<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 3, 1998
REGISTRATION NO. 333-56129
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
C.D. SMITH HEALTHCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 5122 44-0437360
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION OR
ORGANIZATION)
3907 S. 48TH TERRACE
P.O. BOX 789
ST. JOSEPH, MO 64503
(816) 232-5471
(ADDRESS INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT C. FARLEY
CHIEF EXECUTIVE OFFICER
3907 S. 48TH TERRACE
P.O. BOX 789
ST. JOSEPH, MO 64503
(816) 232-5471
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
SHARI L. WRIGHT, ESQ. KATHERINE M. SEABORN, ESQ.
BLACKWELL SANDERS PEPER MARTIN LLP GARDERE & WYNNE, L.L.P.
TWO PERSHING SQUARE 1601 ELM STREET
2300 MAIN STREET, SUITE 1100 3000 THANKSGIVING TOWER
KANSAS CITY, MISSOURI 64108 DALLAS, TEXAS 75201-4761
(816) 983-8000 (214) 999-3000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement is declared effective.
If the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 3, 1998
PROSPECTUS
, 1998
4,750,000 SHARES
C.D. SMITH HEALTHCARE, INC.
[LOGO OF C.D. SMITH HEALTHCARE, INC. APPEARS HERE]
COMMON STOCK
Of the 4,750,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby (the "Offering"), 3,500,000 shares are being
sold by C.D. Smith Healthcare, Inc. (the "Company") and 1,250,000 shares are
being sold by certain shareholders of the Company (the "Selling Shareholders").
The Company will not receive any proceeds from the sale of shares by the
Selling Shareholders. See "Principal and Selling Shareholders."
Prior to the Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be
between $15.00 and $17.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price.
The Common Stock has been approved for listing on the New York Stock Exchange
("NYSE") under the trading symbol "CDH."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
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</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,650,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 712,500 additional shares of
Common Stock, at the Price to the Public less Underwriting Discounts and
Commissions, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions and Proceeds to the Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as, and if delivered to and accepted by them,
subject to certain prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be in New York, New York on or about , 1998.
DONALDSON, LUFKIN & JENRETTE
BT ALEX. BROWN
WHEAT FIRST UNION
<PAGE>
[INSIDE FRONT COVER]
[MAP]
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited financial
statements for the first three quarters of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Investors should carefully consider the information set forth
under the heading "Risk Factors." Unless otherwise indicated, all information
in this Prospectus (i) assumes that the Underwriters' overallotment option is
not exercised, (ii) reflects the exercise of warrants (the "Churchill
Warrants") to purchase 1,080,078 shares of Common Stock held by Churchill ESOP
Capital Partners ("Churchill") and (iii) has been adjusted to give effect to a
51-for-1 Common Stock split. The exercise of the Churchill Warrants and the
Common Stock split will be effected immediately prior to consummation of the
Offering. References throughout this Prospectus to fiscal years refer to the
Company's fiscal years ending on the last day of February of such year. Unless
otherwise indicated, references to the "Company" or "C.D. Smith" refer to C.D.
Smith Healthcare, Inc. and its subsidiaries.
THE COMPANY
C.D. Smith is a leading regional full-line, full-service wholesale
distributor of pharmaceuticals and related products. The Company distributes
over 25,000 SKUs to more than 3,000 customers located predominantly in the
midwestern United States and New England. The Company believes that it is the
primary supplier to a majority of its customers, which include independent
pharmacies, health care institutions and regional and national chain
pharmacies. According to the 1998 Drug Store Market Guide, the Company is the
second largest pharmaceutical wholesale distributor in metropolitan Kansas City
and Boston and the third largest in Chicago. For fiscal 1998, the Company's pro
forma net sales were $762.3 million.
Since being acquired by its management and employees in 1991, C.D. Smith has
grown from a small pharmaceutical distributor serving rural customers into a
full-line, full-service regional wholesale distributor with a major presence in
both rural and urban markets within its core territories. From 1994 through
fiscal 1998, the Company's net sales grew internally (excluding the effect of
acquisitions) at a compound annual rate of approximately 50.3%. The Company has
achieved this growth principally by gaining new customers within its
territories, converting customer relationships from secondary to primary
supplier status and expanding its service territories.
The Company attributes its success since 1991 primarily to the implementation
of a comprehensive program aimed at meeting the specific needs of its
customers. As a part of this program, the Company significantly expanded its
sales and customer service staff. At May 31, 1998, C.D. Smith employed 37
direct sales representatives with an average of 28 years of industry experience
who are supported by 25 telemarketers and customer service professionals. The
Company added multiple operating shifts to extend the hours for customer order
placement and to expand the territories in which it can offer reliable next-day
delivery. The Company also broadened its product offerings and upgraded its
customer ordering and information systems to enhance its ability to serve as a
primary supply source. In 1994, the Company built a state-of-the-art
distribution facility to accommodate its growth and has achieved key measures
of efficiency that significantly exceed industry averages. The Company believes
that providing exceptional customer service distinguishes C.D. Smith from other
wholesale distributors and is key to its continued growth.
In October 1997, the Company acquired General Drug Company, a full-service
wholesale distributor with operations in the greater Chicago and Boston markets
(the "General Drug Companies"). As part of this transaction (the "General Drug
Acquisition"), the Company also acquired SBS Pharmaceuticals, Inc. ("SBS"), a
pharmaceuticals repackaging and distribution business. C.D. Smith is currently
integrating the operations of the General Drug Companies and believes it will
realize substantial synergies by increasing the efficiency of the acquired
distribution facilities, obtaining greater volume purchasing discounts and
eliminating duplicative overhead functions. In addition, the Company is
implementing its program of enhanced customer service in Chicago and Boston,
which it believes will accelerate sales growth in those markets. In Chicago,
the Company doubled the size of its sales force and added a second operating
shift to accommodate late-day orders, commence Saturday deliveries and increase
the territories served by the facility. In Boston, the Company has divested the
3
<PAGE>
marginally profitable tobacco and candy business, which has provided
significant additional warehouse capacity for pharmaceuticals and related
products. The Company also intends to expand the sales force and add a second
operating shift in Boston.
The wholesale pharmaceutical distribution industry has experienced rapid
sales growth over the past twelve years, increasing from approximately $14.0
billion in sales in 1985 to over $74.6 billion in 1997. In addition, the
percentage of pharmaceutical sales through wholesale distributors increased to
approximately 80.0% in 1997, up from 45.0% in 1970. At the same time, there has
been substantial consolidation of full-line pharmaceutical wholesale
distributors in the United States, from approximately 139 at the end of 1980 to
approximately 54 at the end of 1997. Industry analysts expect this
consolidation trend to continue. The Company believes that it is well-
positioned to capitalize on industry consolidation and intends to make
additional selective acquisitions.
OPERATING STRATEGY
The Company's objective is to build on its position as a leading regional
wholesale distributor to become a national pharmaceutical services company. The
principal elements of the Company's strategy are as follows:
Provide High Levels of Customer Service. C.D. Smith believes that its
customer service focus is a significant competitive advantage, especially
with independent pharmacy customers who may not receive personalized
service from national wholesale distributors. C.D. Smith's experienced
direct sales force makes regular personal visits to current and prospective
customers and is supported by a knowledgeable in-house customer service
staff. The Company operates its distribution facilities to meet its
customers' requirements for accurate same-day or next-day delivery. The
Company believes that its commitment to customer service has enabled it to
achieve primary supplier status with many of its customers, resulting in
significant net sales growth.
Increase Sales from Existing Facilities. C.D. Smith intends to leverage
its existing infrastructure and expertise to increase sales from each of
its distribution facilities. Prior to their acquisition by the Company,
each of the Chicago and Boston facilities operated a single shift, served
customers within a small geographic area and carried a more limited
inventory, which typically positioned them as secondary suppliers. The
Company believes that adding a second operating shift and developing a
customer-oriented sales force will enable both of these facilities to
increase net sales by achieving primary supply relationships with customers
in significantly expanded service territories. Similarly, C.D. Smith
believes it can apply the General Drug Companies' greater experience with
managed care and other institutional customers to increase net sales in its
midwestern region.
Continue Selective Acquisitions. The Company believes that it is well-
positioned to make selective acquisitions to expand into new territories
and to further penetrate current market territories. Through its
participation in national industry groups and OptiSourceSM, a Company-
operated generic pharmaceutical buying group that includes 16 other
regional wholesale distributors, C.D. Smith maintains significant contact
with numerous regional and local distributors and has identified several
attractive acquisition candidates.
Offer Broad Line of Products and Services. C.D. Smith provides its
customers a broad line of over 25,000 SKUs of branded and generic
pharmaceuticals, over-the-counter health care products and health and
beauty aids from more than 1,000 vendors. The Company believes its products
and services enable it to be the primary supplier to the majority of its
customers and to further leverage its regional presence by meeting the
secondary supply needs of many significant customers. Through OptiSource,
the Company obtains lower wholesale prices through volume purchasing and
maintains a major presence in the distribution of the rapidly growing
generic pharmaceutical product category. Through SBS, the Company buys
approximately 140 pharmaceuticals in bulk and repackages them into
quantities requested by selected wholesalers. The Company is also
developing its own private label program designed to help independent
pharmacies compete more aggressively with regional and national chain
pharmacies by providing store identification, promotional and advertising
programs and a private label brand of over-the-counter pharmaceuticals and
health and beauty aids.
4
<PAGE>
Expand Pharmaceutical Services. The Company intends to offer
pharmaceutical services beyond its current product and service offerings.
The Company believes that it can leverage its expertise in the
pharmaceutical industry and its large, concentrated customer base to offer
additional pharmacy-related services, such as pharmacy benefits management,
managed care pharmaceutical formulary management and health care
institution unit of use packaging. The Company intends to expand its
service offerings through internal development and selective acquisitions.
The Company believes that its operating strategy can be implemented without
significant additional capital investment (other than possible acquisitions)
and without incurring significant additional operating costs that would not be
offset by anticipated revenue growth.
The Company is a Missouri corporation with its corporate headquarters located
at 3907 South 48th Terrace, St. Joseph, Missouri 64503. The telephone number is
(816) 232-5471.
THE OFFERING
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<S> <C>
Common Stock offered:
By the Company................................. 3,500,000 shares
By the Selling Shareholders.................... 1,250,000 shares
Total......................................... 4,750,000 shares
Common Stock to be outstanding after this
Offering....................................... 10,579,270 shares(1)
Use of Proceeds(2).............................. To repay certain outstanding indebtedness. See
"Use of Proceeds."
NYSE symbol..................................... CDH
</TABLE>
- --------------------
(1) Excludes 848,578 shares subject to options issued under the Company's
Amended and Restated 1996 Equity Compensation Plan, all of which are
immediately exercisable at a weighted average exercise price of $0.73 per
share. See "Management--Executive Compensation--Equity Compensation Plan"
and "Principal and Selling Shareholders."
(2) The Company will not receive any of the proceeds from the sale of Common
Stock by the Selling Shareholders. See "Principal and Selling
Shareholders."
RISK FACTORS
Prospective purchasers of the Common Stock should consider carefully all of
the information set forth in the Prospectus and in particular, should evaluate
the specific factors set forth under the caption "Risk Factors" hereinafter,
which provide a discussion of certain risks involved in an investment in the
Common Stock.
5
<PAGE>
SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL DATA
The following summary financial information sets forth selected consolidated
financial data and selected consolidated pro forma financial data with respect
to the Company. The pro forma Statement of Operations Data and Other Operating
Data, as adjusted, gives effect to the Offering, including the application of
the net proceeds therefrom, the exercise of the Churchill Warrants and the
General Drug Acquisition as if they occurred on March 1, 1997. The financial
data should be read in conjunction with the consolidated financial statements
of the Company and related notes thereto and the pro forma consolidated
statement of income of the Company and related notes thereto included elsewhere
in this Prospectus. The pro forma financial data is provided for comparative
purposes only and is not necessarily indicative of the results which would have
occurred had the General Drug Acquisition, the exercise of the Churchill
Warrants and the Offering been consummated on March 1, 1997, nor is it
necessarily indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED PRO FORMA (2) ENDED
--------------------------------------------------- ------------- -----------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, MAY 31, MAY 31,
1995 1996 1997 1998(1) 1998 1997 1998
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $171,977 $224,163 $301,523 $544,090 $762,259 $88,430 $206,866
Gross profit........... 7,751 10,682 14,739 27,423 39,928 3,928 9,946
Selling, general and
administrative
expense............... 7,868 7,975 9,986 15,879 22,848 2,513 6,013
Depreciation and
amortization.......... 155 221 279 923 1,731 82 431
Special charges........ -- -- -- -- 2,592(3) -- 817(4)
Operating income
(loss)................ (272) 2,486 4,474 10,621 12,757 1,333 2,685
Interest expense....... 1,041 1,478 1,571 4,646 8,756 500 2,105
Net income (loss)...... $ (864) $ 634 $ 1,930 $ 3,997 $ 2,739 $ 542 $ 394
Net income (loss) per
share(5):
Basic................ $ (0.08) $ 0.07 $ 0.29 $ 0.67 $ 0.46 $ 0.09 $ 0.07
======== ======== ======== ======== ======== ======= ========
Diluted.............. $ (0.08) $ 0.07 $ 0.28 $ 0.56 $ 0.38 $ 0.08 $ 0.05
======== ======== ======== ======== ======== ======= ========
Shares used in
computing net income
(loss) per share(5):
Basic................ 10,200 9,500 6,700 5,963 5,963 5,991 5,904
======== ======== ======== ======== ======== ======= ========
Diluted.............. 10,200 9,500 6,872 7,166 7,166 6,614 8,023
======== ======== ======== ======== ======== ======= ========
AS ADJUSTED DATA(6):
Interest expense....... $ 3,217 $ 768
Net income............. 6,273 1,247
Net income per share:
Basic................ $ 0.59 $ 0.12
======== ========
Diluted.............. $ 0.56 $ 0.11
======== ========
Shares used in
computing net income
per share:
Basic................ 10,638 10,579
======== ========
Diluted.............. 11,256 11,363
======== ========
OTHER OPERATING DATA:
Sales growth........... 126.8% 30.3% 34.5% 80.4% N/A 41.5% 133.9%
Same-store sales
growth(7)............. 126.8% 30.3% 34.5% 28.2% N/A 41.5% 29.0%
EBITDA(8).............. $ (174) $ 2,748 $ 4,879 $ 11,833 $ 14,736 $ 1,456 $ 3,181
Net cash provided by
(used in) operating
activities............ (2,642) 56 (6,997) (5,905) N/A 4,659 3,101
Net cash used in
investing activities.. (1,354) (144) (952) (29,715) N/A (38) (600)
Net cash provided by
(used in) financing
activities............ 3,968 182 7,863 35,645 N/A (4,636) (2,543)
Days sales
outstanding(9)........ 19.5 17.8 17.2 20.8 23.9 15.9 23.8
Gross profit margin.... 4.5% 4.8% 4.9% 5.0% 5.2% 4.4% 4.8%
Operating expenses as
a percentage of net
sales(10)............. 4.7% 3.7% 3.4% 3.0% 3.2% 2.9% 3.1%
Operating income
(loss) margin(10)..... (0.2)% 1.1% 1.5% 2.0% 2.0% 1.5% 1.7%
</TABLE>
<TABLE>
<CAPTION>
AT MAY 31, 1998
--------------------
AS
ACTUAL ADJUSTED(6)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets........................................ $136,768 $137,923
Working capital....................................... 65,787 66,942
Total assets.......................................... 171,625 171,899
Total indebtedness.................................... 93,530 42,724
Shareholders' equity.................................. 7,559 58,639
</TABLE>
6
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- --------------------
(1) Includes five months of operating results of the General Drug Companies
following their acquisition by the Company on October 3, 1997 (the
"Acquisition Date").
(2) Adjusted to give effect to the General Drug Acquisition as though it
occurred on March 1, 1997.
(3) Represents non-recurring payments of $2,047 under certain non-compete
agreements entered into by the General Drug Companies prior to the General
Drug Acquisition which were contractually paid and expensed in their
entirety by the General Drug Companies on the Acquisition Date. In
addition, $545 represents non-recurring management fees paid by the General
Drug Companies to a party related to its former owner for no specifically
identifiable service and for which no continuing services are necessary.
(4) Reflects a $592 severance payment to a former officer and a $225 loss on
the sale of the tobacco and candy business of the General Drug Companies.
(5) See Notes 1 and 11 of notes to the consolidated financial statements of the
Company for information concerning the calculation of net income (loss) per
share.
(6) Adjusted to give effect to the exercise of the Churchill Warrants, the
Offering and the exercise by management of options to purchase 94,922
shares, including application of the net proceeds therefrom, as though they
occurred on March 1, 1997.
(7) Reflects growth of net sales from distribution facilities that have been
operated by the Company for the full year in each comparable period.
(8) EBITDA represents income before interest expense, income taxes,
depreciation and amortization. The Company believes that EBITDA is a
measure commonly used in the pharmaceutical wholesale distribution industry
by financial analysts, investors and other interested parties for measuring
and comparing financial information such as liquidity, operating
performance and leverage. EBITDA is not intended to represent cash flow
from operations as defined by generally accepted accounting principles and
should not be used as an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity. EBITDA
amounts shown for the Company may not be comparable to similarly titled
measures reported for other companies as such calculations may not be made
on the same basis.
(9) Days sales outstanding is calculated using the average of the month-end
accounts receivable balances for the respective fiscal periods.
(10) Calculation excludes special charges described in footnotes (3) and (4).
7
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the factors described in this section as well as the other
information contained in this Prospectus.
COMPETITION
The wholesale distribution of pharmaceuticals, health and beauty aids and
other health care products is highly competitive. The Company competes with
numerous national and regional distributors, some of which are larger and have
substantially greater financial resources than the Company. In addition, the
Company competes with numerous distributors, direct-selling manufacturers and
other specialty distributors. Competitive factors include price, service and
delivery, credit terms, breadth of product line, customer support and
marketing programs. A price decrease by a competitor, or an increase in the
other competitive factors, could have a material adverse effect on the
Company. There can be no assurance that the Company will not encounter
increased competition in the future that could adversely affect the Company's
business. See "Business--Competition."
EXPANSION THROUGH ACQUISITIONS
The Company intends to expand, in part, through selective acquisitions of
wholesale pharmaceutical distributors. The Company continually evaluates
strategic acquisition opportunities; however, the Company has no binding
commitments, understandings or other arrangements to acquire any business or
other material assets. There can be no assurance that the Company will be able
to identify attractive acquisition candidates or complete the acquisition of
any such candidate on terms favorable to the Company. Growth through
acquisitions involves numerous risks, including difficulties in the
integration of the operations, systems and personnel, including key
management, of the acquired businesses and the diversion of management's
attention from other business concerns. In the event that the Company acquires
businesses whose employees are parties to collective bargaining agreements,
the Company would be subject to risks inherent in such arrangements, including
strikes or work stoppages. A substantial portion of the Company's capital
resources could be used for acquisitions. The Company may require additional
debt or equity financing for future acquisitions, which additional financing
may not be available on terms favorable to the Company, if at all.
EXPANSION INTO NEW MARKETS
The General Drug Acquisition provided the Company greater access to certain
urban markets and different categories of customers than previously served.
Expansion into these markets and service of these customers presents different
challenges than the Company previously experienced in growing its net sales.
Accordingly, there can be no assurance that the Company will be able to grow
the operations acquired in the General Drug Acquisition at a similar rate to
that achieved in its St. Joseph operations, if at all.
PHARMACEUTICAL WHOLESALE DISTRIBUTION INDUSTRY
Like most wholesale distributors, the Company achieves small gross margins,
making it vulnerable to increases in its fixed operating costs and decreases
in its net sales, which could result from industry-wide price decreases,
customer losses or governmental regulation such as imposed price ceilings. In
addition, as a wholesale distributor, the Company is largely dependent on
service and financial support provided by a small number of pharmaceutical
manufacturers. A cessation or substantial decrease in the supply of products
or financial support provided to the Company by one or more of these
manufacturers could have a material adverse effect on the Company's operations
and financial results.
Although much of the Company's sales are delivered using internal
transportation, a substantial portion of sales is delivered to customers using
third-party shippers. In the event these third-party shippers were to become
unavailable for any reason, the Company could experience a material adverse
effect on its business operations and financial condition.
8
<PAGE>
DEPENDENCE ON KEY PERSONNEL; EMPLOYEES
The Company is dependent on its senior and regional management, the loss of
certain of whom could have a material adverse effect on the Company. The
Company maintains key personnel life insurance on Robert C. Farley in the
amount $1.0 million. In addition, the Company has long-term employment
agreements with its key executives that contain noncompetition clauses. There
can be no assurance that, over time, the Company will be able to retain all of
its senior and regional management. See "Management."
The Company has collective bargaining agreements covering approximately 80
employees, which subject the Company to risks inherent in such arrangements,
including strikes and work stoppages. See "Business--Employees."
CONCENTRATION ON INDEPENDENT PHARMACIES
Approximately 64.1% of the Company's net sales in fiscal 1998 (54.1%, pro
forma for the General Drug Acquisition) were to independent pharmacies. Due
primarily to industry consolidation, increased competition and pricing
pressures, the number of independent pharmacies in the United States has
decreased from approximately 32,000 in 1990 to approximately 21,000 in 1997.
Further reduction in the number of independent pharmacies in the Company's
markets could have a material adverse effect on the Company's business and
financial condition.
DEPENDENCE ON SYSTEMS
The Company's success depends, in part, on the accuracy and proper
utilization of its management information systems, as well as those of its
vendors and customers. The Company's ability to manage its inventory and
accounts receivable collection, to purchase, sell and ship on an efficient and
timely basis and maintain a cost-efficient operation is dependent upon the
quality and utilization of the information generated by its management
information systems. The Company believes that its management information
systems, coupled with planned enhancements, will be sufficient to sustain its
present operations and its anticipated growth for the foreseeable future,
although no assurance can be given to that effect. See "Business--Management
Information Systems."
The Company is in the process of modifying the software in its management
information systems to be Year 2000 compliant. There can be no assurance that
the Company will complete such modifications in a timely fashion. Failure of
the Company, its vendors or its customers to have in place Year 2000 compliant
systems could have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
COVENANT RESTRICTIONS IN CREDIT FACILITY
The Company's existing credit facility (the "Credit Facility") restricts the
Company from paying dividends, could limit the ability of the Company to
effect future debt or equity financings and may otherwise restrict corporate
activities, including the ability to respond to competitive market conditions,
to provide for capital expenditures beyond those permitted or to take
advantage of acquisitions or other business opportunities. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
NONRECURRING AND OTHER CHARGES
Upon closing of the Offering (expected to occur during the second quarter of
fiscal 1999), the Company will incur an extraordinary charge of approximately
$2.0 million (net of income taxes) related to prepayment of the Company's
subordinated debt and to write-off the unamortized debt issuance costs in
connection with the retirement of debt. In addition, earnings during fiscal
1999 will be reduced by interest charges on the subordinated debt until its
repayment with the proceeds of this Offering and by the higher interest
charges on the Credit Facility until it can be reduced. See footnote (10) to
Pro Forma Consolidated Statement of Income.
9
<PAGE>
POTENTIAL VOLATILITY OF FUTURE QUARTERLY OPERATING RESULTS
The Company's results of operations have in the past and will in the future
fluctuate on a quarterly basis as a result of a number of factors, including
the sale of seasonal items, such as during the cold and flu season, the timing
and scope of new customer volumes, the timing and amounts of price
adjustments, the timing and amount of other cost changes and the impact of
interest rate changes. Fluctuations in quarterly operating results could have
a disproportionate impact on the Company's results of operations for the full
year and could affect the market price of the Common Stock in a manner
unrelated to the longer term operating performance of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Common Stock could be subject to wide fluctuations
in response to announcements of increases in the cost of inventory, new
products distributed by the Company or its competitors, acquisitions proposed
by the Company or its competitors, variations in the Company's quarterly
results of operations or changes in financial estimates by securities analysts
and other events or factors. The stock market has experienced extreme price
and volume fluctuations in recent years, often unrelated to the performance of
the companies affected. Stock market volatility unrelated to the operating
performance of the Company may adversely affect the market price of the Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices of the Common Stock. The shares held
by management and the Company's Employee Stock Ownership Plan (the "ESOP") are
subject to restrictions on any public sale or distribution of Common Stock for
a period of 180 days beginning on the effective date of the Registration
Statement. See "Shares Eligible for Future Sale."
CONCENTRATION OF OWNERSHIP
Upon completion of the Offering, the ESOP and certain members of management
of the Company will own beneficially an aggregate of approximately 57.0% of
the Company's outstanding Common Stock. If the ESOP participants and the
management shareholders were to vote all of their shares in a similar manner,
they would effectively control the Company. In most circumstances, they would
have sufficient voting power to elect the entire Board of Directors of the
Company and, in general, to determine (without the consent of the Company's
other shareholders) the outcome of any corporate transaction or other matter
submitted to the shareholders for approval, other than a merger,
consolidation, or the sale of all or substantially all of the Company's
assets, each of which, under Missouri law, requires the affirmative vote of
holders of two-thirds of the outstanding stock. See "Principal and Selling
Shareholders."
GOVERNMENT REGULATION
The wholesale drug distribution industry is subject to regulation by
federal, state and local governmental agencies. The distribution of controlled
substances and prescription pharmaceuticals requires licenses and permits as
well as the implementation of an oversight and compliance program mandated by
the Prescription Drug Marketing Act of 1987. In general, regulations pertain
to the purchase, safe storage and distribution of controlled substances and
pharmaceuticals that are monitored through periodic site inspections conducted
by the Food and Drug Administration (the "FDA") and the Drug Enforcement
Agency (the "DEA"). Failure to comply with these requirements and regulations
could have a material adverse effect on the Company by resulting in penalties
such as fines, restrictions on operations or closures.
Although the Company has implemented an extensive compliance program
administered by its Chief Compliance Officer, there can be no assurance that
the Company will be successful in complying with all
10
<PAGE>
applicable government regulations or that the Company will obtain and maintain
all material licenses and permits applicable to the Company's business.
DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in net tangible book value per share of Common Stock from
the initial public offering price. The existing shareholders of the Company
will experience an increase in net tangible book value per share as a result
of the Offering. Assuming an offering price of $16.00 per share (the midpoint
of the range of prices set forth on the cover of this Prospectus), the
dilution in net tangible book value to purchasers of Common Stock in the
Offering would be $12.88 per share to new investors purchasing shares of
Common Stock in the Offering, and existing shareholders of the Company would
experience an increase in net tangible book value of $5.84 per share as a
result of the Offering. See "Dilution" and "Principal and Selling
Shareholders."
ABSENCE OF PUBLIC MARKET FOR THE COMMON STOCK
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company has applied to list the Common Stock on Nasdaq, there can
be no assurance that an active or liquid trading market in the Common Stock
will develop upon completion of the Offering or, if developed, that it will be
sustained. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Underwriters and
may not be indicative of the market price for the Common Stock after the
Offering. The market price for shares of the Company's Common Stock may be
highly volatile depending on changes in general market and industry
conditions. See "Underwriting."
CERTAIN ANTI-TAKEOVER EFFECTS
The Company's Amended Articles of Incorporation and Amended and Restated
Bylaws and Missouri statutes contain certain provisions that may discourage or
render more difficult an unfriendly tender offer, proxy contest, merger or
change in control of the Company, which could be in the best interests of the
Company's shareholders. These provisions include the ability to issue "blank
check" preferred stock, a classified board of directors and limitations on the
manner of calling and the matters to be considered at a meeting of
shareholders. See "Description of Capital Stock."
11
<PAGE>
DILUTION
The net tangible book value of the Company at May 31, 1998, adjusted for the
exercise of the Churchill Warrants, was approximately $(2.72) per share. Net
tangible book value per share is determined by dividing the tangible net worth
of the Company (total tangible assets less total liabilities) by the number of
shares of Common Stock outstanding. After giving effect to the sale of
3,500,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $16.00 per share and the application by the
Company of the estimated net proceeds therefrom, the pro forma net tangible
book value of the Company as of May 31, 1998, would have been $3.12 per share.
This represents an immediate increase in net tangible book value per share of
$5.84 to existing shareholders and an immediate dilution of $12.88 per share
to new investors purchasing shares of Common Stock in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $16.00
Net tangible book value per share before the
Offering.......................................... $(2.72)
Increase in net tangible book value per share
attributable to price paid by investors in the
Offering.......................................... 5.84
------
Pro forma net tangible book value per share after the
Offering................................................... 3.12
------
Dilution in net tangible book value per share to investors
in the Offering............................................ $12.88
======
</TABLE>
The following table sets forth the difference between the existing
shareholders and the purchasers of shares in this Offering with respect to the
number of shares purchased from the Company, the total cash consideration paid
to the Company for such shares and the average price per share paid (assuming
an initial public offering price of $16.00 per share):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE PER
------------------ ------------------- SHARE PAID
NUMBER PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)(2)..... 7,079,270 66.9% $ 242,115 0.4% $ 0.03
New investors........... 3,500,000 33.1 56,000,000 99.6 $16.00
---------- ------ ----------- -----
Total............... 10,579,270 100.0% $56,242,115 100.0%
========== ====== =========== =====
</TABLE>
- ---------------------
(1) Sales by the Selling Shareholders in this Offering will reduce the number
of shares held by existing shareholders of the Company to 5,829,270, or
55.1% of the total number of shares outstanding after this Offering, and
will increase the number of shares held by new investors to 4,750,000
shares, or 44.9% of the total number of shares outstanding after this
Offering. See "Principal and Selling Shareholders."
(2) Excludes 848,578 shares subject to options under the Company's Amended and
Restated 1996 Equity Compensation Plan, all of which are immediately
exercisable at a weighted average exercise price of $0.73 per share. See
"Management--Executive Compensation--Equity Compensation Plan" and
"Principal and Selling Shareholders."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock it is offering hereby (after deducting underwriting discounts and
commissions and estimated offering expenses) will be approximately $50.4
million (approximately $61.0 million if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$16.00 per share. The net proceeds will be used (i) to retire the $12.0
million outstanding principal amount of the senior subordinated note due
Churchill, which has a maturity date of October 3, 2004 and bears interest at
a rate of 12.0% per annum and (ii) reduce the amount outstanding under the
Credit Facility (approximately $78.4 million as of May 31, 1998, with varying
interest rates) by approximately $38.4 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" for a description of the Credit Facility.
DIVIDEND POLICY
The timing, amount and form of dividends will be determined by the Company's
Board of Directors and will depend on, among other things, the Company's
results of operations, financial condition, cash and capital expenditure
requirements, certain corporate and tax law requirements and other factors
(including factors outside of the Company's control) deemed relevant by the
Board of Directors. It is currently anticipated that earnings will be retained
for use in the business and that no dividends will be paid in the foreseeable
future. The Credit Facility prohibits the Company from paying any cash or
stock dividends.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
31, 1998, on an actual basis and as adjusted to give effect to the sale by the
Company of 3,500,000 shares in the Offering at an assumed initial public
offering price of $16.00 per share, less underwriters' discounts and
commissions and estimated offering expenses, the retirement of the Company's
treasury shares and the application of the estimated net proceeds therefrom as
set forth in "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 31, 1998
---------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Revolving line of credit......................... $ 78,449 $ 40,019
Term notes payable, including current portion.... 2,705 2,705
Subordinated note payable(1)..................... 9,807 --
Churchill Warrants(1)............................ 2,569 --
-------- --------
Total indebtedness............................. 93,530 42,724
-------- --------
Shareholders' equity:
Preferred stock, par value $0.01 per share,
10,000,000 shares authorized, no shares issued
and outstanding................................. -- --
Common stock, par value $0.01 per share,
90,000,000 shares authorized, 10,200,000 shares
issued, actual; 10,579,270 shares issued, as
adjusted(2)..................................... 102 106
Additional paid-in capital....................... 98 52,002
Retained earnings(1)............................. 8,872 6,911
Treasury stock, at cost 4,295,730 shares actual;
none as adjusted................................ (1,133) --
Note receivable from ESOP........................ (380) (380)
-------- --------
Total shareholders' equity..................... 7,559 58,639
-------- --------
Total capitalization......................... $101,089 $101,363
======== ========
</TABLE>
- ---------------------
(1) The subordinated note payable has a principal amount of $12.0 million but
was recorded net of a discount of $2.6 million, which was the value
allocated to the Churchill Warrants. Upon exercise of the Churchill
Warrants, the $2.6 million allocated value will be reclassified into
shareholders' equity. The subordinated note payable will be redeemed at
its principal amount of $12.0 million. This redemption will result in an
extraordinary charge of $2.0 million, net of taxes, which will reduce
retained earnings accordingly.
(2) Excludes 848,578 shares subject to options under the Company's Amended and
Restated 1996 Equity Compensation Plan, all of which are immediately
exercisable at a weighted average exercise price of $0.73 per share. See
"Management--Executive Compensation--Equity Compensation Plan" and
"Principal and Selling Shareholders."
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" as of and for each of the fiscal
years in the four-year period ended February 28, 1998 are derived from the
audited consolidated financial statements of the Company. The data for the
twelve-month period ended February 28, 1994 is derived from the unaudited
consolidated financial statements of the Company due to a change in the
Company's fiscal year in 1994 from September 30 to February 28. The data for
the three-month periods ended May 31, 1997 and 1998 are derived from the
unaudited consolidated financial statements of the Company. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. Operating
results for the three months ended May 31, 1998 are not necessarily indicative
of the results that may be expected for the entire year ending February 28,
1999. The fiscal 1998 information includes the results of operations of the
General Drug Companies since their acquisition on October 3, 1997. This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company, including the notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------ -----------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, MAY 31, MAY 31,
1994(1) 1995 1996 1997 1998(2) 1997 1998
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $75,812 $171,977 $224,163 $301,523 $544,090 $88,430 $206,866
Cost of goods sold..... 71,910 164,226 213,481 286,784 516,667 84,502 196,920
------- -------- -------- -------- -------- ------- --------
Gross profit........... 3,902 7,751 10,682 14,739 27,423 3,928 9,946
Operating expenses:....
Selling, general and
administrative...... 4,138 7,868 7,975 9,986 15,879 2,513 6,013
Depreciation and
amortization........ 111 155 221 279 923 82 431
Special charges(3)... -- -- -- -- -- -- 817
------- -------- -------- -------- -------- ------- --------
Operating income
(loss)................ (347) (272) 2,486 4,474 10,621 1,333 2,685
Other income
(expense):
Interest expense..... (280) (1,041) (1,478) (1,571) (4,646) (500) (2,105)
Other, net........... (126) (57) 41 126 289 41 65
------- -------- -------- -------- -------- ------- --------
Income (loss) before
income taxes.......... (753) (1,370) 1,049 3,029 6,264 874 645
Income tax provision
(benefit)............. (152) (506) 415 1,099 2,267 332 251
------- -------- -------- -------- -------- ------- --------
Net income (loss)...... $ (601) $ (864) $ 634 $ 1,930 $ 3,997 $ 542 $ 394
======= ======== ======== ======== ======== ======= ========
Net income (loss) per
share(4):
Basic................ $ (0.06) $ (0.08) $ 0.07 $ 0.29 $ 0.67 $ 0.09 $ 0.07
======= ======== ======== ======== ======== ======= ========
Diluted.............. $ (0.06) $ (0.08) $ 0.07 $ 0.28 $ 0.56 $ 0.08 $ 0.05
======= ======== ======== ======== ======== ======= ========
Shares used in
computing net income
(loss) per share(4):
Basic................ 10,200 10,200 9,500 6,700 5,963 5,991 5,904
======= ======== ======== ======== ======== ======= ========
Diluted.............. 10,200 10,200 9,500 6,872 7,166 6,614 8,023
======= ======== ======== ======== ======== ======= ========
OTHER OPERATING DATA:
Sales growth........... 25.9%(5) 126.8% 30.3% 34.5% 80.4% 41.5% 133.9%
Same-store sales
growth(6)............. 25.9%(5) 126.8% 30.3% 34.5% 28.2% 41.5% 29.0%
EBITDA(7).............. $ (362) $ (174) $ 2,748 $ 4,879 $ 11,833 $ 1,456 $ 3,181
Net cash provided by
(used in) operating
activities............ -- (1) (2,642) 56 (6,997) (5,905) 4,659 3,101
Net cash used in
investing activities.. -- (1) (1,354) (144) (952) (29,715) (38) (600)
Net cash provided by
(used in) financing
activities............ -- (1) 3,968 182 7,863 35,645 (4,636) (2,543)
Days sales
outstanding(8)........ 26.3 19.5 17.8 17.2 20.8 15.9 23.8
Gross profit margin.... 5.1% 4.5% 4.8% 4.9% 5.0% 4.4% 4.8%
Operating expenses as
a percentage of net
sales................. 5.6% 4.7% 3.7% 3.4% 3.0% 2.9% 3.1%(9)
Operating income
(loss) margin......... (0.5)% (0.2)% 1.1% 1.5% 2.0% 1.5% 1.7%(9)
BALANCE SHEET DATA:
Current assets......... $16,478 $ 25,108 $ 32,255 $ 46,811 $133,995 $41,350 $136,768
Working capital........ 2,663 10,304 11,696 20,811 67,906 16,749 65,787
Total assets........... 17,525 27,774 34,910 50,222 168,702 44,794 171,625
Total indebtedness..... 7,823 11,792 12,135 20,744 95,929 16,494 93,530
Shareholders' equity... 1,985 1,266 1,884 3,167 7,129 3,745 7,559
</TABLE>
14
<PAGE>
- ---------------------
(1) In 1994, the Company changed its fiscal year end from September 30 to
February 28. This information represents the Statement of Operations Data
and Other Operating Data for the twelve month period ended February 28,
1994 developed from the Company's internal unaudited financial statements.
In addition, prior to fiscal 1995, the Company valued its inventory using
the LIFO method. The 1994 Statement of Operations Data, Other Operating
Data and Balance Sheet Data have been restated to report the results of
operations as if inventory was determined using the FIFO method. The 1994
supplemental cash flow data omitted from Other Operating Data is not
available due to the change in the fiscal year.
(2) Includes five months of operating results of the General Drug Companies
following their acquisition by the Company on October 3, 1997.
(3) Reflects a $592 severance payment to a former officer and a $225 loss on
the sale of the tobacco and candy business of the General Drug Companies.
(4) See Notes 1 and 11 of notes to the consolidated financial statements of
the Company for information concerning the calculation of net income
(loss) per share.
(5) Represents sales and same-store sales growth for twelve month period ended
February 28, 1994 as compared to the twelve month period ended September
30, 1993.
(6) Reflects growth of net sales from distribution facilities that have been
operated by the Company for the full year in each comparable period.
(7) EBITDA represents income before interest expense, income taxes,
depreciation and amortization. The Company believes that EBITDA is a
measure commonly used in the pharmaceutical wholesale distribution
industry by financial analysts, investors and other interested parties for
measuring and comparing financial information such as liquidity, operating
performance and leverage. EBITDA is not intended to represent cash flow
from operations as defined by generally accepted accounting principles and
should not be used as an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity. EBITDA
amounts shown for the Company may not be comparable to similarly titled
measures reported for other companies as such calculations may not be made
on the same basis.
(8) Days sales outstanding is calculated using the average of the month-end
accounts receivable balances for the respective fiscal periods.
(9) Calculation excludes special charges described in footnote (3).
15
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
The following unaudited pro forma consolidated statement of income gives
effect to the General Drug Acquisition, the exercise of the Churchill Warrants
and the Offering, including the application of the net proceeds therefrom, as
though they occurred on March 1, 1997. This pro forma information has been
prepared utilizing the audited consolidated financial statements of the
Company for the fiscal year ended February 28, 1998, the unaudited
consolidated financial statements of the General Drug Companies for the seven
months ended September 30, 1997 and the assumptions and adjustments described
in the accompanying notes. The General Drug Acquisition was accounted for
using the purchase method of accounting. This information should be read in
conjunction with the consolidated financial statements of the Company and
notes thereto that appear elsewhere herein. The pro forma financial data is
provided for comparative purposes only and is not necessarily indicative of
the results which would have occurred had the General Drug Acquisition, the
exercise of the Churchill Warrants and the Offering been consummated on March
1, 1997, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28, 1998
----------------------------------------------------------------------------
C.D. SMITH
DRUG GENERAL DRUG ACQUISITION OFFERING PRO FORMA
COMPANY(1) COMPANIES(2) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $544,090 $218,169 $ -- $762,259 $ -- $762,259
Cost of goods sold...... 516,668 205,663 -- 722,331 -- 722,331
-------- -------- ------ -------- ------ --------
Gross profit........... 27,422 12,506 -- 39,928 -- 39,928
Operating expenses:
Selling, general and
administrative........ 15,878 6,970 -- 22,848 -- 22,848
Depreciation and
amortization.......... 923 509 299 (3) 1,731 -- 1,731
Covenants not to
compete............... -- 2,047 (4) -- 2,047 -- 2,047
Employment agreements.. -- 3,340 (3,340)(5) -- -- --
Management fees........ -- 545 (6) -- 545 -- 545
-------- -------- ------ -------- ------ --------
Operating income (loss). 10,621 (905) 3,041 12,757 -- 12,757
Other income (expense)..
Interest expense on
credit facilities..... (3,834) (2,026) (903)(7) (6,763) 3,546(10) (3,217)
Interest expense on
subordinated debt..... (812) -- (1,181)(8) (1,993) 1,993(10) --
Other income (expense). 289 (41) -- 248 -- 248
-------- -------- ------ -------- ------ --------
(4,357) (2,067) (2,084) (8,508) 5,539 (2,969)
-------- -------- ------ -------- ------ --------
Income (loss) before
income taxes........... 6,264 (2,972) 957 4,249 5,539 9,788
Income tax provision
(benefit).............. 2,267 (1,103) 346 (9) 1,510 2,005(11) 3,515
-------- -------- ------ -------- ------ --------
Net income (loss)....... $ 3,997 $ (1,869) $ 611 $ 2,739 $3,534 $ 6,273
======== ======== ====== ======== ====== ========
Net income per share:
Basic.................. $ 0.67 $ 0.46 $ 0.59
======== ======== ========
Diluted................ $ 0.56 $ 0.38 $ 0.56
======== ======== ========
Shares used in computing
net income per share:
Basic.................. 5,963 5,963 10,638
======== ======== ========
Diluted................ 7,166 7,166 11,256
======== ======== ========
</TABLE>
16
<PAGE>
- ---------------------
(1) Represents the Company's consolidated results of operations for the fiscal
year ended February 28, 1998, including the General Drug Companies'
consolidated results of operations following their acquisition by the
Company on the Acquisition Date.
(2) Represents the General Drug Companies' consolidated results of operations
(unaudited) from March 1, 1997 through the Acquisition Date.
(3) Represents amortization on $25,567 of goodwill over a forty year useful
life resulting from the General Drug Acquisition for the period March 1,
1997 through the Acquisition Date, net of the elimination of amortization
expense related to goodwill and other intangibles of the General Drug
Companies amounting to $74.
(4) Represents non-recurring payments under certain non-compete agreements
entered into by the General Drug Companies prior to the General Drug
Acquisition which were contractually paid and expensed in their entirety
by the General Drug Companies on the Acquisition Date.
(5) Represents non-recurring payments by the General Drug Companies to three
executives in accordance with employment agreements entered into with such
individuals by the General Drug Companies prior to the General Drug
Acquisition. These payments were contractually required under certain
change of control provisions in the employment agreements, and were
triggered by, and a condition to, the closing of the General Drug
Acquisition. These payments, which were made at closing, satisfied, in
full, all obligations under the employment agreements, which terminated
upon closing.
(6) Represents non-recurring management fees paid by the General Drug
Companies to a party related to its former owner for no specifically
identifiable service and for which no continuing services are necessary.
(7) Represents $738 of incremental interest and $216 of debt issuance cost
amortization on the financing for the General Drug Acquisition of $16,000
at 7.9%, less $51 of debt issuance cost amortization on previous debt of
the General Drug Companies which is eliminated as if the General Drug
Acquisition occurred on March 1, 1997.
(8) Represents interest at 12.0% and amortization of the discount of $325 on
the $12,000 subordinated note for the period March 1, 1997 to the
Acquisition Date related to the subordinated debt issued by the Company to
finance the General Drug Acquisition.
(9) Represents the tax effect of the pro forma acquisition adjustments above
using the Company's effective rate for fiscal 1998 of 36.2%, which
approximates the rate at which the income associated with the pro forma
acquisition adjustments would be taxed.
(10) Represents the reduced interest expense and elimination of the discount
on the subordinated note and debt issuance cost amortization expense
resulting from the use of net proceeds from the Offering to reduce
outstanding long-term indebtedness as of March 1, 1997. Excludes the
effect of an extraordinary loss of $1,961, net of taxes, on debt
extinguishment that will result from the repayment of the subordinated
note payable with the proceeds from the Offering. At the time of the
purchase of the subordinated note payable, $2,569 of the proceeds were
allocated to common stock put warrants. Upon exercise of the Churchill
Warrant, this amount will be reclassified to shareholders' equity. The
Company will use $12,000 of the proceeds of the Offering to retire the
subordinated note payable of $9,807 at May 31, 1998. The difference
between the amount paid and the net carrying amount plus unamortized debt
issuance costs of $881 less income taxes at 36.2%, represents the
extraordinary loss.
(11) Represents the tax effect of the Offering adjustments described in Note
10 above, using the Company's effective rate for fiscal 1998 of 36.2%,
which approximates the rate at which the income associated with the
Offering adjustments would be taxed.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" as well as the consolidated financial
statements of the Company and notes thereto contained elsewhere in this
Prospectus.
GENERAL
Founded in 1886, C.D. Smith was family-owned and operated until being
acquired by its management and employees in 1991. Since that time, the Company
has grown from a small pharmaceutical distributor serving rural customers into
a full-line, full-service regional wholesale distributor with a major presence
in both rural and urban markets within its core territories. For the twelve
month period ended February 28, 1994 through fiscal 1998, net sales grew from
approximately $75.8 million to approximately $386.7 million (excluding the
impact of the General Drug Acquisition), representing a compound annual growth
rate of approximately 50.3%. Over this time, gross margins have remained in
the range of 4.5% to 5.1%, while the operating leverage created by this
expanded sales base has enabled the Company to reduce operating expenses as a
percentage of net sales from 5.6% in 1994 to 3.0% in fiscal 1998.
In October 1997, the Company acquired the General Drug Companies for $28.0
million in cash and refinanced an additional $39.5 million of existing debt of
the General Drug Companies. The General Drug Companies are wholesale
distributors with operations in the greater Chicago and Boston markets, with
net sales for the twelve months ended February 28, 1998 of approximately
$375.6 million. The Company is in the process of integrating the operations of
the General Drug Companies, including eliminating duplicative functions and
integrating management information systems, adding additional sales personnel
and second operating shifts at the distribution facilities and evaluating the
profitability of and demand for certain product lines. In May 1998, the
Company sold the tobacco and candy business of the General Drug Companies for
$1.9 million, resulting in a loss of $0.2 million. This business accounted for
approximately $25.2 million of pro forma net sales for the twelve months ended
February 28, 1998 and did not contribute significantly to operating income for
that period.
The Company derives its net sales from the sale of branded pharmaceuticals
(approximately 84.0% in fiscal 1998), generic pharmaceuticals (approximately
9.0% in fiscal 1998), over-the-counter products and health and beauty aids
(approximately 3.5% in fiscal 1998) and sundries and miscellaneous items
(approximately 3.5% in fiscal 1998). Net sales constitute revenues less
returns and allowances.
Inventories for the Company are accounted for at the lower of cost or
market, calculated under the FIFO method. The Company has the right to return
all potentially impaired or expiring products to suppliers for full credit;
and therefore, generally does not incur any losses as a result of obsolete,
slow-moving or impaired inventories.
18
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain items from the statements of income of
the Company, on a consolidated basis, as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------------- ---------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, MAY 31, MAY 31,
1996 1997 1998 1997 1998
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 95.2 95.1 95.0 95.6 95.2
----- ----- ----- --------- ---------
Gross profit............ 4.8 4.9 5.0 4.4 4.8
Operating expenses:
Selling, general and
administrative....... 3.6 3.3 2.9 2.8 2.9
Depreciation and
amortization......... 0.1 0.1 0.1 0.1 0.2
Special charges....... -- -- -- -- 0.4
----- ----- ----- --------- ---------
Operating income........ 1.1 1.5 2.0 1.5 1.3
Other income (expense):
Interest expense...... (0.7) (0.5) (0.9) (0.6) (1.0)
Other................. 0.1 -- -- 0.1 --
----- ----- ----- --------- ---------
Income before income
taxes.................. 0.5 1.0 1.1 1.0 0.3
Provision for income
taxes.................. 0.2 0.4 0.4 0.4 0.1
----- ----- ----- --------- ---------
Net income.............. 0.3% 0.6% 0.7% 0.6% 0.2%
===== ===== ===== ========= =========
</TABLE>
THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THREE MONTHS ENDED MAY 31, 1997
Net sales for the three months ended May 31, 1998 were $206.9 million, an
increase of 133.9% from $88.4 million for the three months ended May 31, 1997.
Fiscal 1999 first quarter net sales included operations of the General Drug
Companies, which contributed $92.8 million of net sales and represented
approximately 104.9% of the fiscal 1999 first quarter net sales growth.
Excluding the impact of the General Drug Acquisition, net sales increased
29.0% to $114.0 million in the fiscal 1999 first quarter from $88.4 million in
the fiscal 1998 first quarter. This growth is attributable to continued market
share gains in independent pharmacy customers, increased penetration of chain
store and healthcare institution markets and the addition of a new mail order
pharmacy account.
Gross profit for the fiscal 1999 first quarter was $9.9 million, an increase
of 153.2% from $3.9 million for the fiscal 1998 first quarter, primarily
resulting from the increase in net sales. Gross profit as a percentage of net
sales increased in the fiscal 1999 first quarter to 4.8% compared to 4.4% in
the fiscal 1998 first quarter due to an increase in the amount of discounts
and rebates received, which vary with the timing and volume of inventory
purchases.
Selling, general and administrative expense for the fiscal 1999 first
quarter was $6.0 million, an increase of 139.3% from $2.5 million for the
fiscal 1998 first quarter, principally due to the operating expenses
associated with the General Drug Acquisition. Selling, general and
administrative expense as a percentage of net sales increased to 2.9% for the
fiscal 1999 first quarter compared to 2.8% of net sales for the fiscal 1998
first quarter. The slight increase in selling, general and administrative
expense for the fiscal 1999 first quarter reflects the Company's investment in
an expanded sales and customer support staff at the General Drug Companies,
offset by cost synergies achieved to date from the General Drug Acquisition.
19
<PAGE>
Depreciation and amortization expense increased in the fiscal 1999 first
quarter to $0.4 million from $0.1 million in the fiscal 1998 first quarter.
Depreciation expense increased to $0.3 million from $0.1 million reflecting
depreciation related to the General Drug Acquisition. Amortization expense of
$0.1 million in the fiscal 1999 first quarter reflects the amortization of
goodwill related to the General Drug Acquisition.
Special charges in the fiscal 1999 first quarter were $0.8 million,
resulting from a $0.6 million severance payment to a former officer and a $0.2
million loss on the sale of the tobacco and candy business of the General Drug
Companies.
Operating income for the fiscal 1999 first quarter was $2.7 million, an
increase of 101.4% from $1.3 million for the fiscal 1998 first quarter.
Excluding the special charges, operating income was $3.5 million for the
fiscal 1999 first quarter representing a 162.7% increase from the fiscal 1998
first quarter. Operating income as a percentage of net sales was 1.3% for the
fiscal 1999 first quarter and 1.7% of net sales excluding the special charges,
compared to 1.5% of net sales for the fiscal 1998 first quarter.
Interest expense increased to $2.1 million for the fiscal 1999 first quarter
from $0.5 million for the fiscal 1998 first quarter due to increased borrowing
under the Credit Facility and interest on the subordinated note related to the
General Drug Acquisition financing.
Income tax expense amounted to $0.3 million for the fiscal 1999 first
quarter, reflecting an effective tax rate of 39.0% compared to $0.3 million
and an effective tax rate of 38.0% in the fiscal 1998 first quarter. The
higher effective rate in fiscal 1999 first quarter is attributable primarily
to the effects of the non-deductibility for tax purposes of goodwill
amortization resulting from the General Drug Acquisition.
FISCAL YEAR ENDED FEBRUARY 28, 1998 COMPARED TO FISCAL YEAR ENDED FEBRUARY
28, 1997
Net sales for fiscal 1998 were $544.1 million, an increase of 80.4% from
$301.5 million for fiscal 1997. Fiscal 1998 net sales included five months of
operations of the General Drug Companies, which contributed $157.4 million,
representing approximately 52.2% of the 80.4% fiscal 1998 net sales growth.
Net sales excluding the impact of General Drug Acquisition increased 28.2% to
$386.7 million in fiscal 1998 from $301.5 million in fiscal 1997. This growth
is attributable to market share gains in independent pharmacy customers,
increased penetration of the chain store and healthcare institution markets
and the addition of several new regional chain store customers.
Gross profit for fiscal 1998 was $27.4 million, an increase of 86.1% from
$14.7 million for fiscal 1997, primarily resulting from the increase in net
sales. Gross profit as a percentage of net sales increased in fiscal 1998 to
5.0% compared to 4.9% in fiscal 1997 due to the positive impact of the
slightly higher gross margin sales of the General Drug Companies.
Selling, general and administrative expense for fiscal 1998 was $15.9
million, an increase of 59.0% from $10.0 million for fiscal 1997, principally
due to the operating expenses associated with the General Drug Acquisition.
Selling, general and administrative expense as a percentage of net sales
decreased to 2.9% for fiscal 1998 compared to 3.3% in fiscal 1997, reflecting
synergies achieved to date from the General Drug Acquisition.
Depreciation and amortization expense increased in fiscal 1998 to $0.9
million from $0.3 million in fiscal 1997. Depreciation expense increased to
$0.6 million from $0.3 million, reflecting five months of depreciation related
to the General Drug Acquisition. Amortization expense of $0.3 million in
fiscal 1998 reflects the amortization of goodwill related to the General Drug
Acquisition.
Operating income for fiscal 1998 was $10.6 million, an increase of 137.4%
from $4.5 million for fiscal 1997. Operating income as a percentage of net
sales increased to 2.0% in fiscal 1998 compared to 1.5% in fiscal 1997 due to
the increase in gross margin and the 0.3% decrease in operating expenses as a
percentage of net sales.
20
<PAGE>
Interest expense increased to $4.6 million for fiscal 1998 from $1.6 million
for fiscal 1997 due to increased borrowing under the Credit Facility and
interest on the subordinated note related to the General Drug Acquisition
financing.
Income tax expense increased to $2.3 million for fiscal 1998, reflecting an
effective tax rate of 36.2% compared to $1.1 million and an effective tax rate
of 36.3% in fiscal 1997. The Company's St. Joseph facility is located in a tax
enterprise zone where certain state and local tax abatement provisions have
reduced the effective tax rate.
FISCAL YEAR ENDED FEBRUARY 28, 1997 COMPARED TO FISCAL YEAR ENDED FEBRUARY
29, 1996
Net sales for fiscal 1997 were $301.5 million, an increase of 34.5% from
$224.2 million for fiscal 1996. Net sales growth was attributable to continued
customer expansion due to the hiring of additional sales representatives,
increased penetration of the healthcare institution market and the addition of
several chain store customers.
Gross profit for fiscal 1997 was $14.7 million, an increase of 38.0% from
$10.7 million for fiscal 1996, principally resulting from the increase in net
sales. Gross profit as a percentage of net sales increased in fiscal 1997 to
4.9% compared to 4.8% in fiscal 1996.
Selling, general and administrative expense for fiscal 1997 was $10.0
million, an increase of 25.2% from $8.0 million for fiscal 1996, principally
due to increased administrative expenses of $1.4 million in fiscal 1997.
Selling, general and administrative expense as a percentage of net sales
decreased to 3.3% for fiscal 1997 compared to 3.6% in fiscal 1996, principally
due to economies of scale associated with net sales increases.
Depreciation and amortization expense increased to $0.3 million in fiscal
1997 from $0.2 million in fiscal 1996.
Operating income for fiscal 1997 was $4.5 million, an increase of 80.0% from
$2.5 million for fiscal 1996. Operating income as a percentage of net sales
increased to 1.5% in fiscal 1997 compared to 1.1% in fiscal 1996 due to the
0.1% increase in gross margin and the 0.3% decrease in operating expenses as a
percentage of net sales.
Interest expense increased to $1.6 million for fiscal 1997 from $1.5 million
for fiscal 1996 due to increased borrowing on the Company's line of credit to
finance inventory increases necessitated by the increase in net sales.
Income tax expense increased to $1.1 million for fiscal 1997, reflecting an
effective tax rate of 36.3% compared to $0.4 million, and an effective tax
rate of 39.6%, in fiscal 1996. The lower effective tax rate in fiscal 1997 is
attributable to the effects of enterprise zone tax credits obtained and
utilized by the Company in that year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its working capital requirements through a
combination of internally generated funds, borrowings under a revolving credit
facility and trade credit. The Company actively monitors its accounts
receivable and inventory levels to reduce credit risk and optimize working
capital management. The following table illustrates certain key ratios the
Company uses to assess its working capital management:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------------- ---------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, MAY 31, MAY 31,
1996 1997 1998(1) 1997 1998
<S> <C> <C> <C> <C> <C>
Days Sales
Outstanding(2)......... 17.8 17.2 20.8 15.9 23.8
Inventory Turns......... 12.2 11.2 9.9 12.1 10.3
Current Ratio........... 1.6 1.8 2.0 1.7 1.9
</TABLE>
- ---------------------
(1) Reflects the consolidated operations of the Company. Excluding the impact
of the General Drug Acquisition, fiscal 1998 days sales outstanding and
inventory turns were 16.7 and 11.3, respectively.
(2) Days sales outstanding is calculated using the average of the month-end
accounts receivable balances for the respective fiscal periods.
21
<PAGE>
Working capital at May 31, 1998 was $65.8 million, a decrease of $2.1
million from working capital of $67.9 million at February 28, 1998. The
decrease in working capital reflects normal fluctuations related to the timing
of inventory receipts, vendor payments and customer accounts receivable
collections.
Working capital at February 28, 1998 was $67.9 million, an increase of $47.1
million from working capital of $20.8 million on February 28, 1997. This
increase was due primarily to the acquisition of the General Drug Companies
(which had working capital of $33.1 million at the date of acquisition), as
well as increased inventory and receivables attributable to the growth in C.D.
Smith's business during the year. Management believes that it will be able to
bring its consolidated working capital utilization more in line with its
historical levels upon fully integrating the General Drug Companies. From
fiscal 1996 to fiscal 1997, working capital increased by $9.1 million due
primarily to increased net sales volumes.
Other than periodic investments in distribution facilities, the Company has
had relatively low capital expenditure requirements. The Company had $0.7
million of capital expenditures for the three months ended May 31, 1998
primarily for the Company's Year 2000 compliance program and facilities
improvement, compared to $0.1 million for the three months ended May 31, 1997.
The Company had $0.8 million and $1.1 million of capital expenditures in
fiscal 1998 and fiscal 1997, respectively, primarily for distribution
equipment and technology. Historically, C.D. Smith has invested in technology-
related assets financed primarily by operating leases. The Company anticipates
expending approximately $1.3 million within the next year for the construction
of new corporate headquarters in St. Joseph.
In fiscal 1998, the Company acquired the equity interests of the General
Drug Companies for $28.0 million, which was financed through borrowing under
its Credit Facility of $16.0 million and the issuance of a subordinated note
for $12.0 million. In addition, the Company refinanced approximately $39.5
million of indebtedness of the General Drug Companies through its Credit
Facility.
The Credit Facility consists of a revolving line of credit and various term
notes which expire or mature in October 2000 and is secured by substantially
all of the assets of the Company. The revolving line of credit has a maximum
availability of $90.0 million based on eligible inventory and accounts
receivable. As of May 31, 1998, approximately $64.7 million was outstanding on
the revolving line of credit, excluding the net effects of bank overdraft
(checks issued but not presented at the bank) and unapplied lockbox receipts
totaling $13.7 million. The Company will use approximately $38.4 million of
the net proceeds from this Offering to reduce outstanding borrowings under its
Credit Facility. The revolving portion of the Credit Facility carries an
interest rate at the bank's prime rate or LIBOR plus 175 basis points.
Principal on the term notes, approximately $2.7 million at May 31, 1998, is
payable monthly based on an amortized term of seven to fifteen years plus
interest ranging from 50 basis points below prime to the bank's prime rate.
The Credit Facility contains certain financial covenants and other covenants
which restrict the Company's ability to pay dividends and take certain
extraordinary actions. The Company believes it is currently in compliance with
all covenants.
The $12.0 million subordinated note issued in conjunction with the General
Drug Acquisition bears interest at 12.0%, matures on October 3, 2004 and has
detachable warrants with a nominal exercise price to acquire 1,080,078 shares
of Common Stock. The estimated fair value of the warrants at the time of
issuance was $2.6 million, and it was recorded as a discount on the
subordinated note, resulting in an effective interest rate of 17.9% on the
subordinated note. The Company will use $12.0 million of the net proceeds of
the Offering to repay the subordinated note. Upon repayment of the
subordinated note, the Company will incur an extraordinary charge of
approximately $2.0 million (net of income taxes) to reflect the difference
between the $12.0 million prepayment amount and the net carrying amount plus
unamortized debt issuance costs related to the subordinated note placement.
The Company does not expect that the extraordinary charge will have an ongoing
effect on its operations.
The Company believes that it has adequate capital resources at its disposal
to meet currently anticipated capital expenditures, routine business growth
and current projected debt service requirements.
22
<PAGE>
YEAR 2000 COMPLIANCE
The Company, its vendors and customers use software and related technologies
throughout their businesses that will be affected by the Year 2000 problem,
which is common to most businesses, and concerns the inability of information
systems, primarily computer software programs, to properly recognize and
process date-sensitive information as the year 2000 approaches. This inability
could result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Management has developed a plan to modify the Company's management
information systems to properly recognize the Year 2000 and believes that,
with modifications to existing software and conversions to new software, the
Year 2000 issue can be mitigated. The Company will use both internal and
external resources to test and reprogram or replace the software for Year 2000
modifications. Management currently expects the project to be substantially
complete by late 1998 and that the cost of the Year 2000 initiative, including
both costs for modification of existing software and for the conversions to
new software, will not be material to the Company's results of operations or
financial position. Furthermore, this project is not expected to have a
significant effect on operations.
The Company will initiate formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. However, there can be no assurance that the systems of other companies
will be timely converted.
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates. However,
there can be no assurance that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
RECENTLY ISSUED PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
encourages (but does not require) companies to adopt a fair value based method
of accounting for stock-based compensation plans, in place of the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). If the fair value based method of accounting
is not adopted, SFAS 123 requires companies to disclose pro forma calculations
in the notes to their financial statements of net income and net income per
share as if the fair value based method of accounting had been applied. The
Company has elected to follow APB 25 and related interpretations in accounting
for its employee stock options because the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS
128"), which requires the presentation of earnings per share by all companies
that have issued common stock or potential common stock if those securities
trade in a public market either on a stock exchange or in the over-the-counter
market. This statement supersedes APB Opinion No. 15, "Earnings per Share."
The earnings per share amounts for all prior years have been presented as
required by SFAS 128.
Other recent pronouncements of the FASB, which are not required to be
adopted until 1998, include SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"), and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial
23
<PAGE>
statements. The statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company does not have any material other
comprehensive income as defined by SFAS 130 at May 31, 1998.
SFAS 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," and establishes new standards for the way that public
companies report selected information about operating segments in annual
financial statements and requires that those companies report selected
information about segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company has
not yet determined the effects, if any, the adoption will have on required
disclosures within the Company's financial statements. However, SFAS 131
disclosures are not required in the Company's financial statements for the
three months ended May 31, 1998.
24
<PAGE>
BUSINESS
OVERVIEW
C.D. Smith is a leading regional full-line, full-service wholesale
distributor of pharmaceuticals and related products. The Company distributes
over 25,000 SKUs to more than 3,000 customers located predominantly in the
midwestern United States and New England. The Company believes that it is the
primary supplier to a majority of its customers, which include independent
pharmacies, health care institutions and regional and national chain
pharmacies. According to the 1998 Drug Store Market Guide, the Company is the
second largest pharmaceutical wholesale distributor in metropolitan Kansas
City and Boston and the third largest in Chicago. For fiscal 1998, the
Company's pro forma net sales were $762.3 million.
Since being acquired by its management and employees in 1991, C.D. Smith has
grown from a small pharmaceutical distributor serving rural customers into a
full-line, full-service regional wholesale distributor with a major presence
in both rural and urban markets within its core territories. From 1994 through
fiscal 1998, the Company's net sales grew internally (excluding the effect of
acquisitions) at a compound annual rate of approximately 50.3%. The Company
has achieved this growth principally by gaining new customers within its
territories, converting customer relationships from secondary to primary
supplier status and expanding its service territories.
The Company attributes its success since 1991 primarily to the
implementation of a comprehensive program aimed at meeting the specific needs
of its customers. As a part of this program, the Company significantly
expanded its sales and customer service staff. At May 31, 1998, C.D. Smith
employed 37 direct sales representatives with an average of 28 years of
industry experience who are supported by 25 telemarketers and customer service
professionals. The Company added multiple operating shifts to extend the hours
for customer order placement and to expand the territories in which it can
offer reliable next-day delivery. The Company also broadened its product
offerings and upgraded its customer ordering and information systems to
enhance its ability to serve as a primary supply source. In 1994, the Company
built a state-of-the-art distribution facility to accommodate its growth and
has achieved key measures of efficiency that significantly exceed industry
averages. The Company believes that providing exceptional customer service
distinguishes C.D. Smith from other wholesale distributors and is key to its
continued growth.
In October 1997, the Company acquired General Drug Company, a full-service
wholesale distributor with operations in the greater Chicago and Boston
markets. As part of the General Drug Acquisition, the Company also acquired
SBS, a pharmaceuticals repackaging and distribution business. C.D. Smith is
currently integrating the operations of the General Drug Companies, and
believes it will realize substantial synergies by increasing the efficiency of
the acquired distribution facilities, obtaining greater volume purchasing
discounts and eliminating duplicative overhead functions. In addition, the
Company is implementing its program of enhanced customer service in Chicago
and Boston, which it believes will accelerate sales growth in those markets.
In Chicago, the Company doubled the size of its sales force and added a second
operating shift to accommodate late-day orders, commence Saturday deliveries
and increase the territories served by the facility. In Boston, the Company
has divested the marginally profitable tobacco and candy business, which has
provided significant additional warehouse capacity for pharmaceuticals and
related products. The Company also intends to expand the sales force and add a
second operating shift in Boston.
OPERATING STRATEGY
The Company's objective is to build on its position as a leading regional
wholesale distributor to become a national pharmaceutical services company.
The principal elements of the Company's strategy are as follows:
Provide High Levels of Customer Service. C.D. Smith believes that its
customer service focus is a significant competitive advantage, especially
with independent pharmacy customers who may not receive personalized
service from national wholesale distributors. C.D. Smith's experienced
direct sales force makes
25
<PAGE>
regular personal visits to current and prospective customers and is
supported by a knowledgeable in-house customer service staff. The Company
operates its distribution facilities to meet its customers' requirements
for accurate same-day or next-day delivery. The Company believes that its
commitment to customer service has enabled it to achieve primary supplier
status with many of its customers, resulting in significant net sales
growth.
Increase Sales from Existing Facilities. C.D. Smith intends to leverage
its existing infrastructure and expertise to increase sales from each of
its distribution facilities. Prior to their acquisition by the Company,
each of the Chicago and Boston facilities operated a single shift, served
customers within a small geographic area and carried a more limited
inventory, which typically positioned them as secondary suppliers. The
Company believes that adding a second operating shift and developing a
customer-oriented sales force will enable both of these facilities to
increase net sales by achieving primary supply relationships with customers
in significantly expanded service territories. Similarly, C.D. Smith
believes it can apply the General Drug Companies' greater experience with
managed care and other institutional customers to increase net sales in its
midwestern region.
Continue Selective Acquisitions. The Company believes that it is well-
positioned to make selective acquisitions to expand into new territories
and to further penetrate current market territories. Through its
participation in national industry groups and OptiSourceSM, a Company-
operated generic pharmaceutical buying group that includes 16 other
regional wholesale distributors, C.D. Smith maintains significant contact
with numerous regional and local distributors and has identified several
attractive acquisition candidates.
Offer Broad Line of Products and Services. C.D. Smith provides its
customers a broad line of over 25,000 SKUs of branded and generic
pharmaceuticals, over-the-counter health care products and health and
beauty aids from more than 1,000 vendors. The Company believes its products
and services enable it to be the primary supplier to the majority of its
customers and to further leverage its regional presence by meeting the
secondary supply needs of many significant customers. Through OptiSource,
the Company obtains lower wholesale prices through volume purchasing and
maintains a major presence in the distribution of the rapidly growing
generic pharmaceutical product category. Through SBS, the Company buys
approximately 140 pharmaceuticals in bulk and repackages them into
quantities requested by selected wholesalers. The Company is also
developing its own private label program designed to help independent
pharmacies compete more aggressively with regional and national chain
pharmacies by providing store identification, promotional and advertising
programs and a private label brand of over-the-counter pharmaceuticals and
health and beauty aids.
Expand Pharmaceutical Services. The Company intends to offer
pharmaceutical services beyond its current product and service offerings.
The Company believes that it can leverage its expertise in the
pharmaceutical industry and its large, concentrated customer base to offer
additional pharmacy-related services, such as pharmacy benefits management,
managed care pharmaceutical formulary management and health care
institution unit of use packaging. The Company intends to expand its
service offerings through internal development and selective acquisitions.
The Company believes that its operating strategy can be implemented without
significant additional capital investment (other than possible acquisitions)
and without incurring significant additional operating costs that would not be
offset by anticipated revenue growth.
INDUSTRY OVERVIEW
Industry Growth. Wholesale drug distributors are the most important
distribution channel for pharmaceutical manufacturers, handling approximately
80.0% of the $83.4 billion of prescription drug sales for the twelve months
ended June 1997. Wholesale pharmaceutical distribution industry sales
increased from $2.4 billion in 1970 to $30.2 billion in 1990 and reached
approximately $74.6 billion in 1997, representing a compound annual growth
rate of approximately 13.5%. The principal factors contributing to this growth
are (i) the aging of the population, (ii) introduction of new pharmaceuticals,
(iii) increased emphasis on effective drug therapies as a part of cost
containment efforts, (iv) increased utilization by pharmaceutical
manufacturers of wholesale distributors and (v) rising pharmaceutical costs.
26
<PAGE>
Aging of Population. The number of individuals over 65 in the United States
has grown 68.2% from 20.1 million in 1970 to 33.8 million in 1996. This age
group, which is projected to grow to 39.6 million individuals by 2010,
spends approximately 3.7 times as much per capita on pharmaceuticals and
medical supplies as the rest of the population.
Introduction of New Pharmaceuticals. The introduction of new pharmaceutical
compounds has led to consistent growth in their utilization and
corresponding increases in the sales volumes handled by wholesale
distributors. As new pharmaceutical compounds are approved by the FDA and
introduced into the market, this trend is expected to continue.
Cost Containment Efforts. In response to rising health care costs,
governmental and private payors have adopted cost containment measures that
encourage the use of efficient drug therapies to prevent or treat diseases.
While national attention has been focused on the overall increase in
aggregate health care costs, the Company believes that drug therapy has had
a beneficial impact on overall health care costs by reducing expensive
surgeries and prolonged hospital stays. Pharmaceuticals currently account
for approximately 8.0% of overall health care costs, and manufacturers'
emphasis on research and development is expected to continue the
introduction of cost effective drug therapies.
Increased Utilization of Wholesale Distributors. Over the past decade,
manufacturers of pharmaceuticals have significantly increased the
distribution of their products through wholesalers as the cost and
complexity of maintaining inventories and arranging for delivery of
pharmaceutical products has risen. Drug wholesalers offer their customers
and suppliers more efficient distribution and inventory management. As a
result, from 1980 to 1997, the percentage of total pharmaceutical sales
through wholesale distributors increased from approximately 57.0% to
approximately 80.0%.
Rising Pharmaceutical Costs. The Company believes that price increases by
pharmaceutical manufacturers will equal or exceed the overall Consumer
Price Index. The Company believes that this increase will be due in large
part to relatively inelastic demand in the face of higher prices charged
for patented drugs as manufacturers have attempted to recoup costs
associated with the development, clinical testing and FDA approval of new
products. For example, the average retail price of a prescription has
increased from $22.06 in 1990 to $32.12 in 1997.
Industry Consolidation. While sales by wholesale distributors have been
steadily increasing, the industry has been experiencing consolidation over the
last two decades. The number of full-service pharmaceutical wholesalers in the
United States has declined from approximately 139 at the end of 1980 to
approximately 54 at December 31, 1997. This trend has been driven in large
part by the significant economies of scale available to large regional and
national distributors. Industry analysts expect this trend to continue.
Market Segments and Customer Benefits. Wholesale distributors serve three
major market segments: independent pharmacies and drugstores (approximately
34.4% of the market), retail chains (approximately 25.7% of the market) and
health care institutions (approximately 36.4% of the market). These customers
benefit from the service of wholesale distributors because the distributors
provide access to a single source for pharmaceutical and health care products
from hundreds of different manufacturers. In addition, wholesale distributors
lower customer inventory costs, provide efficient and timely product delivery
and improve inventory and purchasing information. Customers also benefit from
value-added programs developed by wholesale distributors to reduce costs and
increase operating efficiencies for the customer. These programs include
packaging, stockless inventory and pharmacy computer systems. Industry
analysts estimate wholesale distributors save the health care delivery system
an estimated $17.0 billion per year compared to purchasing directly from
manufacturers.
27
<PAGE>
Independent pharmacies and drugstores are typically smaller, community
oriented businesses that are most reliant on marketing, merchandising and
support programs of wholesale distributors. Industry sales to independent
pharmacies have increased, in part, due to the improved competitiveness of
remaining stores, although the number of independent pharmacies has declined.
The following chart presents the number of independent pharmacies and industry
sales to those stores from 1988 to 1997:
[CHART]
Source: National Wholesale Druggists' Association
Retail chains include national and regional chain drugstores, supermarkets,
mass merchandisers and discount stores. The institutional market segment
includes a diverse group of medical care providers such as hospitals, nursing
homes, long-term care and rehabilitation facilities, clinics, HMOs and home
health care providers.
PRODUCTS AND SERVICES
The Company distributes over 25,000 SKUs of branded and generic
pharmaceuticals, over-the-counter health care products and health and beauty
aids. Branded and generic pharmaceutical products generate approximately 85.0%
and 8.0%, respectively, of the Company's net sales and comprise approximately
10,000 SKUs. In addition, the Company supplies a complete line of over-the-
counter health care products and health and beauty aids, including cosmetics,
toiletries, personal health products, home health products, sundries and
seasonal items.
Customers rely on C.D. Smith for dependable same-day or next-day delivery of
pharmaceuticals and other products. Customers may place orders through a
variety of means, including voice telephone interaction with an inside sales
representative, automated touch-tone telephone order placement, hand-held
electronic order entry devices or an interface to the Company's proprietary
CoDeS(R) PC-based customer ordering and information system. The CoDeS system
allows customers to obtain real-time pricing, product availability and
promotional information. CoDeS also allows customers to electronically enter
and track orders and review their purchasing histories.
The Company provides customers with a number of other value-added services
that it believes enhance independent pharmacies' ability to compete
effectively and create customer loyalty. These services include generic drug
sourcing, which allows customers to benefit from the lowest available pricing;
pharmaceutical repackaging; store modernization and planning services; OTC
product merchandising, which includes shelf labeling and plan-o-grams; and
various customer reports, such as inventory tracking, regulatory compliance
and purchasing history.
28
<PAGE>
OptiSourceSM. C.D. Smith leads a collective generic buying program called
OptiSource which, as of May 31, 1998, included 16 other regional wholesale
distributors. The collective buying power of the consortium enables
participants to achieve lower purchase prices comparable to those obtained by
much larger competitors. The Company's operation of OptiSource has increased
its visibility with manufacturers and has allowed the Company to offer generic
pharmaceuticals at more competitive prices, an increasingly important element
of the gross margin mix.
SBS Pharmaceuticals. The Company operates SBS, a pharmaceutical repackaging
and distribution business acquired in the General Drug Acquisition. Through
this business, the Company achieves product cost savings by buying over 140
branded and generic pharmaceutical products in bulk and increases sales by
providing wholesale customers with product quantities and labeling at a lower
price than that available from the manufacturer. Management believes that it
can increase sales to present SBS customers and attract new customers by
expanding the number of pharmaceuticals offered for repackaging and increasing
its investment in inventory to facilitate timely delivery. In addition, the
Company intends to target chain pharmacies and health care institutions by
marketing existing services and offering unit of use packaging.
OPERATIONS
The Company operates three distribution centers with advanced material
handling systems for receiving, storing and distributing the approximately
25,000 SKUs which comprise its product offerings. The St. Joseph, Missouri
facility, built in 1994, was designed to minimize order fill time by
segregating products according to inventory turn rate. The facility operates
three shifts and employs bar code scanning technology to automate the
receiving process and update inventory levels. This facility's operating
efficiency, as measured by inventory turns, sales per square foot and sales
per employee, significantly exceeds the industry average. In most cases,
customer orders may be received as late as 9:00 p.m., and deliveries are made
six days per week.
The Company's Chicago and Boston facilities were acquired in the General
Drug Acquisition. In these facilities, the Company is implementing its
operating model, which includes the reorganization of inventory by turn rate
and other efficiencies to minimize order pick time. The Chicago distribution
center recently increased SKUs and added a second operating shift and a sixth
day of operation to increase customer service levels. The second shift enables
the Company to extend order deadlines and expand the territories in which
next-day deliveries can be provided. The Boston distribution center currently
operates one shift, five days per week. The Company anticipates adding a
second shift in the second quarter of this fiscal year to provide for similar
growth opportunities as those identified for the Chicago facility. In Boston,
the Company sold the tobacco and candy business in the first quarter of fiscal
1999 to provide significant additional warehouse capacity for pharmaceuticals
and related products.
The combination of investments in information technology, inventory
management systems and facility operations has increased the Company's order
fill rate in recent years. In fiscal 1998, the St. Joseph facility achieved an
order fill rate for branded pharmaceuticals, adjusted for manufacturers'
backorders, of approximately 99.6%, up from approximately 97.0% in 1994.
CUSTOMERS AND MARKETS
The Company's customer base consists of over 3,000 independent pharmacies,
regional and national chain pharmacies, supermarkets, mass merchandisers,
hospitals, nursing homes and health care institutions. The Company's ten
largest customers accounted for approximately 21.0% of pro forma fiscal 1998
net sales, with no one customer accounting for more than approximately 7.0%.
C.D. Smith believes it is the primary supplier to the majority of its
customers and derives a majority of its net sales from customers for whom it
provides in excess of 70.0% of their pharmaceutical and other needs. The
Company also serves as a secondary supplier to several large chain drugstores,
supermarkets and mass
29
<PAGE>
merchandisers for items the primary supplier does not carry or periodically
cannot supply. The secondary supply relationships typically have lower sales
volume per order but provide higher gross margins. The Company believes a
substantial percentage of the Company's sales growth has come from converting
customer relationships from secondary to primary supplier status.
The Company historically has focused its marketing efforts on independent
pharmacies, a customer base which the Company believes is not adequately
served by the largest national pharmaceutical wholesalers, who typically focus
on large chain customers and often require high minimum monthly purchases.
Since 1991, the Company has expanded from a principally rural customer base
into the major metropolitan areas of its core midwestern states and increased
market share with retail chains, health care institutions and mass
merchandisers. The General Drug Companies historically had strong
relationships with government and managed care customers who typically place a
greater emphasis on price, flexible delivery options and contract and
formulary support. Consequently, the General Drug Companies were less focused
on establishing primary supply relationships with independent pharmacies and
related marketing efforts were geographically limited. The Company believes
that it will be able to apply the areas of expertise of the acquired
operations, as well as its expertise with independent pharmacies, across all
of its geographic markets, thereby attracting new customers and increasing net
sales.
The table below presents pro forma fiscal 1998 net sales by class of trade
and distribution region as if the General Drug Acquisition occurred at the
beginning of the fiscal year. The pro forma information is provided for
comparative purposes only and is not necessarily indicative of the results
which would have occurred had the General Drug Acquisition been consummated on
March 1, 1997, nor is it necessarily indicative of future results. The net
sales information presented below for the St. Joseph distribution facility was
derived by applying the percentages of net sales by class of trade for
calendar 1997 to total net sales for fiscal 1998.
<TABLE>
<CAPTION>
ST. % OF % OF % OF % OF % OF
JOSEPH TOTAL CHICAGO TOTAL BOSTON TOTAL SBS TOTAL CONSOLIDATED TOTAL
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Independent pharmacies.. $298,855 77.4% $ 59,877 43.6% $ 53,892 24.9% $ -- -- % $412,624 54.1%
Retail chains(1)........ 64,619 16.7% 7,553 5.5% 15,959 7.4% -- -- % 88,131 11.6%
Health care
institutions(2)........ 22,647 5.9% 21,565 15.7% 85,897 39.8% -- -- % 130,109 17.1%
Governments............. -- 0.0% 24,264 17.6% 4,721 2.2% -- -- % 28,985 3.8%
Miscellaneous........... 569 0.0% 24,223 17.6% 55,548(3) 25.7% 22,070 100.0% 102,410 13.4%
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
Total all classes...... $386,690 100.0% $137,482 100.0% $216,017 100.0% $22,070 100.0% $762,259 100.0%
======== ====== ======== ====== ======== ====== ======= ====== ======== ======
</TABLE>
- ---------------------
(1) Includes chain pharmacies, supermarkets and mass merchandisers.
(2) Includes clinics, nursing homes, hospitals and HMOs.
(3) Includes tobacco and candy business and dock to dock sales, which
accounted for $25.2 million and $25.9 million, respectively, of
consolidated net sales.
SUPPLIERS
C.D. Smith purchases pharmaceutical and other products from over 1,000
suppliers. The Company utilizes sophisticated inventory tracking and control
software to assist its purchasing personnel in analyzing demand history,
projecting future demand and identifying investment-buying opportunities. The
Company's system is automated to eliminate virtually all manual elements of
the purchase order process. In addition, the Company uses electronic data
interchange with its pharmaceutical suppliers for substantially all of its
purchases. Automatic inventory replenishment levels have been set for the
majority of non-seasonal SKUs. The Company believes that its strengthened
capitalization following the Offering will allow the Company to increase
investment buying of inventory in anticipation of supplier price increases,
potentially resulting in gross margin improvement.
The Company generally sets an inventory level for each item to minimize the
potential for unfilled orders. The overall level of inventory is affected by
the expected sales level for each inventory item within specified
30
<PAGE>
vendor delivery lead times plus a safety stock which takes into account
historical sales volatility, inventory carrying costs and the vendor's
performance in meeting scheduled deliveries. Orders for inventory stock
replenishment are generally made daily with each vendor after consideration of
the required inventory level for that vendor's supplied items and applicable
minimum or efficient order quantities. Delivery times vary by vendor and
inventory item and generally range from seven days to four weeks. The Company
maintains item-specific information about inventory requirements and delivery
schedules as a part of its inventory management information system.
The Company's suppliers generally grant full credit to the Company on all
returns of potentially impaired or expiring products; and therefore, the
Company does not incur any substantial losses as a result of obsolete, slow-
moving or impaired inventories.
The Company's ten largest suppliers account for approximately 50.0% of its
purchases with no single supplier accounting for more than 10.0% of purchases.
Historically, the Company has not experienced significant difficulty in
obtaining desired products from suppliers. The Company believes that its
relationships with its suppliers are good.
SALES AND MARKETING
The Company has expanded its outside sales force contact with customers,
emphasizing frequent on-site personal interaction and consultation on
merchandising, stocking and inventory management. The Company believes that
customers have relied upon such consultation to improve marketing at the
retail level. The internal customer service staff emphasizes rapid response to
customer inquiries and efficient order placement.
Internal marketing programs are designed to give customers access to special
price and promotional offerings of the manufacturers to better plan inventory
investments. Information on manufacturer promotional programs is rapidly
disseminated to the Company's direct sales representatives to give them a
competitive advantage in customer interactions.
The Company has a combined sales, marketing, order entry and customer
service staff of 62 persons. The St. Joseph organization consists of 25
industry sales representatives supported by an order entry and customer
service staff of eight persons. The Chicago and Boston direct sales forces and
order entry staffs include 12 and 17 persons, respectively.
MANAGEMENT INFORMATION SYSTEMS
The Company invests in management information systems to increase
efficiency, improve customer access to information, decrease the time and
labor cost of receiving orders and improve the speed with which inventory is
received, stocked and monitored. The information systems are intended to
provide for a seamless, integrated tracking of customer order entry,
purchasing, restocking and invoice preparation.
The Company's proprietary on-line customer interface software, CoDeS, allows
direct customer connectivity to the Company's mainframe computer in St. Joseph
to obtain pricing, product availability and promotional information and on-
line order entry. The CoDeS software is designed to reside on a customer site
PC supported by dial-up modem. Complete customer order tracking and purchase
history is available through the software system.
The Company's information systems environment utilizes an IBM AS400
mainframe with integrated links to the PC-based local area network. The
Company has recently purchased an IBM AS400E server for intranet use, sales
force automation and intercompany communication. In the distribution centers,
laser scanners utilizing bar coding information update inventory receiving
data. Extensive use of electronic mail, paperless imaging systems and an
automated broadcast faxing system have reduced cost and labor associated with
customer and vendor interactions and increased the amount and timeliness of
information available to the external sales force. Electronic commerce and
other Internet applications will be implemented in the near future. The
Company has engaged various consultants and is implementing a plan to achieve
Year 2000 compliance by the end of calendar 1998.
31
<PAGE>
COMPETITION
The wholesale distribution of pharmaceuticals, health and beauty aids and
other health care products is highly competitive. The Company competes with
numerous national and regional distributors, some of which are larger and have
substantially greater financial resources than the Company. The five largest
national pharmaceutical wholesale distributors are McKesson Corporation,
Cardinal Health, Inc., Bergen Brunswig Corporation, AmeriSource Health
Corporation and Bindley Western Industries, Inc. In addition, the Company
competes with numerous distributors, direct-selling manufacturers and other
specialty distributors. Competitive factors include price, service and
delivery, credit terms, breadth of product line, customer support and
marketing programs.
EMPLOYEES
As of May 31, 1998, the Company employed approximately 305 persons, of which
approximately 297 were full-time employees. Approximately 80 of the Company's
employees in its Chicago and Boston distribution facilities are covered by
collective bargaining agreements. One of these agreements expired on March 31,
1998. The previous contract terms are being honored during negotiations, which
are expected to be completed at the end of the summer. The remaining
agreements expire at various times through September 2000. The Company
believes that all remaining collective bargaining agreements will be
negotiated upon expiration on contract terms that will not have a material
adverse impact on the Company, and the Company believes that its relationship
with its employees is good.
FACILITIES
The Company owns its headquarters and distribution facility in St. Joseph.
The building encompasses 73,500 square feet with approximately 19,500 square
feet allocated to offices and 54,000 square feet of distribution and warehouse
space. The distribution facility is considered to be adequate for operations
for the foreseeable future, and the design of the facility allows for
additional expansion. The Company is in the process of designing and
constructing a facility for new corporate headquarters in St. Joseph which
will consist of approximately 10,000 square feet of office space.
The Company owns its Chicago distribution center, which includes two
adjoining buildings on a contiguous site totaling 62,000 square feet.
Approximately 16,000 square feet house the administrative and office function
and 46,000 square feet are used for warehouse and distribution functions. The
distribution facility is considered to be efficient and adequate for
operations for the foreseeable future.
The Boston facility includes 10,000 square feet of office space and a
distribution facility encompassing 35,000 square feet. The building is leased
by the Company through 2004 with a five-year renewal option, and it is
considered adequate for the foreseeable future.
GOVERNMENT REGULATION
The wholesale drug distribution industry is subject to regulation by
federal, state and local governmental agencies. The distribution of controlled
substances and prescription pharmaceuticals requires licenses and permits as
well as the implementation of an oversight and compliance program mandated by
the Prescription Drug Marketing Act of 1987. In general, regulations pertain
to the purchase, safe storage and distribution of controlled substances and
pharmaceuticals that are monitored through periodic site inspections conducted
by the FDA and the DEA. Failure to comply with these regulations could have a
material adverse effect on the Company by resulting in penalties such as
fines, restrictions on operations or closures.
The Company has implemented an extensive compliance program administered by
its Chief Compliance Officer. The Company believes that it is in material
compliance with all applicable government regulations and has all material
permits and licenses.
LITIGATION
The Company is a party from time to time in legal proceedings in the
ordinary course of business. There are no pending legal proceedings involving
the Company which have or are expected by management to have a material
adverse effect upon the business, financial condition or operations of the
Company.
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information concerning the executive officers and
directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Robert C. 52 Chief Executive Officer, President and Chairman of
Farley(1) the Board
S. Jeanne 44 Chief Financial Officer, Vice President, Treasurer and
Mathiesen Director
(2)
Delora J. 39 Chief Compliance Officer, Vice President, Secretary
Jamison(3) and Director
Richard M. 46 Vice President--Trade Relations
Meehan
Eric M. Far- 26 Vice President--Strategy and Corporate Development
ley
Richard H. 42 President--James Brudnick Company, Inc., a wholly
Brudnick owned subsidiary (Boston)
Joseph A. 46 President--General Drug Company, a wholly owned
Harris subsidiary (Chicago)
Barbara J. 50 Director
Mowry (4)
David R. 55 Director
Parker (5)
J. Duane 49 Director
Weeks (6)
</TABLE>
- ---------------------
(1) Became a director in 1991; term expires in 2001.
(2) Became a director in 1995; term expires in 1999.
(3) Became a director in 1995; term expires in 2000.
(4) Became a director in 1998; term expires in 1999.
(5) Became a director in 1998; term expires in 2001.
(6) Became a director in 1998; term expires in 2000.
The Company intends to add three outside directors by the end of June 1998.
Robert C. Farley, Chief Executive Officer, President and Chairman of the
Board. Mr. Farley became Chief Executive Officer in 1992. Prior to such time,
he was Chief Financial Officer of the Company since 1986. He serves on the
National Wholesale Druggists' Association ("NWDA") Board of Directors and the
NWDA Government Affairs Committee. Mr. Farley is a wholesaler advisor to the
Missouri Board of Pharmacy, is past Vice President of the Heart of America
ESOP Chapter and was named Ernst & Young LLP's 1996 Entrepreneur of the Year
for Kansas/Western Missouri. Mr. Farley is the father of Eric M. Farley.
S. Jeanne Mathiesen, Chief Financial Officer, Vice President, Treasurer and
Director. Ms. Mathiesen joined the Company in 1993 as Chief Financial Officer
and Treasurer. From 1991 until joining the Company, Ms. Mathiesen was an audit
manager and firm administrator with the accounting firm of Grant Thornton in
Kansas City, Missouri. She previously was a partner in an Orange County,
California, certified public accounting firm for ten years. Ms. Mathiesen is a
licensed CPA in the state of Missouri and is a member of the American
Institute of Certified Public Accountants and the Financial Executives
Institute.
Delora J. Jamison, Chief Compliance Officer, Vice President, Secretary and
Director. Ms. Jamison joined the Company in 1990, has served in various
executive capacities since that time and currently serves as the Company's
Chief Compliance Officer. She previously served as an executive with the St.
Joseph, Missouri YWCA. Ms. Jamison's responsibilities include oversight of the
Company's Corporate Ethics and Business Practices program and administration
of human resources, employee benefits and regulatory compliance. She is a
member of the Ethics Officer Association, national and local chapters of the
Society for Human Resource Management and currently serves on the NWDA Health
Care Information Privacy Task Force.
Richard M. Meehan, Vice President--Trade Relations. Mr. Meehan joined the
Company in 1991 following ten years with Twin City Wholesale Drug Company in
Minneapolis, Minnesota, where he was Group Vice President of Sales and
Marketing. His responsibilities include administering the OptiSource program.
He serves
33
<PAGE>
on the Manufacturing Committee for Wholesale Alliance Coalition and serves
from time to time on wholesale advisor boards for Novopharm USA Inc., Barr
Laboratories, Inc., Glaxo Wellcome plc, Apothecon, Inc. and Geneva
Pharmaceuticals, Inc.
Eric M. Farley, Vice President--Strategy and Corporate Development. Mr.
Farley joined the Company on a full-time basis in 1994 and has worked in
various functions on a part-time basis since 1988. In 1997 he became Vice
President of Purchasing and in May 1998 he assumed the duties of Vice
President--Strategy and Corporate Development. In that position, he is
responsible for acquisition consolidation in addition to his duties in
corporate purchasing. Mr. Farley is the son of Robert C. Farley.
Richard H. Brudnick, President--James Brudnick Company, Inc. Mr. Brudnick
joined the Company in October 1997 as a result of the General Drug
Acquisition. Mr. Brudnick has held the position of President of James Brudnick
Company, Inc. since 1985. He has overall responsibility for the Company's New
England operations. He is past chairman of the NWDA Government Affairs
Committee and past member of the NWDA OTC Marketing Committee. He has served
on the wholesale advisory boards of Eli Lilly and Company, Boehringer
Ingelheim Corporation, Parke-Davis, a division of Warner-Lambert Company and
Schering-Plough Corporation.
Joseph A. Harris, President, General Drug Company. Mr. Harris joined the
Company in October 1997 as a result of the General Drug Acquisition. Mr.
Harris has held the position of President of General Drug Company since 1994.
He joined General Drug Company in 1982 as sales manager and became Executive
Vice President in 1990. He is President of Premier Buying Group, a generic
pharmaceutical buying group and Board Vice President of the Generic Division
of National Pharmacy Alliance.
Barbara J. Mowry, Director. Ms. Mowry has been a director of the Company
since July 1998. She is the President and Chief Executive Officer of Requisite
Technology, which provides businesses with easy-to-find products and service
information that accelerate the adoption of business-to-business electronic
commerce. Prior to starting with Requisite Technology in 1998, she worked for
TCI Communications from 1995 to 1997 as President, New Products Division and
Senior Vice President, Customer Satisfaction. Ms. Mowry also served as Chief
Executive Officer and Founder of The Mowry Company, a consulting business,
from 1990 to 1995.
David R. Parker, Director. Mr. Parker has been a director of the Company
since July 1998. He has also been Chairman of the Board of ProSource, Inc., a
provider of foodservice distribution services to chain restaurants in North
America, since 1992. ProSource, Inc. merged into AmeriServe Food Distribution,
Inc. in the second quarter of 1998. Mr. Parker currently serves as Vice
Chairman of AmeriServe Food Distribution, Inc. Mr. Parker also serves on the
Board of Directors of several other companies, including Premark
International, Inc., a diversified manufacturer of consumer and industrial
products, Tupperware Corporation, one of the world's largest direct sellers of
food storage containers, and Applied Graphics Technologies, Inc., a leading
provider of outsourced digital media asset management services.
J. Duane Weeks, Director. Mr. Weeks has been a director of the Company since
July 1998. Mr. Weeks is currently Managing Partner of Genesia Consulting, a
management consulting firm specializing in supply chain management and
organizational effectiveness. From 1996 to March 1998, he was President of
General Electric Capital Logistics Corporation, whose parent is General
Electric Capital Corporation, a wholly-owned subsidiary of General Electric
Company. Prior to being employed by General Electric Capital Logistics
Corporation, Mr. Weeks was employed by Compaq Computer Corporation as Vice
President, Worldwide Logistics from 1994 to 1995, and as Vice President,
Corporate Re-Engineering, from 1994 to 1996. From 1992 to 1994, he served as
Vice President, Consumer Products, for Cleveland Consulting Associates and as
Vice President, Consumer Products Consulting, for Computer Science
Corporation.
BOARD TERM AND COMMITTEES
The Company's Amended Articles of Incorporation provide for a staggered
Board of Directors, whereby the directors are divided into three classes (as
nearly equal in number as possible), to serve for terms of three years or
until their successors are elected and qualified.
34
<PAGE>
In June 1998, the Board of Directors appointed a Compensation Committee to
make recommendations to the Board of Directors concerning salaries and
incentive compensation for officers and employees of the Company. The
Compensation Committee consists of Mr. Duane Weeks, Mr. David Parker and Ms.
Barbara Mowry. The Audit Committee of the Board of Directors reviews the
results and scope of audits and other accounting related services. The Audit
Committee consists of Mr. Weeks, Mr. Parker and Ms. Mowry.
COMPENSATION OF DIRECTORS
Outside directors will receive $10,000 upon joining the Board of Directors
and an additional $20,000 annual retainer, paid quarterly. Each outside
director, upon completion of the Offering, will receive an immediately vested
option to purchase that number of shares of Common Stock which equals $100,000
divided by the Offering price with an exercise price equal to the Offering
price. Management directors will receive no additional compensation for their
service on the Board.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Chief Executive
Officer of the Company and each of the other four most highly compensated
executive officers of the Company during the fiscal year ended February 28,
1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
----------------- ------------
SECURITIES
UNDERLYING OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
<S> <C> <C> <C> <C>
Robert C. Farley................... $227,603 $372,471 $10,693(1)
Chief Executive Officer
Lee Keith(2)....................... $151,077 $168,302 127,500(2) --
President and Chief Operating
Officer
Richard M. Meehan.................. $135,719 $111,080 $10,693(1)
Vice President
S. Jeanne Mathiesen................ $120,273 $117,811 $10,693(1)
Chief Financial Officer
Delora J. Jamison.................. $ 91,552 $117,811 $10,298(1)
Chief Compliance Officer
</TABLE>
- ---------------------
(1) Company contributions to 401(k) plan and ESOP.
(2) Mr. Keith resigned his positions as President and Chief Operating Officer
in April 1998. The grant of options to purchase 127,500 shares was
rescinded at such time.
OPTION GRANTS DURING 1998 FISCAL YEAR
The following table represents the options granted to the Named Executive
Officers during the fiscal year ended February 28, 1998 and the value of the
options:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED IN GRANT DATE
NAME GRANTED FISCAL YEAR EXERCISE PRICE EXPIRATION DATE PRESENT VALUE
<S> <C> <C> <C> <C> <C>
Lee Keith(1)............ 127,500 45.0% $2.08 N/A N/A
</TABLE>
- ---------------------
(1) Mr. Keith resigned his positions as President and Chief Operating Officer
in April 1998. The grant of options to purchase 127,500 shares was
rescinded at such time.
35
<PAGE>
1998 FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning unexercised options held at the end of fiscal
1998. No options were exercised during fiscal 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
OPTIONS AT FEBRUARY 28, 1998 FEBRUARY 28, 1998
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
<S> <C> <C>
Robert C. Farley..... 204,000/0 $3,174,240/0
Lee Keith(3)......... 127,500/0 -- / --
Richard M. Meehan.... 204,000/0 3,174,240/0
S. Jeanne Mathiesen.. 127,500/0 1,983,900/0
Delora J. Jamison.... 127,500/0 1,983,900/0
</TABLE>
- ---------------------
(1) Unless otherwise indicated, all options have an exercise price of $0.44
per share and a term of ten years.
(2) Based on the proposed initial public offering price of $16.00 per share.
(3) Mr. Keith resigned his positions as President and Chief Operating Officer
in April 1998. The grant of options to purchase 127,500 shares was
rescinded at such time. The exercise price of Mr. Keith's options were
$2.08.
EQUITY COMPENSATION PLAN
The Company's Board of Directors and shareholders have approved the
Company's Amended and Restated 1996 Equity Compensation Plan (the "Equity
Compensation Plan"). Management believes that the Equity Incentive Plan is an
important part of the Company's management compensation program by helping to
attract and retain motivated, highly competent employees. By providing stock
options and other equity-related compensation, management believes that the
participants will have a strong incentive to create shareholder value.
The Equity Compensation Plan allows the grant of stock options and stock
appreciation rights (collectively, "Awards") to eligible participants. The
number of shares authorized to be issued pursuant to Awards granted under the
Equity Compensation Plan is 2,000,000. If an Award expires or is canceled
without having been fully exercised or vested, the unvested or canceled shares
generally will be available thereafter for grants of Awards. The number of
shares available for grant under the Equity Compensation Plan, as well as
outstanding Awards and the numerical limits for individual grants, will be
adjusted as appropriate to reflect any stock splits, stock dividends,
recapitalizations, reorganizations or other changes to the capital structure
of the Company.
The Equity Compensation Plan currently is administered by the Board of
Directors but may be administered by a committee designated by the Board of
Directors. Subject to the terms of the Equity Compensation Plan, the Board or
the Committee has the sole discretion to determine the employees who will be
granted Awards, the size and types of such Awards and the terms and conditions
of such Awards. The exercise price of options must be at least equal to the
fair market value of the Common Stock as of the date of grant. Employees of
the Company and its affiliates (i.e., any person or entity controlling,
controlled by or under common control with the Company) are eligible to be
selected to receive Awards.
Under the Equity Compensation Plan, the Board of Directors of the Company
has approved options for eight employees totaling 943,500 shares. These
options have varying exercise prices and are all immediately exercisable. The
Named Executive Officers have received the following options: Mr. Farley--
204,000; Mr. Keith--127,500 (this option was rescinded effective with Mr.
Keith's resignation); Mr. Meehan--204,000; Ms. Mathiesen--127,500; and Ms.
Jamison--127,500. The actual number of employees who will receive Awards under
the Equity Compensation Plan cannot be determined because selection for
participation in the Equity Compensation Plan is in the sole discretion of the
Board of Directors or the Committee.
36
<PAGE>
EMPLOYMENT AND NONCOMPETE AGREEMENTS
Robert C. Farley, Chief Executive Officer, President and Chairman of the
Board of the Company, has an employment agreement for an initial term through
February 28, 1999, renewable for successive one-year terms thereafter unless
either Mr. Farley or the Company gives notice of nonrenewal at least 60 days
prior to the end of the initial term or any renewal thereof. The initial base
salary was $300,000, and is adjusted annually at the discretion of the Board
of Directors. Additional compensation is at the discretion of the Board of
Directors. The employment agreement contains a noncompetition provision
pursuant to which Mr. Farley has agreed that during the period of his
employment, and (i) if he elects to receive severance payments pursuant to the
provisions of the employment agreement or (ii) if he resigns other than for
good reason (as defined), or if he is terminated for cause (as defined), for a
period of two years, he will not, directly or indirectly, compete with a
business similar to that of the Company. Mr. Farley has also agreed that for
such time period he will not directly or indirectly solicit or recruit the
employees of the Company. If Mr. Farley is terminated by the Company without
cause (as defined), he may receive, as severance, his salary for the remaining
period of the employment agreement. If Mr. Farley terminates his employment
under certain circumstances, he is entitled to receive a lump sum severance
payment equal to two year's current base salary.
Richard M. Meehan, Vice President--Trade Relations of the Company, has an
employment agreement on substantially the same terms as the agreement with Mr.
Farley, except that Mr. Meehan's employment agreement is annually extended by
one year (unless Mr. Meehan or the Company gives notice of nonrenewal at least
60 days prior to the end of such one-year period) so that the remaining term
of Mr. Meehan's employment agreement is always at most three years and at
least two years. In addition, the noncompetition and non-solicitation
severance period for Mr. Meehan is three years. The initial base salary was
$131,300, and is adjusted annually at the discretion of the Board of
Directors. Additional compensation is at the discretion of the Board of
Directors.
S. Jeanne Mathiesen, Chief Financial Officer, Vice President and Treasurer
of the Company, has an employment agreement for an initial term through
February 28, 2000, renewable for successive one-year terms thereafter unless
either Ms. Mathiesen or the Company gives notice of nonrenewal at least 60
days prior to the end of the initial term or any renewal thereof. The initial
base salary was $115,000, and is adjusted annually at the discretion of the
Board of Directors. Additional compensation is at the discretion of the Board
of Directors. The employment agreement contains a noncompetition provision
pursuant to which Ms. Mathiesen has agreed that during the period of her
employment and for a two-year period thereafter, she will not, directly or
indirectly, compete with a business similar to that of the Company. Ms.
Mathiesen has also agreed that for such time period she will not directly or
indirectly solicit or recruit the employees of the Company. If Ms. Mathiesen
is terminated by the Company without cause, she may receive, as severance, her
salary for the remaining period of the employment agreement. If Ms. Mathiesen
terminates her employment under certain circumstances, she is entitled to
receive a lump severance payment equal to one year's current base salary. The
Company and Ms. Mathiesen have also entered into a change in control severance
agreement in which, if Ms. Mathiesen's employment with the Company is
terminated within the twelve month period following any such change in
control, she will receive a lump severance payment equal to two year's current
base salary upon a change in control of the Company.
Delora J. Jamison, Chief Compliance Officer, Vice President and Secretary of
the Company, has an employment agreement and a change in control severance
agreement, both of which are on substantially the same terms as the agreements
with Ms. Mathiesen. The initial base salary was $85,000, and is adjusted
annually at the discretion of the Board of Directors. Additional compensation
is at the discretion of the Board of Directors.
Richard H. Brudnick, President of James Brudnick Company, Inc., a wholly
owned subsidiary of the Company, has an employment agreement for an initial
term through February 28, 2000, renewable for successive two-year terms
thereafter unless either Mr. Brudnick or the subsidiary gives notice of
nonrenewal at least 180 days prior to the end of the initial term or any
renewal thereof. The initial base salary was $176,000, and is adjusted
annually at the discretion of the Board of Directors. Additional compensation
is at the discretion of the Board of Directors. The employment agreement
contains a noncompetition provision pursuant to which Mr. Brudnick has agreed
that during the period of his employment and, if he elects to receive
severance payments
37
<PAGE>
pursuant to the provisions of the employment agreement, for a period of two
years thereafter, he will not, directly or indirectly, compete with a business
similar to that of James Brudnick Company, Inc. Mr. Brudnick also agrees that
for such period he will not directly or indirectly solicit or recruit the
employees of such subsidiary. If Mr. Brudnick is terminated by such subsidiary
without cause, he may receive, as severance, his salary for the remaining
period of the employment agreement. If Mr. Brudnick terminates his employment
under certain circumstances, he is entitled to receive a lump sum severance
payment equal to one year's current base salary. If Mr. Brudnick terminates
his employment or is terminated within six months following a change in
control, he is entitled to receive a lump sum severance payment of one year's
current base salary.
Joseph A. Harris, President of the General Drug Company, a wholly owned
subsidiary of the Company, has an employment Agreement on substantially the
same terms as the employment agreement with Mr. Brudnick. The initial base
salary was $176,000, and is adjusted annually at the discretion of the Board
of Directors. Additional compensation is at the discretion of the Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to June 1998, the Board of Directors did not have a Compensation
Committee. Previously, all executive compensation decisions were made by the
Board of Directors. The Compensation Committee currently consists of Mr.
Weeks, Mr. Parker and Ms. Mowry. No members of the Compensation Committee are
executive officers of the Company.
CERTAIN TRANSACTIONS
On October 3, 1997, Churchill purchased a senior subordinated note in the
sum of $12.0 million to assist the Company in financing the General Drug
Acquisition. In connection therewith, the Company issued to Churchill a
warrant to purchase approximately 13.0% of the fully-diluted equity of the
Company in exchange for the purchase of the note. Churchill was also granted
certain demand and piggyback registration rights with respect to the shares of
Common Stock received upon exercise of the warrant. The maturity date for the
subordinated note is October 3, 2004, with yearly payments of principal at the
end of each fiscal year of the Company commencing with the fiscal year ending
February 28, 1999. Each installment is to be in an amount equal to 30.0% of
the Company's excess cash profit, as defined in the subordinated note.
Interest is payable at 12.0% per annum and certain penalty provisions are in
place in the event of late payment. The Company plans to repay the
subordinated note with the proceeds of the Offering. In addition, Churchill
will exercise the Churchill Warrant to purchase 1,080,078 shares of Common
Stock and sell the stock acquired thereby in this Offering as a Selling
Shareholder. Churchill has no relationship or affiliation with the Company
other than its status as a lender and shareholder.
The ESOP entered into an agreement with the Company in 1991 to borrow $1.4
million (the "ESOP Note") for the purpose of acquiring 5,946,600 shares of
Common Stock. The maturity date for the ESOP Note is January 1, 2000, with
monthly payments of principal of $12,089, plus interest at 0.5% below the
prime lending rate defined in the ESOP Note. As of May 31, 1998, there was
$379,841 outstanding on the ESOP Note.
Joseph A. Harris, the President of General Drug Company, was a partner in a
family partnership which received $116,000 in connection with the cancellation
of a limited partnership interest as a result of the General Drug Acquisition.
Richard H. Brudnick, President of James Brudnick Company, Inc., received
$116,000 in connection with the cancellation of a limited partnership interest
as a result of the General Drug Acquisition. He held the limited partnership
interest with his wife, Cynthia L. Brudnick, as joint tenants with right of
survivorship.
For the five months ended February 28, 1998, the James Brudnick Company,
Inc. made aggregate lease payments of $61,465 to Irving S. Brudnick as Trustee
of the Bershim Realty Trust for its Boston distribution facility. Irving S.
Brudnick is the father of Richard H. Brudnick. The Company believes these
lease payments are as favorable to the Company as those which would have been
made in an arms length transaction with an unrelated third party.
38
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 31, 1998 and as adjusted to reflect
the sale by the Company of 3,500,000 shares offered hereby, by (i) each
shareholder of the Company who beneficially owns more than 5.0% of the Common
Stock, (ii) each director, (iii) each Named Executive Officer, (iv) another
member of management who will be a Selling Shareholder and (v) all executive
officers and directors as a group. Except as otherwise indicated, each named
beneficial owner has sole voting and investment power with respect to the
shares listed.
<TABLE>
<CAPTION>
SHARES PERCENT SHARES PERCENT
BENEFICIALLY OWNED BENEFICIALLY OWNED
OWNED PRIOR PRIOR TO SHARES SOLD OWNED AFTER AFTER
NAME TO OFFERING OFFERING IN OFFERING THE OFFERING OFFERING
<S> <C> <C> <C> <C> <C>
ESOP(1)............................ 5,582,970 70.4% -- 5,582,970 48.9%
Robert C. Farley(2)................ 816,510 10.3 75,000 741,510 6.5
Lee Keith(3)....................... -- -- -- -- --
Richard M. Meehan(4)............... 423,045 5.3 31,230 391,815 3.4
S. Jeanne Mathiesen(5)............. 197,268 2.5 21,231 176,037 1.5
Delora J. Jamison(6)............... 287,487 3.6 21,231 266,256 2.3
Churchill ESOP Capital Partners(7). 1,080,078 13.6 1,080,078 -- --
2400 Metropolitan Centre
333 South Seventh St.
Minneapolis, MN 55402
Robert B. Orr(8)................... 295,137 3.7 21,230 273,907 2.4
J. Duane Weeks..................... -- -- -- -- --
David R. Parker.................... -- -- -- -- --
Barbara J. Mowry................... -- -- -- -- --
All directors and executive offi-
cers as a group (10 persons)(9)... 1,844,466 23.3% 148,692 1,695,774 14.8%
</TABLE>
- ---------------------
(1) Of the shares held of record by the ESOP, 4,007,070 shares have been
allocated to 112 participants in the ESOP (the "Allocated Shares") as of
December 31, 1997 and 1,575,900 shares are unallocated (the "Unallocated
Shares"). The Allocated Shares are voted by each participant to which the
shares are allocated. The Unallocated Shares and any Allocated Shares
which are not voted are voted by George K. Baum & Company Trust Company,
the trustee of the ESOP, for or against the matter in the same proportion
as those Allocated Shares which have been voted.
(2) Includes 204,000 shares subject to immediately exercisable options and
291,210 shares allocated under the ESOP as of December 31, 1997. Mr.
Farley's address is the same as the Company's address.
(3) Mr. Keith resigned his position with the Company in April 1998.
(4) Includes 204,000 shares subject to immediately exercisable options and
219,045 shares allocated under the ESOP as of December 31, 1997. All
shares sold in the Offering will be acquired pursuant to the exercise of
options. Mr. Meehan's address is the same as the Company's address.
(5) Includes 127,500 shares subject to immediately exercisable options and
69,768 shares allocated under the ESOP as of December 31, 1997. All shares
sold in the Offering will be acquired pursuant to the exercise of options.
(6) Includes 127,500 shares subject to immediately exercisable options and
159,987 shares allocated under the ESOP as of December 31, 1997. All
shares sold in the Offering will be acquired pursuant to the exercise of
options.
(7) Shares subject to immediately exercisable warrants which will be exercised
concurrent with the closing of the Offering. Churchill is an institutional
limited partnership which includes, as general and limited partners, a
large number of institutions and high net-worth individuals, none of whom
are affiliated with the Company. No one institution or individual has the
right to vote or dispose of these shares.
(8) Includes 127,500 shares subject to immediately exercisable options and
167,637 shares allocated under the ESOP as of December 31, 1997. Mr. Orr
is President of a subsidiary of the Company. All shares sold in the
Offering will be acquired pursuant to the exercise of options.
(9) Includes 765,000 shares subject to immediately exercisable options (of
which 94,922 will be exercised and sold in the Offering) and 758,166
shares allocated under the ESOP as of December 31, 1997.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Common Stock does not
purport to be complete and is subject to, and qualified in its entirety by,
the provisions of the Company's Amended Articles of Incorporation, which are
included as an exhibit to the Registration Statement of which this Prospectus
is a part and by the provisions of applicable law.
COMMON AND PREFERRED STOCK
The Amended Articles of Incorporation of the Company provide for the
authorized capital stock of the Company of 90,000,000 shares of Common Stock
and 10,000,000 shares of Preferred Stock, the designation and terms of which
may be set by the Board of Directors.
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by shareholders. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
liquidation rights of holders of Preferred Stock then outstanding, if any.
Holders of shares of Common Stock are entitled to receive such dividends as
the Board of Directors may declare in its discretion out of funds legally
available therefor, subject to the prior rights of holders of Preferred Stock
then outstanding, if any.
The rights, preferences and privileges of holders of Common Stock will be
subject to and may be adversely affected by the rights of the holders of
shares of any series of preferred stock that the Company may designate and
issue in the future.
As of May 31, 1998, there were 5,904,270 shares of Common Stock outstanding
(excluding 943,500 shares subject to outstanding options, all of which are
immediately exercisable) held of record by two shareholders. Upon the closing
of the Offering and after giving effect to the sale of 3,500,000 shares
pursuant to the Offering, there will be outstanding 10,579,270 shares of
Common Stock (excluding 848,578 shares subject to outstanding options, all of
which are immediately exercisable). There is no Preferred Stock currently
outstanding. Certain members of management will exercise options to purchase
94,922 shares in connection with the sale of such shares in the Offering.
LIMITATIONS ON CHANGE OF CONTROL
Certain provisions of the General and Business Corporation Law of Missouri
(the "MGBCL") and the Amended Articles of Incorporation could make more
difficult the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise and the removal of incumbent officers and directors.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to first negotiate with the Company. The
Company believes that the benefits of increased protection of the Company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
The Company's Board of Directors is divided into three classes, with
staggered three-year terms. The number of directors shall be not less than
three nor more than nine, with the classes to be as nearly equal in number as
possible. As a result, only one class of directors will be elected at each
annual meeting of shareholders of the Company, with the other classes
continuing for the remainder of their respective three-year terms. The
classification of the Board of Directors makes it more difficult for the
Company's existing shareholders to replace the Board of Directors as well as
for another party to obtain control of the Company by replacing the Board of
Directors. Because the Board of Directors has the power to retain and
discharge officers of the Company, these provisions could also make it more
difficult for existing shareholders or another party to effect a change in
management.
40
<PAGE>
The Amended Articles of Incorporation provide that shareholder action can be
taken only at an annual or a special meeting of shareholders and cannot be
taken by written consent and that special meetings of shareholders can be
called only by the President, the Board of Directors or holders of 50.0% of
the outstanding voting stock. The Company's Amended and Restated Bylaws
provide that the business permitted to be conducted at any special meeting of
shareholders will be limited to those matters specified in the notice of such
meeting authorized by the Board of Directors. The Amended and Restated Bylaws
set forth an advance notice procedure with regard to the nomination, other
than by or at the direction of the Board of Directors, of candidates for
election as directors and with regard to business to be brought before an
annual meeting of shareholders of the Company. Shareholders will not be
permitted to fill vacancies on the Board of Directors caused by resignation or
newly created directorships.
The Amended Articles of Incorporation contain provisions requiring the
affirmative vote of the holders of at least 80.0% of the voting stock of the
Company to amend the foregoing provisions of the Amended Articles of
Incorporation.
In addition to the provisions of the Amended Articles of Incorporation, the
MGBCL contains a business combination statute that protects domestic
corporations from unsolicited takeovers by prohibiting certain transactions.
The statute restricts certain "Business Combinations" between a corporation
and an "Interested Shareholder" and its "Affiliates" and "Associates" (as
defined therein). A "Business Combination" includes a merger or consolidation,
certain sales, leases, exchanges, mortgages, transfers, pledges and similar
dispositions of corporate assets or stock and any reclassifications,
recapitalization and reorganizations that increase the proportionate voting
power of the Interested Shareholder. An "Interested Shareholder" includes any
person or entity which beneficially owns or controls 20.0% or more of the
outstanding voting shares of the corporation. Pursuant to the Missouri
business combination statute, a Missouri corporation may not, for a period of
five years following the Interested Shareholder's stock acquisition date,
engage in a Business Combination with an Interested Shareholder other than (i)
a Business Combination approved by the board of directors prior to the date on
which the Interested Shareholder acquired such status, (ii) a Business
Combination approved by the holders of a majority of the outstanding voting
stock (other than voting stock beneficially owned by the Interested
Shareholder or its Affiliates or Associates) at a meeting called no earlier
than five years after the date on which the Interested Shareholder acquired
such status or (iii) a Business Combination that satisfies certain detailed
fairness and procedural requirements. Notwithstanding the foregoing, unless
the board of directors of the corporation approved such Business Combination
prior to the date on which the Interested Shareholder acquired such status, no
such Business Combination may be engaged in for a period of five years after
such date.
The MGBCL exempts from its business combination provisions: (i) corporations
not having a class of voting stock registered under Section 12 of the Exchange
Act, (ii) corporations which adopt provisions in their original articles of
incorporation or, under certain circumstances, adopt amendments to their
bylaws expressly electing not to be covered by the statute and (iii) certain
circumstances in which a shareholder inadvertently becomes an Interested
Shareholder.
The MGBCL also contains a control share acquisition statute which provides
that persons who acquire a specified percentage of the shares of a Missouri
corporation subject to this statute, unless acquired in an exempt transaction,
will not have the right to vote such shares, unless certain disclosure
requirements are met and the retention or restoration of voting rights is
approved by holders of a majority of the outstanding voting stock and a
majority of the outstanding voting stock after exclusion of the interested
shares.
TRANSFER AGENT AND REGISTRAR
The transfer agent and the registrar for the Company's Common Stock is UMB
Bank, National Association.
LISTING
The Common Stock has been approved for listing on the NYSE under the symbol
"CDH."
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon closing of the Offering, the Company will have outstanding 10,579,270
shares of Common Stock (assuming no exercise of outstanding stock options
other than 94,922 shares sold by Selling Stockholders). Of these shares, the
4,750,000 shares of Common Stock sold in the Offering will be freely tradeable
without restriction under the Securities Act of 1933 as amended (the
"Securities Act") by persons other than "affiliates" of the Company. The
remaining 5,829,270 shares of Common Stock (the "Restricted Shares") were
acquired in transactions exempt from registration under the Securities Act and
may not be resold unless they are registered under the Securities Act, or are
sold pursuant to an applicable exemption from registration, such as Rule 144
under the Securities Act. The existing shareholders, including the ESOP and
certain of its participants, are subject to restrictions on any public sale or
distribution of Common Stock for a period of at least 180 days following the
effective date of the Registration Statement.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities for at least one year or any person
who may be deemed an affiliate of the Company is entitled, subject to certain
conditions, to sell within any three-month period a number of shares which
does not exceed the greater of (i) 1.0% of the Company's then outstanding
shares of Common Stock (approximately 105,792 shares immediately after the
Offering, assuming no exercise of outstanding stock options) or (ii) the
average weekly trading volume of the Common Stock in the over-the-counter
market during the four calendar weeks preceding such sale. Sales under Rule
144 are also subject to certain manner-of-sale provisions, notice requirements
and the availability of public information about the Company.
Beginning 90 days after the date of this Prospectus and subject to the
agreements of the holders thereof not to sell such shares for 180 days
following the effective date of the Registration Statement, 246,300 of the
Restricted Shares will be eligible for sale in the public market under Rule
144, provided the conditions of that rule have been met. A total of 1,822,200
of the Restricted Shares are subject to lock-up agreements with the
Underwriters that prohibit their sale or other disposition for 180 days from
the date of this Prospectus without the prior written consent of the
Representatives. An additional 4,007,070 shares held in the ESOP and allocated
to participant accounts are eligible for distribution only if a vested
employee terminates service or is over the age of 65.
Prior to the Offering, there has been no market for the Common Stock and no
predictions can be made as to the effect, if any, that market sales of shares
or the availability of shares for sale would have on the prevailing market
price. Nevertheless, sales of substantial amounts of the Common Stock in the
public market could adversely affect the prevailing market price and could
impair the Company's ability to raise capital at that time through the sale of
its equity securities.
42
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1998 (the "Underwriting Agreement"), the Underwriters named
below, who are represented by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), BT Alex. Brown and Wheat First Union, a division of Wheat
First Securities, Inc. (the "Representatives"), have severally agreed to
purchase from the Company and the Selling Shareholders the respective number
of shares of Common Stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO
BE
UNDERWRITERS PURCHASED
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............
BT Alex. Brown..................................................
Wheat First Securities, Inc.....................................
---------
Total....................................................... 4,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all the shares of Common Stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including
the Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without
notice. The Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
The Company and the Selling Shareholders have granted to the Underwriters an
option, exercisable within 30 days after the date of this Prospectus, to
purchase, from time to time, in whole or in part, up to an aggregate of
712,500 additional shares of Common Stock at the initial public offering price
less underwriting discounts and commissions. The Underwriters may exercise
such option solely to cover over allotments, if any, made in connection with
the Offering. To the extent that the Underwriters exercise such option, each
Underwriter will become obligated, subject to certain conditions, to purchase
its pro rata portion of such additional shares based on such Underwriter's
percentage underwriting commitment as indicated in the preceding table.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
shareholders of the Company (including the Selling Shareholders) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer
or dispose of, directly or indirectly, any shares of Common
43
<PAGE>
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers
all or a portion of the economic consequences associated with the ownership of
any Common Stock (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of Common Stock, or such
other securities, in cash or otherwise) for a period of 180 days after the
date of this Prospectus without the prior written consent of DLJ. In addition,
during such period, the Company has also agreed not to file any registration
statement with respect to, and each of its executive officers, directors and
certain shareholders of the Company (including the Selling Shareholders) has
agreed not to make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock without DLJ's prior written
consent.
Prior to the Offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company and the
Representatives. The factors to be considered in determining the initial
public offering price include the history of and the prospects for the
industry in which the Company competes, the past and present operations of the
Company, the historical results of operations of the Company, the prospects
for future earnings of the Company, the recent market prices of securities of
generally comparable companies and the general condition of the securities
markets at the time of the Offering.
The Common Stock has been approved for listing on the NYSE under the trading
symbol "CDH."
Other than in the United States, no action has been taken by the Company,
the Selling Shareholders or the Underwriters that would permit a public
offering of the shares of Common Stock offered hereby in any jurisdiction
where action for that purpose is required. The shares of Common Stock offered
hereby may not be offered or sold, directly or indirectly, nor may this
Prospectus or any other offering material or advertisements in connection with
the offer and sale of any such shares of Common Stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this Prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the Offering of
the Common Stock and the distribution of this Prospectus. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
shares of Common Stock offered hereby in any jurisdiction in which such an
offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot the Offering, creating a
syndicate short position. The Underwriters may bid for and purchase shares of
Common Stock in the open market to cover such syndicate short position or to
stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed Common Stock in syndicate
covering transactions, in stabilization transactions or otherwise. These
activities may stabilize or maintain the market price of the Common Stock
above independent market levels. The Underwriters are not required to engage
in these activities and may end any of these activities at any time.
44
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Blackwell Sanders Peper Martin LLP,
Kansas City, Missouri. Certain legal matters will be passed upon for the
Underwriters by Gardere & Wynne, L.L.P., Dallas, Texas.
EXPERTS
The consolidated financial statements and schedules of the Company at
February 28, 1998 and 1997 and for each of the three years in the period ended
February 28, 1998, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein and are included in reliance
upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Gimbel Investor Group L.P. at April
30, 1997 and 1996 and for each of the three years in the period ended April
30, 1997, appearing in this Prospectus and Registration Statement have been
audited by Blackman Kallick Bartelstein, LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a registration statement on Form S-1 (together with
all amendments, schedules and exhibits thereto, the "Registration Statement")
with the Securities and Exchange Commission (the "SEC") pursuant to the
Securities Act, with respect to the Common Stock offered hereby. This
Prospectus, which is a part of the Registration Statement, does not contain
all the information set forth in the Registration Statement, certain parts of
which have been omitted in accordance with the rules and regulations of the
SEC. The Registration Statement is available for inspection and copying at the
Public Reference Room of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein or therein are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference. The SEC maintains
a World Wide Web site on the Internet at http:\\www.sec.gov that contains
information concerning the Company.
45
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 28,
1997 AND FEBRUARY 29, 1996
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets at February 28, 1998 and February 28, 1997. F-3
Consolidated Statements of Income for the Fiscal Years ended February
28, 1998, February 28, 1997 and February 29, 1996..................... F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years
ended February 28, 1998, February 28, 1997 and February 29, 1996...... F-5
Consolidated Statements of Cash Flows for the Fiscal Years ended
February 28, 1998, February 28, 1997 and February 29, 1996............ F-6
Notes to Consolidated Financial Statements............................. F-7
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF MAY 31, 1998
Condensed Consolidated Balance Sheets.................................. F-17
Condensed Consolidated Statements of Income............................ F-18
Condensed Consolidated Statements of Cash Flows........................ F-19
Notes to Condensed Consolidated Financial Statements................... F-20
GIMBEL INVESTOR GROUP L.P. CONSOLIDATED FINANCIAL STATEMENTS FOR THE
FISCAL YEARS ENDED APRIL 30, 1997, 1996 AND 1995
Independent Auditors' Report........................................... F-21
Consolidated Balance Sheets at April 30, 1997 and 1996................. F-22
Consolidated Statements of Income for the Fiscal Years ended April 30,
1997, 1996 and 1995................................................... F-23
Consolidated Statements of Partners' Capital for the Fiscal Years ended
April 30, 1997, 1996 and 1995......................................... F-24
Consolidated Statements of Cash Flows for the Fiscal Years ended April
30, 1997, 1996 and 1995............................................... F-25
Notes to Consolidated Financial Statements............................. F-26
GIMBEL INVESTOR GROUP L.P. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 1, 1997 TO OCTOBER 3, 1997
Consolidated Statement of Operations for the period from May 1, 1997 to
October 3, 1997....................................................... F-32
Consolidated Statement of Cash Flows for the period from May 1, 1997 to
October 3, 1997....................................................... F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
C.D. Smith Drug Company and Subsidiaries
We have audited the accompanying consolidated balance sheets of C.D. Smith
Drug Company and subsidiaries (the "Company") as of February 28, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended February 28,
1998. These consolidated 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 consolidated 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 consolidated financial position of C.D. Smith
Drug Company and subsidiaries at February 28, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 28, 1998, in conformity with
generally accepted accounting principles.
Kansas City, Missouri
April 10, 1998, except for
Note 11 as to which the
date is , 1998
The foregoing report is in the form
that will be signed upon completion
of the change in the Company's
capital stock and the 51-for-1
common stock split as described in
Note 11 to the consolidated
financial statements.
Ernst & Young LLP
Kansas City, Missouri
June 1, 1998
F-2
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS (NOTE 4)
Current assets:
Cash.............................................. $ 42,243 $ 17,437
Trade accounts and notes receivable, less
allowance for doubtful receivables of $650,384 in
1998 and $248,933 in 1997........................ 56,059,092 15,400,134
Other receivables................................. 3,298,940 525,410
Refundable income taxes........................... 542,762 --
Merchandise inventory............................. 73,671,570 30,733,499
Prepaid expenses.................................. 380,307 134,677
------------ -----------
Total current assets............................ 133,994,914 46,811,157
Property and equipment, net (Note 3)................ 6,723,476 3,175,196
Other assets:
Goodwill, net of accumulated amortization of
$266,330 in 1998 (Note 2)........................ 25,301,231 --
Deferred income taxes (Note 7).................... 786,000 --
Debt issuance costs net of accumulated
amortization of $154,515 in 1998................. 1,502,196 --
Other............................................. 393,867 235,335
------------ -----------
Total assets.................................... $168,701,684 $50,221,688
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 60,554,993 $23,599,940
Accrued expenses.................................. 2,708,626 1,664,935
Income taxes payable.............................. -- 334,035
Deferred income taxes (Note 7).................... 2,380,000 96,000
Current portion of long-term debt (Note 4)........ 445,072 305,072
------------ -----------
Total current liabilities....................... 66,088,691 25,999,982
Line of credit (Note 4)............................. 80,880,927 19,436,574
Long-term debt, less current portion (Note 4)....... 2,371,036 1,002,777
Deferred income taxes............................... -- 615,000
Subordinated note payable (Note 5).................. 9,663,026 --
Common stock put warrants (Note 6).................. 2,569,000 --
Shareholders' equity (Notes 4, 8 and 12):
Preferred stock, $.01 par value:
Authorized shares--10,000,000
Issued and outstanding shares--none.............. -- --
Common stock, $.01 par value:
Authorized shares--90,000,000
Issued shares--10,200,000........................ 102,000 102,000
Additional paid-in capital........................ 98,000 98,000
Retained earnings................................. 8,478,444 4,481,731
Treasury stock, at cost, 4,295,730 shares in 1998
and 4,208,979 shares in 1997..................... (1,133,331) (953,195)
------------ -----------
7,545,113 3,728,536
Less note receivable from ESOP.................... (416,109) (561,181)
------------ -----------
7,129,004 3,167,355
------------ -----------
Total liabilities and shareholders' equity...... $168,701,684 $50,221,688
============ ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Net sales........................... $ 544,090,215 $301,523,181 $224,163,431
Cost of goods sold.................. 516,667,769 286,784,687 213,481,167
------------- ------------ ------------
Gross profit........................ 27,422,446 14,738,494 10,682,264
Operating expenses:
Selling, general and
administrative................... 15,878,659 9,985,350 7,975,655
Depreciation and amortization..... 923,178 279,280 220,609
------------- ------------ ------------
16,801,837 10,264,630 8,196,264
------------- ------------ ------------
Operating income.................... 10,620,609 4,473,864 2,486,000
Other income (expense):
Interest income................... 238,352 142,385 82,684
Interest expense on credit
facilities....................... (3,834,459) (1,571,214) (1,478,483)
Interest expense on subordinated
debt (Note 5).................... (812,026) -- --
Other, net........................ 51,101 (15,842) (40,720)
------------- ------------ ------------
(4,357,032) (1,444,671) (1,436,519)
------------- ------------ ------------
Income before income taxes.......... 6,263,577 3,029,193 1,049,481
Income tax provision (Note 7)....... 2,266,864 1,099,190 415,377
------------- ------------ ------------
Net income.......................... $ 3,996,713 $ 1,930,003 $ 634,104
============= ============ ============
Net income per share (Note 11):
Basic............................. $ 0.67 $ 0.29 $ 0.07
============= ============ ============
Diluted........................... $ 0.56 $ 0.28 $ 0.07
============= ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL NOTE
COMMON PAID-IN RETAINED TREASURY RECEIVABLE
STOCK CAPITAL EARNINGS STOCK FROM ESOP TOTAL
-------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 1,
1995................... $102,000 $98,000 $1,917,624 $ -- $(851,325) $1,266,299
Net income............. -- -- 634,104 -- -- 634,104
Collections on note
receivable............ -- -- -- -- 145,072 145,072
Purchase of treasury
stock................. -- -- -- (161,400) -- (161,400)
-------- ------- ---------- ----------- --------- ----------
Balances at February 29,
1996................... 102,000 98,000 2,551,728 (161,400) (706,253) 1,884,075
Net income............. -- -- 1,930,003 -- -- 1,930,003
Collections on note
receivable............ -- -- -- -- 145,072 145,072
Purchase of treasury
stock................. -- -- -- (791,795) -- (791,795)
-------- ------- ---------- ----------- --------- ----------
Balances at February 28,
1997................... 102,000 98,000 4,481,731 (953,195) (561,181) 3,167,355
Net income............. -- -- 3,996,713 -- -- 3,996,713
Collections on note
receivable............ -- -- -- -- 145,072 145,072
Purchase of treasury
stock................. -- -- -- (180,136) -- (180,136)
-------- ------- ---------- ----------- --------- ----------
Balances at February 28,
1998................... $102,000 $98,000 $8,478,444 $(1,133,331) $(416,109) $7,129,004
======== ======= ========== =========== ========= ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................... $ 3,996,713 $ 1,930,003 $ 634,104
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation................... 653,478 279,280 220,609
Amortization................... 656,241 -- --
Net gain on sale of property
and equipment................. (7,775) -- --
Provision for doubtful
accounts...................... 200,825 222,900 37,480
Deferred income taxes.......... (44,496) 243,000 288,000
Changes in operating assets and
liabilities, net of the
effects from the General Drug
Acquisition:
Trade accounts and notes
receivable.................. (5,277,838) (4,856,823) (426,660)
Other receivables............ 1,826,376 (52,164) (371,735)
Refundable income taxes...... 808,531 -- --
Merchandise inventory........ (1,984,843) (10,110,601) (6,285,443)
Prepaid expenses............. 34,642 71,233 76,790
Other........................ 5,598 62,545 78,203
Accounts payable............. (1,627,988) 4,709,217 4,763,476
Accrued expenses............. (4,810,404) 245,963 965,724
Income taxes payable......... (334,035) 258,402 75,633
------------- ------------- -------------
Net cash provided by (used in)
operating activities............ (5,904,975) (6,997,045) 56,181
INVESTING ACTIVITIES
Purchases of property and
equipment....................... (819,275) (1,109,324) (288,634)
Proceeds from sale of property
and equipment................... 56,875 12,500 --
Collections on note receivable
from ESOP....................... 145,072 145,072 145,072
Net cash paid in the General Drug
Acquisition, including
transaction costs............... (29,097,392) -- --
------------- ------------- -------------
Net cash used in investing
activities...................... (29,714,720) (951,752) (143,562)
FINANCING ACTIVITIES
Borrowings on line of credit..... 576,864,146 306,643,441 223,438,779
Principal payments on line of
credit.......................... (551,639,405) (298,517,612) (222,864,039)
Proceeds from issuance of long-
term debt....................... 1,859,996 800,000 --
Principal payments on long-term
debt............................ (1,603,389) (271,440) (231,425)
Proceeds from issuance of
subordinated note payable with
common stock put warrants....... 12,000,000 -- --
Payments of debt issuance costs.. (1,656,711) -- --
Purchases of treasury stock...... (180,136) (791,795) (161,400)
------------- ------------- -------------
Net cash provided by financing
activities...................... 35,644,501 7,862,594 181,915
------------- ------------- -------------
Increase (decrease) in cash...... 24,806 (86,203) 94,534
Cash at beginning of year........ 17,437 103,640 9,106
------------- ------------- -------------
Cash at end of year.............. $ 42,243 $ 17,437 $ 103,640
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest....................... $ 4,025,577 $ 1,523,760 $ 1,460,469
============= ============= =============
Income taxes................... $ 1,814,000 $ 597,788 $ 55,000
============= ============= =============
Cash received during the year
for:
Income tax refund.............. $ -- $ -- $ 58,962
============= ============= =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
C.D. Smith Drug Company ("C.D. Smith"), a Missouri corporation, and its
subsidiaries (collectively referred to as the "Company") are regional full-
line, full-service wholesale distributors of pharmaceuticals and related
products. The Company's customers consist primarily of independent pharmacies,
health care institutions and regional and national chain pharmacies located in
its core territories of the midwestern United States and New England.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include C.D. Smith and its wholly
owned subsidiaries, C.D.S. Transportation, Inc. and G.D. Holdings of Delaware,
Inc., ("Holdings"). Holdings owns 100% of the common stock of General Drug
Company and its wholly owned subsidiaries, James Brudnick Company, Inc. and
SBS Pharmaceuticals, Inc. (collectively referred to as "the General Drug
Companies"). All significant intercompany balances and transactions have been
eliminated upon consolidation. As discussed in Note 2, the General Drug
Companies were acquired in October 1997 (the "General Drug Acquisition") in
connection with the acquisition of Gimbel Investor Group, L.P. ("Gimbel").
REVENUE RECOGNITION
The Company recognizes sales when products are shipped.
INVENTORIES
Inventories are stated at the lower of cost, which approximates the first-
in, first-out ("FIFO") method, or market. The Company has the right to return
all potentially impaired or expiring products to suppliers for full credit;
and therefore, generally does not incur any losses as a result of obsolete,
slow-moving or impaired inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is
provided over the estimated useful lives of the assets using the straight-line
method. Generally, the estimated useful lives are five to forty years for
buildings and improvements, five to fifteen years for machinery and equipment,
five years for vehicles, and three to seven years for office equipment.
OTHER RECEIVABLES
Other receivables consist principally of rebates receivable from
manufacturers, which are recognized when earned.
GOODWILL
Goodwill, resulting from the General Drug Acquisition, is being amortized
over its estimated life of 40 years using the straight-line method.
DEBT ISSUANCE COSTS
Debt issuance costs of approximately $1.6 million were incurred in obtaining
financing for the General Drug Acquisition (see Note 2). These financing costs
are being amortized to interest expense over the term of the different debt
instruments, which range from three to seven years, using the straight-line
method.
F-7
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the liability method is used in accounting for income
taxes, whereby deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CREDIT CONCENTRATIONS
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. Credit
losses are provided for in the Company's consolidated financial statements and
consistently have been within management's expectations.
FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash,
trade accounts and notes receivable, accounts payable and long-term debt, as
reported in the accompanying consolidated balance sheets, approximates fair
value.
CASH
The Company maintains both a lockbox account for cash received from
customers and a controlled disbursement checking account. Cash received from
customers in the lockbox account is used to reduce borrowings on the revolving
line of credit (see Note 4). At February 28, 1998 and 1997, cash received from
customers in the lockbox account of $6,012,976 and $227,787, respectively, has
been recorded as a reduction in the balance of the revolving line of credit in
the accompanying consolidated balance sheets. The controlled disbursement
account allows for daily advances from the revolving line of credit in amounts
sufficient to cover checks presented for payment at the bank each day. The
amount of checks issued but not presented at the bank, totaling $13,492,420
and $3,289,327 at February 28, 1998 and 1997, respectively, has been included
in the balance of line-of-credit borrowings in the accompanying consolidated
balance sheets.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has elected to follow Statement of Position ("SOP") 76-3,
"Accounting Practices for Certain Employee Stock Ownership Plans," issued by
the American Institute of Certified Public Accountants ("AICPA"). The amount
contributed or committed to be contributed to the C.D. Smith Drug Company
Employee Stock Ownership Plan ("ESOP") with respect to a given year is charged
to expense. The compensation and interest elements of the contribution are
separately reported. See Note 8.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principals Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options because, as
discussed in Note 10, the alternative fair value accounting provided for under
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, compensation expense is recorded over the
related vesting period when the exercise price is less than the estimated fair
value of the stock at the date of grant. The Company
F-8
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
has established the exercise prices of options granted at fair value, as
determined by the Board of Directors, giving consideration to the valuation of
the Company's common stock completed by an independent appraiser within the
year in which the stock options were granted. In accordance with APB No. 25,
the Company has recorded no compensation expense related to options granted.
See Note 10.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to SFAS No. 128
requirements.
The following table sets forth the computation of basic and diluted earnings
per share in accordance with SFAS No. 128:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY FEBRUARY FEBRUARY 29,
28, 1998 28, 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Numerator (basic and diluted):
Net income.......................... $3,996,713 $1,930,003 $ 634,104
========== ========== =========
Denominator:
Denominator for basic earnings per
share--weighted average shares
outstanding........................ 5,963,481 6,699,564 9,499,821
Effect of dilutive securities:
Stock options..................... 697,272 172,635 --
Warrants.......................... 505,257 -- --
---------- ---------- ---------
Dilutive potential common shares...... 1,202,529 172,635 --
---------- ---------- ---------
Denominator for diluted earnings per
share................................ 7,166,010 6,872,199 9,499,821
========== ========== =========
Net income per share--basic........... $ .67 $ .29 $ .07
========== ========== =========
Net income per share--diluted......... $ .56 $ .28 $ .07
========== ========== =========
</TABLE>
All shares held by the ESOP are considered outstanding for purposes of
computing earnings per share.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income," which requires that an enterprise report, by
major components and as a single total, the change in its net assets during
the period from nonowner sources, and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information," which establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major
customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. Both
statements are effective for the Company's fiscal year ending February 28,
1999, with earlier application permitted.
F-9
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. THE GENERAL DRUG ACQUISITION
Effective October 3, 1997, C.D. Smith consummated the General Drug
Acquisition, purchasing all outstanding partnership interests in Gimbel, which
owns 100% of the outstanding stock of Holdings, the parent company of the
General Drug Companies, for $28 million in cash. The transaction was accounted
for using the purchase method. The purchase price was allocated to net assets
acquired on the basis of their estimated fair values. Inventories of the
General Drug Companies, previously accounted for using the last-in, first-out
method, were valued at replacement cost and deferred taxes were recorded for
the resulting difference from the tax basis of such inventories. In addition,
the recorded amounts of goodwill were written off. The excess of the purchase
price, including approximately $1.1 million of transaction costs, over the
fair market value of the net assets acquired amounted to $25,567,561 and has
been recorded as goodwill. All operations acquired from Gimbel are conducted
within the General Drug Companies. Gimbel and Holdings had no material assets
or liabilities aside from those related to their investment in the General
Drug Companies. The General Drug Companies' results of operations have been
included in the consolidated results of operations since the date of
acquisition.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the General Drug
Companies as if the General Drug Acquisition had occurred at the beginning of
the fiscal year ended February 28, 1997. Pro forma adjustments principally
give effect to amortization of goodwill, interest expense on debt issued to
fund the acquisition, the exclusion of certain compensation and noncompete
expenses contractually required as a result of the General Drug Acquisition
and related income tax effects. The unaudited pro forma information has been
prepared for comparative purposes only and does not purport to be indicative
of the results of operations had this acquisition been completed as of these
dates or which may occur in the future.
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales....................................... $762,259,269 $693,213,000
Gross profit.................................... 39,928,433 37,420,424
Operating income................................ 12,757,513 11,877,999
Net income...................................... 2,738,866 2,582,557
Net income per share:
Basic......................................... $ 0.46 $ 0.39
Diluted....................................... 0.38 0.38
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment at February 28, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Land............................................. $ 273,500 $ 135,000
Building and improvements........................ 3,736,708 1,694,909
Machinery and equipment.......................... 1,398,209 908,542
Vehicles......................................... 326,102 180,009
Office equipment................................. 2,485,602 1,135,757
----------- ----------
8,220,121 4,054,217
Less accumulated depreciation.................... (1,496,645) (879,021)
----------- ----------
$ 6,723,476 $3,175,196
=========== ==========
</TABLE>
4. LINE OF CREDIT AND LONG-TERM DEBT
In connection with the General Drug Acquisition the Company refinanced its
senior credit facility with a group of lending institutions providing for a
revolving line of credit and certain term notes. All existing debt of the
General Drug Companies was refinanced through the new credit facility. Under
the terms of the new facility, which expires in October 2000, the Company may
borrow up to approximately $90 million, in addition to the
F-10
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amounts outstanding under the term notes described below, based on eligible
inventory and accounts receivable balances (the "borrowing base"). At February
28, 1998, the borrowing base amounted to approximately $102 million. The
Company must pay an aggregate commitment fee of .2% per annum on the unused
balance of the credit facility plus an agency fee of $10,000 per month. At
February 28, 1998, availability under the revolving line of credit was
$16,747,000, excluding the effects of outstanding checks and lockbox receipts
included in outstanding line-of-credit borrowings, as discussed in Note 1.
Generally, advances bear interest at the lender's prime rate (8.5% at February
28, 1998) payable monthly. The Company has an option to pay interest on a
specified amount not less than $1 million at the London Interbank Offered Rate
(LIBOR) plus 1.75% if LIBOR loans are purchased. Such interest periods are of
a one-, two-, or three-month duration. The line of credit borrowings,
amounting to $80,880,927 and bearing interest at a weighted average LIBOR-
based rate of 7.79% at February 28, 1998, are collateralized by substantially
all assets of the Company and its subsidiaries. Beginning in October 2000, the
senior credit facility can be renewed for one-year terms upon mutual consent.
At February 28, 1997, C.D. Smith maintained a credit facility with a lending
institution providing for a revolving line of credit and two term notes. Under
the terms of the facility, which was to expire in February 2000, C.D. Smith
could borrow up to $32 million, including the amounts outstanding under the
term notes, based on eligible inventory and accounts receivable balances. At
February 28, 1997, the borrowing base amounted to approximately $27 million.
Interest on borrowings under the revolving line of credit was payable monthly
at the lender's prime rate (8.25% at February 28, 1997) plus 1.1%. Line-of-
credit borrowings of $19,436,574 at February 28, 1997 were collateralized by
substantially all assets of C.D. Smith and had been personally guaranteed up
to $1 million by the Chief Executive Officer ("CEO") of C.D. Smith.
The agreement governing the senior credit facility contains several
covenants which, among other things, restrict capital expenditures and
dividend payments and require the Company to maintain certain specified levels
of net worth, interest and debt service coverage and minimum levels of stock
ownership by the ESOP and the CEO. This agreement also limits cash dividends,
loans or cash transfers from the General Drug Companies to C.D. Smith, other
than purchases and sales between the companies in the normal course of
business. At February 28, 1998, restricted net assets of the General Drug
Companies were approximately $22.5 million.
The Company's long-term debt at February 28, all of which is due October
2000, unless extended by mutual consent of the Company and the lending
institutions, consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Notes payable to lending institutions under term note
provisions of the senior credit facility described
above, in monthly installments of $12,089, plus in-
terest at .5% below the bank's prime rate, collater-
alized by 1,575,900 shares of common stock held by
the ESOP............................................ $ 416,109 $ 561,181
Notes payable to lending institutions under term note
provisions of the senior credit facility described
above, in monthly installments of $16,667, plus in-
terest at the bank's prime rate, collateralized by
certain warehouse equipment......................... 933,332 746,668
Notes payable to lending institutions under term note
provisions of the senior credit facility described
above, in monthly installments aggregating $8,333,
plus interest at the bank's prime rate, collateral-
ized by certain real estate......................... 1,466,667 --
---------- ----------
2,816,108 1,307,849
Less current portion................................. 445,072 305,072
---------- ----------
$2,371,036 $1,002,777
========== ==========
</TABLE>
F-11
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The prime rate of the lending institutions providing the term debt discussed
above was 8.50% at February 28, 1998.
Principal maturities of long-term debt, other than borrowings under the line
of credit which expires in October 2000, for each of the next three years are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28 AMOUNT
----------- ----------
<S> <C>
1999.......................... $ 445,072
2000.......................... 445,072
2001.......................... 1,925,964
</TABLE>
5. SUBORDINATED NOTE PAYABLE
In conjunction with the General Drug Acquisition, C.D. Smith issued a
subordinated note payable due October 3, 2004 in the principal amount of $12
million with detachable stock warrants (see Note 6) to an investment group.
Interest at 12% per annum is payable quarterly. Principal installments are due
and payable 90 days after the end of each fiscal year, commencing with the
fiscal year ending February 28, 1999, in an amount equal to 30% of "Excess
Cash Flow" as defined below subject to certain conditions. "Excess Cash Flow"
is generally defined in the related agreement as consolidated earnings before
interest expense, income taxes, depreciation and amortization ("EBITDA") minus
current tax liabilities, interest paid, principal payments and capital
expenditures. The estimated fair value of the warrants at October 3, 1997,
amounting to $2,569,000, was recorded as a discount on the subordinated debt.
The discount is being amortized to interest expense over the seven-year term
using the interest method resulting in an effective interest rate of 17.9% on
the subordinated debt. The amount of unamortized discount at February 28, 1998
is $2,336,974.
The subordinated note agreement contains several covenants which are similar
to the covenants associated with the Company's senior credit facility (see
Note 4).
6. COMMON STOCK PUT WARRANTS
The detachable common stock warrants to purchase 1,246,236 shares of common
stock of the Company (1,080,078 in the event the initial public offering
discussed in Note 11 is completed) discussed in Note 5 are subject to certain
antidilution and other adjustments, as defined in the related agreement. The
warrants are exercisable on October 3, 2002, or earlier if certain events
occur as defined in the agreement, at a price of $0.0004 per share. After the
fifth anniversary of the closing of the General Drug Acquisition, the holders
have an option to put the warrants to the Company at a price based on a
multiple of EBITDA less indebtedness and certain other amounts as defined in
the agreement. Once the warrants have been put to the Company, the put price
is payable no earlier than 90 days but no later than 100 days of the put date.
Additionally, after the sixth anniversary of the closing, the Company has the
option to exercise a call right to purchase from the holders all or any
portion of such warrant securities, and the holders are obligated to sell at a
price determined in a similar manner to that of the put option. The $2,569,000
value of these put warrants is presented as a liability in the accompanying
consolidated balance sheet due to the holder's option to require settlement in
cash. The Company is accreting the recorded amount of the warrants to the
highest redemption price of the put warrant using the interest method. No
accretion was necessary at February 28, 1998 as the redemption price
calculated per the agreement did not exceed the recorded amount of the
warrants.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company files its
consolidated income tax return on a fiscal year ending September 30. However,
for purposes of computing deferred taxes in the accompanying consolidated
financial statements, the tax bases of assets and liabilities are determined
as if the Company were filing a tax return as of the balance sheet date.
F-12
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's effective tax rate differed from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax statutory rate.... 34.0% 34.0% 34.0%
State income taxes, net of federal
tax benefit......................... 2.5 2.0 4.3
Other, net........................... (.3) .3 1.3
----- ---- ----
36.2% 36.3% 39.6%
===== ==== ====
</TABLE>
The lower state income tax rate in 1998 and 1997 is attributable to the
effects of enterprise zone tax credits obtained and utilized by the Company in
those years.
Significant components of the Company's deferred tax assets and liabilities
as of February 28, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful receivables............. $ 241,000 $ 91,000
Uniform capitalization costs................... 95,000 53,000
Amortization of tax basis noncompete asset..... 1,677,000 --
Vacation accrual............................... 129,000 55,000
----------- ---------
Total deferred tax assets........................ 2,142,000 199,000
Deferred tax liabilities:
Inventory...................................... (3,259,000) (733,000)
Depreciation................................... (477,000) (177,000)
----------- ---------
Total deferred tax liabilities................... (3,736,000) (910,000)
----------- ---------
Net deferred tax liability....................... $(1,594,000) $(711,000)
=========== =========
</TABLE>
The income tax provision (benefit) for 1998, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- -------- ----------
<S> <C> <C> <C>
1998
Federal................................... $2,068,965 $(38,692) $2,030,273
State..................................... 242,395 (5,804) 236,591
---------- -------- ----------
$2,311,360 $(44,496) $2,266,864
========== ======== ==========
1997
Federal................................... $ 781,154 $224,816 $1,005,970
State..................................... 75,036 18,184 93,220
---------- -------- ----------
$ 856,190 $243,000 $1,099,190
========== ======== ==========
1996
Federal................................... $ 119,820 $226,965 $ 346,785
State..................................... 7,557 61,035 68,592
---------- -------- ----------
$ 127,377 $288,000 $ 415,377
========== ======== ==========
</TABLE>
F-13
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an ESOP covering substantially all employees with over one
year of service. Under the ESOP, the Company initially obtained a term loan
from an outside bank in 1991 (see Note 4) and disbursed the proceeds to the
ESOP in exchange for a note receivable for purposes of acquiring shares from
the original shareholders. Shares held as collateral under the term loan are
released each year in the proportion of principal and interest paid in the
current year to the principal and interest remaining to be paid over the life
of the loan. The Company is obligated to make annual contributions sufficient
to enable the ESOP to repay the loan with interest at .5% below the prime
rate. The ESOP currently owns 5,582,970 shares of stock in the Company, of
which 4,007,070 are allocated. ESOP contributions totaling $145,072 were
expensed during each of the three years in the period ended February 28, 1998.
The estimated repurchase obligation for allocated shares which are vested at
February 28, 1998 is approximately $6.2 million. The loan and receivable are
recorded in the Company's consolidated balance sheets as long-term debt and a
reduction in shareholders' equity, respectively.
DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution 401(k) plan which covers
substantially all C.D. Smith employees with at least one year of service and,
effective January 1, 1998, substantially all nonunion employees of General
Drug Company with at least one year of prior service. Under the plan,
employees may elect to contribute a percentage of their annual salary subject
to Internal Revenue Code ("IRC") maximum limitations. The plan provides for
employer matching and discretionary contributions, the amounts of which are to
be determined annually by the Board of Directors. During the 1997 plan year,
the Company matched 50% of employee contributions up to 4% of qualified
compensation.
James Brudnick Company, Inc. also maintains a defined contribution plan
which covers substantially all employees with at least six months of service.
The plan provides for employer discretionary contributions, the amounts of
which are to be determined annually by the Company's Board of Directors.
Contribution expense, representing employer contributions under the above
plans, was $96,830 and $13,666 for the years ended February 28, 1998 and 1997,
respectively. No matching discretionary contributions were provided for the
year ended February 29, 1996.
MULTIEMPLOYER PLANS
The Company also participates in two multiemployer, union administered,
pension plans that principally cover warehouse workers and drivers at the
General Drug Companies. The Company recognizes as an expense the required
contributions for these plans, the amounts of which were insignificant for the
year ended February 28, 1998.
F-14
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. LEASES
The Company has entered into noncancelable operating leases for certain
facilities, computer equipment and vehicles.
Future minimum rental payments under these noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28 AMOUNT
----------- ----------
<S> <C>
1999........................................................... $ 494,698
2000........................................................... 372,032
2001........................................................... 246,823
2002........................................................... 189,371
2003........................................................... 160,189
Thereafter..................................................... 147,516
----------
Total.......................................................... $1,610,629
==========
</TABLE>
Total rent expense for the years ended February 28, 1998 and 1997 and
February 29, 1996 was $417,767, $285,129 and $353,859, respectively.
10. STOCK OPTIONS
The Company has established the C.D. Smith Drug Company 1996 Equity
Compensation Plan pursuant to which options to purchase up to 1,530,000 shares
of common stock may be granted to employees at prices which approximate the
fair value of the shares on the dates of grant. The terms and vesting
provisions of these options are determined by the Board of Directors and may
vary by optionee; however, no term may be longer than 10 years from the date
of grant.
In August 1996, C.D. Smith granted to certain members of management
nonqualified stock options to purchase 790,500 shares of common stock at $0.44
per share. In October 1997, C.D. Smith granted additional nonqualified stock
options to purchase 280,500 shares of common stock at $2.08 per share. The
weighted average exercise price of options outstanding at February 28, 1998 is
$0.87 per share.
No options were exercised or canceled during the years ended February 28,
1998 and 1997. All options become immediately exercisable upon the date of
grant. The weighted average fair values of options granted during the years
ended February 28, 1998 and 1997, determined in accordance with SFAS No. 123,
equaled $.12 and $0.58, respectively. The weighted-average remaining
contractual life at February 28, 1998 was 8.72 years.
The fair values of options granted were estimated at the date of grant using
the Minimum Value Option Pricing Model with the following weighted-average
assumptions: a risk-free interest rate of 6.10% and 6.50% for the years ended
February 28, 1998 and 1997, respectively, and a weighted-average expected life
of five years for each of the years ended February 28, 1998 and 1997. Under
the Minimum Value Option Pricing Model, the volatility factor is excluded. The
Company assumed a 0% dividend yield over the expected life of the options.
The Minimum Value Option Pricing Model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
F-15
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
For purposes of the pro forma disclosures required under SFAS No. 123, the
estimated fair value of the options is expensed in the year of grant as the
options are immediately vested upon date of grant. For the years ended
February 28, 1998 and 1997, the Company's pro forma net income equals
$3,893,619 and $1,871,848, respectively, pro forma net income per share-basic
equals $0.65 and $0.28, respectively, and pro forma net income per share-
diluted equals $0.54 and $0.27, respectively.
11. PENDING PUBLIC OFFERING OF COMMON STOCK
During June 1998, the Company filed a registration statement with the
Securities and Exchange Commission for an underwritten initial public offering
of 4,750,000 shares of common stock, 3,500,000 shares of which are to be
offered by the Company (the Offering). The Board of Directors and shareholders
have approved a change in the Company's capital stock to authorize 90,000,000
shares of $.01 par value common stock and 10,000,000 shares of $.01 par
preferred stock and to effect a 51-for-1 common stock split in the form of a
stock dividend immediately prior to consummation of the Offering. All share
and per share information included in the accompanying consolidated financial
statements has been adjusted to give retroactive effect to the common stock
split. In connection with the Offering, the Company changed its name to C.D.
Smith Healthcare, Inc.
F-16
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
1998 FEBRUARY 28,
(UNAUDITED) 1998
----------- ------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ -- $ 42
Trade accounts and notes receivable, less allowance
of $665 at May 31, 1998 and $650 at February 28,
1998............................................... 52,363 56,059
Other receivables................................... 3,927 3,299
Refundable income taxes............................. -- 543
Merchandise inventory............................... 79,943 73,672
Prepaid expenses and other.......................... 535 380
-------- ---------
Total current assets.............................. 136,768 133,995
Property and equipment, net........................... 7,051 6,724
Other assets:
Goodwill, net....................................... 25,141 25,301
Debt issuance costs, net............................ 1,409 1,502
Other assets........................................ 1,256 1,180
-------- ---------
Total assets...................................... $171,625 $ 168,702
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 65,740 $ 60,555
Accrued expenses.................................... 2,600 2,709
Income taxes payable................................ 112 --
Deferred income taxes............................... 2,084 2,380
Current portion of long-term debt................... 445 445
-------- ---------
Total current liabilities......................... 70,981 66,089
Line of credit ....................................... 78,449 80,881
Long-term debt, less current portion.................. 2,260 2,371
Subordinated note payable............................. 9,807 9,663
Common stock put warrants............................. 2,569 2,569
Shareholders' equity:
Common stock, $.01 par value........................ 102 102
Additional paid-in capital.......................... 98 98
Retained earnings................................... 8,872 8,478
Treasury stock...................................... (1,133) (1,133)
-------- ---------
7,939 7,545
Less note receivable from ESOP...................... (380) (416)
-------- ---------
7,559 7,129
-------- ---------
Total liabilities and shareholders' equity........ $171,625 $ 168,702
======== =========
</TABLE>
See accompanying notes.
F-17
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MAY 31,
-----------------
1998 1997
-------- -------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net sales.................................................... $206,866 $88,430
Cost of goods sold........................................... 196,920 84,502
-------- -------
Gross profit................................................. 9,946 3,928
Operating expenses:
Selling, general and administrative........................ 6,013 2,513
Depreciation and amortization.............................. 431 82
Special charges (Note 3)................................... 817 --
-------- -------
7,261 2,595
-------- -------
Operating income............................................. 2,685 1,333
Other income (expense):
Interest income............................................ 94 42
Interest expense on credit facilities...................... (1,593) (500)
Interest expense on subordinated debt...................... (512) --
Other, net................................................. (29) (1)
-------- -------
(2,040) (459)
-------- -------
Income before income taxes................................... 645 874
Income tax provision......................................... 251 332
-------- -------
Net income................................................... $ 394 $ 542
======== =======
Net income per share (Notes 2 and 4):
Basic...................................................... $ 0.07 $ 0.09
======== =======
Diluted.................................................... $ 0.05 $ 0.08
======== =======
</TABLE>
See accompanying notes.
F-18
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MAY 31,
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES.................... $ 3,101 $ 4,659
INVESTING ACTIVITIES
Purchases of property and equipment.......................... (690) (74)
Proceeds from sale of property and equipment................. 54 --
Collections on note receivable from ESOP..................... 36 36
-------- -------
Net cash used in investing activities........................ (600) (38)
FINANCING ACTIVITIES
Borrowings on line of credit................................. 214,423 83,867
Principal payments on line of credit......................... (216,855) (88,423)
Proceeds from issuance of long-term debt..................... -- --
Principal payments on long-term debt......................... (111) (80)
-------- -------
Net cash used in financing activities........................ (2,543) (4,636)
-------- -------
Decrease in cash............................................. (42) (15)
Cash at beginning of period.................................. 42 17
-------- -------
Cash at end of period........................................ $ -- $ 2
======== =======
</TABLE>
See accompanying notes.
F-19
<PAGE>
C.D. SMITH DRUG COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended May 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended February 28,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto, included herein.
2. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MAY 31,
1998 1997
------ ------
(AMOUNTS IN
THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
Numerator (basic and diluted):
Net income..................................................... $ 394 $ 541
====== ======
Denominator:
Denominator for basic earnings per share--weighted average
shares outstanding............................................ 5,904 5,991
Effect of dilutive securities:
Stock options................................................ 873 623
Warrants..................................................... 1,246 --
------ ------
Dilutive potential common shares................................. 2,119 623
------ ------
Denominator for diluted earnings per share....................... 8,023 6,614
====== ======
Net income per share--basic...................................... $ 0.07 $ 0.09
====== ======
Net income per share--assuming dilution.......................... $ 0.05 $ 0.08
====== ======
</TABLE>
3. SPECIAL CHARGES
Special charges of $817 include $592 for a severance payment to a former
officer and a $225 loss on the sale of the tobacco and candy business of the
General Drug Companies, which was sold for $1,900 in May 1998.
4. PENDING PUBLIC OFFERING OF COMMON STOCK
During June 1998, the Company filed a registration statement with the
Securities and Exchange Commission for an underwritten initial public offering
of 4,750,000 shares of common stock, 3,500,000 shares of which are to be
offered by the Company (the Offering). The Board of Directors and shareholders
have approved a change in the Company's capital stock to authorize 90,000,000
shares of $0.01 par value common stock and 10,000,000 shares of $0.01 par
preferred stock and to effect a 51-for-1 common stock split in the form of a
stock dividend immediately prior to consummation of the Offering. All share
and per share information included in the accompanying condensed consolidated
financial statements has been adjusted to give retroactive effect to the
common stock split. In connection with the Offering, the Company changed its
name to C.D. Smith Healthcare, Inc.
F-20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Partners
Gimbel Investor Group
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of Gimbel
Investor Group, L.P. and Subsidiary (the "Group") as of April 30, 1997 and
1996, and the related consolidated statements of income, partners' capital and
cash flows for each of the three years in the period ended April 30, 1997.
These financial statements are the responsibility of the Group'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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gimbel
Investor Group, L.P. and Subsidiary as of April 30, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in
the period ended April 30, 1997, in conformity with generally accepted
accounting principles.
Blackman Kallick Bartlestein, LLP
Chicago, Illinois
May 26, 1998
F-21
<PAGE>
GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
-----------------------
1997 1996
ASSETS ----------- -----------
<S> <C> <C>
Current Assets
Accounts receivable (net of allowance for doubtful
accounts of $456,335
and $616,544 for 1997 and 1996, respectively)....... $29,943,802 $30,122,633
Inventories.......................................... 35,072,165 37,062,079
Prepaid expenses and other current assets............ 532,072 485,104
----------- -----------
Total Current Assets............................... 65,548,039 67,669,816
Property and Equipment (net)........................... 2,522,880 2,399,466
Other Assets........................................... 3,320,270 3,122,515
----------- -----------
$71,391,189 $73,191,797
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Current portion of long-term debt.................... $ 249,246 $ 55,187
Accounts payable..................................... 28,238,551 33,500,230
Accrued expenses..................................... 636,511 1,171,117
----------- -----------
Total Current Liabilities.......................... 29,124,308 34,726,534
Long-Term Debt, less current portion................... 36,582,560 34,467,707
----------- -----------
Total Liabilities.................................. 65,706,868 69,194,241
Partners' Capital...................................... 5,684,321 3,997,556
----------- -----------
$71,391,189 $73,191,797
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
<PAGE>
GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales................................ $372,921,546 $347,545,827 $343,925,741
Cost of sales............................ 351,318,560 326,704,375 325,183,287
------------ ------------ ------------
Gross profit............................. 21,602,986 20,841,452 18,742,454
Operating expenses
Selling, general and administrative.... 11,584,734 10,883,847 9,283,265
Depreciation and amortization.......... 831,330 1,118,007 1,293,421
Covenants not to compete............... 1,050,000 1,110,000 1,292,320
Management fees........................ 818,777 754,502 706,451
------------ ------------ ------------
Operating Income..................... 7,318,145 6,975,096 6,166,997
------------ ------------ ------------
Other expenses
Interest expense....................... 3,464,141 3,324,016 3,629,922
Miscellaneous, net..................... 243,854 767,679 789,119
------------ ------------ ------------
Total Other Expenses................. 3,707,995 4,091,695 4,419,041
------------ ------------ ------------
Income before income taxes............... 3,610,150 2,883,401 1,747,956
Income taxes............................. 1,423,385 1,121,677 799,512
------------ ------------ ------------
Net income............................... $ 2,186,765 $ 1,761,724 $ 948,444
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE>
GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
PARTNERS'
CAPITAL
----------
<S> <C>
Balance at April 30, 1994........................................... $1,997,388
Net Income........................................................ 948,444
----------
Balance at April 30, 1995........................................... 2,945,832
Contributed Capital............................................... 1,790,000
Partners' Distribution............................................ (2,500,000)
Net Income........................................................ 1,761,724
----------
Balance at April 30, 1996........................................... 3,997,556
Partners' Distribution............................................ (500,000)
Net Income........................................................ 2,186,765
----------
Balance at April 30, 1997........................................... $5,684,321
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE>
GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................... $ 2,186,765 $ 1,761,724 $ 948,444
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities
Depreciation................... 636,388 566,097 515,954
Amortization................... 194,942 551,910 777,467
Loss on sale of property and
equipment..................... 25,759 35,055 16,584
Deferred income taxes.......... (313,641) (583,000) (83,120)
Changes in operating assets and
liabilities
Accounts receivable.......... 178,831 (890,221) 76,413
Inventories.................. 1,989,914 (4,829,427) (522,287)
Prepaid expenses and other
assets...................... (36,123) 66,598 11,012
Accounts payable............. (5,261,679) 8,546,533 (4,206,345)
Accrued expenses............. (534,606) 336,547 (200,749)
------------- ------------- -------------
Net cash provided by (used in)
operating activities............ (933,450) 5,561,816 (2,666,627)
------------- ------------- -------------
INVESTING ACTIVITIES
Purchase of assets of T & S
Wholesale, Inc.................. -- (461,685) --
Purchase of property and
equipment....................... (779,426) (751,074) (390,545)
Other............................ (6,263) 44,779 (46,985)
------------- ------------- -------------
Net cash used in investing
activities...................... (785,689) (1,167,980) (437,530)
------------- ------------- -------------
FINANCING ACTIVITIES
Proceeds from issuance of long-
term debt....................... 390,218,671 361,356,000 355,625,000
Repayments of long-term debt..... (387,909,759) (363,162,055) (351,894,366)
Financing fees................... (89,773) (87,781) (216,172)
Partners' distribution........... (500,000) (2,500,000) --
Payment to former Brudnick
stockholders.................... -- -- (410,305)
------------- ------------- -------------
Net cash provided by (used in)
financing activities............ 1,719,139 (4,393,836) 3,104,157
------------- ------------- -------------
Net change in cash............... -- -- --
Cash at beginning of year........ -- -- --
------------- ------------- -------------
Cash at end of year.............. $ -- $ -- $ --
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
<PAGE>
GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements of Gimbel Investor Group, L.P. and
Subsidiary (the "Group") include the accounts of Gimbel Investor Group, L.P.
and its wholly owned subsidiary, GD Holdings Inc. ("Holdings").
General Drug Company ("General Drug") is a wholly owned subsidiary of
Holdings. James Brudnick Company, Inc. ("Brudnick") and SBS Pharmaceuticals,
Inc. ("SBS") are wholly owned subsidiaries of General Drug. All significant
intercompany accounts and transactions have been eliminated in consolidation.
In December 1995, General Drug formed a wholly owned subsidiary, SBS. SBS
obtained the rights to use Aligen Independent Laboratories' label on its brand
name repackaged products.
On July 24, 1995, the Group purchased substantially all of the assets and
the name of T&S Wholesale, Inc. ("T&S") for $2,429,811. T&S was a tobacco and
candy wholesaler that operated in the Boston area. A trade receivable in the
amount of approximately $2,000,000 was applied against the purchase price. The
purchase price was allocated as follows:
<TABLE>
<S> <C>
Accounts receivable............................................ $1,274,891
Inventory...................................................... 453,592
Fixed assets................................................... 65,000
Other assets................................................... 2,416
Goodwill....................................................... 633,912
</TABLE>
The results of operations from both acquisitions are included in the
consolidated income statement from the respective dates of acquisition.
NATURE OF BUSINESS
General Drug and Brudnick are wholesale distributors of prescription and
over-the-counter drugs and related products. Brudnick is also a distributor of
candy and tobacco products, which account for less than 5% of sales. SBS is a
repackager and distributor of brand name pharmaceuticals. All companies
routinely extend credit to their customers. General Drug's customers are
located throughout the midwestern United States. Brudnick operates in the
northeastern United States SBS's customers are national.
INVENTORIES
Inventories, consisting of goods sold for resale, are stated at the lower of
cost or market. Cost is determined by the last-in, first-out ("LIFO") method.
If the first-in, first-out ("FIFO") method, which approximates replacement
cost, had been used, inventories would have been approximately $4,700,000
greater as of April 30, 1997. As of April 30, 1996, inventories under the FIFO
method would have been approximately $3,550,000 greater. Cost for SBS's
inventory is determined by the last-in, first-out ("LIFO") method using 1996
as its base year. Therefore, there is no difference between the LIFO and FIFO
methods as of April 30, 1996.
The Group has the right to return all potentially impaired or expiring
products to suppliers for full credit; and therefore, generally does not incur
any losses as a result of obsolete, slow-moving or impaired inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets for
financial statement purposes, as indicated in the following tabulation:
<TABLE>
<CAPTION>
YEARS
<S> <C>
Warehouse equipment................................................. 5-10
Transportation equipment............................................ 4
Computer and office equipment....................................... 3-5
Building and building improvements.................................. 15-30
</TABLE>
F-26
<PAGE>
GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COVENANTS NOT TO COMPETE
The Group's obligation for covenants not to compete is recognized on a
straight-line basis over the terms of the agreements. See Note 8.
GOODWILL
Goodwill purchased in connection with net asset purchases is being amortized
using the straight-line method over a 40-year life.
REVENUE RECOGNITION
The Company recognizes sales when products are shipped.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
FINANCIAL INSTRUMENTS
A financial instrument is cash, evidence of an ownership interest in an
entity or certain contracts involving future conveyances of cash or other
financial instruments. The carrying values of the Group's financial
instruments approximate their fair values.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Group is in the process of evaluating
the specific reporting requirements of SFAS No. 130; however, it believes the
adoption of SFAS No. 130 would have had no impact on the Group's consolidated
results of operations, financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. The Group is in the process of evaluating the
disclosure requirements of SFAS No. 131; however, it believes that its
adoption will have no material impact on its future disclosure requirements.
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land.............................................. $ 139,043 $ 104,500
Warehouse equipment............................... 328,497 318,287
Transportation equipment.......................... 840,029 850,966
Computer and office equipment..................... 2,236,172 2,016,325
Building and building improvements................ 996,743 678,826
Construction in progress.......................... 81,807 --
---------- ----------
4,622,291 3,968,904
Less accumulated depreciation and amortization.... (2,099,411) (1,569,438)
---------- ----------
$2,522,880 $2,399,466
========== ==========
</TABLE>
F-27
<PAGE>
GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INTANGIBLE ASSETS
Intangible assets consist of the following and are included in the caption
other assets on the consolidated balance sheets as of April 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Goodwill arising from the acquisition of Brudnick. $ 2,492,590 $ 2,492,590
Goodwill arising from acquisition of T&S.......... 633,912 633,912
Other............................................. 70,032 55,113
------------ ------------
3,196,534 3,181,615
Less accumulated amortization..................... (327,288) (193,367)
------------ ------------
$ 2,869,246 $ 2,988,248
============ ============
NOTE 4--LONG-TERM DEBT
As of April 30, 1997 and 1996 long-term debt consisted of the following:
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Bank line-of-credit agreement--Borrowings not to
exceed $16,000,000 or the sum of 80% of eligible
accounts receivable and 65% of eligible inventory
($11,000,000 limit for inventory). Interest
payable at .75% over the bank's base rate (8.50%
as of April 30, 1997 and 8.25% as of April 30,
1996). The agreement expires May 1, 1998 and is
secured by substantially all of General Drug's
assets under a loan and security agreement. As of
April 30, 1997, additional borrowing capacity was
approximately $1,700,000 under this agreement.... $ 12,471,230 $ 11,599,007
Bank line-of-credit agreement--Borrowings not to
exceed $5,000,000 or the sum of 80% of eligible
accounts receivable and 65% of eligible inventory
($2,000,000 limit for inventory). Interest
payable at .75% over the bank's base rate (8.50%
as of April 30, 1997 and 8.25% as of April 30,
1996). The agreement expires May 1, 1998 and is
secured by substantially all of SBS's assets
under a loan and security agreement. As of April
30, 1997, additional borrowing capacity was
approximately $1,200,000 under this agreement.... 855,956 --
Bank line-of-credit agreement--Borrowings not to
exceed $30,000,000 or the sum of 85% of eligible
accounts receivable and 65% of eligible inventory
($18,000,000 limit for inventory). Borrowings are
subject to minimum excess availability of
$2,000,000. Interest payable at .75% over the
bank's base rate (8.50% as of April 30, 1997 and
8.25% as of April 30, 1996). The agreement
expires May 1, 1998 and is secured by
substantially all of Brudnick's assets under a
loan and security agreement. As of April 30,
1997, additional borrowing capacity was
approximately $5,400,000 under this agreement.... $22,556,351 $22,240,465
</TABLE>
F-28
<PAGE>
GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Mortgage note payable--Due in monthly
installments of $1,668 plus interest at .75%
over the bank's base rate, which was 8.50% as
of April 30, 1997 and 8.25% as of April 30,
1996. Final payment is due May 1, 1998.
Secured by building and limited guarantee of
certain related parties, which are related
through common ownership..................... 399,023 419,035
Series A subordinated promissory note--
Convertible to 1% equity interest in the
Group for each $220,000 of principal balance.
Interest payable semi-annually at 10%.
Principal payment due in full February 1999.
Subordinated to all bank and lending
institution debt. See Note 7................. 220,000 220,000
Community Development Block Grant float loan
demand note--Borrowings not to exceed
$920,000. Principal plus interest at 3.3% due
November 1998. Secured by an irrevocable
letter of credit. See Note 8. As of April 30,
1997, additional borrowing capacity was
$600,000 under this agreement................ 320,000 --
Other......................................... 9,246 44,387
----------- -----------
36,831,806 34,522,894
Less current portion.......................... (249,246) (55,187)
----------- -----------
$36,582,560 $34,467,707
=========== ===========
</TABLE>
Maturities on long-term debt are as follows as of April 30, 1997:
<TABLE>
<S> <C>
Year Ending April 30:
1998........................................................ $ 249,246
1999........................................................ 36,582,560
-----------
$36,831,806
===========
</TABLE>
Under the agreements, General Drug, Brudnick and SBS must maintain specified
minimum ratios and tangible net worth and pay annual agency fees totaling
$55,000. The agreements also impose certain restrictions relating to, among
other things, further indebtedness, liens, pledges or sales of assets, capital
expenditures, dividends, investments and transactions with affiliates.
NOTE 5--INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Current income tax expense
Federal............................... $1,389,396 $1,315,227 $635,746
State................................. 347,630 389,450 246,886
Deferred income tax benefit............. (313,641) (583,000) (83,120)
---------- ---------- --------
$1,423,385 $1,121,677 $799,512
========== ========== ========
</TABLE>
Deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates, applicable to future
years, to differences between the financial reporting and the tax basis of
existing assets and liabilities.
F-29
<PAGE>
GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The consolidated balance sheets as of April 30, 1997 and 1996 include the
following tax effects of cumulative temporary differences:
<TABLE>
<CAPTION>
1997 1996
---------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
<S> <C> <C> <C> <C>
Inventory..................... $ -- $780,543 $ -- $795,438
Depreciation.................. -- 123,935 -- 153,623
Noncompete and goodwill....... 1,079,717 -- 776,200 --
Accounts receivable........... 108,541 -- 158,756 --
Other......................... 41,410 -- 25,651 --
---------- -------- -------- --------
Total Deferred Taxes...... $1,229,668 $904,478 $960,607 $949,061
========== ======== ======== ========
</TABLE>
Principal reasons for variations between the statutory federal rate and the
effective rates were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory income tax rate................. 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit......... 5.5 5.5 5.5
Income taxes passed through to owners of partnership
and
S-corporation......................................... .1 2.0 4.5
Other.................................................. (.2) (2.6) 1.7
---- ---- ----
39.4% 38.9% 45.7%
==== ==== ====
</TABLE>
Gimbel Investor Group, L.P. is organized as a partnership and Holdings is
organized as an S-corporation under provisions of the Internal Revenue Code.
Accordingly, the accompanying financial statements do not reflect income
taxes, except for state replacement tax, for these entities.
NOTE 6--RELATED PARTY TRANSACTIONS
MANAGEMENT FEE
An annual management fee of $600,000 plus a percentage of earnings, subject
to certain minimum earnings criteria, is being paid to a company that is
related by common ownership. Management fee expense was $818,777, $754,502 and
$706,451 for the years ended April 30, 1997, 1996 and 1995, respectively.
HSS CONSULTING
HSS Consulting ("HSS") is related to the Group by common ownership. The
Group purchased approximately $740,000, $700,000 and $1,100,000 of goods from
HSS during the years ended April 30, 1997, 1996 and 1995, respectively, and
charged HSS certain shared expenses. HSS owed the Group approximately $45,710
and $78,000 as of April 30, 1997 and 1996, respectively.
See Note 7 for additional related party disclosures.
NOTE 7--CAPITAL TRANSACTIONS
During the year ended April 30, 1996, the Group converted $990,000 of Series
A Subordinated Promissory Notes for a 4.5% equity interest in the Group and
$800,000 of Series B Subordinated Promissory Notes for a 5% equity interest in
the Group.
On September 30, 1997, the remaining $220,000 of Series A Notes were
converted for a 1% equity interest in the Group.
F-30
<PAGE>
GIMBEL INVESTOR GROUP, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 8--COMMITMENTS AND CONTINGENCIES
NONCOMPETE AGREEMENTS
In February 1994, the Group entered into various noncompete agreements in
connection with the acquisition of Brudnick. Per the agreements, monthly
payments of $87,500 must be paid for 60 months.
LETTER OF CREDIT
The Group entered into a $920,000 Community Development Block Grant float
loan demand note with the City of Chicago. See Note 4. The loan is
collateralized by an irrevocable letter of credit in the amount of $980,720
from American National Bank. The maximum available additional letter of credit
facility amounted to $369,280 as of April 30, 1997.
LEASES
The Group leases a facility under a lease expiring February 1999 for
$147,516 annually. The lease requires monthly rent payments with annual
increases and an annual rent adjustment based upon taxes and operating
expenses. Rent and real estate tax expense was $321,203, $267,787 and $247,532
for the years ended April 30, 1997, 1996 and 1995, respectively.
Future minimum lease payments for its facilities are as follows as of April
30, 1997:
<TABLE>
<S> <C>
Year Ending April 30:
1998............................................................. $155,150
1999............................................................. 112,500
--------
$267,650
========
</TABLE>
NOTE 9--OTHER CASH FLOW INFORMATION
Cash paid for:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income Taxes................................... $1,836,131 $1,402,500 $1,425,080
========== ========== ==========
Interest....................................... $3,851,670 $3,234,603 $3,561,462
========== ========== ==========
</TABLE>
NOTE 10--MAJOR CUSTOMER
For the year ended April 30, 1997, sales to one major customer amounted to
more than 10% of total sales. The amount of revenue from that customer was
$46,284,092. The receivable balance for the major customer was $3,887,961 as
of April 30, 1997. There were no major customers for the years ended April 30,
1996 and 1995.
NOTE 11--SUBSEQUENT EVENT
On October 3, 1997, CD Smith Drug Company purchased all outstanding
partnership interests in the Group.
F-31
<PAGE>
GIMBEL INVESTOR GROUP L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE PERIOD FROM MAY 1, 1997 TO OCTOBER 3, 1997
<TABLE>
<S> <C>
Net sales........................................................ $157,827,598
Cost of goods sold............................................... 149,785,128
------------
Gross profit..................................................... 8,042,470
Operating expenses:
Selling, general and administrative............................ 5,127,741
Covenants not to compete....................................... 1,871,875
Employment agreements.......................................... 3,339,582
Management fees................................................ 254,395
Depreciation and amortization.................................. 339,550
------------
10,933,143
------------
Operating loss................................................... (2,890,673)
Other income (expense):
Interest expense............................................... (1,454,079)
Other, net..................................................... 16,691
------------
(1,437,388)
------------
Loss before income taxes......................................... (4,328,061)
Income tax benefit............................................... (1,671,009)
------------
Net loss......................................................... $ (2,657,052)
============
</TABLE>
F-32
<PAGE>
GIMBEL INVESTOR GROUP L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE PERIOD FROM MAY 1, 1997 TO OCTOBER 3, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss........................................................ $ (2,657,052)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation.................................................. 283,229
Amortization.................................................. 108,439
Provision for doubtful accounts............................... 123,634
Deferred income taxes......................................... (736,108)
Changes in operating assets and liabilities:
Accounts receivable......................................... (3,458,262)
Other receivables........................................... (4,599,907)
Refundable income taxes..................................... (1,351,293)
Inventory................................................... (836,326)
Prepaid expenses............................................ 244,444
Other....................................................... (141,885)
Accounts payable............................................ 8,040,973
Accrued expenses............................................ 5,218,990
------------
Net cash provided by operating activities....................... 238,876
INVESTING ACTIVITIES
Purchases of property and equipment............................. (1,086,124)
------------
Net cash used in investing activities........................... (1,086,124)
FINANCING ACTIVITIES
Borrowings on line of credit.................................... 66,447,400
Principal payments on line of credit............................ (66,094,695)
Proceeds from issuance of long-term debt........................ 860,967
Principal payments on long-term debt............................ (337,584)
------------
Net cash provided by financing activities....................... 876,088
Increase in cash................................................ 28,840
Cash at beginning of period..................................... --
------------
Cash at end of period........................................... $ 28,840
============
</TABLE>
F-33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS PROSPEC-
TUS AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED OR TO ANY PERSON TO WHOM IT IS UN-
LAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS OR THAT THERE HAS BEEN NO CHANGE ON
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Dilution.................................................................. 12
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 13
Selected Consolidated and Pro Forma
Financial Data........................................................... 14
Pro Forma Consolidated
Statement of Income...................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 25
Management................................................................ 33
Certain Transactions...................................................... 38
Principal and Selling Shareholders........................................ 39
Description of Capital Stock.............................................. 40
Shares Eligible for Future Sale........................................... 42
Underwriting.............................................................. 43
Legal Matters............................................................. 45
Experts................................................................... 45
Additional Information.................................................... 45
Index to Consolidated Financial Statements................................ F-1
</TABLE>
-----------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRIT-
ERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,750,000 SHARES
LOGO
C.D. SMITH HEALTHCARE, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
DONALDSON, LUFKIN & JENRETTE
BT ALEX. BROWN
WHEAT FIRST UNION
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated expenses to be paid by the
Registrant in connection with the initial issuance and distribution of the
securities being registered, other than underwriting discounts and
commissions:
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 29,005
NASD Fees..................................................... 10,333
NYSE Listing Fees............................................. 109,100
Printing and Engraving Expenses............................... 125,000
Legal Fees and Expenses....................................... 250,000
Accounting Fees and Expenses.................................. 250,000
Professional Advisory Fees.................................... 857,500
Blue Sky Qualification Fees and Expenses...................... 2,500
Transfer Agent and Registrar's Fees........................... 500
Miscellaneous................................................. 16,062
----------
Total..................................................... $1,650,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 351.355 of the Missouri Revised Statutes (1986) allows
indemnification of corporate directors and officers by a corporation under
certain circumstances as therein specified against liabilities, expenses,
counsel fees and costs reasonably incurred in connection with or arising out
of any action, suit, proceeding or claim in which such person is made a party
by reason of such person being or having been such director or officer.
Section 351.355 also permits such persons to seek indemnification under any
applicable bylaw, agreement, vote of shareholders or disinterested directors
or otherwise. Section 351.355 also permits corporations to maintain insurance
for officers and directors against liabilities incurred while acting in such
capacities whether or not the corporation would be empowered to indemnify such
person under this section.
The Company's Amended Articles of Incorporation and Amended and Restated
Bylaws contain a provision under which, in certain circumstances, the Company
may indemnify officers and directors from and against any and all of the
expenses, liabilities or other matters covered by said provision.
There is in effect for the Registrant an insurance policy providing
directors and officers with indemnification, subject to certain exclusions and
to the extent not otherwise indemnified by the Registrant, against loss
(including expenses incurred in the defense of claims in connection therewith)
arising from any negligent act, error, omission, misstatement, misleading
statement or breach of duty while acting in their capacity as directors and
officers of the Registrant. The policy also provides for the reimbursement of
the Registrant for liability incurred in the indemnification of its directors
and officers. The Registrant has purchased coverage for liability under the
Securities Act of 1933 (the "Securities Act") in connection with the purchase,
sale, offer or solicitation of an offer to purchase or sell any securities of
the Registrant or an affiliate of the Registrant.
The Underwriting Agreement, filed as Exhibit 1.1 to this Registration
Statement, provides for indemnification by the Underwriters of the
Registrant's directors, its officers who sign the Registration Statement and
its controlling persons and by the Registrant of the Underwriters' directors
and their controlling persons against certain liabilities, including
liabilities under the Securities Act, under certain circumstances.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth the Company's sales of unregistered
securities in the last three years:
<TABLE>
<CAPTION>
SECURITIES SOLD PURCHASER EXEMPTION
<S> <C> <C>
$12,000,000 Senior Subordinated Note Churchill ESOP Capital Partners Section 4(2)
Warrants to Purchase 1,080,078 shares Churchill ESOP Capital Partners Section 4(2)
of
Common Stock (immediately exercisable)
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) A list of exhibits filed as part of this Registration Statement appears
at the end of this Registration Statement.
(b) Financial Statement Schedules
(I) Condensed Financial Information of the Registrant.
(II) Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or the
requested information is shown in the financial statement or noted therein.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) to provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(2) that for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(3) that for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
C.D. SMITH DRUG COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................... $ 24,202 $ 16,041
Trade accounts and notes receivable (including
$290,804 and $57,713 due from subsidiaries in 1998
and 1997, respectively), less allowances of
$261,179 in 1998 and $248,933 in 1997............. 21,390,200 15,457,847
Other receivables.................................. 525,384 525,410
Refundable income taxes............................ 542,762 --
Merchandise inventory.............................. 34,340,158 30,733,499
Prepaid expenses and other......................... 156,379 130,159
----------- -----------
Total current assets............................. 56,979,085 46,862,956
----------- -----------
Property and equipment............................. 4,388,383 3,874,208
Less accumulated depreciation...................... (1,098,916) (811,099)
----------- -----------
3,289,467 3,063,109
Debt issuance costs, net........................... 916,695 --
Other assets (principally investment in
subsidiaries)..................................... 23,078,091 274,629
----------- -----------
Total assets..................................... $84,263,338 $50,200,694
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $33,654,112 $23,599,940
Accrued expenses................................... 1,917,215 1,599,155
Income taxes payable............................... -- 334,035
Deferred income taxes.............................. 122,000 96,000
Current portion of long-term debt.................. 405,072 320,432
----------- -----------
Total current liabilities........................ 36,098,399 25,949,562
----------- -----------
Line of credit....................................... 26,440,540 19,436,574
Long-term debt, less current portion................. 1,824,369 1,032,203
Deferred income taxes................................ 539,000 615,000
Subordinated note payable............................ 9,663,026 --
Common stock put warrants............................ 2,569,000 --
Shareholders' equity:
Preferred stock, $.01 par value.................... -- --
Common stock, $.01 par value....................... 102,000 102,000
Additional paid-in capital......................... 98,000 98,000
Retained earnings.................................. 8,478,444 4,481,731
Treasury stock..................................... (1,133,331) (953,195)
----------- -----------
7,545,113 3,728,536
Less note receivable from ESOP..................... (416,109) (561,181)
----------- -----------
7,129,004 3,167,355
----------- -----------
Total liabilities and shareholders' equity....... $84,263,338 $50,200,694
=========== ===========
</TABLE>
II-3
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
C.D. SMITH DRUG COMPANY
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................ $386,689,291 $301,523,181 $224,163,431
Cost of goods sold................... 368,431,319 286,784,687 213,481,167
------------ ------------ ------------
Gross profit......................... 18,257,972 14,738,494 10,682,264
Operating expenses:
Selling, general and
administrative.................... 11,444,265 10,015,576 7,986,670
Depreciation and amortization...... 305,736 253,725 204,803
------------ ------------ ------------
11,750,001 10,269,301 8,191,473
------------ ------------ ------------
Operating income..................... 6,507,971 4,469,193 2,490,791
Other income (expense):
Income (loss) from subsidiaries.... 1,465,162 4,671 (4,791)
Interest expense on credit
facilities........................ (2,002,798) (1,571,214) (1,478,483)
Interest expense on subordinated
debt.............................. (812,026) -- --
Other, net......................... 255,425 126,543 41,964
------------ ------------ ------------
(1,094,237) (1,440,000) (1,441,310)
------------ ------------ ------------
Income before income taxes........... 5,413,734 3,029,193 1,049,481
Income tax provision................. 1,417,021 1,099,190 415,377
------------ ------------ ------------
Net income........................... $ 3,996,713 $ 1,930,003 $ 634,104
============ ============ ============
</TABLE>
II-4
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
C.D. SMITH DRUG COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES......................... $ 3,403,864 $ (7,067,552) $ 4,401
INVESTING ACTIVITIES
Net cash paid in the General Drug
Acquisition, including transaction
costs.............................. (29,097,392) -- --
Purchases of property and equipment. (532,094) (1,034,032) (240,769)
Collections on note receivable from
ESOP............................... 145,072 145,072 145,072
Other............................... -- 12,500 --
------------ ------------ ------------
Net cash used in investing
activities......................... (29,484,414) (876,460) (95,697)
FINANCING ACTIVITIES
Borrowings on line of credit........ 406,400,925 306,643,441 223,438,779
Principal payments on line of
credit............................. (391,396,959) (298,517,612) (222,864,039)
Proceeds from issuance of long-term
debt............................... 1,259,996 800,000 --
Principal payments on long-term
debt............................... (338,404) (271,440) (231,425)
Proceeds from issuance of
subordinated note payable with
common stock put warrants.......... 12,000,000 -- --
Payments of debt issuance costs..... (1,656,711) -- --
Purchases of treasury stock......... (180,136) (791,795) (161,400)
------------ ------------ ------------
Net cash provided by financing
activities......................... 26,088,711 7,862,594 181,915
Increase (decrease) in cash......... 8,161 (81,418) 90,619
Cash at beginning of year........... 16,041 97,459 6,840
------------ ------------ ------------
Cash at end of year................. $ 24,202 $ 16,041 $ 97,459
============ ============ ============
</TABLE>
II-5
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
C.D. SMITH DRUG COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the parent company-only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The parent company-only financial
statements should be read in conjunction with the Company's consolidated
financial statements.
2. THE GENERAL DRUG ACQUISITION
Effective October 3, 1997, the Company purchased all outstanding partnership
interests in Gimbel Investor Group, L.P. ("Gimbel"), which owns 100% of the
outstanding stock of G.D. Holdings Inc. ("Holdings"), the parent company of
General Drug Company and subsidiaries (the "General Drug Companies"), for $28
million in cash ("the General Drug Acquisition"). The transaction was
accounted for using the purchase method. The purchase price was allocated to
net assets acquired on the basis of their estimated fair values. The excess of
the purchase price, including approximately $1.1 million of transaction costs,
over the fair market value of the net assets acquired, amounted to $25,567,561
and has been recorded as goodwill. All operations acquired from Gimbel are
conducted within the General Drug Companies. Gimbel and Holdings had no
material assets or liabilities aside from their investment in the General Drug
Companies. The General Drug Companies' results of operations have been
included in the consolidated results of operations since the date of
acquisition.
In accordance with the principles of push-down accounting, the Company
recorded all goodwill on the financial statements of the subsidiaries. In
addition, $8 million of acquisition indebtedness under the Company's
refinanced senior credit facility (see Note 3) was recorded on the
subsidiaries' financial statements, representing the approximate amount of the
subsidiaries' available borrowing base (see Note 3) at the time of the
acquisition. All debt issuance costs related to the subsidiaries' share of
borrowings under the refinanced credit facility were also pushed down to the
subsidiaries.
3. LINE OF CREDIT AND LONG-TERM DEBT
In connection with the General Drug Acquisition, the Company refinanced its
senior credit facility with a group of lending institutions providing for a
revolving line of credit and certain term notes. Under the terms of the new
facility, which expires in October 2000, the Company and its subsidiaries may
borrow up to approximately $90 million, in addition to the amounts outstanding
under the term notes described below, based on eligible inventory and accounts
receivable balances ("the borrowing base"). At February 28, 1998, the
consolidated borrowing base amounted to approximately $102 million. The
Company and its subsidiaries must pay an aggregate commitment fee of .2% per
annum on the unused balance of the credit agreement plus an agency fee of
$10,000 per month. At February 28, 1998, consolidated availability under the
line of credit was $16,747,000, excluding the effects of outstanding checks
and lockbox receipts included in outstanding line-of-credit borrowings.
Generally, advances bear interest at the lender's prime rate (8.5% at February
28, 1998) payable monthly. The Company has an option to pay interest on a
specified amount not less than $1 million at the London Interbank Offered Rate
(LIBOR) plus 1.75% if LIBOR loans are purchased. Such interest periods are of
a one-, two-, or three-month duration. The Company line of credit borrowings,
amounting to $26,440,540 and bearing interest at a weighted average LIBOR-
based rate of 7.79% at February 28, 1998, as well as the subsidiaries' line of
credit borrowings amounting to $54,440,387 at February 28, 1998, are
collateralized by substantially all assets of the Company and its
subsidiaries. Beginning in October 2000, the senior credit facility can be
renewed for one-year terms upon mutual consent.
At February 28, 1997, the Company maintained a credit facility with a
lending institution providing for a revolving line of credit and two term
notes. Under the terms of the facility, which was to expire in February
II-6
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
C.D. SMITH DRUG COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
2000, the Company could borrow up to $32 million, including the amounts
outstanding under the term notes, based on eligible inventory and accounts
receivable balances. At February 28, 1997, the borrowing base amounted to
approximately $27 million. Interest on borrowings under the revolving line of
credit was payable monthly at the lender's prime rate (8.25% at February 28,
1997) plus 1.1%. Line-of-credit borrowings of $19,436,574 at February 28, 1997
were collateralized by substantially all assets of the Company and had been
personally guaranteed up to $1 million by the Chief Executive Officer ("CEO")
of the Company.
The senior credit agreement contains several covenants which, among other
things, restrict capital expenditures and dividend payments and require the
Company and its subsidiaries to maintain certain specified levels of net
worth, interest and debt service coverage and minimum levels of stock
ownership by the C.D. Smith Drug Company Employee Stock Ownership Plan
("ESOP") and the CEO. This agreement also limits cash dividends, loans or cash
transfers from the General Drug Companies to the Company, other than purchases
and sales between the companies in the normal course of business. At February
28, 1998, the restricted net assets of the General Drug Companies were
approximately $22.5 million.
The Company's long-term debt at February 28, all of which is due October
2000, unless extended by mutual consent of the Company and the lending
institutions, consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Notes payable to lending institutions under term note
provisions of the senior credit facility described
above, in monthly installments of $12,089, plus
interest at .5% below the bank's prime rate,
collateralized by 1,575,900 shares of common stock held
by ESOP................................................ $ 416,109 $ 561,181
Notes payable to lending institutions under term note
provisions of the senior credit facility described
above, in monthly installments of $16,667, plus
interest at the bank's prime rate, collateralized by
certain warehouse equipment............................ 933,332 746,668
Notes payable to lending institutions under term note
provisions of the senior credit facility described
above, in monthly installments aggregating $5,000, plus
interest at the bank's prime rate, collateralized by
certain real estate.................................... 880,000 --
---------- ----------
2,229,441 1,307,849
Less current portion.................................... 405,072 305,072
---------- ----------
$1,824,369 $1,002,777
========== ==========
</TABLE>
The prime rate of the lending institutions providing the term debt discussed
above was 8.50% at February 28, 1998.
Principal maturities of long-term debt for each of the next three years are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
FEBRUARY 28, AMOUNT
------------ ----------
<S> <C>
1999.............................................................. $ 405,072
2000.............................................................. 405,072
2001.............................................................. 1,419,297
</TABLE>
II-7
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
C.D. SMITH DRUG COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
4. SUBORDINATED NOTE PAYABLE
In conjunction with the General Drug Acquisition, the Company issued a
subordinated note payable due October 3, 2004 in the principal amount of $12
million with detachable stock warrants (see Note 5) to an investment group.
Interest at 12% per annum is payable quarterly. Principal installments are due
and payable 90 days after the end of each fiscal year, commencing with the
fiscal year ending February 28, 1999, in an amount equal to 30% of "Excess
Cash Flow" as defined below subject to certain conditions. "Excess Cash Flow"
is generally defined in the related agreement as consolidated earnings before
interest expense, income taxes, depreciation and amortization ("EBITDA") minus
current tax liabilities, interest paid, principal payments and capital
expenditures. The estimated fair value of the warrants at October 3, 1997,
amounting to $2,569,000, was recorded as a discount on the subordinated debt.
The discount is being amortized to interest expense over the seven-year term
using the interest method resulting in an effective interest rate of 17.9% on
the subordinated debt. The amount of unamortized discount at February 28, 1998
is $2,336,974.
The subordinated note agreement contains several covenants which are similar
to the covenants disclosed in connection with the Company's senior credit
facility (see Note 3).
5. COMMON STOCK PUT WARRANTS
The detachable common stock warrants to purchase 1,246,236 shares of common
stock of the Company (1,080,078 shares in the event the Company completes an
initial public offering) discussed in Note 4 are subject to certain
antidilution and other adjustments, as defined in the related agreement. The
warrants are exercisable at a price of $0.0004 per share. After the fifth
anniversary of the closing, the holders have an option to put the warrants to
the Company at a price based on a multiple of EBITDA less indebtedness and
certain other amounts as defined in the agreement. Once the warrants have been
put to the Company, the put price is payable no earlier than 90 days but no
later than 100 days of the put date. Additionally, after the sixth anniversary
of the closing, the Company has the option to exercise a call right to
purchase from the holders all or any portion of such warrant securities, and
the holders are obligated to sell at a price determined in a similar manner to
that of the put option. The $2,569,000 value of these put warrants is
presented as a liability in the accompanying consolidated balance sheet due to
the holder's option to require settlement in cash. The Company is accreting
the recorded amount of the warrants to the highest redemption price of the put
warrant using the interest method. No accretion was necessary at February 28,
1998 as the redemption price calculated per the agreement did not exceed the
recorded amount of the warrants.
II-8
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
C. D. SMITH DRUG COMPANY AND SUBSIDIARIES
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING CHARGED TO OTHER ACCOUNTS -- -- BALANCE AT
DESCRIPTION OF PERIOD COSTS AND EXPENSES DESCRIBE DESCRIBE END OF PERIOD
<S> <C> <C> <C> <C> <C>
Three Months ended May
31, 1998: Deducted from
asset accounts:
Allowance for doubtful
accounts............... $650,384 $ 77,000 $ -- $ 62,318(2) $ 665,066
Year Ended February 28,
1998: Deducted from
asset accounts:
Allowance for doubtful
accounts............... $248,933 $200,825 $556,896(1) $356,270(2) $ 650,384
Year Ended February 28,
1997: Deducted from
asset accounts:
Allowance for doubtful
accounts............... $110,088 $222,900 -- $ 84,055(2) $ 248,933
Year Ended February 29,
1996: Deducted from
asset accounts:
Allowance for doubtful
accounts............... $ 87,063 $ 37,480 -- $ 14,455(2) $ 110,088
</TABLE>
(1) Addition to reserves as a result of the General Drug Acquisition.
(2) Uncollectible accounts written off, net of recoveries.
II-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF ST.
JOSEPH, STATE OF MISSOURI, ON THIS 2ND DAY OF AUGUST, 1998.
C.D. Smith Drug Company
/s/ Robert C. Farley
By:__________________________________
Robert C. Farley
Chief Executive Officer,
President, and Chairman of the
Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Robert C. Farley Chief Executive Officer, August 2, 1998
____________________________________ President, Chairman of the
Robert C. Farley Board and Director
(Principal Executive
Director)
/s/ S. Jeanne Mathiesen Chief Financial Officer, August 2, 1998
____________________________________ Treasurer and Director
S. Jeanne Mathiesen (Principal Financial and
Accounting Officer)
*/s/ Delora J. Jamison Director August 2, 1998
____________________________________
Delora J. Jamison
*/s/ J. Duane Weeks Director August 2, 1998
____________________________________
J. Duane Weeks
*/s/ David R. Parker Director August 2, 1998
____________________________________
David R. Parker
*/s/ Barbara J. Mowry Director August 2, 1998
____________________________________
Barbara J. Mowry
</TABLE>
*Executed by S. Jeanne Mathiesen as attorney-in-fact.
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<C> <S> <C>
**1.1 Form of Underwriting Agreement.
**3.1 Form of Articles of Incorporation of C.D. Smith
Healthcare, Inc. (Amended in Their
Entirety)
**3.2 Form of Amended and Restated Bylaws of C.D. Smith
Healthcare, Inc.
**4.1 Specimen of Common Stock Certificate.
**4.2 Note Purchase Agreement, dated October 3, 1997, by and
between C.D. Smith Drug Company and Churchill ESOP Capi-
tal Partners.
**4.3 Warrant Agreement, dated October 3, 1997, by and between
C.D. Smith Drug Company and Churchill ESOP Capital Part-
ners.
**5.1 Opinion of Blackwell Sanders Peper Martin LLP.
**10.1 C.D. Smith Drug Company Employee Stock Ownership Plan,
dated December 10, 1991, as amended.
**10.2 Amended and Restated 1996 Equity Compensation Plan (up-
dated).
**10.3 Form of Non-Qualified Stock Option Award Agreement by and
between C.D. Smith Healthcare, Inc. and the recipient.
**10.4 Loan and Security Agreement, dated October 3, 1997, by
and among C.D. Smith Drug Company, General Drug Company,
SBS Pharmaceuticals, Inc. and James Brudnick Company,
Inc. as Borrowers and LaSalle Business Credit, Inc. as
Lender and Agent for the Lenders, Heller Financial, Inc.
as Lender, American National Bank & Trust Company of Chi-
cago as Lender and certain other financial institutions
signatories thereto.
**10.5 First Amendment to Loan and Security Agreement, dated De-
cember 27, 1997, by and among C.D. Smith Drug Company,
General Drug Company, SBS Pharmaceuticals, Inc. and James
Brudnick Company, Inc. as Borrowers and LaSalle Business
Credit, Inc. as a Lender and Agent for the Lenders,
Heller Financial, Inc. as a Lender, American National
Bank & Trust Company of Chicago as a Lender and certain
other financial institutions signatories thereto.
**10.6 Second Amendment to Loan and Security Agreement, dated
January 8, 1998, by and among C.D. Smith Drug Company,
General Drug Company, SBS Pharmaceuticals, Inc. and James
Brudnick Company, Inc. as Borrowers and LaSalle Business
Credit, Inc. as a Lender and Agent for the Lenders,
Heller Financial, Inc. as a Lender, American National
Bank & Trust Company of Chicago as a Lender and certain
other financial institutions signatories thereto.
**10.7 Lease for Property Located at 219 Medford Street, Malden,
Massachusetts, dated February 11, 1994, by and between
Irving S. Brudnick as Trustee of the Bershim Realty Trust
and Brudnick Acquisition Corporation.
**10.8 Employment Agreement, dated September 1, 1995, by and be-
tween Robert C. Farley and C.D. Smith Drug Company.
**10.9 Employment Agreement, dated July 8, 1997 and effective as
of March 1, 1997, by and between Jeanne Mathiesen and
C.D. Smith Drug Company.
**10.10 Employment Agreement, dated July 8, 1997 and effective as
of March 1, 1997, by and between Delora Jamison and C.D.
Smith Drug Company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<C> <S> <C>
**10.11 Employment Agreement, dated as of November 22, 1996, by
and between Richard Meehan and C.D. Smith Drug Company.
**10.12 Severance Compensation Agreement Following Change in Con-
trol, dated as of January 7, 1997, by and between Jeanne
Mathiesen and C.D. Smith Drug Company.
**10.13 Severance Compensation Agreement Following Change in Con-
trol, dated as of January 7, 1997, by and between Delora
Jamison and C.D. Smith Drug Company.
**10.14 Employment Agreement, dated October 3, 1997, by and be-
tween Joseph Harris and General Drug Company and, in a
limited capacity, C.D. Smith Drug Company.
**10.15 Employment Agreement, dated October 3, 1997, by and be-
tween Richard Brudnick and James Brudnick Company, Inc.
and, in a limited capacity, C.D. Smith Drug Company.
**10.16 Acquisition Agreement, dated as of September 11, 1997, by
and among C.D. Smith Drug Company, G.D. Holdings of Dela-
ware, Inc., Gimbel Investor Group L.P. and certain part-
ners of Gimbel Investor Group L.P.
**10.17 First Amendment to Acquisition Agreement, dated as of Oc-
tober 3, 1997, by and among C.D. Smith Drug Company, G.D.
Holdings of Delaware, Inc., Gimbel Investor Group L.P.
and certain partners of Gimbel Investor Group L.P.
**10.18 Fourth Amendment to the Loan and Security Agreement,
dated as of July , 1998, by and among C.D. Smith Drug
Company, General Drug Company, SBS Pharmaceuticals, Inc.
and James Brudnick Company, Inc. as Borrowers and LaSalle
Business Credit, Inc. as a Lender and Agent for the Lend-
ers, Heller Financial, Inc. as a Lender, American Na-
tional Bank & Trust Company of Chicago as a Lender and
certain other financial institutions signatories thereto.
**10.19 Amendment to C.D. Smith Healthcare, Inc. Employee Stock
Ownership Plan, dated July 20, 1998.
**21.1 List of Subsidiaries.
*23.1 Consent of Ernst & Young LLP.
**23.2 Consent of Blackwell Sanders Peper Martin LLP (contained
in Exhibit 5.1).
*23.3 Consent of Blackman Kallick Bartelstein, LLP.
**24.1 Power of Attorney (set forth on the signature page to the
Registration Statement).
**27.1 Financial Data Schedule.
</TABLE>
- ---------------------
*Filed herewith
**Filed with the initial filing or an amendment to this registration statement
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated April 10, 1998 (except Note 12, as to which the date is
, 1998), in the Registration Statement (Form S-1 No. 33- ) and related
Prospectus of C.D. Smith Drug Company for the registration of shares of its
common stock.
Ernst & Young LLP
Kansas City, Missouri
The foregoing consent is in the form that will be signed upon the completion of
the change in the Company's capital stock and the common stock split described
in Note 12 to the consolidated financial statements.
/s/ Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
August 3, 1998
<PAGE>
Exhibit 23.3
[LETTERHEAD OF BLACKMAN KALLICK BARTELSTEIN, LLP APPEARS HERE]
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 26, 1998 in the Registration Statement (Form S-1 No.
33- ) and related Prospectus of C.D. Smith Drug Company for the registration
of shares of its common stock.
/s/ Blackman Kallick Bartelstein, LLP
-------------------------------------
Blackman Kallick Bartelstein, LLP
Chicago, Illinois
August 3, 1998
