D & K HEALTHCARE RESOURCES INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003
--------------

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 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 13,984,300
---------------------------- -------------------------
(class) (May 7, 2003)

Page 2 of 25

D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

Index

Page 3 of 25

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

See notes to condensed consolidated financial statements.

Page 4 of 25

D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to condensed consolidated financial statements.

Page 5 of 25

D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

See notes to condensed consolidated financial statements.

Page 6 of 25

D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. D&K Healthcare Resources, Inc. (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 24 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 develops
and markets sophisticated pharmacy systems software through two wholly
owned subsidiaries, Tykon, Inc. and VC Services, Inc. (dba Viking
Computer Services). 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 accounting
principles generally accepted in the United States of America 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, 2003, 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 Statement of Financial Accounting Standard ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" effective July 1, 2002.
Under the new statement, impairment should be tested at least annually
at the reporting unit level using a two-step impairment test. The
reporting unit is the same as or one level below the operating segment
level as described in SFAS Statement 131, "Disclosures about Segments
of an Enterprise and Related Information" (see Note 8). 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

Page 7 of 25

Company's businesses for the purpose of testing goodwill for
impairment. The discount rate used was based on a risk-adjusted
weighted average cost of capital.

The effects of adopting the new standard on net income and earnings per
share for the three-month and nine-month periods ended March 31, 2003
and 2002 are:

For the three-month period ended March 31: (in thousands,
except per share amounts)

For the nine-month period ended March 31: (in thousands,
except per share amounts)

Net income for the three-month period ended March 31, 2002 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 nine-month
period ended March 31, 2002 would have been $1,185,000, or $0.08 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.

Page 8 of 25

Changes to goodwill and intangible assets during the nine-month period
ended March 31, 2003, including the effects of adopting the new
accounting standard are: (in thousands)

Intangible assets totaled $1,851,000, net of accumulated amortization
of $266,000, at March 31, 2003. Of this amount, $214,000 represents
intangible assets with indefinite useful lives, consisting primarily of
trade names that are not being amortized under SFAS No. 142. The
remaining intangibles relate to customer or supplier relationships and
licenses. Amortization expense for 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 March 31, 2003 and June
30, 2002, respectively. Goodwill related to the PBI segment amounted to
$10.4 million as of March 31, 2003 and June 30, 2002. Goodwill related
to the Company's software segment amounted to $1.4 million as of March
31, 2003 and June 30, 2002. Other intangible assets related to the
wholesale drug distribution segment, net of amortization, were $0.2
million as of March 31, 2003 and June 30, 2002, respectively. Other
intangible assets related to the PBI segment amounted to $1.7 million
as of March 31, 2003 and June 30, 2002, respectively. The Company's
software segment has no intangible assets.

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 condensed consolidated financial statements
have been adjusted to retroactively reflect this stock split.

Page 9 of 25

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
calculations. The reconciliation of the numerator and denominator of
the basic and diluted earnings per share computations are as follows
(in thousands, except for per share amounts):

(1) Outstanding shares computed on a weighted average basis

Note 5. The Company's comprehensive income consists of net income and the net
change in value of cash flow hedge instruments as follows: (in
thousands)

Page 10 of 25

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. The impact of the PBI
convertible securities is included in the reconciliation of the basic
and diluted earnings per share computation in Note 4 above.

Note 7. 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, 2003, the Company was party
to a standby letter of credit of $750,000 and was the guarantor of
certain customer obligations totaling approximately $500,000.
Management does not expect any material losses to result from these
off-balance-sheet items.

Note 8. On March 31, 2003, the Company announced that it had entered into a new
$600 million credit facility. The credit facility, an asset-based
senior secured revolving credit facility, increased its available
credit from $430 million to $600 million. The new single credit
facility replaces a $230 million revolving bank line of credit and a
$200 million accounts receivable securitization program. The interest
rate on the new credit facility is based on the 30-day LIBOR rate.
Borrowings under the new credit facility will be reported as long-term
debt in the Company's financial statements. Accounts receivable at
March 31, 2003 reflected an increase over previous periods as a result
of eliminating the securitization program since the accounts receivable
securitization program had been reported as off-balance sheet
financing. Long-term debt includes borrowings related to the repurchase
of $80 million of receivables that had been part of the securitization
at the time the new credit agreement was established.

To hedge a portion of its exposure to variability in cash flows related
to interest payments under the revolving credit facility, on March 28,
2003, the Company entered into a three-year interest rate cap agreement
at a cost of $0.4 million. The notional amount of the instrument is $50
million and it caps the 30-day LIBOR rate at 3.5% in the first year,
4.25% in the second year and 5% in the third year. The Company's
analysis of this hedge under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," shows this to be an effective
hedge. As such, any change in the intrinsic value of this instrument
will be reported in accumulated other comprehensive loss. Any change in
time value of this will be reflected on its income statement.

Page 11 of 25

Note 9. 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; Wholesale drug
distribution, the Company's interest in PBI , and Software. Two wholly
owned software subsidiaries, Tykon, Inc. and Viking Computer Services,
Inc., constitute the Software 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.

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 original cost.

Page 12 of 25

Except as otherwise disclosed, there has been no material change in
total assets from the amount disclosed in the last annual report. Since
the last annual report, PBI now exceeds certain reporting criteria and
accordingly has been shown separately. Prior period segment information
has been reclassified accordingly. There are no other differences in
the basis of segmentation or in the basis of measurement of segment
profit or loss.

Note 10. 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. The adoption of
this standard did not have a material impact on our consolidated
financial statements.

In April 2002, 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. The adoption of this standard did not have
a material impact on our consolidated financial statements.

In December 2002, the FASB issued SFAS No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used
on reported results. We are required to adopt this standard for fiscal
years beginning after December 15, 2002. The Company currently does not
plan to change to the fair value method of accounting for stock-based
employee compensation, but will comply with the disclosure requirements
of this standard.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). The disclosure
requirements of FIN 45 are effective for our fiscal 2003 consolidated
financial statements and have been included in our quarterly financial
statements beginning with the quarter ending December 31, 2002.

Page 13 of 25

For applicable guarantees issued after January 1, 2003, FIN 45 requires
that a guarantor recognize a liability for the fair value of the
obligation undertaken in issuing the guarantee. We do not believe that
the accounting requirements of FIN 45 will have a material effect on
our financial condition or results of operations.

In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the consolidation
of variable interest entities, as defined. FIN 46 is applicable to
financial statements to be issued after 2002; however, disclosures are
required currently if any variable interest entities are expected to be
consolidated. We do not believe that any entities will be consolidated
as a result of FIN 46.

Page 14 of 25

D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

The discussion below is concerned with material changes in financial
condition and results of operations in the condensed consolidated
balance sheets as of March 31, 2003 and June 30, 2002, and in the
condensed consolidated statements of operations for the three-month and
nine-month periods ended March 31, 2003 and March 31, 2002,
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 competitive nature of the wholesale
pharmaceutical distribution 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.

We have renamed the national pharmacy chains trade class the 'national
accounts' trade class. Given the changing composition of this class of
trade we feel this new name is more reflective of the broader nature of
the business. This is a name change only; we have not changed or
restated the financial results in any way.

Results of Operations:

Net Sales. Net sales decreased $66.6 million, or 9.6%, to $628.6
million, for the quarter ended March 31, 2003, compared to the
corresponding period of the prior year. Sales growth in the independent
and regional pharmacies trade class was offset by a reduction in the
national accounts trade class. Sales in the independent and regional

Page 15 of 25

pharmacies trade class increased $9.9 million over the third quarter of
fiscal 2002 due to increased sales to existing customers. Sales to
national accounts decreased $82.0 million primarily due to fewer
attractively priced purchasing opportunities made available to us
during the quarter. Sales to other healthcare providers increased by
$5.5 million as a result of new customers and increased sales to
existing customers.

Net sales decreased $122.6 million, or 6.8%, to $1.7 billion for the
nine months ended March 31, 2003, compared to the corresponding period
of the prior year. Sales growth in the independent and regional
pharmacies trade class was more than offset by a decrease in the
national accounts trade class. National accounts sales decreased $188.9
million during the first nine months of fiscal 2003 due primarily to
fewer attractively priced purchasing opportunities, particularly from
our largest supplier in fiscal 2002. Sales to independent and regional
pharmacies increased $53.3 million due to increased sales to existing
customers and new accounts. Sales to other healthcare providers
increased by $13.0 million as a result of new customers and increased
sales to existing customers.

Gross Profit. Gross profit decreased 11.0% to $27.0 million for the
quarter ended March 31, 2003, compared to the corresponding period of
the prior year. This decrease was primarily due to lower national
accounts sales driven by fewer attractively priced purchasing
opportunities. As a percentage of net sales, gross margin declined from
4.36% to 4.30% for the quarter ended March 31, 2003, compared to the
corresponding period of the prior year. The decrease in gross margin
percentage was primarily due to lower margin sales in the national
accounts trade class.

Gross profit decreased 9.7% to $69.3 million for the nine months ended
March 31, 2003, compared to the corresponding period of the prior year.
As a percentage of net sales, gross margin decreased from 4.22% to
4.09% for the nine months ended March 31, 2003, compared to the
corresponding period of the prior year. The decrease in gross margin
percentage was primarily due to lower margin sales in the national
accounts trade class.

Operating Expenses. Operating expenses increased $0.2 million, or 1.4%,
to $14.9 million for the quarter ended March 31, 2003, compared to the
corresponding period of the prior year. For the nine months ended March
31, 2003, operating expenses were $41.9 million, which was $0.5
million, or 1.2%, lower than the corresponding period of last year. The
change in operating expenses for both the quarter and nine-month period
ended March 31, 2003, was the net result of several offsetting factors.
With the adoption of SFAS 142, pre-tax goodwill amortization of
approximately $0.5 million for the quarter, and $1.5 million for the
nine-month period, were eliminated. For the quarter, that savings was
more than offset by higher incentive based compensation, higher
property and casualty insurance premiums driven by general insurance
market trends, and increased depreciation on the new enterprise
resource planning system which began in the fourth quarter of fiscal
2002. For the nine month period, the savings

Page 16 of 25

associated with goodwill was combined with lower incentive based
compensation and offset by higher property and casualty insurance
premiums driven by general insurance market trends, and increased
depreciation on the new enterprise resource planning system which began
in the fourth quarter of fiscal 2002. The ratio of operating expenses
to net sales for the quarter was 2.37% compared to 2.11% for the same
quarter last year. The ratio of operating expenses to net sales for the
nine-month period was 2.48% compared to 2.34% for the same period last
year. The slightly higher ratios for the periods relate to the lower
sales levels.

Interest Expense, Net. Net interest expense for the quarter ended March
31, 2003 was $2.8 million, or approximately the same as the
corresponding period of the prior year. Interest expense was slightly
lower as weighted average interest rates were slightly lower and
weighted average borrowings were comparable to the same quarter of last
year. Interest income was also slightly lower this quarter, which
offset the lower interest expense. As a percentage of net sales, net
interest expense increased from 0.41% to 0.45% of net sales for the
quarter ended March 31, 2003, compared to the corresponding period of
the prior year.

For the nine months ended March 31, 2003, net interest expense
increased $1.0 million or 14.2%, to $8.2 million, compared to the
corresponding period of the prior year. As a percentage of net sales,
net interest expense increased from 0.40% to 0.49% of net sales for the
nine-month period ended March 31, 2003, 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 this period compared to the
same period of last year. The weighted average interest rate declined
approximately 60 basis points in the first nine months of fiscal 2003
compared to the same period of fiscal 2002, and the weighted average
borrowings increased to approximately $234 million from $194 million.

Securitization termination costs. In March 2003, we entered into a new
credit agreement that resulted in the termination of the existing
accounts receivable securitization agreement. As a result, we incurred
a one-time charge of $2.0 million during the quarter. These costs were
associated with terminating the existing accounts receivable
securitization program. Further discussion of the impact of the
termination of the securitization agreement is included below in the
Liquidity and Capital Resources portion of this document.

Provision for Income Taxes. Our effective tax rate in the third quarter
and year-to-date was 40.0%, which is the rate currently expected to be
applicable for the full fiscal year ending June 30, 2003. This compares
to 38.5% for the nine-month period last fiscal year. This modestly
higher rate is due to the lower level of earnings relative to our
permanent tax differences, compared to last year.

Page 17 of 25

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 trade credit from our
suppliers. We utilize the following measures as key indicators of our
liquidity and working capital management:

(a) Includes accounts receivable related to securitization agreement

The increase in working capital and current ratio compared to June 30,
2002 relates to the termination of the accounts receivable
securitization agreement and the related increase in accounts
receivable shown on our balance sheet as reflected in the pro forma
figures. See further discussion below relating to the termination of
the securitization agreement.

Cash outflows from operating activities totaled $22.9 million for the
nine-month period ended March 31, 2003 compared to outflows of $103.1
million for the same period of the prior year. These results were
driven by working capital increases during the respective periods. 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. These positions
are generally liquidated in our third and fourth fiscal quarters
producing cash inflows from operating activities.

We invested $2,021,000 in capital assets in the nine-month period ended
March 31, 2003, as compared to $2,637,000 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 $21.4 million for the
nine-month period ended March 31, 2003 as compared to cash inflows of
$107.2 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. In December 2002,
we arranged an additional seasonal overline credit agreement that
increased the revolving credit facility to $230 million. The increase
in the revolving credit facility was utilized during the third quarter
to finance inventory purchases and repaid through the sale of
inventory. This agreement expired March 31, 2003.

On March 31, 2003, we announced that we had entered into a new $600
million credit facility. The credit facility, an asset-based senior
secured revolving credit facility, increased our available credit from
$430 million to $600 million. The new single credit

Page 18 of 25

facility replaces a $230 million revolving bank line of credit and a
$200 million accounts receivable securitization program. The interest
rate on the new credit facility is based on the 30-day LIBOR rate.
Borrowings under the new credit facility will be reported as revolving
line of credit in the company's financial statements. Accounts
receivable at March 31, 2003 reflected an increase over previous
periods as a result of eliminating the securitization program since the
accounts receivable securitization program had been reported as
off-balance sheet financing. The revolving line of credit includes
borrowings related to the repurchase of $80 million of receivables that
had been part of the securitization at the time the new credit
agreement was established.

To hedge a portion of our exposure to variability in cash flows related
to interest payments under the revolving credit facility, on March 28,
2003, we entered into a three-year interest rate cap agreement at a
cost of $0.4 million. The notional amount of the instrument is $50
million and it caps the 30-day LIBOR rate at 3.5% in the first year,
4.25% in the second year and 5% in the third year. Our analysis of this
hedge under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," shows this to be an effective hedge. As such, any
change in intrinsic value of this instrument will be reported in
accumulated other comprehensive. Any change in time value of this
instrument will be reflected on our income statement.

At March 31, 2003, $188.2 million of the possible $600 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 nine months of fiscal 2003, our internal revenue and
margin objectives for the national accounts trade class were not
achieved. The sales shortfall is principally the result of fewer
attractively priced purchasing opportunities, particularly from our
largest supplier in fiscal 2002. Our sales in the national accounts
business have been variable from month to month historically, driven
largely by opportunistic purchases from pharmaceutical companies for
distribution primarily to national pharmacy chains.

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 3.6%,
year-over-year, in the third quarter of fiscal 2003 and 6.6% for the
nine months ended March 31, 2003. We believe our sales performance in
this trade class reflects the continuing effects of the general
economic slowdown, growing healthcare funding constraints on insurance
providers and governmental bodies, the increased influence of generic
drugs, fewer drug approvals, and the competitive nature of the
industry. Accordingly, the outlook is for continued moderation in sales
growth in this trade class.

Page 19 of 25

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 $0.6 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 our 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 20 of 25

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 24.

(b) Reports on Form 8-K

a. On February 12, 2003, 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 under Section 906 of the
Sarbanes-Oxley Act of 2002, which accompanied the
Quarterly Report on Form 10-Q for the quarter ended
December 31, 2002 filed by the registrant on February
12, 2003.

b. On March 4, 2003, the registrant filed a Current
Report on Form 8-K under Item 9 with a press release
announcing that it expects to have a new credit
facility of at least $500 million in place by April
30, 2003.

c. On March 31, 2003, the registrant filed a Current
Report on Form 8-K under Item 9 with a press release
announcing that it entered into a new credit facility
of $600 million.

d. On April 28, 2003, the registrant filed a Current
Report on Form 8-K under Item 9 with a press release
announcing its financial results for the third
quarter of fiscal 2003. The information in this
report is furnished pursuant to Item 9,"Regulation FD
Disclosure" and Item 12, "Disclosure of Results of
Operations and Financial Condition." The information
in this Form 8-K is being furnished under Item 9 and
Item 12 and shall not be deemed to be "filed" for the
purposes of Section 18 of the Securities Exchange Act
of 1934 (the "Exchange Act"), or otherwise subject to
the liabilities of such section, nor shall such
information be deemed incorporated by reference in
any filing under the Securities Act of 1933 or the
Exchange Act, except as shall be expressly set forth
by specific reference in such a filing.

Page 21 of 25

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 12, 2003 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 22 of 25

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: May 12, 2003 /s/ J. Hord Armstrong, III
---------------------------------------
Title: Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)

Page 23 of 25

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: May 12, 2003 /s/ Thomas S. Hilton
-------------------------------
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)

Page 24 of 25

EXHIBIT INDEX

* Incorporated by reference.
** Filed herewith.