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Page 1 of 21
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-20348
D & K HEALTHCARE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1465483
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8235 FORSYTH BOULEVARD, ST. LOUIS, MISSOURI
(Address of principal executive offices)
63105
(Zip Code)
(314) 727-3485
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark whether the registrant is an accelerated filer.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 par value 14,260,856
---------------------------- --------------
(class) (May 03, 2005)
Page 2 of 21
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Index
Page No.
----------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2005 and June 30, 2004 3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended March 31, 2005
and March 31, 2004 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2005 and March 31, 2004 5
Notes to Condensed Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits 17
Page 3 of 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) MARCH 31, JUNE 30,
2005 2004
----------- ----------
(unaudited)
ASSETS
Current Assets
Cash, including restricted cash of $7,082 and $12,499, respectively $ 7,082 $ 12,499
Receivables, net of allowance for doubtful accounts of $3,706 and $5,444,respectively 166,877 130,770
Inventories 431,219 461,295
Other current assets 28,383 29,736
----------- ----------
Total current assets 633,561 634,300
Property and Equipment, net of accumulated depreciation and amortization of
$14,277 and $12,274, respectively 23,679 24,494
Other Assets 19,282 14,298
Goodwill, net of accumulated amortization 72,197 64,233
Other Intangible Assets, net of accumulated amortization 9,664 6,546
----------- ----------
Total assets $ 758,383 $ 743,871
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 2,504 $ 676
Accounts payable 273,620 219,580
Accrued expenses 26,543 31,144
----------- ----------
Total current liabilities 302,667 251,400
Long-term Liabilities 1,383 2,663
Long-term Debt, excluding current maturities 266,929 307,693
Deferred Income Taxes 5,577 2,785
----------- ----------
Total liabilities 576,556 564,541
Stockholders' Equity
Common stock 155 152
Paid-in capital 127,742 125,552
Accumulated other comprehensive loss 161 (1,208)
Deferred compensation - restricted stock (2,055) (730)
Retained earnings 68,050 67,790
Less treasury stock (12,226) (12,226)
----------- ----------
Total stockholders' equity 181,827 179,330
----------- ----------
Total liabilities and stockholders' equity $ 758,383 $ 743,871
=========== ==========
The accompanying notes are an integral part of these statements.
Page 4 of 21
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
(In thousands, except per share data) MARCH 31, MARCH 31,
-------------------------- ----------------------------
2005 2004 2005 2004
------------ ----------- ------------ -------------
Net Sales $ 923,850 $ 833,933 $ 2,492,364 $ 1,823,426
Cost of Sales 889,705 798,756 2,409,033 1,750,706
------------ ----------- ------------ -------------
Gross profit 34,145 35,177 83,331 72,720
Operating Expenses 22,740 21,436 66,618 50,471
------------ ----------- ------------ -------------
Income from operations 11,405 13,741 16,713 22,249
Other Income (Expense):
Interest expense, net (5,421) (4,502) (14,933) (9,980)
Other, net (130) (107) (14) 224
------------ ----------- ------------ -------------
(5,551) (4,609) (14,947) (9,756)
------------ ----------- ------------ -------------
Income before income tax provision, and
minority interest 5,854 9,132 1,766 12,493
Income Tax Provision (2,301) (3,561) (707) (4,872)
Minority Interest -- (167) (185) (573)
------------ ----------- ------------ -------------
Net Income $ 3,553 $ 5,404 $ 874 $ 7,048
============ =========== ============ =============
Earnings Per Share - Basic $ 0.25 $ 0.39 $ 0.06 $ 0.51
============ =========== ============ =============
Earnings Per Share - Diluted $ 0.25 $ 0.38 $ 0.06 $ 0.49
============ =========== ============ =============
Basic common shares outstanding 14,102 13,928 14,133 13,937
Diluted common shares outstanding 14,182 14,108 14,240 14,144
The accompanying notes are an integral part of these statements.
Page 5 of 21
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, (In thousands)
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 874 $ 7,048
Adjustments to reconcile net income to net cash
flows from operating activities --
Depreciation and amortization 4,267 2,722
Amortization of debt issuance costs 1,277 1,224
Deferred income taxes 519 394
Increase in receivables, net (35,553) (13,553)
Decrease (increase) in inventories 30,076 (155,461)
Decrease (increase) in other current assets 2,030 (3,791)
Increase (decrease) in accounts payable 54,040 (2,699)
(Decrease) increase in accrued expenses (4,970) 3,550
Other, net (2,287) (6,104)
---------- ----------
Net cash flows provided by (used in) operating activities 50,273 (166,670)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquired company (12,400) (102,869)
Purchases of property and equipment (3,137) (3,456)
---------- ----------
Net cash flows used in investing activities (15,537) (106,325)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) borrowings under revolving line of credit, net (38,873) 273,770
Proceeds from secured financing 860 --
Payments of long-term debt (1,796) (1,034)
Payment of dividends (636) (628)
Proceeds from exercise of stock options 292 --
Cash dividends paid by affiliates -- (390)
Purchase of treasury stock -- (816)
---------- ----------
Net cash flows (used in) provided by financing activities (40,153) 270,902
---------- ----------
Decrease in cash (5,417) (2,093)
Cash, beginning of period 12,499 14,301
---------- ----------
Cash, end of period $ 7,082 $ 12,208
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for --
Interest $ 14,272 $ 8,211
Income taxes, net $ 2,447 $ 432
The accompanying notes are an integral part of these statements.
Page 6 of 21
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
D & K Healthcare Resources, Inc. (the "Company") is a full-service,
regional wholesale drug distributor supplying customers from facilities in
Missouri, Kentucky, Minnesota, Texas, Arkansas, and South Dakota. The Company
distributes a broad range of pharmaceuticals and related products to its
customers in 27 states primarily in the Midwest, Upper Midwest, and South. The
Company focuses primarily on a target market sector, which includes independent
retail, institutional, franchise, chain store and alternate site pharmacies. The
Company also offers a number of proprietary information systems software
products through two wholly owned subsidiaries, Tykon, Inc. ("Tykon") and VC
Services, Inc. (dba Viking Computer Services)("Viking"). In addition, the
Company owns Pharmaceutical Buyers, Inc. ("PBI"), a leading alternate-site group
purchasing organization.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and include
all of the information and disclosures required by U.S. generally accepted
accounting principles for interim reporting, which are less than those required
for annual reporting. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair
representation have been included. The results of operations for the three-month
and nine-month periods ended March 31, 2005, are not necessarily indicative of
the results to be expected for the full fiscal year.
These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and related notes
contained in the Company's 2004 Annual Report to Stockholders.
NOTE 2. ACQUISITION
On September 30, 2004, the Company completed the acquisition of the
remaining 30% of PBI, a Colorado-based group purchasing organization for
alternate-site providers whose members include long-term care providers, home
infusion providers and medical equipment distributors. The purchase price was
$12.4 million. The transaction resulted in recognition of $7.7 million of
goodwill, which was assigned to the PBI segment. Of that amount, none is
expected to be deductible for tax purposes. Intangible assets of $3.8 million
were also recorded with a weighted-average life of approximately 15 years. The
intangible assets that make up that amount include customer relationships of
$3.2 million (15-year weighted-average useful life) and other assets of $0.2
million (10-year weighted-average useful life). In addition, $0.4 million of
intangible assets were determined to have indefinite lives.
On December 5, 2003, the Company acquired 100 % of the outstanding common
stock of Walsh HealthCare Solutions, Inc. ("Walsh") of Texarkana, Texas. Walsh
is a full-service pharmaceutical distributor with distribution centers located
in San Antonio and Texarkana, Texas and Paragould, Arkansas. The results of
Walsh have been included in the condensed consolidated financial statements
since that date. The aggregate purchase price of $104.4 million in cash before
consideration of cash acquired includes the repayment of all Walsh bank debt and
other direct acquisition costs. The Company utilized its revolving credit
facility to finance the transaction.
NOTE 3. 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 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."
Page 7 of 21
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), Share-Based Payment, which establishes standards for
transactions in which an entity exchanges its equity instruments for goods or
services. This standard requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. This eliminates the exception to account for
such awards using the intrinsic method previously allowable under APB Opinion
No. 25. SFAS No. 123(R) will be effective for interim and annual reporting
periods beginning on or after June 30, 2005. We continue to assess the potential
impact that the adoption of SFAS No. 123(R) will have on our financial
statements.
The Company generally grants its stock options at exercise prices equal to
the fair value of the underlying stock on the date of grant and, therefore,
under APB Opinion No. 25, no compensation expense is recognized in the
statements of operations.
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 unaudited pro forma net income and pro
forma earnings per share would have been as follows:
(In thousands, except per share amounts) Three Months Ended Nine Months Ended
March 31, March 31,
------------------- ------------------
2005 2004 2005 2004
-------- --------- --------- -------
Net income - as reported $ 3,553 $ 5,404 $ 874 $ 7,048
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of tax (235) (352) (645) (1,152)
------- -------- -------- -------
Net income - pro forma $ 3,318 $ 5,052 $ 229 $ 5,896
Earnings per share:
Basic - as reported $ 0.25 $ 0.39 $ 0.06 $ 0.51
Basic - pro forma $ 0.24 $ 0.36 $ 0.02 $ 0.42
Diluted - as reported $ 0.25 $ 0.38 $ 0.06 $ 0.49
Diluted - pro forma $ 0.23 $ 0.36 $ 0.01 $ 0.41
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.
NOTE 4. GOODWILL AND INTANGIBLE ASSETS
Changes to goodwill and intangible assets during the nine-month period
ended March 31, 2005 were:
(In thousands) Goodwill Intangible Assets
--------- -----------------
Balance at June 30, 2004, net of
accumulated amortization $ 64,233 $ 6,546
Acquisition 7,679 3,756
Adjustment to Walsh purchase price 285 --
Amortization expense -- (638)
--------- ---------
Balance at March 31, 2005, net of
accumulated amortization $ 72,197 $ 9,664
========= =========
Intangible assets totaled $9.7 million, net of accumulated amortization of
$1.4 million, at March 31, 2005. Of this amount, $0.6 million 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. Amortization expense
for intangible assets is expected to approximate $0.8 million each year between
2005 and 2014 and $0.2 million from 2015 to 2018.
Page 8 of 21
(In millions) Goodwill Intangible Assets
-------------------- -------------------
March 31, June 30, March 31, June 30,
2005 2004 2005 2004
--------- -------- --------- --------
SEGMENT:
Wholesale drug distribution $ 52.1 $ 51.8 $ 4.6 $ 5.0
PBI 18.7 11.0 5.1 1.5
Software 1.4 1.4 -- --
--------- -------- --------- --------
Total $ 72.2 $ 64.2 $ 9.7 $ 6.5
========= ======== ========= ========
The Company tests goodwill annually as of April 30. A discounted cash flow
model is used to determine the fair value of the Company's businesses for the
purpose of testing goodwill for impairment. The discount rate used is based on a
risk-adjusted weighted-average cost of capital.
NOTE 5. EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic
and diluted earnings per share and requires a reconciliation of the numerators
and denominators of the basic and diluted earnings per share calculations. The
reconciliation of the numerator and denominator of the basic and diluted
earnings per share computations are as follows:
(In thousands, except per share amounts) Three Months ended March 31, 2005 Three Months ended March 31, 2004
----------------------------------------- -------------------------------------------
Income Shares Per-share Income Shares Per-share
(Numerator) (Denominator)(1) Amount (Numerator) (Denominator)(1) Amount
------------ ---------------- --------- ------------ ---------------- ---------
Basic Earnings per Share:
Net income available to common stockholders $ 3,553 14,102 $ 0.25 $ 5,404 13,928 $ 0.39
Effect of Diluted Securities:
Options -- 80 -- 180
Convertible securities -- -- (30) --
------------ ------ ------------ ------
Diluted Earnings per Share:
Net income available to common
stockholders plus assumed conversions $ 3,553 14,182 $ 0.25 $ 5,374 14,108 $ 0.38
============ ====== ========= ============ ====== =========
(1) Outstanding shares computed on a weighted-average basis
(In thousands, except per share amounts) Nine Months ended March 31, 2005 Nine Months ended March 31, 2004
------------------------------------------ -------------------------------------------
Income Shares Per-share Income Shares Per-share
(Numerator) (Denominator)(1) Amount (Numerator) (Denominator)(1) Amount
------------- ---------------- --------- ------------- ---------------- ---------
Basic Earnings per Share:
Net income available to common stockholders $ 874 14,133 $ 0.06 $ 7,048 13,937 $ 0.51
Effect of Diluted Securities:
Options -- 107 -- 207
Convertible securities (66) -- (147) --
------------ ----------- ------------- ------
Diluted Earnings per Share:
Net income available to common
stockholders plus assumed conversions $ 808 14,240 $ 0.06 $ 6,901 14,144 $ 0.49
============ =========== ========= ============= ====== =========
(1) Outstanding shares computed on a weighted-average basis
As of March 31, 2005 and 2004, stock options to purchase 1.5 million and
1.3 million shares, respectively, were not dilutive and therefore not included
in the diluted earnings per share calculation.
Page 9 of 21
NOTE 6. COMPREHENSIVE INCOME
The Company's comprehensive income consists of net income and the net
change in value of cash flow hedge instruments as follows: (in thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- ------------------
2005 2004 2005 2004
-------- --------- -------- -------
Net income $ 3,553 $ 5,404 $ 874 $ 7,048
Change in value of cash flow hedge, net of tax 766 18 1,369 375
-------- --------- -------- -------
Total comprehensive income $ 4,319 $ 5,422 $ 2,243 $ 7,423
======== ========= ======== =======
NOTE 7. COMMITMENTS AND CONTINGENCIES
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
March 31, 2005, the Company was party to standby letters of credit of
approximately $15.8 million and was the guarantor of certain customer
obligations totaling approximately $0.2 million. Management does not expect any
material losses to result from these off-balance-sheet items.
The Company has entered into an agreement with Parata Systems, LLC
("Parata") 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. The Parata RDS can be a significant tool to increase efficiency,
effectiveness and accuracy, and provide pharmacists with more time for
interaction with patients. As part of the agreement, the Company has committed
to purchase machines during a period that ends June 2006. At March 31, 2005, the
remaining purchase commitment was approximately $20 million. In addition, the
Company had approximately $21 million of inventory and approximately $6 million
of deposits recorded as assets at March 31, 2005. While the Company can not
guarantee that all Parata inventory will be sold in the next 12 months, it is
shown as a current asset as of March 31, 2005.
The Company announced the closure of its Paragould, Arkansas and
Owensboro, Kentucky distribution centers and the transfer of their sales to
other locations. The Company anticipates the closure costs for these two
facilities to approximate $0.5 million, the majority of which will be incurred
in the quarter ending June 30, 2005.
On February 5, 2004, an individual named Gary Dutton filed a complaint in
the United States District Court for the Eastern District of Missouri ("Court")
against the Company and its Chief Executive, Operating and Financial Officers
("Defendants") asserting a class action for alleged breach of fiduciary duties
and violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. On April 30, 2004, United Food &
Commercial Workers Union, Local 655, AFL-CIO, Food Employees Joint Pension Plan
("Local 655") filed a motion to become lead plaintiff. On October 5, 2004, the
Court granted Local 655's motion appointing it lead plaintiff. The lead
plaintiff seeks to represent a class consisting of all investors trading in the
Company's common stock during the class periods from August 10, 2000 to
September 16, 2002. The lead plaintiff is seeking to recover compensatory
damages incurred during the class period as well as costs, fees and expenses. On
November 15, 2004, lead plaintiff filed an Amended Complaint against the
Defendants, Bristol-Myers Squibb Company and a former employee of the Company.
On February 4, 2005, the Defendants filed a Motion to Dismiss on the grounds
that lead plaintiff failed to meet the Private Securities Litigation Reform Act
threshold pleading requirements of adequate particularity and scienter.
Bristol-Myers Squibb and the former employee filed separate Motions to Dismiss
based on statute of limitations and pleading deficiency grounds. Plaintiff has
responded to these Motions to Dismiss and oral argument is scheduled for May 20,
2005. Defendants believe they have substantial meritorious defenses to the
Complaint and, if their Motion to Dismiss is not granted, they intend to
vigorously defend against the claims.
There are various other 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 other 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.
Page 10 of 21
NOTE 8. LONG-TERM DEBT
The Company is party to a $635 million asset-based senior secured
revolving credit facility. Under the credit facility, the total amount of loans
and letters of credit outstanding at any time may not exceed the lesser of an
amount based on percentages of eligible receivables and inventories (the
borrowing base formula) and $635 million. Total credit available at March 31,
2005 was approximately $410 million of which approximately $135 million was
unused. The interest rate on the 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 5.13% at March 31, 2005. The facility expires in
March 2009 and contains no subjective acceleration provision, and therefore, the
related debt has been classified as long-term in the Company's financial
statements. The Company is required to meet a minimum fixed charge coverage
ratio only if availability falls below certain levels. Availability is currently
in excess of these levels and the Company projects that it will remain so for
the next 12 months. Availability represents the amount by which borrowing base
collateral exceeds the utilized portion of the credit facility.
NOTE 9. BUSINESS SEGMENTS
Pursuant to SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," the Company has three identifiable business segments:
Wholesale Drug Distribution, the Company's interest in PBI, and Software/Other.
Two wholly owned software subsidiaries, Tykon and Viking, and D & K Pharmacy
Solutions constitute the Software/Other 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. D&K Pharmacy Solutions provides additional services to pharmacy
customers, including the marketing and distribution of Parata robotic dispensing
systems.
Though the Wholesale Drug Distribution segment operates from several
different facilities, the nature of its products and services, the types of
customers and the methods used to distribute its products are similar, and thus
they have been aggregated for presentation purposes. The Company operates
principally in the United States.
(In thousands) For The Three Months Ended For the Nine Months Ended
------------------------------ -------------------------------
March 31, 2005 March 31, 2004 March 31, 2005 March 31, 2004
-------------- -------------- -------------- ---------------
Net Sales -
Wholesale drug
distribution $ 920,401 $ 831,071 $ 2,481,992 $ 1,813,795
PBI 2,370 2,100 6,977 6,697
Software/Other 1,079 762 3,395 2,934
-------------- -------------- ------------- ---------------
Total $ 923,850 $ 833,933 $ 2,492,364 $ 1,823,426
Gross Profit -
Wholesale drug
distribution $ 31,123 $ 32,422 $ 74,362 $ 63,690
PBI (1) 2,370 2,100 6,977 6,697
Software/Other 652 655 1,992 2,063
-------------- -------------- ------------- ---------------
Total $ 34,145 $ 35,177 $ 83,331 $ 72,720
Pre-tax income (loss) -
Wholesale drug
distribution $ 4,598 $ 8,060 $ (2,032) $ 8,560
PBI 1,147 87 3,385 3,043
Software/Other 109 194 413 890
-------------- -------------- ------------- ---------------
Total $ 5,854 $ 9,132 $ 1,766 $ 12,493
(1) Cost of operations recorded by PBI for the three months ended March 31, 2005
and 2004 of $1.2 million and $1.2 million, respectively, has been classified
as operating expenses in the Company's Condensed Consolidated Statements of
Operations. For the nine months ended March 31, 2005 and 2004, cost of
operations recorded by PBI of $3.3 million and $3.4 million, respectively,
has been classified as operating expenses in the Company's Condensed
Consolidated Statements of Operations.
Total assets have not changed significantly from the Company's 2004 Annual
Report. There are no other differences in the basis of segmentation or in the
basis of measurement of segment profit or loss.
NOTE 10. SUBSEQUENT EVENT
On May 5, 2005, a customer with an account balance of $2.3 million on
that date, filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
At the current time, it is not possible to estimate what portion of this
balance, if any, will be uncollectible.
Page 11 of 21
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion below is concerned with material changes in financial
condition and results of operations in our condensed consolidated balance sheets
as of March 31, 2005 and June 30, 2004, and in the condensed consolidated
statements of operations for the three-month and nine-month periods ended March
31, 2005 and March 31, 2004, respectively. We recommend that this discussion be
read in conjunction with the audited consolidated financial statements and
accompanying notes included in our 2004 Annual Report to Stockholders.
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. Our actual results could differ materially from those
currently anticipated due to a number of factors including, without limitation,
the changing business and regulatory environment of the healthcare industry in
which we operate, including manufacturers' pricing or distribution policies or
practices, the competitive nature of the wholesale pharmaceutical distribution
industry with many competitors having substantially greater resources than us,
our ability to maintain or improve our operating margins with the industry's
competitive pricing pressures, our customers and suppliers generally having the
right to terminate or reduce their purchases or shipments on relatively short
notice, changes in our prime vendor status with cooperative purchasing groups,
the availability of investment purchasing opportunities, the loss of one or more
key suppliers for which alternative sources may not be available, changes in
private and governmental reimbursement or in the delivery systems for healthcare
products, changes in interest rates, our ability to complete and integrate
acquisitions successfully, and other factors set forth in reports and other
documents we file 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. We undertake no obligation to publicly
update or revise any forward-looking statements.
RECENT TRENDS AND EVENTS
Sales in the national accounts trade class fell below expectations in the
first nine months of fiscal 2005, as fewer than anticipated product price
increases enacted by pharmaceutical manufacturers resulted in lower activity in
this trade class. Changes in manufacturers' inventory management practices
resulting in reduced availability of product 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 third quarter and first nine months of fiscal 2005. However, during
this period sales trends in this trade class show continued growth that
partially offset the effect of lower gross profit margins. We believe this sales
growth reflects improved regional and independent retail pharmacy industry sales
trends in our service territory and the impact of new business.
Changing behavior on the part of pharmaceutical manufacturers is
impacting, and will continue to impact, how distributors generate earnings.
Three important changes we have noted include changes in the timing of product
price increases, tightening of control over inventory in the distribution
channel resulting in fewer opportunities to purchase inventory from sources
other than the original manufacturer, and a transition to "fee for service"
compensation models which generally reduce the ability to accumulate inventory
positions ahead of price increases. With these changes and with others likely
over time, we expect that our business model and earnings growth will evolve to
reflect that of our core business. We refer to our "core" operations as the
combination of our "independent and regional pharmacies" trade class and the
"other healthcare providers" trade class. Customers in both of these classes of
trade rely on us as their primary pharmaceutical and over-the-counter products
supplier. We have taken several important steps to position D & K for change in
pharmaceutical manufacturers' behavior. We have strengthened and broadened our
core business through the acquisition of Walsh HealthCare Solutions ("Walsh").
In
Page 12 of 21
April, we opened a new distribution center in Birmingham, Alabama to increase
our presence in the growing Southeast market. We have positioned our national
accounts business with a flexible cost structure with minimal fixed costs so
that we can maintain a presence and take advantage of opportunities if and when
they exist. In an effort to streamline our cost structure, we have announced the
closure of our Paragould, Arkansas and Owensboro, Kentucky distribution centers
and the transfer of their sales to other locations. We anticipate the closure
costs for these two facilities to approximate $0.5 million, the majority of
which will be incurred in the quarter ending June 30, 2005. We also anticipate
continued industry consolidation, which may provide additional acquisition
opportunities.
The current industry environment makes it difficult to forecast the timing
of sales from national accounts. Factors such as changes in manufacturers'
inventory management practices, changes in product pricing practices, and the
transition from a "buy and hold" industry model to a "fee for service" model,
are all making future results more difficult to project.
On May 5, 2005, a customer with an account balance of $2.3 million on that
date, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. At the
current time, it is not possible to estimate what portion of this balance, if
any, will be uncollectible.
RESULTS OF OPERATIONS
NET SALES Net sales increased $89.9 million to $923.9 million, or 10.8%,
for the three months ended March 31, 2005, compared to the corresponding period
of the prior year. Sales to independent and regional pharmacies increased $180.9
million to $722.2 million, or 33.4%, compared to the prior year period. The
majority of the increase related to new business and same store growth. National
accounts sales decreased $92.4 million to $168.8 million, or 35.4%, compared to
the prior year period primarily due to changes in manufacturers' inventory
management practices resulting in reduced availability of product for sale. We
provide our national accounts customers bulk pharmaceuticals that we purchase,
if available, on favorable terms from the manufacturers. If we are unable to
obtain bulk inventory on favorable terms, our sales in this area will continue
to decline.
Net sales increased $669.0 million to $2,492.4 million, or 36.7%, for the
nine months ended March 31, 2005, compared to the corresponding period of the
prior year. Sales to independent and regional pharmacies increased $801.8
million to $2,059.7 million, or 63.7%, compared to the prior year period.
Approximately 47% of the increase related to Walsh sales during the first six
months of fiscal 2005 which were not realized during the comparable period. The
majority of the remaining increase related to new business and same store
growth. National accounts sales during the first nine months of fiscal 2005
decreased $139.6 million to $333.3 million, or 29.5%, compared to the prior year
period primarily due to fewer product price increases enacted by pharmaceutical
manufacturers and changes in pharmaceutical manufacturers' inventory management
practices that reduced the availability of attractively priced purchase
opportunities. We provide our national accounts customers bulk pharmaceuticals
that we purchase, if available, on favorable terms from the manufacturers. If we
are unable to obtain bulk inventory on favorable terms, our sales in this area
will continue to decline.
GROSS PROFIT Gross profit decreased $1.0 million to $34.1 million, or
2.9%, and gross margin decreased from 4.22% to 3.70% for the quarter ended March
31, 2005, compared to the corresponding period of the prior year. Gross profit
for the wholesale drug distribution segment decreased $1.3 million to $31.1
million, or 4.0%, and gross margin decreased from 3.90% to 3.38% for the third
quarter of fiscal 2005 compared to the corresponding period of the prior year.
The decreases in gross profit were due to lower national accounts sales and
continued pricing pressure on new and existing business partially offset by the
additional new business and same store growth. The reductions in gross margin
percentages were due to lower price increases than last year and the competitive
market environment.
Gross profit increased $10.6 million to $83.3 million, or 14.6%, and gross
margin decreased from 3.99% to 3.34% for the nine months ended March 31, 2005,
compared to the corresponding period of the prior year. Gross profit for the
wholesale drug distribution segment increased $ 10.7 million to $74.4 million,
or 16.9%, and gross margin decreased from 3.51% to 3.00% for the first nine
months of fiscal 2005 compared to the year ago period. The increases in gross
profit were due to the addition of Walsh and additional sales related to new
business and same store growth, which were partially offset by lower national
accounts sales driven by fewer product price increases and continued pricing
pressure on new and existing business. In addition, last year's results included
a legal settlement totaling $0.8 million (0.09% as a percent of net sales) that
reduced cost of sales. The reductions in gross margin percentages were primarily
due to fewer price increases by manufacturers during the first six months of
fiscal 2005 and the price increases which did occur for the nine-month period
were, on average, lower than last year.
Page 13 of 21
OPERATING EXPENSES Operating expenses (including depreciation and
amortization) increased $1.3 million to $22.7 million, or 6.1%, for the three
months ended March 31, 2005, compared to the corresponding period of the prior
year. The ratio of operating expenses to net sales was 2.46%, a 11 basis point
decrease from the comparable period of the prior year. The increase in operating
expenses resulted primarily from higher sales and the costs relating to the new
facility in Alabama. The lower ratio of operating expenses to net sales related
to the increase in sales.
Operating expenses (including depreciation and amortization) increased
$16.1 million to $66.6 million, or 32.0%, for the nine months ended March 31,
2005 compared to the corresponding period of the prior year. The ratio of
operating expenses to net sales was 2.67%, a 10 basis point decrease from the
comparable period of the prior year. The increase in operating expenses resulted
primarily from the inclusion of Walsh-related operating expenses during the
first six months of fiscal 2005 and higher costs associated with the increase in
sales. The ratio of operating expense to net sales decreased due to the increase
in sales.
INTEREST EXPENSE, NET Net interest expense increased $0.9 million to $5.4
million, or 20.4%, for the three months ended March 31, 2005, compared to the
corresponding period of the prior year. As a percentage of net sales, net
interest expense increased to 0.59% from 0.54% compared to the corresponding
period of the prior year. The increase in net interest expense was primarily the
result of higher average borrowing rates.
Net interest expense increased $5.0 million to $14.9 million, or 49.6%,
for the nine months ended March 31, 2005, compared to the corresponding period
of the prior year. As a percentage of net sales, net interest expense increased
to 0.60% from 0.55% 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 financing higher average investment in inventory, the
Walsh acquisition and a higher average borrowing rate.
INCOME TAX BENEFIT (PROVISION) Our effective income tax rate was 39.3% for
the three months ended March 31, 2005, and 40.0% for the nine months ended March
31, 2005, slightly higher than the 39% 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.
PBI Net sales at PBI were $2.4 million for the three months ended March
31, 2005, up $0.3 million from the corresponding period of the prior year. For
the nine months ended March 31, 2005, PBI's net sales were $7.0 million, which
was up $0.3 million from the year ago period. Gross profit generated by PBI as a
percentage of our total gross profit increased from 6.0% to 6.9% for the three
months ended March 31, 2005, and decreased from 9.2% to 8.4% for the nine months
ended March 31, 2005, as a result of our lower overall gross profit for the
quarter but higher overall gross profit for the nine months. PBI recorded
pre-tax earnings of $1.1 million for the three months ended March 31, 2005, up
$0.3 million from the corresponding period of the prior year pre-tax earnings of
$3.4 million for the nine months ended March 31, 2005, also up $0.3 million
compared to the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
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:
MARCH 31, JUNE 30,
2005 2004
---------- ----------
Working capital (1) (000s) $ 330,894 $ 382,900
Current ratio 2.09 to 1 2.52 to 1
(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. As cash is collected on accounts
receivable, it is used to immediately reduce long term debt.
Our wholesale drug segment requires a substantial investment in working
capital that is susceptible to large variations during the year as a result of
inventory purchase patterns and seasonal demands. Inventory purchase
Page 14 of 21
activity is a function of sales activity, new customer build-up requirements and
the desired level of investment inventory. Working capital at March 31, 2005
decreased compared to June 30, 2004 levels as our inventory levels decreased due
to reduced availability of investment buying opportunities from manufacturers.
An increase in accounts payable associated with the timing of payments for
inventory also factored into the reduction in working capital. This was
partially offset by an increase in receivables tied to higher third quarter
sales.
Under our $635 million credit facility in effect at March 31, 2005, 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 receivables and
inventories (the borrowing base formula) and $635 million. Total credit
available at March 31, 2005 was approximately $410 million, of which
approximately $135 million was unused. The interest rate on the credit facility
was based on the 30-day London Interbank Offering Rate (LIBOR) plus a factor
based on certain financial criteria. The interest rate was 5.13% at March 31,
2005.
The Company is required to meet a minimum fixed charge coverage ratio only
if availability falls below certain levels. Availability is currently in excess
of these levels and the Company projects that it will remain so for the next 12
months. Availability represents the amount by which borrowing base collateral
exceeds the utilized portion of the credit facility.
Net cash provided by operating activities totaled $50.3 million for the
nine months ended March 31, 2005, compared to net cash used in operating
activities of $166.7 million for the prior year period. The fiscal 2005 result
arises primarily from the impact of the normal seasonal sell down of inventory
and the effect of the changing business model while the results from fiscal 2004
were driven by increases in inventory to support our growth.
We invested $3.1 million in capital assets in the nine months ended March
31, 2005, compared with $3.5 million in the corresponding period of the prior
year. Current year additions relate primarily to normal replacement items and
prior year additions relate primarily to the expansion of our Cape Girardeau
distribution center. 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 inflows used in financing activities totaled $40.2 million for
the nine months ended March 31, 2005, with net cash provided by financing
activities totaled $270.9 million for the corresponding period of the prior
year. Results for fiscal 2005 related to our ability to reduce the revolving
credit agreement as a result of the inventory reductions associated with the
changing business model. Fiscal 2004 results included the borrowings under our
credit facility to purchase Walsh.
We have entered into an agreement with Parata that includes a commitment
to purchase machines during a period that ends June 2006. At March 31, 2005, the
remaining purchase commitment was approximately $20 million. In addition, we had
approximately $21 million of inventory and approximately $6 million of deposits
recorded as assets at March 31, 2005. While we can not guarantee that all Parata
inventory will be sold in the next 12 months, it is shown as a current asset as
of March 31, 2005.
Stockholders' equity increased $2.5 million to $181.8 million at March 31,
2005, from $179.3 million at June 30, 2004, due to net income during the first
nine months of fiscal 2005. We believe that funds available under the credit
facility, together with internally generated funds, will be sufficient to meet
our capital requirements for the foreseeable future.
CRITICAL ACCOUNTING POLICIES
Refer to "Critical Accounting Policies" in our 2004 Annual Report on Form
10-K for information on accounting policies that we consider critical in
preparing our consolidated financial statements. These policies include
significant estimates made by management using information available at the time
the estimates are made. However, these estimates could change materially if
different information or assumptions were used.
Page 15 of 21
NEW ACCOUNTING STANDARDS
Refer to Note 14 of Notes to Consolidated Financial Statements in our 2004
Annual Report on Form 10-K for a discussion of recently issued accounting
standards. Our adoption of these new accounting standards did not have a
material effect on our financial position or results of operations. In addition,
the following new standard was issued recently.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), Share-Based Payment, which establishes standards for
transactions in which an entity exchanges its equity instruments for goods or
services. This standard requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. This eliminates the exception to account for
such awards using the intrinsic method previously allowable under APB Opinion
No. 25. SFAS No. 123(R) will be effective for interim and annual reporting
periods beginning on or after June 15, 2005. We continue to assess the potential
impact that the adoption of SFAS No. 123(R) will have on our financial
statements.
ITEM 3. 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 our
operating results and the cash flow available to fund operations and expansion.
Based on estimated average variable borrowings during fiscal 2005, 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.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this
report, our Chief Executive Officer and our Chief Financial Officer have
concluded that such controls and procedures were effective as of the end of the
period covered by this report.
In connection with such evaluation, no change in the Company's internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended) occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Page 16 of 21
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 5, 2004, an individual named Gary Dutton filed a complaint in
the United States District Court for the Eastern District of Missouri ("Court")
against the Company and its Chief Executive, Operating and Financial Officers
("Defendants") asserting a class action for alleged breach of fiduciary duties
and violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. On April 30, 2004, United Food &
Commercial Workers Union, Local 655, AFL-CIO, Food Employees Joint Pension Plan
("Local 655") filed a motion to become lead plaintiff. On October 5, 2004, the
Court granted Local 655's motion appointing it lead plaintiff. The lead
plaintiff seeks to represent a class consisting of all investors trading in the
Company's common stock during the class periods from August 10, 2000 to
September 16, 2002. The lead plaintiff is seeking to recover compensatory
damages incurred during the class period as well as costs, fees and expenses. On
November 15, 2004, lead plaintiff filed an Amended Complaint against the
Defendants, Bristol-Myers Squibb Company and a former employee of the Company.
On February 4, 2005, the Defendants filed a Motion to Dismiss on the grounds
that lead plaintiff failed to meet the Private Securities Litigation Reform Act
threshold pleading requirements of adequate particularity and scienter.
Bristol-Myers Squibb and the former employee filed separate Motions to Dismiss
based on statute of limitations and pleading deficiency grounds. Plaintiff has
responded to these Motions to Dismiss and oral argument is scheduled for May 20,
2005. Defendants believe they have substantial meritorious defenses to the
Complaint and, if their Motion to Dismiss is not granted, they intend to
vigorously defend against the claims.
There are various other 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 other 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.
ITEM 6. EXHIBITS.
See Exhibit Index on page 18.
Page 17 of 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
D & K HEALTHCARE RESOURCES, INC.
Date: May 9, 2005 By: /s/ J. Hord Armstrong, III
----------------------------------
J. Hord Armstrong, III
Chairman of the Board and
Chief Executive Officer
By: /s/ Thomas S. Hilton
----------------------------------
Thomas S. Hilton
Senior Vice President
Chief Financial Officer
(Principal Financial &
Accounting Officer)
Page 18 of 21
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------------------------------------------------------------------------------------
2.1* Agreement and Plan of Merger dated as of October 21, 2003 between D & K Healthcare
Resources, Inc., Walsh HealthCare Solutions, Inc. and D & K Acquisition Company, filed as
an exhibit to registrant's Current Report on Form 8-K dated December 15, 2003.
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., filed as an exhibit to 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 to registrant's Current Report on Form 8-K dated
November 17, 1998.
31.1** Section 302 Certification of Chief Executive Officer.
31.2** Section 302 Certification of Chief Financial Officer.
32** Section 906 Certification of Chief Executive Officer and Chief Financial Officer.
* Incorporated by reference.
** Filed herewith.