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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2003 Commission File Number 0-20348
D & K HEALTHCARE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1465483
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8235 Forsyth Boulevard, St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
(314) 727-3485
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01
Series B Junior Participating Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: approximately $190,055,584 as of September 19, 2003.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of September 19,
2003, 13,973,603 shares of Common Stock, par value $.01, were outstanding.
Indicate by check mark whether the registrant is an accelerated filer. Yes [X]
No [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in the Part of
this report indicated below:
Part II - Registrant's 2003 Annual Report to Stockholders
Part III - Registrant's Proxy Statement for its 2003 Annual Meeting of
Stockholders
PART I
Item 1. Business
GENERAL
D&K Healthcare Resources, Inc. is a full-service wholesale distributor
of branded and generic pharmaceuticals and over-the-counter healthcare and
beauty aid products. We serve three classes of customers:
- INDEPENDENT AND REGIONAL PHARMACIES: Located in 26 states
primarily in the Midwest, Upper Midwest and South, these D&K
customers generally operate single or multisite locations in
one or more states.
- NATIONAL ACCOUNTS: D&K national account customers generally
operate a large number of locations in multiple regions of the
United States.
- OTHER HEALTHCARE PROVIDERS: These D&K customers include
hospitals, alternate-site care providers and pharmacy benefit
management companies located in our 26-state primary
distribution territory.
We serve our customers by distributing a broad range of products
through six distribution facilities located in Missouri, Kentucky, Minnesota,
South Dakota and Florida. We also offer a number of proprietary information
systems, marketing programs and other business management solutions to assist
customers in operating and growing their businesses. In addition, D&K owns a 70%
equity stake in Pharmaceutical Buyers, Inc. ("PBI"), an industry leader in
alternate site group purchasing services.
Sales to independent and regional pharmacies consist of branded
pharmaceuticals (approximately 90% of net sales in fiscal 2003), generic
pharmaceuticals (approximately 7% of net sales in fiscal 2003) and
over-the-counter health and beauty aid products (approximately 3% of net sales
in fiscal 2003). Our national accounts trade class sales are predominantly
branded pharmaceuticals.
On March 13, 2002, we declared a two-for-one stock split in the form of
a stock dividend effective April 12, 2002. We have adjusted all share and per
share amounts in this report and in the consolidated financial statements to
retroactively reflect this stock split.
On July 5, 2001, we completed a secondary stock offering of
approximately 4.8 million shares of our common stock. We used the net proceeds
of approximately $77 million to repay debt.
In July 2001, as part of the secondary stock offering, we increased our
ownership percentage in PBI to 68%, and in August 2001 we increased our
ownership another 2%. We increased our ownership by exchanging PBI stock for
shares of D&K common stock as provided for in the transaction agreement for
acquiring our initial 50% ownership interest. We describe these transactions
more fully in Note 2 to our consolidated financial statements.
On June 15, 2001, we acquired 100% of the outstanding stock of
Diversified Healthcare, LLC, a pharmaceutical distribution company based in
Owensboro, Kentucky that provides comprehensive pharmaceutical distribution
services to customers in the Midwest region.
On June 1, 1999, we acquired 100% of the outstanding stock of Jewett
Drug Co., a pharmaceutical distribution company based in Aberdeen, South Dakota
that provides comprehensive pharmaceutical distribution services to customers in
the Upper Midwest and Great Plains regions.
We believe that our size, decentralized operating structure and high
level of customer service provide us with competitive advantages and position us
to benefit from trends impacting our industry. The national wholesale
distributors are growing in size and scale as they pursue a strategy to become
primary distributors to national pharmacies and other large healthcare
providers. We believe their approach creates opportunities for us to effectively
compete with them based on our business focus and differentiated service
offering.
2
INDUSTRY OVERVIEW
Wholesale pharmaceutical distributors serve pharmacies and healthcare
providers as a single source for pharmaceutical and over-the-counter health and
beauty aid products from hundreds of different manufacturers. Wholesale
pharmaceutical distributors lower customer inventory costs, provide efficient
and timely product delivery, and provide valuable inventory and purchasing
information. Also, value-added programs developed by wholesale pharmaceutical
distributors, including packaging, stockless inventory and pharmacy computer
systems, help customers reduce costs and improve operating efficiencies.
Wholesale pharmaceutical distributors are an important distribution
channel for pharmaceutical manufacturers, accounting for approximately 73% of
the $192.2 billion of prescription drug sales to retailers and institutions
during 2002. Wholesale pharmaceutical distribution industry sales increased from
$2.4 billion in 1970 to an estimated $139.7 billion in 2002, growth we expect to
continue. Several principal factors contribute to this historical and
anticipated growth:
- AGING POPULATION: The number of individuals in the United
States over age 65 grew from approximately 12.3 million in
1950 to approximately 35 million in 2000; the U.S. Census
Bureau projects it will increase to more than 70 million by
the year 2030. This demographic group represents the largest
percentage of new prescriptions filled and obtains more
prescriptions per capita annually than any other age group.
- INCREASED PHARMACEUTICAL USE: In recent years, a number of
factors have contributed to the growth in drug-based therapies
to prevent and treat disease. These include increased research
and development spending by manufacturers leading to new
pharmaceutical introductions; the lower costs of drug-based
therapy relative to surgery; and increased direct-to-consumer
advertising by manufacturers.
- IMPORTANCE OF WHOLESALE DISTRIBUTION CHANNEL: In response to
the rising costs and complexity of inventory management and
product distribution, pharmaceutical manufacturers are relying
increasingly on wholesale distributors to fill these functions
more efficiently. Over the past decade, as the cost and
complexity of maintaining inventories and arranging for
delivery of pharmaceutical products has risen, manufacturers
of pharmaceuticals have significantly increased the
distribution of their products through wholesalers. Drug
wholesalers are generally able to offer their customers and
suppliers more efficient distribution and inventory management
than pharmaceutical manufacturers. As a result, from 1990 to
2002, the percentage of total pharmaceutical sales through
wholesale distributors increased from approximately 57% to
approximately 73%.
- RISING PHARMACEUTICAL PRICES. For more than a decade, the
manufacturers' price increases for branded pharmaceuticals
have met or exceeded the overall increases in the Consumer
Price Index. We believe this trend will continue largely
because the relatively inelastic demand for branded
pharmaceuticals supports the higher prices charged for
patented drugs as manufacturers attempt to recoup costs
associated with developing, testing, and seeking U.S. Food and
Drug Administration approval of new products. From 1990 to
2002, the average retail price of a prescription increased
from $22.06 to $53.87.
CUSTOMERS AND PRODUCTS
Our customer base consists of independent and regional pharmacies,
national pharmacy chains (national accounts), and other healthcare providers.
Independent pharmacies are generally community-based and, we believe, benefit
the most from our customized sales, information systems, and other value-added
services. Regional pharmacies generally focus on serving people from multiple
sites in one or more states. National accounts generally have stores located in
more than one region in the United States; they include supermarket and mass
merchandiser pharmacies. Other healthcare providers consist of hospitals, other
alternate-site care providers (including nursing homes, clinics, home health
services and managed care organizations), and pharmacy benefit management
companies.
We are committed to serving the unique needs of independent and
regional pharmacies and have structured our business and operating model to do
this efficiently and profitably.
We operate on a fiscal year-end of June 30. Unless otherwise indicated,
all further references to "2003," "2002," and "2001" in this document will mean
our fiscal years ended June 30, 2003, June 30, 2002, and June 30, 2001,
respectively.
3
NET SALES
- -------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands) 2003 2002 2001
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------------------- --------------------- ---------------------
Independent and regional pharmacies $ 1,156,460 52.0% $ 1,089,326 44.4% $ 748,399 45.5%
National accounts 929,582 41.8% 1,246,654 50.8% 796,611 48.4%
Other healthcare providers 126,333 5.7% 107,517 4.4% 98,148 5.9%
PBI / Software sales (1) 11,013 0.5% 10,251 0.4% 2,835 0.2%
-------------------- -------------------- --------------------
Total $ 2,223,388 100.0% $ 2,453,748 100.0% $ 1,645,993 100.0%
==================== ==================== ====================
- ---------------------
(1) For FY 2003 and FY 2002, includes sales from PBI, which is now consolidated.
During 2003, 2002 and 2001, our 10 largest customers accounted for
approximately 43.1%, 56.4%, and 49.4%, respectively, of our net sales. Our
largest customer during 2003 accounted for approximately 9% of our net sales.
Our largest customer in 2002 and 2001 accounted for approximately 24% and 16% of
our net sales, respectively.
Independent and Regional Pharmacies
Since our inception, one of our primary strategies has been to focus on
serving the specialized needs of independent and regional pharmacies. While our
larger national competitors increasingly organize their businesses around
serving the primary needs of national pharmacy chains and national contracts
with group purchasing organizations and pharmacy benefit managers, we are
organized to profitably and efficiently provide all of our services to our
independent and regional pharmacy customers in 26 states, primarily in the
Midwest, Upper Midwest, and South from our six distribution centers in five
states. Our independent and regional pharmacy business grew from $748.4 million
in net sales in 2001 to $1,156.5 million in 2003.
Our product offerings to independent and regional pharmacies consist of
more than 25,000 SKUs, including branded and generic pharmaceuticals and
over-the-counter health and beauty aid products. We deliver these products
directly to the stores of our independent pharmacy customers and deliver both to
the stores and warehouses of our regional pharmacy customers if they maintain
centralized inventory.
Our decentralized organization allows our distribution centers to form
strong, attentive and responsive business relationships with our independent and
regional pharmacy customers. Each center has the personnel and capabilities to
autonomously provide customized distribution, information systems, inventory
management and other services to our local independent and regional pharmacy
customers. We believe that we fulfill our customers' orders with a high degree
of speed and accuracy and that they value our flexibility and willingness to
meet and accommodate their special requests and needs. We believe that the large
national wholesale distributors, which are organized to serve primarily large
national pharmacies and national contracts, do not have the operating
flexibility to service independent and regional pharmacies as we do.
National Accounts (previously referred to as National Pharmacy Chains)
We have a significant business serving as a secondary supplier of
high-volume branded pharmaceuticals to national pharmacies and other national
accounts that is built on our strong independent and regional pharmacy business
and our competitive position and solid relationships with pharmaceutical
manufacturers. We provide our national account customers with more than 1,600
branded and generic bulk pharmaceuticals that we purchase from pharmaceutical
manufacturers on favorable terms. Our net revenues from these sales grew from
$796.6 million in 2001 to $1,246.7 million in 2002, before dropping to $929.6
million in 2003. The reduction in 2003 relates to fewer attractively priced
purchase opportunities, particularly from one supplier that accounted for
approximately $554 million in sales during 2002 and approximately $83 million in
2003. As a result, we began to establish a broader business base in this trade
class, increasing the number of suppliers, customers and the number of products
we carry by more than 30%. We plan to continue our efforts to broaden and
diversify the composition of sales in the national accounts trade class with the
goal of replacing the lost business.
4
Our industry is subject to regulations that require organizations that
distribute or sell pharmaceuticals to trace the detailed history of products
back to the manufacturer or an authorized distributor. We purchase the vast
majority of our pharmaceuticals directly from manufacturers; the balance comes
directly from authorized distributors or otherwise is obtained in accordance
with applicable law. We believe our reputation and conservative business
practices make us a desirable business partner for pharmaceutical manufacturers
and national pharmacy chains.
We use our longstanding manufacturer and national account relationships
to provide services that benefit both our customers and our suppliers. We have
developed and maintain the reputation and contacts that enable us to identify
opportunities to purchase branded pharmaceuticals from manufacturers at
attractive prices. In addition to our experience and expertise, we also employ
sophisticated information and inventory management systems to project the demand
for products in advance of purchasing them for distribution.
Additional Services
Consistent with our strategy to offer a high level of customer service
to our customers, we offer a number of proprietary information systems,
marketing, and other business management solutions to help customers operate and
grow their businesses profitably. Through our Tykon, Inc. subsidiary, we have
developed and market a proprietary order entry and confirmation system to the
drug distribution industry. We offer and fully support these services from our
distribution centers. Although we make these services available to all
customers, our independent pharmacy customers profit most from these services
and are the heaviest users. Our services and support provide independent and
regional pharmacies with resources normally available only to larger businesses.
In providing these resources, we believe that we enable them to operate more
efficiently and competitively and that we increase our value to them.
Principal elements of our service offering to our customers include:
- Order entry and confirmation systems: These include
RESOURCE(SM), a proprietary order entry/order confirmation
system, based on Tykon's ORDER-LYNX software, that completely
automates all order creation, transmission and confirmation
operations, and PARTNERS(SM), a fully automated and
customizable replenishment software system which helps
pharmacies more efficiently coordinate product supply and
demand. These proprietary order entry and confirmation systems
help customers improve their margins and significantly reduce
their working capital needs through effective inventory
management.
- Dispensing management systems: SCRIPTMASTER(R) gives customers
computerized order entry, point-of-sale capabilities,
inventory control, patient histories, drug interactions and
pharmacy reimbursement. This service provides pharmacies with
cost savings and enhanced efficiencies as well as
manufacturers with valuable prescription histories.
- Merchandising and marketing services: Under our
MedPlus(R)identity program, we plan and coordinate cooperative
advertising programs for our customers and provide various
promotional products, including single-source generics from
leading pharmaceutical manufacturers at highly competitive
prices. MedPlus(R)also offers new product introduction
programs, point-of-sale materials, calendars, blood pressure
testing units, automatic new product distribution, rack
jobbing, store fixtures and retail employee training programs.
Other services offered under MedPlus(R)include: retail
merchandising, inventory management systems, electronic order
entry, shelf labels and price stickers, private label
products, monthly feature promotions, home healthcare
marketing programs, store layout assistance, business
management reports, pharmacy computer systems and monthly
catalogs.
OPERATIONS
We are an organization of locally managed pharmaceutical wholesale
distribution centers. Each distribution center has its own executive, sales and
operations staff. Management compensation at each center is determined by that
center's operating results. These operations use our corporate staff for
procurement, marketing, financial, legal and executive management resources; the
corporate staff also manages assets and working capital. Our decentralized sales
and distribution network, combined with our centralized procurement and
corporate support, enable us to provide high levels of specialized customer
service while minimizing administrative expenses and maximizing volume discounts
for product purchases.
5
Our distribution centers include computer systems and sophisticated
materials handling equipment for receiving, storing and distributing large
quantities and varieties of products. We continuously seek to improve our
warehouse automation technologies to maximize operational efficiencies on a
cost-effective basis. Our distribution centers receive virtually all orders
electronically and, upon receipt, the warehouse-management system produces
"picking documents" that contain product selection, loading and truck routing
information. The system also provides customized price information (geared to
the customers' local markets) or individual price stickers that accompany each
shipment to facilitate the customers' item pricing. Our distribution centers can
ship virtually all orders in less than 24 hours after customers place them. We
deliver orders using our fleet of trucks and vans or contract carriers.
In May 2003, we announced that construction had begun on an expansion
of our Cape Girardeau, Missouri distribution center. We will add 60,000 square
feet to the existing building to nearly double the size of the facility. In
addition to expanding the facility size, we will install new automated machinery
and equipment including sophisticated materials handling equipment for
receiving, storing and distributing large quantities and varieties of products.
We estimate completion of this expansion during the third quarter of fiscal
2004.
SALES AND MARKETING
We employ sales and customer service representatives at each of our
distribution centers. Our sales representatives receive regular training to
continuously improve customer service and to provide them with the skills and
resources for increasing business with existing customers and establishing new
customer relationships. Each distribution center also maintains a
telephone-based customer service department staffed with trained representatives
who answer customer questions and solve problems.
We focus our marketing efforts on developing and maintaining primary
relationships with customers. Our sales force emphasizes frequent personal
interaction with customers, who come to rely on our dependability and
responsiveness, order accuracy and the breadth of our product line. Our
customers also rely on our sales force for assistance with advertising,
merchandising, stocking and inventory management.
We believe that our distribution center-based service differentiates us
from our national competitors; it is a key element in our marketing program. Our
decentralized customer service staffs focus on developing relationships with
customers, responding quickly to customer inquiries, and placing orders
accurately and efficiently.
In July 2003, we entered into an agreement with Parata Systems, LLC to
become the exclusive distributor of their robotic dispensing system (RDS) for
independent and regional pharmacies in a 23-state region and Puerto Rico. The
Parata RDS is specifically designed to meet the needs of retail pharmacies by
automating up to 150 prescriptions per hour. The RDS uses a bar-coded
maintenance system to ensure accuracy and eliminate potential for operator
error. Faced with shortages of qualified pharmacists and pharmacy technicians,
the Parata RDS can be a significant tool to increase efficiency, effectiveness
and accuracy, and provide pharmacists with more time for interactions with
patients.
PURCHASING AND INVENTORY CONTROL
We use sophisticated inventory control and purchasing software to track
inventory, analyze demand history, and project future demand. Our system is
designed to enhance profit margins by eliminating the manual ordering process,
allowing for automatic inventory replenishment, and identifying inventory buying
opportunities.
We purchase products from approximately 1,200 suppliers. During 2003
and 2002, our 10 largest suppliers accounted for approximately 57% and 71%,
respectively, of our purchases by dollar volume. Our largest supplier accounted
for approximately 8% (by dollar volume) of our purchases during 2003 and
approximately 22% (by dollar volume) of our purchases during 2002. The majority
of our supply contracts are terminable by either party upon short notice and
without penalty, a common industry practice. We believe that our relationships
with our suppliers are strong.
6
MANAGEMENT INFORMATION SYSTEMS
Each of our distribution centers operates as a distinct business with
complete system functionality including sales order, inventory, and
transportation management; customer service; accounts payable and receivable;
general ledger; and financial reporting.
We use the JD Edwards OneWorld(TM) product as our Enterprise Resource
Planning (ERP) software package to integrate all these functions, which were
previously maintained separately by each distribution center. Completed in July
2003, the new system consolidates operations in St. Louis and Cape Girardeau,
Missouri, and provides us with significantly improved operations management and
financial reporting systems.
BUYING GROUP
In November 1995, we purchased 50% of Pharmaceutical Buyers, Inc.
(PBI), a Colorado-based group purchasing organization PBI, with over 3,000
member organizations, is one of the largest pharmaceutical group purchasing
organizations in the United States. PBI's members include long-term care
providers, home infusion providers and medical equipment distributors. In
connection with our secondary stock offering in July 2001, we increased our
ownership in PBI to 68%, and acquired an additional 2% in a subsequent
transaction in August 2001. The resulting consolidation of PBI's operations
increased our gross profit and gross margin percentage but had no effect on
earnings per share. PBI represented 0.3% of our net sales in both 2003 and 2002
and 8.6% and 7.3% of our gross profit in 2003 and 2002, respectively.
COMPETITION
The wholesale distribution of branded and generic pharmaceuticals and
over-the-counter health and beauty aid products, is highly competitive. National
and regional distributors compete primarily on the basis of service and price.
Other competitive factors include delivery service, credit terms, breadth of
product line, customer support, merchandising and marketing programs. We compete
with national, regional, and other wholesale distributors, pharmaceutical
manufacturers, generic pharmaceutical telemarketers and specialty distributors
for product purchases and financial support in the form of trade credit from
manufacturers. Certain of our competitors, including McKesson Corporation,
AmerisourceBergen Corporation, and Cardinal Health, Inc., have significantly
greater financial and marketing resources.
EMPLOYEES
As of August 31, 2003, we employed 466 persons; 414 were full-time
employees. Approximately 37 employees at our Minneapolis distribution center are
covered by a collective bargaining agreement with the Miscellaneous Drivers,
Helpers and Warehousemen's Union, Local 638, which expires in March 2004.
Approximately 13 employees at our Jewett Drug Co. subsidiary are covered by a
collective bargaining agreement with the General Drivers and Helpers Union Local
749, affiliated with the International Brotherhood of Teamsters, which expires
February 29, 2004. We believe we have good employee relations.
FORWARD-LOOKING STATEMENTS
Certain statements in this document regarding future events, prospects,
projections or financial performance are forward looking statements. Such
forward looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and may be identified by
words such as "anticipates," "believes," "estimates," "expects," "intends" and
similar expressions. Such forward-looking statements are inherently subject to
risks and uncertainties. The company's actual results could differ materially
from those currently anticipated due to a number of factors, including without
limitation, the competitive nature of the wholesale pharmaceutical distribution
industry with many competitors having substantially greater resources than D&K
Healthcare, the company's ability to maintain or improve its operating margins
with the industry's competitive pricing pressures, the company's customers and
suppliers generally having the right to terminate or reduce their purchases or
shipments on relatively short notice, the availability of investment purchasing
opportunities, the changing business and regulatory environment of the
healthcare industry in which the company operates, including manufacturer's
pricing or distribution policies or practices, changes in private and
governmental reimbursement or in the delivery systems for healthcare products,
7
changes in interest rates, and other factors set forth in reports and other
documents filed by D&K Healthcare with the Securities and Exchange Commission
from time to time. The reader should not place undue reliance on forward-looking
statements, which speak only as of the date they are made. D&K Healthcare
undertakes no obligation to publicly update or revise any forward-looking
statements.
Item 2. Properties
We conduct our business from a total of nine office, warehouse and
satellite depot facilities:
LOCATION DESCRIPTION SQUARE FOOTAGE
- --------------------------------------------------------------------------------------------
Cape Girardeau, Missouri (1) Distribution and administration 66,000
Lexington, Kentucky (1) Distribution and administration 61,900
Minneapolis, Minnesota (2) Distribution and administration 63,000
Aberdeen, South Dakota (1) Distribution and administration 40,000
Weston, Florida (1) Distribution and administration 24,000
Owensboro, Kentucky (2) Distribution and administration 34,000
Caguas, Puerto Rico (1 Distribution and administration 5,000
Boulder, Colorado (1) PBI headquarters 5,500
St. Louis, Missouri (1) Corporate offices 31,765
- ------------
1) Leased.
2) Owned.
We also maintain warehouse and satellite depot facilities in Missouri
and Kentucky that enable us to efficiently distribute products on a timely
basis. During fiscal 2004 we began expansion of our Cape Girardeau facility to
add approximately 60,000 square feet to the current facility. In addition, in
August 2003, we entered into a lease for a 70,100 square foot facility in Flower
Mound, Texas, which is near Dallas. We expect this facility to be in operation
by December 2003 and will replace the Weston, Florida facility. We believe our
facilities are adequate to support our present business plans.
Item 3. Legal Proceedings
No significant legal proceedings are pending against us.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of our security holders during
the quarter ended June 30, 2003.
Item 4A. Executive Officers of the Registrant
The name, age and position of each of our executive officers are set
forth below.
J. Hord Armstrong, III, 62, has served as Chairman of the Board, Chief
Executive Officer and Treasurer, and a director since December 1987. Prior to
joining us, Mr. Armstrong served as Vice President and Chief Financial Officer
of Arch Mineral Corporation, a coal mining and sales corporation, from 1981 to
1987, and as its Treasurer from 1978 to 1981.
Martin D. Wilson, 42, has served as President and Chief Operating
Officer since January 1996, as Secretary from August 1993 to April 1999 and as a
director since 1997. Mr. Wilson served as Executive Vice President, Finance and
Administration from May 1995 to January 1996, as Vice President, Finance and
Administration from April 1991 to
8
May 1995, and as Controller from March 1988 to April 1991. Prior to joining us,
Mr. Wilson was associated with KPMG Peat Marwick, a public accounting firm. Mr.
Wilson serves as a Trustee of the St. Louis College of Pharmacy.
Thomas S. Hilton, 51, has served as Senior Vice President and Chief
Financial Officer since January 1999. Between May 1980 and June 1998, Mr. Hilton
was employed by the Peabody Group, a coal mining and sales corporation in a
variety of management positions including Vice President and Treasurer from
March 1993 to May 1995, and Vice President and Chief Financial Officer from May
1995 to June 1998.
Leonard R. Benjamin, 53, has served as Vice President, General Counsel
and Secretary since April 1999. Between January 1999 and April 1999, Mr.
Benjamin was Assistant General Counsel of Innovex Corporation, a provider of
sales forces to the pharmaceutical industry. Between October 1998 and January
1999, Mr. Benjamin was counsel to KWS&P/SFA Inc., a software provider to the
pharmaceutical industry. Between April 1994 and July 1998, Mr. Benjamin was
Associate General Counsel, then Vice President, General Counsel and Secretary to
Walsh International Inc., a software provider to the pharmaceutical industry.
Brian G. Landry, 47, has served as Vice President and Chief Information
Officer since April 2000. Mr. Landry previously served as Vice President,
information systems product management from April 1999 to April 2000 and as Vice
President and General Manager of our Minneapolis distribution center from
November 1996 to April 1999. From October 1992 to October 1996, Mr. Landry was
employed by Cardinal Health as a general manager of a distribution center.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information set forth under the caption "Price Range Per Common
Share" on the inside back cover of the registrant's 2003 Annual Report to
Stockholders is incorporated herein by this reference.
The following table contains certain information concerning shares of
common stock of the company subject to options issued under our 1992 Long-term
Incentive Plan (as amended), 1993 Stock Option Plan (as amended) and 2001
Long-term Incentive Plan. Our stockholders approved the 1992 Long-term
Incentive Plan and the 2001 Long-term Incentive Plan. The 1993 Stock Option Plan
(the 1993 Plan) is for employees and certain others (not company directors or
executive officers) who perform services for us and did not require shareholder
approval. Under the 1993 Plan, we can grant options that do not qualify as
incentive stock options at a price not less than fair market value of the
company's common stock at the time of grant. The term of the options cannot
exceed 10 years from the date of grant. There were 700,000 shares authorized
under the 1993 Plan.
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR FUTURE
NUMBER OF SECURITIES TO BE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by stockholders 1,152,066 $15.36 604,636
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by stockholders 136,250 $12.04 --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 1,288,316 $15.01 604,636
- ------------------------------------------------------------------------------------------------------------------------------------
Item 6. Selected Financial Data
The information set forth under the caption "Financial Highlights" on
the inside front cover of the registrant's 2003 Annual Report to Stockholders is
incorporated herein by this reference.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The table below sets forth certain statement of income data for the
last three fiscal years expressed as a percentage of net sales and in comparison
with the prior fiscal year. Unless otherwise indicated, for purposes of this
discussion, all references to "2003," "2002," and "2001" shall mean the
Company's fiscal years ended June 30, 2003, June 30, 2002, and June 30, 2001,
respectively.
The table below contains certain operations data for the last three
years expressed as a percentage of net sales and in comparison with the prior
year:
PERCENTAGE CHANGE FROM
PERCENTAGE OF NET SALES PRIOR YEAR
------------------------------------------- --------------------------
2003 2002 2001 2002-2003 2001-2002
-------- -------- -------- --------- ---------
Net sales 100.00% 100.00% 100.00% (9.4)% 49.1%
Gross profit 4.08% 4.19% 4.18% (11.8)% 49.4%
Total operating expenses (2.44%) (2.30%) (2.54%) (3.9)% 34.9%
------ ------ ------
Income from operations 1.64% 1.89% 1.64% (21.5)% 72.0%
Interest expense, net (0.48%) (0.40%) (0.73%) 9.7% (18.7%)
Securitization termination costs (0.09%) -- -- NM --
Other, net (0.00%) (0.03%) 0.00% NM NM
Income tax provision (0.41%) (0.58%) (0.36%) (35.8)% 139.7%
Minority interest (0.03%) (0.03%) - (3.4)% NA
------ ------ ------
Net income before cumulative
effect of accounting change 0.63% 0.86% 0.56% (33.8)% 130.3%
Cumulative effect of
accounting change, net (0.19%) -- -- NM --
------ ------ ------
Net income 0.44% 0.86% 0.56% (54.0)% 130.3%
====== ====== ======
FISCAL YEAR ENDED JUNE 30, 2003 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30,
2002
NET SALES Net sales decreased $230.4 million to $2.223 billion, or
9.4%, 2003, compared to the corresponding period of the prior year. The sales
decline was in the national accounts trade class and related to fewer
attractively priced purchase opportunities. Sales to independent and regional
pharmacies increased $67.1 million to $1.156 billion, or 6.2%, primarily as a
result of the net increase in sales to existing customers. National accounts
sales decreased $317.1 million to $929.6 million, or 25.4%, compared to 2002
related to fewer attractively priced purchase opportunities of approximately
$554 million partially offset by sales to new customers of approximately $235
million. Sales to other healthcare providers increased $18.8 million to $126.3
million, or 17.5% as a result of new customers.
During 2003 we made no dock-to-dock sales, which historically were not
included in net sales due to our accounting policy of recording only the
commission on such transactions as a reduction to cost of sales in our
consolidated statements of operations. Dock-to-dock sales represent bulk sales
of pharmaceuticals to self-warehousing chain pharmacies for which we act only as
an intermediary in the order and subsequent delivery of products to the
customers' warehouses. The commission on dock-to-dock sales is typically lower
than the gross profit realized on sales of products from inventory. Dock-to-dock
sales were $70.5 million during 2002.
GROSS PROFIT Gross profit decreased $12.1 million to $90.7 million, or
11.8%, for 2003, compared to the corresponding period of the prior year. As a
percentage of net sales, gross margin decreased from 4.19% to 4.08% for 2003,
compared to the corresponding period of the prior year. The decrease in gross
margin percentage was due to the impact on our prices of the competitive forces
in the business.
OPERATING EXPENSES Operating expenses (including depreciation and
amortization) decreased $2.2 million to $54.3 million, or 3.9%, for 2003
compared to the corresponding period of the prior year. The ratio of operating
expenses to net sales for 2003 was 2.44%, a 14 basis point increase from the
comparable period of the prior year. The
11
decrease in operating expenses resulted from the elimination of approximately
$2.5 million of goodwill amortization related to our adoption of SFAS 142,
offset by higher depreciation expense of approximately $0.4 million related to
the new ERP computer system that was fully implemented during 2003. The ratio of
operating expense to net sales increased due to the decrease in national
accounts sales.
INTEREST EXPENSE, NET Net interest expense increased $0.9 million to
$10.7 million, or 9.7%, for 2003, compared to the corresponding period of the
prior year. As a percentage of net sales, net interest expense increased to
0.48% from 0.40% for 2003, compared to the corresponding period of the prior
year. The increase in net interest expense was primarily the result of higher
average borrowing levels driven by higher average investment in inventory.
SECURITIZATION TERMINATION COSTS In March 2003, we entered into a new
credit facility that resulted in the termination of the existing accounts
receivable securitization agreement. As a result, a one-time charge of $2.0
million was incurred during the third quarter of 2003. These costs were
associated with eliminating a $50 million fixed rate component of the accounts
receivable securitization program.
INCOME TAX PROVISION Our effective income tax rate was 38.2% for 2003
compared to 39.3% for the corresponding period of the prior year. These rates
were different from the statutory blended federal and state rates primarily
because of the impact of state income taxes. Our effective rate is lower than
the corresponding period of last year due to the impact of the sales mix on the
blended state income tax rate.
MINORITY INTEREST Minority interest remained at $0.7 million for 2003.
We began recording minority interest during 2002 as a result of our additional
investment in PBI in July 2001.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET As a result of the adoption
of Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets", we recognized an impairment loss of approximately $7.0
million ($4.2 million net of tax) during the first quarter of 2003. This
impairment results from an appraisal valuation and relates to goodwill
originally established for the acquisition of Jewett Drug Co.
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30,
2001
NET SALES Net sales increased $807.8 million to $2.454 billion, or
49.1% for 2002 compared with the prior year, with growth primarily from
independent and regional pharmacies and from national accounts. Sales to
independent and regional pharmacies increased $346.7 million to $1.095 billion,
or 46.3%, a result of the addition of DHI for a full year with $180.0 million of
net sales with the balance of the increase split relatively evenly between
increase in sales to existing customers and the addition of new customers.
National accounts sales increased $450.0 million to $1.247 billion, or 56.5% in
2002; we used proceeds from our equity offering primarily to capitalize on
opportunities in this trade class. Sales to other healthcare providers increased
$3.6 million to $101.7 million, or 3.6% .
We made replenishment purchases and investment purchases with our
largest supplier in 2002, including both forward purchasing and attractively
priced purchasing opportunities. We continue to make replenishment and forward
purchases, but do not anticipate any attractively priced purchasing
opportunities in the near future, with this supplier.
In addition, we made $70.5 million in dock-to-dock sales in 2002 that
are not included in net sales. It is our accounting policy to record only the
commission on such transactions as a reduction to cost of sales in our
consolidated statements of operations. Dock-to-dock sales represent bulk
pharmaceutical sales delivered from manufacturers directly to self-warehousing
chain pharmacies; we act only as an intermediary. Our commission on dock-to-dock
sales is typically lower than the gross profit we realize on sales of products
from inventory. Dock-to-dock sales were $85.1 million during 2001.
GROSS PROFIT Gross profit increased $34.0 million to $102.8 million, or
49.4% for 2002 compared with the prior year. As a percentage of net sales, gross
margin increased from 4.18% to 4.19% for 2002 compared with the prior year. The
slight increase in gross margin percentage, due to the inclusion of PBI, was
partially offset by competitive forces and a slightly higher mix of national
accounts, which normally have lower gross margins.
OPERATING EXPENSES Operating expenses (including depreciation and
amortization) increased $14.6 million to $56.5 million, or 34.9% for 2002
compared with the prior year. The ratio of operating expenses to net sales for
2002 was 2.30%, a 9.4% decrease from 2001. The increase in operating expenses
included the addition of DHI and PBI operating expenses of $9.2 million, higher
sales-based compensation of $2.1 million, and higher depreciation
12
expense of $1.0 million related to portions of the implementation of the ERP
computer system. The ratio of operating expense to net sales fell because
national accounts, which grew in 2002, have lower incremental operating costs.
INTEREST EXPENSE, NET Net interest expense decreased $2.2 million to
$9.7 million, or 18.7% for 2002 compared with the prior year. As a percentage of
net sales, net interest expense decreased to 0.40% from 0.72% for 2002 compared
with 2001. The decrease in net interest expense was primarily the result of
lower average borrowing rates.
INCOME TAX PROVISION Our effective income tax rate was 39.3% for 2002
compared with 39.2% for 2001. These rates differed from statutory blended
federal and state rates primarily because the amortization of intangible assets
was not deductible for federal and state income tax purposes. Our effective rate
was slightly higher than the corresponding period in 2001 due to the impact of
the sales mix on the blended state income tax rate.
MINORITY INTEREST We began recording minority interest during 2002 as a
result of our additional investment in PBI in July 2001. Prior to 2002, we
accounted for our investment under the equity method and recorded our portion of
the PBI earnings accordingly.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2003, the Company entered into a new $600 million credit
facility. The credit facility, an asset-based senior secured revolving credit
facility, increased our available credit from $430 million to $600 million. The
new single credit facility replaced a $230 million revolving bank line of credit
and a $200 million accounts receivable securitization program. Under the credit
facility, the total amount of loans and letters of credit outstanding at any
time cannot exceed the lesser of an amount based on percentages of eligible
receivables and inventories (the borrowing base formula). Total credit available
at June 30, 2003 was approximately $256 million of which approximately $126
million was unused. The interest rate on the new credit facility is based on the
30-day London Interbank Offering Rate (LIBOR) plus a factor based on certain
financial criteria. The interest rate was 3.36% at June 30, 2003.
Under the terms of the credit facility , we are required to comply with
certain financial covenants, including those related to a fixed charge coverage
ratio and tangible net worth. We are also limited in our ability to make loans
and investments, enter into leases, or incur additional debt, among other
things, without the consent of its lenders. We are in compliance with the debt
covenants as of June 30, 2003.
The new credit facility resulted in the termination of the existing
accounts receivable securitization agreement. As a result, a one-time charge of
$2.0 million was incurred during the third fiscal quarter of 2003. These costs
were associated with eliminating a $50 million fixed rate component of the
accounts receivable securitization program that had an interest rate of 4.85%.
Under the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," (as amended by SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities") the accounts receivable sold under the
agreement were removed from the consolidated balance sheet. The amount of
undivided interests in accounts receivable sold were $120.0 million at June 30,
2002.
We generally meet our working capital requirements through a
combination of internally generated funds, borrowings under the revolving line
of credit and trade credit from our suppliers.
We use the following ratios as key indicators of our liquidity and
working capital management:
JUNE 30, JUNE 30,
2003 2002
---------- -----------
Working capital (000s) $ 215,639 $ 182,636
Current ratio 2.14 to 1 1.79 to 1
Working capital is total current assets less total current liabilities
on our balance sheet. The current ratio is calculated by dividing total current
assets by total current liabilities.
Working capital and current ratio at June 30, 2003 are higher than June
30, 2002 levels. Receivables increased as a result of the termination of the
securitization program combined with decreases in both inventory and accounts
payable that are tied to timing of inventory receipts and related payments.
13
We invested $2.4 million in capital assets in 2003 compared with $3.4
million in 2002. The 2003 expenditures were primarily related to leasehold
improvements associated with our new corporate offices. The 2002 expenditures
were primarily related to implementing the ERP computer system. This system
integrates sales order, inventory, and transportation management, customer
service, accounts payable and receivable, general ledger, and financial
reporting. We believe that continuing investment in capital assets is necessary
to achieve our goal of improving operational efficiency, thereby enhancing our
productivity and profitability.
Net cash outflows from financing activities totaled $58.7 million for
2003 with net cash inflows of $61.0 million in 2002. During 2003, repayments
under our revolving line of credit related to the decrease in inventory levels
combined with our purchase of treasury stock produced this result. During 2002,
proceeds from our secondary stock offering were partially offset by increased
repayments under our revolving credit agreement.
Stockholders' equity increased to $170.1 million at June 30, 2003 from
$167.4 million at June 30, 2002, due to the net earnings during the period
offset by the impact of our purchase of treasury stock during the year. We
believe that funds available under the new credit facility , together with
internally generated funds, will be sufficient to meet our capital requirements
for the foreseeable future.
INFLATION
We prepare our consolidated financial statements on the basis of
historical costs and they do not reflect changes in the relative purchasing
power of the dollar. Because we take advantage of purchasing opportunities in
anticipation of price increases (forward purchasing), we believe that our gross
profits generally increase when manufacturers increase the prices of products we
distribute. Our gross profits may decline if manufacturers increase prices more
slowly.
Generally, we pass price increases through to customers, therefore
reducing the negative effect of inflation. During the past three years, we have
offset other non-inventory cost increases such as payroll, supplies and services
by increasing volume and improving productivity.
RECENT TRENDS
Sales in the national accounts trade class declined in 2003 reflecting
the impact of fewer attractively priced purchase opportunities, particularly
from one supplier, and the impact of fewer product price increases. Sales in the
national accounts trade class have fallen below expectations in the first two
months of 2004, as fewer than anticipated product price increases enacted by
pharmaceutical manufacturers have resulted in lower activity in this trade
class. Changes in manufacturers' inventory management practices resulting in
reduced availability of product have also impacted revenues in this trade class.
Fewer than anticipated product price increases also resulted in lower
gross profit margin in the independent and regional pharmacies trade class
during the first two months of 2004. However, during this period sales trends in
the trade class show continued growth, with sales increases of approximately
10%, which partially offsets the effect of lower gross profit margins. The
company believes this sales growth reflects improved regional and independent
retail pharmacy industry sales trends in the company's service territory and the
impact of new business.
14
CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments we use in applying the accounting
policies most critical to our financial statements have a significant impact on
our reported results. The U.S. Securities and Exchange Commission has defined
the most critical accounting policies as the ones that are most important to the
portrayal of our financial condition and results, and require us to make our
most difficult and subjective judgments. Based on this definition, our most
critical policies include the following: (1) inventory valuation; (2) accounts
receivable; (3) valuation of goodwill and other intangible assets (4) accounting
for stock options; and (5) our former accounts receivable securitization
program. We also have other key accounting policies including policies for
revenue recognition. We believe that these other policies either do not
generally require us to make estimates and judgments that are as difficult or as
subjective as the others listed above, or are less likely to have a significant
impact on our reported results of operations for a given period. For additional
information, see Note 1 "Summary of Significant Accounting Policies" in Item 8
of Part II, "Financial Statements and Supplementary Data," of this report.
Although we believe that our estimates and assumptions are reasonable, they are
based upon information available at the time the estimates and assumptions were
made. Actual results may differ significantly from our estimates and our
estimates could be different using different assumptions or conditions.
Inventory Valuation
Inventories consist of pharmaceutical drugs and related
over-the-counter items, which are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. We establish reserves for our
inventory to reflect situations in which the cost of the inventory is not
expected to be recovered. We record provisions for inventory reserves as part of
cost of sales. A change in our inventory reserves of $250,000 would impact our
diluted earnings per share by approximately $0.01 based on shares outstanding at
June 30, 2003.
Accounts Receivable
We perform ongoing credit evaluations of our customers, including
reviews of their current credit information, and we adjust credit limits based
upon their payment histories and current credit worthiness. We continuously
monitor collections and payments from customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues we have identified. However, our ultimate ability to
collect receivables depends on the individual customer's financial condition,
which can change rapidly and without warning.
Valuation of Goodwill and Intangible Assets
We review goodwill and certain identifiable intangible assets when
events or circumstances indicate that the net book value may not be recoverable.
Effective with our adoption of SFAS No. 142,"Goodwill and Other Intangible
Assets" in July 2002, we are no longer amortizing goodwill and intangible assets
that have indefinite lives but will test them annually for impairment, or more
frequently if circumstances indicate potential impairment. We will continue to
amortize other intangible assets over their estimated useful lives.
Stock Options
We account for employee-based stock compensation in accordance with
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees." Under APB No. 25, we record compensation expense based on a stock
option's intrinsic value, which is the difference between a stock's market value
and the exercise price at the date of grant. As we generally grant stock options
at market value at the date of the grant, our compensation expense as a result
of option grants has been nominal. An alternative to APB No. 25 used by many
companies in accounting for stock options is SFAS No.123, "Stock-Based
Compensation." SFAS No. 123 uses the fair value method in valuing stock options
and requires expensing of such values. Companies determine fair value based on
an option-pricing model, with the Black-Scholes model used most commonly. These
pricing models require using several estimates including the expected life of
the option, volatility of common stock, dividend yields (including estimates of
future dividends and market values of common stock), risk-free interest rates
and employee turnover. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, An
Amendment of FASB Statement No. 123" ("SFAS 148"). This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of Statement No. 123 to require more
prominent disclosures, in both interim and annual financial statements, about
the method of accounting for stock-based employee
15
compensation and the effect the method used has on reported results. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. We will continue to account for stock-based compensation using the
intrinsic value method and have adopted the disclosure requirements prescribed
by SFAS 148. The additional required disclosures have been provided in Note 1 to
the consolidated financial statements.
Accounts Receivable Securitization Program
We and our wholly owned, bankruptcy-remote subsidiary ("Seller") had an
accounts receivable securitization program until its termination in March 2003.
Under the program, undivided interests in a pool of eligible trade receivables
that were contributed to the Seller were sold, without recourse, to a
multi-seller, asset backed commercial paper conduit ("Conduit"). Purchases by
the Conduit were financed with the sale of highly rated commercial paper. The
Company utilized proceeds from the sale of its accounts receivable to repay
long-term debt, effectively reducing its overall borrowing costs. Under the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," (as amended by SFAS No. 140) the
securitization transactions were recorded as sales, with those accounts
receivable sold to the Conduit removed from the consolidated balance sheet. The
Seller was a separate legal entity from the Company. The Seller's assets were
available first and foremost to satisfy the claims of its creditors. Eligible
receivables, as defined in the securitization agreement, consisted of trade
receivables from our subsidiaries, excluding non-pharmaceutical receivables,
reduced for certain items, including past due balances and concentration limits.
Of the eligible pool of receivables contributed to the Seller, undivided
interests in only a portion of the pool were sold to the Conduit. The portion of
eligible receivables not sold to the Conduit remained an asset of the Seller.
The Seller's interest in these receivables was subordinate to the Conduit's
interest in the event of default under the securitization agreement. We
terminated this program in March 2003 in connection with the new debt agreements
entered into at that time. Under this agreement, we were required to buy back
any accounts receivable that were determined to be uncollectable. As a result,
there was no significant change in our reserve for bad debts as a result of the
termination of this program.
NEW ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. We are required to adopt this standard for fiscal
years beginning after December 15, 2002. We currently do not plan to change to
the fair value method of accounting for stock-based employee compensation but
will comply with the disclosure requirements of this standard.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS
No. 133 for decisions made as part of the FASB's Derivatives Implementation
Group process, other FASB projects dealing with financial instruments, and in
connection with implementation issues raised in relation to the application of
the definition of a derivative. This statement is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. We believe that the adoption of
SFAS 149 will not have a material impact on our consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. SFAS 150
requires that those instruments be classified as liabilities in statements of
financial position and affects an issuer's accounting for (1) mandatorily
redeemable shares, which the issuing company is obligated to buy back in
exchange for cash or other assets, (2) instruments, other than outstanding
shares, that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets, or (3) obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the value of the
issuer's shares. In addition to its requirements for the classification and
measurement of financial instruments within its scope, SFAS 150 also requires
disclosures about alternative ways of settling those instruments and the capital
structure of entities, all of whose shares are mandatorily redeemable. SFAS 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
16
beginning after June 15, 2003. We believe that the adoption of SFAS 150 will not
have a material impact on our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). The disclosure requirements of
FIN 45 are effective for our 2003 consolidated financial statements and are
included in our quarterly financial statements beginning with the quarter ending
December 31, 2002. For applicable guarantees issued after January 1, 2003, FIN
45 requires that a guarantor recognize a liability for the fair value of the
obligation undertaken in issuing the guarantee. Our adoption of the FIN 45
accounting requirements did not have a material effect on our financial
condition or results of operations.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the consolidation of
variable interest entities, as defined. FIN 46 applies to financial statements
to be issued after 2002; however, disclosures are required currently if any
variable interest entities are expected to be consolidated. We do not have any
entities that will be consolidated as a result of FIN 46.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risk consists of changes in interest
rates on borrowings. An increase in interest rates would adversely affect the
operating results and the cash flow available to fund operations and expansion.
Based on the average variable borrowings during 2003, a change of 25 basis
points in the average variable borrowing rate would result in a change of
approximately $0.6 million in annual interest expense. We continually monitor
this risk and review the potential benefits of entering into hedging
transactions, such as interest rate swap agreements, to mitigate the exposure to
interest rate fluctuations. Our hedging arrangements at June 30, 2003 are
described more fully in the footnotes to our consolidated financial statements.
Item 8. Financial Statements and Supplementary Data
PAGE
----
Independent Auditors' Report Page 18
Consolidated Balance Sheets at June 30, 2003 and June 30, 2002 Page 20
Consolidated Statements of Operations for the years ended June 30, 2003,
June 30, 2002, and June 30, 2001 Page 21
Consolidated Statements of Stockholders' Equity for the years
Ended June 30, 2003, June 30, 2002, and June 30, 2001 Page 22
Consolidated Statements of Cash Flows for the years ended June 30, 2003,
June 30, 2002, and June 30, 2001 Page 23
Notes to Consolidated Financial Statements Page 24
17
INDEPENDENT AUDITORS' REPORT
The Board of Directors
D&K Healthcare Resources, Inc.:
We have audited the accompanying consolidated balance sheets of D&K Healthcare
Resources, Inc. and subsidiaries as of June 30, 2003 and 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule.
These consolidated financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and the financial
statement schedule based on our audits. The consolidated financial statements
and the financial statement schedule of D&K Healthcare Resources, Inc. and
subsidiaries for the year ended June 30, 2001, were audited by other auditors
who have ceased operations. Those auditors expressed an unqualified opinion on
those consolidated financial statements and financial statement schedule, before
the restatements described in Notes 1, 3, and 15 to the consolidated financial
statements, in their report dated August 7, 2001.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 D&K Healthcare
Resources, Inc. and subsidiaries as of June 30, 2003 and 2002, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed above, the consolidated financial statements of D&K Healthcare
Resources, Inc. and subsidiaries for the year ended June 30, 2001, as listed
above, were audited by other auditors who have ceased operations. As described
in Note 1, the Company declared a two-for-one stock split in the form of a stock
dividend during the year ending June 30, 2002, and the amounts in the
consolidated financial statements for the year ended June 30, 2001 relating to
all share and per share amounts have been restated to retroactively reflect this
stock split. We audited the adjustments that were applied to restate the share
and per share amounts reflected in the June 30, 2001 consolidated financial
statements. In our opinion, such adjustments are appropriate and have been
properly applied. However, we were not engaged to audit, review, or apply any
procedures to the June 30, 2001 consolidated financial statements of D&K
Healthcare Resources, Inc. and subsidiaries other than with respect to such
adjustments and, accordingly, do not express an opinion or any other form of
assurance on the June 30, 2001 consolidated financial statements taken as a
whole.
As discussed above, the consolidated financial statements of D&K Healthcare
Resources, Inc. and subsidiaries for the year ended June 30, 2001, as listed
above, were audited by other auditors who have ceased operations. As described
in Note 3, these consolidated financial statements have been revised to include
the transitional disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by
the Company as of July 1, 2002. In our opinion, the disclosures for the year
ended June 30, 2001 in Note 3 are appropriate. However, we were not engaged to
audit, review, or apply any procedures to the June 30, 2001 consolidated
financial statements of D&K Healthcare Resources, Inc. and subsidiaries other
than with respect to such disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the June 30, 2001 consolidated
financial statements taken as a whole.
As discussed above, the consolidated financial statements of D&K Healthcare
Resources, Inc. and subsidiaries for the year ended June 30, 2001, as listed
above, were audited by other auditors who have ceased operations. As described
in Note 15, the Company changed the composition of its reportable segments
during the year ended June 30, 2003, and the amounts in the June 30, 2001
consolidated financial statements relating to reportable segments have been
restated to conform to the June 30, 2003 composition of reportable segments. We
have audited the adjustments that were applied to restate the disclosures for
reportable segments reflected in the June 30, 2001 consolidated financial
statements. In our opinion, such adjustments are appropriate and have been
properly applied. However, we were not engaged to audit, review, or apply any
procedures to the June 30, 2001 consolidated financial statements of D&K
Healthcare Resources, Inc. and subsidiaries other than with respect to such
adjustments and, accordingly, we do not express an opinion or any other form of
assurance on the June 30, 2001 consolidated financial statements taken as a
whole.
/s/ KPMG LLP
St. Louis, Missouri
August 6, 2003
18
THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT
BEEN REISSUED BY ARTHUR ANDERSEN LLP. ALL SHARE AND PER SHARE AMOUNTS INCLUDED
IN THIS REPORT AND IN THE CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL 2001 AND
2000 HAVE BEEN ADJUSTED TO RETROACTIVELY REFLECT A TWO-FOR-ONE STOCK SPLIT IN
THE FORM OF A STOCK DIVIDEND THAT OCCURRED IN FISCAL 2002.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To D&K Healthcare Resources, Inc.:
We have audited the accompanying consolidated balance sheets of D&K Healthcare
Resources, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of D&K Healthcare Resources, Inc.
and subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2001, in conformity with accounting principles generally accepted in
the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
St. Louis, Missouri
August 7, 2001
19
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, (in thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------
2003 2002
---------- ----------
ASSETS
Current Assets
Cash (including restricted cash of $14,301 and $11,754 respectively) $ 14,301 $ 11,754
Receivables, net of allowance for doubtful accounts of $1,604 and $1,374, respectively 122,982 31,217
Inventories 257,984 364,244
Deferred income taxes 2,322 897
Prepaid expenses and other current assets 6,540 5,802
---------- ----------
Total current assets 404,129 413,914
Property and Equipment, net of accumulated depreciation and amortization of
$10,673 and $9,536, respectively 11,140 11,104
Other Assets 11,511 5,024
Goodwill, net of accumulated amortization 44,105 51,131
Other Intangible Assets, net of accumulated amortization 1,810 1,965
---------- ----------
Total assets $ 472,695 $ 483,138
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,677 $ 2,270
Accounts payable 173,342 215,777
Accrued expenses 13,471 13,231
---------- ----------
Total current liabilities 188,490 231,278
Long-term Liabilities 3,703 2,757
Deferred Income Taxes -- 249
Long-term Debt 110,423 81,457
---------- ----------
Total liabilities 302,616 315,741
Stockholders' Equity
Preferred stock -- --
Common stock 152 151
Paid-in capital 124,704 124,089
Accumulated other comprehensive loss (1,371) (887)
Deferred compensation - restricted stock (411) --
Retained earnings 58,415 49,590
Less treasury stock (11,410) (5,546)
---------- ----------
Total stockholders' equity 170,079 167,397
---------- ----------
Total liabilities and stockholders' equity $ 472,695 $ 483,138
========== ==========
Preferred stock has no par value; 1 million shares are authorized. In 2003 and
2002, no shares were issued or outstanding.
Common stock has a par value of $.01 per share; 25 million shares are
authorized; 15,177,100 and 15,146,602 shares were issued at June 30,2003 and
2002, respectively. At June 30, 2003, 13,984,300 shares were outstanding and
1,192,800 shares were held in treasury. At June 30 2002, 14,553,802 shares were
outstanding and 592,800 shares were held in treasury.
The accompanying notes are an integral part of these statements.
20
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended June 30, (in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net Sales $ 2,223,388 $ 2,453,748 $ 1,645,993
Cost of Sales 2,132,689 2,350,917 1,577,169
------------ ------------ ------------
Gross profit 90,699 102,831 68,824
Depreciation and Amortization 2,492 4,453 3,428
Operating Expenses 51,820 52,039 38,450
------------ ------------ ------------
Income from operations 36,387 46,339 26,946
------------ ------------ ------------
Other Income (Expense):
Interest expense (11,070) (10,386) (13,311)
Interest income 410 667 1,352
Securitization termination costs (2,008) -- --
Equity in net income of PBI -- -- 607
Other, net (13) (710) (563)
------------ ------------ ------------
(12,681) (10,429) (11,915)
------------ ------------ ------------
Income before income tax provision and minority interest 23,706 35,910 15,031
Income Tax Provision (9,058) (14,113) (5,887)
Minority Interest (713) (738) --
------------ ------------ ------------
Net income before cumulative effect of accounting change 13,935 21,059 9,144
------------ ------------ ------------
Cumulative effect of accounting change, net (4,249) -- --
------------ ------------ ------------
Net income $ 9,686 $ 21,059 $ 9,144
============ ============ ============
Earnings Per Share - Basic
Net income before cumulative effect of accounting change $ 0.98 $ 1.48 $ 1.08
Cumulative effect of accounting change (0.30) -- --
------------ ------------ ------------
Net income $ 0.68 $ 1.48 $ 1.08
============ ============ ============
Earnings Per Share - Diluted
Net income before cumulative effect of accounting change $ 0.95 $ 1.42 $ 1.01
Cumulative effect of accounting change (0.30) -- --
------------ ------------ ------------
Net income $ 0.65 $ 1.42 $ 1.01
============ ============ ============
The accompanying notes are an integral part of these statements.
21
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEFERRED
OTHER COMPENSATION-
COMMON PAID-IN COMPREHENSIVE RESTRICTED RETAINED TREASURY
STOCK CAPITAL LOSS STOCK EARNINGS STOCK TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 $ 45 $ 30,335 $ -- $ -- $ 20,431 $ (5,546) $ 45,265
Comprehensive income:
Net income -- -- -- -- 9,144 -- 9,144
Change in value of cash flow hedge,
net of $227 tax benefit -- -- (356) -- -- -- (356)
---------
Total comprehensive income 8,788
Stock options exercised, including tax
benefit 2 3,671 -- -- -- -- 3,673
Dividends paid ($0.05/share) -- -- -- -- (216) -- (216)
---------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2001 $ 47 $ 34,006 $ (356) $ -- $ 29,359 $ (5,546) $ 57,510
Comprehensive income:
Net income -- -- -- -- 21,059 -- 21,059
Change in value of cash flow hedge,
net of $347 tax benefit -- -- (531) -- -- -- (531)
---------
Total comprehensive income 20,528
Secondary stock offering 24 76,838 -- -- -- -- 76,862
Shares issued upon acquisition of PBI 2 6,905 -- -- -- -- 6,907
Stock options exercised, including tax
benefit 3 6,340 -- -- -- -- 6,343
Stock split in the form of a stock dividend 75 -- -- -- (75) -- --
Dividends paid ($0.0525/share) -- -- -- -- (753) -- (753)
---------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $ 151 $124,089 $ (887) $ -- $ 49,590 $ (5,546) $ 167,397
Comprehensive income:
Net income -- -- -- -- 9,686 -- 9,686
Change in value of cash flow hedge,
net of $318 tax benefit -- -- (484) -- -- -- (484)
---------
Total comprehensive income 9,202
Issuance of restricted stock 1 615 -- (616) -- -- --
Deferred compensation amortization -
restricted stock -- -- -- 205 -- -- 205
Treasury stock purchases -- -- -- -- -- (5,864) (5,864)
Dividends paid ($0.06/share) -- -- -- -- (861) -- (861)
---------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 $ 152 $124,704 $(1,371) $(411) $ 58,415 $(11,410) $ 170,079
=================================================================================
The accompanying notes are an integral part of these statements.
22
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30, (in thousands)
- ------------------------------------------------------------------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,686 $ 21,059 $ 9,144
Adjustments to reconcile net income to net cash
flows from operating activities--
Depreciation and amortization 2,492 4,453 3,428
Amortization of debt issuance costs 1,425 1,096 1,126
Loss / (gain) from sale of assets (3) 333 (57)
Equity in net income of PBI -- -- (607)
Deferred income taxes (3,463) (1,796) (1,653)
Cumulative effect of accounting change, net 4,249 -- --
Decrease (increase) in receivables, net (11,765) 15,478 (5,577)
(Increase) decrease in inventories 106,260 (149,204) 2,472
Increase in prepaid expenses and other
current assets (1,816) (5,576) (722)
Increase (decrease) in accounts payable (42,435) 56,626 7,519
Increase in accrued expenses 3,006 4,419 3,972
Other, net (3,839) (1,500) 925
----------- ----------- -----------
Net cash flows from operating activities 63,797 (54,612) 19,970
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for acquisitions, net of cash acquired -- 961 (9,037)
Investment in other assets (200) (200) (650)
Cash dividend from PBI -- -- 450
Purchases of property and equipment (2,371) (3,445) (3,450)
Proceeds from sale of assets 3 543 57
----------- ----------- -----------
Net cash flows from investing activities (2,568) (2,141) (12,630)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving line of credit 1,158,172 896,667 662,183
Repayments under revolving line of credit (1,128,602) (912,752) (667,023)
Repurchase of receivables under securitization agreement (80,000) -- --
Proceeds from secondary stock offering -- 76,862 --
Payments of long-term debt (948) (757) (17)
Payments of capital lease obligations (249) (236) (286)
Proceeds from exercise of stock options -- 2,260 2,349
Payment of dividends (861) (753) (216)
Dividends paid by affiliates (330) (300) --
Purchase of treasury stock (5,864) -- --
Payments of deferred debt costs -- -- (475)
----------- ----------- -----------
Net cash flows from financing activities (58,682) 60,991 (3,485)
----------- ----------- -----------
Increase in cash 2,547 4,238 3,855
Cash, beginning of period 11,754 7,516 3,661
----------- ----------- -----------
Cash, end of period $ 14,301 $ 11,754 $ 7,516
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for--
Interest $ 9,605 $ 9,258 $ 12,139
Income taxes, net $ 7,241 $ 11,076 $ 7,168
The accompanying notes are an integral part of these statements.
23
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include the accounts of all
divisions and wholly owned and majority-owned subsidiaries of D&K Healthcare
Resources, Inc. (the Company). All significant intercompany accounts and
transactions are eliminated.
Fiscal Year
The Company's fiscal year end is June 30. References to years relate to
fiscal years rather than calendar years unless otherwise stated.
Concentration of Credit Risk
The Company is a full-service, regional wholesale pharmaceutical drug
distributor. From facilities in Missouri, Kentucky, Minnesota, South Dakota and
Florida, the Company distributes a broad range of branded and generic
pharmaceuticals and over-the-counter health and beauty aid products to its
customers in more than 26 states. The Company is focused on serving the unique
needs of independent and regional pharmacies.
In 2003, sales to one customer represented approximately 9% of total
net sales. In 2002, sales to one customer represented approximately 24% of total
net sales. In 2001, sales to one customer represented approximately 16% of total
net sales.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Revenue Recognition
Revenue is recognized when products are shipped or services are
provided to customers and the Company has no further obligation with respect to
such products or services. Revenues as reflected in the accompanying
consolidated statements of operations are net of sales returns and allowances.
The Company recognizes sales returns as a reduction of revenue and cost of sales
for the sales price and cost, respectively, when products are returned. Rebates
received from suppliers are recognized as a reduction in cost of sales at the
time the product is sold. Shipping and handling costs associated with the
shipment of goods are recorded as operating expenses in the consolidated
statements of operations which amounted to $4.6 million, $4.5 million and $3.7
million in 2003, 2002, and 2001, respectively.
During 2002 and 2001, the Company had $70.5 million, and $85.1 million,
respectively, of "dock-to-dock" sales, which are excluded from net sales due to
the Company's policy of recording only the commission on such transactions as a
reduction against cost of goods sold in the consolidated statements of
operations. The Company had no dock-to-dock sales in 2003. Dock-to-dock sales
represent large volume sales of pharmaceuticals to major self-warehousing retail
chain pharmacies whereby the Company acts as an intermediary in the order and
subsequent delivery of products to the customers' warehouses. Commissions earned
by the Company on these sales were not significant in any year presented.
Stock-Based Compensation
The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123, Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
compensation and also amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
methods of accounting for stock-based employee compensation and the effect of
the method used on reported results. As
24
permitted by SFAS 148 and SFAS 123, the Company continues to apply the
accounting provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees."
The Company generally grants its stock options at exercise prices equal
to the fair market value of the underlying stock on the date of grant and,
therefore, under APB 25, no compensation expense is recognized in the statements
of income.
The fair value of each option grant was estimated on the date of the
grant using the Black-Scholes option-pricing model using the following
weighted-average assumptions:
- -----------------------------------------------------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Risk free interest rates 3.05% 4.19% 4.81%
Expected life of options 4.0 years 5.0 years 5.0 years
Volatility of stock price 61% 43% 46%
Expected dividend yield 0.002% 0.002% 0.01%
Fair value of options granted $ 10.82 $ 10.50 $ 2.99
Had the Company recorded compensation expense based on the estimated
grant date fair values, as defined by SFAS 123, for awards granted under its
stock option plans and stock purchase plan, the pro forma net income and
earnings per share would have been as follows (in thousands, except per share
data):
- ------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---------- ---------- ----------
Net income - as reported $ 9,686 $ 21,059 $ 9,144
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of tax (1,454) (2,059) (1,648)
Net income - pro forma $ 8,232 $ 19,000 $ 7,496
Earnings per share:
Basic - as reported $ 0.68 $ 1.48 $ 1.08
Basic - pro forma $ 0.58 $ 1.33 $ 0.88
Diluted - as reported $ 0.65 $ 1.42 $ 1.01
Diluted - pro forma $ 0.56 $ 1.29 $ 0.83
These pro forma amounts may not be representative of the effects for
future years as options vest over several years and additional awards are
generally granted each year.
Restricted Cash
Restricted cash of $14.3 million and $11.8 million, respectively, at
June 30, 2003 and June 30, 2002, represents cash receipts from customers that
must be used to reduce borrowings under the credit facility and are included in
cash.
Receivables
Receivables are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing receivables. The
Company determines the allowance based on historical write-off experience. The
Company reviews its allowance for doubtful accounts monthly. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is remote.
Inventories
Inventories consist of pharmaceutical drugs and related
over-the-counter items, which are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Reserves are established for
our inventory to reflect situations in which the cost of the inventory is not
expected to be recovered. Provisions for inventory reserves are recorded as part
of cost of sales.
25
Property and Equipment
Property and equipment is stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are charged to
operations primarily using the straight-line method over the shorter of the
estimated useful lives of the various classes of assets, which vary from two to
30 years, or the lease term for leasehold improvements. For income tax purposes,
accelerated depreciation methods are used. Repairs and maintenance costs are
expensed as incurred.
Intangible Assets
Intangible assets are stated at cost less accumulated amortization.
Amortization is determined using the straight-line method over the estimated
useful lives of the related assets.
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets," establishes a single accounting model for long-lived assets to be
disposed of. Adopting this standard did not have a material impact on the
Company's consolidated financial statements.
In accordance with SFAS No. 144, long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet. Prior to adopting SFAS No. 144, the Company
accounted for long-lived assets in accordance with SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Asset to be Disposed of."
Goodwill
The Company accounts for goodwill under SFAS 142, "Goodwill and Other
Intangible Assets," which requires the Company to review for impairment of
goodwill on an annual basis, and between annual tests whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. The
Company performed its goodwill impairment tests upon adoption of SFAS 142 and
again as of April 30, 2003. Upon adoption of SFAS 142 on July 1, 2002, the
Company ceased amortization of its existing net goodwill balance. Prior to
adoption of SFAS 142, goodwill was amortized on a straight-line basis over the
expected periods to be benefited and assessed for recoverability by determining
whether the amortization of the goodwill balance over its remaining life could
be recovered through undiscounted future operating cash flows of the acquired
operation. See Note 3 for further information regarding the adoption of SFAS 142
and the on-going impact.
Interest Rate Risk Management
In accordance with Statement of Financial Accounting Standard No. 133,
"Accounting for Derivatives and Hedging Activities", as amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
all derivative instruments are recorded at fair value on the balance sheet and
all changes in fair value are recorded to earnings or to stockholders' equity
through other comprehensive income. The Company does not use derivative
instruments for trading or speculative purposes.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective basis
for income tax purposes. Deferred tax assets and liabilities are measured and
recorded using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
26
Book Overdrafts
Accounts payable includes book overdrafts (outstanding checks) of $10.4
million and $17.1 million at June 30, 2003 and June 30, 2002, respectively.
Stockholders' Equity
Treasury Stock. In May 1999, the board of directors authorized the
repurchase of up to 600,000 shares of the Company's outstanding common stock.
592,800 shares were acquired in the open market during the twelve-month period
from the date of authorization. In September 2002, the board of directors
authorized the repurchase of up to 1.0 million shares. As of June 30, 2003,
600,000 shares had been repurchased.
Equity Offering. On July 5, 2001, the Company completed a secondary
offering of approximately 4.8 million shares of common stock with net proceeds
of approximately $77 million.
Authorization of additional shares of Common Stock. In January 2002,
the Board of Directors amended the Certificate of Incorporation of the Company
to increase the number of authorized shares of Common Stock to 25 million
shares.
Stock Split. On March 13, 2002, the Company declared a two-for-one
stock split in the form of a stock dividend that was distributed on April 12,
2002 to shareholders of record on March 29, 2002. All share and per share
amounts included in the consolidated financial statements have been adjusted to
retroactively reflect this stock split.
Deferred compensation - restricted stock. The Company issued restricted
shares of stock to certain key management personnel in 2003. This stock will
vest three years from the date of grant. The Company recorded the cost of the
stock at the time of grant as deferred compensation and will amortize this cost
over the vesting period.
Earnings per Share
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS No. 128) requires a dual presentation of basic and diluted earnings
per share. Basic earnings per share excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted into common stock. All share and per share amounts have
been stated in accordance with the provisions of SFAS No. 128 (see Note 13).
NOTE 2. ACQUISITIONS:
In July 2001, as part of the secondary stock offering, the Company
increased its ownership percentage in Pharmaceutical Buyers, Inc. (PBI) to 68%
and in August 2001, acquired an additional 2%. These additions were accomplished
with individuals exchanging PBI stock for shares of the Company's common stock.
The aggregate purchase price was valued at $6.9 million based on the initial
price of the secondary stock offering for the first increase and the closing
price of the stock for the second increase. This arrangement was part of the
original transaction when we acquired our initial 50% ownership interest. This
transaction was accounted for under the purchase method of accounting. Goodwill
recognized in this transaction amounted to $10.7 million, but is not deductible
for tax purposes. Intangible assets other than goodwill recognized in this
transaction amounted to $1.9 million and have a weighted-average useful life of
approximately 15 years.
NOTE 3. GOODWILL AND INTANGIBLE ASSETS:
The Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" effective July 1, 2002. Under
the new statement, impairment should be tested at least annually at the
reporting unit level using a two-step impairment test. The reporting unit is the
same as or one level below the operating segment level as described in SFAS
Statement 131, "Disclosures about Segments of an Enterprise and Related
Information. Under step 1 of this approach, the fair value of the reporting unit
as a whole is compared to the book value of the reporting unit (including
goodwill) and, if a deficiency exists, impairment would need to be calculated.
In step 2, the impairment is measured as the difference between the implied fair
value of goodwill and its
27
carrying amount. The implied fair value of goodwill is the difference between
the fair value of the reporting unit as a whole and the fair value of the
reporting unit's individual assets and liabilities, including any unrecognized
intangible assets. Under this standard, goodwill and intangibles with indefinite
lives are no longer amortized. A discounted cash flow model was used to
determine the fair value of the Company's businesses for the purpose of testing
goodwill for impairment. The discount rate used was based on a risk-adjusted
weighted average cost of capital.
The effects of adopting the new standard on net income and earnings per
share for the years ended June 30, 2003 and 2002 are:
(in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME BASIC EPS DILUTED EPS
------------------------- ----------------------- -----------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
------------------------- ----------------------- -----------------------
Net income $ 9,686 $21,059 $ 9,144 $0.68 $1.48 $1.08 $0.65 $1.42 $1.01
Add: cumulative effect of accounting
change, net 4,249 -- -- 0.30 -- -- 0.30 -- --
------------------------- ----------------------- -----------------------
Income before cumulative effect of
accounting change 13,935 21,059 9,144 0.98 1.48 1.08 0.95 1.42 1.01
Add: goodwill amortization, net of tax -- 1,580 1,256 -- 0.11 0.15 -- 0.11 0.14
------------------------- ----------------------- -----------------------
Income before cumulative effect of
accounting change and goodwill
amortization $13,935 $22,639 $10,400 $0.98 $1.59 $1.23 $0.95 $1.53 $1.15
As a result of this adoption and assessment, the Company recognized an
impairment loss of approximately $7.0 million ($4.2 million net of tax) during
the first quarter of fiscal 2003. This was recognized as the cumulative effect
of a change in accounting principle. This impairment results from an appraisal
valuation and relates to goodwill originally established for the acquisition of
Jewett Drug Co., which is included in the Company's wholesale drug distribution
segment.
Changes to goodwill and intangible assets during the year ended June
30, 2003, including the effects of adopting the new accounting standard, are:
(in thousands)
- ---------------------------------------------------------------------------------------------------------------
INTANGIBLE
GOODWILL ASSETS
-------- ----------
Balance at June 30, 2002, net of accumulated amortization of $8,492 and $148 $51,131 $1,965
Write-off of goodwill recognized in cumulative effect adjustment (7,026) --
Amortization expense -- (155)
------- ------
Balance at June 30, 2003, net of accumulated amortization $44,105 $1,810
Intangible assets totaled $1.8 million, net of accumulated amortization
of $307,000, at June 30, 2003. Of this amount, $214,000 represents intangible
assets with indefinite useful lives, consisting primarily of trade names that
are not being amortized under SFAS No. 142. The remaining intangibles relate to
customer or supplier relationships and licenses which are being amortized using
the straight-line method over periods of 5 to 15 years with an approximate
weighted-average amortization period of 12.5 years Amortization of intangible
assets totaled $0.1 million in 2003 and is estimated to remain approximately the
same for the next five years.
Goodwill related to the wholesale drug distribution segment, net of
amortization, was $32.3 and $39.3 million as of June 30, 2003 and June 30, 2002,
respectively. Goodwill related to the PBI segment amounted to $10.4 million as
of June 30, 2003 and June 30, 2002. Goodwill related to the Company's software
segment amounted to $1.4 million as of June 30, 2003 and June 30, 2002. Other
intangible assets related to the wholesale drug distribution segment, net of
amortization, were $0.2 million as of June 30, 2003 and June 30, 2002,
respectively. Other intangible assets related to the PBI segment amounted to
$1.6 and $1.7 million as of June 30, 2003 and June 30, 2002, respectively. The
Company's software segment has no intangible assets. The Company performed an
annual review of its goodwill and other intangible assets as of April 30, 2003
and determined that no impairment existed.
28
NOTE 4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
- -----------------------------------------------------------------------------------------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Land $ 320 $ 320
Building and improvements 2,115 2,115
Fixtures and equipment 15,336 15,605
Leasehold improvements 3,634 2,082
Vehicles 408 518
---------- ----------
21,813 20,640
Less-Accumulated depreciation and amortization (10,673) (9,536)
---------- ----------
$ 11,140 $ 11,104
========== ==========
Total depreciation and amortization relating to property and equipment
was $2.3 million in 2003, $2.1 million in 2002, and $1.6 million in 2001. The
Company leases certain properties under capital leases. Capital lease asset
balances consist of buildings and equipment of $1.3 million at both June 30,
2003 and 2002. Related accumulated amortization amounted to approximately
$502,000 and $358,000, respectively.
NOTE 5. INVESTMENT IN PBI:
In November 1995, the Company purchased approximately 50% of the
capital stock of Pharmaceutical Buyers, Inc. ("PBI"), a Colorado-based group
purchasing organization. Pursuant to the transaction, the Company acquired
approximately 50% of the voting and non-voting common stock of PBI for $3.75
million in cash. The Company's investment in PBI was accounted for under the
equity method until July 2001 at which time an additional 18% ownership interest
was acquired and PBI was consolidated for financial reporting purposes. An
additional 2% was acquired in August 2001 to bring the Company's total ownership
to 70%. See Note 2 for further information on the acquisition of the additional
20% interest in PBI.
In connection with its investment in PBI, the Company entered into an
agreement pursuant to which MassMutual, which holds 30% of the capital stock of
PBI, is entitled to exchange its capital stock of PBI with the Company at fair
market value. The Company has the right, and it is its intention, to satisfy
this exchange with cash. If the Company elects not to satisfy the exchange with
cash, the Company could satisfy the exchange with shares of its common stock, in
which case MassMutual would have certain registration rights.
NOTE 6. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
- --------------------------------------------------------------------------------------------------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Revolving line of credit with banks $ 108,484 $ 77,993
Other, including capital lease obligations 3,616 5,734
------------ ------------
112,100 83,727
Less--Current maturities (1,677) (2,270)
------------ ------------
$ 110,423 $ 81,457
============ ============
On March 31, 2003, the Company entered into a new $600 million credit
facility. The credit facility, an asset-based senior secured revolving credit
facility, increased the Company's available credit from $430 million to $600
million. The new single credit facility replaced a $230 million revolving bank
line of credit and a $200 million accounts receivable securitization program.
Under the credit facility, the total amount of loans and letters of credit
outstanding at any time cannot exceed the lesser of an amount based on
percentages of eligible receivables and inventories (the borrowing base
formula). Total credit available at June 30, 2003 was approximately $256 million
of which approximately $126 million was unused. The interest rate on the new
credit facility is based on the 30-day London Interbank Offering Rate (LIBOR)
plus a factor based on certain financial criteria. The interest rate was 3.36%
at June 30, 2003. The agreement expires in March 2007, and, therefore, the
related debt has been classified as
29
long-term. The Company is required to pay an annual facility fee, which was
$100,000 in 2003. In addition, the Company is charged a monthly fee of 0.375% of
the unused balance of the facility.
The revolving line of credit in place at June 30, 2002 had a maximum
borrowing capacity of $150 million, expiring in August 2005, which was replaced
by the new $600 million credit facility Under the loan agreement, the total
amount of loans and letters of credit outstanding at any time could not exceed
the lesser of an amount based on percentages of eligible inventories (the
borrowing base formula), or our maximum borrowing capacity under this agreement
but may not be less than $20 million. The advances bore interest at a base rate
of LIBOR plus 1.75%, or at the prime rate plus 0.25% per annum payable monthly.
The Company was required to pay an annual facility fee of $807,000 in both 2003
and 2002. At June 30, 2002, the borrowing base formula amounted to $241.4
million. At June 30, 2002, the unused portion of the line of credit amounted to
$71.3 million. The agreement was to expire August 7, 2005, and, therefore, the
related debt had been classified as long-term. The revolving line of credit was
secured by eligible inventories.
The Company is required under the terms of its debt agreements to
comply with certain financial covenants, including those related to fixed charge
coverage ratio and tangible net worth. The Company is required to reduce
borrowings by cash received. The Company also is limited in its ability to make
loans and investments, enter into leases, or incur additional debt, among other
things, without the consent of its lenders. The Company is in compliance with
its debt covenants as of June 30, 2003.
In June 2000, the Company entered into a $965,000 equipment financing
arrangement with a five-year term ending July 2005. The arrangement provides for
monthly payments bearing interest at LIBOR plus 1.95%. The equipment purchased
with the proceeds secures this arrangement.
At June 30, 2003, maturities of long-term debt, including capital lease
obligations, were as follows (in thousands):
FISCAL YEAR ENDING JUNE 30,
- ---------------------------
2004 $ 1,677
2005 526
2006 1,374
2007 108,523
2008 --
--------
$112,100
========
At June 30, 2003 and June 30, 2002, the fair value of long-term debt
approximated its current carrying value.
NOTE 7. ACCOUNTS RECEIVABLE SECURITIZATION:
During 1999, the Company and its wholly owned, bankruptcy-remote
subsidiary ("Seller") established an accounts receivable securitization program.
Under the program, undivided interests in a pool of eligible trade receivables,
which had been sold on a non-recourse basis by the Company to the Seller, were
then sold to a multi-seller, asset backed commercial paper conduit ("Conduit").
Purchases by the Conduit were financed with the sale of highly rated commercial
paper. The Company utilized proceeds from the sale of its accounts receivable to
repay long-term debt, effectively reducing its overall borrowing costs. Funding
costs under this program were 4.85% on the first $50 million with the rate on
the excess amounts equal to the commercial paper rate. Certain program fees
totaled an additional 0.75%.
The Company's new $600 million credit facility, entered into in March 2003,
resulted in the termination of the existing accounts receivable securitization
agreement. As a result, a one-time charge of $2.0 million was incurred during
the third fiscal quarter of 2003. These costs were associated with eliminating a
$50 million fixed rate component of the accounts receivable securitization
program that had an interest rate of 4.85%. At June 30, 2002, the securitization
program had a maximum capacity of $150 million that was to expire in August
2005. The funding cost of the securitization program for fiscal year 2003, 2002
and 2001 was $2.1 million, $4.2 million and $6.0 million, respectively. In
August 2002, this program was amended to increase the maximum capacity to $200
million.
Under the provisions of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," (as amended
by SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities") the securitization transactions had been
recorded as sales, with those
30
accounts receivable sold to the Conduit removed from the consolidated balance
sheet. The amount of undivided interests in accounts receivable sold to the
Conduit were $120.0 million at June 30, 2002.
The Seller was a separate legal entity from the Company. The Seller's
assets were available first and foremost to satisfy the claims of its creditors.
Eligible receivables, as defined in the securitization agreement, consisted of
trade receivables from our subsidiaries, excluding non-pharmaceutical
receivables, reduced for certain items, including past due balances and
concentration limits. Of the eligible pool of receivables contributed to the
Seller, undivided interests in only a portion of the pool were sold to the
Conduit. The Seller's interest in these receivables was subordinate to the
Conduit's interest in the event of default under the securitization agreement.
The portion of eligible receivables not sold to the Conduit remained an asset of
the Seller ($31.7 million as of June 30, 2002).
NOTE 8. DERIVATIVE INSTRUMENTS:
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", which
was required to be adopted in years beginning after June 15, 2000. At June 30,
2003, the Company had recorded a long-term asset of approximately $114,000 and a
long-term liability of approximately $2,035,000 relating to derivative
instruments. At June 30, 2002, the Company had recorded long-term liabilities of
approximately $1,461,000 related to the interest rate swap.
Through an interest rate swap agreement, the Company effectively fixed
the interest rate on $20 million of its revolving line of credit at a nominal
rate of 6.19%. This interest rate derivative instrument has been designated as a
cash flow hedge. Such instruments are those that effectively convert variable
interest payments on debt instruments into fixed payments. For qualifying
hedges, SFAS No. 133 and No. 138 allow derivative gains and losses to offset
related results on hedged items in the consolidated statements of operations.
The Company formally documents, designates and assesses the effectiveness of
transactions that receive hedge accounting. Changes in the fair value of
interest rate agreements designated as hedging instruments of the variability of
cash flows associated with floating-rate debt obligations are reported in
accumulated other comprehensive loss. During fiscal 2003 and 2002, approximately
$484,000 (net of $318,000 of tax) and $531,000 (net of $347,000 of tax), was
recorded as other comprehensive loss, respectively.
To hedge a portion of its exposure to variability in cash flows related
to interest payments under the revolving credit facility, on March 28, 2003, the
Company entered into a three-year interest rate cap agreement at a cost of $0.3
million. The notional amount of the instrument is $50 million and it caps the
30-day LIBOR rate at 3.5% in the first year, 4.25% in the second year and 5% in
the third year. The Company's analysis of this hedge under SFAS No. 133, shows
this to be an effective hedge. As such, any change in the intrinsic value of
this instrument will be reported in accumulated other comprehensive loss. Any
change in time value of this instrument will be reflected on its statement of
operations.
NOTE 9. COMMITMENTS AND CONTINGENCIES:
The Company leases office and warehouse space and other equipment
through noncancelable operating leases. Rental expense under operating leases
was $3.4 million, $2.9 million, and $2.3 million in 2003, 2002, and 2001,
respectively. Minimum rental payments under these leases with initial or
remaining terms of one year or more at June 30, 2003, are $19.2 million and
payments during the succeeding five years are: 2004, $3.5 million; 2005, $2.9
million; 2006, $2.7 million; 2007, $1.9 million; 2008, $1.9 million; and
thereafter $6.3 million.
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk, such as standby letters of credit and
other guarantees, which are not reflected in the accompanying balance sheets. At
June 30, 2003, the Company was party to standby letters of credit of $21.75
million and was the guarantor of certain customer obligations totaling
approximately $500,000. On July 9, 2003, $21.0 million of the standby letters of
credit were released when the related outstanding invoices were paid. Management
does not expect any material losses to result from these off-balance-sheet
items.
There are various pending claims and lawsuits arising out of the normal
course of the Company's business. In the opinion of management, the ultimate
outcome of these claims and lawsuits will not have a material adverse effect on
the financial position or results of operations of the Company. However, there
can be no assurance that these claims and lawsuits will not have such an impact.
31
NOTE 10. STOCK OPTIONS:
In 1992, the Company adopted a Long-Term Incentive Plan that authorized
the Stock Option and Compensation Committee of the Board of Directors (the
Committee) to grant key employees and officers of the Company incentive or
non-qualified stock options, stock appreciation rights, performance shares,
restricted shares and performance units. Options to purchase up to 400,000
shares of common stock were authorized under the Long-Term Incentive Plan. The
Committee determines the price (which may not be less than fair market value on
the date of grant) and terms at which awards may be granted, along with the
duration of the restriction periods and performance targets. In 1999, the
Company's shareholders approved an Amended and Restated Long-Term Incentive Plan
(Long-Term Incentive Plan) that increased the number of shares available for
grant to 1,700,000 shares. Stock options granted under the Long-Term Incentive
Plan are not exercisable earlier than six months from the date of grant (except
in the case of death or disability of the employee holding the same), nor later
than ten years from the date of grant.
In February 1993, the Board of Directors of the Company adopted the D&K
Wholesale Drug, Inc. 1993 Stock Option Plan (the 1993 Plan) to grant key
employees of the Company non-qualified stock options to purchase up to 700,000
shares of the Company's common stock. The 1993 Plan is administered by the
Company's Board of Directors, which determines the price and terms at which
awards may be granted. Stock options granted under the 1993 Plan are immediately
exercisable from the date of grant and expire not later than ten years from the
date of grant. The exercise price of all options granted pursuant to the 1993
Plan was equal to the fair market value of stock on the respective dates of
grant.
In November 2001, the Board of Directors adopted, and the Company's
shareholders approved, the 2001 Long Term Incentive Plan (the 2001 Plan). Under
the 2001 Plan, the Committee may grant to directors, officers and key employees
of the Company up to an aggregate of 1,000,000 incentive or non-qualified stock
options, stock appreciation rights, performance shares, restricted shares and
performance units. The Committee determines the price of stock options, which
may not be less than the fair market value on the date of grant. Stock options
granted under the 2001 Plan vest over a three year period from the date of
grant, and may be exercised no later than five years from the date of grant.
The following tables summarize information about options at June 30,
2003:
Options Options Exercisable
----------------------------------------------- ------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Exercise Number Contractual Average Number Average
Price Outstanding Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------- ------------------------------
$1.875 to $6.900 540,616 7.11 years $ 6.17 507,285 $ 6.15
$6.901 to $11.700 147,700 6.31 years $ 9.26 97,500 $ 9.21
$11.701 to $16.500 5,000 4.88 years $14.10 -- --
$16.501 to $21.300 270,000 8.13 years $20.66 270,000 $20.66
$12.301 to $26.100 157,000 4.34 years $24.46 10,000 $24.18
$26.101 to $30.8550 168,000 3.68 years $30.63 56,000 $30.63
------------ -----------
1,288,316 6.44 years $15.01 940,785 $12.28
============ ===========
32
Changes in options outstanding under the Company's stock option plans
are as follows:
Number of Weighted Average
Shares Exercise Price
----------- ----------------
OUTSTANDING AT JUNE 30, 2000 518,396 $ 3.88
Granted 1,017,000 6.81
Exercised (430,000) 5.46
Forfeitures (52,000) 10.55
---------- ----------------
OUTSTANDING AT JUNE 30, 2001 1,053,396 5.69
Granted 477,000 24.09
Exercised (424,946) 4.75
Forfeitures (13,334) 6.50
---------- ----------------
OUTSTANDING AT JUNE 30, 2002 1,092,116 13.69
Granted 202,200 20.47
Exercised -- --
Forfeitures (6,000) (30.86)
---------- ----------------
OUTSTANDING AT JUNE 30, 2003 1,288,316 $ 15.01
Stock options exercisable at June 30, 2003, June 30, 2002, and June 30,
2001 were 940,785, 874,773, and 857,396, respectively, with a weighted average
exercise price of $12.28, $11.95, and $5.18, respectively. Shares available to
be granted at June 30, 2003, June 30, 2002, and June 30, 2001 were 604,636,
841,000, and 212,138, respectively.
NOTE 11. INCOME TAXES:
The components of the income tax provision were as follows (in
thousands):
2003 2002 2001
-------- ---------- --------
Current tax provision $ 9,394 $ 15,909 $ 7,540
Deferred tax provision (336) (1,796) (1,653)
-------- --------- --------
Income tax provision $ 9,058 $ 14,113 $ 5,887
======== ========= ========
The actual income tax provision differs from the expected income tax
provision, computed by applying the U.S. statutory Federal tax rates of 35.0%,
35.0%, and 34.3% in 2003, 2002 and 2001, respectively, to income before income
tax provision, as follows (in thousands):
2003 2002 2001
------- -------- -------
Expected income tax provision $ 8,297 $ 12,569 $ 5,156
Amortization of intangible assets not deductible for income -- 120 210
tax purposes
Equity in net income of PBI not taxable for income tax -- -- (242)
purposes
State income taxes, net of Federal benefit 775 1,276 531
Other, net (14) 148 232
------- -------- -------
$ 9,058 $ 14,113 $ 5,887
======= ======== =======
33
At June 30, 2003 and June 30, 2002, the tax effects of temporary
differences that give rise to significant portions of the Company's deferred tax
assets and liabilities are as follows (in thousands):
2003 2002
--------- ---------
Deferred tax assets:
Allowance for doubtful accounts $ 641 $ 473
Accrued expenses 1,463 1,450
Capital lease obligations 53 112
Inventories 909 1,048
Net operating loss carryforwards 641 555
Costs related to derivative instruments 814 584
Property and equipment 32 --
Intangibles 376 --
Other 334 617
--------------------------
Total deferred tax assets $ 5,263 $ 4,839
--------------------------
Deferred tax liabilities:
Property and equipment $ -- $ (256)
Inventories -- (1,831)
Intangibles -- (1,018)
Prepaid expenses (600) --
Accounts receivable -- (156)
Other (552) (930)
--------------------------
Total deferred tax liabilities $ (1,152) $ (4,191)
--------------------------
Net deferred tax assets $ 4,111 $ 648
The use of pre-acquisition operating losses is subject to limitations
imposed by the Internal Revenue Code or individual states and if not utilized by
the Company, the net operating loss carryforwards will expire beginning in 2007.
In assessing the realization of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during periods in which
those temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, the Company believes it
is more likely than not that the benefit of these deductible differences will be
realized.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan covering
substantially all of its employees. Plan participants may contribute up to 20%
of their annual compensation, subject to certain limitations. The Company
contribution is discretionary and was equivalent to 50% of employees'
contributions up to a maximum contribution based on 6% of eligible compensation.
Company match expenses related to the plan were $339,000 in 2003, $260,000 in
2002, and $234,000 in 2001. Jewett Drug Company (Jewett) had a defined
contribution 401(k)/profit sharing plan covering substantially all of its
employees prior to becoming part of the Company's 401(k) plan in January 2003.
Jewett made a discretionary contribution of $100,000 to its plan in 2002 and
2001. Jewett also participates in the Central States Pension, a multi-employer
pension plan, on behalf of its union employees in accordance with the union
agreement. The expenses relating to this plan during 2003 and 2002 were
approximately $24,000 and $21,000, respectively.
The Company also has an executive retirement benefit plan, implemented
in 1998, that provides supplemental pre-retirement life insurance plus
supplemental retirement income to key executives. The life insurance benefit is
calculated at three times the participant's annual salary. The retirement income
benefit is provided through discretionary contributions to each participant's
account, which vest 20% annually and are fully vested upon attaining age 65.
Upon retirement, the accumulated account balance is paid to the participant over
15 years in quarterly benefit payments. The Company's expense related to the
plan was $75,000 in 2002, and $241,000 in 2001. In July 2002, this plan was
terminated with participants receiving their vested retirement income benefit
balance in the plan. There was no income statement impact as a result of this
termination. The life insurance benefit will continue for each participant.
34
NOTE 13. EARNINGS PER SHARE:
SFAS No. 128, "Earnings Per Share", requires dual presentation of basic
and diluted earnings per share and requires reconciliation of the numerators and
denominators of the basic and diluted earnings per share calculation. The
reconciliation of the numerator and denominator of the basic and diluted
earnings per common share computations are as follows (in thousands, except for
shares and per share amounts):
2003
----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $ 13,935 14,327,646 $ 0.98
Cumulative effect of accounting change, net (4,249) -- (0.30)
---------- ---------- ---------
9,686 $ 0.68
EFFECT OF DILUTED SECURITIES:
Options -- 185,470
Convertible securities (182) --
---------- ------------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders
plus assumed conversions $ 9,504 14,513,116 $ 0.65
========== ===========
2002
----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $ 21,059 14,246,751 $ 1.48
EFFECT OF DILUTED SECURITIES:
Options -- 419,852
Convertible securities (169) 11,178
---------- ------------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders
plus assumed conversions $ 20,890 14,677,781 $ 1.42
========== ===========
2001
----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $ 9,144 8,478,198 $ 1.08
EFFECT OF DILUTED SECURITIES:
Options -- 253,316
Convertible securities 95 400,000
---------- ------------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders
plus assumed conversions $ 9,239 9,131,514 $ 1.01
========== ===========
NOTE 14. EFFECT OF NEW ACCOUNTING STANDARDS:
In December 2002, the FASB issued SFAS No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company is required to adopt this standard for
fiscal years beginning after December 15, 2002. The Company currently does not
plan to change to the fair value method of accounting for stock-based employee
compensation, but will comply with the disclosure requirements of this standard.
35
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS
No. 133 for decisions made as part of the FASB's Derivatives Implementation
Group process, other FASB projects dealing with financial instruments, and in
connection with implementation issues raised in relation to the application of
the definition of a derivative. This statement is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The Company does not believe that
the adoption of SFAS 149 will have a material impact on its consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. SFAS 150
requires that those instruments be classified as liabilities in statements of
financial position and affects an issuer's accounting for (1) mandatorily
redeemable shares, which the issuing company is obligated to buy back in
exchange for cash or other assets, (2) instruments, other than outstanding
shares, that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets, or (3) obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the value of the
issuer's shares. In addition to its requirements for the classification and
measurement of financial instruments within its scope, SFAS 150 also requires
disclosures about alternative ways of settling those instruments and the capital
structure of entities, all of whose shares are mandatorily redeemable. SFAS 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not believe that the adoption of
SFAS 150 will have a material impact on its consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). The disclosure requirements of
FIN 45 are effective for our 2003 consolidated financial statements and have
been included in our quarterly financial statements beginning with the quarter
ending December 31, 2002. For applicable guarantees issued after January 1,
2003, FIN 45 requires that a guarantor recognize a liability for the fair value
of the obligation undertaken in issuing the guarantee. The adoption of the FIN
45 accounting requirements did not have a material effect on the Company's
financial condition or results of operations.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable to financial
statements to be issued after 2002; however, disclosures are required currently
if any variable interest entities are expected to be consolidated. The Company
does not have any entities that will be consolidated as a result of FIN 46.
NOTE 15. BUSINESS SEGMENTS:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for the way public companies report
information about operating segments that is consistent with that made available
to management of the Company in allocating resources and assessing performance.
After application of the aggregation criteria, the Company has three
identifiable business segments, two of which, Wholesale drug distribution and
PBI, meet the quantitative thresholds for separate disclosure prescribed in SFAS
No. 131. Wholesale drug distribution is described in Note 1. The Company's
ownership of PBI is a second segment. Two wholly owned software subsidiaries;
Viking Computer Services, Inc. and Tykon, Inc. constitute the third segment.
Viking markets a pharmacy management software system and Tykon developed and
markets a proprietary PC-based order entry/order confirmation system to the drug
distribution industry. These software companies are combined as Software and
Other in the table that follows.
Though the Wholesale drug distribution segment operates from several
different facilities, the nature of its products and services, the types of
customers and the methods used to distribute its products are similar and thus
they have been aggregated for presentation purposes. Sales to independent and
regional pharmacies consist of branded pharmaceuticals (approximately 90% of net
sales in fiscal 2003), generic pharmaceuticals (approximately 7% of net sales in
fiscal 2003) and over-the-counter health and beauty aid products (approximately
3% of net sales in fiscal 2003). Our national accounts business deals
predominantly with branded pharmaceuticals. The Company operates principally in
the United States. Intersegment sales have been recorded at amounts
approximating market. Interest and corporate expenses are allocated to wholly
owned subsidiaries only. Assets have been identified with the segment to which
they relate.
36
For the Years Ended
-------------------------------------------------
(in thousands) JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2001
------------- ------------- -------------
Sales to unaffiliated customers -
Wholesale drug distribution $ 2,213,257 $ 2,444,290 $ 1,643,594
PBI 7,768 7,539 --
Software and Other 2,363 1,919 2,399
------------- ------------- -------------
TOTAL $ 2,223,388 $ 2,453,748 $ 1,645,993
Intersegment sales --
Wholesale drug distribution $ -- $ -- $ --
PBI -- -- --
Software and Other -- 1,197 891
Intersegment eliminations -- (1,197) (891)
------------- ------------- -------------
TOTAL $ -- $ -- $ --
Gross profit --
Wholesale drug distribution $ 81,193 $ 92,578 $ 66,070
PBI 7,768 7,539 --
Software and Other 1,738 2,714 2,754
------------- ------------- -------------
TOTAL $ 90,699 $ 102,831 $ 68,824
Depreciation and amortization --
Wholesale drug distribution $ 2,410 $ 4,107 $ 3,177
PBI 47 97 --
Software and Other 35 249 527
Less: PBI amortization (1) -- -- (276)
------------- ------------- -------------
TOTAL $ 2,492 $ 4,453 $ 3,428
Interest expense -
Wholesale drug distribution $ 10,680 $ 9,955 $ 13,148
PBI 336 380 --
Software and Other 54 51 163
------------- ------------- -------------
TOTAL $ 11,070 $ 10,386 $ 13,311
Earnings before income tax provision -
Wholesale drug distribution $ 19,424 $ 31,271 $ 14,150
PBI 3,833 4,029 --
Software and Other 449 610 881
------------- ------------- -------------
TOTAL $ 23,706 $ 35,910 $ 15,031
Purchases of property and equipment -
Wholesale drug distribution $ 679 $ 988 $ 555
PBI 33 40 --
Software and Other 5 23 46
Other unallocated Corporate amounts 1,654 2,394 2,849
------------- ------------- -------------
TOTAL $ 2,371 $ 3,445 $ 3,450
Identifiable assets -
Wholesale drug distribution $ 450,263 $ 464,494 $ 316,211
PBI 4,448 3,810 --
Software and Other 2,693 2,301 7,050
Other unallocated Corporate amounts (2) 15,291 12,533 6,943
------------- ------------- -------------
TOTAL $ 472,695 $ 483,138 $ 330,204
(1) Amortization of PBI goodwill is netted against Equity in net income of PBI
in the accompanying consolidated statement of operations in 2001.
(2) Amounts represent assets at corporate headquarters consisting primarily of
deferred tax assets, property and equipment and deferred debt costs.
NOTE 16. QUARTERLY RESULTS (UNAUDITED)
Quarterly results are determined in accordance with annual accounting
policies. They include certain items based upon estimates for the entire year.
Summarized quarterly results for the last two years were as follows:
(in thousands, except per share data) 2003 QUARTER 2003
--------------------------------------------------- ----------
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
Net sales $533,966 $530,843 $628,618 $529,961 $2,223,388
Gross profit 21,053 21,222 27,018 21,406 90,699
Net income (loss) (1,387) 2,675 4,235 4,163 9,686
Basic earnings per share ($0.09) $ 0.18 $ 0.30 $ 0.30 $ 0.68
Diluted earnings per share (0.10) 0.18 0.29 0.29 0.65
37
(in thousands, except per share data) 2002 QUARTER 2002
--------------------------------------------------- ----------
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
Net sales $529,091 $591,698 $695,241 $637,718 $2,453,748
Gross profit 21,858 24,495 30,347 26,131 102,831
Net income 3,586 4,642 7,302 5,529 21,059
Basic earnings per share $ 0.26 $ 0.33 $ 0.51 $ 0.38 $ 1.48
Diluted earnings per share 0.25 0.31 0.49 0.37 1.42
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective June 11, 2002, the Board of Directors, upon recommendation of
its audit committee, dismissed Arthur Andersen LLP ("Andersen") as the company's
independent public accountants and engaged KPMG LLP ("KPMG") to serve as the
principal accountant to audit the financial statements for 2003 and 2002.
Andersen audited the financial statements for 2001, and served as principal
accountant since 1989 until dismissed.
In connection with its audit for 2001, and during the subsequent interim period
preceding the engagement of KPMG, we had no disagreements with Andersen on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure. Andersen's report on the financial statements for
2001 did not contain an adverse opinion or a disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
During 2001, and during the subsequent interim period preceding the engagement
of KPMG, Andersen did not advise or indicate that it had reason to advise the
company of any reportable event, as defined in Item 304(a) of Regulation S-K of
the Exchange Act. We requested that Andersen furnish a letter addressed to the
Securities and Exchange Commission stating whether or not it agrees with the
statements made in the Form 8-K filed on June 11, 2002. A copy of the letter,
dated June 11, 2002, stated Andersen's agreement with the foregoing disclosures
and was filed as Exhibit 16.1 to the Form 8-K filed on June 11, 2002.
During the last two fiscal years, and during the subsequent interim
period preceding the engagement of KPMG, the Registrant had not consulted KPMG
regarding the application of accounting principles to a specified transaction,
either contemplated or proposed, or the type of audit opinion that might be
rendered on the Registrant's financial statements or any other matter that would
be required to be reported
Item 9a. Controls and Procedures
Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective. There were no changes in our internal
control over financial reporting during the quarter ended June 30, 2003 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
38
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Election of Directors" in
the Proxy Statement for our 2003 Annual Meeting of Stockholders (the "2003 Proxy
Statement") is incorporated herein by this reference. We will file the 2003
Proxy Statement with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the close of the fiscal year. Information
regarding executive officers is in Part I of this report.
Item 11. Executive Compensation
The information set forth under the captions "Directors' Fees" and
"Compensation of Executive Officers" in the 2003 Proxy Statement, to be filed
with the SEC pursuant to Regulation 14A of the Exchange Act, is incorporated
herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the captions "Voting Securities and
Principal Holders Thereof" and "Security Ownership By Management" in the 2003
Proxy Statement, to be filed with the SEC pursuant to Regulation 14A of the
Exchange Act, is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions" in
the 2003 Proxy Statement, to be filed with the SEC pursuant to Regulation 14A of
the Exchange Act, is incorporated herein by this reference.
Item 14. Principal Accountant Fees and Services
A description of the fees paid to our independent auditors will be set
forth in the section titled "Independent Public Accountants" of the Proxy
Statement and is incorporated herein by reference.
39
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) (1) Financial statements: See Item 8 above.
(2) The following financial statement schedule and
auditors' report thereon are included in Part IV of
this report:
Page
Schedule II - Valuation and Qualifying Accounts 42
Schedules other than those listed above have been
omitted because they are either not required or not
applicable or because the information is presented
in the consolidated financial statements or the
notes thereto.
(3) Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K
On April 28, 2003, the registrant filed a Current Report on
Form 8-K to furnish as an exhibit registrant's press release
announcing its results for its fiscal 2003 third quarter and
first nine months.
(c) See Item 15(a)(3) above.
(d) See Item 15(a)(2) above.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
D & K HEALTHCARE RESOURCES, INC.
(Registrant)
By /s/ J. Hord Armstrong, III
--------------------------
J. Hord Armstrong, III, Chairman of the Board,
Chief Executive Officer and Treasurer
Date: September 29, 2003
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ J. Hord Armstrong, III Chairman, Chief Executive Officer, September 29, 2003
- ------------------------------- Treasurer and Director
J. Hord Armstrong, III
/s/ Martin D. Wilson President, Chief Operating Officer September 29, 2003
- ------------------------------- and Director
Martin D. Wilson
/s/ Thomas S. Hilton Senior Vice President, Chief Financial September 29, 2003
- ------------------------------- Officer (Principal financial and
Thomas S. Hilton accounting officer)
/s/ Richard F. Ford Director September 29, 2003
- -------------------------------
Richard F. Ford
/s/ Bryan H. Lawrence Director September 29, 2003
- -------------------------------
Bryan H. Lawrence
/s/ Mary Ann Van Lokeren Director September 29, 2003
- -------------------------------
Mary Ann Van Lokeren
/s/ Thomas F. Patton Director September 29, 2003
- -------------------------------
Thomas F. Patton
/s/ Louis B. Susman Director September 29, 2003
- -------------------------------
Louis B. Susman
/s/ Harvey C. Jewett, IV Director September 29, 2003
- -------------------------------
Harvey C. Jewett, IV
41
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL 2001,
FISCAL 2002, AND FISCAL 2003
Additions
-----------------------------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Acquisitions Deductions Period
- ----------------------------- -- -------------- -- ------------- --- -------------- -- --------------- -- -------------
Valuation Allowances for
Doubtful Receivables:
Fiscal Year 2001 $ 1,411,000 $ 436,000 $ 670,000 $ (320,000) $ 2,197,000
=========== ========== ============ ============ ===========
Fiscal Year 2002 $ 2,197,000 $ 525,000 $ -- $ (1,348,000) $ 1,374,000
=========== ========== ============ ============ ===========
Fiscal Year 2003 $ 1,374,000 $ 230,000 $ -- $ -- $ 1,604,000
=========== ========== ============ ============ ===========
42
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------
2.1* Stock Purchase and Redemption Agreement, dated as of
November 30, 1995, by and among Pharmaceutical Buyers, Inc.,
J. David McCay, The J. David McCay Living Trust, Robert E.
Korenblat and the registrant filed as an exhibit to the
registrant's Annual Report on Form 10-K for the year ended
March 28, 1997.
2.2* Stock Purchase Agreement dated June 1, 1999 by and between
the registrant and Harvey C. Jewett, IV, filed as an exhibit
to Form 8-K dated June 14, 1999.
3.1* Restated Certificate of Incorporation, filed as an exhibit
to registrant's Registration Statement on Form S-1 (Reg. No.
33-48730).
3.2* Certificate of Amendment to the Restated Certificate of
Incorporation of D&K Wholesale Drug, Inc filed as an exhibit
to the registrant's Annual Report on Form 10-K for the year
ended June 30, 1998.
3.3* Certificate of Designations for Series B Junior
Participating Preferred Stock of D&K Healthcare Resources,
Inc. filed as an exhibit to the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.
3.4* By-laws of the registrant, as currently in effect, filed as
an exhibit to registrant's Registration Statement on Form
S-1 (Reg. No. 33-48730).
3.5* Certificate of Amendment of Certificate of Incorporation of
D&K Healthcare Resources, Inc., dated March 13, 2002, filed
as an exhibit to the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002
4.1* Form of certificate for Common Stock, filed as an exhibit to
registrant's Registration Statement on Form S-1 (Reg. No.
33-48730).
4.2* Form of Rights Agreement dated as of November 12, 1998
between registrant and Harris Trust and Savings Bank as
Rights Agent, which includes as Exhibit B the form of Right
Certificate, filed as an exhibit to Form 8-K dated November
17, 1998.
10.1* D & K Healthcare Resources, Inc., Amended and Restated 1992
Long Term Incentive Plan, filed as Annex A to the
registrant's 1999 Proxy Statement.
10.2* D & K Wholesale Drug, Inc. 401(k) Profit Sharing Plan and
Trust, dated January 1, 1995, filed as an exhibit to the
registrant's Annual Report on Form 10-K for the year ended
March 29, 1996.
10.2a* Amendment Number 1 to D & K Wholesale Drug, Inc. 401(k) Profit
Sharing Plan and Trust, dated December 20, 1996, filed as an
exhibit to the registrant's Annual Report on Form 10-K for the
year ended June 30, 2000.
10.2b* Amendment Number 2 to D & K Wholesale Drug, Inc. 401(k) Profit
Sharing Plan and Trust, dated September 17, 1997, filed as an
exhibit to the registrant's Annual Report on Form 10-K for the
year ended June 30, 2000.
10.2c* Resolution to D & K Wholesale Drug, Inc. 401(k) Profit Sharing
Plan and Trust, dated March 27, 2000, filed as an exhibit to
the registrant's Annual Report on Form 10-K for the year ended
June 30, 2000.
10.3* Amended and Restated Lease Agreement, dated as of January 16,
1996, by and between Morhaert Development, L.L.C. and the
registrant, filed as an exhibit to the registrant's Annual
Report on Form 10-K for the year ended March 29, 1996.
10.4* Purchase and Sale Agreement dated as of August 7, 1998
between registrant, certain of its subsidiaries and D&K
Receivables Corporation, filed as an exhibit to the
registrant's Annual Report on Form 10-K for the year ended
June 30, 1998.
10.5* Fifth Amended and Restated Loan and Security Agreement dated
September 30, 2000, by and among Fleet Capital Corporation,
the registrant, Jaron Inc., and Jewett Drug Co., filed as an
exhibit to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.
10.5a* First Amendment to Fifth Amended and Restated Loan and
Security Agreement, dated as of March 7, 2001, by and among
Fleet Capital Corporation, the registrant, Jaron, Inc, and
Jewett Drug Co., filed as an exhibit to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2001.
43
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.5b* Third Amendment to Fifth Amended and Restated Loan and
Security Agreement, dated as of June 12,2001, by and among
Fleet Capital Corporation, the registrant, Jaron, Inc., and
Jewett Drug Co, filed as an exhibit to the registrant's
Current Report on Form 8-K dated June 14, 2001.
10.5c* Ninth Amendment to Fifth Amended and Restated Loan and
Security Agreement, dated July 9, 2002, by and among Fleet
Capital Corporation, the registrant, Jaron, Inc., and Jewett
Drug Co, Diversified Healthcare, LLC, and Medical and Vaccine
Products, Inc. filed as an exhibit to the registrant's Annual
Report on Form 10-K for the year ended June 30, 2002.
10.5d* Sixth Amended and Restated Loan and Security Agreement, dated
March 28, 2003, by and among Fleet Capital Corporation
(individually and as Agent for Lenders), registrant, Jewett
Drug Co., Diversified Healthcare, LLC, and Medical & Vaccine
Products, Inc. filed as an exhibit to the registrant's Current
Report on Form 8-K dated March 31, 2003.
10.6* Amended and Restated Receivables Purchase Agreement, dated
June 8, 2001, by and among D&K Receivables Corporation, the
registrant, Blue Keel Funding, LLC, Market Street Funding
Corporation, PNC Bank, N.A. and Fleet National Bank, filed
as an exhibit to the registrant's Current Report on Form 8-K
dated June 14, 2001.
10.6a* Third Amendment to the Amended and Restated Receivables
Purchase Agreement, dated August 9, 2002, by and among D&K
Receivables Corporation, the registrant, Blue Keel Funding,
LLC, Market Street Funding Corporation, Fifth Third Bank,
Indiana, PNC Bank, N.A., Fifth Third Bank, and Fleet National
Bank filed as an exhibit to the registrant's Annual Report on
Form 10-K for the year ended June 30, 2002.
10.7* Prime Vendor Agreement dated as of August 25, 1999, between
Tennessee Pharmacy Purchasing Alliance and the registrant,
filed as an exhibit to the registrant's Annual Report on
Form 10-K for the year ended June 30, 1999.
10.7a* First Amendment to Prime Vendor Agreement dated effective as
of April 1, 2001 between The Pharmacy Cooperative formerly
known as Tennessee Pharmacy Purchasing Alliance and the
registrant filed as an exhibit to the registrant's
Registration Statement, Amendment No. 2 to Form S-3 dated June
27, 2001.
10.8* Lease Agreement, dated as of May 18, 1999, by and between
BSRT Lexington Trust and the registrant, filed as an exhibit
to the registrant's Annual Report on Form 10-K for the year
ended June 30, 1999.
10.9* Lease Agreement, dated as of January 1, 1997, by and between
Jewett Family Investments, LLC and Jewett Drug Co, filed as
an exhibit to the registrant's Annual Report on Form 10-K
for the year ended June 30, 1999.
10.10* First Amendment to Lease, dated as of June 1, 1999, by and
between Jewett Family Investments, LLC and Jewett Drug Co,
filed as an exhibit to the registrant's Annual Report on Form
10-K for the year ended June 30, 1999.
10.11* Lease Agreement dated as of July 1, 1997 by and between Jewett
Family Investments, LLC and the registrant, filed as an
exhibit to the registrant's Annual Report on Form 10-K for the
year ended June 30, 1999.
10.12* First Amendment to Lease, dated as of June 1, 1999, by and
between Jewett Family Investments, LLC and Jewett Drug Co,
filed as an exhibit to the registrant's Annual Report on Form
10-K for the year ended June 30, 1999.
10.13* Employment agreement for J. Hord Armstrong, III dated
September 15, 2000, filed as an exhibit to the registrant's
Annual Report on Form 10-K for the year ended June 30, 2000.
10.14* Employment agreement for Martin D. Wilson dated August 28,
2000, filed as an exhibit to the registrant's Annual Report
on Form 10-K for the year ended June 30, 2000.
44
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.15* Employment agreement for Thomas S. Hilton dated August 31,
2000, filed as an exhibit to the registrant's Annual Report
on Form 10-K for the year ended June 30, 2000.
10.16* D&K Healthcare Resources, Inc. Executive Retirement Benefit
Plan, dated January 1, 1998. filed as an exhibit to the
registrant's Annual Report on Form 10-K for the year ended
June 30, 2000.
10.17* D & K Healthcare Resources, Inc. 2001 Long Term Incentive
Plan, dated November, 2001, filed as an exhibit to the
registrant's 2001 Proxy Statement.
10.18* Lease Agreement dated as of October 10, 2001 by and between
Forsyth Centre Associates, L.L.C., and the registrant filed
as an exhibit to the registrant's Annual Report on Form 10-K
for the year ended June 30, 2002.
10.18a* Amendment to Lease Agreement dated February 26, 2002 by and
between Forsyth Centre Associates, L.L.C., and the
registrant filed as an exhibit to the registrant's Annual
Report on Form 10-K for the year ended June 30, 2002.
10.19* Lease Agreement, dated February 7, 2001, by and between
Industrial Property Fund III, L.P. and the registrant, filed
as an exhibit to the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001.
10.20** Lease Agreement, dated August 2003, by and between Hillwood
Metro No. 10, L.P., LCS Land Partners II, Ltd and the
registrant.
13** Registrant's 2003 Annual Report to Stockholders.
21** Subsidiaries of the registrant.
23.1** Consent of KPMG LLP
23.2** Consent of Arthur Andersen LLP
31.1** Certification by Chief Executive Officer Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2** Certification by Chief Financial Officer Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 ** Certification by Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference.
** Filed herewith.
45