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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 3,857,775
---------------------------- ------------------
(class) (April 30, 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
March 31, 1999 and June 30, 1998 3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended March 31, 1999
and March 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1999 and
March 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 17
Part II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
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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>
March 31, June 30,
1999 1998
----------- --------
(Unaudited)
<S> <C> <C>
Assets
------
Cash $456 $4,051
Receivables 36,508 50,496
Inventories 104,856 90,413
Other current assets 583 532
-------- --------
Total current assets 142,403 145,492
-------- --------
Net property and equipment 5,042 5,924
Investment in PBI 4,074 4,129
Deferred income taxes 2,842 2,842
Other assets 720 228
Intangible assets 13,244 11,735
-------- --------
Total assets $168,325 $170,350
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current maturities of long-term debt $280 $6,448
Accounts payable 103,446 80,659
Deferred income taxes 2,906 2,974
Accrued expenses 6,439 3,161
-------- --------
Total current liabilities 113,071 93,242
-------- --------
Revolving line of credit 33,137 60,185
Long-term debt, excluding current maturities 31 971
-------- --------
Total liabilities 146,239 154,398
-------- --------
Stockholders' equity:
Common stock 39 37
Paid-in capital 16,640 15,074
Retained earnings 5,407 841
-------- --------
Total stockholders' equity 22,086 15,952
-------- --------
Total liabilities and stockholders' equity $168,325 $170,350
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $213,984 $155,314 $591,703 $442,908
Cost of sales 201,779 147,240 561,318 421,639
--------- --------- --------- ---------
Gross profit 12,205 8,074 30,385 21,269
Operating expenses 7,505 5,386 19,661 15,176
--------- --------- --------- ---------
Income from operations 4,700 2,688 10,724 6,093
Other income (expense):
Interest expense, net (1,395) (1,031) (3,602) (2,576)
Other, net 95 113 363 359
--------- --------- --------- ---------
(1,300) (918) (3,239) (2,217)
--------- --------- --------- ---------
Income before income tax provision 3,400 1,770 7,485 3,876
Income tax provision 1,326 708 2,919 1,593
--------- --------- --------- ---------
Net income $2,074 $1,062 $4,566 $2,283
========= ========= ========= =========
Earnings per common share:
Basic earnings per share $0.54 $0.29 $1.21 $0.70
Diluted earnings per share $0.49 $0.27 $1.11 $0.62
Basic common shares outstanding 3,841,253 3,603,448 3,785,259 3,244,501
Diluted common shares outstanding 4,215,747 3,873,494 4,162,421 3,789,946
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
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D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $4,566 $2,283
Adjustments to reconcile net income
to net cash flows from operating activities:
Amortization of debt issuance costs 349 212
Depreciation and amortization 1,148 1,163
Gain from sale of assets (9) (17)
Equity in net income of PBI (295) (281)
Changes in operating assets and liabilities, net
of acquisitions:
Decrease (increase) in accounts receivable, net 14,139 (2,848)
Increase in inventories (14,444) (34,152)
Increase in other current assets (66) (1,183)
Increase in accounts payable 22,787 16,042
Increase in accrued expenses 3,824 685
Other, net (12) 247
-------- --------
Cash flows from operating activities 31,987 (17,849)
Cash flows from investing activities:
Cash paid for acquired company (2,176) (1,255)
Cash dividend from affiliate 350 350
Proceeds from sale of fixed assets 752 17
Purchases of property and equipment (545) (726)
-------- --------
Cash flows from investing activities (1,619) (1,614)
Cash flows from financing activities:
Borrowings under revolving line of credit 332,748 306,694
Repayments under revolving line of credit (364,935) (284,002)
Principal payments on long-term debt (1,970) (3,777)
Proceeds from exercise of stock options 810 83
Debt issuance costs (616) (288)
-------- --------
Cash flows from financing activities (33,963) 18,710
Decrease in cash (3,595) (753)
Cash, beginning of period 4,051 1,646
-------- --------
Cash, end of period $456 $893
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for
Interest $3,544 $2,465
Income taxes 1,281 1,045
See notes to condensed consolidated financial statements.
</TABLE>
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D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. The Company is a full-service, regional wholesale drug distributor.
From facilities in Missouri, Kentucky and Minnesota, the Company
distributes a broad range of pharmaceuticals and related products to
its customers in more than 20 states. The Company focuses primarily
on a target market sector, which includes independent retail,
institutional, mail-order, franchise, chain store and alternate site
pharmacies in the Midwest and South. The Company also owns a 50%
equity interest in Pharmaceutical Buyers, Inc. (PBI), a group
purchasing organization with approximately 2,200 members nationwide.
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and include
all of the information and disclosures required by generally accepted
accounting principles for interim reporting, which are less than
those required for annual reporting. In the opinion of management,
all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair representation have been included.
The results of operations for the three-month and nine-month periods
ended March 31, 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 1998 Annual Report to
Stockholders.
Note 2. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128), which establishes standards for computing and
presenting earnings per share. SFAS 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per
share. It also requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all
entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic and
diluted earnings per share computations. The Company was required to
adopt the provisions of SFAS 128 during the quarter ended December
31, 1997 and all prior period earnings per share data presented have
been restated.
Basic earnings per common share are computed by dividing net income
by the weighted average number of common shares outstanding during
the period. Diluted earnings per common share are computed using the
component mentioned above for the basic computation with the addition
of: (1) the dilutive
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effect of outstanding stock options and warrants (calculated using
the treasury stock method); (2) common shares issuable upon
conversion of certain convertible PBI stock; and (3) common shares
issuable upon conversion of all convertible subordinated notes. The
diluted computation for the quarter and nine months ended March 31,
1998 adds to income interest on all convertible subordinated notes
and deducts the related income tax effect as if such notes had been
converted into common stock at the beginning of the period. On
December 29, 1997, the holder of 11% convertible subordinated notes
converted its remaining $1,750,000 of notes into 530,978 shares of
the Company's common stock. The conversion ratio was approximately
$3.30 per share. The diluted computation for the quarter and nine
months ended March 31, 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.
The reconciliation of the numerator and denominator of the basic and
diluted earnings per common share computations is as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31, 1999 Quarter Ended March 31, 1998
--------------------------------------- --------------------------------------
Income Shares Per- Income Shares Per-
(Denominator) Share (Denominator) Share
(Numerator) <F1> Amount (Numerator) <F1> Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to
Common shareholders 2,073,581 3,841,253 $0.54 1,062,071 3,603,448 $0.29
EFFECT OF DILUTED SECURITIES:
Options and warrants 174,494 260,068
Convertible PBI stock (1,063) 200,000 -- --<F2>
Convertible subordinated notes -- -- 1,750 9,978
--------- --------- --------- ---------
DILUTED EPS:
Net Income available to
Common stockholder plus
assumed conversions 2,072,518 4,215,747 $0.49 1,063,821 3,873,494 $0.27
--------- --------- --------- ---------
<CAPTION>
Nine Months Ended March 31, 1999 Nine Months Ended March 31, 1998
--------------------------------------- --------------------------------------
Income Shares Per- Income Shares Per-
(Denominator) Share (Denominator) Share
(Numerator) <F1> Amount (Numerator) <F1> Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to
Common shareholders 4,565,961 3,785,259 $1.21 2,283,498 3,244,501 $0.70
EFFECT OF DILUTED SECURITIES:
Options and warrants 177,162 189,475
Convertible PBI stock 47,193 200,000 -- --<F2>
Convertible subordinated notes -- -- 59,500 355,970
--------- --------- --------- ---------
DILUTED EPS:
Net Income available to
Common stockholder plus
assumed conversions 4,613,154 4,162,421 $1.11 2,343,998 3,789,946 $0.62
<FN>
<F1> - Outstanding shares computed on a weighted average basis
<F2> - Impact of PBI stock conversion has been determined not to be dilutive
for this period
</TABLE>
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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 $45 million revolving
accounts receivable securitization facility (the "Securitization").
Under this facility and pursuant to a purchase and contribution
agreement between the Company and D&KRC, the Company sells to D&KRC,
on a non-recourse basis, all rights and interests in its accounts
receivable. Pursuant to the receivables purchase agreement, D&KRC in
turn sells certain interests in the accounts receivable pool owned by
D&KRC under similar terms to a third party purchaser. In December
1998, this facility was increased from $45 million to $60 million to
provide greater access to working capital.
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, $60.0
million of accounts receivable were sold as of March 31, 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 nine-month period ended March 31, 1999.
Accordingly, the Company's trade accounts receivable at March 31,
1999 are net of $60.0 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, in August 1998, the Company amended the terms of its
revolving line of credit to provide a maximum borrowing capacity of
line of credit to provide a maximum borrowing capacity of $75 million
based upon eligible inventories and to extend its maturity through
August 2001. The advances bear interest at the daily LIBOR plus
1.25%. The Company also has the option to pay interest on the
obligation at prime plus .5% per annum. At March 31, 1999 and June
30, 1998, the unused portion of the line of credit amounted to $34.7
million and $14.8 million, respectively.
The Company also has an interest rate collar agreement, whereby the
LIBOR on $10.0 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
$40.0 million of the outstanding revolving line of credit, whereby
the LIBOR shall not exceed 6.85% nor be less than 4.93%.
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
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PBI's underlying net assets at the date of the original investment.
The Company's equity in the net income of PBI totaled $52,000 and
$81,000 for the three-month periods ended March 31, 1999 and March
31, 1998 ($121,000 and $150,000, respectively, before goodwill
amortization). The Company's equity in the net income of PBI totaled
$294,000 and $281,000 for the nine-month periods ended March 31, 1999
and March 31, 1998, respectively ($501,000 and $488,000,
respectively, before goodwill amortization).
The remaining PBI shareholders have options to convert their ownership
interests in PBI into shares of the Company's common stock under the
terms of the original purchase agreement. Those options which have
been determined to be dilutive are included in the reconciliation of
the basic and diluted earnings per share computation in Note 2 above.
Note 5. During the nine months ended March 31, 1999, under the provisions of
its Long-Term Incentive Plan and its 1993 Stock Option Plan, the
Company granted non- qualified stock options for an aggregate of
85,000 and 69,200 shares, respectively, of common stock to certain
executives and key employees at exercise prices ranging from $16.88
to $25.50 per share.
The exercise price of all options granted pursuant to the two plans
was equal to the fair market value of the stock on the date of grant.
Stock options granted under the Long-Term Incentive Plan are
generally not exercisable earlier than six months from the date of
grant, nor later than ten years from the date of grant. Stock
options granted under the 1993 Stock Option Plan are immediately
exercisable from the date of grant and expire not later than ten
years from the date of grant.
The following sets forth a summary of the options outstanding under
the Company's Long-Term Incentive Plan and the 1993 Stock Option
Plan:
<TABLE>
<CAPTION>
Weighted Average
Number of ------------------
Shares Exercise Price
--------------------------------------
<S> <C> <C>
Outstanding at June 30, 1998 441,998 $7.13
Granted 154,200 $19.40
Exercised (108,500) $7.37
Cancelled (3,000) $11.25
--------
Outstanding at March 31, 1999 484,698 $10.95
========
</TABLE>
Note 6. On November 12, 1998, the Company filed a Current Report on 8-K
announcing the adoption of a shareholder rights plan. The
shareholder rights plan provides for a dividend distribution of one
right for each share of the Company's common stock to holders as of
the close of business on November 23, 1998. Each right will entitle
the holder to buy, under certain circumstances,
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one one-thousandth of a share of preferred stock for $100. The
rights will become exercisable only in the event, with certain
exceptions, a person or group acquires 15 percent or more of the
Company's common stock or commences a tender or exchange offer for 15
percent or more of the Company's common stock. In addition, upon the
occurrence of certain events, holders of the rights will be entitled
to purchase either the Company's common stock or preferred stock or
shares in an acquiring entity at half of market value.
The Company will generally be entitled to redeem the rights in whole,
but not in part, at a price of $0.005 per right, at any time up to
and including the tenth day after the time that a person or group has
acquired 15 percent or more of the Company's common stock or
announced a tender offer to purchase at least 15 percent of the
outstanding common stock of the Company, subject to extension of the
redemption period by the Company's Board of Directors. Unless earlier
redeemed, the rights will expire on November 12, 2008.
Note 7. On February 16, 1999, the Company announced the signing of a letter
of intent to acquire Jewett Drug Co., Inc., ("Jewett") a privately
owned pharmaceutical distribution company based in Aberdeen, South
Dakota. The consideration will be a combination of cash and the
Company's common stock totaling $34 million, which is $2 million less
than originally announced. Jewett provides comprehensive
pharmaceutical distribution services to over 250 customers in South
Dakota, North Dakota, Minnesota and four north central states. The
Company expects the transaction to be closed in its fourth fiscal
quarter subject to execution of a definitive agreement, satisfactory
completion of due diligence and required regulatory approvals.
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D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The discussion below is concerned with material changes in financial
condition and results of operations in the condensed consolidated
balance sheets as of March 31, 1999 and June 30, 1998, and in
the condensed consolidated statements of operations for the
three-month and nine-month periods ended March 31, 1999 and March 31,
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 1998
Annual Report to Stockholders.
Statements contained in this Report that state the Company's or
management's intentions, expectations, beliefs or predictions about
future events, including expected Year 2000 compliance costs, tax
rates and capital resources, are forward-looking statements and are
inherently subject to risks and uncertainties. The Company's actual
results could differ materially from those contained in such
forward-looking statements due to a number of factors, including
without limitation, higher than anticipated software modification
costs, changes in the level of Company borrowings, changes in tax
laws, the nature of the wholesale pharmaceutical drug distribution
industry, the evolving business and regulatory environment of the
healthcare industry and changes in the Company's business and capital
needs.
Results of Operations:
---------------------
Net Sales Net sales increased $58.7 million, or 37.8%, for the
---------
quarter ended March 31, 1999, compared to the corresponding period of
the prior year. Institutional sales increased $8.7 million primarily
due to increased sales to a prescription benefit management company.
Independent pharmacy sales increased by $19.7 million due to new and
existing retail accounts, including a $10.4 million increase from the
prior year in sales made to an independent retail purchasing
association and independent retail pharmacies formerly associated
with an acquired drug wholesaler. Chain store sales increased $29.9
million due to higher sales to existing and new chain store customers
during the current quarter.
Net sales increased $148.8 million, or 33.6% for the nine months
ended March 31, 1999, compared to the corresponding period of the
prior year. Institutional sales increased $22.2 million primarily due
to increased sales to a prescription benefit management company.
Independent pharmacy sales increased by $52.4 million due to new and
existing retail accounts, including a $33.4 million increase from the
corresponding period of prior year in sales made to an independent
retail purchasing association and independent retail pharmacies
formerly associated with an acquired drug wholesaler. Chain store
sales increased $73.6 million due to higher sales to existing and
new chain
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store customers of approximately $100.0 million during the nine-month
period partially offset by the termination of the Company's
relationship with a large regional chain customer on September 30,
1997 (an impact of approximately $26.4 million).
Excluding sales made to the former large regional chain customer
from the nine-month period in the prior year, net sales effectively
increased 42.1% for the nine months ended March 31, 1999. In
addition, the quarter and nine months ended March 31, 1999 contained
$92.6 million and $171.0 million, respectively, 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 $11.1 million
and $25.2 million, respectively, for the quarter and nine months
ended March 31, 1998.
Gross Profit Gross profit increased 51.2% to $12.2 million for the
------------
quarter ended March 31, 1999, compared to the corresponding period of
the prior year. As a percentage of net sales, gross margin increased
from 5.20% to 5.70% for the quarter ended March 31, 1999, compared to
the corresponding period of the prior year. The increase in gross
margin percentage was due mainly to benefits from inventory
investment buying initiatives and to higher penetration of profitable
generic sales, partially offset by higher sales to large customers,
which typically carry a lower margin percentage. The gross margin
computed on a first-in, first-out (FIFO) basis increased from 5.55%
to 6.14% for the quarter ended March 31, 1999, compared to the
corresponding period of the prior year.
Gross profit increased 42.9% to $30.4 million for the nine months
ended March 31, 1999, compared to the corresponding period of the
prior year. As a percentage of net sales, gross margin increased
from 4.80% to 5.14% for the nine months ended March 31, 1999,
compared to the corresponding period of the prior year. The increase
in gross margin percentage was due mainly to benefits from changes in
the Company's procurement strategies and higher penetration of
profitable generic sales, partially offset by higher sales to large
customers, which typically carry a lower margin percentage. The gross
margin computed on a first-in, first-out (FIFO) basis increased from
5.01% to 5.37% for the nine months ended March 31, 1999, compared to
the corresponding period of the prior year.
Operating Expenses Operating expenses increased $2.1 million, or
------------------
39.3%, to $7.5 million for the quarter and increased $4.5 million, or
29.6%, to $19.7 million for the nine months ended March 31, 1999,
compared to the corresponding period of the prior year. The ratio of
operating expenses to net sales for the quarter remained essentially
stable compared to the third quarter of fiscal 1998, while the ratio
for the first nine months of fiscal 1999 was 3.32%, an 11 basis point
decrease from the comparable period of the prior year. The increase
in operating expenses for the quarter and nine months ended March 31,
1999 resulted primarily from incremental warehouse and distribution
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costs associated with increased sales activity, and higher personnel
and occupancy costs related to additional managerial positions in
several major functional areas of the Company. The decrease in the
operating expense percentages for the nine months ended March 31,
1999 was due mainly to the increase in chain store sales, which
typically carry a lower operating expense to net sales percentage
than other trade classes.
Interest Expense, Net Net interest expense increased $364,000 or
---------------------
35.3% for the quarter and increased $1,026,000 or 39.8% for the nine
months ended March 31, 1999, compared to the corresponding periods of
the prior year. As a percentage of net sales, net interest expense
decreased from 0.66% of net sales to 0.65% of net sales for the
quarter and increased from 0.58% to 0.61% of net sales for the nine
months ended March 31, 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 changes in the Company's inventory procurement strategies, offset
by the lower interest rates on these facilities.
Other Income, Net Other income, net decreased from $113,000 to
-----------------
$95,000 for the quarter and increased from $359,000 to $363,000 for
the nine months ended March 31, 1999, compared to the corresponding
period of the prior year. The decrease in other income, net for the
quarter was primarily due to slightly lower 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 $930,000 and $549,000, respectively, for the quarter
ended March 31, 1999 and March 31, 1998 and approximately $1,382,000
and $909,000, respectively, for the nine months ended March 31, 1999
and March 31, 1998.
Provision for Income Taxes The Company's effective income tax rate
--------------------------
of 39.0% is the rate expected to be applicable for the full fiscal
year ending June 30, 1999. This rate was greater than the federal
income tax rate of 34% primarily because of the amortization of
intangible assets that are not deductible for federal and state
income tax purposes and the effect of state income taxes.
Financial Condition:
-------------------
Liquidity and Capital Resources The Company's working capital
-------------------------------
requirements are generally met through a combination of internally
generated funds, borrowings under its revolving line of credit and
the Securitization facility, and trade credit from its suppliers.
The following measures are utilized by the Company as key indicators
of the Company's liquidity and working capital management:
<PAGE> 14
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<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
-------- --------
<S> <C> <C>
Working capital (000's) $29,332 $52,250
Current ratio 1.26 to 1 1.56 to 1
</TABLE>
Working capital and the current ratio have declined as a result of
the Securitization, since a portion of the Company's trade accounts
receivables are no longer included in the Company's current assets.
The reduction in trade accounts receivable as a result of the
Securitization at March 31, 1999 amounted to $60.0 million.
Adjusting for the Securitization, working capital and the current
ratio would have been $89.3 million and 1.79 to 1, respectively.
The Company invested $545,000 in capital assets in the nine-month
period ended March 31, 1999, as compared to $726,000 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 outflows from financing activities totaled $34.0 million for the
nine-month period ended March 31, 1999 as compared to cash inflows of
$18.7 million for the corresponding period in the prior year. The
current year increase in cash outflows is primarily due to the
reduction in the revolver that resulted from the application of the
receivable Securitization proceeds. At March 31, 1999, the revolving
line of credit provided a maximum borrowing capacity of $75.0
million. At March 31, 1999 and June 30, 1998, the unused portion of
the line of credit amounted to $34.7 million and $14.8 million,
respectively. In addition, at March 31, 1999, the Securitization
provided a maximum capacity of $60.0 million. At March 31, 1999, the
entire Securitization of $60.0 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.
On March 31, 1999, the Company paid off the entire remaining balance
of the Missouri First Link loan in an effort to reduce higher
interest bearing debt. The principal amount outstanding on this loan
was $ 875,000.
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
<PAGE> 15
Page 15 of 19
and its subsidiaries. The Company operates its business using a
network of distributed AS/400, local area network (LAN) and PC
Systems. The Company's financial, distribution and operational
systems reside on the AS/400. 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 also 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 and approximately 50% of AS/400 systems, which
includes financial, 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, RF and hand held ordering
systems, which support distribution and internal operations functions,
are undergoing rigorous testing procedures before being implemented
in production in late summer 1999. The Company's 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 is in the process of
completing its Y2K software implementation in customer sites, which
it expects to complete in the summer of 1999. Software upgrades to
enable the Company's software products to handle Year 2000 date
processing is 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 are being notified regarding potential hardware
issues and given alternatives to resolve the issue. The Company
expects this effort to be completed in the summer of 1999.
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, 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.
<PAGE> 16
Page 16 of 19
The Company is concurrently developing its Y2K contingency plan and
expects to complete this phase of the project in the summer 1999.
The Company's contingency planning efforts are focused to identify
the entities that are critical to the Company's business functions,
determine which entities have the largest potential for impact if
there are Y2K issues, determine the likelihood of the potential
problem, rank the entities by criticality and likelihood of potential
problems, and develop work-around plans to handle any potential
emergency situation. The Company expects to implement contingency
plans in the summer of 1999 and to monitor critical situations
thereafter, 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 $500,000 as of March 31, 1999 in its Year 2000 project
from internally generated funds and expects to spend approximately
another $200,000 from internally generated funds to complete the
project by late summer 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 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> 17
Page 17 of 19
Other:
-----
On February 16, 1999, the Company announced the signing of a letter
of intent to acquire Jewett Drug Co., Inc., ("Jewett") a privately
owned pharmaceutical distribution company based in Aberdeen, South
Dakota. The consideration will be a combination of cash and the
Company's common stock totaling $34 million, which is $2 million less
than originally announced. Jewett provides comprehensive
pharmaceutical distribution services to over 250 customers in South
Dakota, North Dakota, Minnesota and four north central states. The
Company expects the transaction to be closed in its fourth fiscal
quarter subject to execution of a definitive agreement, satisfactory
completion of due diligence and required regulatory approvals.
<PAGE> 18
Page 18 of 19
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Part II. Other Information
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.29 - Employment agreement for Senior Vice President and Chief
Financial Officer dated December 18, 1998
10.30 - Employment Agreement for Vice President, General Council
and Secretary dated March 17, 1999
27 - Financial Data Schedule
99 - Press Release
(b) Reports on Form 8-K
None
<PAGE> 19
Page 19 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: May 14, 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> 1
CONFIDENTIAL
December 18, 1998
Mr. Thomas S. Hilton
602 Carman View Ct.
Ballwin, MO 63021
Dear Tom:
Thank you for taking the time to visit with Hord and me on December 16.
We are very excited about having you join D&K as the Senior Vice President and
Chief Financial Officer. Outlined below are the significant points of the
terms of employment that I believe we mutually agreed upon:
Title: Senior Vice President and Chief Financial Officer
General Job Description: Senior officer in charge of the successful leadership
and execution of all financial planning and
management, accounting, and administration functions.
Such functions include, but are not limited to:
* External and internal financial reporting
* Merger and acquisition projects
* Budgeting, forecasting and planning
* Income taxes
* Risk management and insurance programs
* Employee benefits and 401(k) plans
* Working capital management
Your position reports directly to the President and
COO.
Salary: $165,000 per annum
Bonus: 30% of base salary upon achieving net income targets
as established at the discretion of the Board of
Directors. For fiscal 1999, your bonus may or may
not be prorated based on your performance.
<PAGE> 2
Page Two
Change in Control: During the first 24 months of your employment a
Change in Control occurs, defined as the acquisition
of 51% or more of the then outstanding voting shares
of the Company by an outsider, and your position is
terminated due to the Change in Control, you will be
eligible for severance compensation equal to one
times your current annual base salary.
Company Car: Level I automobile (executive level) per D&K's Auto
Lease Program, or an auto allowance to be mutually
agreed upon.
Stock Options: Subject to Board of Director approval, an initial
award of 45,000 options that would vest in three
equal increments over a three-year period
(15,000/year) upon the successful completion of
mutually-defined goals and objectives at the end of
years one, two and three. Option price will be the
fair market value of the Company's Common Stock on
the date of each award.
Benefits: After 60 days, you will qualify for D&K's health
coverage and participation in D&K's 401(k) plan and
long-term disability plan. In addition, you will be
eligible for the Executive Deferred Compensation Plan
established for retirement income.
Other: The Company will reimburse you for other reasonable
business related expenses including but not limited
to:
* Monthly dues for Greenbriar Country Club
* Cellular phone expenses
* Professional association dues
* Other out-of-pocket expenses related to performing
your responsibilities.
In addition, in the first year of your employment,
you will be eligible for three weeks of vacation.
<PAGE> 3
Page Three
Tom, I hope I have adequately explained our job offer to you, and I hope
we have addressed any issues or questions you have regarding employment with
D&K. Per our discussion, we anticipate your starting date to be on or about
January 11, 1999.
We are extremely excited about your joining D&K's corporate team, and we
think you will play an integral part in D&K's future growth and success.
Please keep in touch in the interim.
Sincerely,
/s/ Martin D. Wilson
- --------------------
Martin D. Wilson
President and Chief Operating Officer
MDW/ejb
cc: J.H. Armstrong, III
Accepted by: /s/ Thomas S. Hilton Date: January 7, 1999
----------------------- ---------------
<PAGE> 1
CONFIDENTIAL
March 17, 1999
Mr. Leonard R. Benjamin
14 Abby Drive
Lawrenceville, NJ 08648
VIA FACSIMILE 609-896-0987
Dear Len:
Thank you for taking the time to visit with us on March 12. We are very
excited about having you join D&K as the Vice President, General Counsel and
Secretary. Outlined below are the significant points of the terms of
employment that we are offering you:
Title: Vice President, General Counsel and Secretary
General Job Description: Senior officer in charge of the successful
leadership and execution of all the Company's
legal affairs and outside counsel activities.
Such functions include, but are not limited to:
* Managing outside counsel engagements
* Merger and acquisition counseling
* SEC and NASDAQ filings
* In-house policies and compliance
* Customer and supplier agreements
* Insider trading
* Proxies
* Certain Human Resource functions
Your position reports directly to the President
and COO or the CEO when appropriate.
Salary: $160,000 per annum
<PAGE> 2
Page Two
Bonus: 30% of base salary upon achieving net income
targets as established at the discretion of the
Board of Directors. For fiscal 1999, your bonus
will be prorated based on your starting date.
Change in Control: From the date of your acceptance through the
first 24 months of your employment a Change in
Control occurs, defined as the acquisition of 51%
or more of the then outstanding voting shares of
terminated due to the Change in Control, you will
be eligible for severance compensation equal to
one times your current annual base salary.
Company Car: Level I automobile (executive level) per D&K's
Auto Lease Program, or an auto allowance to be
mutually agreed upon.
Stock Options: Subject to Board of Director approval, an initial
award of 45,000 options that would vest in three
equal increments over a three-year period
(15,000/year) upon the successful completion of
mutually-defined goals and objectives at the end
of years one, two and three. Option price will
be the fair market value of the Company's Common
Stock on the date of each award. If during the
first 24 months of your employment with D&K, a
Change of Control occurs as defined above, all
ungranted stock options will accelerate and be
granted at the most recent exercise price of the
prior grant.
Relocation: All moving and relocation expenses will be the
Company's responsibility in accordance with D&K's
policy. Temporary residence costs will also be
provided by D&K until which time your
Lawrenceville home is sold.
Benefits: After 60 days, you will qualify for D&K's health
coverage and participation in D&K's 401(k) plan
and long-term disability plan. In addition, you
will be eligible for the Executive Deferred
Compensation Plan established for retirement
income. During the 60 days, D&K will reimburse
you for the difference between your current COBRA
payment amount and D&K's current premium amount.
<PAGE> 3
Page Three
Other: The Company will reimburse you for other
reasonable business related expenses including
but not limited to:
* Cellular phone expenses
* Professional association dues
* Other out-of-pocket expenses related to
performing your responsibilities.
In addition, in the first year of your
employment, you will be eligible for three weeks
of vacation.
Len, I hope I have adequately explained our job offer to you, and I hope
we have addressed any issues or questions you have regarding employment with
D&K. We anticipate your starting date to be April 12, 1999.
We are extremely excited about your joining D&K's corporate team, and we
think you will play an integral part in D&K's future growth and success.
Please call me with any questions or comments.
Sincerely,
/s/ Martin D. Wilson
- --------------------
Martin D. Wilson
President and Chief Operating Officer
MDW/ejb
cc: J.H. Armstrong, III
Accepted by: /s/ Leonard R. Benjamin Date: March 17, 1999
----------------------- --------------
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<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
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<PAGE> 1
D&K HEALTHCARE RESOURCES, INC. ANNOUNCES
LETTER OF INTENT TO ACQUIRE JEWETT DRUG CO., INC.
ST. LOUIS, MISSOURI, FEBRUARY 16, 1999 - D&K Healthcare Resources, Inc.
(NASDAQ:DKWD) today announced the signing of a letter of intent to acquire
Jewett Drug Co., Inc., ("Jewett") a privately owned pharmaceutical distribution
company based in Aberdeen, South Dakota for $36 million in a combination of
cash and D&K common stock. D&K expects the acquisition of Jewett to be
immediately accretive to earnings. Jewett will be operated as a wholly owned
subsidiary of D&K under its own name from its existing facilities.
Jewett provides comprehensive pharmaceutical distribution services to over
250 customers in South Dakota, North Dakota, Minnesota and four north central
states. Jewett recorded 1998 sales of approximately $250 million. D&K expects
the transaction to be closed in its fourth fiscal quarter subject to execution
of a definitive agreement, satisfactory completion of due diligence and
required regulatory approvals.
"The acquisition of Jewett will further our goal of developing strong regional
pharmaceutical distribution services throughout the Midwest," said J. Hord
Armstrong, III, D&K's Chairman and Chief Executive Officer. "Jewett
complements our existing distribution operations in the Northern Midwest,
permitting expansion of geographic coverage and creation of economies of scale
that will allow D&K to leverage its operating costs. A highly respected
115-year-old regional pharmaceutical distribution business, Jewett will provide
an excellent opportunity for access to a broader base of clients in these
markets. We are determined to execute a seamless transition for all stakeholders
involved including employees, customers and suppliers. We believe an integral
component of this transaction is Jewett's network in the Northern Midwest,
which we intend to maintain in order to capitalize on its strong customer
relationships. Following the conclusion of the transaction, we expect Harvey
C. Jewett IV to join D&K's Board of Directors, and we extend a warm welcome to
Jewett's customers and employees."
In commenting on the transaction, Harvey C. Jewett IV, Chairman of Jewett,
remarked "D&K Healthcare is a company very much like Jewett Drug Company. We
believe that this transaction will allow our customers more options in
products, better pricing and the same extremely high quality of service. D&K
is a company that realizes that the customer and the wholesale house are very
much in a partnership. We think this will be good news for Jewett Drug Co.,
its employees and customers. I look forward to a long and successful
relationship with D&K."
The forward-looking statements contained in this press release are inherently
subject to risks and uncertainties. D&K's actual results could differ
materially from those currently anticipated due to a number of factors,
including without limitation, the competitive nature of the wholesale
pharmaceutical drug distribution industry, the evolving business and regulatory
environment of the healthcare industry in which D&K operates and other factors
set forth in reports and other documents filed by D&K with the Securities and
Exchange Commission from time to time.
D&K Healthcare Resources, Inc., of St. Louis, Missouri, is a full-service
regional wholesale drug distributor supplying customers from facilities in
Lexington, Kentucky; Minneapolis, Minnesota; and Cape Girardeau, Missouri. D&K
owns a 50 percent interest in Pharmaceutical Buyers, Inc., of Boulder,
Colorado, one of the nation's leading alternate site group purchasing
organizations. D&K also invites all interested parties to visit its Web site
at http://www.dkwd.com.
-------------------
