10-Q 1 c69220e10-q.txt QUARTERLY REPORT DATED 03/31/02 Page 1 of 17 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, 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 incorporation or organization) Identification No.) 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 14,489,302 ---------------------------- ------------------------- (class) (May 1, 2002) Page 2 of 17 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Index
Page No. -------- Part l. Financial Information --------------------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2002 and June 30, 2001 3 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended March 31, 2002 and March 31, 2001 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2002 and March 31, 2001 5 Notes to Condensed Consolidated Financial Statements 6 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Part ll. Other Information ----------------- Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15
PAGE 3 OF 17 Part l. Financial Information Item 1. Financial Statements. D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
ASSETS MARCH 31, JUNE 30, ------ 2002 2001 --------------- ------------ (Unaudited) Cash $ 9,490 $ 7,516 Receivables 35,254 45,131 Inventories 430,046 214,739 Other current assets 2,694 2,664 --------- --------- Total current assets 477,484 270,050 --------- --------- Net property and equipment 10,897 9,703 Investment in PBI - 4,552 Other assets 5,705 3,920 Intangible assets 53,295 41,979 --------- --------- Total assets $ 547,381 $ 330,204 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current maturities of long-term debt $ 1,159 $ 320 Accounts payable 239,849 158,930 Accrued expenses 14,227 13,267 --------- --------- Total current liabilities 255,235 172,517 --------- --------- Long-term liabilities 2,622 2,300 Revolving line of credit 126,179 93,151 Long-term debt, excluding current maturities 745 1,338 Deferred income taxes 2,925 3,388 --------- --------- Total liabilities 387,706 272,694 --------- --------- Stockholders' equity: Common stock 75 47 Paid-in capital 121,372 34,006 Accumulated other comprehensive loss (581) (356) Retained earnings 44,355 29,359 Less treasury stock (5,546) (5,546) --------- --------- Total stockholders' equity 159,675 57,510 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 547,381 $ 330,204 ========= =========
See notes to condensed consolidated financial statements. PAGE 4 OF 17 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, 2002 2001 2002 2001 ------------- -------------- ------------- ------------- Net sales $ 695,241 $ 490,469 $ 1,816,030 $ 1,196,646 Cost of sales 664,894 469,896 1,739,330 1,146,057 ------------ ------------ ------------ ------------ Gross profit 30,347 20,573 76,700 50,589 Operating expenses 14,672 11,740 42,441 30,895 ------------ ------------ ------------ ------------ Income from operations 15,675 8,833 34,259 19,694 Other income (expense): Interest expense, net (2,847) (3,325) (7,239) (9,011) Other, net (756) (262) (1,349) 4 ------------ ------------ ------------ ------------ (3,603) (3,587) (8,588) (9,007) ------------ ------------ ------------ ------------ Income before income tax provision 12,072 5,246 25,671 10,687 Income tax provision 4,770 2,046 10,140 4,168 ------------ ------------ ------------ ------------ Net income $ 7,302 $ 3,200 $ 15,531 $ 6,519 ============ ============ ============ ============ EARNINGS PER COMMON SHARE: (SEE NOTES 2 AND 4) Basic earnings per share $ 0.51 $ 0.38 $ 1.09 $ 0.77 DILUTED EARNINGS PER SHARE $ 0.49 $ 0.35 $ 1.05 $ 0.73 BASIC COMMON SHARES OUTSTANDING 14,365,797 8,476,946 14,198,783 8,431,722 Diluted common shares outstanding 14,774,835 9,191,980 14,654,735 9,031,792
See notes to condensed consolidated financial statements. PAGE 5 OF 17 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED MARCH 31, MARCH 31, 2002 2001 ------------------ ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 15,531 $ 6,519 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES: AMORTIZATION OF DEBT ISSUANCE COSTS 885 822 DEPRECIATION AND AMORTIZATION 3,245 2,509 GAIN FROM SALE OF ASSETS 334 - DEFERRED INCOME TAXES (251) - EQUITY IN NET INCOME OF PBI - (426) CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF ACQUISITIONS: DECREASE (INCREASE) IN RECEIVABLE, NET 11,441 (35,533) (INCREASE) DECREASE IN INVENTORIES (215,006) 25,702 DECREASE (INCREASE) IN OTHER CURRENT ASSETS (677) 382 INCREASE IN ACCOUNTS PAYABLE 80,698 8,171 INCREASE IN ACCRUED EXPENSES 2,734 1,647 OTHER, NET (2,037) 55 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES (103,103) 9,848 CASH FLOWS FROM INVESTING ACTIVITIES: CASH FROM ACQUIRED COMPANY, NET OF CASH PAID 520 - CASH INVESTED IN AFFILIATES - (500) CASH DIVIDEND RECEIVED FROM AFFILIATES - 450 PURCHASES OF PROPERTY AND EQUIPMENT (2,637) (2,366) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES (2,117) (2,416) CASH FLOWS FROM FINANCING ACTIVITIES: BORROWINGS UNDER REVOLVING LINE OF CREDIT 708,912 469,939 REPAYMENTS UNDER REVOLVING LINE OF CREDIT (679,262) (476,386) PROCEEDS FROM SECONDARY STOCK OFFERING 76,862 - PRINCIPAL PAYMENTS ON LONG-TERM DEBT (189) (251) PROCEEDS FROM EXERCISE OF STOCK OPTIONS 1,707 475 PAYMENT OF DIVIDENDS (536) - CASH DIVIDEND PAID BY AFFILIATES (300) - DEBT ISSUANCE COSTS - (710) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES 107,194 (6,933) INCREASE IN CASH 1,974 499 CASH, BEGINNING OF PERIOD 7,516 3,661 --------- --------- CASH, END OF PERIOD $ 9,490 $ 4,160 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: INTEREST $ 6,897 $ 9,344 INCOME TAXES 5,967 4,544 NON-CASH TRANSACTIONS: ISSUANCE OF EQUITY FOR PBI ACQUISITION $ 6,477 $ -
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. PAGE 6 OF 17 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 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, VC Services, Inc. (dba Viking Computer Services, Inc.) and Tykon, Inc. In addition, the Company owns a 70% equity interest in Pharmaceutical Buyers, Inc. (PBI), a recognized alternate site group purchasing organization (see Note 5). 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 and nine-month periods ended March 31, 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 2001 Annual Report to Stockholders. Note 2. 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): PAGE 7 OF 17
Quarter Ended March 31, 2002 Quarter Ended March 31, 2001 --------------------------------------------- ----------------------------------------- Per- Per- Income Shares Share Income Shares Share (Numerator) (Denominator) (1) Amount (Numerator) (Denominator)(1) Amount ------------- ---------------- ---------- ------------ -------------- ------- BASIC EARNINGS PER SHARE: Net income available to Common stockholders $ 7,302 14,365,797 $0.51 $ 3,200 8,476,946 $0.38 EFFECT OF DILUTED SECURITIES: Options and warrants - 409,038 - 315,034 Convertible PBI securities (56) - 2 400,000 ------------- ---------------- ------------ ---------------- DILUTED EPS: Net Income available to Common stockholders plus assumed conversions $ 7,246 14,774,835 $0.49 $ 3,202 9,191,980 $0.35 ------------- ---------------- ------------ ---------------- Nine Months Ended March 31, 2002 Nine Months Ended March 31, 2001 -------------------------------------------- ------------------------------------------ Per- Per- Income Shares Share Income Shares Share (Numerator) (Denominator) (1) Amount (Numerator) (Denominator) (1) Amount ------------ ----------------- --------- ----------- ----------------- -------- BASIC EARNINGS PER SHARE: Net income available to Common stockholders $15,531 14,198,783 $1.09 $6,519 8,431,722 $0.77 EFFECT OF DILUTED SECURITIES: Options and warrants - 441,062 - 200,070 Convertible PBI securities (146) 14,890 94 400,000 ------------ ----------------- ----------- ------------------- DILUTED EPS: Net Income available to Common stockholders plus assumed conversions $15,385 14,654,735 $1.05 $6,613 9,031,792 $0.73 ------------ ----------------- ----------- -------------------
(1) - Outstanding shares computed on a weighted average basis NOTE - Shares and earnings per share have been adjusted to reflect the 2 for 1 stock dividend effective April 12, 2002 (see Note 4) Note 3. The Company's comprehensive income consists of net income and the net change in value of cash flow hedge instruments as follows:
For the Quarter ended For the Nine Months ended (in thousands) March 31, March 31, 2002 2001 2002 2001 --------------------------- ------------------------------ Net income $ 7,302 $ 3,200 $ 15,531 $ 6,519 Change in value of cash flow hedge, net of tax benefit 136 - (225) - -------- -------- --------- -------- Total comprehensive income $ 7,438 $ 3,200 $ 15,306 $ 6,519
Note 4. On March 13, 2002, the Company's Board of Directors approved a 2-for-1 split of the Company's common stock. The stock split was in the form of a stock dividend of one additional share of the Company's common stock for each share held. The additional shares were distributed on April 11, 2002 to stockholders of record on March 29, 2002. Shares and earnings per share have been adjusted to reflect this event. PAGE 8 OF 17 Note 5. On July 5, 2001, the Company completed a secondary offering of approximately 2.4 million shares of common stock. In connection with the secondary stock offering, the Company increased its ownership in Pharmaceutical Buyers (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 and the related PBI convertible debt. The impact of the PBI convertible securities is included in the reconciliation of the basic and diluted earnings per share computation in Note 2 above. Note 6. 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. This segment is described in Note 1. The Company's interest in PBI is a second segment. Two wholly owned software subsidiaries, VC Services, Inc. (dba 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. PAGE 9 OF 17
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED (IN THOUSANDS) MARCH 31, MARCH 31, 2002 2001 2002 2001 -------------------------------- -------------------------------- Sales to unaffiliated customers - Wholesale drug distribution $ 692,458 $ 489,916 $ 1,808,333 $ 1,194,764 Other 2,783 553 7,697 1,882 ----------- ------------ ------------ ----------- Total $ 695,241 $ 490,469 $ 1,816,030 $ 1,196,646 Intersegment sales - Wholesale drug distribution $ - $ - $ - $ - Other 292 250 901 652 Intersegment eliminations (292) (250) (901) (652) ----------- ------------ ------------ ----------- Total $ - $ - $ - $ - Net Sales - Wholesale drug distribution $ 692,458 $ 489,916 $ 1,808,333 $ 1,194,764 Other 3,075 803 8,598 2,534 Intersegment eliminations (292) (250) (901) (652) ----------- ------------ ------------ ----------- Total $ 695,241 $ 490,469 $ 1,816,030 $ 1,196,646 Gross Profit - Wholesale drug distribution $ 27,362 $ 19,869 $ 68,391 $ 48,487 Other 2,985 704 8,309 2,102 ----------- ------------ ------------ ----------- Total $ 30,347 $ 20,573 $ 76,700 $ 50,589 Pre-tax income (loss) Wholesale drug distribution $ 10,576 $ 5,027 $ 21,698 $ 9,992 Other 1,496 219 3,973 695 ----------- ------------ ------------ ----------- Total $ 12,072 $ 5,246 $ 25,671 $ 10,687
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 7. The Financial Accounting Standards Board has issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 141 is effective for all business combinations completed after June 30, 2001. Adoption of SFAS No. 141 did not significantly impact our consolidated financial position. The Financial Accounting Standards Board has issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under the new standard, we will no longer be required or permitted to amortize goodwill reflected on our balance sheet. We will, however, be required to evaluate goodwill reflected on our balance sheet to determine whether the goodwill is impaired under the guidelines of the proposed standard. If we determine that the goodwill is impaired, we will be required to write-off a portion of the goodwill. As of March 31, 2002, we had approximately $51.3 million of goodwill on our balance sheet. During fiscal 2001, goodwill amortization amounted to approximately $1.9 PAGE 10 OF 17 million, which is expected to remain approximately the same for fiscal 2002. Under the standard we will not be required to adopt these rules until July 2002, which is the beginning of our fiscal year 2003. We have not yet performed valuations or appraisals to evaluate any potential goodwill impairment, and therefore no impairment, if any, is currently determinable. If goodwill impairment exists at the date of adoption, it would be recorded as a cumulative effect of a change in accounting principles. The Financial Accounting Standards Board 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. The standard is effective for fiscal years beginning after June 15, 2002. Adoption of SFAS No. 143 is not expected to impact our consolidated financial position. The Financial Accounting Standards Board has issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The new standard replaces FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement 144 requires that all long-lived assets, including discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The standard is effective for fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144 is not expected to impact our consolidated financial position. PAGE 11 OF 17 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, 2002 and June 30, 2001, and in the condensed consolidated statements of operations for the three-month and nine-month periods ended March 31, 2002 and March 31, 2001, respectively. We recommend that this discussion be read in conjunction with the audited consolidated financial statements and accompanying notes included in our 2001 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 our ability to compete in a competitive industry, with many competitors having substantially greater resources than ours and our customers and suppliers generally having the right to terminate or reduce their purchases or shipments with us on relatively short notice without penalty, changes in interest rates, our 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, the continued availability of investment buying 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 our views as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements. Results of Operations: Net Sales Net sales increased $204.8 million, or 41.8%, for the quarter ended March 31, 2002, compared to the corresponding period of the prior year. Sales growth was in both the national pharmacy chain and independent and regional pharmacy groups. Sales to national pharmacy chains increased $112.1 million in part due to our ability to deploy the capital secured in our July 2001 secondary equity offering. Independent and regional pharmacy sales increased $87.9 million over the third quarter of fiscal 2001 due to new accounts, increased PAGE 12 OF 17 sales to existing customers and the inclusion of Diversified Healthcare acquired in June 2001. Net sales increased $619.4 million, or 51.8% for the nine months ended March 31, 2002, compared to the corresponding period of the prior year. Sales growth was primarily in the national pharmacy chains and independent and regional pharmacy groups. National pharmacy chain sales increased $339.4 million over the first nine months of fiscal 2001 in part due to our ability to deploy the capital secured in our July secondary equity offering. Sales to independent and regional pharmacy groups increased $265.4 million due to new accounts, increased sales to existing customers and the inclusion of Diversified Healthcare acquired in June 2001. In addition, the nine months ended March 31, 2002 contained $35.0 million in "dock-to-dock" sales, which are not included in net sales due to the Company's accounting policy of recording only the commission on such transactions as a component of cost of sales in its consolidated statements of operations. "Dock-to-dock" sales were $34.4 million and $73.2 million, respectively, for the quarter and nine months ended March 31, 2001. Gross Profit Gross profit increased 47.5% to $30.3 million for the quarter ended March 31, 2002, compared to the corresponding period of the prior year. This increase was primarily due to the increase in net sales. As a percentage of net sales, gross margin increased from 4.19% to 4.36% for the quarter ended March 31, 2002, compared to the corresponding period of the prior year. A favorable pricing environment from the manufacturers compared to last year and the consolidation of PBI's results was partially offset by competitive forces in the business. Gross profit increased 51.6% to $76.7 million for the nine months ended March 31, 2002, compared to the corresponding period of the prior year. As a percentage of net sales, gross margin was essentially flat, decreasing from 4.23% to 4.22% for the nine months ended March 31, 2002, compared to the corresponding period of the prior year. The positive impact of consolidating PBI was offset by the competitive nature of the business. Operating Expenses Operating expenses increased $2.9 million, or 25.0%,to $14.7 million for the quarter and increased $11.5 million, or 37.4%, to $42.4 million for the nine months ended March 31, 2002, compared to the corresponding periods of the prior year. The ratio of operating expenses to net sales for the quarter decreased to 2.11% from 2.39% while the ratio for the first nine months of fiscal 2002 was 2.34%, a 24 basis point decrease from the comparable period of the prior year. The increase in operating expenses for the quarter and period ended March 31, 2002, resulted from the increase in sales during the period as well as the inclusion of operating expenses related to Diversified Healthcare and PBI. The decrease in the ratio of operating expenses to net sales for both the quarter and nine-month period were due to PAGE 13 OF 17 economies of scale that we were able to achieve related to the increase in sales for the periods. Interest Expense, Net Net interest expense decreased $0.5 million or 14.4% for the quarter and $1.8 million or 19.7% for the nine months ended March 31, 2002, compared to the corresponding periods of the prior year. As a percentage of net sales, net interest expense decreased to 0.41% from 0.68% for the quarter ended March 31, 2002, compared to the corresponding period of the prior year. This ratio for the first nine months of fiscal 2002 was 0.40%, or 35 basis points lower than the corresponding period of last year. The decrease in net interest expense is the result of declining interest rates that more than offset higher average borrowings during the period. Our rates declined approximately 320 basis points in the third quarter of fiscal 2002 compared to the same quarter of fiscal 2001. See Item 3 for further discussion of market risk associated with interest rates. 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, 2002. This rate is greater than the federal income tax rate of 34% primarily because of the amortization of intangible assets that are not deductible for income tax purposes and state tax rates. The overall rate is slightly higher than the corresponding period of last year due to the impact of the sales mix on the blended state income tax rate. 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 the Securitization facility, and trade credit from our suppliers. We utilize the following measures as key indicators of our liquidity and working capital management:
March 31, June 30, 2002 2001 ---- ---- Working capital (000's) $ 222,249 $ 97,533 Current ratio 1.87 to 1 1.57 to 1
Working capital and the current ratio have increased as a result of an increase in inventory and the timing of receipts and payments. We invested $2,637,000 in capital assets in the nine-month period ended March 31, 2002, as compared to $2,366,000 in the corresponding period in the prior year. The expenditures were primarily related to the new Enterprise Resource Planning computer system being implemented during fiscal 2002. PAGE 14 OF 17 This system integrates sales order management, inventory management, transportation management, customer service, accounts payable, accounts receivable, general ledger and financial reporting. We believe that continuing investment in capital assets is necessary to achieve our goal of improving operational efficiency, thereby enhancing its productivity and profitability. Cash inflows from financing activities totaled $107.2 million for the nine-month period ended March 31, 2002, as compared to cash outflows of $6.9 million for the corresponding period in the prior year. The current year increase in cash inflows is primarily a result of the proceeds from our secondary equity offering completed in July 2001 combined with borrowings under the revolving credit facilities utilized to finance inventory builds. The prior year outflows were primarily related to the repayment of borrowings under the revolving credit facilities utilized to finance inventory builds. At March 31, 2002, $125 million of the possible $150 million of the Securitization facility was utilized and approximately $124 million of the possible $150 million of the revolving credit facility was utilized. In January 2002, we arranged an additional seasonal overline credit agreement that increased the revolving credit agreement to $200 million and the Securitization to $175 million. The additional credit was utilized during the quarter to finance inventory purchases and repaid through the sale of inventory. These agreements expired April 15, 2002. We have begun negotiations to increase both the revolving credit agreement and the Securitization to a total of $400 million. We expect to have these new facilities in place by June 30, 2002. We believe that, together with internally generated funds, our available capital resources will be sufficient to meet foreseeable capital requirements. 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. PAGE 15 OF 17 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Part ll. Other Information Item 4. Submission of Matters to a Vote of Security Holders (a) A Special Meeting of Stockholders of the Registrant was held on March 13, 2002. (b) Matters voted upon at the Special Meeting were as follows: a. Approval of the Registrant's 2002 proposal to amend the Registrant's Certificate of Incorporation to increase the total number of shares of common stock we are authorized to issue from 10,000,000 shares to 25,000,000 shares. The result of the stockholder voting was as follows: 5,730,192 for, 723,062 against, 5,542 abstaining, and 0 broker non-votes. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on page 17. (b) Reports on Form 8-K None PAGE 16 OF 17 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 3, 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 17 OF 17 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., dated March 13, 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. ** Filed herewith