10-Q 1 c80812e10vq.txt FORM 10-Q Page 1 of 18 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, 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 by check mark whether the registrant is an accelerated filer. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 13,973,603 ---------------------------- ---------- (class) (November 7, 2003) Page 2 of 18 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Index
Page No. -------- Part l. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2003 and June 30, 2003 3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2003 and September 30, 2002 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2003 and September 30, 2002 5 Notes to Condensed Consolidated Financial Statements 6 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Item 4. Controls and Procedures 12 Part ll. Other Information Item 6. Exhibits and Reports on Form 8-K 13
Page 3 of 18 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands) SEPTEMBER 30, JUNE 30, 2003 2003 --------- --------- (unaudited) ASSETS Current Assets Cash (including restricted cash of $12,517 and $14,301, respectively) $ 12,517 $ 14,301 Receivables, net of allowance for doubtful accounts of $1,604 and $1,604, respectively 100,507 122,982 Inventories 321,856 257,984 Other current assets 11,114 8,862 --------- --------- Total current assets 445,994 404,129 Property and Equipment, net of accumulated depreciation and amortization of $11,225 and $10,673, respectively 10,814 11,140 Other Assets 8,933 11,511 Goodwill, net of accumulated amortization 44,105 44,105 Other Intangible Assets, net of accumulated amortization 1,769 1,810 --------- --------- Total assets $ 511,615 $ 472,695 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 1,510 $ 1,677 Accounts payable 174,357 173,342 Accrued expenses 11,535 13,471 --------- --------- Total current liabilities 187,402 188,490 Long-term Liabilities 3,707 3,703 Long-term Debt, excluding current maturities 149,689 110,423 --------- --------- Total liabilities 340,798 302,616 Stockholders' Equity Common stock 152 152 Paid-in capital 125,502 124,704 Accumulated other comprehensive loss (1,179) (1,371) Deferred compensation - restricted stock (1,105) (411) Retained earnings 59,673 58,415 Less treasury stock (12,226) (11,410) --------- --------- Total stockholders' equity 170,817 170,079 --------- --------- Total liabilities and stockholders' equity $ 511,615 $ 472,695 ========= =========
The accompanying notes are an integral part of these statements. Page 4 of 18 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the three months ended September 30, (in thousands, except per share data)
2003 2002 --------- --------- Net Sales $ 478,548 $ 533,966 Cost of Sales 460,460 512,913 --------- --------- Gross profit 18,088 21,053 Operating Expenses 13,188 13,544 --------- --------- Income from operations 4,900 7,509 Other Income (Expense): Interest expense, net (2,147) (2,513) Other, net 36 (54) --------- --------- (2,111) (2,567) --------- --------- Income before income tax provision and minority interest 2,789 4,942 Income Tax Provision (1,088) (1,952) Minority Interest (234) (128) --------- --------- Net income before cumulative effect of accounting change 1,467 2,862 Cumulative effect of accounting change, net - (4,249) --------- --------- Net income (loss) $ 1,467 $ (1,387) ========= ========= Earnings (Loss) Per Share - Basic Net income before cumulative effect of accounting change $ 0.11 $ 0.20 Cumulative effect of accounting change - (0.29) --------- --------- Net income (loss) $ 0.11 $ (0.09) ========= ========= Earnings (Loss) Per Share - Diluted Net income before cumulative effect of accounting change $ 0.10 $ 0.19 Cumulative effect of accounting change - (0.29) --------- --------- Net income (loss) $ 0.10 $ (0.10) ========= ========= Basic common shares outstanding 13,956 14,553 Diluted common shares outstanding 14,194 14,850
The accompanying notes are an integral part of these statements. Page 5 of 18 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the 3 months ended September 30, (in thousands) 2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 1,467 $ (1,387) Adjustments to reconcile net income (loss) to net cash flows from operating activities - Depreciation and amortization 656 637 Amortization of debt issuance costs 407 276 Deferred income taxes 862 (1,903) Cumulative effect of accounting change, net - 4,249 Decrease (increase) in receivables, net 22,475 (15,174) (Increase) decrease in inventories (63,872) 6,738 Increase in other current assets (2,480) (3,629) Increase (decrease) in accounts payable 1,015 (22,183) (Decrease) increase in accrued expenses (1,936) 973 Other, net 1,837 135 --------- --------- Net cash flows used in operating activities (39,569) (31,268) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (289) (1,147) --------- --------- Net cash flows used in investing activities (289) (1,147) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under revolving line of credit 545,613 212,147 Repayments under revolving line of credit (506,276) (181,026) Payments of long-term debt (238) (275) Payment of dividends (209) (219) Purchase of treasury stock (816) (122) --------- --------- Net cash flows provided by financing activities 38,074 30,505 --------- --------- Decrease in cash (1,784) (1,910) Cash, beginning of period 14,301 11,754 --------- --------- Cash, end of period $ 12,517 $ 9,844 --------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for - Interest $ 1,760 $ 2,093 Income taxes, net $ 207 $ 13
The accompanying notes are an integral part of these statements. Page 6 of 18 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1. BASIS OF PRESENTATION D&K Healthcare Resources, Inc. (the "Company") is a full-service, regional wholesale drug distributor, supplying customers from facilities in Missouri, Florida, Kentucky, Minnesota, and South Dakota. The Company distributes a broad range of pharmaceuticals and related products to its customers in 26 states primarily in the Midwest, Upper Midwest, and South. The Company focuses primarily on a target market sector, which includes independent retail, institutional, franchise, chain store and alternate site pharmacies. The Company also offers a number of proprietary information systems software 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. 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 period ended September 30, 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 2003 Annual Report to Stockholders. NOTE 2. STOCK-BASED COMPENSATION The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the methods of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS 148 and SFAS 123, the Company continues to apply the accounting provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Had the Company recorded compensation expense based on the estimated grant date fair values, as defined by SFAS 123, for awards granted under its stock option plans and stock purchase plan, the unaudited pro forma net income and pro forma earnings per share would have been as follows (in thousands, except per share data):
Three Months Ended September 30, ----------------------- 2003 2002 ---------- ---------- Net income (loss) - as reported $ 1,467 $ (1,387) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (393) (339) --------- --------- Net income (loss) - pro forma $ 1,074 $ (1,726) Earnings (loss) per share: Basic - as reported $ 0.11 $ (0.09) Basic - pro forma $ 0.08 $ (0.12) Diluted - as reported $ 0.10 $ (0.10) Diluted - pro forma $ 0.07 $ (0.12)
These pro forma amounts may not be representative of the effects for future years as options vest over several years and additional awards are generally granted each year. Page 7 of 18 NOTE 3. GOODWILL AND INTANGIBLE ASSETS The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets" effective July 1, 2002. Under the new statement, impairment should be tested at least annually at the reporting unit level using a two-step impairment test. The reporting unit is the same as or one level below the operating segment level as described in SFAS Statement 131, "Disclosures about Segments of an Enterprise and Related Information" (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 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. 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, 2003 are: (in thousands)
Goodwill Intangible Assets ------------------------------ Balance at June 30, 2003, net of accumulated amortization $44,105 $ 1,810 Amortization expense - (41) ------------------------------ Balance at September 30, 2003, net of accumulated amortization $44,105 $ 1,769
Intangible assets totaled $1,769,000, net of accumulated amortization of $348,000, at September 30, 2003. Of this amount, $214,000 represents intangible assets with indefinite useful lives, consisting primarily of trade names that are not being amortized under SFAS No. 142. The remaining intangibles relate to customer or supplier relationships and licenses. Amortization expense for intangible assets is expected to approximate $150,000 each year between 2004 and 2018. Goodwill related to the wholesale drug distribution segment, net of amortization, was $32.3 million as of September 30, 2003 and June 30, 2003. Goodwill related to the PBI segment amounted to $10.4 million as of September 30, 2003 and June 30, 2003. Goodwill related to the Company's software segment amounted to $1.4 million as of September 30, 2003 and June 30, 2003. Other intangible assets related to the wholesale drug distribution segment, net of amortization, were $0.2 million as of September 30, 2003 and June 30, 2003. Other intangible assets related to the PBI segment amounted to $1.6 million and $1.7 million as of September 30, 2003 and June 30, 2003, respectively. The Company's software segment has no intangible assets. NOTE 4. EARNINGS PER SHARE SFAS No. 128, "Earnings Per Share", requires dual presentation of basic and diluted earnings per share and requires a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations. The reconciliation of the numerator and denominator of the basic and diluted earnings per share computations are as follows (in thousands, except for per share amounts): Page 8 of 18
Three-Months ended September 30, 2003 Three-Months ended September 30, 2002 ---------------------------------------- ---------------------------------------- Income Shares Per-share Income Shares Per-share (Numerator) (Denominator) (1) Amount (Numerator) (Denominator) (1) Amount ---------------------------------------- ---------------------------------------- Basic Earnings per Share: Net income before cumulative effect of accounting change, net $ 1,467 13,956 $ 0.11 $ 2,862 14,553 $ 0.20 Cumulative effect of accounting change, net - - (4,249) - (0.29) ------------------------------- ------------------------------- Net income (loss) available to common stockholders 1,467 13,956 (1,387) 14,553 Effect of Diluted Securities: Options - 238 - 297 Convertible securities (63) - (29) - ------------------------------- -------------------------------- Diluted Earnings (Loss) per Share: Net income (loss) available to common stockholders plus assumed conversions $ 1,404 14,194 $ 0.10 $(1,416) 14,850 $(0.10) ======================================== ======================================
(1) Outstanding shares computed on a weighted average basis NOTE 5. COMPREHENSIVE INCOME The Company's comprehensive income (loss) consists of net income (loss) and the net change in value of cash flow hedge instruments as follows: (in thousands)
Three Months Ended September 30, ---------- -- ---------- 2003 2002 ---------- ---------- Net income (loss) $ 1,467 $ (1,387) Change in value of cash flow hedge, net of tax 192 (422) ---------- ---------- Total comprehensive income (loss) $ 1,659 $ (1,809) ========== ==========
NOTE 6. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk, such as standby letters of credit and other guarantees, which are not reflected in the accompanying balance sheets. At September 30, 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 7. LONG-TERM DEBT 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. Under the credit facility, the total amount of loans and letters of credit outstanding at any time cannot exceed the lesser of an amount based on percentages of eligible receivables and inventories (the borrowing base formula) and $600 million. Total credit available at September 30, 2003 was approximately $250 million of which approximately $101 million was unused. The interest rate on the new credit facility is based on the 30-day London Interbank Offering Rate (LIBOR) plus a factor based on certain financial criteria. The interest rate was 3.37% at September 30, 2003. Borrowings under the new credit facility are reported as long-term debt in the Company's financial statements. NOTE 8. SEGMENT INFORMATION Pursuant to SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has three identifiable business segments; Wholesale drug distribution, the Company's interest in PBI, and Software. Two wholly owned software subsidiaries, Tykon, Inc. and Viking Computer Services, Inc., constitute the Page 9 of 18 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.
(In thousands) For The Three Months Ended September 30, 2003 September 30, 2002 ------------------- --------------------- Net Sales - Wholesale drug distribution $475,519 $531,657 PBI 2,319 1,612 Software 710 697 ---------------------------- Total $478,548 $533,966 Gross Profit - Wholesale drug distribution $ 15,204 $ 18,894 PBI 2,319 1,612 Software 565 547 ---------------------------- Total $ 18,088 $ 21,053 Pre-tax income - Wholesale drug distribution $ 1,372 $ 4,066 PBI 1,232 681 Software 185 195 ---------------------------- Total $ 2,789 $ 4,942
Except as otherwise disclosed, there has been no material change in total assets from the amount disclosed in the last annual report. Prior period segment information has been reclassified to reflect PBI separately since PBI now exceeds certain reporting criteria. There are no other differences in the basis of segmentation or in the basis of measurement of segment profit or loss. NOTE 9. SUBSEQUENT EVENT On October 22, 2003, the Company announced that it had signed a definitive agreement to acquire Walsh HealthCare Solutions, Inc. of Texarkana, Texas. Walsh is a family-owned, full-service pharmaceutical distributor with distribution centers located in San Antonio and Texarkana, Texas and Paragould, Arkansas. Walsh had net sales of approximately $900 million in its most recent fiscal year ended April 30, 2003. The transaction is expected to close by December 31, 2003. Closing of the transaction is subject to receipt of required regulatory approvals and other customary terms and conditions, as well as Walsh's acquisition of 100% of the equity interests in a joint venture to which it is a party. The acquisition purchase price of $99.25 million in cash includes the repayment of all Walsh bank debt. The purchase price will be subject to adjustment based on the net working capital at closing. D&K will utilize its existing revolving credit facility to finance the transaction. Walsh serves customers in Texas, Arkansas, Louisiana, Oklahoma, Kansas, Missouri, Illinois, Tennessee, Kentucky and Mississippi. Approximately 96% of Walsh's sales are to independent and regional pharmacy customers with the remaining 4% to hospitals and other healthcare providers. Page 10 of 18 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, 2003 and June 30, 2003, and in the condensed consolidated statements of operations for the three-month periods ended September 30, 2003 and September 30, 2002, respectively. We recommend that this discussion be read in conjunction with the audited consolidated financial statements and accompanying notes included in our 2003 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 be identified by words such as "anticipates," "believes," "estimates," "expects," "intends" and similar expressions. Such forward-looking statements are inherently subject to risks and uncertainties. The company's actual results could differ materially from those currently anticipated due to a number of factors, including without limitation, the competitive nature of the wholesale pharmaceutical distribution industry with many competitors having substantially greater resources than D&K Healthcare, the company's ability to maintain or improve its operating margins with the industry's competitive pricing pressures, the company's customers and suppliers generally having the right to terminate or reduce their purchases or shipments on relatively short notice, the availability of investment purchasing opportunities, the changing business and regulatory environment of the healthcare industry in which the company operates, including manufacturer's pricing or distribution policies or practices, changes in private and governmental reimbursement or in the delivery systems for healthcare products, changes in interest rates, ability to complete and integrate acquisitions successfully, and other factors set forth in reports and other documents filed by D&K Healthcare with the Securities and Exchange Commission from time to time. The reader should not place undue reliance on forward-looking statements, which speak only as of the date they are made. D&K Healthcare undertakes no obligation to publicly update or revise any forward-looking statements. 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 $55.4 million to $478.5 million, or 10.4%, for the three months ended September 30, 2003, compared to the corresponding period of the prior year. Sales to independent and regional pharmacies increased $38.6 million to $319.8 million, or 13.7%. Approximately two-thirds of this increase relates to new business with the remainder tied to same store growth. National accounts sales decreased $95.3 million to $127.9 million, or 42.7%, compared to last year primarily due to lower availability of attractively priced purchase opportunities. We provide our national accounts customers bulk pharmaceuticals that we purchase, if available, on favorable terms from the manufacturers. If we are unable to obtain bulk inventory on favorable terms, our sales in this area will decline. GROSS PROFIT Gross profit decreased $3.0 million to $18.1 million, or 14.1%, for the three months ended September 30,2003, compared to the corresponding period of the prior year. As a percentage of net sales, gross margin decreased from 3.94% to 3.78% for the quarter ended September 30, 2003, compared to the corresponding period of the prior year. The decrease in gross profit was due to lower national accounts sales and fewer product price increases, which resulted in lower gross profit margins. OPERATING EXPENSES Operating expenses (including depreciation and amortization) decreased $0.4 million to $13.2 million, or 2.6%, for the three months ended September 30, 2003 compared to the corresponding period of the prior year. The ratio of operating expenses to net sales was 2.76%, a 22 basis point increase from the comparable Page 11 of 18 period of the prior year. The decrease in operating expenses resulted primarily from lower incentive compensation. The ratio of operating expense to net sales increased due to the decrease in national accounts sales. INTEREST EXPENSE, NET Net interest expense decreased $0.4 million to $2.1 million, or 14.6%, for the three months ended September 30, 2003, compared to the corresponding period of the prior year. As a percentage of net sales, net interest expense decreased to 0.45% from 0.47%, compared to the corresponding period of the prior year. The decrease in net interest expense was primarily the result of lower average borrowing levels driven by lower average investment in inventory partially offset by a higher average borrowing rate. INCOME TAX PROVISION Our effective income tax rate was 39.0% for the three months ended September 30, 2003, compared to 39.5% for the corresponding period of the prior year. These rates were different from the statutory blended federal and state rates primarily because of the impact of state income taxes. Our effective rate is lower than the corresponding period of last year due to the impact of the sales mix on the blended state income tax rate. MINORITY INTEREST Minority interest was $0.2 million for the three months ended September 30, 2003, compared to $0.1 million in the corresponding period of the prior year. The increase relates to higher earnings at PBI as a result of higher sales. CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET As a result of the adoption of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets", we recognized an impairment loss of approximately $7.0 million ($4.2 million net of tax) during the first quarter of fiscal 2003. This impairment resulted from an appraisal valuation and related to goodwill originally established for the acquisition of Jewett Drug Co. No such adjustment was required in the current period. LIQUIDITY AND CAPITAL RESOURCES We generally meet our working capital requirements through a combination of internally generated funds, borrowings under the revolving line of credit and trade credit from our suppliers. We use the following ratios as key indicators of our liquidity and working capital management:
SEPTEMBER 30, JUNE 30, 2003 2003 -------------------------------- Working capital (000s) $258,592 $215,639 Current ratio 2.38 to 1 2.14 to 1
Working capital is total current assets less total current liabilities on our balance sheet. The current ratio is calculated by dividing total current assets by total current liabilities. Working capital and current ratio at September 30, 2003 are higher than June 30, 2003 levels. Inventory increased as a result of start of normal seasonal builds that typically occur as we enter the December and March quarters. On March 31, 2003, the Company entered into a new $600 million credit facility. The credit facility, an asset-based senior secured revolving credit facility, increased our available credit from $430 million to $600 million. The new single credit facility replaced a $230 million revolving bank line of credit and a $200 million accounts receivable securitization program. Under the credit facility, the total amount of loans and letters of credit outstanding at any time cannot exceed the lesser of an amount based on percentages of eligible receivables and inventories (the borrowing base formula) and $600 million. Total credit available at September 30, 2003 was approximately $250 million of which approximately $101 million was unused. The interest rate on the new credit facility is based on the 30-day London Interbank Offering Rate (LIBOR) plus a factor based on certain financial criteria. The interest rate was 3.37% at September 30, 2003. Page 12 of 18 Under the terms of the credit facility, we are required to comply with certain financial covenants, including those related to a fixed charge coverage ratio and tangible net worth. We are also limited in our ability to make loans and investments, enter into leases, or incur additional debt, among other things, without the consent of our lenders. We are in compliance with the debt covenants as of September 30, 2003. Net cash outflows used in operating activities totaled $39.6 million for the three months ended September 30, 2003 with net cash used in operating activities of $31.3 million in the prior year. Working capital changes and the timing of accounts payable and accounts receivable payments account for the difference between periods. We invested $0.3 million in capital assets in the three months ended September 30, 2003 compared with $1.1 million in the previous year. The prior year expenditures were primarily related to leasehold improvements associated with our new corporate offices that were completed during fiscal 2003. We believe that continuing investment in capital assets is necessary to achieve our goal of improving operational efficiency, thereby enhancing our productivity and profitability. Net cash inflows provided by financing activities totaled $38.1 million for the three months ended September 30, 2003 with net cash provided by financing activities of $30.5 million for last year. Borrowings under our revolving line of credit related to the increase in inventory levels offset with our purchase of treasury stock produced this result. Stockholders' equity increased $0.7 million to $170.8 million at September 30, 2003 from $170.1 million at June 30, 2003, due to the net earnings during the period offset by the impact of our purchase of treasury stock during the quarter. We acquired an additional 56,500 shares in the open market during the quarter. In September 2002, the board of directors authorized the repurchase of up to 1.0 million shares. As of September 30, 2003, 656,500 shares had been repurchased and the board authorization expired. We believe that funds available under the new credit facility, together with internally generated funds, will be sufficient to meet our capital requirements for the foreseeable future. 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 during fiscal 2003, a change of 25 basis points in the average variable borrowing rate would result in a change of approximately $0.6 million in annual interest expense. We continually monitor this risk and review the potential benefits of entering into hedging transactions, such as interest rate swap agreements, to mitigate the exposure to interest rate fluctuations. ITEM 4. CONTROLS AND PROCEDURES Based on an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that such controls and procedures were effective as of the end of the period covered by this report. In connection with such evaluation, no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Page 13 of 18 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES Part ll. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on page 15. (b) Reports on Form 8-K 1. On August 7, 2003, the registrant filed a Current Report on Form 8-K under Item 12 with a press release announcing its financial results for the fourth quarter and full year of fiscal 2003. Page 14 of 18 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 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 15 of 18 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. 31.1** Section 302 Certification of Chief Executive Officer. 31.2** Section 302 Certification of Chief Financial Officer. 32** Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. * Incorporated by reference. ** Filed herewith.