities and stockholders' deficit $ 3,585,626 $ 4,002,542
============ ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
<PAGE> 4
PHARMACEUTICAL BUYERS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUE:
Administrative fees $4,884,483 $4,893,479
Membership fees 702,344 745,462
---------- -----------
Total revenue 5,586,827 5,638,941
---------- -----------
EXPENSES:
Operating 1,434,088 1,436,791
Selling, general and administrative 1,040,680 1,076,546
Depreciation and amortization 249,067 289,136
---------- -----------
Total expenses 2,723,835 2,802,473
---------- -----------
Income from operations 2,862,992 2,836,468
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense-related parties (Note 4) (732,600) (826,176)
Other income, net 61,216 105,285
---------- ----------
Total other expense, net (671,384) (720,891)
---------- ----------
INCOME BEFORE INCOME TAX PROVISION 2,191,608 2,115,577
INCOME TAX PROVISION (Note 5) (806,491) (808,914)
---------- ----------
NET INCOME $1,385,117 $1,306,663
========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 5
PHARMACEUTICALBUYERS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ---------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
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)
Net income - - - 1,385,117 - 1,385,117
Dividends paid - - - (700,000) - (700,000)
---- --- ---------- ----------- ------------ -----------
BALANCES,
December 31, 1998 150 $ 2 $5,766,681 $ 3,467,782 $(12,600,000) $(3,365,535)
==== === ========== =========== ============ ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 6
PHARMACEUTICAL BUYERS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,385,117 $ 1,306,663
------------ -----------
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 287,925 289,136
Loss on sales of investments, net 15,212 -
Loss on disposals of property and equipment 11,689 -
Deferred income tax benefit (142,925) (53,679)
Other - (20,163)
Changes in assets and liabilities-
Decrease (increase) in receivables 51,213 (33,545)
Increase in income taxes receivable (13,214) -
Decrease in other assets 651 71,496
Increase (decrease) in accounts payable 21,286 (28,734)
(Decrease) increase in accrued expenses (31,521) 35,669
(Decrease) increase in deferred revenue (5,586) 47,429
Decrease in income taxes payable (31,977) (634,980)
------------ -----------
Net cash provided by operating activities 1,547,870 979,292
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (47,303) (71,619)
Proceeds from sales and maturity of investments 490,873 -
------------ -----------
Net cash provided by (used in) investing activities 443,570 (71,619)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (700,000) (600,000)
Payments on notes payable and other long-term payables ( 828,737) (1,194,775)
------------ -----------
Net cash used in financing activities (1,528,737) (1,794,775)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 462,703 (887,102)
CASH AND CASH EQUIVALENTS, at beginning of year 1,190,409 2,077,511
------------ -----------
CASH AND CASH EQUIVALENTS, at end of year $ 1,653,112 $ 1,190,409
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 699,100 $ 798,550
------------ -----------
Cash paid for income taxes $ 994,607 $ 1,497,573
============ ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 7
PHARMACEUTICAL BUYERS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
(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.
(2) SIGNIFICANT ACCOUNTING POLICIES
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.
Basis of Accounting
The accompanying financial statements have been prepared using the accrual
method of accounting.
<PAGE> 8
-2-
Cash and Cash Equivalents and Available-For-Sale Investments
Cash and cash equivalents consist of highly liquid investments with original
maturities of three months or less at the time of purchase 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, 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.
The components of property and equipment as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Office furniture and equipment $ 255,153 $ 316,713
Software 27,939 15,880
Leasehold improvements 45,225 45,225
--------- --------
328,317 377,818
Less: Accumulated depreciation (183,803) (215,842)
--------- ---------
Total property and equipment
$ 144,514 $ 161,976
========= =========
</TABLE>
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, 1998 and 1997, non-compete agreements of $783,965 are
recorded, net of accumulated amortization of $587,974 and $391,983,
respectively. The non-compete agreements are included in other assets in the
accompanying balance sheets.
Debt Issuance Costs
<PAGE> 9
-3-
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, 1998 and 1997, deferred debt
issuance costs of $388,584 is recorded, net of accumulated amortization of
$116,570 and $77,712, respectively, and is included in other assets in the
accompanying balance sheets.
Income Taxes
The current provision for income taxes represents actual or estimated amounts
payable on tax return filings each year. Deferred tax assets and liabilities are
recorded for the estimated future tax effects of temporary differences between
the tax basis of assets and liabilities and amounts reported in the accompanying
balance sheets. The change in deferred tax assets and liabilities for the period
measures the deferred tax provision or benefit of the period. Effects of changes
in enacted tax laws on deferred tax assets and liabilities are reflected as
adjustments to the tax provision or benefit in the period of enactment.
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 members anniversary date and are recognized
on a straight-line basis over the membership period. 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.
<PAGE> 10
-4-
At December 31, 1998 and 1997, the Company had recorded approximately $1,238,000
and $1,279,000, 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, 1998 and 1997, approximately $288,000 and $293,000, 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.
Advertising Costs
Advertising costs are expensed as incurred and are included in selling, general
and administrative expenses in the accompanying statements of income. The
Company does not incur any direct-response advertising costs. Advertising
expense totaled $56,628 and $29,833 in 1998 and 1997, respectively.
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 considered impaired if the undiscounted future cash flows related to the
asset did not exceed the net book value.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying comprehensive
income and loss and its components in a financial statement that is displayed
with the same prominence as other financial statements. Effective January 1,
1998, the Company adopted SFAS 130. For the years ended December 31, 1998 and
1997, the Company's net income equaled its comprehensive income.
<PAGE> 11
-5-
Fair Value Financial Instruments
Financial instruments include cash and cash equivalents, receivables, accounts
payable, accrued liabilities, and notes payable and other long-term payables.
The carrying amounts for cash and cash equivalents, receivables, accounts
payable and accrued liabilities approximate fair value because of the short
maturity of those instruments. The carrying amount of the notes payable and
other long-term payables approximate fair value as the pricing and terms of
those instruments are indicative of the Company's current credit risk.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance on
accounting for the cost of such software. SOP No. 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company does not expect that the adoption of SOP No. 98-1 will have a material
impact on its financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Company is required to
adopt SFAS No. 133 in the year ended December 31, 2000. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, the Company has not entered into any derivative financial instruments or
hedging activities.
Reclassifications
Certain reclassifications have been made to prior year financial statements in
order to conform to the current year presentation.
<PAGE> 12
-6-
(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).
(4) NOTES PAYABLE AND OTHER LONG-TERM PAYABLES
Notes payable and other long-term payables at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<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; certain amounts were prepaid in 1998 and 1997. $ 4,837,500 $5,450,000
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 October 1999. 204,373 420,610
----------- ----------
6,341,873 7,170,610
Less: Current portion (1,125,802) (185,290)
----------- ----------
$ 5,216,071 $6,985,320
=========== ==========
</TABLE>
<PAGE> 13
-7-
Principal repayments of notes payable and other long-term payables at December
31, 1998, are summarized as follows:
<TABLE>
<S> <C>
1999 $1,125,802
2000 921,429
2001 921,429
2002 921,429
2003 921,429
Thereafter 1,530,355
----------
$6,341,873
==========
</TABLE>
The Company is required under the terms of its notes payable to comply with
certain financial and nonfinancial covenants. At December 31, 1998 and 1997, the
Company was in compliance with all such covenants.
(5) INCOME TAXES
The income tax provision consists of the following for the years ended December
31:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Current:
Federal $ 812,987 $735,661
State 136,429 126,932
-------- -------
949,416 862,593
-------- -------
Deferred:
Federal (122,487) (50,824)
State (20,438) (2,855)
-------- -------
(142,925) (53,679)
-------- -------
Income tax provision $ 806,491 $808,914
======== =======
</TABLE>
<PAGE> 14
-8-
Through December 31, 1997, the Company prepared its tax returns under the cash
basis. Effective January 1, 1998, the Company changed its basis for tax
reporting purposes to the accrual method. As a result, the Company is required
to recognize approximately $730,000 into taxable income over the next four
years, relating mainly to administrative fees receivable.
The significant components of the Company's net deferred tax liability at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current deferred tax assets (liabilities):
Administrative fees receivable $ - $(477,155)
Accounts payable - 7,521
Accruals - 85,993
Deferred revenue - 109,415
Other - (19,333)
Amortization of change to accrual
basis for tax (68,061) -
--------- ---------
Net current deferred tax liabilities $ (68,061) $(293,559)
========= =========
Long-term deferred tax assets (liabilities):
Amortization of non-compete agreements 160,831 107,721
Amortization of change to accrual
basis for tax (135,683) -
--------- ---------
Net long-term deferred tax assets $ 25,148 $ 107,721
========= =========
</TABLE>
The following table reconciles the federal statutory income tax rate to the
Company's effective income tax rate:
<TABLE>
1998 1997
-------- --------
<S> <C> <C>
Provision for income taxes at federal statutory rate 34.0% 34.0%
State income taxes, net of federal benefit 3.8 3.6
Nondeductible expenses 0.7 0.7
Nontaxable investment income (0.5) (0.5)
Other (1.2) 0.4
---- ----
Effective income tax rate 36.8% 38.2%
==== ====
</TABLE>
<PAGE> 15
-9-
(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 $91,485 and $90,231
for the years ended December 31, 1998 and 1997, respectively. The lease is
noncancellable and expires May 31, 2000.
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 $44,000 and $45,000 during 1998 and 1997,
respectively. No additional discretionary payments were made.
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. The accounting effect of
terminating the plan was not significant. 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.
<PAGE> 16
-10-
(8) CONCENTRATION OF CREDIT RISK
The Company earns administrative fees primarily from large pharmaceutical and
medical supply manufacturers and distributors within the United States.
Historically, the Company has not experienced any significant administrative
fees receivable write-offs. Management believes all administrative fees
receivable are fully collectable.
PBI's significant customers which individually comprised more than 10% of total
administrative fees for the years ended December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Customer A 28% 26%
Customer B 13 10
Customer C 10 5
Receivables from PBI's significant customers which comprised greater than 10%
of total administrative fee receivables are as follows:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Customer A 27% 27%
Customer B 7 29
Customer C 10 15
</TABLE>
The Company believes that these customers will continue to represent a
substantial portion of the Company's total revenue in the future. However,
should any of these customers terminate their relationship with the Company, the
results of operations would be materially affected.
<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 $93,000 and $115,000 for
the years ended December 31, 1998 and 1997, respectively.
Minimum rental payments under these leases with initial or remaining terms of
one year or more at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 95,681
2000 42,092
2001 2,930
2002 2,930
2003 977
-------
$144,610
=======
</TABLE>
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 not have a material
impact on the financial position of the Company or its results of operations.
(10) SUBSEQUENT EVENTS
In February 1999, 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, 1999.
<PAGE> 18
-12-
In January 1999, the Company purchased a 5% voting equity interest in Medical
Equipment Distributors, Inc. ("Med Group") at net book value for approximately
$103,000. Med Group is a group purchasing organization whose members include
rehabilitation providers and home medical equipment dealers. Until July 2000,
the Company has a right of first refusal to participate in any future equity
offerings of Med Group or any event whereby a Med Group stockholder elects to
sell or transfer more than 50% of the outstanding shares of Med Group to a third
party.
