-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tl7tSDfWCBJ29gPb9j/cZ0GTIe4/fuYbgbDDiE+e0E7bE5TQxY80KREL1R4Gtr21 CKKvOjmKVWoa3RVV/rYgfw== 0000950114-97-000313.txt : 19970627 0000950114-97-000313.hdr.sgml : 19970627 ACCESSION NUMBER: 0000950114-97-000313 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970328 FILED AS OF DATE: 19970626 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: D & K WHOLESALE DRUG INC/DE/ CENTRAL INDEX KEY: 0000888914 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 431465483 STATE OF INCORPORATION: DE FISCAL YEAR END: 0327 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20348 FILM NUMBER: 97630244 BUSINESS ADDRESS: STREET 1: 8000 MARYLAND AVE STE 1190 CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3147273485 MAIL ADDRESS: STREET 1: 8000 MARYLAND AVE STE 1190 CITY: ST LOUIS STATE: MO ZIP: 63105 10-K405 1 D & K WHOLESALE DRUG, INC. FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 28, 1997 Commission File Number 0-20348 D & K WHOLESALE DRUG, INC. (Exact name of registrant as specified in its charter) Delaware 43-1464583 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8000 Maryland Avenue, Suite 1190, St. Louis, Missouri 63105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 727-3485 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Common Stock, par value $.01 Section 12(g) of the Act: (Title of Class) 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. Yes X . No . ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant: approximately $11,833,668 as of June 25, 1997. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of June 25, 1997, 3,056,217 shares of Common Stock, par value $.01, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in the Part of this report indicated below: Part III - Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders 2 PART I Item 1. Business - ------ -------- GENERAL D & K Wholesale Drug, Inc. is a regional wholesale distributor of pharmaceutical and related health care products. From its facilities in Cape Girardeau, Missouri, Lexington, Kentucky and Minneapolis, Minnesota, the Company distributes a broad range of pharmaceuticals, health and beauty aids and related products to its customers in 20 states in the Midwest and South. The Company's customer base includes independent drug stores, chain drug companies, hospitals, alternate site care facilities and organizations specializing in managed care. Through its wholly owned Viking Computer Services subsidiary, D & K offers SCRIPTMASTER, a sophisticated pharmacy systems software product. The Company also owns a 50% equity interest in Pharmaceutical Buyers, Inc. ("PBI"), a leading alternate site group purchasing organization ("GPO"). The Company was organized under the Delaware General Corporation Law in December 1987 by J. Hord Armstrong, III, the Chairman and Chief Executive Officer of the Company, and another individual to acquire Delta Wholesale Drug, Inc. ("Delta") and W. Kelly Company ("Kelly"). Delta and Kelly were merged into the Company in April 1993. The Company completed the initial public offering of its common stock in September 1992. Unless the context otherwise indicates, references to the "Company" refer to D & K Wholesale Drug, Inc. and its present and former subsidiaries. During fiscal 1997, approximately 46.6% of the Company's net sales were to independent pharmacies and approximately 27.4% of the Company's net sales were to franchisee-operated pharmacies and chain drug stores. Although the number of independent pharmacies and regional drug store chains has decreased over the past several years, the Company believes that these retailers remain an important segment of the retail drug market, especially in many of the communities served by the Company. Building upon its strength with independent and chain drug pharmacies, the Company is actively involved in expanding the Company's business with customers in the hospital, clinic and managed care market sectors. The Company's marketing program to customers in each of these sectors emphasizes customers benefits of the Company's cost competitiveness and advanced systems, such as the Company's PARTNERS and FOCUS software programs for pharmacies and its proprietary RESOURCE(TM) software system which enables hospitals and managed care organizations, as well as retailers, to order electronically, obtain the best price available, maintain contract compliance and better manage their purchasing functions. During fiscal 1996, the Company completed the consolidation of the operations of its Northern Drug Company ("Northern") and Krelitz Industries, Inc. ("Krelitz") subsidiaries. Northern formally served customers consisting of independent and retail chain pharmacies, hospitals, and managed care facilities in Minnesota, Wisconsin and the Upper Peninsula of Michigan. Krelitz, which is headquartered in Minneapolis, Minnesota and operates as Twin City Wholesale Drug Company, is a wholesale drug distributor to hospitals, clinics, group purchasing organizations, chain and independent pharmacies, and other retail outlets throughout the Upper Midwest. Additionally, Krelitz's wholly owned Viking Computer Services subsidiary provides computerized order entry, inventory control, pharmacy prescription disbursement and third party pay processing systems to pharmaceutical customers. The Company believes that combining the operations of Northern and Krelitz has strengthened its position in the Upper Midwest by cost-effectively offering its customers enhanced service and competitively priced products. The Company also believes that it is continuing to attain operating leverage from the Northern and Krelitz acquisitions as it more completely integrates the purchased operations into D & K's systems, and as D & K's management further implements improvements in the effectiveness and efficiency of operations. In fiscal 1996, the Company completed the purchase of 50% of the capital stock of PBI, a Colorado-based GPO. Pursuant to the transaction, the Company acquired 50% of the voting and nonvoting common stock of PBI for $3.75 million in cash. PBI acts as an intermediary, consolidating its members' buying power and negotiating volume discounts. PBI is one of the largest - 1 - 3 pharmaceutical group purchasing organizations in the United States, with over 2,200 members in 50 states, the District of Columbia and Puerto Rico. PBI's members include long-term care facilities, home infusion providers and medical equipment distributors. In March 1997, the Company received a cash dividend of $300,000 from PBI. In June 1996, the Company entered into an operating lease agreement for the development and construction of a 66,000 square foot distribution center on a 6.5 acre tract of land in Cape Girardeau, Missouri. In order to facilitate growth and other operational efficiencies, the Company relocated its Cairo, Illinois operation to the new facility in December 1996. The term of the lease is for a period of ten years with two five-year renewal options. In July 1996, the Company announced that it had been selected as the primary pharmaceutical supplier for a mail order service and prescription management company. The agreement became effective on August 1, 1996 and will be for a base period of two years with an option by the customer to renew for a third year. Sales to this customer in fiscal 1997 totaled $41.4 million, or 8.6% of net sales, and it currently represents the Company's second largest single customer. CUSTOMERS AND MARKETS The Company's customer base consists of approximately 1,000 customers, including independent and franchise pharmacies, regional drug store chains, hospitals, managed care organizations and other alternate site care facilities. During the past three years, the sales have been derived principally from independent and franchise-operated pharmacies and regional drug store chains. During fiscal 1997, approximately 46.6% of the Company's net sales were to independent pharmacies; approximately 27.4% of the Company's net sales were to franchisee-operated pharmacies and drug store chains, of which 19.6% represented net sales to one drug store chain. Sales to hospitals and managed care organizations represented 17.4% of the Company's net sales during fiscal 1997. Sales to a mail order and prescription management company represented approximately 8.6% of fiscal 1997 net sales. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company's ten largest customers accounted for approximately 47.2% of total net sales during fiscal 1997. The following table sets forth the Company's sales mix by customer segment.
Net Sales -------------------------------------------------------------------- Fiscal Years Ended -------------------------------------------------------------------- March 28, 1997 March 29, 1996 March 31, 1995 -------------- -------------- -------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (in thousands) Independent pharmacies $222,978 46.6% $206,617 48.7% $152,488 47.6% Franchise and chain drug stores 131,343 27.4 134,427 31.7 129,153 40.4 Hospitals and managed care 83,086 17.4 83,472 19.6 32,497 10.2 Mail order 41,387 8.6 11 -- 5,820 1.8 -------------------------------------------------------------------- Total $478,794 100.0% $424,527 100.0% $319,958 100.0% ====================================================================
In view of its expanding customer base, the Company expects that the trend in its mix of revenues toward hospitals, managed care organizations and alternate site care providers will continue in fiscal 1998. SALES AND MARKETING The Company's marketing efforts are focused on increasing its number of primary supplier relationships with drug retailers and on offering hospitals and managed care organizations competitive pricing and value-added services. The Company emphasizes frequent personal interaction of its sales force with customers so that the customer comes to rely on the Company's dependability, responsiveness, accuracy of order filling and breadth of product line. The Company offers its PARTNERS and FOCUS software programs for pharmacies and its proprietary RESOURCE(TM) software system which enables hospitals and managed care organizations, as well as retailers, to order electronically, obtain best price available, maintain formulary compliance and better manage their purchasing functions. The Company maintains a sophisticated telephone service department which interfaces with customers to answer questions and solve problems. The Company believes that its customer service department is a key element in its marketing program given the - 2 - 4 expanding use of electronic data entry by customers. The Company's marketing program also targets larger drug store chains, franchise pharmacies, hospital groups and managed care organizations. The Company's senior management is actively involved in developing opportunities to expand the Company's business with customers in each of these sectors, including the preparation of proposals which highlight customer benefits of the Company's cost-competitiveness and advanced systems. The Company continually attempts to identify new customers within its service territory who are likely to perceive the benefits of the Company's services. In the retail pharmacy sector, the Company's marketing program emphasizes educating the pharmacist on how to enhance customer relationships and maximize profits. As of March 28, 1997, the Company had approximately 18 sales representatives. Its sales program includes continual training to improve customer service and provide the skills and resources necessary to increase business with existing customers and establish new customer relationships. The Company also utilizes a team selling program to generate additional revenues from existing customers. PRODUCTS AND SERVICES The Company continuously seeks to improve the depth and breadth of its product line. Although sales tend to be concentrated among a relatively small number of stock keeping units ("SKU's"), the Company is a primary supplier which can provide immediate, reliable delivery of all its products. The Company's product line consists of more than 25,000 SKU's. The product line includes branded pharmaceuticals, multi-source generics, private label products, repackaged pharmaceutical products and over-the-counter health and beauty aids. The Company strives to offer services which enhance the operating efficiencies of its customers and assist them in competing effectively. Principal elements in the Company's service offerings to its customers include its proprietary RESOURCE software system which enables customers to better manage their purchasing functions, the Company's PARTNERS software program which helps pharmacies statistically coordinate product demand and supply more efficiently, and the Company's FOCUS software which is a group contract management and reporting system. Services offered to retail pharmacies include: retail merchandising, inventory management systems, electronic order entry, planogramming, shelf labels and price stickers, private label products, monthly feature promotions, home health care marketing programs, store layout assistance, business management reports, pharmacy computer systems and monthly catalogs. In addition, the Company offers new product introduction programs, point-of-sale materials, calendars, blood pressure testing units, trial size programs, automatic new product distribution, rack jobbing, store fixturing and retail employee training programs. The Company maintains a promotional and advertising support program under the "Rx-tra" Values, "Med Plus" and "Source" names, pursuant to which it plans and coordinates cooperative advertising programs for participating independent drug stores and provides for the availability of various promotional products. In addition to offering its RESOURCE software system, the Company's Viking Computer Services subsidiary licenses its SCRIPTMASTER proprietary pharmacy computer service system to more than 200 pharmacies. OPERATIONS All of the Company's distribution centers have data processing systems and appropriate materials handling equipment for receiving, storing and distributing large quantities and varieties of products. The Company will continue to seek to improve its warehouse automation technologies to maximize its operational efficiencies on a cost-effective basis. Upon receipt of the customer's order at a distribution center, the Company's warehouse-management system produces a "picking document" containing product selection, loading and truck routing information. The - 3 - 5 system also provides customized price information (geared to each customer's local market) or individual package price stickers to accompany each shipment to facilitate the customer's pricing of the items. Virtually all items ordered from the Company's distribution centers are available and shipped by the Company within 24 hours after the orders are placed. Orders are delivered to customers by the Company's fleet of trucks and vans or by contract carriers. PURCHASING AND INVENTORY CONTROL The Company utilizes a sophisticated inventory-control and forward-buying software of a type used by several large companies in the drug wholesaling industry. The software perpetually tracks the Company's inventory, analyzes demand history, projects future demand and analyzes forward-buying opportunities. The Company's system eliminates the manual ordering process, allows for automatic inventory replenishment and identifies buying opportunities, all of which benefit profit margins. The system also improves the Company's fill rate and enhances inventory management and control. The Company's software combines customer order entry and order processing with sales history and the inventory control function, providing inventory movement reports on a monthly basis and further assisting customers with their inventory control. The Company has supply agreements with substantially all leading manufacturers for the wholesale purchase of pharmaceuticals and other products. During fiscal 1997, the Company's ten largest suppliers accounted for approximately 45% (by dollar volume) of the Company's purchases. Historically, the Company has not experienced difficulty in purchasing desired products from suppliers. The loss of a contract with a principal supplier could adversely affect the Company's business because many suppliers are the sole manufacturers of certain pharmaceuticals under their exclusive patents. To continue serving its customers, the Company would have to purchase these patented pharmaceuticals from other distributors on less favorable terms. The Company has agreements with many of its suppliers which generally require the Company to maintain an adequate quantity of the supplier's products in inventory. The majority of contracts with suppliers are terminable upon 30 days' notice by either party. The Company believes that its relationships with its suppliers are good. COMPETITION The wholesale distribution of pharmaceuticals, health and beauty aids, and other healthcare products is highly competitive, with national and regional distributors competing primarily on the basis of service and price. Other competitive factors include delivery service, credit terms, breadth of product line, customer support and merchandising and marketing programs. The Company competes with large, national distributors such as McKesson Corporation, Bergen Brunswig Corporation, Cardinal Health, Inc., Bindley-Western Industries, Inc. and AmeriSource Health Corporation, as well as with local and regional wholesalers, manufacturers and mail order and specialty distributors. Certain of the Company's competitors have significantly greater financial and marketing resources than the Company. SEASONALITY The Company's business has been subject to slight seasonal selling patterns. In particular, pharmaceuticals sales tend to increase during the fall and winter months due to greater incidence of colds and flu. REGULATORY MATTERS The Company, as a distributor of certain controlled substances and prescription pharmaceuticals, is required to register with and obtain licenses and permits from certain federal and state agencies and must comply with operating and security measures prescribed by such agencies. The Company is also subject to the 1987 Prescription Drug Marketing Act, an amendment to the federal Food, Drug and Cosmetic Act, which regulates certain conditions pertaining to the purchase and distribution of prescription pharmaceuticals. The Company believes that it is in substantial compliance with all federal and state statutes and regulations concerning its activities. There can be no assurance that future changes in applicable laws or regulations will not have an adverse effect on the Company's business. - 4 - 6 EMPLOYEES As of June 1, 1997, the Company employed 234 persons, of which 217 were full-time employees. Of its part-time employees, 17 were substitute drivers. Approximately 25 of the Company's employees are covered by collective bargaining agreements. The Company believes that its employee relations are good. Item 2. Properties - ------ ---------- The Company conducts its business from a total of eight office, warehouse and depot facilities. The primary facilities used by the Company are three distribution facilities, located in Cape Girardeau, Missouri, Lexington, Kentucky and Minneapolis, Minnesota. The Company's Cape Girardeau distribution facility is leased under an operating lease and contains an aggregate of 66,000 square feet and houses both administrative and operational functions. The Lexington distribution facility is owned by the Company and contains an aggregate of 37,500 square feet of both administrative and operational space. The Minneapolis, Minnesota distribution facility is owned by the Company and contains 63,000 square feet of both administrative and operational space. The Company also previously owned a building in Duluth, Minnesota with approximately 46,000 square feet of space and which formerly housed the Company's Duluth distribution facility. The Company sold this property on June 2, 1997 for cash proceeds of approximately $950,000. The Company formerly leased its executive offices, consisting of approximately 1,000 square feet, from an affiliated party at rates considered competitive. In July 1997, the Company will be relocating its executive offices to 8000 Maryland Avenue, Suite 920, St. Louis, Missouri 63105. The Company also leases from non-affiliated parties four satellite transfer depots ranging from approximately 1,500 to 3,800 square feet, in Missouri, Iowa, Tennessee and Kentucky. The Company believes its principal facilities are adequate to support its present business plans. Item 3. Legal Proceedings - ------ ----------------- In a first amended petition filed on September 1, 1995, Krelitz and Northern were added as defendants in an action captioned Salk Drug Co., Inc., -------------------- et. al. v. Abbott Laboratories, et. al. pending in the District Court, Fourth - --------------------------------------- Judicial District of Hennepin County, Minnesota. The plaintiffs, Salk Drug Co., Inc. and two other independent pharmacies, brought this class action on behalf of themselves and all other similarly situated independent pharmacies in the State of Minnesota. The complaint alleges a conspiracy among pharmaceutical manufacturers and wholesalers in violation of Minnesota statutes prohibiting price discrimination and restraint of trade with respect to the pricing and sale of pharmaceutical products to pharmacies. The complaint seeks injunctive relief and treble damages. On June 10, 1996, the court in this action dismissed the plaintiff's conspiracy claims, but did not dismiss the plaintiffs' Minnesota state law claim. Similar actions (in which neither Krelitz nor Northern were named as a defendant), are pending in other states and federal courts against the same manufacturers and other wholesalers. The Company intends to defend this action vigorously and does not expect that this lawsuit will have a material adverse effect on the Company's financial position or results of operations. The Company is currently a party to an arbitration with Central States, Southeast and Southwest Areas Pension Plan (the "Plan"). This matter involves an assessment of withdrawal liability issued by the Plan as a result of the closing of the Duluth, Minnesota facility of Northern Drug Company, a subsidiary of the Company. Certain employees at this facility were covered by a collective bargaining agreement which required contributions to the Plan. Under Title IV of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), an employer who permanently ceases to have an obligation to contribute to the Plan is liable to the Plan for a certain share (determined according to a statutory formula) of the Plan's unfunded vested benefits. An employer may contest the validity and/or amount of the assessment, but is required to make interim payments on the assessment while contesting the matter. By letter dated April 26, 1996, the Plan advised that (by reason of the closing of the Duluth facility) the Company had completely withdrawn from the Plan within the meaning of Title IV of ERISA and was being assessed $414,920, due and payable in 33.71 monthly installments of $13,282 starting June 1, 1996. The Company has contested this assessment and submitted the claim to arbitration. The matter is now pending before the arbitrator, but no hearing date has been set. The principal issues are the date of withdrawal (calendar 1994 or 1995) and whether the Company should receive credit against the assessment for approximately $110,000 in contributions made after the alleged December 31, 1994 withdrawal. The likely outcome of this matter cannot be readily determined at this time. The Company intends to defend this matter vigorously and does not expect that the outcome of this matter will have a material adverse effect on the Company's financial condition or results of operations. - 5 - 7 Except as described, no material legal proceedings are pending against the Company. Item 4. Submission of Matters to a Vote of Security Holders - ------ --------------------------------------------------- The Company did not submit any matters to a vote of its security holders during the quarter ended March 28, 1997. - 6 - 8 Item 4A. Executive Officers of the Registrant - ------- ------------------------------------ The name, age and position of each of the executive officers of the Company is set forth below: J. Hord Armstrong, III, 56, has served as the Chairman of the Board, Chief Executive Officer and Treasurer of the Company and as a director of the Company since December 1987. Prior to joining the Company, Mr. Armstrong served as Treasurer (1978-1981) and Vice President and Chief Financial Officer (1981-1987) of Arch Mineral Corporation, a coal mining and sales corporation. Mr. Armstrong is Chairman of the Board of Pilot Funds, registered investment companies sponsored by Boatmen's Trust Company, St. Louis, Missouri and serves as a Trustee of the St. Louis College of Pharmacy. Martin D. Wilson, 36, has served as President and Chief Operating Officer of the Company since April 1996 and as Secretary since August 1993. Mr. Wilson has previously served as Executive Vice President, Finance and Administration (May 1995 to April 1996), Vice President, Finance and Administration (April 1991 to May 1995) and Controller (March 1988 to April 1991) of the Company. Prior to joining the Company, Mr. Wilson, a certified public accountant, was associated with KPMG Peat Marwick, a public accounting firm. Dennis A. White, 47, has served as Vice President, Chief Information Officer of the Company since April 1996. Prior to joining the Company, from May 1988 to May 1996, Mr. White served as Director of Customer Information Services and in various other management positions with Bergen Brunswig Corporation, a national wholesale drug distributor. Daniel E. Kreher, 32, has served as Vice President, Finance and Administration of the Company since November 1996. Prior to joining the Company, from August 1987 to November 1996, Mr. Kreher, a certified public accountant, served as a senior manager and in various other positions with Price Waterhouse LLP, a public accounting firm. Edward W. McManus, 49, has served as Vice President, Sales and Business Development of the Company since May 1997. Prior to joining the Company, from March 1994 to April 1997, Mr. McManus served as Vice President Corporate Sales with Managed Healthcare Associates, a group purchasing organization specializing in long-term care. From January 1982 to February 1994, Mr. McManus served in various sales management positions with Fujisawa, USA, a pharmaceuticals manufacturer. - 7 - 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder - ------ ------------------------------------------------------------- Matters ------- The Company's Common Stock (symbol: "DKWD") is traded on the Nasdaq Small-Cap Market. The number of beneficial holders of the Company's Common Stock is approximately 1,200. Set forth below are the high and low transaction prices as reported by the Nasdaq Stock Market for the periods indicated. Such prices reflect interdealer prices, without retail mark-up, mark-down or commission:
1997 1996 ---- ---- High Low High Low --------------------------------------------- First Quarter $8 1/2 $5 1/8 $7 1/2 $5 3/4 Second Quarter 6 1/8 4 5/8 7 1/2 6 1/4 Third Quarter 4 7/8 3 3/8 8 1/8 6 3/4 Fourth Quarter 5 7/8 3 9/16 8 7/8 7 1/4
Item 6. Selected Financial Data - ------ ----------------------- The following table should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, included elsewhere in this report. FINANCIAL HIGHLIGHTS
Fiscal Year Ended ------------------------------------------------------------------------------------------- March 28, 1997 March 29, 1996 March 31, 1995 April 1, 1994 April 2, 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Income Statement Data (in thousands, except share data) Net Sales $478,794 $424,527 $319,958 $211,196 $167,940 Nonrecurring expenses -- (1,317) -- -- -- Income from operations 4,276 1,824 4,441 2,077 1,565 Net income (loss) 739 (1,109) 1,409 374 253 Primary earnings (loss) per share $0.24 ($0.37) $0.54 $0.16 Fully diluted earnings (loss) per share $0.24 ($0.37) $0.49 $0.16 Primary common shares outstanding 3,072,117 2,971,117 2,602,739 2,394,022 Fully diluted common shares outstanding 3,072,117 2,971,117 3,141,885 2,394,022 Pro forma earnings per share $0.14 Pro forma common shares outstanding 2,414,222 March 28, 1997 March 29, 1996 March 31, 1995 April 1, 1994 April 2, 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data (in thousands) Working capital $24,270 $25,224 $27,395 $14,154 $9,523 Total assets 101,466 94,937 95,787 43,352 39,818 Long-term debt 41,530 43,190 39,991 17,858 13,705 Stockholders' equity 8,873 8,033 8,784 4,078 3,704
Item 7. Management's Discussion and Analysis of Financial Condition and - ------ --------------------------------------------------------------- Results of Operations --------------------- The following discussion should be read in conjunction with the Consolidated Financial Statements contained herein. The table below sets forth for the years indicated certain financial data expressed as a percentage of net sales and in comparison to the prior fiscal year. Unless indicated to the contrary, for purposes of this discussion, all references to "1997," "1996," and "1995" shall mean the Company's fiscal years ended March 28, 1997, March 29, 1996, and March 31, 1995, respectively. - 8 - 10 See Note 1 of "Notes to Consolidated Financial Statements."
Percentage of Net Sales Percentage Change From Prior Year ----------------------- --------------------------------- 1997 1996 1995 1996-97 1995-96 ---- ---- ---- ------- ------- Net sales 100.00% 100.00% 100.00% 12.8% 32.7% Gross profit 4.39% 4.61% 5.03% 7.3% 21.7% Depreciation and amortization (0.32%) (0.41%) (0.33%) (13.2%) 64.8% Nonrecurring expenses -- 0.31% -- Operating expenses (3.18%) (3.46%) (3.31%) 3.6% 38.8% ---------------------------------------------- Income from operations 0.89% 0.43% 1.39% 134.4% (58.9%) Interest expense (0.78%) (0.90%) (0.73%) 2.0% (62.9%) Other income, net 0.15% 0.12% 0.12% 50.9% 29.9% Income tax provision (benefit) 0.11% (0.09%) 0.33% -- 136.4% ---------------------------------------------- Net income (loss) 0.15% (0.26%) 0.44% 166.6% (178.7%) ==============================================
RESULTS OF OPERATIONS Net sales increased $54.3 million or 12.8% to $478.8 million in 1997 compared with 1996. The addition of a large mail order service and prescription management customer in August 1996 accounted for $41.4 million of the increase. Chain drug sales increased $10.6 million during 1997 spurred largely by increased sales to a large regional drug store chain, which increased $6.0 million or 6.8% to $93.8 million in 1997 compared with 1996, plus increased sales to other chain customers of $4.6 million during 1997. The supply agreement with the large regional drug store chain expires during 1998 and there can be no assurance that it will be renewed. Franchise sales decreased $13.7 million in 1997 primarily due to the decision of a regional group of franchise pharmacies not to renew the Company's status as the group's primary supplier effective as of June 30, 1995. Institutional sales decreased $0.4 million or 0.5% in 1997 compared to the prior year. The remaining increase in sales of $16.4 million for 1997 was due to greater volume with independent retail pharmacies. Net sales increased $104.6 million or 32.7% to $424.5 million in 1996 compared to 1995. The acquisition of Northern Drug Company ("NDC") in October 1994 and Krelitz Industries, Inc. ("KII") in March 1995 accounted for $99.8 million or 95.5% of the increase in sales for 1996. During 1996, the Company's operations other than NDC and KII, experienced an increase in net sales of $4.8 million. A $31.3 million decrease in sales was experienced primarily due to the decision of a regional group of franchise pharmacies not to renew the Company's status as the group's primary supplier effective as of June 30, 1995. Sales to a large regional drug store chain increased $19.7 million or 28.3% to $89.1 million in 1996 compared with 1995. The increase was due to expanded sales and the inclusion of twelve months sales in 1996 compared with ten months in 1995. Institutional sales increased $8.5 million or 39.7% to $29.9 million in 1996 compared with the prior year. The addition of new hospitals and expanded sales to existing hospital customers accounted for the increase. The remaining increase in sales of $7.9 million was due primarily to greater volume with independent retail and chain store pharmacies. Gross profit as a percentage of net sales declined from 5.03% in 1995 to 4.61% in 1996 and to 4.39% in 1997. The decrease in gross margin in 1997 reflected the impact of sales to the new mail order customer which yield relatively low selling margins but generate favorable working capital benefits by reducing the Company's overall borrowing costs. In addition, the significant reduction from 1996 in franchise sales, which carried more favorable selling margins, combined with increased sales to chain drug store customers contributed to the decline in the gross margin in the current year. Despite the reduction in gross margin during 1997, gross margin dollars increased $1.4 million or 7.3% due to overall increased sales levels as compared to the prior year. The Company believes that the declining gross margin is consistent with the experience of its industry as a whole, and it estimates that LIFO gross margins within the industry now average below 5%. - 9 - 11 As a percentage of net sales, total operating expenses increased from 3.64% in 1995 to 4.18% in 1996 and declined to 3.50% in 1997. The significant decrease in total operating expenses as a percentage of sales from 1996 to 1997 was attributable primarily to certain nonrecurring expenses totaling $1.3 million incurred at the Company's NDC and KII facilities in 1996 related to redundant fixed overhead expenses and costs associated with the consolidation of their operations. The improvement in total operating expenses as a percentage of net sales in 1997 was also reflective of enhanced operating efficiencies in the warehouse and delivery areas which were realized most notably on sales to the Company's large mail order customer. In addition, the implementation of various cost management measures contributed to the decline in operating expenses during 1997. Total operating expenses for 1997 reflected additional sales, administrative, information services and warehouse costs associated with supporting increased sales levels. In 1997, the Company made significant investments in personnel, computer hardware and software and warehouse systems which management believes will position it to realize continued improvements in its operating expense ratio in future periods. Depreciation and amortization increased from $1.1 million in 1995 to $1.8 million in 1996 and decreased to $1.5 million in 1997. The increase in 1996 reflects additional depreciation expense associated with the investment in property and equipment and incremental goodwill amortization from the 1995 acquisitions of NDC and KII. The decline in 1997 resulted from the impact of certain adjustments made in 1996 to the recorded NDC and KII goodwill balances coupled with the discontinuance of depreciation on the NDC property which has been held for sale since the 1996 consolidation of the Company's Minnesota facilities. As a percentage of net sales, interest expense decreased from .90% in 1996 to .78% in 1997. This favorable trend in interest expense in 1997 was reflective of improved utilization of working capital in financing the Company's increased sales levels and the reduction of relatively high interest term debt, somewhat offset by the incremental interest cost associated with the November 1995 investment in PBI and the addition of an equipment loan in 1997. In addition, the weighted average of the Company's LIBOR and prime borrowing rates were lower compared to the prior year due to reduced interest rates which commenced during the last quarter of 1996 and continued into 1997. As a percentage of net sales, interest expense increased from .73% in 1995 to .90% in 1996. The increase in interest expense in 1996 was the result of higher average borrowings during the year to finance the increased sales, initial investment and working capital associated with the acquisitions of NDC and KII and the investment in PBI coupled with a higher weighted average interest rate as compared with 1995. Other income increased $250,000 in 1997 compared with 1996 and increased $113,000 compared to 1995. The increase in 1997 was primarily due to $410,000 of income from the Company's 50% investment in PBI compared with $88,000 recognized in the prior year. These amounts are net of amortization expense of $276,000 and $92,000, respectively, for 1997 and 1996, associated with accounting for the Company's investment in PBI. The increase in other income in 1997 was partly offset by reduced computer service income realized at KII compared with the prior year. In addition, the Company recorded a $287,000 charge in 1996 to fully reserve for its investment in a wholesale alliance after having determined that the probability of fully recovering its investment in the alliance was remote. The effective tax rates (tax benefit in 1996) of 42.2% in 1997, (26.0%) in 1996, and 43.1% in 1995 differed from the "expected" blended federal and state effective rates primarily due to the impact of the amortization of intangible assets that were not deductible for income tax purposes, partially offset by the Company's equity in the net income of PBI a portion of which was excludable from taxable income. The Company uses the LIFO method of accounting for inventories because it believes that the method more realistically matches current product costs with current product sales and minimizes the effect of inflationary cost increases on inventory values. The effect of price inflation, as measured by the excess of LIFO costs over FIFO costs, was $1.2 million in 1997, $663,000 in 1996, and $446,000 in 1995. The increases in the respective LIFO provisions during the three-year period ended in 1997 were due to increased sales levels and to comparatively higher product price inflation experienced primarily with respect to the Company's pharmaceutical inventories. - 10 - 12 LIQUIDITY AND CAPITAL RESOURCES The Company's working capital requirements generally are met through a combination of internally generated funds, borrowings from the revolving line of credit, and trade credit from its suppliers. The following ratios are utilized by the Company as key indicators of the Company's liquidity and working capital management:
March 28, 1997 March 29, 1996 -------------- -------------- Working capital (000s) $24,270 $25,224 Current ratio 1.48 to 1 1.58 to 1 Working capital to assets .24 to 1 .27 to 1 Net debt to FIFO equity .65 to 1 .88 to 1
The decrease in working capital in 1997 was due primarily to decreases in accounts receivable and prepaid expenses and other current assets coupled with increases in accounts payable, current maturities of long-term debt and accrued expenses, offset by increases in the Company's cash and inventories. The decrease in accounts receivable reflects the receipt of a payment in late March 1997 of a portion of the outstanding balance due from the Company's largest customer, a regional drug store chain. Absent the receipt of these funds, working capital would have been $5.0 million higher and the current ratio would have been 1.57 to 1 at March 28, 1997. Prepaid expenses and other current assets decreased primarily from the receipt in 1997 of income tax refunds generated from the carryback of the Company's taxable loss incurred in 1996. The increases in inventories, accounts payable and accrued expenses are reflective of the expansion in net sales occurring throughout 1997. Current maturities of long-term debt increased approximately $2.0 million primarily due to the maturity of $1.75 million of 11% convertible subordinated notes due to an insurance company in December 1997. Management believes that the holder of the convertible subordinated notes may exercise its option to convert a portion of the notes into shares of the Company's common stock at a price of $3.30 per share prior to its maturity. However, the Company has received no indication from the holder regarding its intentions. The Company plans to utilize availability on its revolving line of credit to repay the outstanding balance of the convertible notes plus $1.1 million due under the 11% subordinated notes payable to the same holder upon their maturity in December 1997. The Company utilizes the ratio of net debt to FIFO equity as a measure of its financial leverage position and working capital utilization. Net debt is determined as the difference between working capital (presented on a FIFO basis) and total current and long-term debt. FIFO equity reflects total stockholders' equity increased by the total LIFO reserve. The 26% improvement in the ratio of net debt to FIFO equity in 1997 is reflective of a more efficient use of working capital and a reduction in the Company's financial leverage. The Company invested $2.2 million in capital assets in 1997 and $963,000 in 1996. The 1997 amount includes approximately $1.3 million of warehouse and computer equipment and leasehold and site improvements at the Company's new, 66,000 square-foot warehouse facility located in Cape Girardeau, Missouri. The Company believes that its investment in capital assets is necessary to achieve its goal of improving operating efficiency, thereby improving its productivity and ratio of operating expenses to net sales. In December 1996, the Company obtained a $1.5 million equipment loan from a bank through the Missouri First Link program ("Missouri First") to finance certain capital expenditures at its leased Cape Girardeau, Missouri facility. During the first year of the four-year agreement, the Missouri First loan bears interest at 5.95% and requires monthly interest payments. At the end of the first year of the agreement, the Company must reapply for the Missouri First program with approval dependent upon the Company's meeting certain criteria related to job creation and economic development in the Cape Girardeau area. If approved, the loan will bear interest at a fixed rate of seventy percent of the bank's current prime rate (8.5% at March 28, 1997) plus 1/2%; otherwise, interest will be charged at the bank's prime rate plus 1/2%. The Missouri First loan requires a principal payment of $182,500 at the end of the first year of the agreement. If approved - 11 - 13 for continuation in the Missouri First program, interest will continue to be paid monthly plus a $437,500 principal reduction at the end of the second year of the agreement; after such time, the loan requires monthly payments of $36,458 plus interest until maturity in December 2000. Should the Company's participation in the program not be approved at the end of year one, the monthly payments plus interest will commence at the beginning of the second year of the agreement. In November 1995, the Company acquired approximately 50% of the capital stock of Pharmaceutical Buyers, Inc. ("PBI"), a Colorado-based group purchasing organization. Pursuant to the transaction, the Company acquired approximately 50% of the voting and non-voting common stock of PBI for $3.75 million in cash using borrowings under its revolving line of credit. In March 1997, the Company received a cash dividend of $300,000 from PBI which did not impact the recognition of the Company's equity interest in the net income of PBI under the equity method of accounting for its investment. The Company believes that dividends will be paid annually by PBI subject to PBI's future financial performance and internal cash needs. In connection with the acquisition of NDC, effective October 25, 1994, the Company amended its revolving line of credit with its senior lender increasing the maximum borrowing capacity from $30 million to $35 million during the period of December through June of each year under the remaining term of the loan agreement. In connection with the acquisition of KII, effective March 3, 1995, the Company amended its revolving line of credit to increase the maximum borrowing capacity from $30 million to $50 million, plus a supplemental facility up to $10 million during the months of December through June of each year. The expiration of the loan agreement was extended from December 10, 1998 to December 10, 2000. At March 28, 1997, the unused portion of the line of credit amounted to $10.2 million. The Company believes that its availability under the line of credit, together with internally generated funds, will be sufficient to meet its capital requirements for the foreseeable future. Stockholders' equity increased from $8.0 million at March 29, 1996 to $8.9 million at March 28, 1997. The increase was primarily due to net income of $739,000 plus proceeds of $94,000 received from the exercise of stock options. A net loss of $1,109,000 offset by the exercise of stock options of $221,000 in 1996 decreased stockholders' equity from $8.8 million at March 31, 1995 to $8.0 million at March 29, 1996. The Company has one customer that comprised approximately 20% and 21%, respectively, of net sales in fiscal 1997 and 1996 and approximately 22% and 40%, respectively, of the March 28, 1997 and March 29, 1996 accounts receivable balances. The supply agreement with this customer expires during 1998. There can be no assurances that the supply agreement with this customer will be renewed upon its expiration. The loss of this customer and/or the inability to collect amounts due from this customer in the future could have a material adverse effect on the Company's results of operations and financial position. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which establishes standards for computing and presenting earnings per share. SFAS 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations. The Company is required to adopt the provisions of SFAS 128 during the quarter ending December 31, 1997 and all prior period earnings per share data presented must be restated. The adoption of SFAS 128 is not expected to have a significant impact on the Company's previously reported or prospective earnings per share amounts. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" (SFAS 129), which establishes standards for disclosing information about an entity's capital structure. The Company is required to adopt the provisions of SFAS 129 during the quarter ending December 31, 1997. The adoption of SFAS 129 is not expected to have a material impact on the Company's financial position or results of operations. - 12 - 14 Certain information in this annual report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Certain factors such as changes in interest rates, competitive pressures, customer mix, inventory investment buying opportunities and capital markets could cause actual results to differ materially from those in the forward-looking statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ------- ---------------------------------------------------------- Not applicable. - 13 - 15 Item 8. Financial Statements and Supplementary Data - ------ ------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To D & K Wholesale Drug, Inc.: We have audited the accompanying consolidated balance sheets of D & K Wholesale Drug, Inc. (a Delaware corporation) and subsidiaries as of March 28, 1997, and March 29, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended March 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of D & K Wholesale Drug, Inc. and subsidiaries as of March 28, 1997, and March 29, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended March 28, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP St. Louis, Missouri May 8, 1997 - 14 - 16 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) - ---------------------------------------------------------------------------------------------------- March 28, 1997 March 29, 1996 - ---------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash (including restricted cash) $ 2,213 $ 1,947 Receivables, net of allowance for doubtful accounts of $697 and $868, respectively 22,247 25,150 Inventories 49,991 39,500 Prepaid expenses and other current assets 882 2,341 ------------------------------------ Total current assets 75,333 68,938 Property and Equipment, net of accumulated depreciation and amortization of $5,038 and $4,027, respectively 6,242 5,162 Investment in 50% Owned Company 4,039 3,929 Deferred Income Taxes 889 1,147 Other Assets 338 723 Intangible Assets, net of accumulated amortization 14,625 15,038 ------------------------------------ Total assets $101,466 $94,937 ==================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 3,138 $ 1,209 Accounts payable 41,410 35,805 Accrued expenses 2,673 2,963 Deferred income taxes 3,842 3,737 ------------------------------------ Total current liabilities 51,063 43,714 Long-Term Debt 41,530 43,190 ------------------------------------ Total liabilities 92,593 86,904 ------------------------------------ Stockholders' Equity Preferred stock; no par value, 1,000,000 shares authorized, no shares issued or outstanding -- -- Common stock; $.01 per value, 10,000,000 shares authorized, 3,044,717 and 3,018,051 shares issued and outstanding, respectively 30 30 Paid-in capital 11,693 11,592 Accumulated deficit (2,850) (3,589) ------------------------------------ Total stockholders' equity 8,873 8,033 ------------------------------------ Total liabilities and stockholders' equity $101,466 $94,937 ==================================== The accompanying notes are an integral part of these statements.
- 15 - 17 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) For the Years Ended - --------------------------------------------------------------------------------------------------------------------- March 28, 1997 March 29, 1996 March 31, 1995 - --------------------------------------------------------------------------------------------------------------------- Net Sales $478,794 $424,527 $319,958 Cost of Sales 457,778 404,938 303,863 -------------------------------------------------------------- Gross profit 21,016 19,589 16,095 Depreciation and Amortization 1,523 1,754 1,064 Nonrecurring Expenses -- 1,317 -- Operating Expenses 15,217 14,694 10,590 -------------------------------------------------------------- Income from operations 4,276 1,824 4,441 -------------------------------------------------------------- Other Income (Expense) Interest expense (3,738) (3,813) (2,341) Interest income 338 424 358 Equity in net income of 50% owned company 410 88 -- Other, net (7) (21) 20 -------------------------------------------------------------- (2,997) (3,322) (1,963) -------------------------------------------------------------- Income (loss) before income tax provision (benefit) 1,279 (1,498) 2,478 Income Tax Provision (Benefit) 540 (389) 1,069 -------------------------------------------------------------- Net income (loss) $ 739 $ (1,109) $ 1,409 ============================================================== Primary Earnings (Loss) Per Share $ 0.24 $ (0.37) $ 0.54 ============================================================== Fully Diluted Earnings (Loss) Per Share $ 0.24 $ (0.37) $ 0.49 ============================================================== The accompanying notes are an integral part of these statements.
- 16 - 18 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share data) - ------------------------------------------------------------------------------------------------------------- Accumulated Common Stock Paid-In Capital Deficit Total - ------------------------------------------------------------------------------------------------------------- Balance at April 1, 1994 $24 $7,943 ($3,889) $4,078 Common stock issued in connection with acquisitions 6 3,203 -- 3,209 Stock option and warrant expense -- 67 -- 67 Stock options exercised -- 21 -- 21 Net income -- -- 1,409 1,409 ------------------------------------------------------- Balance at March 31, 1995 30 11,234 (2,480) 8,784 Common stock issued -- 122 -- 122 Stock option and warrant expense -- 15 -- 15 Stock options exercised -- 221 -- 221 Net loss -- -- (1,109) (1,109) ------------------------------------------------------- Balance at March 29, 1996 30 11,592 (3,589) 8,033 Common stock issued -- 4 -- 4 Stock option and warrant expense -- 3 -- 3 Stock options exercised -- 94 -- 94 Net income -- -- 739 739 ------------------------------------------------------- Balance at March 28, 1997 $30 $11,693 ($2,850) $8,873 ======================================================= The accompanying notes are an integral part of these statements.
- 17 - 19 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) For the Years Ended - ---------------------------------------------------------------------------------------------------------------------- March 28, 1997 March 29, 1996 March 31, 1995 - ---------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income (loss) $739 ($1,109) $1,409 Adjustments to reconcile net income (loss) to net cash flows from operating activities -- Depreciation and amortization 1,523 1,754 1,064 Amortization of debt issuance costs 73 71 75 Stock option and warrant expense 3 15 67 (Gain) loss from sale of assets (6) 2 59 Equity in net income of 50% owned company (410) (88) -- (Increase) decrease in receivables, net 3,214 3,197 (4,782) (Increase) decrease in inventories (10,491) 2,154 (2,670) (Increase) decrease in prepaid expenses and other current assets 1,483 (76) 205 Increase (decrease) in accounts payable 4,719 (2,192) 1,304 Increase (decrease) in accrued expenses 754 (2,212) 434 Increase (decrease) in deferred income taxes 363 655 (172) Decrease in other long-term liabilities -- -- (77) Other, net 22 866 64 -------------------------------------------------------- Net cash flows from operating activities 1,986 3,037 (3,020) -------------------------------------------------------- Cash Flows from Investing Activities Payments for acquisitions, net of cash acquired -- -- (18,963) Investment in 50% owned company -- (3,842) -- Cash dividend from 50% owned company 300 -- -- Purchases of property and equipment (2,198) (963) (601) Proceeds from sale of assets 6 10 -- -------------------------------------------------------- Net cash flows from investing activities (1,892) (4,795) (19,564) -------------------------------------------------------- Cash Flows from Financing Activities Borrowings under revolving line of credit 306,471 307,623 294,404 Repayments under revolving line of credit (306,471) (303,213) (271,307) Proceeds from equipment loan 1,495 -- -- Payments of long-term debt (1,132) (1,563) (72) Payments of capital lease obligations (94) (206) (149) Payments of other long-term debt (155) -- -- Proceeds from exercise of stock options 94 221 21 Payments of deferred debt costs (36) -- (258) -------------------------------------------------------- Net cash flows from financing activities 172 2,862 22,639 -------------------------------------------------------- Increase in cash 266 1,104 55 Cash, Beginning of Year 1,947 843 788 -------------------------------------------------------- Cash, End of Year $2,213 $1,947 $843 -------------------------------------------------------- Supplemental Disclosure of Cash Flow Information Cash paid (refunded) during the year for -- Interest $3,689 $3,914 $2,083 -------------------------------------------------------- Income taxes, net ($1,089) $427 $1,320 -------------------------------------------------------- The accompanying notes are an integral part of these statements.
- 18 - 20 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies: The consolidated financial statements include the accounts of all divisions and the wholly owned subsidiaries, Northern Drug Company (NDC) and Krelitz Industries, Inc. (KII), collectively referred to as the Company. During 1996, NDC's operations were closed and merged into KII. All significant intercompany accounts and transactions are eliminated. Concentration of Credit Risk The Company is a full-service, regional wholesale drug distributor. From facilities in Missouri, Kentucky, and Minnesota, the Company distributes a broad range of pharmaceutical products, health and beauty aids and related products to its customers in 20 states. The Company focuses primarily on a target market sector which includes independent retail, institutional, franchise, chain store, and alternate site pharmacies in the Midwest and South. The Company operates in one business segment. The Company recognizes sales on the date the products are shipped. The Company has one customer that comprised approximately 20% and 21%, respectively, of net sales in 1997 and 1996 and approximately 22% and 40%, respectively, of the March 28, 1997 and March 29, 1996 accounts receivable balances. At April 30, 1997, this customer comprised approximately 38% of the accounts receivable balance. The supply agreement with this customer expires on June 30, 1997. There can be no assurances that the supply agreement with this customer will be renewed upon its expiration. The loss of this customer and/or the inability to collect amounts due from this customer in the future could have a material adverse effect on the Company's results of operations and financial position. In 1995, net sales to two customers represented approximately 22% and 14% of total net sales, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year The Company's fiscal year ends on the Friday closest to March 31. Fiscal years 1997, 1996 and 1995 ended on March 28, 1997, March 29, 1996 and March 31, 1995, respectively, and included 52 weeks. References to years relate to fiscal years rather than calendar years. Bulk Shipments The Company purchased pharmaceuticals in prior years from an industry trade association of which an officer of the Company is Chairman of the Board of Directors. Purchases of pharmaceuticals from this association amounted to $5,123,000 and $19,123,000 for 1996 and 1995, respectively. No material balances were payable to or receivable from this association at March 28, 1997 and March 29, 1996. Restricted Cash Restricted cash of $784,000 at March 28, 1997, and $773,000 at March 29, 1996, represents cash receipts from customers that must be used to reduce borrowings under the revolving line of credit and are included in cash. - 19 - 21 Inventories Inventories are comprised of pharmaceutical drugs and related over-the-counter items which are stated at the lower of cost or market. Cost is primarily determined using the last-in, first-out method. Property and Equipment Property and equipment is stated at cost. Depreciation and amortization are charged to operations primarily using the straight-line method over the estimated useful lives of the various classes of assets, which vary from 2 to 30 years, or over the shorter of the lease term for leasehold improvements. For income tax purposes, accelerated depreciation methods are used. At March 28, 1997 and March 29, 1996, $150,000 of property and equipment was under capital leases. Intangible Assets Intangible assets are stated at cost less accumulated amortization. Amortization is determined using the straight-line method over the estimated useful lives of the related assets. Long-Lived Assets If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. Income Taxes Deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective bases for income tax purposes. Deferred tax assets and liabilities are measured and recorded using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Book Overdrafts Accounts payable includes book overdrafts (outstanding checks) of $5,346,000 and $4,662,000 at March 28, 1997 and March 29, 1996, respectively. - 20 - 22 Reclassifications Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. Note 2. Acquisitions: In June 1994, the Company entered into a definitive asset purchase agreement (the "Agreement") with another pharmaceutical distributor whereby the Company purchased all of the pharmaceutical and non-pharmaceutical inventories dedicated to servicing a supply agreement and all of the accounts receivable directly related to a large regional drug store chain. The purchase price of the assets was $10.8 million and was financed through borrowings under the Company's existing credit facilities. In October 1994, the Company acquired all of the issued and outstanding common stock of NDC pursuant to the terms and conditions of a Stock Purchase Agreement (the "NDC Agreement"). Pursuant to the NDC Agreement, the Company acquired NDC for aggregate consideration consisting of $2,500,000 in cash, 308,334 shares of the Company's common stock valued at $1,706,000 and the issuance of $325,000 of 9% subordinated notes. At closing, the Company also repaid $3,581,000 of NDC's debt obligations. In March 1995, the Company acquired all of the issued and outstanding common stock of KII. The acquisition of KII was consummated pursuant to the terms and conditions of the Agreement and Plan of Merger dated February 13, 1995 whereby KII was acquired for an aggregate of $318,000 in cash, 107,852 shares of the Company's common stock valued at $646,000 and a $100,000 non-compete agreement with the former Chairman and CEO of KII. In addition, the Company exchanged 142,857 shares of its common stock to retire KII's $1,000,000 subordinated mortgage note payable and repaid $12,432,000 of KII's debt obligations. In February 1996, the Company settled a pre-acquisition lawsuit against KII resulting in cash payments of $325,000 and the issuance of 15,000 shares of common stock valued at $122,000. The results of operations for NDC and KII have been included in the consolidated financial statements since their respective acquisition dates. The following unaudited pro forma information presents a summary of consolidated results of operations of the Company, NDC and KII as if the acquisitions had occurred at the beginning of fiscal 1995, with pro forma adjustments to give effect to amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects. The unaudited pro forma information has been prepared for comparative purposes only and does not purport to be indicative of the results of operations had these transactions been completed as of the assumed dates or which may be obtained in the future (in thousands, except per share amounts).
March 31, 1995 -------------- Net sales $449,347 Net loss ($1,100) Net loss per share ($0.37)
- 21 - 23 Note 3. Inventories: Substantially all inventories are stated at the lower of last-in, first-out (LIFO) cost or market. If the Company had used the first-in, first-out (FIFO) method of inventory valuation, which approximates current replacement cost, inventories would have been $6,969,000 and $5,799,000 higher than reported at March 28, 1997 and March 29, 1996, respectively. Note 4. Property and Equipment: Property and equipment at March 28, 1997 and March 29,1996 consists of the following (in thousands):
1997 1996 ---- ---- Land $ 528 $ 528 Building and improvements 3,296 3,130 Fixtures and equipment 5,669 4,031 Leasehold improvements 735 390 Vehicles 1,052 1,110 ----------------------------- 11,280 9,189 Less--Accumulated depreciation and amortization (5,038) (4,027) ----------------------------- $ 6,242 $ 5,162 =============================
At March 28, 1997, the NDC building which is being held for sale was included in property and equipment in the Consolidated Balance Sheets at its estimated net realizable value of approximately $700,000. The property is expected to be sold in the first quarter of fiscal 1998. Note 5. Investment in 50% Owned Company: In November 1995, the Company completed the purchase of approximately 50% of the capital stock of Pharmaceutical Buyers, Inc. ("PBI"), a Colorado-based group purchasing organization. Pursuant to the transaction, the Company acquired approximately 50% of the voting and non-voting common stock of PBI for $3,750,000 in cash. The Company's investment in PBI, which includes the capitalization of professional fees of $92,000, is accounted for under the equity method. The Company's equity in the net income of PBI totaled $410,000 and $88,000, respectively, for 1997 and 1996, which is net of amortization of goodwill associated with its investment in PBI of $276,000 and $92,000 for these respective fiscal years. The PBI goodwill is being amortized using the straight line method over a period of 25 years. During 1997, the Company received a cash dividend of $300,000 from PBI which was recorded as a reduction in the carrying amount of the investment. Incremental interest expense related to the Company's financing of its investment in PBI with borrowings under its revolving line of credit approximated $301,000 and $100,000, respectively, in 1997 and 1996. Summarized balance sheet information for PBI for its fiscal year ended December 31, 1996 included current assets of $3.9 million, noncurrent assets of $1.2 million, current liabilities of $1.7 million and noncurrent liabilities of $8.1 million. Summarized income statement information for PBI for its fiscal year ended December 31, 1996 included net revenues of $5.5 million and income from continuing operations and net income of $1.2 million. Note 6. Other Assets: Other assets include deferred debt issuance costs of $669,000 at March 28, 1997 and $633,000 at March 29, 1996, that are amortized over the periods the related debt is outstanding. The $36,000 increase during the current year represents deferred cost related to the Missouri First Link loan (see Note 8). Accumulated amortization amounted to $471,000 at March 28, 1997 and - 22 - 24 $398,000 at March 29, 1996. Amortization of deferred debt issuance costs totaled $73,000 in 1997, $71,000 in 1996 and $75,000 in 1995, and is included in interest expense in the Consolidated Statements of Operations. Note 7. Intangible Assets: Intangible assets at March 28, 1997 and March 29, 1996, consist of the following (in thousands):
1997 1996 ------- ------- Excess of purchase price over fair value of net assets acquired $16,475 $16,475 Less--Accumulated amortization (1,850) (1,437) ------------------------- $14,625 $15,038 =========================
The excess of purchase price over the fair value of net assets acquired is being amortized using the straight-line method over a period of 40 years. Amortization of intangible assets totaled $413,000 in 1997, $413,000 in 1996, and $190,000 in 1995. Note 8. Long-Term Debt: Long-term debt at March 28, 1997 and March 29, 1996, consists of the following (in thousands):
1997 1996 ---- ---- Revolving line of credit with banks $40,000 $40,000 Subordinated notes payable to insurance company 1,083 2,167 Convertible subordinated notes payable to insurance company 1,750 1,750 Subordinated notes to former shareholders 325 325 Missouri First Link loan 1,495 -- Other, including capital lease obligations 15 157 ------------------------- $44,668 $44,399 Less--Current maturities (3,138) (1,209) ------------------------- $41,530 $43,190 =========================
As of March 28, 1997, the revolving line of credit had a maximum borrowing capacity of $50,000,000, plus a supplemental facility in an aggregate amount of up to $10,000,000 during the months of December through June of each year. Under the loan agreement, the total amount of loans and letters of credit outstanding at any time may not exceed the lesser of an amount based on percentages of eligible inventories and accounts receivable (the borrowing base formula), or $50,000,000, plus the supplemental facility, if applicable. Generally, advances bear interest at prime plus .75% per annum (8.5% prime rate at March 28, 1997 and 8.25% prime rate at March 29, 1996) payable monthly. The Company has an option to pay interest on a specified amount not less than $1,000,000 at the London Interbank Offered Rate (LIBOR) plus 2.5%. Such interest periods are of a one-, three-, or six-month duration. At March 28, 1997, and March 29, 1996, all of the Company's borrowings bore interest at a weighted average LIBOR-based rate of 7.938% and 7.837%, respectively. The Company was required to pay an annual facility fee of $138,875 through December 10, 1995 and $206,250 thereafter. At March 28, 1997, and March 29, 1996, the borrowing base formula amounted to $50,712,000 and $43,880,000, respectively. At March 28, 1997 and March 29, 1996, the unused portion of the line of credit amounted to $10,212,000 and $3,880,000, respectively. The agreement expires December 10, 2000, and, therefore, the related debt has been classified as long-term. Beginning December 10, 2000, the agreement can be renewed for - 23 - 25 one-year periods upon mutual consent. The revolving line of credit is secured by all of the Company's eligible accounts receivable and inventories. The subordinated notes payable to an insurance company bear interest at 11%, payable semiannually, and are comprised of nonconvertible notes of $1,083,333 and convertible notes of $1,750,000. Principal on the notes is due in full on December 29, 1997; however, the Company was required to prepay the nonconvertible notes in three equal annual installments of $1,083,333, the first of which was paid December 29, 1995. At any time prior to December 29, 1997, the convertible notes payable may be converted into shares of the Company's common stock at a price of $3.30 per share. In December 1996, the Company obtained a $1,495,000 equipment loan from a bank through the Missouri First Link program ("Missouri First") to finance certain capital expenditures at its leased Cape Girardeau, Missouri facility. During the first year of the four-year agreement, which is secured by certain property and equipment and leasehold improvements, the Missouri First loan bears interest at 5.95% and requires monthly interest payments. At the end of the first year of the agreement, the Company must reapply for the Missouri First program with approval dependent upon the Company meeting certain criteria related to job creation and economic development in the Cape Girardeau area. If approved, the loan will bear interest at a fixed rate of seventy percent of the bank's current prime rate (8.5% at March 28, 1997) plus 1/2%; otherwise, interest will be charged at the bank's current prime rate plus 1/2%. The Missouri First loan requires a principal payment of $182,500 at the end of the first year of the agreement. If approved for continuation in the Missouri First program, interest will continue to be paid monthly plus a $437,500 principal reduction at the end of the second year of the agreement; after such time, the loan requires monthly payments of $36,458 plus interest until maturity in December 2000. Should the Company's participation in the program not be approved at the end of the first year, monthly payments plus interest will commence at the beginning of the second year of the agreement. In October 1994, the Company issued subordinated notes to former shareholders of NDC in connection with the acquisition of NDC. The notes bear interest at 9%, payable quarterly. Principal on the notes is due in three equal annual installments beginning October 31, 1997. In addition, the Company issued unsecured notes in the aggregate principal amount of $424,000 to certain former shareholders of NDC replacing outstanding debt obligations of NDC. Such unsecured notes were paid in October 1995 plus interest at prime plus 1%. An aggregate of $69,000 of subordinated notes and $115,000 of unsecured notes were issued to a former shareholder of NDC who is currently a director of the Company. The Company is required under the terms of its debt agreements to comply with certain financial covenants, including those related to the maintenance of current ratio, tangible net worth and debt service and interest coverage ratios. The Company also is limited in its ability to make loans and investments, enter into leases, make capital expenditures or incur additional debt, among other things, without the consent of its lenders. At March 28 1997, maturities of long-term debt, excluding capital lease obligations, are as follows (in thousands):
Fiscal year: ------------ 1998 $ 3,127 1999 656 2000 546 2001 40,328 ------- $44,657 =======
At March 28, 1997, and March 29, 1996, the fair value of long-term debt approximated its current carrying value. Note 9. Commitments and Contingencies: The Company leases office and warehouse space and other equipment through noncancelable operating leases. Rental expense under operating leases was $713,000, $378,000 and - 24 - 26 $217,000 in 1997, 1996 and 1995, respectively. Minimum rental payments under these leases with initial or remaining terms of one year or more at March 28, 1997, are $2,115,000 and payments during the succeeding five years are: 1998 $740,000; 1999 $537,000; 2000 $330,000; 2001 $261,000; 2002 $247,000. There are various pending claims and lawsuits arising out of the normal course of the Company's business. In the opinion of management, the ultimate outcome of these claims and lawsuits will not have a material adverse effect on the financial position or results of operations of the Company. Note 10. Nonrecurring Expenses: In October 1995, the Company completed the consolidation of the operations of its subsidiaries NDC and KII into one facility in Minneapolis. As a result of the acquisition and consolidation of NDC and KII, the Company incurred additional nonrecurring expenses of $1,317,000. Prior to the consolidation, the Company incurred approximately $800,000 of fixed operating expenses at NDC which are not expected to be incurred at the consolidated facility. In addition, approximately $517,000 of costs were incurred in conjunction with the Company's decision to consolidate NDC and KII. Note 11. Stock Options: In April 1992, the Company adopted a Long-Term Incentive Plan that authorized the Compensation Committee of the Board of Directors (the "Committee") to grant key employees and officers of the Company incentive or non-qualified stock options, stock appreciation rights, performance shares, restricted shares and performance units. Options to purchase up to 200,000 shares of common stock may be granted under the Long-Term Incentive Plan. The Committee determines the price and terms at which awards may be granted, along with the duration of the restriction periods and performance targets. In May 1994, the Company granted non-qualified stock options for 20,999 shares to three executive officers at a price of $3.375 per share. The exercise price of all options granted in May 1994 was equal to the fair market value of the stock on the date of grant. In August 1994, the Company granted incentive stock options for 60,000 shares to three executive officers at a price of $5.85 per share which was equal to 96% of the fair market value of the stock on the date of grant. The stock options vest and can be exercised ratably on each anniversary date from the grant date over a four-year period. The difference between the fair market value of the stock at the date of grant and the exercise price is being recorded as compensation expense over the four-year vesting period. In May 1995, the Company granted non-qualified stock options for 58,664 shares to five executive officers at a price of $7.00. In May 1996, the Company granted non-qualified stock options for 59,333 shares to four executive officers at an exercise price of $6.375 per share. The exercise price of the options granted in May 1995 and 1996 was equal to the fair market value of the stock on the respective dates of grant. In January 1997, 67,999 non-qualified stock options outstanding under the Company's Long-Term Incentive Plan with exercise prices ranging from $3.875 to $7.00 per share were canceled and replaced with an equivalent number of non-qualified options with an exercise price equal to the then fair market price of the stock of $3.75 per share. In February 1997, the Company granted non-qualified stock options for 41,500 shares to three executive officers at an exercise price of $4.50 per share. The exercise price of the options granted in February 1997 was equal to the fair market value of the stock on the date of grant. Stock options granted under the Long-Term Incentive Plan are not exercisable earlier than six months from the date of grant (except in the case of death or disability of the employee holding the same), nor later than ten years from the date of grant. In February 1993, the Board of Directors of the Company adopted the D & K Wholesale Drug, Inc. 1993 Stock Option Plan (the "1993 Plan") to grant key employees of the Company non-qualified stock options to purchase up to 350,000 shares of the Company's common stock. The 1993 Plan is administered by the Company's Board of Directors, which determines the price and terms at which awards may be granted. In May 1994, the Company granted non-qualified stock options for an aggregate of 33,000 shares to certain key employees at an exercise price of $3.375 per share. In May 1995, the Company granted non-qualified stock options for an aggregate of 33,500 shares to certain key employees at an exercise price of $7.00 per share. In May 1996, the Company granted non-qualified stock options for 23,500 shares to certain key employees at an - 25 - 27 exercise price of $6.375 per share. The exercise price of all options granted pursuant to the 1993 Plan was equal to the fair market value of stock on the respective dates of grant. In January 1997, 60,000 non-qualified stock options outstanding under the 1993 Plan with exercise prices ranging from $3.875 to $7.00 per share were canceled and replaced with an equivalent number of non-qualified stock options with an exercise price equal to the fair market price of the stock of $3.75 per share. Stock options granted under the 1993 Plan are immediately exercisable from the date of grant and expire not later than ten years from the date of grant. Changes in options outstanding under the Company's Long-Term Incentive Plan and the 1993 Plan are as follows:
Number of Shares Weighted Average Exercise Price ---------------- ------------------------------- Outstanding at April 1, 1994 58,699 $3.71 Granted Fiscal 1995 113,999 4.68 Canceled Fiscal 1995 (5,500) 3.51 Exercised Fiscal 1995 (6,333) 3.38 ---------------------------------------------------------- Outstanding at March 31, 1995 160,865 4.42 Granted Fiscal 1996 92,164 7.00 Exercised Fiscal 1996 (43,834) 5.05 Canceled Fiscal 1996 (19,998) 6.14 ---------------------------------------------------------- Outstanding at March 29, 1996 189,197 5.35 Granted Fiscal 1997 252,332 4.74 Canceled Fiscal 1997 (209,164) 6.31 Exercised Fiscal 1997 (25,666) 3.65 ---------------------------------------------------------- Outstanding at March 28, 1997 206,699 $3.84 ==========================================================
Stock options exercisable at March 28, 1997, March 29, 1996 and March 31, 1995 were 155,199, 159,197 and 100,865, respectively, with a weighted average exercise price of $3.66, $5.25 and $3.56, respectively. The weighted average remaining contractual term for all outstanding options was 8.24 years at March 28, 1997. In accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company has elected to continue following Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and its related interpretations in accounting for its stock option plans, and accordingly, generally does not recognize compensation expense related to options issued to employees. If the Company had elected to recognize compensation expense based upon the fair value of the options granted at the grant date as prescribed by SFAS 123, pro forma net income (loss) and earnings (loss) per share would have been as follows (in thousands, except per share data):
1997 1996 ---- ---- Net income (loss) - as reported $739 ($1,109) Net income (loss) - pro forma $464 ($1,398) Earnings (loss) per share: Primary - as reported $0.24 ($0.37) Primary - pro forma $0.15 ($0.47) Fully diluted - as reported $0.24 ($0.37) Fully diluted - pro forma $0.15 ($0.47)
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions:
1997 1996 ---- ---- Risk free interest rates 5.78% 5.68% Expected life of options 6.2 years 6.1 years Volatility of stock price 83% 85% Expected dividend yield 0% 0% Fair value of options $3.43 $5.22
- 26 - 28 Compensation expense based on the fair value of options granted prior to April 1, 1995 were not included in the preceding pro forma calculations. Therefore, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Note 12. Warrants: The Company has outstanding warrants to purchase 22,072 shares of common stock at a price of $0.005 per share. These warrants are exercisable only at such time as a principal investor receives, following a merger or sale of all or substantially all of the assets of the Company, in excess of a 30% compounded annual rate of return on its investment in common stock of the Company. The warrants were not exercisable at March 28, 1997, and will expire in December 1999. The Company does not - 27 - 29 believe the conditions to the exercise of the warrants will ever be satisfied. In June 1994, the Company entered into a letter agreement with an independent research firm to produce reports with respect to the Company's publicly traded equity securities. The term of the agreement was 13 months and in consideration for the research reports, the Company granted the firm warrants to purchase up to 70,000 shares of the Company's common stock at an exercise price equal to the closing price of the stock on the date of the agreement, which was $4.125 per share. The warrants are exercisable for a period of three years from the date of the agreement. The research firm earned the warrants on a vesting schedule over the 13-month term of its services. Fifty percent of the warrants vested on the date of the agreement, an additional 25% vested upon issuance of a second research report in November 1994, and the final 25% vested upon issuance of a third research report in June, 1995. At March 28, 1997, the research firm was vested in 70,000 warrants at a price of $4.125 per share. The Company recorded expense of $9,000 and $61,000 in 1996 and 1995, respectively, related to these warrants. Note 13. Other Income (Expense): The Company recorded a $287,000 charge in the fourth quarter of 1996 to fully reserve for its investment in a wholesale alliance of which the probability of fully recovering its investment was remote. Note 14. Income Taxes: The components of the income tax provision (benefit) for the fiscal years ended 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995 ---- ---- ---- Current tax provision (benefit) $177 ($1,044) $1,129 Deferred tax provision (benefit) 363 655 (60) --------------------------------------- Income tax provision (benefit) $540 ($389) $1,069 =======================================
The actual income tax provision (benefit) differs from the expected income tax provision (benefit), computed by applying the respective U.S. statutory Federal tax rates of 34% to income before income tax provision (benefit), as follows (in thousands):
1997 1996 1995 ---- ---- ---- Current expected income tax provision (benefit) $435 ($509) $ 843 Amortization of intangible assets not deductible for income tax purposes 234 172 65 Equity in net income of 50% owned company not taxable for income tax purposes (186) (49) -- State income taxes net of Federal benefit 61 (49) 114 Other, net (4) 46 47 ------------------------------------- $540 ($389) $1,069 =====================================
At March 28, 1997 and March 29, 1996, the tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities are as follows (in thousands): - 28 - 30
1997 1996 ---- ---- Deferred tax assets Allowance for doubtful accounts $ 299 $ 347 Accrued liabilities 235 302 Capital lease obligations 29 41 Inventories 671 666 Net operating loss carryforwards 4,172 4,172 Alternative minimum tax and contribution carryforwards 201 298 Other 43 19 ------------------------- Total deferred tax assets $5,650 $5,845 ------------------------- Deferred tax liabilities Property and equipment ($167) ($36) Inventories (4,160) (4,133) Other (45) (35) ------------------------- Total deferred tax liabilities ($4,372) ($4,204) ------------------------- Valuation allowance (4,231) (4,231) ------------------------- Net deferred tax liabilities ($2,953) ($2,590) =========================
In connection with the acquisitions of NDC and KII in 1995, net deferred tax liabilities of $4,055,000 were established for the differences in the income tax basis of assets and liabilities acquired and their carrying amounts for financial reporting purposes. In addition, deferred tax assets of $4,012,000 were recorded with respect to net operating loss carryforwards, contribution carryforwards, and alternative minimum tax carryforwards that were generated by NDC and KII prior to the acquisitions. The use of pre-acquisition operating losses is subject to limitations imposed by the Internal Revenue Code and if not utilized by the Company, the net operating loss carryforwards will expire beginning in fiscal year 2007. At March 28, 1997, and March 29, 1996, the Company recorded a valuation allowance of ($4,231,000) primarily due to the uncertainty of utilizing the pre-acquisition operating losses and other carryforwards. During 1996, the previously recorded valuation allowance decreased by $1,386,000 with a corresponding decrease in the excess purchase price over the fair value of net assets acquired. Note 15. Earnings (Loss) Per Share: Primary earnings (loss) per share are computed by dividing net income (loss) by the sum of: (1) the weighted average number of common shares outstanding during the period; and (2) the dilutive effect of outstanding stock options and warrants (calculated using the treasury stock method). Fully diluted earnings (loss) per share are computed using the components mentioned above for the primary computation with the addition of common shares issuable upon conversion of the Company's 11% convertible subordinated notes. The fully diluted computation adds back to income (loss) interest on the 11% convertible subordinated notes and deducts the income tax effect as if such notes had been converted into common stock at the beginning of the period. Primary and fully diluted earnings per share for 1997 were calculated using 3,072,117 weighted average common shares outstanding. Loss per share for 1996 was calculated using 2,971,117 weighted average common shares outstanding. Primary and fully diluted earnings per share for 1995 were calculated using 2,602,739 and 3,141,885 weighted average common shares outstanding, respectively. Note 16. Accounting Standards Not Implemented: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which establishes standards for computing and presenting earnings per share. SFAS 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations. The Company is required to adopt the provisions of SFAS 128 during the quarter ending December 31, 1997 and all prior period earnings per share data presented must be restated. The adoption of SFAS 128 is not expected to have a significant impact on the Company's previously reported or prospective earnings per share amounts. - 29 - 31 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" (SFAS 129), which establishes standards for disclosing information about an entity's capital structure. The Company is required to adopt the provisions of SFAS 129 during the quarter ending December 31, 1997. The adoption of SFAS 129 is not expected to have a material impact on the Company's financial position or results of operations. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------ --------------------------------------------------------------- Financial Disclosure -------------------- Not Applicable. PART III Item 10. Directors and Executive Officers of the Registrant - ------- -------------------------------------------------- The information set forth under the captions "Election of Directors" of the registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders (the "1997 Proxy Statement") is incorporated herein by this reference. The Company will file the 1997 Proxy Statement with the Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year. Information regarding executive officers is set forth in Part I of this report. Item 11. Executive Compensation - ------- ---------------------- The information set forth under the captions "Directors' Fees" and "Compensation of Executive Officers" of the registrant's 1997 Proxy Statement is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------- -------------------------------------------------------------- The information set forth under the captions "Voting Securities and Principal Holders Thereof" and "Security Ownership By Management" of the registrant's 1997 Proxy Statement is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions - ------- ---------------------------------------------- The information set forth under the caption "Certain Transactions" of the registrant's 1997 Proxy Statement is incorporated herein by this reference. PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K - ------- ----------------------------------------------------------------- D & K Wholesale Drug, Inc. - ------------------------- (a)(1) Financial statements: The following consolidated financial statements are submitted in response to Item 14(a)(1):
PAGE ---- D & K Wholesale Drug, Inc Report of Independent Public Accountants 14 Consolidated Balance Sheets at March 28, 1997 and March 29, 1996 15 Consolidated Statements of Operations for the years ended March 28, 1997, March 29, 1996 and March 31, 1995 16 Consolidated Statements of Stockholders' Equity for the years ended March 28, 1997, March 29, 1996 and March 31, 1995 17 Consolidated Statements of Cash Flows for the years ended March 28, 1997, March 29, 1996 and March 31, 1995 18 Notes to Consolidated Financial Statements 19
- 30 - 32 (2) The following financial statement schedule and auditors' report thereon are included in Part IV of this report:
PAGE ---- Report of Independent Public Accountants on Schedule 33 Schedule II--Valuation and Qualifying Accounts 34
The Financial Statements of Pharmaceutical Buyers, Inc. for the year ended December 31, 1996 included as Exhibit 99 to this Annual Report on Form 10-K are incorporated herein by this reference. Schedules other than those listed above have been omitted because they are either not required or not applicable, or because the information is presented in the consolidated financial statements or the notes thereto. (3) Exhibits. See Exhibit Index. (b) Reports on Form 8-K. None. (c) See Item 14(a)(3) above. (d) See Item 14(a)(2) above. - 31 - 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 WHOLESALE DRUG, INC. (Registrant) By /s/ J. Hord Armstrong, III ------------------------------------------------- J. Hord Armstrong, III, Chairman of the Board, Chief Executive Officer and Treasurer Date: June 24, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ J. Hord Armstrong, III Chairman, Chief Executive Officer, June 24, 1997 - -------------------------------- Treasurer and Director J. Hord Armstrong, III (Principal Financial Officer) /s/ Martin D. Wilson President, Chief Operating Officer, June 24, 1997 - -------------------------------- Secretary and Director Martin D. Wilson /s/ Daniel E. Kreher Vice President, Finance & Administration June 24, 1997 - -------------------------------- (Principal Accounting Officer) Daniel E. Kreher /s/ Richard F. Ford Director June 24, 1997 - -------------------------------- Richard F. Ford /s/ Bryan H. Lawrence Director June 24, 1997 - -------------------------------- Bryan H. Lawrence /s/ Elliot H. Stein Director June 24, 1997 - -------------------------------- Elliot H. Stein
- 32 - 34 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To D & K Wholesale Drug, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements included in the D & K Wholesale Drug, Inc. Annual Report on Form 10-K for the fiscal year ended March 28, 1997 and have issued our report thereon dated May 8, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Schedule II included in this Form 10-K is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP St. Louis, Missouri May 8, 1997 - 33 - 35 D & K WHOLESALE DRUG, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL YEARS 1995, 1996, 1997
Additions --------- Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Acquisitions Deductions Period - ------------------------------------------------------------------------------------------------------------------------ Valuation Allowance for Doubtful Receivables: Fiscal Year 1995 $ 370,000 $ 33,000 $1,229,000 $ -- $1,632,000 ======================================================================================= Fiscal Year 1996 $1,632,000 $136,000 $ 251,000 $(1,151,000) $ 868,000 ======================================================================================= Fiscal Year 1997 $ 868,000 $ 65,000 $ -- $ (236,000) $ 697,000 =======================================================================================
- 34 - 36
EXHIBIT INDEX Exhibit No. Description Page - ---------- ----------- ---- 2.1 Asset Purchase Agreement, by and between registrant and Malone & Hyde, Inc., filed as Exhibit 2.4 to registrant's Annual Report on Form 10-K for the year ended April 1, 1994 is incorporated herein by this reference. 2.2 Stock Purchase Agreement, dated October 25, 1994, by and among registrant, Northern Drug Company, G. Jay Coughlin, Amy Goldfine, Dan W. Goldfine, Erwin L. Goldfine, John J. Goldfine, Manley M. Goldfine, Steven B. Goldfine, Gene W. Halverson and William D. Watters, filed as Exhibit 2 to registrant's Current Report on Form 8-K dated October 25, 1994 is incorporated herein by this reference. 2.3 Agreement and Plan of Merger, dated February 13, 1995, by and among Krelitz Industries, Inc., Barry M. Krelitz, Annetta J. Krelitz, Annetta J. Krelitz Trustee under certain trusts FBO Lori M. Krelitz, Michael J. Krelitz and Steven A. Krelitz, The Estate of Philip J. Krelitz, Andrew C. Krelitz, Bennett A. Krelitz, Ellen B. Krelitz, Pearl G. Krelitz, Okabena Partnership K, DKWD Acquisition Corp. and registrant, filed as Exhibit 2 to registrant's Current Report on Form 8-K dated March 2, 1995 is incorporated herein by this reference. 2.4 Stock Purchase and Redemption Agreement, dated as of November 30, 1995, by and among Pharmaceutical Buyers, Inc., J. David McCay, The J. David McCay Living Trust, Robert E. Korenblat and the registrant is filed herewith. 3.1 Restated Certificate of Incorporation, filed as Exhibit 3.2 to registrant's Registration Statement on Form S-1 (Reg. No. 33-48730) is incorporated herein by this reference. 3.2 By-laws of the registrant, as currently in effect, filed as Exhibit 3.3 to registrant's Registration Statement on Form S-1 (Reg. No. 33-48730) is incorporated herein by this reference. 4.1 Form of certificate for Common Stock, filed as Exhibit 4.1 to registrant's Registration Statement on Form S-1 (Reg. No. 33-48730) is incorporated herein by this reference. - 35 - 37 Exhibit No. Description Page - ---------- ----------- ---- 10.1 Note Agreement, dated December 29, 1987, regarding $3,250,000.00 11% Joint and Several Subordinated Notes due December 29, 1997, and $1,750,000.00 11% Joint and Several Convertible Subordinated Notes due December 29, 1997, by and among registrant, Delta Wholesale Drug, Inc., W. Kelly Company, Wholesale Management Services, Inc. and Massachusetts Mutual Life Insurance Company, and amendments thereto, filed as Exhibit 10.3 to the registrant's Registration Statement on Form S-1 (Reg. No. 33-48730) is incorporated herein by this reference. 10.2 Note Agreement, dated December 29, 1987, regarding $3,250,000.00 11% Joint and Several Subordinated Notes due December 29, 1997, and $1,750,000.00 11% Joint and Several Convertible subordinated Notes due December 29, 1997, by and among registrant, Delta Wholesale Drug, Inc., W. Kelly Company, Wholesale Management Services, Inc. and MassMutual Corporate Investors, and amendments thereto, filed as Exhibit 10.4 to the registrant's Registration Statement on Form S-1 (Reg. No. 33-48730) is incorporated herein by this reference. 10.3 Preferred Stock Purchase Agreement, dated December 29, 1987, by and among registrant, Gateway Venture Partners III, L.P., J. Hord Armstrong, III and W. VanMeter Alford, Jr., filed as Exhibit 10.5 to the registrant's Registration Statement on Form S-1 (Reg. No. 33-48730) is incorporated herein by this reference. 10.4 Preferred Stock Purchase Agreement, dated December 29, 1987, by and among registrant, Elliott H. Stein, Robert A. Geddes, Bryan H. Lawrence, W.G. Heckman, Robert R. Hermann, Inmann Brandon, J. Hord Armstrong, III and W. VanMeter Alford, Jr., filed as Exhibit 10.4 to the registrant's Registration Statement on Form S-1 (Reg. No. 33-48730) is incorporated herein by this reference. 10.5 D & K Wholesale Drug, Inc. Amended and Restated 1992 Long Term Incentive Plan, filed as Annex A to the registrant's 1995 Proxy Statement is incorporated herein by this reference. 10.6 Wholesale Distribution Agreement, by and between registrant and GLAXO INC., filed as Exhibit 10.14 to the registrant's Registration Statement on Form S-1 (Reg. No. 3348730) is incorporated herein by this reference. 10.7 Wholesale Distribution Agreement, dated January 1, 1995, by and between registrant and SmithKline Beecham Pharmaceuticals, filed as Exhibit 10.7 to registrant's Annual Report on Form 10-K for the year ended March 29, 1996 is incorporated herein by this reference. - 36 - 38 Exhibit No. Description Page - ---------- ----------- ---- 10.8 Wholesale Prime Vendor Agreement, dated September 27, 1993, by and between registrant and Pfizer Inc., filed as Exhibit 10.16 to the registrant's Annual Report on Form 10-K for the year ended April 1, 1994 is incorporated herein by this reference. 10.9 Warehousing and Distribution Service Agreement, dated July 1, 1994, by and between registrant and Eli Lilly and Company, filed as Exhibit 10.17 to the registrant's Annual Report on Form 10-K for the year ended April 1, 1994 is incorporated herein by this reference. 10.10 Amendment to Note Agreements, filed as Exhibit 10.21 to the registrant's Registration Statement on Form S-1 (Reg. No. 33-48730) is incorporated herein by this reference. 10.11 Letter Agreement, dated March 31, 1992, between registrant, Delta, Kelly, WMSI, Massachusetts Mutual Life Insurance Company and MassMutual Corporate Investors, filed as Exhibit 10.26 to registrant's Annual Report on Form 10-K for the year ended April 2, 1993 is incorporated herein by this reference. 10.12 Letter Agreement dated May 24, 1994, between registrant, Massachusetts Mutual Life Insurance Company and MassMutual Corporate Investors, filed as Exhibit 10.30 to the registrant's Annual Report on Form 10-K for the year ended April 1, 1994 is incorporated herein by this reference. 10.13 Letter Agreement dated February 14, 1995, between registrant, Massachusetts Mutual Life Insurance Company and MassMutual Corporate Investors, filed as Exhibit 10.15 to the registrant's Annual Report on Form 10-K for the year ended March 31, 1995 is incorporated herein by this reference. 10.14 Letter Agreement dated January 18, 1995, between registrant, Massachusetts Mutual Life Insurance Company and MassMutual Corporate Investors, filed as Exhibit 10.16 to the registrant's Annual Report on Form 10-K for the year ended March 31, 1995 is incorporated herein by this reference. 10.15 Letter Agreement dated June 10, 1994, between registrant, Massachusetts Mutual Life Insurance Company and MassMutual Corporate Investors, filed as Exhibit 10.17 to the registrant's Annual Report on Form 10-K for the year ended March 31, 1995 is incorporated herein by this reference. 10.16 Letter Agreement dated October 10, 1994 between registrant, Massachusetts Mutual Life Insurance Company and MassMutual Corporate Investors, filed as Exhibit 10.18 to the registrant's Annual Report on Form 10-K for the year ended March 31, 1995 is incorporated herein by this reference. - 37 - 39 Exhibit No. Description Page - ---------- ----------- ---- 10.17 Supply Agreement dated April 18, 1995 by and between registrant and M & H Drugs, Inc., filed as Exhibit 10.19 to the registrant's Annual Report on Form 10-K for the year ended March 31, 1995 is incorporated herein by this reference. 10.18 Letter Agreement, dated August 31, 1993, by and between registrant and W. VanMeter Alford, Jr. filed as Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended April 1, 1994 is incorporated herein by this reference. 10.19 Third Amended and Restated Loan and Security Agreement, dated as of March 3, 1995, by and among registrant, Northern Drug Company, Krelitz Industries, Inc. and Shawmut Capital Corporation, filed as Exhibit 10.21 to the registrant's Annual Report on Form 10-K for the year ended March 31, 1995 is incorporated herein by this reference. 10.20 First Amendment to Third Amended and Restated Loan and Security Agreement, dated as of June 9, 1995, by and among registrant, Northern Drug Company, Krelitz Industries, Inc. and Shawmut Capital Corporation, filed as Exhibit 10.22 to the registrant's Annual Report on Form 10-K for the year ended March 31, 1995 is incorporated herein by this reference. 10.21 Release of All Claims, dated as of June 6, 1995, by and between registrant and George P. Bray, filed as Exhibit 10.23 to the registrant's Annual Report on Form 10-K for the year ended March 31, 1995 is incorporated herein by this reference. 10.22 Second Amendment to Third Amended and Restated Loan and Security Agreement and Consent, dated as of November 29, 1995 by and among Shawmut Capital Corporation, the registrant, Northern Drug Company and Krelitz Industries, Inc., filed as Exhibit 10.22 to the registrant's Annual Report on Form 10-K for the year ended March 29, 1996 is incorporated herein by this reference. 10.23 Third Amendment to Third Amended and Restated Loan and Security Agreement, Amendment to Pledge Agreement and Waiver, dated as of July 1996, by and among Fleet Capital Corporation, the registrant and Krelitz Industries, Inc., filed as Exhibit 10.23 to the registrant's Annual Report on Form 10-K for the year ended March 29, 1996 is incorporated herein by this reference. 10.24 Amendment to and Restatement of Employment Agreement, dated as of January 2, 1996, by and between the registrant and Steven B. Goldfine, filed as Exhibit 10.24 to the registrant's Annual Report on Form 10-K for the year ended March 29, 1996 is incorporated herein by this reference. - 38 - 40 Exhibit No. Description Page - ---------- ----------- ---- 10.25 D & K Wholesale Drug, Inc. 401(k) Profit Sharing Plan and Trust, dated January 1, 1995, filed as Exhibit 10.25 to the registrant's Annual Report on Form 10-K for the year ended March 29, 1996 is incorporated herein by this reference. 10.26 Amended and Restated Lease Agreement, dated as of January 16, 1996, by and between Morhaert Development, L.L.C. and the registrant's, filed as Exhibit 10.26 to the registrant's Annual Report on Form 10-K for the year ended March 29, 1996 is incorporated herein by this reference. 10.27 First Amendment to Amended and Restated Lease Agreement, dated as of June 6, 1996, by and between Morhaert Development, L.L.C. and the registrant's, filed as Exhibit 10.27 to the registrant's Annual Report on Form 10-K for the year ended March 29, 1996 is incorporated herein by this reference. 10.28 Fourth Amendment to Third Amended and Restated Loan and Security Agreement, dated as of May 1997, by an among Fleet Capital Corporation, the registrant and Krelitz Industries, Inc. is filed herewith. 10.29 Pharmaceutical Services Agreement between Anthem Prescription Management, Inc. and D&K Wholesale Drug, Inc. dated July 16, 1996, filed as Exhibit 10.1 to the registrant's Quarterly Report of Form 10-Q for the quarterly period ended June 30, 1996 is incorporated herein by this reference. 10.30 Loan Agreement dated as of December 23, 1996, by and among registrant, Krelitz Industries, Inc. and Magna Bank, N.A. is filed herewith. 13 Registrant's 1997 Annual Report to Stockholders is filed herewith. 21 Subsidiaries of the registrant, filed as Exhibit 21 to the registrant's Annual Report on Form 10-K for the year ended March 29, 1996 is incorporated herein by this reference. 23 Consent of Arthur Andersen LLP is filed herewith. 99 Pharmaceutical Buyers, Inc. Financial Statements as of December 31, 1996 together with Report of Independent Public Accountants are filed herewith.
- 39 - EX-10.28 2 1 FOURTH AMENDMENT TO THIRD AMENDED AND RESTATED ---------------------------------------------- LOAN AND SECURITY AGREEMENT --------------------------- THIS FOURTH AMENDMENT TO THE THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Amendment") is made as of May 23, 1997, by and among FLEET CAPITAL CORPORATION, a Rhode Island corporation (the "Lender"), and D&K WHOLESALE DRUG, INC. ("D & K") and KRELITZ INDUSTRIES, INC. ("KII"), individually and as successor by merger to NORTHERN DRUG COMPANY ("NDC") (D & K and KII are sometimes hereinafter referred to individually as "Borrower" and collectively as "Borrowers"). Preliminary Statements ---------------------- A. Lender and Borrowers are parties to that certain Third Amended and Restated Loan and Security Agreement dated as of March 3, 1995 (as amended, the "Loan Agreement"). Capitalized terms used herein and not otherwise defined shall have the meanings given them in the Loan Agreement. B. Borrowers and Lender now desire to amend certain provisions of the Loan Agreement on and subject to the terms hereof. Terms of Agreement ------------------ NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Consent. The Lender hereby consents to the Borrowers' changing ------- their fiscal years from March 31 to June 30, which consent shall be effective for the 1997 fiscal year. This consent is conditioned upon the Borrowers delivering to Lender an audited year-end financial statement for the fiscal year ending March 28, 1997, and any other audited financial statements prepared for the Borrowers. After June 30, 1997, all year-end statements shall be for the June 30 fiscal year of Borrower. 2. Amendments to Loan Agreement. The Loan Agreement is hereby amended ---------------------------- as follows: (a) Section 1.1 [relating to Defined Terms] is hereby amended by deleting the definition of LIBO Rate and --------- replacing it with the following new definition: 2 LIBO Rate - With respect to any Revolving Credit Loan --------- (or portion thereof) means an interest rate per annum equal to the highest rate of interest per annum (adjusted to reflect reserve, deposit insurance or other similar requirements to which Bank may be subject) at which deposits in United States dollars are offered to the Bank for a thirty-day period, in London, England, by prime banks in the London interbank market at or about 11:00 a.m. (London time) two Business Days before the date upon which the LIBO Rate will be effective for such Loans in an amount approximately equal to the principal amount of such Revolving Credit Loan (or portion thereof). (b) Section 3.1 [relating to Interest and Charges] is hereby deleted in its entirety and replaced by the following new Section 3.1: 3.1. Interest and Charges. -------------------- (A) Interest Rate. The Borrowers shall pay interest ------------- on the unpaid principal amount of each Revolving Credit Loan and any other Obligation for payment of money from the due date at the applicable interest rates set forth below. (B) LIBO Rate Loans. So long as no Default or Event --------------- of Default exists hereunder, and except to the extent that D & K, on its own behalf and/or as agent for KII, shall elect to pay interest on any Revolving Credit Loan pursuant to subsection (C) of this Section 3.1, the Borrowers shall pay interest on (i) each Revolving Credit Loan, from and including the date of such Loan and (ii) any other Obligation for the payment of money from the due date thereof, in either case at a fluctuating interest rate per annum in effect from time to time equal to the LIBO Rate plus one and seven-tenths of one percent (1.70%) per annum, subject, -------- however, to adjustment semi-annually as set forth in Section ------- 3.1(D) hereof; provided, however, that, for LIBO Rate Loans ----------------- outstanding on May 23, 1997, such LIBO Rate Loans will only accrue interest at the rate set forth above upon the expiration of the interest periods governing such LIBO Rate Loans. - 2 - 3 After the effective date of this Amendment, the foregoing rate of interest shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the LIBO Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the LIBO Rate becomes effective. The LIBO Rate in effect on the date of this Amendment shall be the LIBO Rate effective as of the opening of business on such date. (C) Base Rate Loans. D & K, on its own behalf and/or as --------------- agent for KII, may from time to time elect to have the interest on all (but not a portion of) the outstanding Revolving Credit Loans determined and payable at a floating rate equal to the Base Rate plus one-half percent (0.50%) per annum, (subject, however, ---------------- to adjustment semi-annually as set forth in Section 3.1(D) hereof) by written notice to the Lender, such notice to be received by the Lender before 10:00 a.m. (Milwaukee, Wisconsin time) on the day on which such conversion is to take effect. If D & K, on its own behalf and/or as agent for KII, has made such election, Borrowers shall pay interest on the Revolving Credit Loans as provided in Section 3.7. Notwithstanding any election by Borrowers, upon and after the occurrence of an Event of Default, and during the continuation thereof, Lender may at its sole option elect to have the interest of the outstanding Revolving Credit Loans determined and payable pursuant to this Subsection 3.1(C), plus the additional percentage set forth in Subsection 3.1(H). After the date hereof, the foregoing rate of interest shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Base Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the Base Rate becomes effective. The Base Rate in effect on the date of the election to have the Revolving Credit Loans bear interest at the Base Rate plus a percentage as set forth herein shall be the Base Rate effective as of the opening of business on such date. (D) Semiannual Adjustment in Interest Rate. Notwithstanding -------------------------------------- anything else herein to the contrary, however, the interest rate payable hereunder shall be - 3 - 4 subject to a semiannual change upon the Borrowers' achieving certain Interest Coverage Ratios for any prior twelve-month period, determined based upon financial statements for the year-to-date periods ending June 30 and December 31 of each year. The adjustment in interest rate shall occur on the date of the Lender's receipt of Borrowers' audited and certified financial statements for the period ending on June 30 of each year, and on internally-prepared financial statements certified by the Borrowers for the period ending December 31 of each year, with the initial rate adjustment to be considered for the period ending December 31, 1997. Such rate changes shall be effective only for the period after such receipt. The rates of interest achieved with each Interest Coverage Ratio shall automatically be adjusted up or down in accordance with the following schedule: Ratio Rate Payable ----- ------------ between 1.50 to 1 and 1.74 to 1.0 Base Rate plus 1.00% LIBO Rate plus 2.25% between 1.75 to 1 and 1.99 to 1.0 Base Rate plus 0.75% LIBO Rate plus 2.00% between 2.00 to 1 and 2.49 to 1.0 Base Rate plus 0.50% LIBO Rate plus 1.70% 2.50 to 1 or greater Base Rate plus 0.00% LIBO Rate plus 1.50% In calculating the ratio, Lender will calculate numbers to hundredths, and amounts of .05 or greater will be rounded up to the next tenth. For example (and not by way of limitation) "2.45 shall be rounded to 2.5, but 2.44 shall be rounded to 2.4." (E) Illegality; Impracticality. If it shall become unlawful -------------------------- for Bank, Lender or any Participating Lender to obtain funds in the London interbank market in order to fund or maintain LIBO Rate Loans or otherwise to perform its obligations hereunder with respect to any such Loans, upon at least five (5) - 4 - 5 Business Days' notice by Lender to D & K the rate of interest on all such LIBO Rate Loans shall thereupon be determined under Subsection (D) of this Section 3.1, and the right of D & K, on its own behalf and/or as agent for KII, to have interest accrue on any Loan at the LIBO Rate plus the percentage set forth herein shall thereupon terminate. Notwithstanding any other provision of this Agreement to the contrary, if, during any period in which interest at the LIBO Rate plus a percentage is to be charged on any Loan, (i) deposits in U.S. dollars for thirty-day periods are not available to the Bank in the London interbank market, or (ii) the LIBO Rate plus the percentage set forth herein will not adequately and fairly reflect the cost to Lender or any Participating Lender of making or maintaining the related LIBO Rate Loan, or (iii) by reason of national or international financial, political or economic conditions or by reason of any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect, or the interpretation or administration thereof by any governmental authority, or compliance by the Bank, Lender or any Participating Lender with any request or directive of such authority (whether or not having the force of law), including without limitation exchange controls, it is impracticable, unlawful or impossible for Bank, Lender or any Participating Lender to make or continue the relevant LIBO Rate Loan, then D & K, on its own behalf and/or as agent for KII, shall not be entitled, so long as such circumstances continue, to continue to have interest accrue on any Loan be at the LIBO Rate plus a percentage as set forth herein. (F) Increased Costs. If, on or after the date hereof, --------------- the introduction of or any change in, or in the interpretation of, any law or regulation or the compliance by Lender or any Participating Lender with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against all or any assets held by, deposits or accounts with, or credit extended by or to, Lender or any Participating Lender, or impose on Bank, Lender, any Participating Lender or the London interbank - 5 - 6 market any other condition affecting the LIBO Rate Loans, or its obligation to make LIBO Rate Loans; or (ii) subject Bank, Lender or any Participating Lender to, or cause the termination or reduction of a previously granted exemption with respect to, any tax, levy, impost, deduction, charge or withholding with respect to the LIBO Rate Loans, the Note or Lender's obligation to make LIBO Rate Loans, or change the basis of taxation of payment to Lender or any Participating Lender of the principal of or interest on its Loans or any other amounts under this Agreement (except for a change in the rate of tax on the overall net income of Lender or any Participating Lender imposed by any applicable jurisdiction), and the result of any of the foregoing events is to increase the cost to Bank, Lender or any Participating Lender of agreeing to make or making, funding, or maintaining its LIBO Rate Loans, or to reduce the amount of any sums received or receivable by Lender under this Agreement or the Note, then, the Borrowers shall from time to time, not later than thirty (30) days after Lender's demand therefor, pay such additional amounts as will compensate Lender for such increased cost or reduced amount. A certificate of Lender submitted to D & K, setting forth the amounts of such increased costs or reduced amount and the additional amounts to be paid to Lender or any Participating Lender (as applicable) under this Section shall be conclusive in the absence of manifest error. (G) Minimum Interest Rate. Notwithstanding the foregoing, --------------------- in no event shall the per annum rate of interest on any Revolving Credit Loan be less than six percent (6.0%). Interest in all cases shall be calculated on a daily basis (computed on the actual number of days elapsed over a year of 360 days), commencing on the date hereof. (H) Default Rate. Upon and after the occurrence of an ------------ Event of Default, and during the continuation thereof, the principal amount of the Obligations shall bear interest, calculated daily (computed on the actual days elapsed over a year of 360 days), at a - 6 - 7 fluctuating rate per annum equal to three and one-quarter percent (3.25%) above the interest rate that would otherwise apply under Sections 3.1(B), (C), or (D) hereof (the "Default Rate"). (I) Usury. In no contingency or event whatsoever shall the ----- aggregate of all amounts deemed interest hereunder or under the Note and charged or collected pursuant to the terms of this Agreement or the Note exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that Lender has charged or received interest hereunder in excess of th highest applicable rate, Lender shall apply any such excess to any other Obligation then due and payable and shall promptly refund amounts not so applied to Borrowers and such rate shall automatically be reduced to the maximum rate permitted by such law. (c) Section 3.6(B) [relating to Termination] is hereby deleted in its entirety and replaced by the following new Section 3.6(B): (B) At the effective date of any termination prior to the end of the Original Term, Borrowers shall pay to Lender (in addition to the then outstanding principal, accrued interest and other charges owing under the terms of this Agreement and any of the other Loan Documents) a termination fee equal to one percent (1.0%) of the average of each month's Average Monthly Loan Balance for the period from March 3, 1995 through the effective date of such termination, provided, however, that the termination fee shall ----------------- not be less than $400,000 or more than $450,000, regardless of the Average Monthly Loan Balance. (d) Section 3.7(B) [relating to Payments] is hereby amended by deleting it in its entirety and replacing it with the following: (B) Interest accrued on the Obligations shall be due on the earliest to occur of (i) the first day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the - 7 - 8 maturity and payment of the Obligations, and (iii) termination of this Agreement for any reason; provided, however, that Borrowers ----------------- hereby irrevocably authorize Lender, in Lender's sole discretion, to advance to Borrowers, and to charge to Borrowers' Loan Account hereunder as a Revolving Credit Loan, a sum sufficient each month to pay all interest accrued on the Obligations during the immediately preceding month; (e) Section 9.2(W) of the Loan Agreement [relating to Leases] is hereby amended by deleting it in its entirety and replacing it with the following: (W) Leases. Become a lessee under any operating lease (other ------ than a lease under which Borrower is a lessor) of Property if the aggregate Rentals payable during any current or future period of twelve (12) consecutive months under the lease in question and all other leases under which Borrowers are then a lessee would exceed $1,000,000. The term "Rentals" means, as of the date of determination, all payments which the lessee is required to make by the terms of any lease. (f) Section 9.3(D) [relating to Maintenance of Capital Base] is hereby deleted in its entirety and replaced by the following new Section 9.3(D): (D) Maintenance of Capital Base. Maintain at all times --------------------------- during the periods specified below a Capital Base in an amount not less than the amount shown below for the period corresponding thereto: Period Amount ------ ------ As of 3/31/97 $1,976,000 4/1/97 through 6/29/97 $3,000,000 6/30/97 through 9/29/97 $3,400,000 9/30/97 through 12/30/97 $3,800,000 12/31/97 through 3/30/98 $4,200,000 3/31/98 through 6/30/98 $4,600,000 The Capital Base for all periods after 6/30/98 through the end of the Original Term, and for each Renewal Term, shall be established on or before 6/30/98 by the mutual agreement of the Lender and Borrowers - 8 - 9 based on the Borrowers' financial forecasts. If the parties are unable to reach agreement on the Capital Base for such periods on or before such date, then, notwithstanding anything contained herein or elsewhere to the contrary, such failure to so agree shall constitute an Event of Default hereunder by Borrowers. 3. No Claims. Borrowers acknowledge that there are no existing --------- claims, defenses (personal or otherwise) or rights of set-off or recoupment whatsoever with respect to any of the Loan Documents. Borrowers agree that this Amendment in no way acts as a release or relinquishment of any Liens in favor of the Lender securing payment of the Obligations. 4. Miscellaneous. Except as expressly set forth herein, there are no ------------- agreements or understandings, written or oral, between Borrowers and Lender relating to the Loan Agreement that are not fully and completely set forth herein or therein. Except to the extent specifically waived or amended herein or in any of the documents, instruments, or agreements delivered in connection herewith, all terms and provisions of the Loan Agreement hereby are ratified and reaffirmed and shall remain in full force and effect in accordance with the respective terms thereof. This Agreement may be executed in one or more counterparts, and by different parties on different counterparts. All such counterparts shall be deemed to be original documents and together shall constitute one and the same agreement. A signature of a party delivered by facsimile or other electronic transmission shall be deemed to be an original signature of such party. - 9 - 10 IN WITNESS WHEREOF, this Amendment has been executed and delivered by the duly authorized representatives of the parties as of the date first above written. FLEET CAPITAL CORPORATION By: /s/ Edward M. Bartkowski ------------------------------------ Name: Edward M. Bartkowski Title: Vice President D & K WHOLESALE DRUG, INC. By: /s/ Martin D. Wilson ------------------------------------ Name: Martin D. Wilson Title: President KRELITZ INDUSTRIES, INC. By: /s/ Martin D. Wilson ------------------------------------ Name: Martin D. Wilson Title: President - 10 - EX-10.30 3 LOAN AGREEMENT 1 LOAN AGREEMENT -------------- This LOAN AGREEMENT (this "AGREEMENT" or the "LOAN AGREEMENT") dated as of --- DAY OF DECEMBER, 1996, is made and entered into by and among D & K WHOLESALE DRUG, INC., a Delaware corporation ("D & K"), and KRELITZ INDUSTRIES, INC., a Minnesota corporation ("KRELITZ") (said D & K and Krelitz being sometimes hereinafter referred to collectively as the "BORROWER"); and MAGNA BANK, N.A., a national banking association ("BANK"). The following recitals form the basis of this Agreement: A. Borrower has applied to Bank for a loan (the "LOAN") under the Missouri First Link Program described below in the principal sum of $1,495,000.00 to finance the Borrower's purchase and installation of certain leasehold improvements for the distribution and warehouse facility leased by Borrower located at 1823 RUST AVENUE, CAPE GIRARDEAU, MISSOURI 63701 (the "MISSOURI FACILITY"), and to finance the Borrower's purchase of furniture, fixtures and equipment for use in connection with the Borrower's operation of the Missouri Facility. B. The Loan will be evidenced by a PROMISSORY NOTE (the "NOTE"), dated as of the date hereof, made by Borrower in the original principal amount of $1,495,000.00. This Agreement, together with the Note, together with the "SECURITY DOCUMENTS" (as defined below) which secure the Note and secure this Agreement, and together with all other documents and agreements evidencing, securing or guaranteeing repayment of the Loan, are collectively referred to herein as the "LOAN DOCUMENTS." C. As a condition to closing the Loan, and to further evidence Borrower's obligation to repay the Loan, Bank has required Borrower to agree to repay the Loan on the following terms and conditions, and to make the certifications, representations, warranties and covenants herein. NOW, THEREFORE, in consideration of the above recitals and the making of the Loan, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Bank hereby agree as follows: ARTICLE I - LOAN TERMS AND CONDITIONS ------------------------------------- 1.1 LOAN TERMS AND CONDITIONS. The terms and conditions of the ------------------------- $1,495,000.00 LOAN (including the term, interest rate and provisions for repayment of the principal amount thereof) are as set forth in the Promissory Note annexed hereto as EXHIBIT A, and as set forth in this Loan Agreement. --------- With respect to the Loan and Note, Bank agrees that Bank shall issue to Borrower a monthly computer generated invoice of the amount of interest and principal due and payable for the applicable month for the Loan and Note, which invoice shall be mailed to Borrower's address for notices set forth in Section 4.3 hereof, on or about the first (1st) of each month during the - ----------- term of the Loan. 2 The Loan shall be closed ("CLOSING" or "CLOSING DATE") in accordance with the terms, conditions and requirements of this Agreement on the full execution of this Agreement by Bank and Borrower, at the offices of the Bank. The Loan shall be funded in accordance with Sections 1.3 through 1.5 hereof. ------------------------ 1.2 SECURITY FOR LOAN; COLLATERAL. Pursuant to the Security Documents ----------------------------- described in Section 4.1 hereof, the Loan will be secured by: (A) a first ----------- lien perfected security interest in the personal property, furniture, fixtures and equipment (the "MISSOURI FFE") owned by Borrower and located at or affixed or attached to the Missouri Facility; (B) a first lien perfected security interest in the personal property, furniture, fixtures and equipment (the "KENTUCKY FFE") owned by Borrower and located at or affixed or attached to the distribution and warehouse facility owned by Borrower located at 516 WEST FOURTH STREET, LEXINGTON, KENTUCKY 40508 (the "KENTUCKY FACILITY"); and (C) a first deed of trust lien in the real estate and improvements (distribution and warehouse facility) owned by Krelitz located at 800 NORTH THIRD STREET, MINNEAPOLIS, MINNESOTA 55401 (the "MINNESOTA FACILITY"), and a first lien perfected security interest in the personal property, furniture, fixtures and equipment (the "MINNESOTA FFE") owned by Borrower and/or Krelitz and located at or affixed or attached to the Minnesota Facility. The Missouri Facility and the Missouri FFE, the Kentucky Facility and the Kentucky FFE, and the Minnesota Facility and the Minnesota FFE, are sometimes hereinafter referred to collectively as the "COLLATERAL". Notwithstanding anything to the contrary contained herein, the Collateral expressly excludes all of, and expressly does not include any of, the "FLEET COLLATERAL" described in INTERCREDITOR AGREEMENT dated December --, 1996, by and between Magna Bank, N.A., and Fleet Capital Corporation. 1.3 FUNDING OF LOAN. --------------- (a) MISSOURI FIRST LINK PROGRAM. The Borrower has been approved for --------------------------- participation in, and the Loan from the Bank to the Borrower for the first (1st) year of the Loan has ben extended by Bank to Borrower pursuant to, the MISSOURI FIRST LINKED DEPOSIT JOB CREATION LOAN PROGRAM (the "MISSOURI FIRST LINK PROGRAM"). The State of Missouri has agreed to deposit with Bank the sum of $1,495,000.00 (the "STATE DEPOSIT") for the first (1st) year of the Loan, pursuant to the Missouri First Link Program. For the purposes hereof, the annual rate of interest on the State Deposit charged to the Bank by the State of Missouri is the "STATE DEPOSIT RATE". The State Deposit Rate determined on and as of the "FUNDING DATE" (as defined in Section 1.3(c) below) is the "INITIAL STATE DEPOSIT RATE". Bank -------------- and Borrower agree that the interest rate for the Loan under this Loan Agreement pursuant to Paragraph C(1) of the Note shall be that fixed annual -------------- rate of interest which is THREE PERCENT (3%) over and in addition to the Initial State Deposit Rate determined on and as of the Funding Date. If the Initial State Deposit Rate, as determined on the Funding Date, is other than 2.95%, then the Bank and the Borrower shall enter into, execute and deliver to each other an amendment 3 to the Note, changing the interest rate stated under Paragraph C(1) of the Note -------------- to that fixed annual rate of interest which is 3% over and in addition to the Initial State Deposit Rate, as determined on the Funding Date. The State of Missouri has the right to increase the State Deposit Rate charged to Bank on the State Deposit, in accordance with the applicable regula- tions and guidelines under the Missouri First Link Program, by reason of the failure of the Borrower to create and retain the requisite minimum number of jobs in the State of Missouri and by reason of other defaults by Borrower under the Missouri First Link Program. If, after the Funding Date, the State of Missouri increases the State Deposit Rate charged to Bank on the State Deposit (any such increased State Deposit Rate is an "ADJUSTED STATE DEPOSIT RATE"), then, in such event, for all periods during which the Adjusted State Deposit Rate exceeds the Initial State Deposit Rate, the Borrower shall pay to Bank, as additional interest under the Loan, that amount which is equal to interest on the outstanding principal amount of the Loan at a rate of interest equal to that amount which is: (1) the Adjusted State Deposit Rate, minus ----- (2) the Initial State Deposit Rate. (b) RECEIPT OF STATE DEPOSIT; COMPLIANCE WITH REQUIREMENTS OF MISSOURI ------------------------------------------------------------------ FIRST LINK PROGRAM. The Bank will advise the State of Missouri of the Closing - ------------------ of the Loan. Thereafter, upon the Bank's receipt of the State Deposit, the Bank shall proceed to fund and advance loan proceeds of the Loan in accordance with this Section 1.3 and Section 1.4. The Bank and the Borrower agree ----------- ----------- that the Bank shall have no obligation to fund and advance loan proceeds of the Loan or any portion thereof, unless and until receipt by the Bank of the State Deposit. Bank agrees to fully comply with all the requirements, terms and conditions of Sec.Sec.30.750 to 30.767 R.S.Mo., regarding the Missouri First Link Program, as the same may be amended from time-to-time, and to timely and promptly provide the State Treasurer with all required certifications and such other documents as may be required by the State Treasurer in connection therewith in the form and manner prescribed by the State Treasurer. In accordance with the requirements of Section 30.760.1 R.S.Mo., Borrower agrees that Borrower shall use the loan proceeds of the Loan as required by Sections 30.750 to 30.765 R.S.Mo., and that in the event Borrower does not use the loan proceeds in the manner prescribed by said Sections, then the remaining loan proceeds (not then used by the Borrower) shall be immediately returned to Bank and any loan proceeds used by the Borrower (in violation of the requirements of said Sections) shall be repaid to the Bank as soon as practicable. (c) INITIAL FUNDING OF LOAN. The date of the Bank's receipt of the ----------------------- State Deposit is the "FUNDING DATE" of the Loan. On the Funding Date, Bank agrees to and shall fund and advance to Borrower loan proceeds of the Loan in an amount equal to the sum of: (1) $1,000,000.00, which loan proceeds are funded and advanced based on the value of the Collateral in place as of the Closing Date at the Kentucky Facility and the Minnesota Facility; plus (2) ---- that amount which is equal to FIFTY-SIX PERCENT (56%) of the actual cost of any leasehold improvements to the Missouri Facility ("MISSOURI LEASEHOLD IMPROVEMENTS") actually completed as of the Clos- 4 ing Date, and of any Missouri FFE (furniture, equipment, machinery, appliances, fixtures and other items of personal property) purchased by Borrower and actually delivered to, or in place, or installed at the Missouri Facility as of the Closing Date. At Loan Closing, Borrower shall provide to Bank the evidence required under Section 1.5 (b) hereof with respect to the amount to be funded --------------- under the preceding Item 2 of this Section 1.3(b). -------------- On the Funding Date, the balance, if any, of the Loan not funded and advanced by Bank to Borrower pursuant to this Section 1.3, shall be funded, ----------- advanced and deposited by Bank into a money market interest bearing "ESCROW ACCOUNT" at Bank for the benefit of the Borrower. All interest earned on the Escrow Account shall be reported under Borrower's FEIN and paid to Borrower. After the Funding Date, the loan proceeds on deposit in the Escrow Account shall be funded and advanced by Bank to Borrower pursuant to Section 1.4 ----------- hereof. The deposit of monies by Bank into the Escrow Account shall be deemed to be a funding and advance of loan proceeds for the benefit of the Borrower; and interest on the full amount of the Loan (including the amount deposited into the Escrow Account) shall commence to accrue on the Funding Date. 1.4 FUTURE FUNDING OF LOAN. The remaining balance of the Loan ---------------------- on deposit in the Escrow Account may be drawn by Borrower after the Funding Date and prior to the maturity of the Loan, in accordance with and upon satisfaction of the "FUNDING CONDITIONS" set forth in Section 1.5 hereof, ----------- for the payment of, or reimbursement to Borrower for its payment of, installation and construction of Missouri Leasehold Improvements and purchase by Borrower of Missouri FFE. The balance of the Loan may be drawn in one or more installments, to a maximum $1,495,000.00 aggregate amount funded to Borrower under Section 1.3 hereof and drawn and funded to Borrower under ----------- this Section 1.4. The Loan is not a revolving line of credit. Amounts ----------- borrowed under the Loan may not be reborrowed after any such amounts are repaid. 1.5 FUNDING CONDITIONS. Borrower may draw the balance of the Loan, ------------------ only upon and after satisfaction by Borrower of the following conditions (the "FUNDING CONDITIONS"), to-wit: (a) Borrower may draw loan proceeds for the payment of, or reimbursement to Borrower for its payment of, FIFTY-SIX PERCENT (56%) of the actual cost of installation and construction of Missouri Leasehold Improvements actually completed. Borrower may draw loan proceeds for the payment of, or reimbursement to Borrower for its payment of, FIFTY-SIX PERCENT (56%) of the actual cost of the purchase by Borrower of Missouri FFE actually delivered to, or in place, or installed at the Missouri Facility. (b) Borrower must submit and present to Bank: (1) Copies of invoices for items to be paid and/or reimbursed by the draw on the Loan; and (2) Borrower's duly executed written draw request for loan proceeds (in the form annexed hereto as Exhibit B). The Borrower's draw request shall contain a --------- detailed listing and/or description of all applicable Missouri Leasehold Improvements which are the subject of the draw, and/or of all applicable Missouri FFE which is the subject of the draw; all of which Missouri Leasehold Improvements and Missouri FFE which are the subject of said draws must be substantially in accordance with the "BUDGET" annexed hereto as Exhibit C. --------- The Borrower's draw request shall certify to the Bank that: all applicable Missouri Leasehold Im- 5 provements which are the subject of the draw are substantially in accordance with the Exhibit C Budget and have been completed; all applicable Missouri FFE --------- which is the subject of the draw is substantially in accordance with the Exhibit C Budget and has been delivered to, or is in place, or has been - --------- installed at the Missouri Facility; and the proceeds of the draw shall be used by the Borrower for the payment and/or reimbursement of the corresponding invoices provided by Borrower to Bank per the preceding Item (1) of this Section 1.5(b). - -------------- (c) Borrower is not, as of the date of the requested draw, then in default (after the expiration of any applicable grace, notice and cure periods) under this Loan Agreement or under the terms of any of the other Loan Documents. (d) Provided that Borrower is not then in default (after the expiration of any applicable grace, notice and cure periods) under this Loan Agreement or under the terms of any of the other Loan Documents; then the Bank agrees to and shall fund to Borrower draws on the Loan within five (5) business days after Borrower's written draw request submitted to Bank in satisfaction of, compliance with and conformity with all of the terms, condi- tions, requirements and provisions of this Section 1.5. Borrower's ----------- submission of its draw request to Bank for a draw under the Loan shall constitute Borrower's certification, warranty and representation to Bank that, to the best of its knowledge after due inquiry, as of the date of the draw request: (1) the Borrower is not then in default under any material term, condition, provision or requirement of this Loan Agreement or of any of the other Loan Documents; (2) all of Borrower's warranties and representations contained in this Loan Agreement and in all of the other Loan Documents are then true and correct in all material respects; and (3) Borrower is then in compliance with all of the Borrower's agreements, obligations and covenants contained in this Loan Agreement and in all of the other Loan Documents. ARTICLE II - BORROWER COVENANTS ------------------------------- 2.1 RESERVED. -------- 2.2 CLOSING COSTS. Borrower shall pay, without limitation, all ------------- reasonable costs and expenses incurred by Bank in connection with the Loan, including but not limited to reasonable appraisal fees, environmental audit fees, legal expenses, title insurance premiums, survey charges, and recording and filing fees. 2.3 LITIGATION. If any proceedings are filed or are legitimately ---------- threatened to be filed seeking to: (a) enjoin or otherwise prevent or declare invalid or unlawful the Borrower's use or occupancy of the Missouri Facility, the Kentucky Facility or the Minnesota Facility; (b) adversely affect the validity or priority of the liens and security interests granted Bank under the Loan Documents; or (c) materially adversely affect the financial condition of Borrower, then Borrower will notify Bank of such proceedings and, within five (5) calendar days following Borrower's receipt of notice of such proceedings, or at least five (5) calendar days prior to the expiration of the time period allowed under applicable law to file an answer, Borrower will cause such proceedings to be vigorously contested in good faith, and in the event of an adverse ruling or decision, prosecute all allowable 6 appeals therefrom. Borrower will, without limiting the generality of the foregoing, resist the entry or seek the stay of any temporary or permanent injunction that may be entered, and use its best efforts to bring about a favorable and speedy disposition of all such proceedings. Borrower agrees to reimburse Bank for all of Bank's reasonable expenses incurred in connection with any such proceedings, including, without limitation, Bank's reasonable attorneys' fees and expenses, regardless of whether Bank is named in any such proceeding. 2.4 Financial Statements. Borrower agrees to promptly supply -------------------- Bank with such information concerning the Collateral, and the Borrower's assets, liabilities and affairs as Bank may reasonably request from time to time; provided that Borrower shall, without necessity of any request by Bank, provide to Bank: (a) Within forty-five (45) days after the close of each calendar quarter, company prepared quarterly financial statements, certified to be true and correct by an officer of the Borrower; and (b) as soon as available and in no event later than ninety (90) days after the close of each calendar year (or Borrower's fiscal year, if different), audited financial statements, prepared by a certified public accountant, showing the results of its operations, and containing a balance sheet and statement of income prepared in accordance with generally accepted accounting principles consis- tently applied. Borrower agrees to: (c) maintain its books and records in accordance with generally accepted accounting principles consistently applied; (d) permit Bank or any of its agents or representatives to have access to and to examine all books and records regarding the Collateral, at any time or times hereafter during business hours; (e) permit Bank to copy and make abstracts from any and all of said books and records; and (f) to provide Bank with such other current financial information regarding such property and the Borrower on an interim basis as determined necessary by Bank in its reasonable judgment. Subject to the proviso hereinafter set forth, Bank agrees to treat all books and records, and all other financial information, and all other information regarding Borrower's business, supplied or provided by Borrower to Bank, as confidential information; and subject to the proviso hereinafter set forth, and except in response to a valid court order, Bank shall not divulge any of said books, records or information to any third-parties without the prior written consent of Borrower. PROVIDED, HOWEVER, that Bank may divulge such books, records and other information where required by applicable banking law and regulations, and/or to Bank's loan committee(s), employees, officers, directors, attorneys and accountants, and/or to bank examiners, and/or to any party with or to whom Bank is negotiating or investigating a sale, merger or consolidation of or with Bank (and to such party's loan committee(s), employees, officers, directors, attorneys and accountants). 2.5 NOTICE OF DEFAULT. Borrower agrees to promptly notify Bank: ----------------- (a) of any condition or event which to its knowledge constitutes (or which to its knowledge, with the giving of notice or lapse of time, or both, would constitute) an Event of Default hereunder; (b) of any condition or event which to its knowledge constitutes (or to its knowledge, with the giving of notice or lapse of time, or both, would constitute) a default or event of default under or within the meaning of any present or future 7 material agreement or obligation of Borrower to any third party, including (without limitation) the loan obligations of Borrower to FLEET CAPITAL CORPORATION ("FLEET") under the THIRD AMENDED AND RESTATED LOAN AGREEMENT dated March 3, 1995 (as now and hereafter amended and restated, the "FLEET LOAN AGREEMENT") by and between Borrower, as borrower, and Fleet, as Lender, and any other material loan, line of credit, revolving credit, guaranty or letter of credit reimbursement obligations of Borrower to any third parties; and (c) and of any material adverse change in the financial condition of Borrower. Borrower also agrees to cooperate with Bank in arranging for inspections by representatives of the Bank of the Collateral, from time to time. Borrower shall perform all of its obligations under the Note, the Security Documents and the other Loan Documents and shall cause all of the representations and warranties in this Agreement to be true and correct at all times until the Loan is repaid in full. Borrower shall immediately notify Bank if any representation or warranty made herein to its knowledge ceases to be true and correct in all material respects. 2.6 NEGATIVE COVENANTS. Until the Loan is repaid in full, ------------------ Borrower agrees, without the prior consent of Bank (which consent shall not be unreasonably withheld, conditioned or delayed), as follows: (a) Borrower shall not merge into or consolidate with or into any corporation, partnership, limited liability company or other legal entity, nor shall any of the foregoing partnerships dissolve, liquidate or otherwise be terminated, except as expressly permitted in Section 4.4 ----------- hereof. (b) Borrower shall not mortgage, encumber or suffer any lien on the Collateral, or any part thereof, except as may be expressly permitted in the Loan Documents. (C) Borrower shall not sell, lease or otherwise transfer all or any portion of the Collateral, other than to allow for the substitution and/or replacement of the same with reasonably equivalent Collateral, as may be reasonable and appropriate in the normal course of Borrower's business, and except as expressly permitted in Section 4.4 hereof. ----------- (d) The articles of incorporation and corporate by-laws of the Borrower shall not be amended, modified or terminated, except as expressly permitted in Section 4.4 hereof. ----------- 2.7 FINANCIAL COVENANTS. Until the Loan is repaid in full, ------------------- Borrower agrees and covenants, as follows: (a) MAINTENANCE OF CAPITAL BASE. Borrower shall maintain at all --------------------------- times during the periods specified below a Capital Base in an amount not less than the amount shown below for the period corresponding thereto: Period Amount ------ ------ 09/30/96 through 12/30/96 $1,800,000 12/31/96 through 03/30/97 $1,400,000 As of 03/31/97 $1,976,000 8 The Capital Base for all periods after 3/31/97 through the maturity date of the Note, shall be established on or before 3/31/97 in the same amounts established by Borrower and Fleet as the Capital Base requirement for such periods under the Fleet Loan Agreement. If Borrower and Fleet are unable to reach agreement on the amounts of the Capital Base requirement for such periods on or before such date, then, notwithstanding anything contained herein or elsewhere to the contrary, such failure to so agree shall constitute an Event of Default hereunder by Borrower. (b) CURRENT RATIO. Borrower shall maintain at all times a ratio ------------- of Consolidated Current Assets to Consolidated Current Liabilities of not less than 1.5 to 1.0. For purposes of computing the ratio contemplated herein, the amount of Borrower's Inventory comprising Consolidated Current Assets shall be computed on a first in, first out basis in accordance with GAAP. (c) DEBT SERVICE COVERAGE RATIO. Borrower shall maintain for --------------------------- each fiscal year of Borrower a ratio of Net Cash Flow minus Capital Expenditures not financed by Permitted Purchase Money Indebtedness to Debt Service of not less than 1.0 to 1.0. Any capitalized terms used in the foregoing Section 2.7 (a), (b) & (c) -------------------------- not otherwise defined in this Loan Agreement shall have the meanings ascribed to such terms in the "ADDITIONAL DEFINITIONS" annexed hereto as EXHIBIT D --------- and incorporated herein by this reference. 2.8 FURTHER ASSURANCES. Borrower will, on request of Bank, from time ------------------ to time, execute and deliver such documents as may be necessary to perfect and maintain perfected as valid liens and security interests, upon the Collateral, the liens and security interests granted to Bank pursuant to the Loan Documents, and to fully consummate the transactions contemplated thereby. ARTICLE III - BORROWER'S REPRESENTATIONS AND WARRANTIES ------------------------------------------------------- Borrower represents and warrants as follows: 3.1 EXISTENCE AND OWNERSHIP. D & K is corporation duly organized and ----------------------- validly existing under the laws of the State of Delaware, and qualified to do business in the State of Missouri and the State of Kentucky, and all other States in which D & K does business. Krelitz is corporation duly organized and validly existing under the laws of the State of Minnesota, and qualified to do business in the State of Minnesota, and all other States in which Krelitz does business. Krelitz is a wholly-owned subsidiary of D & K. D & K has full power and authority to conduct its business as presently conducted, to lease the Missouri Facility, to own the Kentucky Facility, to own the Missouri FFE, the Kentucky FFE and the Minnesota FFE (if any), and to own its other properties, and to perform all of its duties and obligations under the Loan Documents; and such execution and performance have been duly authorized by all corporate action. Krelitz has full power and authority to conduct its business as presently conducted, to own the Minnesota Facility, to own the Minnesota FFE, and to own its other properties, and to perform all of its duties and obligations under 9 the Loan Documents; and such execution and performance have been duly authorized by all corporate action. 3.2 NO VIOLATIONS. Neither the execution, delivery, nor performance ------------- of the Loan Documents will violate or conflict with any law, rule, regulation, order, judgment, organizational document, indenture, instrument, or agreement by which Borrower is bound. 3.3 COMPLIANCE WITH LAWS. To the best of its knowledge after due and -------------------- diligent inquiry and investigation, the Collateral is in compliance with all applicable laws, ordinances, regulations, and other requirements of governmental authorities and any restrictive covenants applicable to such property (including, without limitation, land use, development, zoning and environmental laws, regulations and restrictions, and the requirements of the Federal Fair Housing Act and the Americans with Disabilities Act). 3.4 ENVIRONMENTAL. To the best of Borrower's knowledge and belief, ------------- after due and diligent inquiry, the Missouri Facility, the Kentucky Facility and the Minnesota Facility are each now in full compliance with all applicable Local, State and Federal Environmental Laws, Ordinances, Regulations and Requirements. 3.5 LITIGATION. Except as disclosed on EXHIBIT E annexed hereto, ---------- --------- there is no material adverse litigation or other civil or criminal proceeding pending nor, to the best of its knowledged threatened, against or affecting Borrower, or the Collateral, or any circumstance existing which would in any manner materially adversely affect the Collateral, the priority or enforce- ability of the Loan Documents or the ability of Borrower to perform its obligations under the Loan Documents. If civil litigation is hereafter commenced or threatened against Borrower, or the Collateral, and if the claims and causes of action which are the subject of such litigation are fully insured and/or covered by insurance policies which are then in full force and effect (collectively, "INSURED CLAIMS"), then the Borrower's warranty and representation under this Section shall be deemed to be true and correct ------- notwithstanding the pendency or threat of such civil litigation. All litigation disclosed on EXHIBIT E are Insured Claims. --------- 3.6 NO MISSTATEMENTS. To the best of Borrower's knowledge and belief, ---------------- no information, certification or report submitted to Bank by Borrower pursuant to this Agreement contains any material misstatement of fact or omits to state a material fact or any fact necessary to make the information not misleading. For the purposes of this Loan Agreement, the phrase "Borrower's knowledge and belief" (or similar) refers to the actual knowledge of Martin D. Wilson and James Largent (being the employees of the Borrower actually involved in the transactions contemplated hereby), and such other information which said individuals would know or should know upon such investigation as is appropriate under the circumstances. For the purposes of this Loan Agreement, the phrase "Due and Diligent Inquiry and Investigation" (or similar) means such inquiry of the Borrower's records, officers, directors and employees, and such investigation of public records, and such other investigations and studies, as is reasonably appropriate under the circumstances in order for Borrower to make that applicable statement or give the applicable warranty or representation. 10 3.7 NO DEFAULTS. To the best of Borrower's knowledge and belief, (A) ----------- Borrower is not in default under its lease (the "MISSOURI LEASE") of the Missouri facility; and (B) no event has occurred or condition exists which, with the giving of notice, the lapse of time, or both, would constitute a default under any of the Loan Documents, the Missouri Lease, or any other material agreement or instrument to which Borrower is a party or an obligor. 3.8 FINANCIAL STATEMENTS. To the best of Borrower's knowledge and -------------------- belief, all financial statements of Borrower delivered to Bank have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the financial condition of Borrower. To the best of Borrower's knowledge and belief, no material adverse change has occurred in the financial condition of Borrower since the respective dates thereof. 3.9 TAX RETURNS. Borrower has filed all required federal, state and ----------- local tax and informational returns and paid all taxes due pursuant to said returns or any assessments against Borrower or the Collateral. 3.10 CONSENT OF FLEET. Fleet has consented in writing to Borrower ---------------- procuring and obtaining the Loan hereunder. At or prior to Closing, Borrower shall deliver to Bank a true and correct copy of such written consent by Fleet. ARTICLE IV - MISCELLANEOUS -------------------------- 4.1 NOTE AND SECURITY. The Loan shall be evidenced by the Note ----------------- executed by the Borrower, as maker, and delivered to the Bank, at the Closing of the Loan. The Loan, and all of the agreements, obligations, covenants, representations and warranties of Borrower contained in this Loan Agreement, are secured by the following "SECURITY DOCUMENTS" executed and delivered by the Borrower to the Bank at the Closing of the Loan, to-wit: (a) Deed of Trust executed by Krelitz, as grantor, to and in favor of Bank, granting a first lien on the Minnesota Facility; (b) Security Agreement executed by Borrower, as debtor, to and in favor of Bank, as secured party, granting a first lien security interest the Missouri FFE, the Kentucky FFE and the Minnesota FFE; (c) UCC Financing Statements executed by Borrower, as debtor, to and in favor of Bank, as secured party, with respect to the Missouri FFE, the Kentucky FFE and the Minnesota FFE; and (d) Landlord's Agreement executed by the Landlord of the Missouri Facility. 4.1A DEED OF TRUST -- SURVEY EXCEPTION. Borrower agrees, provides and --------------------------------- covenants that (at Borrower's sole cost and expense), at Borrower's option, either: - ------ (a) AT LOAN CLOSING, Borrower shall cause FIRST AMERICAN TITLE --------------- INSURANCE COMPANY (or such other title insurance company reasonable acceptable to Bank) (the "TITLE COMPANY") to delete the survey exception from Bank's loan policy of title insurance insuring the first mortgage lien of the Deed of Trust encumbering the 11 Minnesota Facility (the "LOAN POLICY"); and in connection therewith, at Borrower's option, either Borrower shall provide the Title Company with a survey of the Minnesota Facility which is sufficient to cause the Title Company to delete the survey exception from the Loan Policy, or Borrower shall provide the Title Company with such affidavits, and indemnity and other agreements, as are sufficient to cause the Title Company to delete the survey exception from the Loan Policy; or. -- (b) WITHIN SIXTY (60) DAYS AFTER LOAN CLOSING, Borrower shall ----------------------------------------- cause the Title Company to issue an "ENDORSEMENT" to Bank's Loan Policy insuring the first mortgage lien of the Deed of Trust encumbering the Minnesota Facility, by which Endorsement the Title Company deletes the survey exception from Bank's Loan Policy; and in connection therewith, at Borrower's option, either Borrower shall provide the Title Company with a survey of the Minnesota Facility which is sufficient to cause the Title Company to issue such Endorsement to the Loan Policy deleting the survey exception from the Loan Policy, or Borrower shall provide the Title Company with such affidavits, and indemnity and other agreements, as are sufficient to cause the Title Company to issue such Endorsement to the Loan Policy deleting the survey exception from the Loan Policy. In the event that for any reason whatsoever Borrower fails or is unable to satisfy the requirements of the foregoing Section 4.1A(a) at Loan --------------- Closing, and thereafter for any reason whatsoever Borrower fails or is unable to satisfy the requirements of the foregoing Section 4.1A(b) within SIXTY --------------- (60) DAYS after Loan Closing, then such failure or inability by Borrower shall constitute the "SURVEY DEFAULT" hereunder. If Borrower obtains a survey of the Minnesota Facility, such survey shall be certified to Bank and Borrower shall deliver two (2) prints thereof to Bank. 4.2 EVENTS OF DEFAULT. The Borrower agrees that the occurrence and ----------------- continuation beyond any applicable grace, notice or cure period specifically allowed for under this Loan Agreement or any of the other Loan Documents or otherwise approved by Bank in writing, of any one or more of the followings events shall constitute an "EVENT OF DEFAULT" by Borrower under this Loan Agreement and under the Loan Documents, to-wit: (a) PAYMENT DEFAULT. In the event that Borrower fails to make any --------------- regularly scheduled payment due under the Note within TWENTY (20) DAYS after the due date thereof, or in the event that Borrower fails to make any other payment required under the Security Documents, this Loan Agreement or any of the other Loan Documents within TWENTY (20) DAYS after the Bank's written invoice or other demand for payment. (b) SURVEY DEFAULT. In the event of the occurrence of the Survey -------------- Default under Section 4.1A hereof, and for any reason whatsoever Borrower ------------ fails or is unable to cure such Survey Default within TEN (10) DAYS after written notice of such Survey Default from Bank to Borrower. (c) NON-MONETARY DEFAULT. In the event that Borrower defaults on or -------------------- breaches or fails to perform with respect to any agreement, obligation and covenant under the Note, this Loan 12 Agreement, the Security Documents or any of the other Loan Documents not involving the payment of money (a "NON-MONETARY DEFAULT"), and such Non-Monetary Default shall not be cured within THIRTY (30) DAYS after written notice of such Non-Monetary Default from Bank to Borrower. (d) DEFAULTS UNDER OBLIGATIONS TO THIRD-PARTIES. A default ------------------------------------------- or event of default (after the expiration of any applicable notice and cure period, if any) shall occur under or within the meaning of any present or future material agreement or obligation of Borrower to any third party, including (without limitation): (1) D & K's obligations under AMENDED AND RESTATED LEASE AGREEMENT dated as of January 19, 1996 (as amended, the "MISSOURI LEASE") by and between D & K, as tenant, and Morhaert Development, L.L.C., as landlord (the "MISSOURI LANDLORD"), covering the Missouri Facility; (2) the loan obligations of Borrower to Fleet; and (3) any other material loan, line of credit, revolving credit, guaranty or letter of credit reim- bursement obligations of Borrower to any third parties. (e) RENT DEFAULT UNDER MISSOURI LEASE. If the Missouri --------------------------------- Landlord gives Bank written notice of a rent payment default under the Missouri Lease ("RENT DEFAULT NOTICE"), the failure of D & K to pay the rent due under the Missouri Lease within ten (10) days after Bank gives Borrower written notice of such Rent Default Notice; or if the Missouri Landlord gives Bank a Rent Default Notice, and Bank thereupon pays to the Missouri Landlord rent due under the Missouri Lease, the failure of D & K to reimburse to Bank the rent paid by Bank under the Missouri Lease to the Missouri Landlord within ten (10) days after Bank gives Borrower written notice of such Bank payment of rent. (f) MISREPRESENTATION. Any warranty or representation made by ----------------- Borrower hereunder shall be untrue or misleading or inaccurate in any material respect when made; or with respect to warranties and representations of Borrower hereunder which are required to be true and correct at all times, any such warranty or representation made by Borrower hereunder shall be untrue or misleading or inaccurate in any material respect at any time, and Borrower fails to cure or correct such untrue or misleading or inaccurate warranty or representation within THIRTY (30) DAYS after written notice thereof from Bank to Borrower. Upon the occurrence and during the continuation of any such Event of Default, the Bank shall have the right and option, and shall be entitled, to exercise any and all rights and remedies available to Bank under the Note, the Security Documents and the other Loan Documents, and under applicable law. 4.3 NOTICES. Any notices required or permitted to be given hereunder ------- shall be given either hand-delivered or by United States Certified Mail, Return Receipt Requested, and addressed to the parties hereto at the addresses set forth below, or at such other addresses as the parties may themselves designate in writing (by notice given hereunder) for the purpose of receiving notices hereunder. Such notices shall be deemed effective on delivery if hand-delivered or on the second business day after being deposited in the mails with postage prepaid if mailed. 13 Bank: ---- Magna Bank, N.A. One Magna Place 1401 South Brentwood Blvd. St. Louis, Missouri 63144 Attn: Ms. Anne D. Silvestri with a copy to [Attorney]: ------------------------- Roger Herman, Esq. Rosenblum, Goldenhersh, Silverstein & Zafft, P.C. 7733 Forsyth Blvd. - 4th Floor St. Louis, Missouri 63105 Borrower: -------- c/o D & K Wholesale Drug, Inc. Attn: Martin D. Wilson 8000 Maryland Avenue - Suite 1190 St. Louis, Missouri 63105 with a copy to [Attorney]: ------------------------- Steven Graham, Esq. Thompson Coburn One Mercantile Center St. Louis, Missouri 63101 4.4 CERTAIN PERMITTED BORROWER TRANSACTIONS. Notwithstanding anything --------------------------------------- to the contrary contained in this Loan Agreement, or contained in any of the Security Documents, or contained in any of the other Loan Documents, Bank agrees, as follows: (a) With prior written notice to Bank, Krelitz may merge and be merged into D & K, with D & K being the surviving entity, without Bank's consent, provided that D & K assumes in writing and/or ratifies all of Krelitz's obligations under this Loan Agreement, the Security Documents and the other Loan Documents, upon terms and conditions reasonably satisfactory to Bank (the "PERMITTED MERGER"). (b) With prior written notice to Bank, the articles of incorporation and corporate by-laws of D & K and of Krelitz may each be amended, modified and/or restated in writing, and D & K and/or Krelitz may adopt written articles of merger and other appropriate documents, in order to effect and consummate the Permitted Merger, without Bank's consent, provided that the amendments, modifications and/or restatements of the articles of incorporation and corporate by-laws of D & K and of Krelitz, and articles of merger and other appropriate documents, all are reasonably satisfactory to Bank. (c) With prior written notice to Bank, Krelitz may sell, transfer, convey and/or lease to D & K all or any portion of the Collateral now or hereafter owned by Krelitz, without Bank's consent, provided that D & K assumes in writing and/or ratifies all of Krelitz's obligations under this Loan Agreement, the Security Documents and the other Loan Documents with respect to the sold, transferred, conveyed and/or leased Collateral, upon terms and conditions reasonably satisfactory to Bank. 14 4.5 ATTORNEY'S FEES. Borrower shall pay to Bank all reasonable --------------- attorney's fees, costs and expenses incurred by Bank in exercising and enforcing any of its rights and remedies under this Loan Agreement, the Security Documents or any of the other Loan Documents, and in connection with the enforcement and/or collection by Bank of the Loan. 4.6 LOAN COMMITMENT. This Loan Agreement has been entered into in --------------- furtherance of that certain "LOAN COMMITMENT" dated July 30, 1996, issued by Bank, and accepted by Borrower on August 2, 1996. In all respects, the Loan Commitment is superseded by the Loan Documents, and the terms and conditions of the Loan Commitment shall not survive the Closing, the execution of this --- Loan Agreement and of the other Loan Documents. The terms, conditions, provisions and agreements of the Note, the Security Documents and this Loan Agreement shall prevail, govern and control in any and all events. 4.7 MISCELLANEOUS. This Agreement shall be binding upon Borrower and ------------- Bank, and their respective successors and assigns. This Agreement may be executed in several counterparts, each of which shall, for all purposes, be deemed an original and all of such counterparts, taken together, shall constitute one and the same agreement, even though all of the parties hereto may not have executed the same counterpart of this Agreement. If any provision or provisions of this Agreement shall be unlawful, then such provision or provisions shall be null and void, but the remainder of this Agreement shall remain in full force and effect and be binding on the parties. This Agreement and the Loan Documents referenced herein contain all the agreements and commitments of Bank relating to or connection with this Agreement. Any prior agreements or commitments of Bank, whether oral or written, relating to or connected with this Agreement not expressly set forth herein or in the exhibits hereto (if any), or in the other Loan Documents, are null and void and superseded in their entirety by the provisions hereof. Borrower and Bank hereby submit and consent to the jurisdiction and venue of any Federal District Court located in the City of St. Louis, State of Missouri or any Missouri State Circuit Court located in the City or County of St. Louis for purposes of litigation involving this Agreement or any of the Loan Documents. BORROWER AND BANK HEREBY WAIVE AND RELINQUISH ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING UNDER THIS AGREEMENT. 15 4.8 ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT BORROWER AND BANK FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS BORROWER AND BANK REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN BORROWER AND BANK, EXCEPT AS BORROWER AND BANK MAY LATER AGREE IN WRITING TO MODIFY IT. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. BORROWER: - -------- D & K WHOLESALE DRUG, INC., a Delaware corporation By:-------------------------- MARTIN D. WILSON, President KRELITZ INDUSTRIES, INC., a Minnesota corporation By:-------------------------- MARTIN D. WILSON, President BANK: - ---- MAGNA BANK, N.A., a national banking association By:--------------------------- PAUL GROSSE Vice President Exhibits: - -------- Exhibit A -- Note Exhibit B -- Form of Draw Request Exhibit C -- Budget Exhibit D -- Additional Definitions Exhibit E -- Disclosed Litigation 16 PROMISSORY NOTE --------------- $1,495,000.00 DECEMBER --, 1996 St. Louis, Missouri FOR VALUE RECEIVED, the undersigned D & K WHOLESALE DRUG, INC., a corporation organized and existing under the laws of the State of Delaware and qualified to do business in the State of Missouri ("D & K") and KRELITZ INDUSTRIES, INC., a Minnesota corporation ("KRELITZ") (said D & K and Krelitz being hereinafter referred to collectively as the "MAKERS"), jointly and severally, promise to pay to the order of MAGNA BANK, N.A., a national banking association (the "PAYEE"), at: One Magna Place, 1401 South Brentwood Blvd., St. Louis, Missouri 63144, or at such other place or places as may be hereafter designated in writing from time to time by the holder of this Note, the principal sum of ONE MILLION FOUR HUNDRED NINETY-FIVE THOUSAND AND 00/XX DOLLARS ($1,495,000.00), or such lesser principal amount as is from time-to-time outstanding and unpaid hereunder, together with interest, from the date hereof, on the whole of said principal sum remaining from time-to-time outstanding and unpaid hereunder, at the rate or rates hereinafter specified, said principal and interest to be paid as hereinafter provided. A. MATURITY DATE. This Note, if not sooner paid, shall mature ------------- on DECEMBER --, 2000 (THE "MATURITY DATE"). On the Maturity Date of this Note, all unpaid principal hereon, together with all unpaid accrued interest hereon, shall be due and payable in full. B. MISSOURI FIRST LINKED DEPOSIT JOB CREATION LOAN PROGRAM. The ------------------------------------------------------- Makers have been approved for participation in, and the loan to the Makers under this Note for the first (1st) year of this Note has been extended by Payee to Makers pursuant to, the MISSOURI FIRST LINKED DEPOSIT JOB CREATION PROGRAM (the "FIRST LINK PROGRAM"). The initial interest rate under this Note for the first (1st) year of this Note has been established based upon Makers' participation in the First Link Program for the first (1st) year of this Note. Prior to the first (1st) anniversary date of this Note, at the request of Makers, the Makers and Payee agree to and shall reapply to the State of Missouri for Makers' 17 participation in the First Link Program for the second (2nd) year of this Note. C. INTEREST RATE. ------------- (1) From and after the date of this Note, through the first (1st) ----------- anniversary date of this Note, the from time-to-time principal balance - ---------------- outstanding hereunder shall bear interest at a fixed rate of interest per annum equal to FIVE AND NINETY-FIVE ONE-HUNDREDTHS PERCENT (5.95%). Provided, however, that said interest rate is subject to amendment and adjustment in accordance with the terms, conditions and provisions of Section 1.3 of the ----------- "LOAN AGREEMENT" (as defined in Paragraph F hereof. ----------- (2) If the State of Missouri approves in writing the Makers' -- -------- participation in the First Link Program for the second (2nd) year of this Note, then from and after the first (1st) anniversary date of this Note, ---- ---------------------------- through the second (2nd) anniversary date of this Note, the from ----------------------------- time-to-time principal balance outstanding hereunder shall bear interest at a fixed rate of interest per annum equal to: THAT PER ANNUM INTEREST RATE WHICH IS EQUAL TO THE SUM OF: (1) SEVENTY PERCENT (70%) OF THE "PRIME RATE" (AS ------ DEFINED BELOW) ON THE FIRST (1ST) ANNIVERSARY DATE OF THIS NOTE, PLUS (2) ---- ONE-HALF PERCENT (1/2%). (3) If the State of Missouri fails to approve in writing the -- ---------------- Makers' participation in the First Link Program for the second (2nd) year of this Note, then from and after the first (1st) anniversary date of this ---- ---------------------------- Note, through the second (2nd) anniversary date of this Note, the from ----------------------------- time-to-time principal balance outstanding hereunder shall bear interest at a variable rate of interest per annum equal to: THAT PER ANNUM INTEREST RATE WHICH IS EQUAL TO ONE-HALF PERCENT (1/2%) OVER AND IN ADDITION TO THE FROM TIME-TO-TIME PRIME RATE. (4) From and after the second (2nd) anniversary date of this Note, ----------------------------- through the Maturity Date of this Note, the from time-to-time principal ------------- balance outstanding hereunder shall bear interest at a variable rate of interest per annum equal to: THAT PER ANNUM INTEREST RATE WHICH IS EQUAL TO ONE-HALF PERCENT (1/2%) OVER AND IN ADDITION TO THE FROM TIME-TO-TIME PRIME RATE. (5) Any change in the interest rate hereunder resulting from a change in the Prime Rate shall be effective on the same date on which the Prime Rate changes. Payee's invoices to Makers shall reflect any applica- 18 ble changes in the interest rate hereunder. Interest hereunder shall be computed on the basis of a year consisting of three hundred sixty (360) days, and charged on the basis of the actual number of days elapsed. D. INTEREST AND PRINCIPAL PAYMENTS. ------------------------------- (1) Commencing on JANUARY 1, 1997, and on the FIRST (1ST) day of each month thereafter prior to Maturity, Makers shall pay to Payee the accrued interest on the then outstanding principal balance of this Note at the applicable interest rate set forth in Paragraph C hereof. At Maturity, ----------- Makers shall pay to Payee all unpaid accrued interest hereon. (2) The principal under this Note shall be due and payable in install- ments, as follows: (a) A cash installment of principal in the amount of $182,500.00 shall be due and payable on the FIRST (1ST) ANNIVERSARY DATE of this Note. (b) If the State of Missouri approves in writing the Makers' -- -------- participation in the First Link Program for the second (2nd) year of this Note, then: (i) a cash installment of principal in the amount of $437,500.00 ---- shall be due and payable on the SECOND (2ND) ANNIVERSARY DATE of this Note; (ii) a cash installment of principal in the amount of $36,458.33 shall be due and payable on January 1, 1999; and (iii) a like cash installment of principal --------------- in the amount of $36,458.33 shall be due and payable on the FIRST (1ST) day of each and every month thereafter continuing to and including December 1, 2000. ----------------- (c) If the State of Missouri fails to approve in writing the -- ---------------- Makers' participation in the First Link Program for the second (2nd) year of this Note, then: (i) a cash installment of principal in the amount of ---- $36,458.33 shall be due and payable on January 1, 1998; and (ii) a like cash --------------- installment of principal in the amount of $36,458.33 shall be due and payable on FIRST (1ST) day of each and every month thereafter continuing to and including December 1, 2000. - ----------------- (d) On the Maturity Date of this Note, a final cash installment of principal shall be due and payable, such installment to be in an amount equal to the then outstanding principal balance of this Note. At Maturity, 19 Makers shall pay to Payee the full amount of the then outstanding principal balance of this Note, together with all unpaid accrued interest thereon. E. PRIME RATE. For purposes of this Note, the "PRIME RATE", as ---------- of any date, is that variable interest rate periodically reported as the highest Prime Rate in the "Money Rates" column or any successor column of The --- Wall Street Journal, currently defined as being the base rate on corporate - ------------------- loans posted by at least seventy-five percent (75%) of the nation's thirty (30) largest banks (regardless of whether such rate has actually been charged by any such bank). In the event The Wall Street Journal ceases publication ----------------------- of the Prime Rate, then "Prime Rate" shall mean the "prime rate" or "base rate" announced by Payee or any other bank designated by Payee, from time to time (regardless of whether such rate has actually been charged by such bank). In the event the Wall Street Journal: (a) publishes more than one Prime Rate, the highest of such rates shall be the "Prime Rate", or (b) publishes a retraction or correction of any such rate, the rate reported in such retrac- tion or correction shall be the "Prime Rate". F. LOAN AGREEMENT. This Note has been executed and delivered by the -------------- Makers to the Payee pursuant to the terms of that certain LOAN AGREEMENT (the "LOAN AGREEMENT") of even date herewith, by and between Makers and Payee; to which Loan Agreement reference is hereby made for the terms and conditions under which the loan proceeds evidenced by this Note have been and shall be disbursed and advanced by Payee to Makers. G. SECURITY. This Note is secured by a SECURITY AGREEMENT (the -------- "SECURITY AGREEMENT") of even date herewith, executed by the Makers hereof, as the debtor, in favor of the Payee hereunder, as the secured party; which Security Agreement grants to Payee a security interest in certain personal property, furniture, fixtures and equipment owned by Makers located at the following addresses: (1) 1823 Rust Avenue, Cape Girardeau, Missouri 63701; (2) 800 North Third Street, Minneapolis, Minnesota 55401; and (3) 516 West Fourth Street, Lexington, Kentucky 40508; all as more particularly described in said Security Agreement. This Note also is secured by a DEED OF TRUST AND SECURITY AGREEMENT (the "MORTGAGE") of even date herewith, executed by Krelitz, as the grantor, in favor of the Payee hereunder, as the beneficiary; which Mortgage creates a first lien on certain real estate located in the COUNTY OF HENNEPIN, STATE OF MINNESOTA; all as more particularly described in said Mortgage. The Security Agreement and the Mortgage provide, inter ----- 20 alia, for the acceleration of the maturity of this Note under the circumstances - ---- specified in the Security Agreement and the Mortgage. H. DEFAULT RATE; LATE FEE. Any and every payment of principal, ---------------------- interest or any other sums shall be made in the lawful money of the United States that is legal tender for payment of all debts and dues, public and private, at the time of payment, and shall be credited on interest then due and the remainder on principal; and after the proper crediting of any principal payments, interest shall cease upon the portion of the principal so credited. If any payment of principal, interest or the balance of principal shall not have been paid within twenty (20) days after due, whether by acceleration or otherwise, as herein provided, the same shall thereafter bear interest (the "DEFAULT RATE") at the rate of TWO PERCENT (2%) above and in addition to the Prime Rate, until paid; provided, however, that in no event shall interest by charged at a rate in excess of the highest interest rate allowable by applicable law. In addition, if Makers fail to make any payment of principal or interest under this Note within fifteen (15) days after due, then Makers agree to and shall pay to the order of Payee a late fee in an amount equal to five percent (5%) of the amount of the late payment. I. EVENTS OF DEFAULT. The occurrence of any of the following ----------------- events shall constitute an "EVENT OF DEFAULT" or a "DEFAULT" hereunder by Makers (or any of them), to-wit: (1) Any default or failure by Makers in respect to any promise to pay made in this Note, and such payment default continues for twenty (20) days beyond the due date; or (2) Any other default hereunder, or under the terms of the Loan Agreement, or under the terms of the Security Agreement, or under the terms of the Mortgage, which default remains uncured after the expiration of any applicable notice and cure period contained in the Loan Agreement, if any; or (3) Makers (or any of them) shall (a) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator for itself, or for all of or a substantial part of its assets, (b) be unable, or admit in writing its inability, to pay its debts as they mature, (c) make a general assignment for the benefit of creditors, (d) be adjudicated a bankrupt or insolvent, (e) file a voluntary petition in Bankruptcy, or seek an arrangement with creditors, or take advantage of any insolvency law or file an 21 answer admitting the material allegations of a petition filed against itself in any Bankruptcy, reorganization or insolvency proceedings, or (f) take any action to effectuate any of the foregoing; or (4) An injunction or attachment shall be issued against any of the property or assets of Makers (or any of them) with respect to a claim having a value in excess of $100,000.00; or (5) A final non-appealable judgment(s) (individually or collectively in excess of $100,000.00) is entered against Makers (or any of them) by a court of competent jurisdiction in the premises, and such judgment shall not be satisfied by Makers within thirty (30) days after the date on which such judgment becomes final; or (6) A default or event of default (after the expiration of any applicable notice and cure period, if any) has been committed by Makers (or any of them) under or within the meaning of any agreement, document or instru- ment to which Makers (or any of them) are a party evidencing, securing or guaranteeing the payment of or otherwise relating to this Note, or any such agreement, document or instrument shall cease to be in full force and effect (not due to any act or omission of Payee); or (7) Any assignment, sale, transfer, assignment or other conveyance of corporate stock or other ownership interest in Makers (or any of them) (including transfers caused by the death or incompetency of any individual), which effects a change in control of Makers (or any of them), without the prior written consent of Payee first obtained (which consent shall not be unreasonably withheld, conditioned or delayed); or (8) Dissolution, termination of existence, reorganization, merger or consolidation of Makers (or any of them), or sale or transfer of a substantial part of the property of Makers (or any of them), without the prior written consent of Payee first obtained (which consent shall not be unreasonably withheld, conditioned or delayed), or except as expressly permitted in Section 4.4 of the Loan Agreement; or - ----------- (9) Any encumbrance, pledge, mortgage, sale, transfer, assignment or other conveyance of any personal property or real property which is collateral for this Note, without the prior written consent of Payee first obtained, except as expressly permitted in Section 4.4 of the Loan Agreement; or ----------- 22 (10) Makers (or any of them) shall be in default (after the expiration of any applicable notice and cure period, if any) on, or pursuant to the terms of, (a) any other present or future obligation of Makers (or any of them) to Payee, including, without limitation, any loan, line of credit, revolving credit, guaranty or letter of credit reimbursement obligation, or (b) any other present or future agreement purporting to convey to Payee a lien or encumbrance upon, or a security interest in, any of the property or assets of Makers (or any of them); or (11) A default or event of default (after the expiration of any applicable notice and cure period, if any) shall occur under or within the meaning of any present or future material agreement or obligation of Makers (or any of them) to any third party, including (without limitation) the loan obligations of Makers (or any of them) to Fleet Capital Corporation and any other material loan, line of credit, revolving credit, guaranty or letter of credit reimbursement obligations of Makers (or any of them) to any third parties. Upon the occurrence of any such Event of Default, the Payee may, at its option, declare in writing the entire indebtedness hereby evidenced to be due, payable and collectible, then or thereafter as the holder may elect, whereupon all of the unpaid principal amount due under this Note, all unpaid accrued interest due under this Note, and all such other amounts due under this Note, shall become and be immediately due and payable in full, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Makers, and the Payee may exercise any and all other rights and remedies which it may have under this Note or under any other agreement, document or instrument evidencing, securing or guaranteeing the payment of this Note or under applicable law. The failure of the Payee to exercise such option or any other right to which the Payee may be entitled shall not constitute a waiver of the right to exercise such option or any other right in the event of any subsequent default. J. The Makers and any endorsers, guarantors, sureties and all other parties liable for the payment of any sum or sums due or to become due under the terms of this Note severally waive demand, presentment, demand for payment, protest, notice of protest, nonpayment and dishonor except as specifically provided herein or otherwise mandated by applicable law, and consent that the time of payment of this Note may be extended, renewed, or modified, from time to time, without notice to them or their consent, and further agree that the security for this Note or any 23 portion thereof may from time to time be modified, adjusted, subordinated or released in whole or in part without affecting the liability of any party liable or becoming liable for the payment of this Note. K. If this Note be not paid as hereinbefore provided or should it become necessary in the reasonable opinion of the holder hereof to employ counsel to collect or enforce this Note or to protect the security for the same, the undersigned Makers and all other parties liable for the payment of any sum or sums due or to become due under the terms of this Note shall pay to the holder hereof, to the extent permitted by applicable law, all costs, charges, disbursements and reasonable attorneys' fees incurred by the holder hereof in collecting or enforcing payment thereof or in protecting the same, whether incurred in or out of court, or in litigation, including probate proceedings, appeals and bankruptcy proceedings. L. Any indebtedness, including deposits due, from the legal holder hereof to the undersigned Makers (or any of them) or any guarantor, endorser, or surety hereof, shall be deemed to be pledged to secure the payment hereof and may at any time while the whole or any part of the debt evidenced hereby remains unpaid (whether before or after the Maturity Date hereof) be appropriated, held or applied toward the payment of this obligation. M. Provided that the undersigned Makers are not then in default in the payment of any monies due from Makers to Payee hereunder, or under the Loan Agreement, or under the Security Agreement, or under the Mortgage, the undersigned Makers shall have the right, at any time, to prepay all or any portion hereof; provided that, upon the first voluntary prepayment of ------------- principal of this Note (e.g., excluding involuntary prepayments resulting from any required application of insurance or condemnation proceeds to the repayment of this Note), the Makers shall pay to Payee a one time prepayment penalty of FIVE THOUSAND DOLLARS ($5,000.00), except that no such prepayment ----------- penalty shall be due and payable if such first prepayment of principal of this Note is a prepayment of the entire principal balance of this Note made during the ninety (90) day period immediately prior to the Maturity Date of this Note. Any prepayment made hereon will be applied first to accrued and unpaid interest hereon, and the remainder of such prepayment will be applied to the balance of the principal then remaining unpaid. No prepayment shall postpone the installment payments required hereunder, or affect the obligation to pay the same on the Maturity Date when the entire indebtedness must be paid in full. 24 N. To the extent that Payee receives any payment on account of Makers' liabilities and any such payment(s) or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside, subordinated and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or Federal law, common law or equitable cause, then, to the extent of such payment(s) received, Makers' liabilities or part thereof intended to be satisfied and any and all liens, security interests, mortgages and/or other encumbrances upon or pertaining to any collateral for this Note and theretofore created and/or existing in favor of Payee as security for the payment of such Makers' liabilities shall be revived and continue in full force and effect, the same as if such payment(s) had not been received by Payee and applied on account of Makers' liabilities. O. Any notices sent by Payee to Makers hereunder shall be deemed given if sent by United States Certified Mail, return receipt requested, or if hand delivered to Makers at Makers' address listed at the end of this Note, and the same shall be deemed given two business days after deposit in the mails, if mailed, or upon receipt if hand delivered. P. The obligations of Makers under this Note shall be binding upon each Maker and the respective successors and assigns thereof and shall inure to the benefit of Payee and Payee's successors and assigns. If any provision of this Note or any portion thereof, is adjudicated by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Note shall be construed as if such invalid or unenforceable provision was never included herein. Q. This Note is secured by the above described Security Agreement and Mortgage of even date herewith. This Note is payable in the State of Missouri. This Note is to be construed and enforced according to, and governed by, the laws of the State of Missouri, without regard to its conflict of laws provisions, and the laws of the United States applicable to transactions in Missouri. Any litigation arising hereunder shall be subject to the jurisdiction of any state or federal court located in the State of Missouri as Payee may designate and, in the absence of designation, the situs for jurisdiction shall be in any state court located in the City or County of St. Louis, Missouri or the federal court district and division in which the aforesaid City or County is located. Makers and Payee each hereby consent to the jurisdiction of such courts and waive any and all rights to contest jurisdiction and venue and waive any right to commence any action against the other in any other jurisdiction. MAKERS 25 AND PAYEE HEREBY WAIVE AND RELINQUISH ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING UNDER THIS NOTE. R. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT MAKERS AND PAYEE FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. IN WITNESS WHEREOF, the undersigned Makers have executed this Note on the date first hereinabove stated, in St. Louis, Missouri. D & K WHOLESALE DRUG, INC., a Delaware Corporation By:--------------------------- MARTIN D. WILSON, President KRELITZ INDUSTRIES, INC., a Minnesota Corporation By:--------------------------- MARTIN D. WILSON, President Borrower's Address For Receipt of Notices: c/o D & K Wholesale Drug, Inc. - ---------------------- Attn: Mr. Martin D. Wilson 8000 Maryland Avenue - Suite 1190 St. Louis, Missouri 63105 EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated May 8, 1997, included in this Form 10-K for the year ended March 28, 1997, into the Company's previously filed Registration Statements on Form S-3 (Nos. 33-99210 and 333-3262) and Form S-8 (Nos. 33-88714 and 333-24263). ARTHUR ANDERSEN LLP St. Louis, Missouri, June 24, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 03/28/97 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-28-1997 MAR-30-1996 MAR-28-1997 2,213 0 22,944 697 49,991 75,333 11,280 5,038 101,466 51,063 41,530 30 0 0 8,843 101,466 478,794 478,794 457,778 457,778 16,740 0 3,738 1,279 540 739 0 0 0 739 0.24 0.24
EX-99 6 1 PHARMACEUTICAL BUYERS, INC. FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Pharmaceutical Buyers, Inc.: We have audited the accompanying balance sheet of PHARMACEUTICAL BUYERS, INC. (an Arkansas corporation) as of December 31, 1996, and the related statements of operations, stockholders' deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pharmaceutical Buyers, Inc. as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Denver, Colorado, March 4, 1997. 3 PHARMACEUTICAL BUYERS, INC. --------------------------- BALANCE SHEET ------------- DECEMBER 31, 1996 -----------------
ASSETS ------ CURRENT ASSETS: Cash and cash equivalents (Note 2) $ 2,077,511 Available-for-sale investments (Note 2) 485,922 Receivables (Note 2) 1,257,239 Other current assets (Note 7) 54,816 ------------ Total current assets 3,875,488 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $154,194 159,172 DEFERRED INCOME TAXES (Note 5) 43,863 OTHER ASSETS, net (Note 2) 982,568 ------------ Total assets $ 5,061,091 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- CURRENT LIABILITIES: Accounts payable $ 48,897 Accrued expenses 207,878 Deferred revenue (Note 2) 245,909 Income taxes payable 666,957 Current deferred income taxes (Note 5) 283,380 Current portion of other long-term payables (Note 4) 204,736 ------------ Total current liabilities 1,657,757 NOTES PAYABLE AND OTHER LONG-TERM PAYABLES (Note 4) 8,160,649 ------------ Total liabilities 9,818,406 ------------ COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS' DEFICIT (Note 3): Class A common stock, $.01 par value, 500 shares authorized, 66 shares issued and outstanding 1 Class B common stock, $.01 par value, 500 shares authorized, 84 shares issued and outstanding 1 Additional paid-in capital 5,766,681 Retained earnings 2,076,002 Treasury stock (12,600,000) ------------ Total stockholders' deficit (4,757,315) ------------ Total liabilities and stockholders' deficit $ 5,061,091 ============ The accompanying notes to financial statements are an integral part of this balance sheet.
4 PHARMACEUTICAL BUYERS, INC. --------------------------- STATEMENT OF OPERATIONS ----------------------- FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------------------------ REVENUE: Administrative fees $4,815,708 Membership fees 686,542 ---------- Total revenue 5,502,250 ---------- EXPENSES: Operating 1,270,420 Selling, general and administrative 1,159,538 Depreciation and amortization 289,497 ---------- Total expenses 2,719,455 ---------- Income from operations 2,782,795 ---------- OTHER INCOME (EXPENSE): Interest expense (899,352) Other income, net 145,379 ---------- Total other expense, net (753,973) ---------- INCOME BEFORE INCOME TAX PROVISION 2,028,822 INCOME TAX PROVISION (810,881) ---------- NET INCOME $1,217,941 ========== The accompanying notes to financial statements are an integral part of this statement.
5 PHARMACEUTICAL BUYERS, INC. --------------------------- STATEMENT OF STOCKHOLDERS' DEFICIT ---------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------------------------
Common Stock --------------- Paid-In Retained Treasury Shares Amount Capital Earnings Stock Total ------ ------ ---------- ----------- ------------ ----------- BALANCES, December 31, 1995 150 $2 $5,766,681 $ 858,061 $(12,600,000) $(5,975,256) Net income - - - 1,217,941 - 1,217,941 --- -- ---------- ---------- ------------ ----------- BALANCES, December 31, 1996 150 $2 $5,766,681 $2,076,002 $(12,600,000) $(4,757,315) === == ========== ========== ============ =========== The accompanying notes to financial statements are an integral part of this statement.
6 PHARMACEUTICAL BUYERS, INC. --------------------------- STATEMENT OF CASH FLOWS ----------------------- FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,217,941 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 289,497 Gain on sales of investments, net (11,446) Deferred income tax benefit (55,187) Changes in assets and liabilities- Increase in receivables (154,919) Increase in other assets (44,790) Decrease in accounts payable (3,688) Decrease in accrued expenses (46,216) Increase in deferred revenue 112,259 Increase in income taxes payable 602,317 ---------- Net cash provided by operating activities 1,905,768 ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (60,823) Proceeds from sales of investments 69,249 Purchase of investments (543,455) ---------- Net cash used in investing activities (535,029) ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on other long-term payables (168,850) ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,201,889 CASH AND CASH EQUIVALENTS, at beginning of year 875,622 ---------- CASH AND CASH EQUIVALENTS, at end of year $2,077,511 ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 897,164 ========== Cash paid for income taxes $ 129,200 ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: In 1996, the Company contributed to Vista Purchasing Partners, L.L.C. the balance of its accounts receivable from Vista of $40,379 as its initial contribution to the joint venture (Note 6). The accompanying notes to financial statements are an integral part of this statement.
7 PHARMACEUTICAL BUYERS, INC. --------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- AS OF DECEMBER 31, 1996 ----------------------- (1) ORGANIZATION ------------ Pharmaceutical Buyers, Inc. ("PBI" or the "Company"), an Arkansas corporation, is a group purchasing organization. PBI aggregates buying power for its members in order to negotiate favorable contracts with pharmaceutical and medical supply manufacturers and distributors. PBI's members include long-term care providers, home infusion providers, home medical equipment dealers, medical distributors and other healthcare providers. The Company's revenue is derived from membership fees paid by members and administrative fees paid by manufacturers and distributors. In November 1995, in connection with the Stock Purchase and Redemption Agreement (Note 3), the Company restated and amended its Articles of Incorporation to authorize 500 shares of $.01 par value Class A voting common stock and 500 shares of $.01 par value Class B non-voting common stock. On November 30, 1995, as discussed in Note 3, the Company was recapitalized (the "Recapitalization") by way of the issuance of debt and equity, and the repurchase of common stock for the Company's treasury. (2) SIGNIFICANT ACCOUNTING POLICIES ------------------------------- Basis of Accounting ------------------- The accompanying financial statements have been prepared using the accrual method of accounting. Investment in joint venture is accounted for using the equity method (Note 6). 8 -2- Cash and Cash Equivalents and Available-For-Sale Securities ----------------------------------------------------------- Cash and cash equivalents include cash and investments with original maturities of three months or less and which are not subject to significant risk from changes in interest rates. Available-for-sale investments include those investments expected to be held between three and twelve months. At December 31, 1996, all investments were in equity securities, classified as available-for-sale and therefore were accounted for at fair market value in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The carrying value of all investments approximated fair market value. Property and Equipment ---------------------- Property and equipment is stated at cost. Depreciation and amortization are charged to operations using primarily accelerated depreciation methods over the estimated useful lives of the various classes of assets, which vary from 5 to 39 years. Non-Compete Agreements ---------------------- Non-compete agreements have been recorded by the Company as a result of the Recapitalization discussed in Note 3. Such intangible assets are being amortized over a four-year period from the date of the Recapitalization (November 30, 1995). At December 31, 1996, non-compete agreements of $587,974 is recorded, net of accumulated amortization of $195,991, and is included in other assets in the accompanying balance sheet. Debt Issuance Costs ------------------- Costs associated with the debt transactions discussed in Note 4 are being amortized over the term of the related debt, which approximates the effective interest method of amortization. At December 31, 1996, deferred debt issuance costs of $346,490 is recorded, net of accumulated amortization of $42,094, and is included in other assets in the accompanying balance sheet. 9 -3- Income Taxes ------------ The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109. "Accounting for Income Taxes" ("SFAS 109"), which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective basis for income tax purposes. The Company files their income tax returns under the cash basis. Deferred tax assets and liabilities are measured and recorded using enacted tax rates in effect for the year in which those temporary difference are expected to be recorded or settled. Receivables and Deferred Revenue -------------------------------- The Company derives its revenue primarily from two sources. The Company charges annual membership dues to its members. Membership dues are billed in advance throughout the year depending on the member's anniversary date. The Company also receives contract administrative fees from medical supply and pharmaceutical manufacturers and distributors. These fees are usually paid monthly or quarterly, in arrears, depending on the supplier. The amounts paid to the Company by manufacturers and distributors are based on the volume of purchases by the Company's members. At December 31, 1996, the Company has recorded approximately $1,257,000 of administrative fees receivable. This amount is based on Company estimates of the volume of purchases by its members based on discussions with and information provided by manufacturers and distributors. Management believes that all administrative fees receivable are fully collectible. Additionally, approximately $246,000 of membership dues have been received in advance, and are recorded in the accompanying balance sheet as deferred revenue, to be recognized ratably over their one year membership period. 10 -4- Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments ----------------------------------- Financial instruments include cash and cash equivalents, available-for-sale investments, administrative fees receivable, accounts payable, accrued expenses, notes payable and other long-term payables. The carrying amounts for cash and cash equivalents, administrative fees receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The carrying amounts of available-for-sale investments, notes payable and other long-term payables approximate fair value as the pricing and terms of those instruments are indicative of current rates and credit risk. Asset Impairment ---------------- The Company reviews its assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For assets which are held and used in operations, the asset would be impaired if the undiscounted future cash flows related to the asset did not exceed the net book value. (3) RECAPITALIZATION ---------------- On November 30, 1995, the Company completed the Recapitalization. As a result of this Recapitalization, the Company: (1) sold shares of its Class A common stock and Class B common stock for $6,000,000, (2) repurchased shares of its Class A common stock for $12,600,000, and (3) 11 -5- borrowed $6,450,000 through Senior Secured Notes and $1,300,000 through Senior Secured Convertible Notes from Massachusetts Mutual Life Insurance Company and affiliates ("Mass Mutual"), due in November 2005 (Note 4). Also as part of the Agreement, the Company entered into non-compete agreements with the two original stockholders to be paid over a period ending October 1999 (Note 4). (4) NOTES PAYABLE AND OTHER LONG-TERM PAYABLES ------------------------------------------ Notes payable and other long-term payables at December 31, 1996, are as follows: Senior Secured Notes, payable to a stockholder (Mass Mutual); collateralized by substantially all assets of the Company; interest payable semi-annually at 10.5%; annual principal payments commencing November 30, 1999, of $921,429 until paid in full by November 2005; available for prepayment subject to a maximum annual and aggregate prepayment amount, as defined $6,450,000 Senior Secured Convertible Notes, payable to a stockholder (Mass Mutual); collateralized by substantially all assets of the Company; interest payable semi-annually at 10.5%; due November 30, 2005; available for prepayment subject to a maximum annual and aggregate prepayment amount, as defined; convertible into 26 Class A common shares at $50,000 per share 1,300,000 Non-compete agreements payable; noninterest bearing installments (discounted using 10.5% rate); due in semi-annual installments through 1999 615,385 ---------- 8,365,385 Less: Current portion (204,736) ---------- $8,160,649 ==========
12 -6- Principal repayments of notes payable and other long-term payables at December 31, 1996, are summarized as follows: 1997 $ 204,736 1998 216,238 1999 1,115,840 2000 921,429 2001 921,429 Thereafter 4,985,713 ---------- $8,365,385 ==========
(5) INCOME TAXES ------------ The income tax provision consists of the following for the year ended December 31, 1996: Current: Federal $822,647 State 43,421 -------- 866,068 -------- Deferred: Federal (52,428) State (2,759) -------- (55,187) -------- Income tax provision $810,881 ========
The significant components of the Company's net deferred liability at December 31, 1996 are as follows: Current deferred tax assets (liabilities): Administrative fees receivable $(468,950) Accounts payable 18,239 Accruals 77,538 Deferred revenue 91,724 Other (1,931) --------- Net current deferred tax liabilities $(283,380) ========= Long-term deferred tax assets: Amortization of non-compete agreements $ 43,863 =========
13 -7- The following table reconciles the federal statutory income tax rate to the Company's effective income tax rate: Provision for income taxes at federal statutory rate 34.0% Nondeductible expenses 1.5% Nontaxable investment income (2.2)% State income taxes, net of federal benefit 3.3% Other 3.4% ---- Effective income tax rate 40.0%
(6) RELATED PARTY TRANSACTIONS -------------------------- The Company leases certain office space from a stockholder. The Company's management believes that the transaction is arms length and reflects market rates for similar space. Payments made for this lease were $89,635 for the year ended December 31, 1996. The lease is noncancellable and expires May 31, 2000. During 1996, the Company paid fees of $35,008 to DASCO, an entity related by common ownership, for administrative activities. Also, prior to April 1996, the Company had a $50,000 certificate of deposit with a bank. This certificate of deposit served as security for a loan made by the bank to DASCO. In April 1996, DASCO defaulted on the loan and the certificate of deposit was used by the bank to pay down the loan. Both amounts have been reflected as selling, general and administrative expenses in the accompanying statement of operations. In May 1995, PBI and an entity owned by certain of the Company's officers (the "Officers") entered into a joint venture agreement and formed Vista Purchasing Partners, L.L.C. ("Vista"). Vista is owned 50% by PBI and 50% by this other entity. Vista was formed to pursue related aggregate purchasing opportunities with hospital-affiliated alternative sites. Vista had insignificant activity during 1995. In 1996, Vista reimbursed PBI for contract labor costs of $62,000. 14 -8- PBI accounts for its investment in Vista under the equity method. PBI's share of Vista's 1996 net loss was not material. Effective June 1, 1995, the Company entered into an agreement to purchase the operations of Parental Alimentation Providers Association ("PAPA"). In accordance with the agreement, PAPA was entitled to all membership dues of existing PAPA members until June 1, 1996. At June 1, 1996, the Company exercised its option to purchase the operations of PAPA for no additional consideration. The operations of PAPA were merged with those of the Company from that date. During 1996, the Company reimbursed approximately $41,000 to PAPA for certain costs incurred prior to June 1, 1996, which are classified as selling, general and administrative expenses in the accompanying statement of operations. On November 30, 1995, in connection with the Recapitalization discussed in Note 3, the Company entered into a consulting agreement with one of the Officers for two years with annual payments of $150,000. (7) EMPLOYEE BENEFIT PLANS ---------------------- Deferred Contribution Plan -------------------------- In August 1996, the Company adopted a 401(k) plan for its employees, effective January 1, 1996. Under this plan, employees, who are at least 21 years old and have completed one year of service, as defined, are eligible to participate in the plan. The Company may contribute a discretionary matching contribution equal to a percentage of each employee's contribution plus an additional discretionary amount as determined by the Company. In 1996, the Company matched 100% of the employees' contributions totaling approximately $24,000. No additional discretionary amount was made. 15 -9- Defined Benefit Plan -------------------- In August 1996, the Company terminated its defined benefit pension plan. Prior to its termination, the terms of the plan stated that in order to be eligible for benefits under the plan, the employee must be 21 years of age or older, have completed 20 months of service, and recorded 1,000 hours of service during each year. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. The Company makes contributions to the plan in accordance with actuarial projections, subject to the requirements of the Internal Revenue Code, as amended. In accordance with Statement of Financial Accounting Standards No. 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the plan's termination triggered a curtailment gain of approximately $46,000, which is included in other income, net in the accompanying statement of operations. The plan's obligations were not yet settled as of December 31, 1996. The following table reconciles the funded status of the plan with the amount reflected in the Company's December 31, 1996 balance sheet: Accumulated benefit obligation $(453,233) ========= Projected benefit obligation $(453,233) Fair value of plan assets 507,021 --------- Funded status 53,788 Unrecognized liability 102,673 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (141,549) --------- Prepaid pension asset $ 14,912 =========
16 -10- Net pension cost in 1996 is comprised of the following: Service cost $ 36,796 Interest cost 32,534 Return on assets (56,846) Other 24,817 -------- $ 37,301 ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5%. The expected long-term rate of return on assets was 7.5%. (8) SIGNIFICANT CUSTOMERS --------------------- The Company receives a significant portion of its administrative fee revenue from two manufacturers who represent 24% and 11%, respectively, of total revenue for the year ended December 31, 1996. (9) COMMITMENTS AND CONTINGENCIES ----------------------------- The Company leases office space and other equipment through noncancellable operating leases. Certain of the leases are with related parties (Note 6). Rental expense under operating leases was approximately $106,000 for the year ended December 31, 1996. Minimum rental payments under these leases with initial or remaining terms of one year or more at December 31, 1996 are as follows: 1997 $ 94,080 1998 94,080 1999 89,288 2000 33,210 -------- $310,658 ========
17 -11- The Company is currently a defendant in a lawsuit which arose in the normal course of business, whereby the Company, a pharmaceutical manufacturer and other group purchasing organizations have been accused of damaging certain retail pharmacies by not allowing them memberships in buying organizations such as the Company, which would allow them to receive reduced prices on pharmaceuticals. Management believes that the outcome of this matter will have no material impact on the financial position of the Company or its results of operations. -----END PRIVACY-ENHANCED MESSAGE-----