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Page 1 of 20
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 September 30, 2002
-------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ -------------------
Commission File No. 0-20348
-------
D & K HEALTHCARE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1465483
(State or other jurisdiction of (I.R.S. Employer
Identification No.) incorporation or organization)
8000 MARYLAND AVENUE, SUITE 920, ST. LOUIS, MISSOURI
(Address of principal executive offices)
63105
(Zip Code)
(314) 727-3485
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X YES NO
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value 14,578,966
---------------------------- -------------------------
(class) (November 8, 2002)
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D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Index
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2002 and June 30, 2002 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2002
and September 30, 2001 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2002 and
September 30, 2001 5
Notes to Condensed Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Page 3 of 20
Part I. Financial Information
Item 1. Financial Statements.
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
Assets September 30, June 30,
2002 2002
--------- ---------
(Unaudited)
Cash $ 9,844 $ 11,754
Receivables, net of allowance for doubtful accounts 46,391 31,217
Inventories 357,506 364,244
Other current assets 10,007 6,699
--------- ---------
Total current assets 423,748 413,914
--------- ---------
Net property and equipment 11,647 11,104
Other assets 6,979 5,024
Goodwill, net of accumulated amortization 44,105 51,131
Other intangible assets, net of accumulated amortization 1,932 1,965
--------- ---------
Total assets $ 488,411 $ 483,138
========= =========
Liabilities and Stockholders' Equity
Current maturities of long-term debt $ 2,226 $ 2,270
Accounts payable 193,594 215,777
Accrued expenses 11,430 13,231
--------- ---------
Total current liabilities 207,250 231,278
--------- ---------
Long-term liabilities 3,515 2,757
Revolving line of credit 111,566 80,445
Long-term debt, excluding current maturities 781 1,012
Deferred income taxes -- 249
--------- ---------
Total liabilities 323,112 315,741
--------- ---------
Stockholders' equity:
Common stock 151 151
Paid-in capital 124,705 124,089
Accumulated other comprehensive loss (1,309) (887)
Retained earnings 47,420 49,590
Less treasury stock (5,668) (5,546)
--------- ---------
Total stockholders' equity 165,299 167,397
--------- ---------
Total liabilities and stockholders' equity $ 488,411 $ 483,138
========= =========
See notes to condensed consolidated financial statements.
Page 4 of 20
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended
September 30, September 30,
2002 2001
------------- -------------
Net sales $ 533,966 $ 529,091
Cost of sales 512,913 507,233
--------- ---------
Gross profit 21,053 21,858
Operating expenses 13,544 13,782
--------- ---------
Income from operations 7,509 8,076
Other income (expense):
Interest expense, net (2,513) (1,876)
Other, net (54) (68)
--------- ---------
(2,567) (1,944)
--------- ---------
Income before income tax provision and
minority interest 4,942 6,132
Income tax provision (1,952) (2,342)
Minority interest (128) (203)
--------- ---------
Income before cumulative effect
of accounting change 2,862 3,587
Cumulative effect of accounting change, net (4,249) -
--------- ---------
Net income (loss) ($1,387) $ 3,587
========= =========
Earnings (loss) per share - basic
Net income before cumulative
effect of accounting change $ 0.20 $ 0.26
Cumulative effect of accounting change (0.29) -
--------- ---------
Net income (loss) ($0.09) $ 0.26
Earnings (loss) per share - diluted
Net income before cumulative
effect of accounting change $ 0.19 $ 0.25
Cumulative effect of accounting change (0.29) -
--------- ---------
Net income (loss) ($0.10) $ 0.25
Basic common shares outstanding 14,553 13,858
Diluted common shares outstanding 14,850 14,344
See notes to condensed consolidated financial statements.
Page 5 of 20
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
September 30, September 30,
2002 2001
------------ -------------
Cash flows from operating activities:
Net income (loss) ($ 1,387) $ 3,587
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Amortization of debt issuance costs 276 212
Depreciation and amortization 637 1,113
Gain from sale of assets - (162)
Deferred income taxes (1,903) (379)
Cumulative effect of change in accounting principle, net 4,249 -
Changes in operating assets and liabilities, net
of acquisitions:
Increase in receivable, net (15,174) (7,873)
Decrease (increase) in inventories 6,738 (56,228)
Increase in other current assets (3,629) (1,059)
Increase (decrease) in accounts payable (22,183) 25,715
Increase in accrued expenses 973 137
Other, net 135 1,117
--------- ---------
Cash flows from operating activities (31,268) (33,820)
Cash flows from investing activities:
Cash from acquired company, net of cash paid - 1,299
Purchases of property and equipment (1,147) (973)
--------- ---------
Cash flows from investing activities (1,147) 326
Cash flows from financing activities:
Borrowings under revolving line of credit 212,147 187,785
Repayments under revolving line of credit (181,026) (232,935)
Proceeds from secondary stock offering - 76,888
Principal payments on long-term debt (275) (66)
Proceeds from exercise of stock options - 1,379
Purchase of treasury stock (122) -
Payment of dividends (219) (178)
--------- ---------
Cash flows from financing activities 30,505 32,873
Decrease in cash (1,910) (621)
Cash, beginning of period 11,754 7,516
--------- ---------
Cash, end of period $ 9,844 $ 6,895
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid (refunded) during the period for:
Interest $ 2,093 $ 2,188
Income taxes 13 (30)
Non-cash transactions:
Issuance of equity for PBI acquisition $ - $ 4,477
See notes to condensed consolidated financial statements.
Page 6 of 20
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. The Company is a full-service, regional wholesale drug distributor,
supplying customers from facilities in Missouri, Florida, Kentucky,
Minnesota, and South Dakota. The Company distributes a broad range of
pharmaceuticals and related products to its customers in more than 24
states primarily in the Midwest and the 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 develops and markets sophisticated
pharmacy systems software through two wholly owned subsidiaries,
Tykon, Inc., and VC Services, Inc. (dba Viking Computer Services,
Inc.). In addition, the Company owns a 70% equity interest in
Pharmaceutical Buyers, Inc. (PBI), a leading alternate site
group purchasing organization (see Note 6).
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 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
period ended September 30, 2002 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 2002 Annual Report to
Stockholders.
Note 2. The Company adopted 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 FASB
Statement 131, "Disclosures about Segments of an Enterprise and
Related Information" (see Note 7). 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 carrying amount. The implied fair value of
goodwill is the difference between the fair value of the reporting
unit as a whole less 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.
Page 7 of 20
The effects of adopting the new standard on net income and earnings
per share for the quarter ended September 30, 2002 and 2001 are:
Net Income Basic EPS Diluted EPS
----------------------------------------------------
(in thousands) 2002 2001 2002 2001 2002 2001
----------------------------------------------------
Net income (loss) $(1,387) $ 3,587 $(0.09) $0.26 $(0.10) $0.25
Add: cumulative effect of
accounting change, net 4,249 -- 0.29 -- 0.29 --
----------------------------------------------------
Income, before cumulative
effect of accounting change 2,862 3,587 0.20 0.26 0.19 0.25
Add: goodwill amortization -- 395 -- 0.03 -- 0.03
----------------------------------------------------
Income before cumulative
effect of accounting change
and goodwill amortization $ 2,862 $ 3,982 $ 0.20 $0.29 $ 0.19 $0.28
Net income for the three-month period ended September 30, 2001 would
have been $395,000, or $0.03 per share higher, if goodwill
amortization had been discontinued effective July 1, 2001. Net income
for the full fiscal year ended June 30, 2002 would have been
$1,580,000, or $0.11 per diluted share, higher if goodwill
amortization had been discontinued effective July 1, 2001.
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 three-month
period ended September 30, 2002, including the effects of adopting
the new accounting standard are:
(in thousands)
Intangible
Goodwill Assets
---------------------
Balance at June 30, 2002, net of
accumulated amortization $ 51,131 $ 1,965
Write-off of goodwill recognized in
cumulative effect adjustment (7,026) --
Amortization expense -- (33)
---------------------
Balance at September 30, 2002, net
of accumulated amortization $ 44,105 $ 1,932
Intangible assets totaled $1,932,000, net of accumulated amortization
of $182,000, at September 30, 2002. 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. Amortization expense for the intangible
assets is expected to approximate $150,000 each year between 2003 and
2018.
Goodwill related to the wholesale drug distribution segment, net of
amortization, was $32.3 and $39.3 million as of September 30, 2002
and June 30, 2002, respectively.
Page 8 of 20
Goodwill related to the Company's other segments, which are combined
for reporting purposes, amounted to $11.8 million as of September 30,
2002 and June 30, 2002. Other intangible assets related to the
wholesale drug distribution segment, net of amortization, were $0.2
as of September 30, 2002 and June 30, 2002, respectively. Other
intangible assets related to the Company's other segments amounted to
$1.7 million as of September 30, 2002 and June 30, 2002,
respectively.
Note 3. 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 11,
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.
Note 4. 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 calculation. The reconciliation of the numerator and
denominator of the basic and diluted earnings per share computations
are as follows (in thousands, except for shares and per share
amounts):
Quarter Ended September 30, 2002 Quarter Ended September 30, 2001
--------------------------------------- ------------------------------------------
Per- Per-Share
Income Shares Share Income Shares
(Numerator) (Denominator)(1) Amount (Numerator) (Denominator)(1) Amount
----------- ------------- -------- ----------- ------------- ----------
BASIC EARNINGS PER SHARE:
Net income available to
Common stockholders before
cumulative effect of
accounting change $ 2,862 14,553 $ 0.20 $ 3,587 13,858 $0.26
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET (4,249) -- (0.29) -- -- --
-------- -------- ------ -------- -------- -----
(1,387) 14,553 (0.09) 3,587 13,858 0.26
EFFECT OF DILUTED SECURITIES:
Options and warrants -- 297 -- 442
Convertible PBI securities (29) -- (15) 44
-------- -------- -------- --------
DILUTED EPS:
Net income (loss) available
to Common stockholder plus
Assumed conversions $ (1,416) 14,850 $(0.10) $ 3,572 14,344 $0.25
-------- -------- -------- --------
(1) - Outstanding shares computed on a weighted average basis
Page 9 of 20
Note 5. The Company's comprehensive income consists of net earnings and
net change in value of cash flow hedge instruments as follows:
(in thousands) FOR THE THREE MONTHS ENDED
September 30,
2002 2001
---- ----
Net income (loss) $(1,387) $ 3,587
Change in value of cash flow hedge, net of
tax benefit (422) (580)
------- -------
Total comprehensive income $(1,809) $ 3,007
======= =======
Note 6. On July 5, 2001, the Company completed a secondary offering of
approximately 4.8 million shares of common stock. In connection with
the secondary stock offering, the Company increased its ownership in
PBI to 68% and an additional 2% was acquired in a subsequent
transaction in August 2001. Prior to the completion of the offering,
PBI was accounted for under the equity method. Since the completion
of the offering, PBI has been consolidated. For the period prior to
consolidation, certain other shareholders of PBI had the option to
exchange their combined 20% ownership interests in PBI for a fixed
number of shares of the Company's common stock under the terms of the
original purchase agreement. The impact of the PBI convertible
securities are included in the reconciliation of the basic and
diluted earnings per share computation in Note 4 above.
Note 7. Pursuant to Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", the Company has three identifiable business segments,
only one of which, Wholesale drug distribution, meets the
quantitative thresholds for separate disclosure prescribed in SFAS
No. 131. The Company's interest in 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 two additional segments are
combined as Other in the table below.
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.
Intersegment sales have been recorded at amounts approximating
market.
(in thousands) FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
Sales to unaffiliated customers -
Wholesale drug distribution $ 531,657 $ 526,638
Other 2,309 2,453
------------------- -------------------
Total $ 533,966 $ 529,091
Page 10 of 20
Intersegment sales -
Wholesale drug distribution $ -- $ --
Other
-- 319
Intersegment eliminations -- (319)
--------- ---------
Total $ -- $ --
Net sales -
Wholesale drug distribution $ 531,657 $ 526,638
Other
2,309 2,772
Intersegment eliminations -- (319)
--------- ---------
Total $ 533,966 $ 529,091
Gross profit -
Wholesale drug distribution $ 18,894 $ 19,490
Other 2,159 2,368
--------- ---------
Total $ 21,053 $ 21,858
Pre-tax income
Wholesale drug distribution $ 4,066 $ 5,231
Other 876 901
--------- ---------
Total $ 4,942 $ 6,132
Except as otherwise disclosed, there has been no material change in
total assets from the amount disclosed in the last annual report.
There are no differences from the last annual report in the basis of
segmentation or in the basis of measurement of segment profit or
loss.
Note 8. The Financial Accounting Standards Board (FASB) has issued SFAS No.
143, "Asset Retirement Obligations." The new standard requires
entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or
loss upon settlement. The standard is effective for fiscal years
beginning after June 15, 2002. Adoption of SFAS No. 143 did not
impact our consolidated financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which supersedes SFAS
121, "Accounting for Long-lived Assets and for Long-lived Assets to
be Disposed Of," and Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". SFAS 144 establishes
a single accounting model, based on the framework established in SFAS
121, for long-lived assets to be disposed of by sale. We are in the
process of evaluating the adoption of this standard, but do not
believe it will have a material impact on our consolidated financial
statements.
Page 11 of 20
The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement updates, clarifies and simplifies
existing accounting pronouncements related to accounting for gains
and losses from the extinguishments of debt and accounting for
certain lease modifications. We are in the process of evaluating the
adoption of this standard, but do not believe it will have a material
impact on our consolidated financial statements.
The FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." This statement addresses the accounting
for costs associated with disposal activities covered by SFAS No. 144
or with exit activities previously covered by EITF 94-3. This
statement will be applied prospectively to any exit or disposal
activities that we initiate after December 31, 2002.
Page 12 of 20
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The discussion below is concerned with material changes in financial
condition and results of operations in the condensed consolidated
balance sheets as of September 30, 2002 and June 30, 2002, and in the
condensed consolidated statements of operations for the three-month
period ended September 30, 2002 and September 30, 2001, respectively.
We recommend that this discussion be read in conjunction with the
audited consolidated financial statements and accompanying notes
included in our 2002 Annual Report to Stockholders.
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 also be identified by words such as
"anticipates," "believes," "estimates," "expects," "intends" and
similar expressions. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially
from those described in or suggested by such forward looking
statements. These risks and uncertainties include the Company's
ability to compete in a competitive industry, with many competitors
having substantially greater resources than the Company and the
Company's customers and suppliers generally having the right to
terminate or reduce their purchases or shipments on relatively short
notice, changes in interest rates, the Company's ability to maintain
or improve its operating margin with the industry's competitive
pricing pressures, the changing business and regulatory environment,
including possible changes in reimbursement for healthcare products
and in manufacturers' pricing or distribution policies or practices,
the availability of investment purchasing opportunities, the loss of
one or more key suppliers for which alternative sources may not be
available, and the ability to integrate recently acquired businesses.
Readers are cautioned not to place undue reliance on these
forward-looking statements that reflect the Company's views as of the
date hereof. The Company undertakes no obligation to publicly update
or revise any forward-looking statements.
Results of Operations:
Net Sales Net sales increased $4.9 million, or 0.9%, for the quarter
ended September 30, 2002, compared to the corresponding period of the
prior year. Sales growth in the independent and regional pharmacies
was offset by a reduction in the national pharmacy chain groups.
Independent and regional pharmacy sales increased $24 million over
the first quarter of fiscal 2001 due to new accounts and increased
sales to existing customers. Sales to national pharmacy chains
decreased $19 million primarily due to fewer purchasing and sales
opportunities made available to us during the quarter.
Page 13 of 20
Gross Profit Gross profit decreased 3.7% to $21.1 million for the
quarter ended September 30, 2002, compared to the corresponding
period of the prior year. This decrease was primarily due to lower
margins on national pharmacy chain sales. As a percentage of net
sales, gross margin declined from 4.13% to 3.94% for the quarter
ended September 30, 2002, compared to the corresponding period of the
prior year.
Operating Expenses Operating expenses decreased $0.2 million, or
1.7%, to $13.5 million for the quarter ended September 30, 2002,
compared to the corresponding period of the prior year. The ratio of
operating expenses to net sales for the quarter was comparable to
last year with a slight decrease to 2.54% from 2.60%. The decrease in
operating expenses for the quarter ended September 30, 2002, was the
net result of several offsetting factors. With the adoption of SFAS
142, pre-tax goodwill amortization of approximately $0.5 million was
eliminated. That savings combined with lower incentive based
compensation was partially offset by higher property and casualty
insurance premiums driven by general insurance market trends, and
depreciation on the new ERP system which began in the fourth quarter
of last year.
Interest Expense, Net Net interest expense increased $0.6 million or
33.9% for the quarter ended September 30, 2002, compared to the
corresponding period of the prior year. As a percentage of net sales,
net interest expense increased from 0.35% to 0.47% of net sales for
the quarter ended September 30, 2002, compared to the corresponding
period of the prior year. The increase in net interest expense is
primarily driven by higher average borrowings related to the higher
average investment in inventories during the quarter compared to the
same quarter of last year. Our rates declined approximately 120 basis
points in the first quarter of fiscal 2003 compared to the same
quarter of fiscal 2002, and the weighted average borrowings increased
to approximately $200 million from $136 million.
Provision for Income Taxes Our effective income tax rate of 39.5% is
the rate expected to be applicable for the full fiscal year ending
June 30, 2003. This rate is greater than the federal income tax rate
primarily because of state tax rates.
Financial Condition:
Liquidity and Capital Resources Our working capital requirements are
generally met through a combination of internally generated funds,
borrowings under our revolving line of credit and our Securitization
facility, and trade credit from our suppliers. We utilize the
following measures as key indicators of our liquidity and working
capital management:
Page 14 of 20
September 30, June 30,
2002 2002
---- ----
Working capital (000's) $216,498 $182,636
Current ratio 2.04 to 1 1.79 to 1
Cash outflows from operating activities totaled $31.3 million for the
three-month period ended September 30, 2002 compared to outflows of
$33.8 million during the same quarter of the prior year. Both of
these results were driven by working capital increases during the
respective quarters. Our first and second fiscal quarters generally
produce operating cash outflows as we establish inventory positions
ahead of normal year-end price increases from the pharmaceutical
manufacturers.
We invested $1,147,000 in capital assets in the three-month period
ended September 30, 2002, as compared to $973,000 in the
corresponding period in the prior year. We believe that continuing
investment in capital assets is necessary to achieve our goal of
improving operational efficiency, thereby enhancing our productivity
and profitability.
Cash inflows from financing activities totaled $30.5 million for the
three-month period ended September 30, 2002 as compared to cash
inflows of $32.9 million for the corresponding period in the prior
year. The current year cash inflows related to borrowings under our
revolving credit facility to finance our inventory positions. The
prior year cash inflows were primarily a result of the proceeds from
our secondary equity offering completed in July 2001 offset by
repayments of the revolving credit facility from these proceeds. At
September 30, 2002, $105 million of the possible $200 million of the
Securitization facility was utilized and approximately $112 million
of the possible $200 million of the revolving credit facility was
utilized. Management believes that, together with internally
generated funds, our available capital resources will be sufficient
to meet foreseeable capital requirements.
Recent Trends:
During the first quarter of fiscal 2003, our internal revenue and
margin objectives for the national chain business were not achieved.
The sales shortfall is principally the result of fewer than expected
purchasing and sales opportunities available during the period. Our
sales in the national chain business have been variable from month to
month historically, driven largely by opportunistic purchases from
pharmaceutical companies for distribution primarily to national
chains.
Page 15 of 20
Additionally, our growth in sales to the independent and regional
pharmacy trade class has trended below internal expectations during
the quarter. Sales to this trade class grew approximately 9.4%,
year-over-year, in the first quarter of fiscal 2003. While sales
growth is below expectation, we believe our market share in this
trade class continues to grow in the regions that we operate. We
believe our sales performance in the trade class reflects a recent
softening in retail sales trends now being exhibited across the
country. We also believe the retail sales trends reflect a greater
than expected revenue impact from generic drugs' encroachment on
branded pharmaceuticals, the impact of increasingly higher
prescription co-payment costs as well as funding challenges across
most state Medicaid systems.
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 the operating results and the cash flow available to fund
operations and expansion. Based on the average variable borrowings, a
change of 25 basis points in the average variable borrowing rate
would result in a change of approximately $0.3 million in annual
interest expense. The reductions in interest rates have had a
positive impact on our short-term interest expense. We continually
monitor this risk and review the potential benefits of entering into
hedging transactions, such as interest rate collar agreements, to
mitigate the exposure to interest rate fluctuations.
Item 4. Controls and Procedures
a) Evaluation of disclosure controls and procedures. Based on
their evaluations as of a date within 90 days of the filing
date of this report, our principal executive officer and
principal financial officer, with the participation of our
full management team, have concluded that our disclosure
controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act) are effective to
ensure that information required to be disclosed by us in
reports that we file or submit under the Securities Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC.
b) Changes in internal controls. There were no significant
changes in our internal controls or in other factors that
could significantly affect these internal controls subsequent
to the date of their most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Page 16 of 20
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page 19.
(b) Reports on Form 8-K
1. On September 16, 2002, the registrant filed a Current
Report on Form 8-K under Item 9 that announced
revised first quarter earnings per share guidance.
2. On September 24, 2002, the registrant filed a Current
Report on Form 8-K under Item 9 to furnish copies of
the certifications required by Securities and
Exchange Commission Order 4-460, which were filed on
September 24, 2002. In addition, registrant furnished
copies of the certifications required by Section 906
of the Sarbanes-Oxley Act of 2002, which accompanied
the Annual Report on Form 10-K filed by the
registrant on September 24, 2002.
Page 17 of 20
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: November 13, 2002 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 20
CERTIFICATIONS
I, J. Hord Armstrong, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of D&K
Healthcare Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of D&K Healthcare Resources, Inc. as
of, and for, the periods presented in this quarterly report;
4. D&K Healthcare Resources, Inc.'s other certifying officer and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for D&K Healthcare Resources, Inc. and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to D&K Healthcare
Resources, Inc., including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of D&K Healthcare Resources,
Inc.'s disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. D&K Healthcare Resources, Inc.'s other certifying officer and I
have disclosed, based on our most recent evaluation, to D&K
Healthcare Resources, Inc.'s auditors and the audit committee of
D&K Healthcare Resources, Inc.'s board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect D&K Healthcare
Resources, Inc.'s ability to record, process, summarize and
report financial data and have identified for D&K Healthcare
Resources, Inc.'s auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in D&K
Healthcare Resources, Inc.'s internal controls; and
6. D&K Healthcare Resources, Inc.'s other certifying officer and I
have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ J. Hord Armstrong, III
---------------------------------
Title: Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Page 19 of 20
I, Thomas S. Hilton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of D&K
Healthcare Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of D&K Healthcare Resources, Inc. as
of, and for, the periods presented in this quarterly report;
4. D&K Healthcare Resources, Inc.'s other certifying officer and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for D&K Healthcare Resources, Inc. and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to D&K Healthcare
Resources, Inc., including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of D&K Healthcare Resources,
Inc.'s disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. D&K Healthcare Resources, Inc.'s other certifying officer and I
have disclosed, based on our most recent evaluation, to D&K
Healthcare Resources, Inc.'s auditors and the audit committee of
D&K Healthcare Resources, Inc.'s board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect D&K Healthcare
Resources, Inc.'s ability to record, process, summarize and
report financial data and have identified for D&K Healthcare
Resources, Inc.'s auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in D&K
Healthcare Resources, Inc.'s internal controls; and
6. D&K Healthcare Resources, Inc.'s other certifying officer and I
have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Thomas S. Hilton
---------------------------
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 20 of 20
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
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
registrants 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.
* Incorporated by reference.