-----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, U+8JlmvhCXkRr1/bpTHCL9uh1/EdjSY4uV6xLADSMua0BLJXv6f3oDEG3ty42NAA /fkk1eStXISBVvs/kV8E3A== 0000950124-98-005289.txt : 19980930 0000950124-98-005289.hdr.sgml : 19980930 ACCESSION NUMBER: 0000950124-98-005289 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: D & K HEALTHCARE RESOURCES INC CENTRAL INDEX KEY: 0000888914 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 431465483 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20348 FILM NUMBER: 98716707 BUSINESS ADDRESS: STREET 1: 8000 MARYLAND AVENUE STREET 2: SUITE 920 CITY: ST. LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3147273485 MAIL ADDRESS: STREET 1: 8000 MARYLAND AVENUE STREET 2: SUITE 920 CITY: ST. LOUIS STATE: MO ZIP: 63105 FORMER COMPANY: FORMER CONFORMED NAME: D & K WHOLESALE DRUG INC/DE/ DATE OF NAME CHANGE: 19930328 10-K405 1 FORM 10-K405 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 June 30, 1998 Commission File Number 0-20348 D & K HEALTHCARE RESOURCES, INC. (Exact name of registrant as specified in its charter) Delaware 43-1465483 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8000 Maryland Avenue, Suite 920, St. Louis, Missouri 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 Section 12(g) of the Act: Common Stock, par value $.01 (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 ___ 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 $40,903,904 as of September 17, 1998. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of September 17, 1998, 3,756,775 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 II - Registrant's 1998 Annual Report to Stockholders Part III - B Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders 2 PART I Item 1. Business FORWARD-LOOKING STATEMENTS Statements herein regarding the Company's prospective business, market position and growth opportunities are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as a mended, and Section 21E of the Securities Exchange Act of 1934, as amended, and involve substantial risks and uncertainties. Forward-looking statements include statements contained in the "Business" section of this Form 10-K regarding the Company's ability to: (i) optimize its sales mix among customers in the various market segments of the industry; (ii) capitalize on trends in the wholesale distribution industry, and (iii) achieve increased economies of scale and greater cost-effectiveness. Forward-looking statements also include statements relating to the Company or its operations that are preceded by terms such as "expect", "believes", "intends" and similar expressions. The Company's actual results of operations or financial performance may differ materially form those implied by such forward-looking statements as a result of various factors, including, without limitation, the following: The wholesale pharmaceutical distribution industry is very competitive and many of the Company's competitors have substantially greater resources than the Company. The Company's contracts with its customers generally enable the customer to terminate the contract or reduce purchasing levels on relatively short notice without penalty. The Company=s relationships with its customers and suppliers, and its ability to increase its operating margins, is dependent, to a large extent, upon the efforts of its senior management and key sale personnel and the continued availability of inventory investment buying opportunities. OVERVIEW The Company is a leading regional wholesale distributor of pharmaceutical and related healthcare and beauty aid products to more than 700 retail and institutional customers in 20 states primarily in the Midwest and South. The Company also offers a variety of value-added services to its customers, particularly in the area of cost containment and inventory management. The Company had net sales of $612.4 million in fiscal 1998, of which 49.3% were to independent pharmacies, 21.4% were to retail chains, including national pharmacy chains and the pharmacy departments of supermarkets and mass merchandisers, and 29.3% were to healthcare institutions, including hospitals, alternate site care facilities, pharmacy benefit management companies and managed care organizations. The Company operates three state-of-the-art distribution facilities in Cape Girardeau, Missouri, Lexington, Kentucky and Minneapolis, Minnesota. Since its formation in 1987, the Company has expanded the scope and breadth of its business by consistently providing the highest levels of service to its customers and suppliers. The Company achieves such high levels of service by (i) providing its customers with a full continuum of products, value-added services and support, which enable its customers to compete more effectively; (ii) focusing on flexibility, which allows the Company to respond quickly to change and to customize systems to meet its customers' and suppliers' requirements; (iii) strategically locating the Company's distribution centers and satellite transfer depots throughout the Midwest and the South, which enables the Company to ship products to and service its customers promptly and efficiently; and (iv) attracting and motivating experienced and entrepreneurial management personnel, who continually seek to improve and expand the Company's business. -2- 3 In 1996, senior management of the Company initiated a plan to reposition the Company and significantly improve operating performance. This plan included: (i) identifying and focusing the Company's efforts on high-growth niche markets; (ii) centralizing certain management functions, including purchasing, marketing and information systems at its corporate offices, while decentralizing executive, sales and operating functions at each of its independently managed profit centers, including its three regional distribution centers; (iii) enhancing the depth and breadth of the Company's management team; (iv) creating new management and employee incentive plans; (v) upgrading the Company's facilities; and (vi) enhancing the Company's corporate image. Since implementing these strategic initiatives, net sales and net income have grown in each of the last nine fiscal quarters as compared to the same periods in the prior years. The Company believes that its regional-market focus and high level of customer service provide it with competitive advantages and position it to benefit from trends impacting the industry. Management believes that the increasing size of the wholesale pharmaceutical industry's larger participants hampers the ability of these companies to deliver specialized services to all their customers. The Company has successfully differentiated itself from its national competitors through its ability to provide flexible and customized services to its targeted customer segments. In addition, healthcare providers' need for value-added services which help contain costs and effectively manage inventory has given the Company the opportunity to capitalize on its cost competitiveness and advanced systems. The location and quality of the Company's distribution facilities and satellite transfer depots throughout the Midwest and South allow the Company to service its customers' and suppliers' needs promptly and efficiently. The Company has capitalized on the increased demand for alternate care providers through its investment in PBI in fiscal 1996. PBI is one of the nation's leading alternate site group purchasing organizations, and the Company's investment in PBI provides it with access to a higher margin business segment and insight into alternate site distribution. The wholesale pharmaceutical distribution industry has experienced rapid sales growth over the past twelve years, increasing from approximately $14.0 billion in sales in 1985 to more than $73.0 billion in 1997. In addition, the percentage of pharmaceutical sales made through wholesale distributors rather than directly by manufacturers increased to approximately 83% in 1997, from 58% in 1985. The Company believes that there are several major trends currently affecting the industry, including: (i) continued consolidation of national and regional wholesale drug distribution companies; (ii) an increasing emphasis on value-added services that lower healthcare providers' administrative and other costs associated with medical supply management; (iii) the growing importance of an efficient distribution model as customers become more cost-conscious; and (iv) a shift in the delivery of healthcare services from acute care settings to alternate sites, including physician offices and extended care facilities. PRODUCTS, SERVICES AND VALUE ADDED MARKETING SYSTEMS The Company's product line consists of more than 25,000 SKUs, including branded pharmaceuticals, multi-source generics, private label products, repackaged pharmaceutical products and over-the-counter health and beauty aids. The Company sells branded pharmaceuticals (approximately 89.7% of net sales in fiscal 1998), generic pharmaceuticals (approximately 6.0% of net sales in fiscal 1998) and over-the-counter health and beauty aids (approximately 4.3% of net sales in fiscal 1998). -3- 4 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: (i) RESOURCE, a proprietary PC based order entry/order confirmation system that completely automates all order creation, transmission and confirmation operations; (ii) PARTNERS, a fully automated and customizable replenishment software system which helps pharmacies more efficiently coordinate product supply and demand; (iii) FOCUS, a contract management and reporting software system designed for group purchasing and managed care organizations which automates functions relating to corporate and group contracts; and (iv) SCRIPTMASTER, a total pharmacy management software system that provides prescription management functions, drug and allergy checks, instantaneous connections to hundreds of third party insurance plans, "just in time" inventory management, automated accounts receivable, quick pay program monitoring and central office functions. The Company offers a broad range of merchandising and marketing services to its independent pharmacy customers under its "Med Plus" program. Under this program, the Company plans and coordinates cooperative advertising programs and provides for the availability of various promotional products. The Company also 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. Other services offered to independent pharmacies under Med Plus include: retail merchandising, inventory management systems, electronic order entry, planogramming, shelf labels and price stickers, private label products, monthly feature promotions, home healthcare marketing programs, store layout assistance, business management reports, pharmacy computer systems and monthly catalogs. CUSTOMERS AND MARKETS The Company's diverse customer base is comprised of over 700 independent pharmacies, retail chains and healthcare institutions. Independent pharmacies generally are small, community-based pharmacies, which the Company believes benefit the most from the Company's sales and value added services. Retail chains, which the Company believes is the fastest growing segment of the market, include national pharmacy chains and the pharmacy departments of supermarkets and mass merchandisers. Healthcare institutions, which currently comprise the largest segment of the market, consist of hospitals, nursing homes, clinics and other alternate site care facilities, home health agencies, HMOs and pharmacy benefit management companies. The Company believes that diversifying its sales across the various market segments enables the Company to capture greater market share in the geographic areas it serves and better serve the faster growing segments of the healthcare markets. The following table sets forth the Company's sales mix by customer segment:
NET SALES ----------------------------------------------------------------------- FISCAL YEARS ENDED ----------------------------------------------------------------------- MARCH 29, 1996 MARCH 28, 1997 JUNE 30, 1998 ------------------------ --------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- --------- -------- --------- -------- --------- (IN THOUSANDS) Independent Pharmacies $ 207,423 48.8% $ 223,708 49.6% $ 301,536 49.3% Retail Chains 134,427 31.6 131,343 27.4 131,233 21.4 Healthcare nstitutions 83,483 19.6 124,473 26.0 179,658 29.3 --------- ----- ---------- ----- ---------- ----- Total $ 425,333 100.0% $ 479,524 100.0% $ 612,427 100.0% ========= ===== ========== ===== ========== =====
-4- 5 The Company's senior management is actively involved in identifying and developing opportunities to expand the Company's business with customers in each of these market segments, including the preparation of proposals which highlight customer benefits of the Company's cost-competitiveness, advanced systems and value-added services. During fiscal 1997 and fiscal 1998, the Company's 10 largest customers accounted for approximately 47.2% and 37.1%, respectively, of the Company's revenues. The Company's largest customer during fiscal 1997 (with which the Company's relationship was mutually terminated in September 1997) accounted for approximately 20.0% of the Company's revenues during fiscal 1997 and Anthem Prescription Management, Inc., its largest customer during fiscal 1998, accounted for approximately 13.1% of the Company's revenues during that period. SALES AND MARKETING The Company employs sales representatives and customer service representatives at each of its three distribution centers. In addition to base salary, the Company's sales personnel receive incentive compensation based upon increases in the Company's market share and market penetration. The corporate vice president of sales and business development works closely with each business unit to develop sales goals. The Company's sales program includes regular training to improve customer service and to provide its sales and customer service representatives with the skills and resources necessary to increase business with existing customers and establish new customer relationships. The Company also maintains a telephone service department staffed with trained personnel who work with customers to answer questions and solve problems. The Company's marketing efforts are focused on developing new primary relationships with its customers. 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. Retail customers also rely on the Company's sales force for consulting services on advertising, merchandising, stocking and inventory management. The Company believes that its customer service department is a key element in its marketing program and differentiates it from its national competitors. The decentralized customer service staff emphasizes rapid response to customer inquiries and efficient order placement. OPERATIONS The Company is structured as an organization of locally managed profit centers. Each of the Company's profit centers has an executive, sales and operations staff with management compensation at each profit center determined by its operating results. The profit centers utilize the Company's corporate staff for procurement, marketing, financial, legal and executive management resources and corporate coordination of assets and working capital management. The Company's decentralized sales and distribution network, combined with its centralized procurement and corporate support staff structure, enable the Company to provide high levels of specialized, customer service while minimizing administrative expenses and maximizing volume discounts for product purchases. The Company's distribution centers maintain data processing systems and sophisticated materials handling equipment for receiving, storing and distributing large quantities and varieties of products. The Company continuously seeks to improve its warehouse automation technologies to maximize operational efficiencies on a cost-effective basis. In 1996, the Company developed state-of-the-art radio transmission and receiving procedures and barcoding and scanning technologies at one of -5- 6 its distribution centers which significantly improved accuracy, efficiency and productivity at that center. The Company subsequently exported this technology to its other distribution centers. The Company receives virtually 100% of its orders electronically and, 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 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 by customers. 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 sophisticated inventory-control and purchasing software. The software perpetually tracks the Company's inventory, analyzes demand history and projects future demand. The Company's system is designed to enhance profit margins by eliminating the manual ordering process, allowing for automatic inventory replenishment and identifying inventory buying opportunities. The system also improves the Company's fill rate and enhances inventory management and control. The Company purchases products from approximately 1,000 manufacturers for the wholesale purchase of pharmaceuticals and other products. The Company initiates purchase orders with manufacturers through its information systems. During fiscal 1997 and fiscal 1998, the Company's 10 largest suppliers accounted for approximately 45% and 70%, respectively, of the Company's purchases by dollar volume. Historically, the Company has not experienced difficulty in purchasing desired products from suppliers. The majority of contracts with suppliers are terminable by either party upon short notice and without penalty. The Company believes that its relationships with its suppliers are good. MANAGEMENT INFORMATION SYSTEMS Each of the Company's distribution centers operates as a distinct business with full system functionality: order processing, inventory management, accounts receivable, accounts payable, general ledger, master file maintenance, external and internal reporting. Each distribution center houses an AS/400 system and several PCs. Another AS/400 resides in the Company's corporate office, along with several PCs and a Local Area Network (LAN). The four AS/400s are connected via data lines and information is transmitted between locations on a regular basis. LANs are being installed in the Company's remaining locations over the next fiscal year in order to facilitate file sharing and e-mail delivery. The Company's purchasing system resides on the corporate host computer. 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 generic pharmaceutical -6- 7 telemarketers and specialty distributors. The Company also competes with other wholesale distributors for purchases of products and financial support in the form of trade credit from manufacturers. Certain of the Company's competitors have significantly greater financial and marketing resources than the Company. EMPLOYEES As of August 31, 1998, the Company employed 261 persons, 231 of whom were full-time employees. Approximately 25 of the Company's employees at its Minneapolis, Minnesota distribution center are covered by a collective bargaining agreement with the Miscellaneous Drivers, Helpers and Warehousemen's Union, Local 638, which expires in March 2000. 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 satellite depot facilities. The Company's primary operating facilities include:
LOCATION DESCRIPTION SQUARE FOOTAGE -------- ----------- -------------- Cape Girardeau, Distribution and administration 66,000 Missouri(1) Lexington, Kentucky(2)... Distribution and administration 37,500 Minneapolis, Minnesota(2) Distribution and administration 63,000 St. Louis, Missouri(1)... Corporate offices 7,900
- ---------- (1) Leased (2) Owned The Company also maintains warehouse and satellite depot facilities in Missouri, Tennessee, Kentucky and Florida that enable it to efficiently distribute product on a timely basis. The Company believes its facilities are adequate to support its present business plans. Item 3. Legal Proceedings 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 June 30, 1998. Item 4A. Executive Officers of the Registrant The name, age and position of each of the executive officers of the Company are set forth below. J. Hord Armstrong, III, 57, has served as the Chairman of the Board, Chief Executive Officer and Treasurer and as a director of the Company since December 1987. Prior to joining the Company, Mr. Armstrong served as Vice President and Chief Financial Officer of Arch Mineral Corporation, a coal mining and sales corporation, from 1981 to 1987 and as its Treasurer from 1978 to 1981. Mr. Armstrong serves as a Trustee of the St. Louis College of Pharmacy. -7- 8 Martin D. Wilson, 37, has served as President and Chief Operating Officer of the Company since January 1996, as Secretary since August 1993 and as a director since 1997. Mr. Wilson previously served as Executive Vice President, Finance and Administration of the Company from May 1995 to January 1996, as Vice President, Finance and Administration of the Company from April 1991 to May 1995 and as Controller of the Company from March 1988 to April 1991. Prior to joining the Company, Mr. Wilson, a certified public accountant, was associated with KPMG Peat Marwick, a public accounting firm. Dennis A. White, 48, has served as Vice President, Chief Information Officer of the Company since April 1996. 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, 33, has served as Vice President, Finance and Administration of the Company since November 1996. 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, 50, has served as Vice President, Sales and Business Development of the Company since May 1997. 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. Douglas E. Linton, 50, has served as Senior Vice President, Pharmaceutical and Specialty Services of the Company since February 1998, and as Vice President, Specialty Division from September 1997 to February 1998. Prior thereto, Mr. Linton served as Vice President, Merchandising of Walker Drug Company from October 1995 to August 1997, and as Senior Vice President, Supplier Services for Cardinal Health, Inc. for more than the preceding 5 years. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information set forth under the caption "Price Range Per Common Share" on the inside back cover page of the registrant's 1998 Annual Report to Stockholders is incorporated herein by this reference. Item 6. Selected Financial Data The information set forth under the caption "Financial Highlights on page 3 of the registrant's 1998 Annual Report to Stockholders is incorporated herein by this reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the registrant's 1998 Annual Report to Stockholders is incorporated herein by this reference. -8- 9 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The following financial statements and supplementary data, included in the registrant's 1998 Annual Report to Stockholders, are incorporated herein by this reference.
ANNUAL REPORT REFERENCE ----------------------- Report of Independent Public Accountants Page 22 Consolidated Balance Sheets at June 30, 1998 and March 28, 1997 Page 23 Consolidated Statements of Operations for the years ended June 30, 1998, March 28, 1997, and March 29, 1996 and for the Page 24 three months ended June 30, 1997 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1998, March 28, 1997, and March 29, 1996 and Page 25 for the three months ended June 30, 1997 Consolidated Statements of Cash Flows for the years ended June 30, 1998, March 28, 1997, and March 29, 1996 and for the Page 26 three months ended June 30, 1997 Notes to Consolidated Financial Statements Page 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The information set forth under the captions "Election of Directors" in the registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement) is incorporated herein by this reference. The Company will file the 1998 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 Officer" in the registrant's 1998 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" in the registrant's 1998 Proxy Statement is incorporated herein by this reference. -9- 10 Item 13. Certain Relationships and Related Transactions The information set forth under the caption "Certain Transactions" in the registrant's 1998 Proxy Statement is incorporated herein by this reference. Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K (a)(1) Financial statements: Incorporated herein by reference, are listed in Item 8 of this report. (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 12 Schedule II - Valuation and Qualifying Accounts 13 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. -10- 11 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 HEALTHCARE RESOURCES, INC. (Registrant) By /s/ J. Hord Armstrong, III -------------------------- J. Hord Armstrong, III, Chairman of the Board, Chief Executive Officer and Treasurer Date: September 28, 1998 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, September 28, 1998 - ------------------------------------ Treasurer and Director J. Hord Armstrong, III (Principal Financial Officer) /s/ Martin D. Wilson President, Chief Operating Officer, - ------------------------------------ Secretary and Director September 28, 1998 Martin D. Wilson /s/ Daniel E. Kreher Vice President, Finance & Administration September 28, 1998 - ------------------------------------ (Principal Accounting Officer) Daniel E. Kreher /s/ Richard F. Ford Director September 28, 1998 - ------------------------------------ Richard F. Ford /s/ Bryan H. Lawrence Director September 28, 1998 - ------------------------------------ Bryan H. Lawrence /s/ Elliot H. Stein Director September 28, 1998 - ------------------------------------ Elliot H. Stein /s/ Robert E. Korenblat Director September 28, 1998 - ------------------------------------ Robert E. Korenblat /s/ Thomas F. Patton Director September 28, 1998 - ------------------------------------ Thomas F. Patton /s/ James M. Usdan Director September 28, 1998 - ------------------------------------ James M. Usdan
-11- 12 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To D & K Healthcare Resources, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in the D & K Healthcare Resources, Inc. Annual Report to Stockholders which is incorporated by reference in this Form 10-K, and have issued our report thereon dated August 11, 1998. 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 August 11, 1998 -12- 13 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL YEARS 1996, 1997, THE THREE MONTHS ENDED JUNE 30, 1997 AND FISCAL 1998
Additions ------------------ Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Acquisitions Deductions of Period ----------- --------- -------- ------------ ---------- --------- Valuation Allowance for Doubtful Receivables: Fiscal Year 1996 $1,632,00 $136,000 $ 251,000 $(1,151,000) $ 868,000 ========= ======== ============= =========== =========== Fiscal Year 1997 $ 868,000 $ 65,000 $ -- $ (236,000) $ 697,000 ========= ======== ============= =========== =========== Three Monthd Ended June 30, 1997 $ 697,000 $ -- $ -- $ -- $ 697,000 ========= ======== ============= =========== =========== Fiscal Year 1998 $ 697,000 $ 15,000 $ 28,000 $ (40,000) $ 700,000 ========= ======== ============= =========== ===========
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EXHIBIT INDEX ------------- Exhibit No. Description Page - ----------- ----------- ---- 2.1 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 filed as Exhibit 2.4 to the registrant's Annual Report on Form 10-K for the year ended March 28, 1997 is incorporated herein by this reference. 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. 3.1a* Certificate of Amendment to the Restated Certificate of Incorporation of D&K Wholesale Drug, Inc. 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. 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.
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Exhibit No. Description Page - ----------- ----------- ---- 33-48730) is incorporated herein by this reference. 10.3 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. 10.4 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. 33-48730) is incorporated herein by this reference. 10.5 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. 10.6 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. 10.7 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. 10.8 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. 10.9 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. 10.10 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
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Exhibit No. Description Page - ----------- ----------- ---- the year ended March 31, 1995 is incorporated herein by this reference. 10.11 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. 10.12 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. 10.13 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. 10.14 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. 10.15 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. 10.16 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. 10.17 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
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Exhibit No. Description Page - ----------- ----------- ---- 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. 10.18 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. 10.19 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. 10.20 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. 10.21 Amended and Restated Lease Agreement, dated as of January 16, 1996, by and between Morhaert Development, L.L.C. and the registrant, 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. 10.22 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. filed as Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended March 28, 1997 is incorporated herein by this reference.
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EXHIBIT No. Description Page - ----------- ----------- ---- 10.23 Loan Agreement dated as of December 23, 1996, by and among registrant, Krelitz Industries, Inc. and Magna Bank, N.A., filed as Exhibit 10.30 to the registrant's Annual Report on Form 10-K for the year ended March 28, 1997 is incorporated herein by this reference. 10.24* Pharmaceutical Services Agreement between Anthem Prescription Management, Inc. and D&K Wholesale Drug, Inc. dated July 16, 1996. 10.25* Renewal dated June 26, 1998, to Pharmaceutical Services Agreement between Anthem Prescription Management, Inc. and D&K Wholesale Drug, Inc. dated July 16, 1996. 10.26* Purchase and Sale Agreement dated as of August 7, 1998 between D&K Healthcare Resources, Inc., certain of its subsidiaries and D&K Receivables Corporation. 10.27* Receivables Purchase Agreement dated as of August 7, 1998 among D&K Receivables Corporation, D&K Healthcare Resources, Inc., Blue Keel Funding, LLC and Fleet National Bank. 10.28* Fourth Amended and Restated Loan and Security Agreement dated as of August 7, 1998 among D&K Healthcare Resources, Inc., Jaron Inc., and Fleet Capital Corporation. 13* Registrant's 1998 Annual Report to Stockholders. 21* Subsidiaries of the registrant. 23* Consent of Arthur Andersen LLP.
* Filed herewith. -18- EX-3.1(A) 2 EXHIBIT 3.1(A) 1 EXHIBIT 3.1a CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF D & K WHOLESALE DRUG, INC. -------------------------- D&K Wholesale Drug, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify: FIRST: That at a duly noticed and convened meeting of the Board of Directors of the Corporation at which a quorum was present and acting throughout, the Board of Directors duly adopted resolutions proposing and declaring advisable the following amendment to the Corporation's Restated Certificate of Incorporation: FIRST: The name of this corporation is D&K Healthcare Resources, Inc. SECOND: That at a duly noticed and convened meeting of the stockholders of the Corporation held August 14, 1997, at which a quorum was present and acting throughout in person or by proxy, the stockholders of the Corporation have approved the aforesaid amendment. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, D&K Wholesale Drug, Inc. has caused its corporate seal to be hereunto affixed and this Certificate of Amendment to be signed by Martin D. Wilson, its President, as of this 21st day of August, 1997. (Corporate Seal) D&K WHOLESALE DRUG, INC. /s/ MARTIN D. WILSON ------------------------------- Martin D. Wilson, President EX-10.24 3 EXHIBIT 10.24 1 EXHIBIT 10.24 PHARMACEUTICAL SERVICES AGREEMENT This Agreement ("Agreement") is entered into this 16th day of July, 1996, by and between Anthem Prescription Management, Inc. (APM), 8845 Governor's Hill Drive, Cincinnati, Ohio, 45249 and D&K Wholesale Drug, Inc., (D&K) 516 West Fourth Street, Lexington, Kentucky, 40508. WHEREAS, APM is an administrator of managed care pharmacy programs for persons enrolled in health care plans; WHEREAS, as a part of its managed care pharmacy programs, APM operates Priority Rx ("Priority Rx"), a licensed mail service pharmacy, to dispense pharmaceutical products to Members under certain terms and conditions; WHEREAS, D&K is a wholesale distributor of pharmaceutical products; NOW THEREFORE, the parties agree as follows: 1. DEFINITIONS 1.1 "Member" means all individuals enrolled in a APM administered managed care pharmacy program as part of fully-insured, partially-insured, self-insured or prepaid health benefit plans. 1.2 "Products" means the federally approved pharmaceutical drug products, equipment, supplies and sundry items ordered and dispensed by APM to Members. 1.3 "Acquisition Cost" means the lower of the contractual price negotiated by APM with a drug manufacturer or the amount D&K pays for the Products ordered by APM. In determining the amount D&K pays for Products, the value of any and all rebates, free goods and cash discounts to which D&K is entitled with respect to the Products sold by D&K to APM hereunder shall be deducted from the price actually remitted to the manufacturer by D&K. 2. RESPONSIBILITIES OF D&K 2.1 Sale of Products. D&K agrees to supply APM's requirements for Products during the term of this Agreement. Such Products shall be dispensed only to Members by Priority Rx for the personal use of such Members. 1 2 2.2 Contract Maintenance. D&K agrees to charge APM the contract price for Products negotiated between APM and a pharmaceutical manufacturer. D&K further agrees to notify APM in the event that lower pricing for generically equivalent items to such Products becomes available. 2.3. Fill Rate Guarantee. Commencing on August 1, 1996, and continuing through the term of this Agreement, D&K shall accurately fill at least 97% of all Products ordered by APM on a weekly basis. The fill rate shall be determined by dividing the total number of Products (defined by NDC number) ordered by and delivered to APM by the number of Products ordered. In the event D&K is unable to procure a particular Product from a manufacturer, the fill-rate on subsequent orders shall exclude the unavailable Product from the calculation until such time as the Product becomes available. Failure to meet the above fill rate shall constitute a breach of a material term of this Agreement. 2.4 Customer Service. D&K shall provide the following customer service resources to APM: 2.4.1 On-Site Representative: D&K agrees to provide a person to serve as a primary contact person for resolution of all questions and inquiries from APM. Such person will be available at APM's facility in Cincinnati, Ohio at such times as requested by APM. 2.4.2 In-house Representative: D&K also agrees to designate a specific employee to provide and/or coordinate all customer service activities for APM within D&K's Lexington Distribution Center. 2.4.3 Emergency Phone Number: D&K shall be available to provide emergency services to APM 24 hours per day, seven days a week. D&K shall designate a means for communicating emergency needs via telephone. 2.5 Shipping Terms. D&K agrees to ship Products to APM under the following terms: a. All shipments shall be F.O.B. APM's facility in Cincinnati, Ohio b. All Products ordered will be delivered without substitution, unless expressly approved by APM prior to shipment. c. D&K shall notify APM on-line within one hour of all Products ordered by APM that D&K is unable to provide. 2 3 d. All in-stock items ordered by APM before 8:00 p.m. will be delivered by 6:30 a.m. the following morning, except that Products obtained from D&K distribution centers located outside of Lexington, Kentucky may be delivered up to 5:00 p.m. of the day after the Products are ordered or up to 10:00 a.m. the following day. e. D&K will deliver order to APM Monday through Friday, except legal holidays. Saturday delivery shall be available to APM upon request at no additional charge to APM. f. Emergency shipments shall be made within a reasonable time upon APM's request. g. D&K shall insure delivery of all Products which are schedule II controlled substances to APM within 24 hours of ordering, except for Saturdays and Sundays. h. D&K shall, in the event of a stock outage, arrange for drop-shipment of Products from manufacturers. In the event a Product is not available from the manufacturer, D&K shall notify APM of such outage and shall use its best efforts to find alternative sources of such Product. 2.6 Systems Support. D&K agrees to provide (pursuant to D&K's licensing agreements which are referenced in Exhibit C) and install at no charge the following to APM, and or as dictated by business needs: a. Three Resource(R) electronic ordering systems. b. Three copies of the Partners(R) vendor managed inventory (VMI) system. c. Three copies of the Focus(R) group management information system. d. On-site training, upon request by APM, for the Partners(R), Resource(R) and Focus(R) systems. e. The hardware described in Exhibit A. Upon termination, such computer hardware shall be returned to D&K, or if APM leases such hardware, to the lessor. 3 4 2.7 Reporting. D&K shall provide the following standard reports, examples of which are included in Exhibit B, to APM upon request. In addition, D&K agrees to make reasonable efforts to provide specialized, non-standard reports to APM upon request. a. Narcotic and Controlled Substances Report, on at least a monthly basis. b. Therapeutic Category Report. c. Purchase History Report, on at least a monthly basis. d. Item Price Change Report, on at least a monthly basis. e. Inventory Report, on at least a semi-annual basis. 2.8 Credit and Returned Goods Policies. D&K will issue, upon notification by APM, a full credit for damaged or mispicked Products delivered to APM and for Products returned to D&K by APM. Such credit memo will accompany the next shipment to APM. D&K will issue, pursuant to D&K's returned goods policies and upon notification by APM, a credit for Products returned for reasons other than damage or mispicks. All credits for returned goods will be issued within three days of receipt of the goods by D&K. D&K will maintain the capability to accept notice of returned Products through electronic transmission. D&K represents that the returned good and credit policies are in conformance with all applicable laws, including the Prescription Drug Marketing Act of 1987. 2.9 Physical Inventory Assistance. D&K agrees to provide, in lieu of the Resource(R) system described above, access to D&K's mainframe computer system to allow for physical inventory reporting by APM. In addition, D&K shall provide Telxon machines (or reasonable equivalent) and inventory preparation training to APM upon request. D&K will provide an electronic file containing physical inventory data requested by APM, or it's designee, within twelve hours of D&K's receipt of data from APM. 2.10 Shelf Labels, Price Stickers and MSDS Sheets. D&K will provide, upon request, laminated shelf labels with bar coding, material data safety sheets and encoded price stickers. 2.11 Notice of Impairment. D&K shall give APM immediate notice in the event of a major occurrence experienced by D&K that could impair its ability to perform the duties of this Agreement. This shall include but not be limited to any shutdown of any D&K distribution center. 4 5 2.12 Insurance. D&K agrees to obtain and maintain throughout the term of this Agreement, general liability insurance in amounts of not less than ten Million Dollars ($10,000,000) per aggregate. 2.12.1 D&K agrees to maintain in full force and effect general liability insurance and other insurance in types and amounts as are customary and usual within its industry or required by law. 2.13 Competitive Circumstances. D&K warrants and represents that the pricing provided herein would be available to other owners and operators of mail service pharmacies on substantially the same terms and conditions, provided that such mail service pharmacies performed substantially the same services as APM and were similarly situated and whose volumes of purchases were comparable to those of APM from D&K. 2.14 Warehousing Facility. D&K agrees to make available, as reasonably needed and requested by APM, warehouse space to APM for the storage of Products. Such space shall meet all reasonable specifications defined by APM. 2.15 Compliance with Laws. D&K agrees to comply with all applicable state and federal laws, including but not limited to Title VII of the Civil Rights Act of 1964 (as amended), the Equal Pay Act of 1963 (sections 6, 7 and 12 of the Fair Labor Standards Act), the Age Discrimination and Employment Act of 1967, all antitrust laws, Executive Orders 11246 and 11375, the Social Security Act Amendment of December 5, 1980 and the Federal Acquisition Regulations (FAR) and Department of Defense Acquisition Regulations (DFAR). 2.16 Implementation Plan. D&K agrees to comply with the terms and conditions set forth in an implementation plan which will be mutually agreed upon. Implementation will be completed within four weeks from the date of execution of this agreement. 2.17 Audit & Inspection. D&K agrees to comply with all reasonable requests made by APM to provide copies of records and reports related to this Agreement for auditing purposes. Such records, may include without limitation, financial records and reports relating to the purchase and delivery of Products. Such profiles and records may be inspected on-site during regular business hours, or, upon request, copies thereof shall be sent to APM at no charge. The parties agree to keep all such records confidential. 5 6 Upon reasonable notice, APM may inspect D&K's premises, records and operations to ensure that they are adequate to perform D&K's obligations under this Agreement, are consistent with the intent and purpose of this Agreement, and in conformance with applicable law. a. D&K agrees that upon reasonable notice, APM, during regular business hours, shall have free access for examination and reproduction to all books, records of accounts, and other documents, including without limitation computer files, employee work schedules, invoices and prescription files, and any other documents that may be required in the course of any audit conducted pursuant to this Agreement, as requested by APM. b. All information obtained during any such audit shall be maintained in confidence. c. Audits may be performed at any time during the term of this Agreement and up to one year following termination hereof. 3. RESPONSIBILITIES OF APM 3.1 Purchase Orders. APM shall provide, in a format acceptable to D&K, purchase orders for Products. APM agrees to give D&K 30 days advance notice of any expected increases in the volume of Products APM reasonably expects to purchase from D&K. 3.2 Provision of Other Services. Other than the activities to be performed by D&K pursuant to this Agreement, APM shall provide all required public relations, legislative, marketing and operational support necessary to ensure implementation and delivery of Products. 3.3 Notice of Impairment. APM shall give D&K immediate notice in the event of a major occurrence experienced by APM that could impair APM's ability to perform the duties of this Agreement. 3.4 Insurance. APM agrees to maintain in full force and effect general liability insurance and other insurance in types and amounts as are customary and usual within its industry. 3.5 Own Use. APM warrants and represents that Products shall be dispensed only to Members by Priority Rx for the personal use of such Members. 6 7 3.6 Credit Information. APM agrees to provide to D&K, upon request, including reasonable financial information sufficient to allow for D&K's evaluation of unsecured credit extended to APM. 4. COMPENSATION 4.1 Acquisition Costs and Fees. APM agrees to pay D&K the Acquisition Cost for all Products ordered by APM and delivered by D&K pursuant to this Agreement. In addition, APM agrees to pay D&K a fee of 0.1% of the aggregate Acquisition Cost for services provided by D&K during the term of this Agreement except as adjusted by section 4.3 below. 4.2 Timing of Payments. Payments to under Paragraph 4.1 shall be made by APM weekly. Failure by APM to make payments due under Paragraph 4.1 shall be a material breach subject to Paragraph 5.2.1 of this Agreement. 4.3 EFT Payment Discount. In the event that APM elects to make payments pursuant to section 4.1 above, by means of an electronic funds transfer method acceptable to D&K within one business day after receipt of Products, D&K shall provide a discount to APM of 0.12% of the fees specified in section 4.1. 4.4 Dock to Dock Shipment Discount. In the event that APM elects to utilize "dock to dock" shipping arrangements, and provided that EFT payments are made for such Products within 2 business days of receipt thereof, D&K shall provide to APM a discount of 0.2% of the fees specified in section 4.1. 4.5 Partners Shared Savings. APM agrees to negotiate, in good faith, an agreement whereby D&K will receive compensation for any demonstrated savings resulting to APM through the use of the Partners software system. 5. TERM AND TERMINATION 5.1 Term. Except as provided in Section 5.2, the initial term of this Agreement shall be from July 15, 1996 through June 30, 1998. Thereafter, this Agreement shall be renewed for a successive 12 month period upon mutual agreement of the parties. D&K agrees that APM may extend this Agreement, at APM's option, for a period of 90 days following the expiration of its term. 5.2 Termination. Either party may terminate this Agreement by giving the other party at least 45 days written notice of its intention to terminate the Agreement. In such event, APM shall purchase all Products which are stocked solely for APM pursuant to Section 2.14 above. 7 8 5.2.1 This Agreement may be terminated by either party for a material breach of the agreement upon thirty (30) days advance written notice specifying the facts and circumstances of the breach if such is not cured within such thirty (30) day period. 5.2.2 If any legislative enactment, court decision or regulatory action by any governmental agency, or other circumstances beyond the control of either party prevents such party from performing its obligations hereunder, the failure to perform shall not be considered a breach. Rather, the parties agree, to negotiate the terms of this Agreement so that each party's obligations may be performed in compliance with applicable law. If, after the parties negotiate in good faith, no agreement is reached, either party may terminate this agreement upon giving thirty (30) days written notice to the other party. 5.2.3 Notwithstanding any other provision of this Agreement, either party to this Agreement shall have the right to cancel this Agreement immediately and without prior notice, if the other party is adjudicated bankrupt or makes an assignment for the benefit of creditors without the other party's prior written consent, or if a receiver is appointed for the other party, or in the event the other party commits an illegal act that affects the operation or management of services rendered under this Agreement. 6. INDEMNIFICATION 6.1 APM will indemnify and hold harmless D&K, its successors and assigns, officers and directors, employees, agents, affiliates and subsidiaries, from any and all claims, demands, damages, judgments, liabilities and expenses, including but not limited to reasonable attorney fees, that arise directly or indirectly from any acts, omissions or negligence of APM, or any failure of APM to perform its obligations under this Agreement. 6.2 D&K will indemnify and hold harmless APM, its successors and assigns, officers and directors, employees, agents, affiliates and subsidiaries, from any and all claims, demands, damages, judgments, liabilities and expenses, including but not limited to reasonable attorney fees, that arise directly or indirectly from any acts, omissions or negligence of D&K, or any failure of D&K to perform its obligations under this Agreement. 8 9 7. CONFIDENTIALITY 7.1 D&K and APM each agree to keep confidential and not to disclose to any other party any or all information obtained or produced during the performance of the Agreement, except that APM may provide account-specific data to its accounts. Upon the request of the disclosing party, the other party shall promptly return all such information. Neither party shall release pricing information associated with the Agreement to outside parties without the prior written consent of the other party. 8. NON-EXCLUSIVITY 8.1 This is a non-exclusive agreement and either party shall have the right to enter into similar agreements with other parties. 9. GENERAL PROVISIONS 9.1 Notice. Any notice required or permitted to be given in this Agreement by either party to the other may be given by personal delivery in writing, by facsimile transmission, or by registered or certified mail, return receipt requested, to the following: If to APM: If to D&K: David Ayres D&K Wholesale Drug, Inc. Pharmaceutical Purchaser 516 West Fourth Street Priority Rx Lexington, Kentucky 40508 4800 Parkway Drive Attention: Lewis E. Mead Suite 101 Mason, Ohio 45040-1092 With a copy to: D&K Wholesale Drug, Inc. 8000 Maryland Ave. Suite 1190 St. Louis, Missouri 63105 Attention: Martin D. Wilson Notices delivered personally or by facsimile transmission will be deemed communicated as of the time of actual receipt; mailed notices will be deemed communicated as of three days after mailing. 9.2 Severability. If any of the provisions of this Agreement, or the application of any provision to any person or any circumstance, shall be determined to be invalid or unenforceable, then such determination shall not affect any other provision of the 9 10 Agreement or the application of said provision to any other person or circumstance. 9.3 ServiceMarks and Tradenames. Each party agrees not to use any service mark or tradename which the other party owns or to which it has rights in any advertisement without the other's prior written consent. 9.4 Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. 9.5 Assignment. This Agreement may not be assigned by either party without the express written consent of the other party, except that either party may assign this Agreement to another party that wholly owns it, which it wholly owns or which is under common ownership with such party. 9.6 Waiver. The failure of either party to enforce or insist upon compliance with any provision of this Agreement in any instance shall not be construed as or constitute a waiver of that party's right to enforce or insist upon compliance with such provision, rule, or regulation, either currently or in the future. 9.7 Headings. The subject headings of the provisions of this Agreement are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. 9.8 Incorporation of RFP. All terms, covenants and representations contained in D&K's response to APM's request for proposals and information provided to APM during site visits and presentation prior to the award of this Agreement (collectively the "RFP Information") are expressly included in this Agreement. In the event that the terms of this Agreement and the RFP Information conflict, the terms of this Agreement shall control. Other than the RFP Information, this Agreement and its Exhibits supersede any and all agreements, either oral or written, between the parties to this agreement with respect to the subject matter contained in the Agreement, and contains all of the covenants and agreements with respect to the purchase and sale of Products within the scope of this Agreement. 10 11 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by authorized representatives. Anthem Prescription Management, Inc. D&K Wholesale Drug, Inc. BY: /S/ MARGORIE W. DORR BY: /S/ J. HORD ARMSTRONG, III ----------------------- -------------------------- TITLE: CEO, PRESIDENT TITLE: CHAIRMAN & CEO ----------------------- -------------------------- DATE: 7/16/98 DATE: 7/16/98 ----------------------- ------------------------- 11 EX-10.25 4 EXHIBIT 10.25 1 EXHIBIT 10.25 RENEWAL OF PHARMACEUTICAL SERVICES AGREEMENT THIS RENEWAL AGREEMENT ("Renewal Agreement") is entered into as of this 26th day of June, 1998, by and between Anthem Prescription Management, Inc. ("APM"), 8990 Duke Boulevard, Mason, Ohio 45040 and D&K Healthcare Resources, Inc. ("D&K"), formerly known as D&K Wholesale Drug, Inc., 516 West Fourth Street, Lexington, Kentucky 40508. RECITALS A. APM and D&K entered into a Pharmaceutical Services Agreement dated as of July 16, 1996 (the "Agreement"). B. The Agreement expires as of June 30, 1998 unless the parties mutually agree to renew the Agreement. C. Both parties desire to renew the Agreement for an additional term of three (3) years. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. The parties hereby agree to renew the Agreement for an additional term of three (3) years ("Renewal Term" and each one year period during the Renewal Term commencing on July 1 and ending on June 30 shall be referred to as a "Renewal Year"), so that the Agreement shall now extend through June 30, 2001. Thereafter, the Agreement may be renewed for successive twelve (12) month periods pursuant to Section 5.1 of the Agreement upon the mutual agreement of both parties. 2. D&K agrees to reduce the distribution fee by .10% upon APM achieving monthly net purchases from D&K of not less than $8,000,000 per month for two consecutive months during the Renewal Term. Such reduction shall commence with the month following such two consecutive month period during which such net purchases have been made. If achieved, D&K will reduce the distribution fee by an additional .05% upon APM achieving monthly net purchases from D&K of not less than $10,000,000 per month for two consecutive months during the Renewal Term. Such additional reduction shall commence with the month following such two consecutive month period during which such net purchases have been made. 3. D&K agrees to use diligent efforts to support APM's Unit-of-Use Program during the Renewal Term of this Agreement. D&K reserves the right to only stock and 1 2 invoice products from manufacturers that carry adequate product liability insurance and extend industry standard payment terms. 4. D&K agrees to undertake diligent efforts to develop a radio frequency ("RF") order fulfillment system which APM will be allowed to use during the Renewal Term once developed. This system will be designed to achieve improved efficiencies in the receiving and stocking of product purchased from D&K and to have the capability to transfer electronic records, including shipping and invoice documents. 5. Termination. Either party may terminate this Agreement with or without cause by giving the other party at least 60 days written notice of its intention to terminate the Agreement. In such event, APM shall purchase any extraordinary amounts of inventory that have been purchased by D&K specifically to service Anthem in amounts up to 60 days worth of actual purchases, or 60 days estimated use as calculated by D&K based on historical purchase levels by Anthem pursuant to Section 2.1. 6. All the remaining terms of the Agreement remain in full force and effect. IN WITNESS WHEREOF, the undersigned have caused this Renewal Agreement to be executed by their duly authorized representatives as of the date set forth above. ANTHEM PRESCRIPTION MANAGEMENT, INC. By: /s/TERRY SELREGONA -------------------------------------- Title: Executive Director ----------------------------------- D&K HEALTHCARE RESOURCES, INC. By: /s/LAURA MISEL --------------------------------------- Title: Vice President and General Manager ------------------------------------ 2 EX-10.26 5 EXHIBIT 10.26 1 EXHIBIT 10.26 ================================================================================ PURCHASE AND SALE AGREEMENT among D&K HEALTHCARE RESOURCES, INC. as an Originator and initial Servicer, CERTAIN OTHER SUBSIDIARIES OF D&K HEALTHCARE RESOURCES, INC. THAT MAY BECOME PARTY HERETO, as Originators and D&K RECEIVABLES CORPORATION, as the Initial Purchaser Dated as of August 7, 1998 ================================================================================ 2 TABLE OF CONTENTS
PAGE ARTICLE I AMOUNTS AND TERMS OF THE PURCHASES SECTION 1.1. Agreement to Purchase and Sell................................................4 SECTION 1.2. Timing of Purchases...........................................................5 SECTION 1.3. No Recourse...................................................................6 SECTION 1.4. True Sales....................................................................6 SECTION 1.5. Consideration for Purchases...................................................7 SECTION 1.6. Initial Purchaser Agreement to Make Demand Loans..................................................................7 SECTION 1.7. Addition of Originators.......................................................7 ARTICLE II CALCULATION OF PURCHASE PRICE SECTION 2.1. Calculation of Purchase Price.................................................8 ARTICLE III PAYMENT OF PURCHASE PRICE SECTION 3.1. The Initial Purchase Price Payment...........................................10 SECTION 3.2. Purchase Price Payments......................................................11 SECTION 3.3. Deemed Collections, Etc......................................................12 SECTION 3.4. Payments and Computations, Etc...............................................13 ARTICLE IV CONDITIONS TO PURCHASES SECTION 4.1. Conditions Precedent to Initial Purchase.....................................................................14 SECTION 4.2. Conditions Precedent to All Purchases........................................16 SECTION 4.3. Certification as to Representations and Warranties...............................................................16 SECTION 4.4. Effect of Payment of Purchase Price..........................................16 ARTICLE V REPRESENTATIONS AND WARRANTIES SECTION 5.1. Representations and Warranties...............................................17 ARTICLE VI COVENANTS SECTION 6.1. Affirmative Covenants........................................................20 SECTION 6.2. Negative Covenants...........................................................22 SECTION 6.3. Separate Existence...........................................................23 ARTICLE VII INDEMNIFICATION SECTION 7.1. Indemnities by the Originators...............................................23 SECTION 7.2. Contribution.................................................................26 SECTION 7.3. AfterTax Basis...............................................................26
(i) 3 ARTICLE VIII ADMINISTRATION AND COLLECTIONS; ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF THE POOL RECEIVABLES SECTION 8.1. Servicing of Pool Receivables and Related Rights...........................................................26 SECTION 8.2. Rights of the Initial Purchaser; Enforcement Rights...........................................................27 SECTION 8.3. Responsibilities of the Originator...........................................28 SECTION 8.4. Further Action Evidencing Purchases..........................................29 ARTICLE IX MISCELLANEOUS SECTION 9.1. Amendments, Etc..............................................................30 SECTION 9.2. Notices, Etc.................................................................30 SECTION 9.3. Acknowledgment and Consent...................................................31 SECTION 9.4. Binding Effect; Assignability................................................32 SECTION 9.5. Costs, Expenses and Taxes....................................................32 SECTION 9.6. No Proceedings; Limitation on Payments.......................................32 SECTION 9.7. GOVERNING LAW AND JURISDICTION...............................................33 SECTION 9.8. Execution in Counterparts....................................................33 SECTION 9.9. Survival of Termination......................................................34 SECTION 9.10. WAIVER OF JURY TRIAL.........................................................34 SECTION 9.11. Entire Agreement.............................................................34 SECTION 9.12. Headings.....................................................................34
SCHEDULE 9.2 NOTICE ADDRESSES SCHEDULE I LOCK-BOX BANKS AND LOCK-BOX ACCOUNTS EXHIBIT A FORM OF PURCHASE REPORT EXHIBIT B FORM OF INITIAL PURCHASER NOTE EXHIBIT C FORM OF ORIGINATOR NOTE (ii) 4 PURCHASE AND SALE AGREEMENT This PURCHASE AND SALE AGREEMENT (as amended, supplemented or otherwise modified from time to time, this "Agreement") is entered into as of August 7, 1998, between D&K HEALTHCARE RESOURCES, INC., a Delaware corporation ("D&K" or, together with the other Persons who may become parties hereto pursuant to Section 1.7, an "Originator"), as seller and as initial Servicer, and D&K RECEIVABLES CORPORATION, a Delaware corporation, as initial purchaser (the "Initial Purchaser"). DEFINITIONS Unless otherwise defined herein or the context otherwise requires, certain terms that are used throughout this Agreement (including the Exhibits hereto) are defined in Appendix A to the Receivables Purchase Agreement, dated as of even date herewith, among the Initial Purchaser, as Seller, D&K, as the initial Servicer, Blue Keel Funding, LLC, as Purchaser, and Fleet National Bank, as Administrator (as the same may be amended, modified or supplemented from time to time, the "Receivables Purchase Agreement"). Any reference to "this Agreement" or "the Purchase and Sale Agreement", including any such reference in any Exhibit hereto, shall mean this Agreement in its entirety, including the Exhibits and other attachments hereto, as amended, modified or supplemented from time to time in accordance with the terms hereof. Available Funds shall have the meaning assigned to such term in Section 3.2(a) hereof. Contributed Receivables shall have the meaning assigned to such term in Section 1.2(b) hereof. Cost Discount shall have the meaning assigned to such term in Section 2.1 hereof. Cost Rate shall have the meaning assigned to such term in Section 2.1 hereof. Deemed Collection means amounts payable by an Originator pursuant to Section 3.3. Earned Discount Rate Percentage shall be equal to a fraction (expressed as a percentage) (x) the numerator of which is the sum of the products obtained by multiplying (A) each Earned Discount Rate applicable to any portion of the Asset Interest as of the first day of such Settlement Period, times (B) the amount of the Capital (or portion thereof) to which such Earned Discount Rate 5 applied on such first day, and (y) the denominator of which is the Capital on such first day. Fair Market Value Discount Factor shall have the meaning assigned to such term in Section 2.1 hereof. Ineligible Receivable shall have the meaning assigned to such term in Section 3.3(b) hereof. Initial Closing Date shall have the meaning assigned to such term in Section 1.2(a) hereof. Initial Contributed Receivables shall have the meaning assigned to such term in Section 1.1(b) hereof. Initial Cut-Off Date means the Business Day immediately preceding the Initial Closing Date. Initial Purchaser Note shall have the meaning assigned to such term in Section 3.1 hereof. LIBO Rate shall have the meaning assigned to such term in Section 2.1 hereof. Loss Discount shall have the meaning assigned to such term in Section 2.1 hereof. Originator Loan shall have the meaning assigned to such term in Section 1.6 hereof. Originator Note shall have the meaning assigned to such term in Section 1.6(a) hereof. Payment Day means (i) the date hereof and (ii) each Business Day thereafter that an Originator is open for business. Purchase Price shall have the meaning assigned to such term in Section 2.1 hereof. Purchase Report shall have the meaning assigned to such term in Section 2.1 hereof. Related Rights shall have the meaning assigned to such term in Section 1.1(a) hereof. Sale Indemnified Amounts shall have the meaning assigned to such term in Section 7.1 hereof. Sale Indemnified Party shall have the meaning assigned to such term in Section 7.1 hereof. -2- 6 Sale Termination Date shall be the Purchase Termination Date under the Receivables Purchase Agreement. Seller Material Adverse Effect means, with respect to any event or circumstance: (i) an effect on the assets, business, financial condition or operations of D&K and its Subsidiaries, taken as a whole, which could reasonably be expected to have a material adverse effect on the creditworthiness of D&K; (ii) a material adverse effect on the ability of any Originator to perform its obligations under this Agreement or any other Transaction Document to which such Originator, in its capacity as such, is a party; (iii) a material adverse effect on the validity or enforceability as against any Originator of this Agreement or any other Transaction Document to which any Originator, in its capacity as such, is a party; (iv) a material adverse effect on the status, existence, perfection, priority or enforceability of the Initial Purchaser's interest in the Receivables Pool and the Related Rights; or (v) a material adverse effect on the validity, enforceability or collectibility of a material portion of the Receivables Pool. PRELIMINARY STATEMENTS 1. The Initial Purchaser is a limited purpose corporation, all of the issued and outstanding shares of capital stock of which are wholly owned by D&K. 2. Each Originator wishes to sell Receivables that it now owns and from time to time hereafter will own to the Initial Purchaser, and the Initial Purchaser is willing, on the terms and subject to the conditions contained in this Agreement, to purchase such Receivables from such Originator at such time. 3. The Initial Purchaser has entered into the Receivables Purchase Agreement, pursuant to which, among other things, the Initial Purchaser may sell to the Administrator, for the benefit of Purchaser, undivided ownership interests in the Receivables and certain Related Rights. -3- 7 NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties hereto agree as follows: ARTICLE I AMOUNTS AND TERMS OF THE PURCHASES SECTION 1.1. Agreement to Purchase and Sell. (a) On the terms and conditions hereinafter set forth, and in consideration of the Purchase Price, each Originator agrees to sell to the Initial Purchaser, and the Initial Purchaser agrees to purchase from such Originator, at the times set forth in Section 1.2, but prior to the Sale Termination Date, all of such Originator's right, title, and interest in and to: (i) each Receivable (other than Initial Contributed Receivables) of such Originator that existed and was owing to such Originator as of the close of such Originator's business on the Initial Cut-Off Date, in the case of D&K, or on the Business Day immediately preceding the day on which such Originator became a party hereto pursuant to Section 1.7 in the case of each other Originator; (ii) each Receivable (other than Contributed Receivables) created or originated by such Originator from the close of such Originator's business on the Initial CutOff Date, in the case of D&K, or on the Business Day immediately preceding the day on which such Originator became a party hereto pursuant to Section 1.7 in the case of each other Originator, to and including the Sale Termination Date; (iii) all rights to, but not the obligations under, all related Contracts and all Related Security with respect thereto; (iv) all monies due or to become due with respect to the foregoing; (v) all books and records related to any of the foregoing; (vi) all Lock-Box Accounts, all amounts on deposit therein and all related agreements between such Originator and the Lock-Box Banks, in each case to the extent constituting or representing items described in paragraph (vii) below; and -4- 8 (vii) all Collections in respect of, and other proceeds of, Receivables or any other of the foregoing (as defined in the UCC) received on or after the Initial Cut-Off Date, in the case of D&K, or on the Business Day immediately preceding the day on which such Originator became a party hereto pursuant to Section 1.7 in the case of each other Originator, including, without limitation, all funds which either are received by such Originator, the Initial Purchaser or the Servicer from or on behalf of the Obligors in payment of any amounts owed (including, without limitation, finance charges, interest and all other charges) in respect of Receivables, or are applied to such amounts owed by the Obligors (including, without limitation, insurance payments, if any, that such Originator or the Servicer applies in the ordinary course of its business to amounts owed in respect of any Receivable and net proceeds of sale or other disposition of repossessed goods or other collateral or property of the Obligors or any other party directly or indirectly liable for payment of such Receivable and available to be applied thereon). All purchases and capital contributions hereunder shall be made without recourse, but shall be made pursuant to and in reliance upon the representations, warranties and covenants of the Originators set forth in each Transaction Document. The proceeds and rights described in subsections (iii) through (vii) of this Section 1.1(a) are herein collectively called the "Related Rights". (b) Agreement to Contribute. In consideration of the capital stock of the Initial Purchaser issued to D&K, D&K agrees to contribute, and does hereby contribute to the Initial Purchaser, and the Initial Purchaser agrees to accept, and does hereby accept, from D&K, in each case, on the Initial Closing Date, all of D&K's right, title and interest in and to (i) Receivables, and the Related Rights with respect thereto, existing on the Initial Cut-Off Date, starting with the oldest such Receivables such that the aggregate Unpaid Balance of all such Receivables shall be as close as possible to, but not less than, $1,000,000 (the "Initial Contributed Receivables") and (ii) all other Contributed Receivables. SECTION 1.2. Timing of Purchases. (a) Initial Closing Date Purchase. On the date of the first Purchase under the Receivables Purchase Agreement (the "Initial Closing Date") D&K shall sell to the Initial Purchaser, and the Initial Purchaser shall purchase, pursuant to Section 1.1, D&K's entire right, title and interest in (i) each Receivable (other than the Initial Contributed Receivables) that existed and was owing to D&K as of the close of D&K's business on -5- 9 the Initial Cut-Off Date, and (ii) all Related Rights with respect thereto. (b) Regular Purchases and Contributions. After the Initial Closing Date, and continuing until the Sale Termination Date, each Receivable described in Section 1.1(a)(ii) hereof, and all the Related Rights with respect thereto, created or originated by each Originator shall be sold or contributed by such Originator to the Initial Purchaser (without any further action) upon the creation or origination of such Receivable. All such Receivables, other than those Receivables indicated on a Purchase Report as having been contributed by the related Originator to the Initial Purchaser (such other Receivables, together with the Initial Contributed Receivables, the "Contributed Receivables"), shall be sold to the Initial Purchaser on such date; all Contributed Receivables shall be contributed by the related Originator to the Initial Purchaser on such date. SECTION 1.3. No Recourse. Except as specifically provided in this Agreement, the purchase and sale of Pool Receivables and Related Rights under this Agreement shall be without recourse to the related Originator; provided that each Originator shall be liable to the Initial Purchaser for all representations, warranties, covenants and indemnities made by such Originator pursuant to the terms of this Agreement, it being understood that such obligation of such Originator will not arise on account of the failure of the Obligor for credit reasons to make any payment in respect of a Pool Receivable. SECTION 1.4. True Sales. (a) Each of each Originator and the Initial Purchaser intend the transactions hereunder to constitute true sales (or in the case of Contributed Receivables, conveyances in the form of capital contributions) of Pool Receivables and the Related Rights by such Originator to the Initial Purchaser providing the Initial Purchaser with the full benefits of ownership thereof, and no party hereto intends the transactions contemplated hereunder to be, or for any purpose to be characterized as, a loan from the Initial Purchaser to D&K. (b) In the event (but only to the extent) that the conveyance of Pool Receivables and Related Rights hereunder is characterized by a court or other governmental authority as a loan rather than a sale or contribution, each Originator shall be deemed hereunder to have granted to the Initial Purchaser, and each Originator hereby grants to the Initial Purchaser, a security interest in all of such Originator's right, title and interest in, to and under all of the Pool Receivables and Related Rights originated by it, whether now or hereafter owned, existing or arising. Such security interest shall secure all of such -6- 10 Originator's obligations (monetary or otherwise) under this Agreement and the other Transaction Documents to which it is a party, whether now or hereafter existing or arising, due or to become due, direct or indirect, absolute or contingent. The Initial Purchaser shall have, with respect to the property described in this Section 1.4(b), and in addition to all the other rights and remedies available to the Initial Purchaser under this Agreement and applicable law, all the rights and remedies of a secured party under the UCC, and this Agreement shall constitute a security agreement under Applicable Law. SECTION 1.5. Consideration for Purchases. On the terms and subject to the conditions set forth in this Agreement, the Initial Purchaser agrees to make all Purchase Price payments to the Originators in accordance with Article III. SECTION 1.6. Initial Purchaser Agreement to Make Demand Loans. On the terms and subject to the conditions set forth in this Agreement and in the Receivables Purchase Agreement, the Initial Purchaser agrees to make demand loans (each such loan being herein called an "Originator Loan") to D&K prior to the Sale Termination Date in such amounts as D&K may request from time to time; provided, however, that: (a) The Originator Loans made to D&K shall be evidenced by a demand promissory note in the form of Exhibit C to this Agreement issued by D&K to the order of the Initial Purchaser (such demand promissory note, as it may be amended, supplemented, endorsed or otherwise modified from time to time in accordance with the Transaction Documents, together with all promissory notes issued from time to time in substitution therefor or renewal thereof in accordance with the Transaction Documents, being called the "Originator Note"); and (b) No Originator Loan shall be made to D&K to the extent that the making of such Originator Loan would violate the Receivables Purchase Agreement. SECTION 1.7. Addition of Originators. Subsidiaries of D&K may be added as Originators under this Agreement provided that all of the following conditions have been met: (i) the conditions precedent set forth in paragraphs (b) through (k) of Section 4.1 are satisfied with respect to such Subsidiary; (ii) such Subsidiary executes a joinder agreement, in form and substance satisfactory to the Initial Purchaser and Administrator, pursuant to which such Subsidiary agrees to become an Originator hereunder, assumes all of the obligations of an Originator hereunder and under the other -7- 11 Transaction Documents and makes all of the representations and warranties set forth in Section 5.1; (iii) D&K executes and delivers a guaranty of such Subsidiary's obligations hereunder and under the other Transaction Documents in form and substance satisfactory to the Initial Purchaser and the Administrator; and (iv) the Initial Purchaser and the Administrator consent to such addition in writing. ARTICLE II CALCULATION OF PURCHASE PRICE SECTION 2.1. Calculation of Purchase Price. On each Reporting Date (commencing with the first Reporting Date following the Initial Closing Date), the Servicer shall deliver to the Initial Purchaser, the Administrator, the Liquidity Agent and D&K (if the Servicer is other than D&K) a report in substantially the form of Exhibit A (each such report being herein called a "Purchase Report") with respect to the Initial Purchaser's purchases of Receivables from the Originators (a) that arose on or prior to the Initial Cut-Off Date (in the case of the first Purchase Report to be delivered hereunder) and (b) that arose during the Settlement Period immediately preceding such Reporting Date (in the case of each successive Purchase Report). Each Purchase Report shall designate the amount of such Receivables that were Eligible Receivables on the date of origination (or, in the case of Receivables transferred or contributed on the Initial Closing Date, on the Initial Closing Date). The "Purchase Price" (to be paid to the Originators in accordance with the terms of Article III) for the Receivables and the Related Rights shall be determined in accordance with the following formula: PP = AUB - (AUB X FMVD) where: PP = Purchase Price (to be paid to the Originators in accordance with the terms of Article III) as calculated on the relevant Reporting Date; -8- 12 AUB = (i) for purposes of calculating the Purchase Price on the Initial Closing Date, the aggregate Unpaid Balance of all Receivables that existed and were owing to D&K as measured as at the Initial Cut-Off Date, less an amount equal to the sum of the aggregate Unpaid Balance of all Initial Contributed Receivables, and (ii) for purposes of calculating the Purchase Price for Receivables on each Reporting Date thereafter, the aggregate Unpaid Balance of the Receivables described in Section 1.1(a)(ii) hereof that were generated by the related Originator during the immediately preceding Settlement Period, less an amount equal to the sum of the aggregate Unpaid Balance of all Contributed Receivables, if any, indicated on the related Purchase Report; and FMVD = "Fair Market Value Discount Factor" on the determination date, which is the sum of the Loss Discount and the Cost Discount, in each case as calculated on the most recent Reporting Date as set forth in the definitions below. "Loss Discount" as measured on the Initial Closing Date or any Reporting Date means the ratio, expressed as a percentage, of (i) the losses (i.e. write-offs to the bad debt reserve or other write-offs consistent with the Credit and Collection Policy, in each case, net of recoveries) recognized for all Pool Receivables during the period equal to twelve (12) months ending on the CutOff Date immediately preceding the Initial Closing Date or such Reporting Date, as the case may be, divided by (ii) the Collections on all Pool Receivables received during such period. "Cost Discount" as measured on the Initial Closing Date or any Reporting Date means a percentage determined in accordance with the following formula: CD = (TD/360) x CR where: CD = the Cost Discount as measured on such date; TD = the Days Sales Outstanding, as set forth in the most recent Purchase Report; and CR = the Cost Rate as measured on such Reporting Date. "Cost Rate" as measured on the Initial Closing Date or any Reporting Date means a per annum percentage rate equal to the sum -9- 13 of (i) the LIBO Rate for the Initial Closing Date or the related Settlement Period, as the case may be, plus (ii) 1.50%. "LIBO Rate" for the Initial Closing Date or any Settlement Period means the offered rate per annum (rounded upwards, if necessary, to the nearest 1/16th of one percent) appearing in The Wall Street Journal for one month LIBOR loans on the Initial Closing Date or the first Business Day of such Settlement Period, as the case may be. "Days Sales Outstanding" means a number of days calculated as (i) Sales as of the end of the second preceding month divided by the Collections for the preceding month multiplied by (ii) 30. ARTICLE III PAYMENT OF PURCHASE PRICE SECTION 3.1. The Initial Purchase Price Payment. (a) On or prior to the Initial Closing Date, the Initial Purchaser shall pay the Purchase Price for the purchase to be made from D&K with respect to the Receivables existing on or prior to the Initial Cut-Off Date (other than the Initial Contributed Receivables) (i) in cash in an amount equal to the amount received by the Initial Purchaser from the Purchaser in connection with the first Purchase made pursuant to the Receivables Purchase Agreement and (ii) by the issuance of a promissory note in the form of Exhibit B to this Agreement payable to the order of D&K in the initial principal amount equal to the remainder of the Purchase Price owing after subtracting the amount paid in cash (such promissory note together with the promissory note issued to any other Originator hereunder, as it may be amended, supplemented, endorsed or otherwise modified from time to time, together with any promissory notes issued from time to time in substitution therefor or renewal thereof in accordance with the Transaction Documents, being called an "Initial Purchaser Note"), each of which Initial Purchaser Note shall, in accordance with its terms, be subordinated to all interests in Pool Receivables and Related Rights and all obligations of the Initial Purchaser, of any nature, whether now or hereafter arising under or in connection with the Receivables Purchase Agreement. (b) The Servicer shall hold the Initial Purchaser Note for the benefit of the related Originator, and shall make all appropriate record-keeping entries with respect to the Initial Purchaser Note or otherwise to reflect payments on and adjustments of the Initial Purchaser Note. The Servicer's books and records shall constitute rebuttable presumptive evidence of -10- 14 the principal amount of and accrued and unpaid interest on the Initial Purchaser Note at any time. Each Originator hereby irrevocably authorizes the Servicer to mark its Initial Purchaser Note "CANCELED" and to return such Initial Purchaser Note to the Initial Purchaser upon the full and final payment thereof after the Sale Termination Date. SECTION 3.2. Purchase Price Payments. On each Business Day falling after the date of the Initial Closing Date until the termination of this Agreement pursuant to Section 9.4, on the terms and subject to the conditions of this Agreement, the Initial Purchaser shall pay to each Originator the Purchase Price for the Pool Receivables and Related Rights purchased from such Originator during the immediately preceding Settlement Period as follows: (i) First, by paying to such Originator a portion of the Purchase Price due pursuant to Section 2.1 by depositing into such account as such Originator shall specify immediately available funds from monies held by or on behalf of the Initial Purchaser solely to the extent that such monies do not constitute Collections that are required to be segregated and held by the Servicer or distributed to the Administrator or the Purchaser pursuant to the Receivables Purchase Agreement on the next Settlement Date or required to be paid to the Servicer as the Servicer's Fee on the next Settlement Date, or otherwise necessary to pay current expenses of the Initial Purchaser (in its reasonable discretion)(such available monies, the "Available Funds"), subject to the terms of the Receivables Purchase Agreement. Any Collections that have been paid to, or retained by, the related Originator during such Settlement Period shall be credited towards the Initial Purchaser's obligation pursuant to this clause first; provided, however, that, if Collections paid to, or retained by, such Originator exceed the Purchase Price for Pool Receivables and Related Rights purchased from such Originator for such Settlement Period, or, absent a cash payment, the Initial Purchaser shall not have sufficient cash to meet its payment obligations pursuant to the Receivables Purchase Agreement, such Originator shall turn over such excess to the Initial Purchaser; (ii) Second, to the extent any portion of the Purchase Price remains unpaid, the principal amount outstanding under the related Originator Note automatically shall be reduced and deemed paid in an amount equal to such remaining Purchase Price, until such outstanding principal amount is reduced to zero; and -11- 15 (iii) Third, to the extent any portion of the Purchase Price remains unpaid, the principal amount outstanding under the Initial Purchaser Note issued to such Originator automatically shall be increased in an amount equal to such remaining Purchase Price. To the extent that (x) the amount due pursuant to Section 2.1 with respect to all Receivables created or originated by an Originator that arose during the corresponding Settlement Period is exceeded by (y) the amount paid to such Originator during such Settlement Period pursuant to the foregoing sentences for such Receivables, such excess shall be treated as a reduction in the principal amount of the Initial Purchaser Note, effective as of the last day of the related Settlement Period; provided, however, that if at any time the unpaid principal amount of the Initial Purchaser Note has been reduced to zero, such Originator shall pay the Initial Purchaser the remainder owed with respect thereto in immediately available funds. SECTION 3.3. Deemed Collections, Etc. (a) If on any day the Unpaid Balance of any Pool Receivable owed by an Obligor is reduced or adjusted as a result of any defective, rejected or returned merchandise or services, any cash discount, any credit, any incorrect billing, pricing adjustment or any other adjustment by an Originator or any Affiliate of an Originator, or is reduced or canceled as a result of a setoff in respect of any claim by the Obligor thereof against an Originator or any Affiliate of D&K (whether such claim arises out of the same or a related or unrelated transaction) or as a result of any dispute or any obligation of an Originator or any Affiliate of an Originator to pay to the related Obligor any rebate or refund, or to rework any product or service, such Originator shall deliver to the Servicer in same day funds an amount equal to the amount of such reduction or adjustment, provided that, prior to the Sale Termination Date, such amount may be paid by a reduction to the Purchase Price to be paid to such Originator on the next occurring Reporting Date; (b) if on any day any of the representations or warranties in Sections 5.1 (i), (k), and (u) hereto is not true with respect to any Pool Receivable (each such Receivable, an "Ineligible Receivable"), the related Originator shall deliver to the Servicer in same day funds an amount equal to the Unpaid Balance of such Pool Receivable for application by the Servicer to the same extent as if Collections of such Unpaid Balance had actually been received on such date, provided that prior to the Sale Termination Date, such amount may be paid by a reduction to the Purchase Price to be paid to such Originator on the next occurring Reporting Date; -12- 16 (c) except as provided in paragraph (a) or (b) of this Section 3.3, or as otherwise required by Applicable Law or the relevant Contract, all Collections received from an Obligor of any Pool Receivables shall be applied to the Pool Receivables of such Obligor in the order of the age of such Pool Receivables, starting with the oldest such Pool Receivable, unless such Obligor designates in writing its payment for application to specific Pool Receivables; (d) if and to the extent that the Initial Purchaser shall be required for any reason to pay over to an Obligor (or any trustee, receiver, custodian or similar official in any Event of Bankruptcy) any amount received by it hereunder, such amount shall be deemed not to have been so received but rather to have been retained by the related Originator and, accordingly, the Initial Purchaser shall have a claim against such Originator for such amount, payable when and to the extent that any distribution from or on behalf of such Obligor is made in respect thereof; and (e) in the event that an Originator has paid (by effecting a Purchase Price reduction or otherwise) to the Initial Purchaser the full Unpaid Balance of any Receivable pursuant to this Section 3.3, the Initial Purchaser shall reconvey such Receivable and all Related Rights with respect thereto to such Originator, without recourse, representation or warranty, but free and clear of all Liens created by the Initial Purchaser; such reconveyed Receivables and all Related Rights shall no longer be subject to the terms of this Agreement (including any obligation to turn over Collections with respect thereto). SECTION 3.4. Payments and Computations, Etc. (a) All amounts to be paid or deposited by an Originator or the Servicer hereunder shall be paid or deposited no later than 11:00 a.m. (New York time) on the day when due in same day funds. All amounts received after 11:00 a.m. (New York time) will be deemed to have been received on the immediately succeeding Business Day. (b) Each Originator shall, to the extent permitted by law, pay interest on any amount not paid or deposited by such Originator (whether as Servicer, or otherwise) when due hereunder, at an interest rate equal to 2.0% per annum above the Alternate Base Rate, payable on demand. (c) All computations of interest under Section 3.4(b) and all computations of the Purchase Price, fees, and other amounts hereunder shall be made on the basis of a 360-day year and actual days elapsed. Whenever any payment or deposit to be made hereunder shall be due on a day other than a Business Day, such payment or deposit shall be made on the next succeeding Business -13- 17 Day and such extension of time shall be included in the computation of such payment or deposit. ARTICLE IV CONDITIONS TO PURCHASES SECTION 4.1. Conditions Precedent to Initial Purchase. The initial Purchase under this Agreement is subject to the condition precedent that the Initial Purchaser shall have received each of the following (with copies to the Administrator), on or before the date of such purchase, each in form and substance (including the date thereof) satisfactory to the Initial Purchaser and the Administrator: (a) The Receivables Purchase Agreement, duly executed by the parties thereto, together with evidence reasonably satisfactory to the Initial Purchaser that all conditions precedent to the initial Purchase of an undivided interest thereunder (other than any condition relating to the effectiveness of the purchase commitment under this Agreement) shall have been met; (b) A certificate of the Secretary of D&K certifying (i) a copy of the resolutions of its Board of Directors approving this Agreement and the other Transaction Documents to be delivered by it hereunder and the transactions contemplated hereby; (ii) the names and true signatures of the officers authorized on its behalf to sign this Agreement and the other Transaction Documents to be delivered by it hereunder (on which certificate the Administrator and Initial Purchaser may conclusively rely until such time as the Administrator shall receive from D&K a revised certificate meeting the requirements of this subsection (b)); (iii) a copy of its by-laws; and (iv) all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the other Transaction Documents; (c) The Articles of Incorporation of D&K, duly certified by the Secretary of State of Delaware, as of a recent date acceptable to Administrator; (d) Acknowledgment copies or time stamped receipt copies, of the proper financing statements (Form UCC-1) that have been duly executed and name D&K as the debtor and seller and the Initial Purchaser as the secured party and purchaser (and the Administrator, for the benefit of the Purchaser, as assignee of the Initial Purchaser) of the Receivables and the Related Rights or other, similar -14- 18 instruments or documents, as may be necessary or, in Servicer's or the Administrators's opinion, desirable under the UCC or any comparable law of all appropriate jurisdictions to perfect the Initial Purchaser's ownership interest in all Receivables and Related Rights in which an ownership interest may be assigned to it hereunder; (e) A search report provided in writing to and approved by the Administrator, listing all effective financing statements that name D&K as debtor or assignor and that are filed in the jurisdictions in which filings were made pursuant to subsection (d) above and in such other jurisdictions that Administrator shall reasonably request, together with copies of such financing statements (none of which shall cover any Pool Assets), and tax and judgment lien search reports from a Person satisfactory to Servicer and the Administrator showing no evidence of such liens filed against D&K; (f) Duly executed copies of the Lock-Box Agreements with the Lock-Box Banks; (g) A pro forma Purchase Report, prepared in respect of the proposed initial Purchase, assuming an Initial CutOff Date of July 31, 1998; (h) The Initial Purchaser Note in favor of D&K, duly executed by the Initial Purchaser; (i) A certificate from an officer of D&K to the effect that Servicer and D&K have placed on the most recent, and have taken all steps reasonably necessary to ensure that there shall be placed on subsequent, summary master control data processing reports the following legend (or the substantive equivalent thereof): THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN SOLD TO D&K RECEIVABLES CORPORATION PURSUANT TO A PURCHASE AND SALE AGREEMENT, DATED AS OF AUGUST 7, 1998, AS AMENDED FROM TIME TO TIME, BETWEEN D&K HEALTHCARE RESOURCES, INC., CERTAIN SUBSIDIARIES OF D&K AND D&K RECEIVABLES CORPORATION; AND AN OWNERSHIP AND SECURITY INTEREST IN THE RECEIVABLES DESCRIBED HEREIN HAS BEEN GRANTED AND ASSIGNED TO FLEET NATIONAL BANK, AS ADMINISTRATOR, PURSUANT TO A RECEIVABLES PURCHASE AGREEMENT, DATED AS OF AUGUST 7, 1998, AMONG D&K HEALTHCARE RESOURCES, INC., D&K RECEIVABLES CORPORATION, BLUE KEEL FUNDING, LLC, AND FLEET NATIONAL BANK, AS THE ADMINISTRATOR; and -15- 19 (j) Such other agreements, instruments, UCC financing statements, certificates, opinions and other documents as the Initial Purchaser or the Administrator may reasonably request. SECTION 4.2. Conditions Precedent to All Purchases. Each purchase under this Agreement is subject to the condition precedent that the agreement of the Originator to sell Pool Receivables and Related Rights, and the agreement of the Initial Purchaser to purchase Pool Receivables and Related Rights, shall not have terminated pursuant to Section 9.4 of this Agreement, and shall be subject further to the conditions precedent that: (a) in the case of each purchase, the Servicer shall have delivered to the Initial Purchaser on or prior to such purchase, a completed Purchase Report with respect to the immediately preceding calendar month, together with such additional information as may be reasonably requested by the Initial Purchaser; and (b) the representations and warranties contained in Article V are correct on and as of such day as though made on and as of such day and shall be deemed to have been made on such day (except that any such representation or warranty that is expressly stated as being made only as of a specified earlier date shall be true and correct in all material respects as of such earlier date). SECTION 4.3. Certification as to Representations and Warranties. Each Originator, by accepting the Purchase Price (whether in cash or by an increase in the principal amount outstanding under the Initial Purchaser Note or a reduction of the Originator Note) paid for each purchase of Pool Receivables and Related Rights on any day, shall be deemed to have certified that its representations and warranties contained in Article V are true and correct on and as of such day, with the same effect as though made on and as of such day. SECTION 4.4. Effect of Payment of Purchase Price. Upon the payment of the Purchase Price (whether in cash or by an increase in the principal amount outstanding under an Initial Purchaser Note or a reduction of an Originator Note) for any purchase of Pool Receivables and Related Rights, title to such Pool Receivables and Related Rights shall vest in the Initial Purchaser, whether or not the conditions precedent to such purchase were in fact satisfied; provided that the Initial Purchaser shall not be deemed to have waived any claim it may have under this Agreement for the failure by an Originator in fact to satisfy any such condition precedent. -16- 20 ARTICLE V REPRESENTATIONS AND WARRANTIES SECTION 5.1. Representations and Warranties. In order to induce the Initial Purchaser to enter into this Agreement and to make purchases thereunder, D&K hereby represents and warrants as follows: (a) Organization and Good Standing. D&K has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and to conduct its business as such properties are presently owned and such business is presently conducted. (b) Due Qualification. D&K is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualification, licenses or approvals except where the failure to so qualify or have such licenses or approvals has not had, and could not reasonably be expected to have, a Seller Material Adverse Effect. (c) Power and Authority; Due Authorization. D&K (i) has all necessary power, authority and legal right to (A) execute and deliver this Agreement and the other Transaction Documents to which it is a party, (B) carry out the terms of the Transaction Documents to which it is a party, and (C) sell and assign the Receivables and Related Rights on the terms and conditions herein provided and (ii) has duly authorized by all necessary corporate action the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party. (d) Binding Obligations. This Agreement constitutes, and each other Transaction Document to be signed by D&K when duly executed and delivered will constitute, a legal, valid and binding obligation of D&K enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents to which D&K is a party and the -17- 21 fulfillment of the terms hereof and thereof will not (i) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under the D&K's articles of incorporation or by-laws or any Contractual Obligation of D&K, (ii) result in the creation or imposition of any Lien upon any of D&K's properties pursuant to the terms of any such Contractual Obligation, other than this Agreement, or (iii) violate any Applicable Law. (f) No Proceedings. There is no litigation, proceedings or investigations pending or, to the best of D&K's knowledge, threatened, before any Governmental Authority or arbitrator (i) asserting the invalidity of this Agreement or any other Transaction Document to which D&K is a party, (ii) seeking to prevent the sale and assignment of the Receivables and Related Rights, the collectibility of the Receivables or the consummation of any of the other transactions contemplated by this Agreement or any other Transaction Document, or (iii) seeking any determination or ruling that could reasonably be expected to have a Seller Material Adverse Effect. (g) Government Approvals. No Governmental Action is required for the due execution, delivery and performance by D&K of this Agreement or any other Transaction Document to which it is a party, other than the filing of the UCC financing statements referred to in Section 4.1, all of which, at the time required in Section 4.1, shall have been duly made and shall be in full force and effect. (h) Securities Exchange Act. No proceeds of any purchase will be used to acquire any equity security of a class which is registered pursuant to Section 12 of the Securities Exchange Act of 1934. (i) Quality of Title; Valid Sale; Etc. Upon its creation and prior to its sale or contribution to the Initial Purchaser under this Agreement, it is the legal and beneficial owner of each of the Receivables and the Related Rights originated by it free and clear of any Lien; and upon each purchase or contribution the Initial Purchaser shall acquire a valid and enforceable ownership interest in each Pool Receivable then existing or thereafter arising and in the Related Rights with respect thereto, free and clear of any Lien, enforceable against all creditors of, and purchasers from, D&K. Each Pool Receivable constitutes an "account" as such term is defined in the UCC. No effective financing statement or other instrument similar in effect covering any Pool Receivable or Related Rights with respect thereto is on file in any recording office, except those -18- 22 filed in favor of the Initial Purchaser pursuant to this Agreement and in favor of the Administrator pursuant to the Receivables Purchase Agreement. (j) Accuracy of Information. Each report, information, exhibit, financial statement, document, book, record or report furnished or to be furnished at any time by or on behalf of it to the Initial Purchaser or the Administrator in connection with this Agreement is or will be accurate in all material respects as of its date or (except as otherwise disclosed to the Administrator at such time) as of the date so furnished, and no such item contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they were made, not materially misleading. (k) Offices. The principal place of business and chief executive office of D&K are located at the address of D&K referred to in Section 9.2, and the offices where D&K keeps all its books, records and documents evidencing or relating to Pool Receivables are located at the address of D&K referred to in Section 9.2 (or at such other locations, notified to the Administrator in accordance with Section 6.1(e), in jurisdictions where all action required by Section 8.4 has been taken and completed). (l) Bulk Sales Act. No transaction contemplated hereby requires compliance with any bulk sales act or similar law. (m) Margin Regulations. The use of all funds obtained by D&K under this Agreement will not conflict with or contravene any of Regulations G, T, U or X promulgated by the Federal Reserve Board from time to time. (n) Maintenance of Books and Records. It has accounted for each sale of Pool Receivables and Related Rights in its books and financial statements as sales, consistent with GAAP. (o) Credit and Collection Policy. It has complied in all material respects with the Credit and Collection Policy with regard to each Receivable. (p) Solvency. It is solvent; and at the time of (and immediately after) each sale pursuant to this Agreement it shall be solvent. -19- 23 (q) Compliance with Transaction Documents. It, as Servicer or Originator, has complied with all of the terms, covenants and agreements contained in this Agreement and the other Transaction Documents applicable to it. (r) Corporate Name. D&K's complete corporate name is set forth in the preamble to this Agreement, and, other than D&K Wholesale Drug, Inc., D&K does not use and has not during the last six years used any other corporate name, trade name, doing business name or fictitious name. (s) Investment Company Act. It is not, and is not controlled by, an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended. (t) Eligible Receivables. Each Pool Receivable sold or contributed by it to the Initial Purchaser hereunder that is designated as an Eligible Receivable on a Purchase Report is in fact an Eligible Receivable. ARTICLE VI COVENANTS SECTION 6.1. Affirmative Covenants. From the date hereof until the Final Payout Date: (a) Compliance with Laws, Etc. Each Originator will comply in all material respects with all Applicable Laws, including those with respect to the Pool Receivables and the related Contracts, except where noncompliance could not reasonably be expected to have a Seller Material Adverse Effect. (b) Preservation of Corporate Existence. Each Originator will preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification could reasonably be expected to have a Seller Material Adverse Effect. (c) Audits. (i) Each Originator will at any time and from time to time during regular business hours, permit the Administrator or any of its agents or representatives, (A) to examine and make copies of and abstracts from all books, records and documents (including, without limitation, -20- 24 computer tapes and disks) in its possession or under its control relating to Pool Receivables, (B) to visit its offices and properties for the purpose of examining such materials described in clause (i)(A) above, and to discuss matters relating to Pool Receivables or its performance hereunder with any of its officers or employees having knowledge of such matters, and (C) to verify the existence and amount of the Pool Receivables; and (ii) without limiting the provisions of clause (i) above, from time to time on request of Administrator, permit certified public accountants or other auditors acceptable to the Administrator to conduct, at such Originator's expense, a review of its books and records with respect to the Pool Receivables; provided, however that, unless a Liquidation Event has occurred and is continuing, no Originator shall be obligated to pay for more than one review in each calendar year. (d) Keeping of Records and Books of Account. Each Originator will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Pool Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Pool Receivables (including, without limitation, records adequate to permit the daily identification of each new Pool Receivable and all Collections of and adjustments to each existing Pool Receivable). (e) Performance and Compliance with Receivables and Contracts. Each Originator will, at its expense, timely and fully perform and comply with all provisions, covenants and other promises required to be observed by it under the Contracts related to the Pool Receivables and all other agreements related to such Pool Receivables, except where failure to do so would not materially adversely affect the validity, enforceability or collectibility of the related Pool Receivable. (f) Location of Records. Each Originator will keep its principal place of business and chief executive office, and the offices where it keeps its records concerning the Pool Receivables and all related Contracts and all other agreements related to such Pool Receivables (and all original documents relating thereto), at its address(es) referred to in Section 9.2 or, upon 30 days' prior written notice to the Administrator, at such other locations in jurisdictions where all action required by Section 8.4 shall have been taken and completed. -21- 25 (g) Credit and Collection Policies. Each Originator, at its own expense, will timely and fully perform and comply in all material respects with the Credit and Collection Policy in regard to each Pool Receivable and the related Contracts. (h) Collections. Each Originator will instruct (i) all Obligors to cause all Collections to be sent to a LockBox that is the subject of a Lock-Box Agreement and (ii) each Lock-Box Bank to deposit all such Collections directly into a Lock-Box Account that is the subject of a Lock-Box Agreement. In the event that any Originator receives Collections directly from any Obligor, any Originator shall deposit such Collections into a Lock-Box Account within two Business Days of receipt thereof. SECTION 6.2. Negative Covenants. From the date hereof until the Final Payout Date: (a) Sales, Liens, Etc. No Originator will, except as otherwise provided herein or in any other Transaction Document, sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Lien upon or with respect to, any Pool Receivable or any interest therein. (b) Extension or Amendment of Receivables. No Originator will, except as otherwise permitted in any other Transaction Document, extend, amend or otherwise modify, or permit Servicer to extend, amend or otherwise modify, the terms of any Pool Receivable; or amend, modify or waive, or permit Servicer to amend, modify or waive, any term or condition of any Contract related to a Pool Receivable. (c) Change in Business or Credit and Collection Policy. No Originator will make any change in the character of its business or in the Credit and Collection Policy, which change could impair the collectibility of any Pool Receivable or otherwise adversely affect the interests or remedies of the Administrator, Purchaser or the Initial Purchaser under this Agreement or any other Transaction Document. (d) Change in Payment Instructions to Obligors. No Originator will add or terminate any bank as a Lock-Box Bank or any Lock-Box Account from those listed in Schedule I or make any change, or permit Servicer to make any change, in its instructions to Obligors regarding payments to be made to the Initial Purchaser or Servicer or payments to be made to any Lock-Box Bank, unless the Administrator shall have received notice of such addition, termination or change and -22- 26 duly executed copies of Lock-Box Agreements with each new Lock-Box Bank or with respect to each new Lock-Box Account, as the case may be. (e) Mergers, Acquisitions, Sales, etc. No Originator will (i) be a party to any merger or consolidation, or purchase or otherwise acquire all or any substantial part of the Properties of any other Person without the consent of the Administrator (provided that the consolidation of PBI with D&K shall not constitute a violation of this covenant so long as such consolidation does not include a merger and so long as D&K does not become directly or indirectly liable for any Indebtedness of PBI), or (ii) sell, transfer, convey or lease all or any substantial part of its assets, or sell or assign with or without recourse any Receivables or any interest therein (other than pursuant hereto or to the Receivables Purchase Agreement). (f) Deposits to Special Accounts. No Originator will deposit or otherwise credit, or cause or permit to be so deposited or credited, to any Lock-Box Account cash or cash proceeds other than Collections of Pool Receivables. SECTION 6.3. Separate Existence. Each Originator hereby acknowledges that Purchaser and the Administrator are entering into the transactions contemplated by the other Transaction Documents in reliance upon the Initial Purchaser's identity as a legal entity separate from each Originator. Therefore, from and after the date hereof, each Originator shall take all steps specifically required by the Transaction Documents or by the Initial Purchaser, Purchaser or Administrator to continue the Initial Purchaser's identity as a separate legal entity and to make it apparent to third Persons that the Initial Purchaser is an entity with assets and liabilities distinct from those of such Originator and any other Person, and is not a division of such Originator or any other Person. ARTICLE VII INDEMNIFICATION SECTION 7.1. Indemnities by the Originators. Without limiting any other rights which the Initial Purchaser and each of its permitted assigns, officers, directors, employees and agents (each of the foregoing Persons being individually called a "Sale Indemnified Party") may have hereunder or under applicable law, each Originator, jointly and severally, hereby agrees to indemnify the Initial Purchaser and each Sale Indemnified Party -23- 27 from and against any and all damages, losses, claims, judgments, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing collectively being called "Sale Indemnified Amounts") arising out of or resulting from this Agreement (whether directly or indirectly) or the use of proceeds of purchases or the ownership of any Pool Receivable or Related Rights, excluding, however, (a) Sale Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of the Initial Purchaser or such Sale Indemnified Party, (b) Sale Indemnified Amounts to the extent the same includes losses in respect of Pool Receivables and reimbursement therefor that would constitute credit recourse to the Originators for the amount of any Pool Receivable or Related Rights not paid by the related Obligor for credit reasons, or (c) any net income taxes or franchise taxes imposed on the Initial Purchaser or such Sale Indemnified Party by the jurisdiction under the laws of which such Sale Indemnified Party is organized or any political subdivision thereof. Without limiting or being limited by the foregoing, but subject to the exclusions set forth in the immediately preceding sentence, each Originator, jointly and severally, shall pay on demand to the Initial Purchaser and each Sale Indemnified Party any and all amounts necessary to indemnify the Initial Purchaser and such Sale Indemnified Party from and against any and all Sale Indemnified Amounts relating to or resulting from any of the following: (i) the transfer by any Originator of an interest in any Receivable or Related Rights to any Person other than the Initial Purchaser; (ii) the failure of any information provided by any Originator, as Servicer or otherwise, to the Initial Purchaser, the Purchaser, the Administrator or the Servicer with respect to Pool Receivables or this Agreement to be true, correct and complete; (iii) the failure of any representation or warranty or statement made or deemed made by any Originator (or any of its officers), as Servicer or otherwise, under or in connection with this Agreement to have been true and correct when made; (iv) the failure by any Originator, as Servicer or otherwise, to comply with any Applicable Law, with respect to any Pool Receivable or Related Rights; or the failure of any Pool Receivable or Related Rights to conform to any such Applicable Law; (v) the failure to vest and maintain vested in the Initial Purchaser a valid and enforceable ownership interest -24- 28 in each Pool Receivable at any time existing and the Related Rights with respect thereto, free and clear of any Lien, other than a Lien arising solely as a result of an act of the Initial Purchaser, the Purchaser, the Liquidity Agent or the Administrator, whether existing as the time of purchase of such Pool Receivable or at any time thereafter; (vi) the failure of any Originator to have filed, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Pool Receivables and the Related Rights in respect thereof, whether at the time of any purchase or at any subsequent time; (vii) any dispute, claim, offset or defense (other than discharge in bankruptcy) of the Obligor to the payment of any Pool Receivable (including, without limitation, a defense based on such Pool Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the goods or services related to such Pool Receivable or the furnishing or failure to furnish such goods or services or relating to collection activities with respect to such Pool Receivable (if such collection activities were performed by any Originator or any of its Affiliates, acting as Servicer or by any agent or independent contractor retained by any Originator or any of its Affiliates); (viii) any failure of any Originator, as Servicer or otherwise, to perform its duties or obligations in accordance with the provisions hereof or under the Receivables Purchase Agreement or to perform its duties or obligations under the Contracts; (ix) any products liability or other claim, investigation, litigation or proceeding arising out of or in connection with merchandise, insurance or services which are the subject of any Contract; (x) the commingling of Collections of Pool Receivables at any time with other funds; (xi) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of purchases or the ownership of any Pool Receivable or Related Rights; (xii) any tax or governmental fee or charge (but not including taxes upon or measured by net income or -25- 29 representing a franchise or unincorporated business tax on such Sale Indemnified Party), all interest and penalties thereon or with respect thereto, and all out-of-pocket costs and expenses, including the reasonable fees and expenses of counsel in defending against the same, which may arise by reason of the purchase or ownership of the Receivables generated by any Originator or any Related Rights connected with any such Receivables; or (xiii) any requirement that all or a portion of the distributions made to the Initial Purchaser pursuant to this Agreement shall be rescinded or otherwise must be returned to any Originator for any reason. SECTION 7.2. Contribution. If for any reason the indemnification provided above in this Article VII (and subject to the exceptions set forth therein) is unavailable to the Initial Purchaser or a Sale Indemnified Party or is insufficient to hold the Initial Purchaser or a Sale Indemnified Party harmless, then the Originators shall contribute to the maximum amount of Sale Indemnified Amounts payable or paid by the Initial Purchaser or such Sale Indemnified Party in such proportion as is appropriate to reflect not only the relative benefits received by the Initial Purchaser or such Sale Indemnified Party on the one hand and the Originators on the other hand, but also the relative fault of such Sale Indemnified Party (if any) and the Originators and any other relevant equitable considerations. SECTION 7.3. After-Tax Basis. Indemnification hereunder shall be in an amount necessary to make the Sale Indemnified Party whole after taking into account any tax consequences to the Sale Indemnified Party of the receipt of the indemnity provided hereunder, including the effect of such tax or refund on the amount of tax measured by net income or profits which is or was payable by the Sale Indemnified Party. ARTICLE VIII ADMINISTRATION AND COLLECTIONS; ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF THE POOL RECEIVABLES SECTION 8.1. Servicing of Pool Receivables and Related Rights. Consistent with the Initial Purchaser's ownership of the Pool Receivables and the Related Rights, the Initial Purchaser shall have the sole right to service, administer and collect the Pool Receivables, to assign such right and to delegate such right to others. In consideration of the Initial Purchaser's purchase of the Pool Receivables and the Related Rights, each Originator agrees to cooperate fully with the Initial Purchaser to facilitate the full and proper performance of such duties and -26- 30 obligations for the benefit of the Initial Purchaser, the Purchaser, and the Administrator. To the extent that the Initial Purchaser, individually or through the Servicer, has granted or grants powers of attorney to the Administrator under the Receivables Purchase Agreement, each Originator hereby grants a corresponding power of attorney on the same terms to the Initial Purchaser. Each Originator hereby acknowledges and agrees that the Initial Purchaser, in all of its capacities, shall assign to the Administrator for the benefit of the Purchaser and the Administrator such powers of attorney and other rights and interests granted by such Originator to the Initial Purchaser hereunder, and agrees to cooperate fully with the Administrator in the exercise of such rights. SECTION 8.2. Rights of the Initial Purchaser; Enforcement Rights. (a) The Initial Purchaser shall have no obligation to account for, to replace, to substitute or to return any Receivables and Related Rights to any Originator. The Initial Purchaser shall have no obligation to account for, or to return to any Originator, Collections, or any interest or other finance charge collected pursuant thereto, without regard to whether such Collections and charges are in excess of the Purchase Price for such Pool Receivables and Related Rights. (b) The Initial Purchaser shall have the unrestricted right to further assign, transfer, deliver, hypothecate, subdivide or otherwise deal with the Pool Receivables and Related Rights, and all of the Initial Purchaser's right, title and interest in, to and under this Agreement, on whatever terms the Initial Purchaser shall determine, pursuant to the Receivables Purchase Agreement or otherwise. (c) The Initial Purchaser shall have the sole right to retain any gains or profits created by buying, selling or holding the Pool Receivables and Related Rights and, except as expressly set forth in the Transaction Documents, shall have the sole risk of and responsibility for losses or damages created by such buying, selling or holding. (d) At any time following the designation of a Servicer (other than D&K) in accordance with the Receivables Purchase Agreement: (i) the Administrator may direct the Obligors that payment of all amounts payable under any Pool Receivable be made directly to the Administrator or its designee; (ii) the Administrator may instruct D&K to give notice of the Initial Purchaser's interest in the Pool Receivables -27- 31 or the Purchaser's interest in Pool Receivables to each Obligor, which notice shall direct that payments with respect to Pool Receivables be made directly to the Administrator or its designee, and upon such instruction from the Administrator D&K shall give such notice at its expense; provided, that if D&K fails to so notify each Obligor, the Administrator may so notify the Obligors; and (iii) the Administrator may request D&K to, and upon such request D&K shall, (A) assemble all of the records necessary or desirable to collect the Pool Receivables and the Related Rights (including, without limitation, computer programs, tapes and disks, other than excluded data), and make the same available to the Administrator or its designee at a place selected by the Administrator, and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections with respect to the Pool Receivables in a manner acceptable to the Administrator and, promptly upon receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Administrator or its designee. (e) Each Originator hereby authorizes the Initial Purchaser, and irrevocably appoints the Initial Purchaser as its attorney-in-fact with full power of substitution and with full authority in the place and stead of such Originator, which appointment is coupled with an interest, to take any and all steps in the name of such Originator and on behalf of such Originator necessary or desirable, in the determination of the Initial Purchaser, to collect any and all amounts or portions thereof due under any and all Pool Receivables or Related Rights, including, without limitation, endorsing the name of such Originator on checks and other instruments representing Collections and enforcing such Pool Receivables and Related Rights. SECTION 8.3. Responsibilities of the Originator. Anything herein to the contrary notwithstanding: (a) each Originator agrees to deliver directly to the Servicer (for the Initial Purchaser's account), within two (2) Business Days of receipt thereof, any Collections that it receives, in the form so received, and agrees that all Collections shall be deemed to be received in trust for the Initial Purchaser and shall be maintained and segregated separate and apart from all other funds and moneys of such Originator until delivery of the Collections to the Servicer; (b) each Originator agrees to instruct (i) all Obligors to cause all Collections to be sent to a Lock-Box that is the subject of a Lock-Box Agreement and (ii) each Lock-Box Bank to -28- 32 deposit all such Collections directly into a Lock-Box Account that is the subject of a Lock-Box Agreement; and (c) each Originator shall (i) perform all of its obligations hereunder and under the Contracts related to the Pool Receivables and Related Rights (and under its agreements with the Lock-Box Banks) to the same extent as if the Pool Receivables and Related Rights had not been sold hereunder, and the exercise by the Initial Purchaser or its designee or assignee of the Initial Purchaser's rights hereunder or in connection herewith shall not relieve such Originator from such obligations and (ii) pay when due any taxes, including, without limitation, any sales taxes payable in connection with the Pool Receivables and their creation and satisfaction. Notwithstanding anything to the contrary in this Agreement, none of the Initial Purchaser, the Administrator or the Purchaser shall have any obligation or liability with respect to any Receivable or Related Rights nor shall any of them be obligated to perform any of the obligations of any Originator under any of the foregoing. SECTION 8.4. Further Action Evidencing Purchases. Each Originator agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action, in order to perfect, protect or more fully evidence the purchase of the Pool Receivables and the Related Rights by the Initial Purchaser hereunder, or to enable the Initial Purchaser to exercise or enforce any of its rights hereunder or under any other Transaction Document. Each Originator further agrees from time to time, at its expense, promptly to take all action that the Initial Purchaser, the Servicer or the Administrator may reasonably request in order to perfect, protect or more fully evidence such purchase of the Pool Receivables and the Related Rights or to enable the Initial Purchaser or the Purchaser (as assignee of the Initial Purchaser) or the Administrator to exercise or enforce any of its or their respective rights hereunder or under any other Transaction Document in respect of the Pool Receivables and the Related Rights. Without limiting the generality of the foregoing each Originator will: (a) execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as the Initial Purchaser or the Administrator may reasonably determine to be necessary or appropriate; and (b) mark the master data processing records evidencing the Pool Receivables and, if requested by the Initial Purchaser or the Administrator, to the extent reasonably practicable, legend the related Contracts, to reflect the sale of the Pool -29- 33 Receivables and Related Rights pursuant to this Agreement and the Receivables Purchase Agreement. Each Originator hereby authorizes the Initial Purchaser or its designee or assignee to file one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any of the Pool Receivables and Related Rights of such Originator, in each case whether now existing or hereafter generated. If an Originator fails to perform any of its agreements or obligations under this Agreement, the Initial Purchaser or its designee or assignee may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the reasonable expenses of the Initial Purchaser or its designee or assignee incurred in connection therewith shall be payable by the Originator under Section 7.1. ARTICLE IX MISCELLANEOUS SECTION 9.1. Amendments, Etc. No amendment or waiver of any provision of this Agreement or consent to any departure by any Originator therefrom shall be effective unless in a writing signed by the Initial Purchaser, and consented to in writing by the Administrator, and any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of the Initial Purchaser or the Administrator to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. SECTION 9.2. Notices, Etc. All notices and other communications provided for hereunder shall, unless otherwise expressly stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by certified mail, postage prepaid, or by facsimile, to the intended party at the address or facsimile number of such party set forth on Schedule 9.2 or at such other address or facsimile number as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, (a) if personally delivered, when received, (b) if sent by certified mail, three (3) Business Days after having been deposited in the mail, postage prepaid, (c) if sent by overnight courier, one (1) Business Day after having been given to such courier, and (d) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means. -30- 34 SECTION 9.3. Acknowledgment and Consent. (a) Each of D&K, as an Originator and as initial Servicer, and each other Originator acknowledges that, contemporaneously herewith or at any time hereafter, the Initial Purchaser is assigning or will assign to the Administrator, for the benefit of the Purchaser, pursuant to the Receivables Purchase Agreement, one or more undivided interests in all of the Initial Purchaser's rights, title and interest in, to and under the Pool Receivables and Related Rights, and all of the Initial Purchaser's right, title and interest in, to and under this Agreement, it being understood that such assignment shall not relieve any party hereto from (or require the Purchaser or the Administrator to undertake) the performance of any term, covenant or agreement on the part of any party hereto to be performed or observed under or in connection with this Agreement. Each of D&K, as Originator and as initial Servicer, and each other Originator hereby consents to such assignments, including, without limitation, the assignment by the Initial Purchaser of (i) the right of the Initial Purchaser, at any time, to enforce this Agreement against the Originators and the obligations of the Originators hereunder, (ii) the right to appoint a successor to the Servicer as set forth in the Receivables Purchase Agreement, (iii) the right, at any time, to give or withhold any and all consents, requests, notices, directions, approvals, demands, extensions or waivers under or with respect to this Agreement, any other Transaction Document or the obligations in respect of the Originators thereunder to the same extent as the Initial Purchaser may do, and (iv) all of the Initial Purchaser's rights, remedies, powers and privileges, and all claims of the Initial Purchaser against each Originator, under or with respect to this Agreement and the other Transaction Documents (whether arising pursuant to the terms of this Agreement or otherwise available at law or in equity). Each of the parties hereto acknowledges and agrees that the Purchaser, the Administrator and the other Indemnified Parties are third party beneficiaries of the rights of the Initial Purchaser arising hereunder and under the other Transaction Documents to which any Originator is a party. (b) Each Originator hereby agrees to execute all agreements, instruments and documents, and to take all other action, that the Initial Purchaser or the Administrator determines is necessary or reasonably desirable to evidence its consent described in Section 9.3(a). (c) Each Originator hereby acknowledges that its obligations to the Purchaser and the Administrator as assignees of the Initial Purchaser are and shall be, to the extent permitted by Applicable Law or not prohibited by any order of any court or administrative or regulatory authority, absolute and unconditional under any and all circumstances and shall be -31- 35 unaffected by any claims, offsets or other defenses such Originator may have against the Initial Purchaser, and each Originator agrees that it shall not assert or interpose any such claims, offsets or defenses as a defense to its performance of its obligations under the Transaction Documents to which it is a party. SECTION 9.4. Binding Effect; Assignability. This Agreement shall be binding upon and inure to the benefit of the Initial Purchaser, each Originator and their respective successors and permitted assigns. No Originator may assign its rights hereunder or any interest herein without the prior written consent of the Initial Purchaser, the Administrator and the Liquidity Agent; subject to Section 9.3, the Initial Purchaser may not assign its rights hereunder or any interest herein without the prior written consent of D&K, the Administrator and the Liquidity Agent. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until the date after the Sale Termination Date on which each Originator has received payment in full for all of its Receivables and Related Rights conveyed pursuant to Section 1.1 hereof and has paid and performed all of its obligations hereunder in full. The rights and remedies with respect to any breach of any representation and warranty made by any Originator pursuant to Article V shall be continuing and shall survive any termination of this Agreement. SECTION 9.5. Costs, Expenses and Taxes. In addition to the rights of indemnification granted under Article VII, each Originator, jointly and severally, agrees to pay on demand all costs and expenses in connection with the preparation, execution, delivery and administration (including, without limitation, periodic auditing of Pool Receivables) of this Agreement and the other Transaction Documents, and any amendment, modification or waiver of or consent to any of the foregoing, including, without limitation, attorneys' fees for the Administrator, the Initial Purchaser and their respective Affiliates and agents with respect thereto and with respect to advising the Administrator, the Initial Purchaser and their respective Affiliates and agents as to their rights and remedies under this Agreement and the other Transaction Documents, and all costs and expenses, if any (including, without limitation, attorneys' fees (including the allocated fees of in-house counsel)), of the Administrator, the Initial Purchaser and their respective Affiliates and agents, in connection with the enforcement of this Agreement and the other Transaction Documents. SECTION 9.6. No Proceedings; Limitation on Payments. (a) Each Originator hereby agrees that it will not institute against, or join any other Person in instituting -32- 36 against, the Initial Purchaser any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any federal or state bankruptcy or similar law, for one year and one day after the latest maturing Commercial Paper Note is paid in full. The foregoing shall not limit any Originator's right to file any claim in or otherwise take any action with respect to any insolvency proceeding that was instituted by any Person other than an Originator. (b) Notwithstanding any provisions contained in this Agreement to the contrary, the Initial Purchaser shall not, and shall not be obligated to, pay any amount pursuant to this Agreement unless the Initial Purchaser has excess cash flow from operations or has received funds with respect to such obligation which may be used to make such payment and, in each case, such payment is permitted by the Receivables Purchase Agreement. SECTION 9.7. GOVERNING LAW AND JURISDICTION. (A) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF), EXCEPT TO THE EXTENT THAT THE PERFECTION (OR THE EFFECT OF PERFECTION OR NON-PERFECTION) OF THE INTERESTS OF THE INITIAL PURCHASER IN THE POOL RECEIVABLES AND THE RELATED RIGHTS IS GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. (B) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR ANY UNITED STATES FEDERAL COURT, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES HERETO CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY TRANSACTION DOCUMENT. EACH PARTY HERETO WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY NEW YORK LAW. SECTION 9.8. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. -33- 37 SECTION 9.9. Survival of Termination. The provisions of Section 1.4, Article VII, Section 9.3, Section 9.5, Section 9.6, Section 9.7, Section 9.10 and this Section 9.9 shall survive any termination of this Agreement. SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES ITS RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. EACH PARTY HERETO AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, EACH OF THE PARTIES HERETO FURTHER AGREES THAT ITS RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. SECTION 9.11. Entire Agreement. This Agreement and the other Transaction Documents embodies the entire agreement and understanding of the parties hereto, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. The Exhibits, Schedules and Annexes to this Agreement shall be deemed incorporated by reference into this Agreement as if set forth herein. SECTION 9.12. Headings. The captions and headings of this Agreement and in any Exhibit hereto are for convenience of reference only and shall not affect the interpretation hereof or thereof. -34- 38 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. D&K HEALTHCARE RESOURCES, INC., as Originator and as an initial Servicer By:________________________________ Name: Title: D&K RECEIVABLES CORPORATION, as Initial Purchaser By:________________________________ Name: Title: PURCHASE AND SALE AGREEMENT 39 SCHEDULE I LOCK-BOX BANKS AND LOCK-BOX ACCOUNTS Lock-Box Bank Lock-Box Account 40 EXHIBIT A FORM OF PURCHASE REPORT PURCHASE REPORT D&K Healthcare Resources, Inc. D&K Receivables Corporation As of____________________________________
Cut-Off Date Total Receivables UPB $ - Input Initial Contributed Receivables $ Fixed Aggregate Unpaid Balance of Receivables AUB $ Calculated LIBOR 0.0000% Input Days Sales Outstanding TD 0 Input 12 Month Losses $ - Input 12 Month Collections $ - Input Purchaser's Total Investment PTI $ Fixed Cost Rate (LIBOR +1.50%) CR Calculated Cost Discount (TD/360)*CR CD 0 Calculated Loss Discount (12 Month Losses/12 Month Coll) LD #DIV/0! Calculated Fair Market Value Discount (LD+CD) FMVD #DIV/0! Calculated Purchase Price (AUB-(AUB*FMVD)) PP #DIV/0! Calculated Eligible Receivables $ - Input Ineligible Receivables $ - Input
A-1 41 EXHIBIT B FORM OF INITIAL PURCHASER NOTE NON-NEGOTIABLE PROMISSORY NOTE August 7, 1998 FOR VALUE RECEIVED, the undersigned, D&K RECEIVABLES CORPORATION, a Delaware corporation (the "Initial Purchaser"), promises to pay to [NAME OF ORIGINATOR], a _________________________________________________________________ _______ corporation (the "Originator"), at its office at _______________________ ___________________________________________________ , on the terms and subject to the conditions set forth herein and in the Purchase and Sale Agreement referred to below, the aggregate unpaid Purchase Price of all Pool Receivables and Related Rights of the Originator purchased and to be purchased by the Initial Purchaser pursuant to the Purchase and Sale Agreement (subject to adjustment pursuant to Section 3.3 of such Purchase and Sale Agreement). Such amount as shown in the records of the Servicer will be rebuttable presumptive evidence of the principal amount owing under this Note. 1. Purchase and Sale Agreement. This Note is an "Initial Purchaser Note" described in, and is subject to the terms and conditions set forth in, that certain Purchase and Sale Agreement, dated as of August 7, 1998 (as the same may be amended, supplemented, or otherwise modified in accordance with its terms, the "Purchase and Sale Agreement"), among the Originator and the Initial Purchaser. Reference is hereby made to the Purchase and Sale Agreement for a statement of certain other rights and obligations of the Initial Purchaser and the Originator. In the case of any conflict between the terms of this Note and the terms of the Purchase and Sale Agreement, the terms of the Purchase and Sale Agreement shall control. 2. Definitions. Capitalized terms used (but not defined) herein have the meanings ascribed thereto in the Purchase and Sale Agreement. In addition, as used herein, the following terms have the following meanings: "Final Maturity Date" means the date that falls ninety one (91) days after the later of (x) the Sale Termination Date and (y) the Final Payout Date. "Junior Liabilities" means all obligations of the Initial Purchaser to the Originator under this Note. "Senior Agent" means the Administrator. B-1 42 "Senior Interests" means (a) the undivided percentage ownership interests acquired by the Administrator pursuant to the Receivables Purchase Agreement, and (b) all obligations of the Initial Purchaser to the Senior Interest Holders, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due on or before the Final Maturity Date. "Senior Interest Holders" means, collectively, the Purchaser, the Administrator and the other Indemnified Parties. "Subordination Provisions" means, collectively, clauses (a) through (k) of Section 7 hereof. 3. Interest. Subject to the Subordination Provisions, the Initial Purchaser promises to pay interest on the aggregate unpaid principal amount of this Note outstanding on each day (a) prior to the final payment in full and in cash of the Senior Interests, at a variable rate per annum equal to the Earned Discount Rate Percentage, determined as of the then most recent Reporting Date, and (b) after such final payment, at a variable rate per annum equal to the Alternate Base Rate, as determined by the Servicer. 4. Interest Payment Dates. Subject to the Subordination Provisions, the Initial Purchaser shall pay accrued interest on this Note on each Settlement Date and on the Final Maturity Date (or, if any such day is not a Business Day, the next succeeding Business Day). The Initial Purchaser also shall pay accrued interest on the principal amount of each prepayment hereof on the date of each such prepayment. 5. Basis of Computation. Interest accrued hereunder shall be computed for the actual number of days elapsed on the basis of a 360-day year. 6. Principal Payment Dates. Subject to the Subordination Provisions, any unpaid principal of this Note shall be paid on the Final Maturity Date (or, if such date is not a Business Day, the next succeeding Business Day). Subject to the Subordination Provisions, the principal amount of and accrued interest on this Note may be prepaid on any Business Day without premium or penalty. 7. Subordination Provisions. The Initial Purchaser covenants and agrees, and the Originator, by its acceptance of this Note, likewise covenants and agrees, that the payment B-2 43 of all Junior Liabilities is hereby expressly subordinated in right of payment to the payment and performance of the Senior Interests to the extent and in the manner set forth in the following clauses of this Section 7: (a) No payment or other distribution of the Initial Purchaser's assets of any kind or character, whether in cash, securities, or other rights or property, shall be made on account of this Note except to the extent such payment or other distribution is (i) permitted under the Receivables Purchase Agreement or (ii) made pursuant to Sections 4 or 6 of this Note; (b) (i) In the event of any Event of Bankruptcy involving the Initial Purchaser, and (ii) on and after the occurrence of the Sale Termination Date, the Senior Interests shall first be paid and performed in full and in cash before the Originator shall be entitled to receive and to retain any payment or distribution in respect of the Junior Liabilities. In order to implement the foregoing: (x) all payments and distributions of any kind or character in respect of the Junior Liabilities to which the Originator would be entitled except for this subsection 7(b) shall be made directly to the Senior Agent (for the benefit of the Senior Interest Holders); and (y) the Originator hereby irrevocably agrees that the Senior Agent, in the name of the Originator or otherwise, may demand, sue for, collect, receive and receipt for any and all such payments or distributions, and file, prove and vote or consent in any such proceeding with respect to any and all claims of the Originator relating to the Junior Liabilities, in each case until the Senior Interests shall have been paid and performed in full and in cash. (c) In the event that the Originator receives any payment or other distribution of any kind or character from the Initial Purchaser or from any other source whatsoever, in respect of the Junior Liabilities, other than as expressly permitted by the terms of this Note, such payment or other distribution shall be received in trust for the Senior Interest Holders and shall be turned over by the Originator to the Senior Agent (for the benefit of the Senior Interest Holders) forthwith until the Senior Interests have been paid in full. All payments and distributions received by the Senior Agent in respect of this Note, to the extent received in or converted into cash, may be applied by the Senior Agent (for the benefit of the Senior Interest Holders) first to the payment of any and all reasonable expenses (including, without limitation, reasonable attorneys' B-3 44 fees and other legal expenses) paid or incurred by the Senior Agent or the Senior Interest Holders in enforcing these Subordination Provisions, or in endeavoring to collect or realize upon the Junior Liabilities, and any balance thereof shall, solely as between the Originator and the Senior Interest Holders, be applied by the Senior Agent toward the payment of the Senior Interests in a manner determined by the Senior Agent to be in accordance with the Receivables Purchase Agreement; but as between the Initial Purchaser and its creditors, no such payments or distributions of any kind or character shall be deemed to be payments or distributions in respect of the Senior Interests. (d) Upon the final payment in full and in cash of all Senior Interests, the Originator shall be subrogated to the rights of the Senior Interest Holders to receive payments or distributions from the Initial Purchaser that are applicable to the Senior Interests until the Junior Liabilities are paid in full. (e) These Subordination Provisions are intended solely for the purpose of defining the relative rights of the Originator, on the one hand, and the Senior Interest Holders, on the other hand. Nothing contained in the Subordination Provisions or elsewhere in this Note is intended to or shall impair, as between the Initial Purchaser, its creditors (other than the Senior Interest Holders) and the Originator, the Initial Purchaser's obligation, which is unconditional and absolute, to pay the Junior Liabilities as and when the same shall become due and payable in accordance with the terms hereof and of the Purchase and Sale Agreement or to affect the relative rights of the Originator and creditors of the Initial Purchaser (other than the Senior Interest Holders). (f) The Originator shall not, until the Senior Interests have been finally paid and performed in full and in cash, (i) cancel, waive, forgive, transfer or assign, or commence legal proceedings to enforce or collect, or subordinate to any obligation of the Initial Purchaser, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, or now or hereafter existing, or due or to become due, other than the Senior Interests, the Junior Liabilities, or any rights in respect thereof or (ii) convert the Junior Liabilities into an equity interest in the Initial Purchaser, unless, in the case of each of clauses (i) and (ii) above, the Originator shall have B-4 45 received the prior written consent of the Administrator in each case. (g) The Originator shall not, without the advance written consent of the Administrator, commence, or join with any other Person in commencing, any proceedings related to an Event of Bankruptcy with respect to the Initial Purchaser until at least one year and one day shall have passed since the Senior Interests shall have been finally paid and performed in full and in cash. (h) If, at any time, any payment (in whole or in part) made with respect to any Senior Interest is rescinded or must be restored or returned by a Senior Interest Holder (whether in connection with any Event of Bankruptcy or otherwise), these Subordination Provisions shall continue to be effective or shall be reinstated, as the case may be, as though such payment had not been made. (i) Each of the Senior Interest Holders may, from time to time, at its sole discretion, without notice to the Originator, and without waiving any of its rights under these Subordination Provisions, take any or all of the following actions: (i) retain or obtain an interest in any property to secure any of the Senior Interests; (ii) retain or obtain the primary or secondary obligations of any other obligor or obligors with respect to any of the Senior Interests; (iii) extend or renew for one or more periods (whether or not longer than the original period), alter or exchange any of the Senior Interests, or release or compromise any obligation of any nature with respect to any of the Senior Interests; (iv) amend, supplement, or otherwise modify any Transaction Document; and (v) release its security interest in, or surrender, release or permit any substitution or exchange for all or any part of any rights or property securing any of the Senior Interests, or extend or renew for one or more periods (whether or not longer than the original period), or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such rights or property. (j) The Originator hereby waives: (i) notice of acceptance of these Subordination Provisions by any of the Senior Interest Holders; (ii) notice of the existence, creation, non-payment or non-performance of all or any of the Senior Interests; and (iii) all diligence in enforcement, collection or protection of, B-5 46 or realization upon the Senior Interests, or any thereof, or any security therefor. (k) These Subordination Provisions constitute a continuing offer from the Initial Purchaser to all Persons who become the holders of, or who continue to hold, Senior Interests; and these Subordination Provisions are made for the benefit of the Senior Interest Holders, and the Administrator may proceed to enforce such provisions on behalf of each of such Persons. 8. Amendments, Etc. No failure or delay on the part of the Originator in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No amendment, modification or waiver of, or consent with respect to, any provision of this Note shall in any event be effective unless (a) the same shall be in writing and signed and delivered by the Initial Purchaser and the Originator, and (b) all consents required for such actions under the Transaction Documents shall have been received by the appropriate Persons. 9. Limitation on Interest. Notwithstanding anything in this Note to the contrary, the Initial Purchaser shall never be required to pay unearned interest on any amount outstanding hereunder, and shall never be required to pay interest on the principal amount outstanding hereunder, at a rate in excess of the maximum interest rate that may be contracted for, charged or received without violating applicable federal or state law. 10. No Negotiation. This Note is not negotiable. 11. GOVERNING LAW. THIS NOTE SHALL GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF). 12. Captions. Paragraph captions used in this Note are provided solely for convenience of reference only and shall not affect the meaning or interpretation of any provision of this Note. B-6 47 IN WITNESS WHEREOF, the undersigned has caused this Note to be executed by its officer thereunto duly authorized on the date first above written. D&K RECEIVABLES CORPORATION By:_______________________________ Title:____________________________ B-7 48 EXHIBIT C FORM OF ORIGINATOR NOTE DEMAND NOTE August 7, 1998 The undersigned, [NAME OF ORIGINATOR], a ____________________________ ________________corporation (the "Originator"), for value received, promises to pay to the order of D&K RECEIVABLES CORPORATION, a Delaware corporation (the "Initial Purchaser"), ON DEMAND, the aggregate unpaid principal amount of all loans made by the Initial Purchaser to the Originator (the "Originator Loans") together with accrued interest on such amounts from time to time outstanding hereunder at the rate provided below. Such amounts as shown in the records of the Servicer (as such term is defined in the Purchase and Sale Agreement referred to below) will be rebuttable presumptive evidence of the principal amount owing under this Demand Note. The unpaid principal amount of each Originator Loan from time to time outstanding shall bear interest (which also shall be payable ON DEMAND) from (and including) the date on which such Originator Loan was made to (but excluding) the date on which such Originator Loan is paid in full (a) prior to the final payment in full and in cash of the Senior Interests (as such term is defined in the Initial Purchaser Note), at a variable rate per annum equal to the Earned Discount Rate Percentage, determined as of the then most recent Payment Date, and (b) after such final payment, at a variable rate per annum equal to the Alternative Base Rate, as determined by the Servicer. Interest hereunder shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. This Demand Note is an Originator Note described in, and is subject to the terms and conditions set forth in, that certain Purchase and Sale Agreement, dated as of August 7, 1998 (as the same may at any time be amended, supplemented, or otherwise modified from time to time in accordance with its terms, the "Purchase and Sale Agreement"), between the Initial Purchaser and the Originator. Reference is hereby made to the Purchase and Sale Agreement for a statement of certain other rights and obligations of the Initial Purchaser. All capitalized terms used but not otherwise defined herein have the meanings assigned thereto in the Purchase and Sale Agreement. C-1 49 All payments of principal and interest hereunder are to be made in lawful money of the United States of America in same day funds to the account designated from time to time by the Servicer to the Initial Purchaser. In addition to and not in limitation of the foregoing, the Originator further agrees, subject to any limitation imposed by applicable law, to pay all expenses, including without limitation reasonable attorney fees, incurred by the holder of this Demand Note in seeking to collect any amounts payable hereunder which are not paid when due. No failure or delay on the part of the Initial Purchaser or any other holder of this Demand Note in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Originator shall entitle it to any notice or demand in similar or other circumstances. No amendment, modification or waiver of, or consent with respect to, any provision of this Demand Note shall in any event be effective unless (i) the same shall be in writing and signed and delivered by the holder hereof and (ii) all consents required for such action under the Transaction Documents shall have been given by the appropriate Persons. Upon the occurrence of any Event of Bankruptcy with respect to the Originator, the principal balance hereof and all interest accrued hereon shall be immediately due and payable, without demand, presentment, protest or notice of dishonor. Notwithstanding anything in this Demand Note to the contrary, the Originator shall never be required to pay unearned interest on any amount outstanding hereunder, and shall never be required to pay interest on the principal amount outstanding hereunder, at a rate in excess of the maximum nonusurious interest rate that may be contracted for, charged or received under applicable federal or state law. THIS DEMAND NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF). [NAME OF ORIGINATOR] By:_______________________________ Title:____________________________ C-2 50 PAY TO THE ORDER OF Fleet National Bank, as Administrator, pursuant to that certain Receivables Purchase Agreement dated as of August 7, 1998, as the same may be further amended, supplemented, or otherwise modified from time to time. D&K RECEIVABLES CORPORATION By:________________________________ Title:_____________________________ C-3 EX-10.27 6 EXHIBIT 10.27 1 EXHIBIT 10.27 ================================================================================ RECEIVABLES PURCHASE AGREEMENT Dated as of August 7, 1998 Among D&K RECEIVABLES CORPORATION as Seller and D&K HEALTHCARE RESOURCES, INC. as initial Servicer and BLUE KEEL FUNDING, LLC as Purchaser and FLEET NATIONAL BANK as Administrator ================================================================================ 2 TABLE OF CONTENTS
Page ARTICLE I PURCHASES AND REINVESTMENTS SECTION 1.01. Commitment to Purchase; Limits on Purchaser's Obligations..............................................................2 SECTION 1.02. Purchase Procedures; Assignment of Purchaser's Interests................................................................2 SECTION 1.03. Reinvestments of Certain Collections; Payment of Remaining Collections.....................................................2 SECTION 1.04. Asset Interest.......................................................................4 SECTION 1.05. Voluntary Termination of Purchase and Reinvestment Obligations or Reduction of Purchase Limit.......................................................................5 ARTICLE II COMPUTATIONAL RULES SECTION 2.01. Computation of Capital...............................................................5 SECTION 2.02. Computation of Concentration Limit...................................................5 SECTION 2.03. Computation of Earned Discount.......................................................5 SECTION 2.04. Estimates of Earned Discount Rate, Fees, Etc............................................................................6 ARTICLE III SETTLEMENTS SECTION 3.01. Settlement Procedures................................................................6 SECTION 3.02. Deemed Collections; Reduction of Capital, Etc.........................................................................9 SECTION 3.03. Payments and Computations, Etc......................................................10 ARTICLE IV FEES AND YIELD PROTECTION SECTION 4.01. Fees................................................................................11 SECTION 4.02. Yield Protection....................................................................11 SECTION 4.03. Funding Losses......................................................................13 ARTICLE V
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CONDITIONS TO PURCHASES SECTION 5.01. Conditions Precedent to Initial Purchase............................................13 SECTION 5.02. Conditions Precedent to All Purchases and Reinvestments...................................................................15 ARTICLE VI REPRESENTATIONS AND WARRANTIES SECTION 6.01. Representations and Warranties of Seller............................................16 SECTION 6.02. Representations and Warranties of Parent............................................20 ARTICLE VII GENERAL COVENANTS SECTION 7.01. Affirmative Covenants...............................................................22 SECTION 7.02. Reporting Requirements..............................................................25 SECTION 7.03. Negative Covenants..................................................................27 SECTION 7.04. Separate Existence..................................................................29 ARTICLE VIII ADMINISTRATION AND COLLECTION SECTION 8.01. Designation of Servicer.............................................................31 SECTION 8.02. Duties of Servicer..................................................................33 SECTION 8.03. Rights of the Administrator.........................................................34 SECTION 8.04. Responsibilities of Seller..........................................................35 SECTION 8.05. Further Action Evidencing Purchases and Reinvestments.......................................................................36 SECTION 8.06. Application of Collections..........................................................37 ARTICLE IX SECURITY INTEREST SECTION 9.01. Grant of Security Interest..........................................................37 SECTION 9.02. Further Assurances..................................................................37 SECTION 9.03. Remedies............................................................................37 ARTICLE X LIQUIDATION EVENTS SECTION 10.01. Liquidation Events..................................................................38 SECTION 10.02. Remedies............................................................................40
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ARTICLE XI THE ADMINISTRATOR SECTION 11.01. Authorization and Action............................................................40 SECTION 11.02. Administrator's Reliance, Etc.......................................................40 SECTION 11.03. Fleet and Affiliates................................................................41 ARTICLE XII ASSIGNMENT OF PURCHASER'S INTEREST SECTION 12.01. Restrictions on Assignments.........................................................41 SECTION 12.02. Rights of Assignee..................................................................42 ARTICLE XIII INDEMNIFICATION SECTION 13.01. Indemnities.........................................................................42 ARTICLE XIV MISCELLANEOUS SECTION 14.01. Amendments, Etc.....................................................................45 SECTION 14.02. Notices, Etc........................................................................45 SECTION 14.03. No Waiver; Remedies.................................................................45 SECTION 14.04. Binding Effect; Survival............................................................46 SECTION 14.05. Costs, Expenses and Taxes...........................................................46 SECTION 14.06. No Proceedings......................................................................47 SECTION 14.07. Confidentiality of Program Information..............................................47 SECTION 14.08. Confidentiality of Parent Information...............................................48 SECTION 14.09. Captions and Cross References.......................................................50 SECTION 14.10. Integration.........................................................................50 SECTION 14.11. Governing Law.......................................................................50 SECTION 14.12. Waiver Of Jury Trial................................................................50 SECTION 14.13. Consent To Jurisdiction; Waiver Of Immunities..........................................................................51 SECTION 14.14. Execution in Counterparts...........................................................51 SECTION 14.15. No Recourse Against Other Parties...................................................51
-iii- 5 APPENDICES APPENDIX A Definitions SCHEDULES SCHEDULE 6.01(m) List of Offices of Seller where Records Are Kept SCHEDULE 6.01(n) List of Lock-Box Banks SCHEDULE 7.01(e) Forms of Contracts SCHEDULE 7.01(g) Description of Credit and Collection Policy SCHEDULE 14.02 Notice Addresses EXHIBITS EXHIBIT 1.02(a) Form of Purchase Notice EXHIBIT 3.01(a)-1 Form of Servicer Report EXHIBIT 3.01(a)-2 Form of Daily Report EXHIBIT 5.01 Form of Lock-Box Agreement -iv- 6 RECEIVABLES PURCHASE AGREEMENT Dated as of August 7, 1998 THIS IS A RECEIVABLES PURCHASE AGREEMENT, among D&K RECEIVABLES CORPORATION, a Delaware corporation ("Seller"), D&K HEALTHCARE RESOURCES, INC., a Delaware corporation ("Parent"), as initial Servicer, BLUE KEEL FUNDING, LLC, a Delaware limited liability company ("Purchaser"), and FLEET NATIONAL BANK, a national banking association ("Fleet"), as administrator for Purchaser (in such capacity, the "Administrator"). Unless otherwise indicated, capitalized terms used in this Agreement are defined in Appendix A. Background 1. The Originators are engaged in the business of distribution and sale of pharmaceuticals and related products. 2. Seller is a single purpose corporation formed for the purpose of purchasing, and accepting contributions of, Receivables generated by the Originators in the ordinary course of its business. 3. Seller has, and expects to have, Pool Receivables in which Seller intends to sell an undivided interest. Seller has requested Purchaser, and Purchaser shall, subject to the terms and conditions contained in this Agreement, fund the purchase of such undivided interest, referred to herein as the Asset Interest, from Seller from time to time during the term of this Agreement. 4. Seller and Purchaser also desire that, subject to the terms and conditions of this Agreement, certain of the daily Collections in respect of the Asset Interest be reinvested in Pool Receivables, which reinvestment shall constitute part of the Asset Interest. 5. Parent has been requested, and is willing, to act as initial Servicer. 6. Fleet has been requested, and is willing, to act as the Administrator. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: 7 ARTICLE I PURCHASES AND REINVESTMENTS SECTION 1.01. Commitment to Purchase; Limits on Purchaser's Obligations. Upon the terms and subject to the conditions of this Agreement, from time to time prior to the Termination Date, Seller may request that Administrator, for the benefit of Purchaser, purchase from Seller an undivided ownership interest in the Pool Assets (each being a "Purchase") and Purchaser may, in its sole discretion, fund such Purchase; provided that no Purchase shall be funded by Purchaser if, after giving effect thereto, either (a) the then Capital would exceed an amount equal to $45,000,000 (the "Purchase Limit"), as such amount may be decreased from time to time as provided in Section 1.05, or (b) the Asset Interest would exceed 100% (the "Allocation Limit"); and provided further that each Purchase made pursuant to this Section 1.01 shall have a purchase price of at least $1,000,000. SECTION 1.02. Purchase Procedures; Assignment of Interests. (a) Notice of Purchase. Each Purchase from Seller shall be made on notice from Seller to the Administrator received by the Administrator not later than 11:00 a.m. (Boston, Massachusetts time) on the second Business Day next preceding the date of such proposed Purchase. Each such notice of a proposed Purchase shall be substantially in the form of Exhibit 1.02(a) (each a "Purchase Notice"), and shall specify the desired amount and date of such Purchase, which shall be a Settlement Date; provided, however, that Seller may give one additional Purchase Notice each calendar month, specifying the desired amount, which shall not exceed $10,000,000, and date of such Purchase, which shall be a Business Day occurring on or before the 20th day of such calendar month, but which need not be a Settlement Date, which Purchase Notice shall be given at least three Business Days prior to the date of the proposed Purchase. (b) Funding of Purchase. On the date of each Purchase, if Purchaser has elected to fund such Purchase, Purchaser shall, upon satisfaction of the applicable conditions set forth in Article V, make available to the Administrator at the Administrator's Office the amount of its Purchase in immediately available funds, and after receipt by the Administrator of such funds, the Administrator will make such funds immediately available to Seller at such office. (c) Assignment of Asset Interest. Seller hereby sells, and transfers to Administrator, for the benefit of Purchaser, the Asset Interest. -2- 8 SECTION 1.03. Reinvestments of Certain Collections; Payment of Remaining Collections. (a) On the close of business on each day during the period from the date hereof to the Termination Date, Servicer will, out of all Collections received on such day: (i) determine the portion of Collections attributable on any day to the Asset Interest by multiplying (x) the amount of all Collections times (y) the Asset Interest; (ii) out of the portion of Collections allocated to the Asset Interest pursuant to clause (i), set aside and hold in trust for Purchaser an amount equal to the sum of the estimated amount of Earned Discount accrued in respect of the Capital (based on rate information provided by the Administrator pursuant to Section 2.04), the accrued Fees, all other amounts due to Purchaser, the Administrator, the Affected Parties or the Indemnified Parties hereunder (other than the Capital) and the Purchaser's Share of the Servicer's Fee (in each case, accrued through such day) and not so previously set aside; provided that unless the Administrator shall request it to do so in writing, Servicer shall not be required to hold Collections that have been set-aside in a separate deposit account containing only such Collections; (iii) apply the Collections allocated to the Asset Interest pursuant to clause (i) and not set aside pursuant to clause (ii) to the purchase from Seller of ownership interests in Pool Assets (each such purchase being a "Reinvestment"); provided that (A) if the Excess Amount exceeds zero, then Servicer shall not reinvest, but shall set aside and hold for the benefit of Purchaser, a portion of such Collections which, together with other Collections previously set aside and then so held, shall equal the Excess Amount; and (B) if the conditions precedent to Reinvestment in Section 5.02 are not satisfied, then Servicer shall not reinvest any of such Collections; (iv) pay to Seller (A) the portion of Collections not allocated to the Asset Interest pursuant to clause (i), less the Seller's Share of the Servicer's Fee, and (B) the Collections applied to Reinvestment pursuant to clause (iii); and (v) out of the portion of Collections not allocated to the Asset Interest pursuant to clause (i), pay to the Servicer the Seller's Share of the Servicer's Fee accrued through such day. (b) Unreinvested Collections. Servicer shall set aside and hold in trust for the benefit of Purchaser all Collections which -3- 9 pursuant to clause (iii) of Section 1.03(a) may not be reinvested in Pool Assets; provided that unless the Administrator shall request it to do so in writing, Servicer shall not be required to hold Collections that have been set-aside in a separate deposit account containing only such Collections. If, prior to the date when such Collections are required to be paid to the Administrator pursuant to Section 3.01, the amount of Collections set aside pursuant to clause (iii) of Section 1.03(a) exceeds the Excess Amount, if any, and the conditions precedent to Reinvestment set forth in Section 5.02 are satisfied, then the Servicer shall apply such Collections (or, if less, a portion of such Collections equal to the amount of such excess) to the making of a Reinvestment. SECTION 1.04. Asset Interest. (a) Components of Asset Interest. On any date the Asset Interest will represent Administrator's (for the benefit of Purchaser) combined undivided percentage ownership interest in (i) all then outstanding Pool Receivables, (ii) all Related Security with respect to such Pool Receivables, (iii) all of Seller's right and claims under the Purchase Agreement, (iv) all Collections with respect to, and other proceeds of, the foregoing as at such date, (v) all lock-boxes and lock-box or collection accounts into which Collections of Pool Receivables are or may be deposited, and all investments therein, and (vi) all books and records (including computer disks, tapes and software) evidencing or relating to any of the foregoing, in each case, whether now owned by Seller or hereafter acquired or arising, and wherever located (all of the foregoing, collectively referred to as "Pool Assets"). (b) Computation of Asset Interest. On any date, the Asset Interest will be equal to a percentage, expressed as the following fraction: C + RR ------ NPB where: C = the then Capital. RR = the then Required Reserves. NPB = the then Net Pool Balance; provided, however, that from and after the Termination Date, the Asset Interest will be 100% (c) Frequency of Computation. The Asset Interest shall be computed as of the Cut-Off Date for each Settlement Period. In addition, the Administrator may require Servicer to provide a Servicer Report for purposes of computing the Asset Interest as -4- 10 of any other date, and the Servicer agrees to do so within two Business Days of its receipt of the Administrator's request. SECTION 1.05. Voluntary Termination of Purchase and Reinvestment Obligations or Reduction of Purchase Limit. Seller may, upon at least 60 days' prior written notice to the Administrator, either (a) terminate Purchaser's commitment to fund Purchases and Reinvestments hereunder, or (b) reduce the Purchase Limit to an amount not less than $25,000,000; provided, however, that (i) each partial reduction of the Purchase Limit shall be in an amount equal to $1,000,000 or an integral multiple thereof, and (ii) after giving effect to such reduction, the Capital will not exceed the Purchase Limit as so reduced. The Purchase Limit may be increased upon the request of Seller and the written consent of the Administrator and Purchaser thereto, which consent may be granted or withheld in their sole discretion and may be subject to such conditions as they may require. ARTICLE II COMPUTATIONAL RULES SECTION 2.01. Computation of Capital. In making any determination of Capital, the following rules shall apply: (a) Capital shall not be considered reduced by any allocation, setting aside or distribution of any portion of Collections unless such Collections shall have been actually delivered to the Administrator pursuant hereto for application to the Capital; and (b) Capital shall not be considered reduced by any distribution of any portion of Collections if at any time such distribution is rescinded or must otherwise be returned for any reason. SECTION 2.02. Computation of Concentration Limit. In the case of any Obligor that is an Affiliate of any other Obligor, the Concentration Limit and the aggregate Unpaid Balance of Pool Receivables of such Obligors shall be calculated as if such Obligors were one Obligor. SECTION 2.03. Computation of Earned Discount. In making any determination of Earned Discount, the following rules shall apply: (a) no provision of this Agreement shall require the payment or permit the collection of Earned Discount in excess of the maximum permitted by Applicable Law; and -5- 11 (b) Earned Discount for any period shall not be considered paid by any distribution if at any time such distribution is rescinded or must otherwise be returned for any reason. SECTION 2.04. Estimates of Earned Discount Rate, Fees, Etc. For purposes of determining the amounts required to be set aside by Servicer pursuant to Section 1.03, the Administrator shall notify Servicer from time to time of the Earned Discount Rate applicable to the Capital and the rates at which fees and other amounts are accruing hereunder. It is understood and agreed that (i) the Earned Discount Rate may change from time to time, (ii) certain rate information provided by the Administrator to Servicer shall be based upon the Administrator's good faith estimate, (iii) the amount of Earned Discount actually accrued with respect to the Capital during any Settlement Period may exceed, or be less than, the amount set aside with respect thereto by Servicer, and (iv) the amount of fees or other payables accrued hereunder with respect to any Settlement Period may exceed, or be less than, the amount set aside with respect thereto by Servicer. Failure to set aside any amount so accrued shall not relieve Servicer of its obligation to remit Collections to the Administrator with respect to such accrued amount, as and to the extent provided in Section 3.01. ARTICLE III SETTLEMENTS SECTION 3.01. Settlement Procedures. The parties hereto will take the following actions with respect to each Settlement Period: (a) Servicer Report. On or before the ninth calendar day (or if such day is not a Business Day, the next Business Day) after each Cut-Off Date (each, a "Reporting Date"), Servicer shall deliver to the Administrator a report containing the information described in Exhibit 3.01(a)-1 (each, a "Servicer Report"). On or before 12:00 noon (Boston, Massachusetts time) on each Business Day, Servicer shall deliver to the Administrator a report containing the information described in Exhibit 3.01(a)-2 (each, a "Daily Report"). (b) Earned Discount; Other Amounts Due. Two Business Days prior to each Reporting Date, the Administrator shall notify Servicer of (i) the amount of Earned Discount that will have accrued in respect of the Capital as of the next Settlement Date and (ii) all Fees and other amounts that -6- 12 will have accrued and be payable by Seller under this Agreement on the next Settlement Date (other than Capital). (c) Settlement Date Procedure - Reinvestment Period. On the second Business Day after each Reporting Date (each, a "Settlement Date") prior to the Termination Date, the Servicer shall distribute from Collections set aside pursuant to Sections 1.03(a)(i) through (iii) during the immediately preceding Settlement Period the following amounts in the following order: (1) to the Administrator, an amount equal to the Earned Discount accrued during such Settlement Period, plus any previously accrued Earned Discount not paid on a prior Settlement Date, which amount shall be distributed by the Administrator to the Purchaser for application to such Earned Discount; (2) to the Administrator, an amount equal to the Program Fee and Commitment Fee accrued during such Settlement Period, plus any previously accrued amounts described in this clause (2) not paid on a prior Settlement Date; (3) to the Servicer, if the Servicer is not Parent, an amount equal to the Purchaser's Share of the Servicer's Fee accrued during such Settlement Period, plus any previously accrued Purchaser's Share of the Servicer's Fee not paid on a prior Settlement Date; (4) to the Administrator, all other amounts (other than Capital) then due under this Agreement to the Administrator, the Purchaser, the Affected Parties or the Indemnified Parties; (5) to the Administrator, an amount equal to the Excess Amount, if any, which amount shall be distributed by the Administrator to the Purchaser for application to the Capital; (6) to the Servicer, if the Servicer is Parent, an amount equal to the Purchaser's Share of the Servicer's Fee accrued during such Settlement Period, plus any previously accrued Purchaser's Share of the Servicer's Fee not paid on a prior Settlement Day; and (7) to the Seller, any remaining amounts. (d) Settlement Date Procedure - Liquidation Period. On each Settlement Date during the Liquidation Period, the Servicer shall distribute from Purchaser's Share of Collections received -7- 13 or deemed received pursuant to Section 3.02 during the immediately preceding Settlement Period the following amounts in the following order: (1) to the Administrator, an amount equal to the Earned Discount accrued during such Settlement Period, plus any previously accrued Earned Discount not paid on a prior Settlement Date, which amount shall be distributed by the Administrator to the Purchaser for application to such Earned Discount; (2) to the Administrator, an amount equal to the Program Fee and Commitment Fee accrued during such Settlement Period, plus any previously accrued Program Fee and Commitment Fee not paid on a prior Settlement Date; (3) to the Servicer, if the Servicer is not Parent, an amount equal to the Purchaser's Share of the Servicer's Fee accrued during such preceding Settlement Period, plus any previously accrued Purchaser's Share of the Servicer's Fee not paid on a prior Settlement Date; (4) to the Administrator, an amount equal to the remaining Purchaser's Share of Collections until the Capital is reduced to zero, which amount shall be distributed by the Administrator to the Purchaser for application to the Capital; (5) to the Administrator, all other amounts (other than Capital) then due under this Agreement to the Administrator, the Purchaser, the Affected Parties or the Indemnified Parties; (6) to the Servicer, if the Servicer is Parent, an amount equal to the Purchaser's Share of the Servicer's Fee accrued during such Settlement Period, plus any previously accrued Purchaser's Share of the Servicer's Fee not paid on a prior Settlement Date; and (7) to the Seller, any remaining amounts. (e) Delayed Payment. If on any day described in this Section 3.01, because Collections during the relevant Settlement Period were less than the aggregate amounts payable, Servicer does not make any payment otherwise required, the next available Collections in respect of the Asset Interest shall be applied to such payment, and no -8- 14 Reinvestment shall be permitted hereunder until such amount payable has been paid in full. SECTION 3.02. Deemed Collections; Reduction of Capital, Etc. (a) Deemed Collections. If on any day (i) a Dilution occurs or the Unpaid Balance of any Pool Receivable is less than the amount included in calculating the Net Pool Balance for purposes of any Servicer Report for any other reason, or (ii) any of the representations or warranties of Seller set forth in Section 6.01(k) or (o) with respect to any Pool Receivable were not true when made with respect to any Pool Receivable, or any of the representations or warranties of Seller set forth in Section 6.01(k) are no longer true with respect to any Pool Receivable, or (iii) without duplication, Seller receives a Deemed Collection pursuant to the Purchase Agreement, then, on such day, Seller shall be deemed to have received a Collection of such Pool Receivable (I) in the case of clause (i) above, in the amount of such Dilution or the difference between the actual Unpaid Balance and the amount included in calculating such Net Pool Balance, as applicable; and (II) in the case of clause (ii) above, in the amount of the Unpaid Balance of such Pool Receivable; and (III) in the case of clause (iii) above, in the amount of such Deemed Collection. (b) Seller's Optional Reduction of Capital. Seller may at any time elect to reduce the Capital as follows: (i) Seller shall give the Administrator at least five (5) Business Days' prior written notice of such reduction (including the amount of such proposed reduction and the proposed date on which such reduction will commence), (ii) on the proposed date of commencement of such reduction and on each day thereafter, Servicer shall refrain from reinvesting Collections pursuant to Section 1.03 until the amount thereof not so reinvested shall equal the desired amount of reduction, and -9- 15 (iii) Servicer shall hold such Collections in trust for Purchaser, pending payment to the Administrator on the next Settlement Date, as provided in Section 1.03; provided that, (A) the amount of any such reduction shall be not less than $1,000,000, and the Capital after giving effect to such reduction shall be not less than $25,000,000 (unless Capital shall thereby be reduced to zero), and (B) Seller shall use reasonable efforts to attempt to choose a reduction amount, and the date of commencement thereof, so that such reduction shall commence and conclude in the same Settlement Period. SECTION 3.03. Payments and Computations, Etc. (a) Payments. All amounts to be paid or deposited by Seller or Servicer to the Administrator or any other Person (other than to Seller, Parent or Servicer) hereunder (other than amounts payable under Section 4.02) shall be paid or deposited in accordance with the terms hereof no later than 10:00 a.m. (Boston, Massachusetts time) on the day when due in lawful money of the United States of America in immediately available funds to the Administrator at ABA# 011 000 138, account # 940 518 9033; attention: Blue Keel. (b) Late Payments. Seller or Servicer, as applicable, shall, to the extent permitted by law, pay to Purchaser or the Administrator, as the case may be, interest on all amounts not paid or deposited when such amount is due hereunder at 2% per annum above the Alternate Base Rate, payable on demand, provided, however, that such interest rate shall not at any time exceed the maximum rate permitted by Applicable Law. (c) Method of Computation. All computations of interest, Earned Discount and any fees payable hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) elapsed. -10- 16 ARTICLE IV FEES AND YIELD PROTECTION SECTION 4.01. Fees. Seller shall pay to the Administrator and Purchaser the fees in the amounts and at the times set forth in the fee letter, dated as of the date hereof, between the Administrator and Seller (as amended or supplemented from time to time, the "Fee Letter"). SECTION 4.02. Yield Protection. (a) If (i) Regulation D or (ii) any Regulatory Change occurring after the date hereof (A) shall subject an Affected Party to any tax, duty or other charge with respect to any Asset Interest owned by or funded by it, or any obligations or right to make Purchases or Reinvestments or to provide funding therefor, or shall change the basis of taxation of payments to the Affected Party of any Capital or Earned Discount owned by, owed to or funded in whole or in part by it or any other amounts due under this Agreement in respect of the Asset Interest owned by or funded by it or its obligations or rights, if any, to make Purchases or Reinvestments or to provide funding therefor (except for franchise taxes or changes in the rate of tax on the overall net income of such Affected Party imposed by the United States of America, by the jurisdiction in which such Affected Party's principal executive office is located and, if such Affected Party's principal executive office is not in the United States of America, by the jurisdiction where such Affected Party's principal office in the United States is located); or (B) shall impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed by the Federal Reserve Board, special deposit, compulsory loan or similar requirement against assets of any Affected Party, deposits or obligations with or for the account of any Affected Party or with or for the account of any affiliate (or entity deemed by the Federal Reserve Board to be an affiliate) of any Affected Party, or credit extended by any Affected Party, but excluding any reserve, special deposit or similar requirement included in the determination of Earned Discount; or (C) shall change the amount of capital maintained or required or requested or directed to be maintained by any Affected Party; or -11- 17 (D) shall impose any other condition affecting any Asset Interest owned or funded in whole or in part by any Affected Party, or its obligations or rights, if any, to make Purchases or Reinvestments or to provide funding therefor; or (E) shall change the rate for, or the manner in which the Federal Deposit Insurance Corporation (or a successor thereto) assesses, deposit insurance premiums or similar charges; and the result of any of the foregoing is (x) to increase the cost to or to impose a cost on an Affected Party funding or making or maintaining any Purchases or Reinvestments, any purchases, reinvestments, or loans or other extensions of credit under any Program Agreement, or any commitment of such Affected Party with respect to any of the foregoing, (y) to reduce the amount of any sum received or receivable by an Affected Party under this Agreement, or under any Program Agreement with respect thereto, or (z) to reduce the rate of return on the capital of an Affected Party as a consequence of its obligations hereunder or under any Program Agreement or arising in connection herewith to a level below that which such Affected Party could otherwise have achieved, then within thirty days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis for, calculation of, and amount of such additional costs or reduced amount receivable; provided, however, that no Affected Party shall be required to disclose any confidential or tax planning information in any such statement), Seller shall pay directly to such Affected Party such additional amount or amounts as will compensate such Affected Party for such additional or increased cost or such reduction, but without duplication of any other similar additional amounts due under any other Program Agreement. (b) Each Affected Party will notify Seller and the Administrator within one year of the occurrence of any event of which it has knowledge which will entitle such Affected Party to compensation pursuant to this Section 4.02. (c) In determining any amount provided for or referred to in this Section 4.02, an Affected Party may use any reasonable averaging and attribution methods that it shall deem applicable. Any Affected Party when making a claim under this Section 4.02 -12- 18 shall submit to Seller a statement as to such increased cost or reduced return (including a calculation thereof in reasonable detail), which statement shall, in the absence of demonstrable error, be conclusive and binding upon Seller. SECTION 4.03. Funding Losses. In the event that any Affected Party shall incur any loss or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Affected Party to make or maintain any funding with respect to the Asset Interest) as a result of (i) any settlement with respect to any portion of Capital funded by such Affected Party being made on any day other than the scheduled last day of an applicable Settlement Period with respect thereto, or (ii) any Purchase not being made in accordance with a request therefor under Section 1.02, then, within thirty days of written notice from the Administrator to Seller, Seller shall pay to the Administrator for the account of such Affected Party, the amount of such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of demonstrable error, be conclusive and binding upon the Seller. ARTICLE V CONDITIONS TO PURCHASES SECTION 5.01. Conditions Precedent to Initial Purchase. The initial Purchase hereunder is subject to the condition precedent that the Administrator shall have received, on or before the date of such Purchase, the following, each (unless otherwise indicated) dated such date and in form and substance satisfactory to the Administrator: (a) Good standing certificates for each of Parent and Seller issued by the Secretaries of State of the jurisdiction of its incorporation and its principal place of business; (b) A certificate of the Secretary of each of Seller and Parent certifying (i) a copy of the resolutions of its Board of Directors approving this Agreement and the other Transaction Documents to be delivered by it hereunder and the transactions contemplated hereby; (ii) the names and true signatures of the officers authorized on its behalf to sign this Agreement and the other Transaction Documents to be delivered by it hereunder (on which certificate the Administrator and Purchaser may conclusively rely until such time as the Administrator shall receive from Seller or Parent, as the case may be, a revised certificate meeting the requirements of this subsection (b)); (iii) a copy of -13- 19 its by-laws; and (iv) all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the other Transaction Documents; (c) The Certificate of Incorporation or Articles of Incorporation, as applicable, of each of Seller and Parent, duly certified by the Secretary of State of the jurisdiction of its incorporation, as of a recent date acceptable to Administrator; (d) Acknowledgment copies, or time stamped receipt copies, of proper financing statements (Form UCC-1), filed on or prior to the date of the initial Purchase, naming (i) Parent as the debtor and seller of Receivables, Seller as the secured party and purchaser and Administrator, for the benefit of Purchaser, as the assignee and (ii) Seller as the debtor and seller of Receivables or an undivided interest therein and Administrator, for the benefit of Purchaser, as the secured party and purchaser, or other, similar instruments or documents, as may be necessary or, in the opinion of the Administrator, desirable under the UCC or any comparable law of all appropriate jurisdictions to perfect Seller's and Purchaser's interests in the Pool Assets; (e) A search report provided in writing to and approved by the Administrator listing all effective financing statements that name Parent as debtor or assignor and that are filed in the jurisdictions in which filings were made pursuant to subsection (d) above and in such other jurisdictions that Administrator shall reasonably request, together with copies of such financing statements (none of which shall cover any Pool Assets, unless executed termination statements and/or partial releases with respect thereto have been delivered to the Administrator), and tax and judgment lien search reports from a Person satisfactory to Servicer and the Administrator showing no evidence of such liens filed against Parent; (f) Duly executed copies of the Lock-Box Agreements with the Lock-Box Banks; (g) Favorable opinions of Armstrong, Teasdale, Schlafly & Davis, counsel to Parent and Seller, in substantially the forms of Exhibits 5.01(g)-1 and 5.01(g)-2, respectively; (h) Such powers of attorney as the Administrator shall reasonably request to enable the Administrator to collect all amounts due under any and all Pool Assets; -14- 20 (i) A pro forma Servicer Report, prepared in respect of the proposed initial Purchase, assuming a Cut-Off Date of July 31, 1998; (j) Satisfactory results of a review and audit, conducted by Fleet, of the Parent's collection, operating and reporting systems, Credit and Collection Policy, historical receivables data and accounts, including satisfactory results of a review of the Parent's operating location(s) and satisfactory review and approval of the Eligible Receivables in existence on the date of the initial Purchase; (k) Evidence of payment of the Seller by all accrued and unpaid fees (including those contemplated by the Fee Letter), costs and expenses to the extent then due and payable on the date thereof, together with attorneys' fees of the Administrator to the extent invoiced prior to or on such date, plus such additional amounts of attorneys' fees as shall constitute the Administrator's reasonable estimate of attorneys' fees incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Seller and the Administrator), including any such costs, fees and expenses arising under or referenced in Section 14.05; (l) The Liquidity Agreement, duly executed by Purchaser, the Liquidity Agent and each Liquidity Bank; (m) The Purchase Agreement, duly executed by Parent and Seller, and a copy of all documents required to be delivered thereunder; and (n) Such other documents, certificates or opinions as the Administrator may reasonably request. SECTION 5.02. Conditions Precedent to All Purchases and Reinvestments. Each Purchase (including the initial Purchase) and each Reinvestment hereunder, shall be subject to the further conditions precedent that: (a) in the case of each Purchase, the Servicer shall have delivered to the Administrator on or prior to such purchase, in form and substance satisfactory to the Administrator, a completed Servicer Report with respect to the immediately preceding calendar month, dated within two (2) Business Days prior to the date of such Purchase, together with such additional information as may be reasonably requested by the Administrator; -15- 21 (b) on the date of such Purchase or Reinvestment the following statements shall be true (and Seller by accepting the amount of such Purchase or by receiving the proceeds of such Reinvestment shall be deemed to have certified that): (i) the representations and warranties contained in Article VI are correct on and as of such day as though made on and as of such day and shall be deemed to have been made on such day (except that any such representation or warranty that is expressly stated as being made only as of a specified earlier date shall be true and correct in all material respects as of such earlier date), (ii) no event has occurred and is continuing, or would result from such Purchase or Reinvestment, that constitutes a Liquidation Event or Unmatured Liquidation Event, (iii) after giving effect to each proposed Purchase or Reinvestment, Capital will not exceed the Purchase Limit and the Asset Interest will not exceed the Allocation Limit, and (iv) the Termination Date shall not have occurred; (c) the Administrator shall have received such other approvals, opinions or documents as it may reasonably request; provided, however, the absence of the occurrence and continuance of an Unmatured Liquidation Event shall not be a condition precedent to any Reinvestment. ARTICLE VI REPRESENTATIONS AND WARRANTIES SECTION 6.01. Representations and Warranties of Seller. Seller represents and warrants as follows: (a) Organization and Good Standing. Seller has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and to conduct its business as such properties are presently owned and such business is presently conducted, and had at all relevant times, and now has, all necessary power, authority, and legal right to acquire and own the Pool Assets. -16- 22 (b) Due Qualification. Seller is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all other jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualification, licenses or approvals has not had, and except where the failure to so qualify or have such licenses or approvals has not had, and could not reasonably be expected to have, a Material Adverse Effect. (c) Power and Authority; Due Authorization. Seller (i) has all necessary power, authority and legal right to (A) execute and deliver this Agreement and the other Transaction Documents to which it is a party, (B) carry out the terms of the Transaction Documents to which it is a party, and (C) sell and assign the Asset Interest on the terms and conditions herein provided and (ii) has duly authorized by all necessary corporate action the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party and the sale and assignment of the Asset Interest on the terms and conditions herein provided. (d) Valid Transfer; Binding Obligations. This Agreement constitutes a valid transfer and assignment of the Asset Interest to the Administrator, for the benefit of Purchaser, enforceable against creditors of, and purchasers from, Seller; and this Agreement constitutes, and each other Transaction Document to be signed by Seller when duly executed and delivered will constitute, a legal, valid and binding obligation of Seller enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents to which it is a party and the fulfillment of the terms hereof and thereof will not (i) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, the Seller's certificate of incorporation or by-laws or any Contractual Obligation of Seller, (ii) result in the creation or imposition of any Lien upon any of Seller's properties pursuant to the terms of any such Contractual Obligation, other than this Agreement, or (iii) violate any Applicable Law. -17- 23 (f) No Proceedings. There is no litigation, proceedings or investigations pending, or to the best of Seller's knowledge, threatened, before any Governmental Authority or arbitrator (i) asserting the invalidity of this Agreement or any other Transaction Document to which Seller is a party, (ii) seeking to prevent the sale and assignment of the Asset Interest or the consummation of any of the other transactions contemplated by this Agreement or any other Transaction Document, or (iii) seeking any determination or ruling that could reasonably be expected to have a Material Adverse Effect. (g) Bulk Sales Act. No transaction contemplated hereby requires compliance with any bulk sales act or similar law. (h) Government Approvals. No Governmental Action is required for the due execution, delivery and performance by Seller of this Agreement or any other Transaction Document to which Seller is a party, except for the filing of the UCC financing statements referred to in Article V, all of which, at the time required in Article V, shall have been duly made and shall be in full force and effect. (i) Financial Condition. Since the date of Seller's formation, there has been no material adverse change in Seller's financial condition, business, assets or operations. (j) Margin Regulations. The use of all funds obtained by Seller under this Agreement will not conflict with or contravene any of Regulations G, T, U and X promulgated by the Board of Governors of the Federal Reserve System from time to time. (k) Quality of Title. Each Pool Asset is legally and beneficially owned by Seller free and clear of any Lien (other than any Lien arising solely as the result of any action taken by Purchaser or the Administrator); when the Administrator, for the benefit of Purchaser, makes a Purchase or Reinvestment, it shall have acquired a valid and enforceable perfected first priority undivided percentage interest to the extent of the Asset Interest in each Pool Asset, free and clear of any Lien (other than any Lien arising solely as the result of any action taken by Purchaser or the Administrator), enforceable against any creditor of, or purchaser from, Seller or any Originator; and no financing statement or other instrument similar in effect covering any Pool Asset is on file in any recording office except such as may be filed (i) in favor of an Originator in accordance with the Contracts, (ii) in favor -18- 24 of Seller in accordance with the Purchase Agreement, or (iii) in favor of Purchaser or the Administrator in accordance with this Agreement or in connection with any Lien arising solely as the result of any action taken by Purchaser or the Administrator. (l) Accurate Reports. No Servicer Report or Daily Report (if prepared by Seller, or to the extent information therein was supplied by Seller) or other information, exhibit, financial statement, document, book, record or report furnished or to be furnished by or on behalf of Seller to the Administrator or Purchaser in connection with this Agreement was or will be inaccurate in any material respect as of the date it was or will be dated or (except as otherwise disclosed to the Administrator at such time) as of the date so furnished, or contained or will contain any material misstatement of fact or omitted or will omit to state a material fact or any fact necessary to make the statements contained therein not materially misleading. (m) Offices. The principal place of business and chief executive office of Seller are located at the address of Seller referred to in Section 14.02, and the offices where Seller keeps all its books, records and documents evidencing or relating to Pool Receivables are located at the addresses specified in Schedule 6.01(m) (or at such other locations, notified to the Administrator in accordance with Section 7.01(f), in jurisdictions where all action required by Section 8.05 has been taken and completed). (n) Lock-Box Accounts. The names and addresses of all the Lock-Box Banks, together with the account numbers of the lock-box accounts of Seller at such Lock-Box Banks, are specified in Schedule 6.01(n) (or have been notified to the Administrator in accordance with Section 7.03(d)). (o) Eligible Receivables. Each Receivable included in the Net Pool Balance as an Eligible Receivable on the date of any Purchase, Reinvestment or other calculation of Net Pool Balance shall be an Eligible Receivable on such date. (p) Accounting Sale. The Seller has accounted for each sale of undivided percentage ownership interests in Receivables in its books and financial statements as sales, consistent with GAAP. (q) Credit and Collection Policy. The Seller has complied in all material respects with the Credit and Collection Policy with regard to each Receivable. -19- 25 (r) Corporate Name. The Seller's complete corporate name is set forth in the preamble to this Agreement, and the Seller does not use and has not during the last six years used any other corporate name, trade name, doing business name or fictitious name. SECTION 6.02. Representations and Warranties of Parent. Parent represents and warrants as follows: (a) Organization and Good Standing. Parent has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and to conduct its business as such properties are presently owned and such business is presently conducted. (b) Due Qualification. Parent is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business requires such qualification, licenses or approvals, except where the failure to so qualify or have such licenses or approvals has not had, and could not reasonably be expected to have, a Material Adverse Effect. (c) Power and Authority; Due Authorization. Parent (i) has all necessary power, authority and legal right to (A) execute and deliver this Agreement and the other Transaction Documents to which it is a party and (B) carry out the terms of the Transaction Documents to which it is a party and (ii) has duly authorized by all necessary corporate action the execution, delivery and performance of this Agreement and the other Transaction Documents to which it is a party. (d) Binding Obligations. This Agreement constitutes, and each other Transaction Document to be signed by Parent when duly executed and delivered will constitute, a legal, valid and binding obligation of Parent enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents to which Parent is a party and the fulfillment of the terms hereof and thereof will not (i) -20- 26 conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under the Parent's articles of incorporation or by-laws or any Contractual Obligation of Parent, (ii) result in the creation or imposition of any Lien upon any of Parent's properties pursuant to the terms of any such Contractual Obligation (other than any Lien created pursuant to the Transaction Documents), or (iii) violate any Applicable Law. (f) No Proceedings. There is no litigation, proceedings or investigations pending or, to the best of Parent's knowledge, threatened, before any Governmental Authority or arbitrator (i) asserting the invalidity of this Agreement or any other Transaction Document to which Parent is a party, (ii) seeking to prevent the sale and assignment of the Asset Interest or the consummation of any of the other transactions contemplated by this Agreement or any other Transaction Document, or (iii) seeking any determination or ruling that could reasonably be expected to have a Material Adverse Effect. (g) Government Approvals. No Governmental Action is required for the due execution, delivery and performance by Parent of this Agreement or any other Transaction Document to which it is a party, other than the filing of the UCC financing statements referred to in Article V, all of which, at the time required in Article V, shall have been duly made and shall be in full force and effect. (h) Financial Condition. (x) The consolidated balance sheets of Parent and its consolidated Subsidiaries as at June 30, 1997, and the related statements of earnings, shareholders' equity and cash flows of Parent and its consolidated Subsidiaries for the fiscal year then ended, certified by Arthur Andersen, and the consolidated balance sheets of Parent and its consolidated Subsidiaries as at March 31, 1998, and the related statements of earnings, shareholders' equity and cash flows of Parent and its consolidated Subsidiaries for the fiscal quarter then ended, copies of which have been furnished to the Administrator, fairly present the consolidated financial condition, business and operations of Parent and its consolidated Subsidiaries as at such dates and the consolidated results of the operations of Parent and its consolidated Subsidiaries for the periods ended on such dates, all in accordance with GAAP consistently applied, and (y) since June 30, 1997 there has been no material adverse change in any such condition, business or operations. -21- 27 (i) Accurate Reports. No Servicer Report or Daily Report (if prepared by Parent, or to the extent information therein was supplied by Parent) or other information, exhibit, financial statement, document, book, record or report furnished or to be furnished by or on behalf of Parent to the Administrator or Purchaser, in connection with this Agreement was or will be inaccurate in any material respect as of the date it was or will be dated or (except as otherwise disclosed to the Administrator at such time) as of the date so furnished, or contained or will contain any material misstatement of fact or omitted or will omit to state a material fact or any fact necessary to make the statements contained therein not materially misleading. ARTICLE VII GENERAL COVENANTS SECTION 7.01. Affirmative Covenants. From the date hereof until the Final Payout Date: (a) Compliance with Laws, Etc. Each of Seller and Parent will comply in all material respects with all Applicable Laws, including those with respect to the Pool Receivables and the related Contracts, except where noncompliance could not reasonably be expected to have a Material Adverse Effect. (b) Preservation of Corporate Existence. Each of Seller and Parent will preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification could reasonably be expected to have a Material Adverse Effect. (c) Audits. (i) Each of Parent and Seller will at any time and from time to time during regular business hours, permit the Administrator or any of its agents or representatives, (A) to examine and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes and disks) in its possession or under its control relating to Pool Assets, (B) to visit its offices and properties for the purpose of examining such materials described in clause (i)(A) above, and to discuss matters relating to Pool Assets or its performance hereunder with any of its officers or employees having knowledge of such matters, and (C) to verify the -22- 28 existence and amount of the Receivables; and (ii) without limiting the provisions of clause (i) above, from time to time on request of Administrator, permit certified public accountants or other auditors acceptable to the Administrator to conduct, at Seller's or Parent's, as the case may be, expense, a review of its books and records with respect to the Pool Receivables; provided, however that unless a Liquidation Event has occurred and is continuing, Seller and Parent shall not be obligated to pay for more than one such review in each calendar year. (d) Keeping of Records and Books of Account. Each of Seller and Parent will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Pool Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Pool Assets (including, without limitation, records adequate to permit the daily identification of each new Pool Receivable and all Collections of and adjustments to each existing Pool Receivable). (e) Performance and Compliance with Receivables and Contracts. Seller will, at its expense, timely and fully perform and comply (or cause an Originator to perform and comply pursuant to the Purchase Agreement) with all provisions, covenants and other promises required to be observed by it under the Contracts related to the Pool Receivables and all other agreements related to such Pool Receivables, except where failure to do so would not materially adversely affect the validity, enforceability or collectibility of the related Pool Receivable. (f) Location of Records. Each of Seller and Parent will keep its principal place of business and chief executive office, and the offices where it keeps its records concerning the Pool Receivables and all related Contracts and all other agreements related to such Pool Receivables (and all original documents relating thereto), at its address(es) referred to in Section 14.02 or, upon 30 days' prior written notice to the Administrator, at such other locations in jurisdictions where all action required by Section 8.05 shall have been taken and completed. (g) Credit and Collection Policies. Each of Seller and Parent, at its own expense, will timely and fully perform and comply in all material respects with the Credit and Collection Policy in regard to each Pool Receivable and the related Contracts. -23- 29 (h) Collections. Each of Seller and Parent will instruct (i) all Obligors to cause all Collections to be sent to a Lock-Box that is the subject of a Lock-Box Agreement and (ii) each Lock-Box Bank to deposit all such Collections directly into a Lock-Box Account that is the subject of a Lock-Box Agreement. In the event that Parent or Seller receives Collections directly from any Obligor, Parent or Seller, as the case may be, shall deposit such Collections into a Lock-Box Account within two Business Days of receipt thereof. (i) Net Worth. Seller will maintain a Tangible Net Worth of at least $1,000,000. (j) Quality of Title. Each of Seller and Parent will take all action necessary or desirable to establish and maintain a valid and enforceable perfected first priority undivided percentage interest in favor of the Administrator, for the benefit of the Purchaser, to the extent of the Asset Interest in each Pool Asset, free and clear of any Lien (other than any Lien arising solely as a result of any action taken by Purchaser or the Administrator), enforceable against any creditor of, or purchaser from, Seller or Parent. (k) Financial Covenant. Parent will 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 ------ ------ July 1, 1998 through June 30, 1999 $10,000,000 July 1, 1999 through June 30, 2000 $12,500,000 July 1, 2000 and thereafter $15,000,000 SECTION 7.02. Reporting Requirements. From the date hereof the Final Payout Date: (a) Monthly Financial Statements. As soon as available and in any event within 30 days after the end of each calendar month Parent will furnish to the Administrator copies of the unaudited interim financial statements of Parent and its Subsidiaries prepared on a consolidated and consolidating basis, consisting of at least a balance sheet as at the close of such month and statements of earnings for such month and for the period from the beginning of the fiscal year to the close of such month, in each case in conformity with GAAP (except for footnote disclosures) and fairly presenting the consolidated financial position and results of operations of Parent and its Subsidiaries for -24- 30 such month and period, duly certified by the principal financial officer of Parent; (b) Quarterly Financial Statements. As soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year (i) Seller will furnish to the Administrator copies of its financial statements, consisting of at least a balance sheet as at the close of such quarter and statements of earnings for such quarter and for the period from the beginning of the fiscal year to the close of such quarter, in each case in conformity with GAAP (except for footnote disclosures), duly certified by the chief financial officer of Seller and (ii) Parent will furnish to the Administrator copies of the financial statements of Parent and its Subsidiaries prepared on a consolidated and consolidating basis, consisting of at least a balance sheet as at the close of such quarter and statements of earnings for such quarter and for the period from the beginning of the fiscal year to the close of such quarter, in each case in conformity with GAAP (except for footnote disclosures) and fairly presenting the consolidated financial position and results of operations of Parent and its Subsidiaries for such month and period, duly certified by the principal financial officer of Parent; (c) Annual Financial Statements. As soon as available and in any event within 90 days after the end of each fiscal year (i) Seller will furnish to the Administrator copies of its financial statements, consisting of at least a balance sheet of Seller for such year and statements of earnings, cash flows and shareholders' equity, in each case in conformity with GAAP, consistently applied, setting forth in each case in comparative form corresponding figures from the preceding fiscal year, with all such statements duly certified by independent certified public accountants of recognized standing selected by Seller and (ii) Parent will furnish to the Administrator copies of the unqualified audited financial statements of Parent and its Subsidiaries prepared on a consolidated and consolidating basis, consisting of at least a balance sheet of Parent and its Subsidiaries for such year and consolidated and consolidating statements of earnings, cash flows and shareholders' equity, in each case in conformity with GAAP, consistently applied, setting forth in each case in comparative form corresponding consolidated figures from the preceding fiscal year, with all such statements duly certified by independent certified public accountants of recognized standing selected by Parent, together with copies of any and all letters, reports or other communications from such accountants to management or to Parent's Board of Directors or any committee thereof; provided that any -25- 31 accompanying consolidating schedules need not be separately audited; (d) Compliance Certificate. Together with each quarterly and annual financial statement delivered in accordance with the preceding paragraphs, Parent will furnish to the Administrator a compliance certificate showing a calculation of the financial covenant set forth in Section 7.01(k) certified by the principal financial officer of Parent; (e) Liquidation Events. Each of Seller and Parent will furnish to the Administrator, as soon as possible and in any event within two (2) Business Days after an officer of Seller or Parent obtains actual knowledge of the occurrence of each Liquidation Event and each Unmatured Liquidation Event, a written statement of the chief financial officer or chief accounting officer of Seller or Parent, as the case may be, setting forth details of such event and the action that Seller or Parent, as the case may be, proposes to take with respect thereto; (f) Litigation. Each of Seller and Parent will furnish to the Administrator, as soon as possible and in any event within three Business Days of Seller's or Parent's actual knowledge thereof, notice of (i) any litigation, investigation or proceeding which may exist at any time which could be reasonably expected to have a Material Adverse Effect and (ii) any material adverse development in previously disclosed litigation; (g) Change in Credit and Collection Policy. Each of Seller and Parent will furnish to the Administrator, prior to its effective date, notice of any material change in the Credit and Collection Policy; (h) Change in Name. Seller will furnish to the Administrator, at least thirty days prior to any change in the Seller's name, location or any other change requiring the amendment of UCC financing statements, a notice setting forth such changes and the effective date thereof; and (i) Other Information. Each of Seller and Parent will furnish to the Administration such other information respecting the Receivables or the condition or operations, financial or otherwise, of the Parent or Seller or any of its Affiliates as the Administrator may from time to time reasonably request. SECTION 7.03. Negative Covenants. From the date hereof the Final Payout Date: -26- 32 (a) Sales, Liens, Etc. Seller will not, except as otherwise provided herein, sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Lien upon or with respect to, any Pool Asset or any interest therein. (b) Extension or Amendment of Receivables. Neither Parent nor Seller will, except as otherwise permitted in Section 8.02, extend, amend or otherwise modify, or permit Servicer to extend, amend or otherwise modify, the terms of any Pool Receivable; or amend, modify or waive, or permit Servicer to amend, modify or waive, any term or condition of any Contract related to a Pool Receivable. (c) Change in Business or Credit and Collection Policy. Neither Parent nor Seller will make any change in the character of its business or in the Credit and Collection Policy, which change could materially impair the collectibility of any Pool Receivable or otherwise materially adversely affect the interests or remedies of the Administrator or Purchaser under this Agreement or any other Transaction Document. (d) Change in Payment Instructions to Obligors. Neither Parent or Seller will add or terminate any bank as a Lock-Box Bank or any Lock-Box Account from those listed in Schedule 6.01(n) or make any change, or permit Servicer to make any change, in its instructions to Obligors regarding payments to be made to Seller or Servicer or payments to be made to any Lock-Box Bank, unless the Administrator shall have received notice of such addition, termination or change and duly executed copies of Lock-Box Agreements with each new Lock-Box Bank or with respect to each new Lock-Box Account, as the case may be. (e) Mergers, Acquisitions, Sales, etc. Neither Parent nor Seller will (i) be a party to any merger or consolidation, or purchase or otherwise acquire all or any substantial part of the Properties of any other Person without the consent of the Administrator (provided that the consolidation of PBI with Parent shall not constitute a violation of this covenant so long as such consolidation does not include a merger and so long as Parent does not become directly or indirectly liable for any Indebtedness of PBI) or (ii) sell, transfer, convey or lease all or any substantial part of its assets, or sell or assign with or without recourse any Receivables or any interest therein (other than pursuant hereto or to the Purchase Agreement). Parent will not sell any of the capital stock of Seller, or permit any Lien to exist thereon. -27- 33 (f) Deposits to Special Accounts. Neither Parent nor Seller will deposit or otherwise credit, or cause or permit to be so deposited or credited, to any Lock-Box Account cash or cash proceeds other than Collections of Pool Receivables. (g) Other Business. Seller will not (i) engage in any business other than the transactions contemplated by the Transaction Documents; (ii) incur any indebtedness, obligation, liability or contingent obligation of any kind other than pursuant to this Agreement or the Purchase Agreement; or (iii) form any Subsidiary or make any investments in any other Person. (h) Certificate of Incorporation; Purchase Agreement. Seller will not amend, modify, terminate, revoke or waive any provision of its certificate of incorporation, the Initial Purchaser Note or the Purchase Agreement. (i) Restricted Payments. Seller will not declare or make any dividend or other distributions to any of its shareholders, redeem or purchase any of its capital stock or make any loan or other payments to any of its shareholders (other than (1) payments of the purchase price of Receivables as set forth in the Purchase Agreement, (2) the turn-over of Collections of Reconveyed Receivables to an Originator as set forth in the Purchase Agreement, (3) payment of the Servicer's Fee so long as Parent is the Servicer and (4) payment of reasonable management fees and reimbursement of reasonable expenses of Parent incurred in connection with managing Seller, so long as such fees and expenses are in an amount not in excess of those that would be paid in a similar arms'-length transaction) unless, in each case, no Liquidation Event or Unmatured Liquidation Event has occurred and is continuing or would result therefrom. (j) Change of Name or Location. Seller will not change its name or the location of its principal place of business or chief executive office or its corporate structure, unless Seller has given the Administrator at least thirty (30) days prior notice thereof, and has taken all steps necessary or advisable under the UCC to continue the perfection and priority of the Administrator's and Purchaser's interest in the Pool Assets. SECTION 7.04. Separate Existence. Each of Seller and Parent hereby acknowledges that Purchaser, the Program Support Providers and the Administrator are entering into the transactions contemplated by this Agreement and the other Transaction Documents in reliance upon Seller's identity as a legal entity separate from Parent. Therefore, from and after the -28- 34 date hereof, each of Seller and Parent shall take all steps specifically required by this Agreement or by the Purchaser or Administrator to continue Seller's identity as a separate legal entity and to make it apparent to third Persons that Seller is an entity with assets and liabilities distinct from those of Parent and any other Person, and is not a division of Parent or any other Person. Without limiting the generality of the foregoing and in addition to and consistent with the other covenants set forth herein, each of Seller and Parent shall take such actions as shall be required in order that: (a) Seller will be a limited purpose corporation whose primary activities are restricted in its certificate of incorporation to purchasing or otherwise acquiring from the Originators, owning, holding, granting security interests, or selling interests, in Pool Assets, entering into agreements for the selling and servicing of the Receivables Pool, and conducting such other activities as it deems necessary or appropriate to carry out its primary activities; (b) Seller shall not engage in any business or activity, or incur any indebtedness or liability other than as expressly permitted by the Transaction Documents; (c) Not less than one member of Seller's Board of Directors shall be an Independent Director. The certificate of incorporation of Seller shall provide that (i) Seller's Board of Directors shall not approve, or take any other action to cause the filing of, a voluntary bankruptcy petition or a merger or dissolution with respect to Seller unless the Independent Director shall approve the taking of such action in writing prior to the taking of such action and (ii) such provision cannot be amended without the prior written consent of the Independent Director; (d) The Independent Director shall not at any time serve as a trustee in bankruptcy for Seller, Parent or any Affiliate thereof; (e) Any employee, consultant or agent of Seller will be compensated from Seller's funds for services provided to Seller. Seller will not engage any agents other than its attorneys, auditors and other professionals, and a Servicer as contemplated by the Transaction Documents for the Receivables Pool, which Servicer will be fully compensated for its services by payment of the Servicer's Fee and a manager, which manager will be fully compensated from Seller's funds; -29- 35 (f) Seller will not incur any material indirect or overhead expenses for items shared with Parent (or any other Affiliate thereof) which are not reflected in the Servicer's Fee or the fee to Parent in its role as manager for Seller. To the extent, if any, that Seller (or any other Affiliate thereof) share items of expenses not reflected in the Servicer's Fee or the manager's fee, such as legal, auditing and other professional services, such expenses will be allocated to the extent practical on the basis of actual use or the value of services rendered, and otherwise on a basis reasonably related to the actual use or the value of services rendered, it being understood that Parent shall pay all expenses relating to the preparation, negotiation, execution and delivery of the Transaction Documents, including, without limitation, legal and other fees; (g) Seller's operating expenses will not be paid by Parent or any other Affiliate thereof; (h) Seller will have its own stationery; (i) Seller's books and records will be maintained separately from those of Parent and any other Affiliate thereof; (j) All financial statements of Parent or any Affiliate thereof that are consolidated to include Seller will contain detailed notes clearly stating that (A) all of Seller's assets are owned by Seller, and (B) Seller is a separate entity with creditors who have received security interests in Seller's assets; (k) Seller's assets will be maintained in a manner that facilitates their identification and segregation from those of Parent or any Affiliate thereof; (l) Seller will strictly observe corporate formalities in its dealings with Parent or any Affiliate thereof, and funds or other assets of Seller will not be commingled with those of Parent or any Affiliate thereof except as permitted by this Agreement in connection with servicing the Pool Receivables. Seller shall not maintain joint bank accounts or other depository accounts to which Parent or any Affiliate thereof (other than Parent in its capacity as Servicer) has independent access; and (m) Seller will maintain arms'-length relationships with Parent (and any Affiliate thereof). Any Person that renders or otherwise furnishes services to Seller will be compensated by Seller at market rates for such services it renders or otherwise furnishes to Seller. Neither Seller -30- 36 nor Parent will be or will hold itself out to be responsible for the debts of the other or the decisions or actions respecting the daily business and affairs of the other. Seller and Parent will immediately correct any known misrepresentation with respect to the foregoing, and they will not operate or purport to operate as an integrated single economic unit with respect to each other or in their dealing with any other entity. ARTICLE VIII ADMINISTRATION AND COLLECTION SECTION 8.01. Designation of Servicer. (a) Parent as Initial Servicer. The servicing, administering and collection of the Pool Receivables shall be conducted by the Person designated as Servicer hereunder ("Servicer") from time to time in accordance with this Section 8.01. Until the Administrator gives to Parent a Successor Notice, Parent is hereby designated as, and hereby agrees to perform the duties and obligations of, Servicer pursuant to the terms hereof. (b) Successor Notice; Servicer Transfer Events. Upon Parent's receipt of notice from the Administrator of the Administrator's designation of a new Servicer (a "Successor Notice"), Parent agrees that it will terminate its activities as Servicer hereunder in a manner that the Administrator reasonably believes will facilitate the transition of the performance of such activities to the new Servicer, and the new Servicer shall assume each and all of Parent's obligations to service and administer such Pool Receivables, on the terms and subject to the conditions herein set forth, and Parent shall use its best efforts to assist the new Servicer in assuming such obligations. The Administrator agrees not to give Parent a Successor Notice until after the occurrence of a Liquidation Event (any such Liquidation Event being herein called a "Servicer Transfer Event"), in which case such Successor Notice may be given at any time in the Administrator's discretion. (c) Resignation. The Parent acknowledges that the Administrator and Purchaser have relied on the Parent's agreement to act as Servicer hereunder in making their decision to execute and deliver this Agreement. Accordingly, the Parent agrees that it will not voluntarily resign as Servicer. (d) Subcontracts. Servicer may, with the prior consent of the Administrator, subcontract with any other Person for servicing, administering or collecting the Pool Receivables, -31- 37 provided that (i) such Sub-Servicer shall agree in writing to perform the duties and obligations of the Servicer pursuant to the terms hereof; (ii) Servicer shall remain primarily liable for the performance of the duties and obligations of Servicer pursuant to the terms hereof, (iii) Seller, the Administrator and Purchaser shall have the right to look solely to the Servicer for performance, and (iv) any such subcontract may be terminated at the option of the Administrator upon the occurrence of a Servicer Transfer Event. (e) Servicing Programs. In the event that Servicer uses any software program in servicing the Pool Receivables that it licenses from a third party, Servicer shall use its best efforts to obtain whatever licenses or approvals are necessary to allow the Administrator or the new Servicer to use such program. SECTION 8.02. Duties of Servicer. (a) Appointment; Duties in General. Each of Seller, Purchaser and the Administrator hereby appoints as its agent Servicer, as from time to time designated pursuant to Section 8.01, to enforce its rights and interests in and under the Pool Assets. Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect each Pool Receivable from time to time, all in accordance with Applicable Law, with reasonable care and diligence and in accordance with the Credit and Collection Policy. (b) Allocation of Collections; Segregation. Servicer shall set aside for the account of Seller and Purchaser their respective allocable shares of the Collections of Pool Receivables in accordance with Section 1.03 but shall not be required (unless otherwise instructed by the Administrator) to segregate the funds constituting such portions of such Collections prior to the remittance thereof in accordance with Section 3.01. If instructed by the Administrator, Servicer shall segregate and deposit with a bank designated by the Administrator, Purchaser's Share of Collections, on the second Business Day following receipt by Servicer of such Collections in immediately available funds. (c) Modification of Receivables. So long as no Liquidation Event or Unmatured Liquidation Event shall have occurred and be continuing, Servicer may (i) in accordance with the Credit and Collection Policy, adjust the Unpaid Balance of any Defaulted Receivable or extend the time for payment of any Defaulted Receivable (but in no event to a date later than 120 days from the date of the original invoice), provided that (A) such extension or adjustment shall not alter the status of such Pool Receivable as a Delinquent Receivable or a Defaulted Receivable or limit the rights of Purchaser or the Administrator under this -32- 38 Agreement, and (B) the aggregate amount of all such adjustments made in any Settlement Period, plus the aggregate Unpaid Balance of all Pool Receivables that have been extended during such Settlement Period, shall not exceed 2% of the aggregate Unpaid Balance of all Pool Receivables as at the Cut-Off Date for such Settlement Period and (ii) adjust the Unpaid Balance of any Receivable to reflect the reductions or cancellations described in the first sentence of Section 3.02(a). (d) Documents and Records. Seller shall deliver to Servicer, and Servicer shall hold in trust for Seller and Purchaser in accordance with their respective interests, all documents, instruments and records (including, without limitation, computer tapes or disks) that evidence or relate to Pool Receivables. (e) Certain Duties to Seller. Servicer shall, as soon as practicable following receipt, turn over to Seller (i) that portion of Collections of Pool Receivables representing its undivided interest therein, less the Seller's Share of the Servicer's Fee, and (ii) the Collections of any Receivable which is not a Pool Receivable. Seller hereby directs Servicer to pay any Collections of any Reconveyed Receivable directly to the related Originator to be applied pursuant to the Purchase Agreement. Servicer shall, as soon as practicable upon demand, deliver to Seller copies of documents, instruments and records in its possession that evidence or relate to Pool Receivables. (f) Termination. Servicer's authorization under this Agreement shall terminate upon the Final Payout Date. (g) Power of Attorney. Seller hereby grants to Servicer an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take in the name of Seller all steps which are necessary or advisable to endorse, negotiate or otherwise realize on any writing or other right of any kind held or transmitted by Seller or transmitted or received by Purchaser (whether or not from Seller) in connection with any Receivable. Notwithstanding anything to the contrary contained herein, the Administrator may direct the Servicer to commence or settle any legal action to enforce collection of any Pool Receivable or to foreclose upon or repossess any Related Security; provided, however, that no such direction may be given unless either (i) a Liquidation Event has occurred or (ii) the Administrator believes is good faith that failure to commence, settle, or effect such legal action, foreclosure or repossession, could adversely affect Receivables constituting a material portion of the Pool Receivables. -33- 39 SECTION 8.03. Rights of the Administrator. (a) Notice to Obligors. At any time after the occurrence of a Liquidation Event, the Administrator may notify the Obligors of Pool Receivables, or any of them, of the ownership of the Asset Interest by the Administrator, for the benefit of Purchaser. (b) Notice to Lock-Box Banks. At any time following the earlier to occur of (i) the occurrence of a Liquidation Event, and (ii) the commencement of the Liquidation Period, the Administrator is hereby authorized to give notice to the Lock-Box Banks, as provided in the Lock-Box Agreements, of the transfer to the Administrator of dominion and control over the lock-boxes and Lock-Box Accounts. Seller hereby transfers to the Administrator, effective when the Administrator shall give notice to the LockBox Banks as provided in the Lock-Box Agreements, the exclusive dominion and control over such lock-boxes and accounts, and shall take any further action that the Administrator may reasonably request to effect such transfer. Any proceeds of Pool Receivables received by the Seller or Parent, as Servicer or otherwise, thereafter shall be sent immediately to the Administrator. (c) Rights on Servicer Transfer Event. At any time following the designation of a Servicer other than Parent pursuant to Section 8.01: (i) The Administrator may direct the Obligors of Pool Receivables, or any of them, to pay all amounts payable under any Pool Receivable directly to the Administrator or its designee. (ii) Parent shall, at the Administrator's request and at Parent's expense, give notice of such ownership to each said Obligor and direct that payments be made directly to the Administrator or its designee. (iii) Parent and Seller shall, at the Administrator's request, (A) assemble all of the documents, instruments and other records (including, without limitation, computer programs, tapes and disks) which evidence the Pool Receivables and the related Contracts and Related Security, or which are otherwise necessary or desirable to collect such Pool Receivables and make the same available to the Administrator at a place selected by the Administrator, and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections in a manner acceptable to the Administrator and promptly upon receipt, remit all such cash, checks and instruments, duly -34- 40 endorsed or with duly executed instruments of transfer, to the Administrator. (iv) Each of Seller and Purchaser hereby authorizes the Administrator, and grants to the Administrator an irrevocable power of attorney, to take any and all steps in Seller's name and on behalf of Seller and Purchaser which are necessary or desirable, in the reasonable determination of the Administrator, to collect all amounts due under any and all Pool Receivables including, without limitation, endorsing Seller's name on checks and other instruments representing Collections and enforcing such Pool Receivables and the related Contracts. SECTION 8.04. Responsibilities of Seller. Anything herein the contrary notwithstanding: (a) Contracts. Seller shall perform, or cause an Originator to perform under the Purchase Agreement, all of its obligations under the Contracts related to the Pool Receivables and under the other agreements related thereto to the same extent as if the Asset Interest had not been sold hereunder, and the exercise by the Administrator or its designee of its rights hereunder shall not relieve Seller from such obligations. (b) Limitation of Liability. Neither the Administrator nor Purchaser shall have any obligation or liability with respect to any Pool Receivables, the related Contracts or any other related agreements, nor shall any of them be obligated to perform any of the obligations of Seller or any Originator thereunder. -35- 41 SECTION 8.05. Further Action Evidencing Purchases and Reinvestments. (a) Further Assurances. The Seller shall, at its expense, take all action necessary or desirable to establish and maintain a valid and enforceable first priority perfected undivided ownership interest, to the extent of the Asset Interest, in the Pool Assets, free and clear of any Lien, in favor of the Administrator, for the benefit of Purchaser. Without limiting the generality of the foregoing, Seller will upon the request of the Administrator or its designee execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate to evidence or perfect the interest described in the previous sentence. (b) Data Processing Records. Each of Parent and Seller will mark its master data processing records evidencing the Pool Receivables with a legend, acceptable to the Administrator, evidencing that the Asset Interest has been sold in accordance with this Agreement. (c) Additional Financing Statements; Performance by Administrator. Seller hereby authorizes the Administrator or its designee to file one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any portion of the Asset Interest now existing or hereafter arising in the name of Seller. If Seller or Parent fails to perform any of its agreements or obligations under this Agreement, the Administrator or its designee may (but shall not be required to), after notice to Seller or Parent (unless immediate action is reasonably required to protect the interests of the Administrator or Purchaser), itself perform, or cause performance of, such agreement or obligation, and the expenses of the Administrator or its designee incurred in connection therewith shall be payable by Seller or Parent, as the case may be. (d) Continuation Statements; Opinion. Without limiting the generality of subsection (a), Seller will, not earlier than six (6) months and not later than three (3) months prior to the fifth anniversary of the date of filing of the financing statement referred to in Section 5.01(d) or any other financing statement filed pursuant to this Agreement or in connection with any Purchase hereunder, unless the Final Payout Date shall have occurred execute and deliver and file or cause to be filed an appropriate continuation statement with respect to such financing statement. SECTION 8.06. Application of Collections. Any payment by Obligor in respect of any indebtedness owed by it to Seller -36- 42 shall, except as otherwise specified by such Obligor, required by the underlying Contract or law or unless the Administrator instructs otherwise, be applied, first, as a Collection of any Pool Receivable or Receivables then outstanding of such Obligor in the order of the age of such Pool Receivables, starting with the oldest of such Pool Receivable and, second, to any other indebtedness of such Obligor. ARTICLE IX SECURITY INTEREST SECTION 9.01. Grant of Security Interest. To secure all obligations of Seller arising in connection with this Agreement and each other Transaction Document, whether now or hereafter existing, due or to become due, direct or indirect, or absolute or contingent, including, without limitation, all Indemnified Amounts, payments on account of Collections of Pool Receivables received or deemed to be received and fees, Seller hereby assigns and grants to Administrator, for the benefit of the Secured Parties, a security interest in all of Seller's right, title and interest (including specifically any undivided interest retained by Seller hereunder) now or hereafter existing in, to and under all the Pool Assets. SECTION 9.02. Further Assurances. The provisions of 8.05 shall apply to the security interest granted under Section 9.01 as well as to the Purchases, Reinvestments and the Asset Interest hereunder. SECTION 9.03. Remedies. Upon the occurrence of a Liquidation Event, the Administrator and Purchaser shall have, with respect to the collateral granted pursuant to Section 9.01, and in addition to all other rights and remedies available to Purchaser or the Administrator under this Agreement or other applicable law, all the rights and remedies of a secured party upon default under the UCC. ARTICLE X LIQUIDATION EVENTS SECTION 10.01. Liquidation Events. The following events be "Liquidation Events" hereunder: (a) (i) Servicer (if Parent or its Affiliate is Servicer) shall fail to perform or observe any material term, covenant or agreement that is an obligation of -37- 43 Servicer hereunder (other than as referred to in clause (ii) next following) and such failure shall remain unremedied for more than three Business Days or (ii) Seller or Servicer (if Parent or its Affiliate is Servicer) shall fail to make any payment or deposit to be made by it hereunder within two (2) Business Days of when due; or (b) Any representation or warranty made or deemed to be made by Seller, Parent or any Originator under or in connection with this Agreement, any other Transaction Document, any Daily Report or any Servicer Report or other information or report delivered pursuant hereto shall prove to have been false or incorrect in any material respect when made; or (c) Seller, Parent or any Originator shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any of the other Transaction Documents on its part to be performed or observed and any such failure shall remain unremedied for ten (10) Business Days after written notice thereof shall have been given by the Administrator to Seller or Parent, as the case may be; or (d) A default shall have occurred and be continuing under any instrument or agreement evidencing, securing or providing for the issuance of indebtedness for borrowed money in excess of $10,000 of, or guaranteed by, Parent or any Subsidiary thereof, which default is a payment default or if unremedied, uncured, or unwaived (with or without the passage of time or the giving of notice or both) would permit acceleration of the maturity of such indebtedness and such default shall have continued unremedied, uncured or unwaived for a period long enough to permit such acceleration; or any default under any agreement or instrument relating to the purchase of receivables of Parent or any Subsidiary thereof (other than this Agreement), if the effect of such default is to terminate, or permit the termination of, the commitment of any party to such agreement or instrument to purchase receivables or the right of Parent or such Subsidiary to reinvest in receivables the principal amount paid by any party to such agreement or instrument for an interest in receivables; or (e) This Agreement or any Purchase or any Reinvestment pursuant to this Agreement shall for any reason (other than pursuant to the terms hereof) (i) cease to create, or the Asset Interest shall for any reason cease to be, a valid and enforceable perfected undivided percentage interest to the extent of the Asset Interest in each Pool Asset, free and clear of any other Lien or (ii) cease to create with respect -38- 44 to the items described in Section 9.01, or the interest of the Administrator (for the benefit of Purchaser) with respect to such items shall cease to be, a valid and enforceable first priority perfected security interest, free and clear of any other Lien; or (f) An Event of Bankruptcy shall have occurred and remain continuing with respect to Seller, Parent or any Subsidiary thereof; or (g) The Sales-Based Dilution Ratio for any Cut-Off Date exceeds 7%; or (h) The Default Ratio for any Cut-Off Date exceeds 2%; or (i) On any Settlement Date, after giving effect to the payments made under Section 3.01(c), the Asset Interest exceeds the Allocation Limit; or (j) The Delinquency Ratio for any Cut-Off Date is greater than 5%; or (k) There shall exist any event or occurrence that has caused, or has a reasonable possibility of causing, a Material Adverse Effect; or (l) Seller, any Originator or Parent is subject to a Change-in-Control; or (m) The Internal Revenue Service shall file notice of a lien pursuant to Section 6323 of the Internal Revenue Code with regard to any of the assets of Seller or Parent and such lien shall not have been released within 5 Business Days, or the Pension Benefit Guaranty Corporation shall file notice of a lien pursuant to Section 4068 of the Employee Retirement Income Security Act of 1974 with regard to any of the assets of Seller or Parent and such lien shall not have been released within 5 Business Days. SECTION 10.02. Remedies. (a) Optional Liquidation. Upon the occurrence of a Liquidation Event (other than a Liquidation Event described in subsection (f) of Section 10.01), the Administrator shall, at the request, or may with the consent, of Purchaser, by notice to Seller declare the Purchase Termination Date to have occurred and the Liquidation Period to have commenced. (b) Automatic Liquidation. Upon the occurrence of a Liquidation Event described in subsection (f) of Section 10.01, -39- 45 the Purchase Termination Date shall occur and the Liquidation Period shall commence automatically. (c) Additional Remedies. Upon any Purchase Termination Date occurring pursuant to this Section 10.02, no Purchases or Reinvestments thereafter will be made, and the Administrator and Purchaser shall have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the UCC of each applicable jurisdiction and other Applicable Law, which rights shall be cumulative. ARTICLE XI THE ADMINISTRATOR SECTION 11.01. Authorization and Action. Pursuant to the Program Agreements, Purchaser has appointed and authorized the Administrator (or its designees) to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrator by the terms hereof, together with such powers as are reasonably incidental thereto. SECTION 11.02. Administrator's Reliance, Etc. The Administrator and its directors, officers, agents or employees shall not be liable for any action taken or omitted to be taken by it or them under or in connection with the Transaction Documents (including, without limitation, the servicing, administering or collecting of Pool Receivables as Servicer pursuant to Section 8.01), except for its or their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Administrator: (a) may consult with legal counsel (including counsel for Seller), independent certified public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (b) makes no warranty or representation to Purchaser or any other holder of any interest in Pool Receivables and shall not be responsible to Purchaser or any such other holder for any statements, warranties or representations made in or in connection with any Transaction Document; (c) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Transaction Document on the part of Seller or Parent or to inspect the property (including the books and records) of Seller, any Originator or Parent; (d) shall not be responsible to Purchaser or any other holder of any interest in Pool Receivables for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Transaction Document; and (e) shall incur no liability under or in respect of this Agreement by acting upon any notice -40- 46 (including notice by telephone), consent, certificate or other instrument or writing (which may be by facsimile or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 11.03. Fleet and Affiliates. Fleet and any of its Affiliates may generally engage in any kind of business with Seller, Parent, any Originator or any Obligor, any of their respective Affiliates and any Person who may do business with or own securities of Seller, Parent, any Originator or any Obligor or any of their respective Affiliates, all as if Fleet were not the Administrator, and without any duty to account therefor to Purchaser or any other holder of an interest in Pool Receivables. ARTICLE XII ASSIGNMENT OF PURCHASER'S INTEREST SECTION 12.01. Restrictions on Assignments. (a) Neither Seller nor Parent may assign its rights, or delegate its duties, hereunder or any interest herein without the prior written consent of the Administrator. Purchaser may not assign its rights hereunder (although it may delegate its duties hereunder as expressly indicated herein) or the Asset Interest (or any portion thereof) to any Person without the prior written consent of Seller, which consent shall not be unreasonably withheld; provided, however, that Purchaser may assign all of its rights and interests in the Transaction Documents, together with all its interest in the Asset Interest, to (i) Fleet or any Affiliate thereof, or (ii) to any "bankruptcy remote" special purpose entity the business of which is administered by Fleet or any Affiliate thereof, so long as such entity has the ability to issue commercial paper notes, or to cause the issuance of commercial paper notes, to fund the Asset Interest or (iii) to any Program Support Provider. If Purchaser notifies Seller and Parent that it has decided to assign its rights and delegate its duties hereunder to one or more Program Support Providers (or an agent therefor), Seller and Parent agree to enter into such amendments hereto and to the other Transaction Documents as the Administrator may reasonably request to reflect such assignment and delegation, provided that, unless a Liquidation Event exists, the Administrator shall be responsible for all reasonable out-of-pocket costs and expenses incurred by Seller and Parent in connection therewith. (b) Seller agrees to advise the Administrator within five (5) Business Days after notice to Seller of any proposed assignment by Purchaser of the Asset Interest (or any portion thereof), not otherwise permitted under subsection (a), of -41- 47 Seller's consent or non-consent to such assignment and if it does not consent, the reasons therefor. If Seller does not respond in such time period, Seller shall be deemed to have consented to such assignment. All of the aforementioned assignments shall be upon such terms and conditions as Purchaser and the assignee may mutually agree. SECTION 12.02. Rights of Assignee. Upon the assignment by Purchaser in accordance with this Article XII, the assignee receiving such assignment shall have all of the rights of Purchaser with respect to the Transaction Documents and the Asset Interest (or such portion thereof as has been assigned). ARTICLE XIII INDEMNIFICATION SECTION 13.01. Indemnities. (a) General Indemnity by Seller. Without limiting any other rights which any such Person may have hereunder or under Applicable Law, Seller hereby agrees to indemnify each of the Administrator, Purchaser, each Program Support Provider, each of their respective Affiliates, and all successors, permitted transferees, participants and permitted assigns and all officers, directors, shareholders, controlling persons, employees and agents of any of the foregoing (each an "Indemnified Party"), within ten (10) Business Days of demand, from and against any and all damages, losses, claims, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts") awarded against or incurred by any of them arising out of or relating to the Transaction Documents or the ownership or funding of the Asset Interest or in respect of any Receivable or any Contract, excluding, however, (a) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Indemnified Party or (b) Indemnified Amounts which have the effect of recourse for non-payment of the Pool Receivables due to credit problems of the Obligors (except as otherwise specifically provided in this Agreement). Without limiting the foregoing, Seller shall indemnify each Indemnified Party for Indemnified Amounts arising out of or relating to: (i) the transfer by Seller of any interest in any Pool Receivable other than the transfer of an Asset Interest to the Administrator, for the benefit of Purchaser, pursuant to this Agreement and the grant of a security interest to the Administrator pursuant to Section 9.01; -42- 48 (ii) any representation or warranty made by Seller under or in connection with any Transaction Document, any Servicer Report, any Daily Report or any other information or report delivered by or on behalf of Seller pursuant hereto, which shall have been false, incorrect or misleading in any respect when made or deemed made; (iii) the failure by Seller to comply with any Applicable Law, or the nonconformity of any Pool Receivable or the related Contract with any Applicable Law; (iv) the failure to vest and maintain vested in the Administrator, for the benefit of Purchaser, an undivided percentage ownership interest, to the extent of the Asset Interest, in the Pool Assets, free and clear of any Lien, other than a Lien arising solely as a result of an act of Purchaser or the Administrator, whether existing at the time of any Purchase or Reinvestment of such Asset Interest or at any time thereafter; (v) the failure to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Pool Assets, whether at the time of any Purchase or Reinvestment or at any time thereafter; (vi) any dispute, claim, offset or defense (other than discharge in bankruptcy or payment) of the Obligor to the payment of any Receivable included in the Net Pool Balance (including, without limitation, a defense based on such Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or services related to such Receivable or the furnishing or failure to furnish such merchandise or services; (vii) any failure of Seller to perform its duties or obligations in accordance with this Agreement; (viii) any products liability claim arising out of or in connection with merchandise or services that are the subject of any Pool Receivable; (ix) any litigation, proceedings or investigation against Seller; or (x) any tax or governmental fee or charge (but not including taxes upon or measured by net income or representing a franchise or unincorporated business tax of -43- 49 such Person), all interest and penalties thereon or with respect thereto, and all out-of-pocket costs and expenses, including the reasonable fees and expenses of counsel in defending against the same, which may arise by reason of the purchase or ownership of any Asset Interest, or any other interest in the Pool Receivables or in any goods which secure any such Pool Receivables. (b) Indemnity by Servicer. Without limiting any other rights which any such Person may have hereunder or under applicable law, Servicer hereby agrees to indemnify each Indemnified Party, forthwith on demand, from and against any and all Indemnified Amounts awarded against or incurred by any of them arising out of or relating to (i) any representation or warranty made by Servicer under or in connection with any Transaction Document, any Servicer Report or any other information or report delivered by or on behalf of Servicer pursuant hereto, which shall have been false, incorrect or misleading in any material respect when made or deemed made, (ii) the failure by Servicer to comply with any Applicable Law, (iii) the failure of Servicer to perform its duties or obligations in accordance with this Agreement or (iv) the commingling of any Collections with other funds. (c) After-Tax Basis. Indemnification hereunder shall be in an amount necessary to make the Indemnified Party whole after taking into account any tax consequences to the Indemnified Party of the receipt of the indemnity provided hereunder, including the effect of such tax or refund on the amount of tax measured by net income or profits which is or was payable by the Indemnified Party. (d) Contribution. If for any reason the indemnification provided above in this Section 13.01 is unavailable to an Indemnified Party or is insufficient to hold an Indemnified Party harmless, then Seller or Servicer, as the case may be, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by such Indemnified Party on the one hand and Seller or Servicer, as the case may be, on the other hand but also the relative fault of such Indemnified Party as well as any other relevant equitable considerations. -44- 50 ARTICLE XIV MISCELLANEOUS SECTION 14.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by any party therefrom shall in any event be effective unless the same shall be in writing and signed by (a) Seller, the Administrator, Parent and Purchaser (with respect to an amendment) or (b) the Administrator and Purchaser (with respect to a waiver or consent by them) or Seller or Parent (with respect to a waiver or consent by it), as the case may be, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. The parties acknowledge that, before entering into such an amendment or granting such a waiver or consent, Purchaser may also be required to obtain the approval of some or all of the Program Support Providers or to obtain confirmation from certain rating agencies that such amendment, waiver or consent will not result in a withdrawal or reduction of the ratings of the Commercial Paper Notes. SECTION 14.02. Notices, Etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by express mail or courier or by certified mail, postage prepaid, or by facsimile, to the intended party at the address or facsimile number of such party set forth under its name on Schedule 14.02 or at such other address or facsimile number as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, (a) if personally delivered or sent by express mail or courier or if sent by certified mail, when received, and (b) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means. SECTION 14.03. No Waiver; Remedies. No failure on the part of the Administrator, any Affected Party, any Indemnified Party, Purchaser or any other holder of the Asset Interest (or any portion thereof) to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 14.04. Binding Effect; Survival. This Agreement shall be binding upon and inure to the benefit of Seller, Parent, the Administrator, Purchaser and their respective successors and assigns, and the provisions of Section 4.02 and Article XIII -45- 51 shall inure to the benefit of the Affected Parties and the Indemnified Parties, respectively, and their respective successors and assigns; provided, however, nothing in the foregoing shall be deemed to authorize any assignment not permitted by Section 12.01. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until the Final Payout Date. The rights and remedies with respect to any breach of any representation and warranty made by Seller or Parent pursuant to Article VI and the indemnification and payment provisions of Article XIII and Sections 4.02, 14.05, 14.06, 14.07, 14.08 and 14.15 shall be continuing and shall survive any termination of this Agreement. SECTION 14.05. Costs, Expenses and Taxes. In addition to its obligations under Article XIII, Seller or Parent, as the case may be, agrees to pay within five Business Days of demand; (a) all costs and expenses incurred (i) by the Administrator and Purchaser, and their respective Affiliates, in connection with the negotiation, preparation, execution and delivery of, and (ii) by the Administrator, any Program Support Provider and Purchaser and their respective Affiliates, in connection with the enforcement after the occurrence of a Liquidation Event against Seller or Parent, as the case may be, of, or any actual or claimed breach by Seller or Parent, as the case may be, of, this Agreement and the other Transaction Documents, including, without limitation (A) the reasonable fees and expenses of counsel to any of such Persons incurred in connection with any of the foregoing or in advising such Persons as to their respective rights and remedies under any of the Transaction Documents, and (B) all reasonable out-of-pocket expenses (including reasonable fees and expenses of independent accountants incurred in connection with any review of Seller's or Parent's, as the case may be, books and records either prior to the execution and delivery hereof or pursuant to Section 7.01(c) or otherwise); and (b) all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement or the other Transaction Documents, and agrees to indemnify each Indemnified Party against any liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. SECTION 14.06. No Proceedings. Seller, Parent, Servicer and Fleet (individually and as Administrator) each hereby agrees that it will not institute against Purchaser, or join any other Person in instituting against Purchaser, any insolvency -46- 52 proceeding (namely, any proceeding of the type referred to in the definition of Event of Bankruptcy) so long as any Commercial Paper Notes shall be outstanding or there shall not have elapsed one year plus one day since the last day on which any such Commercial Paper Notes shall have been outstanding. SECTION 14.07. Confidentiality of Program Information. (a) Confidential Information. Each party hereto acknowledges that Fleet regards the structure of the transactions contemplated by this Agreement to be proprietary, and each such party severally agrees that: (i) it will not disclose without the prior consent of Fleet or as is required or authorized by the Transaction Documents (other than to the directors, employees, agents, auditors, counsel or affiliates (collectively, "representatives") of such party, each of whom shall be informed by such party of the confidential nature of the Program Information (as defined below) and of the terms of this Section 14.07), (A) any information regarding the pricing in, or copies of, this Agreement or any transaction contemplated hereby, (B) any information regarding the organization, business or operations of Purchaser generally or the services performed by the Administrator for Purchaser, or (C) any information which is furnished by Fleet to such party and which is designated by Fleet to such party in writing or otherwise as confidential or not otherwise available to the general public (the information referred to in clauses (A), (B) and (C) is collectively referred to as the "Program Information"); provided, however, that such party may disclose any such Program Information (I) to any other party to this Agreement for the purposes contemplated hereby, (II) as may be required by any Governmental Authority having or claiming to have jurisdiction over such party, (III) in order to comply with Applicable Law, including, without limitation, by filing the Transaction Documents with the Securities and Exchange Commission (provided that neither Seller nor Parent shall file the Fee Letter, or, if required by Applicable Law to file the Fee Letter, Parent or Seller, as the case may be, shall request confidential treatment therefor) or (IV) subject to subsection (c), in the event such party is legally compelled (by interrogatories, requests for information or copies, subpoena, civil investigative demand or similar process) to disclose any such Program Information; (ii) it will use the Program Information solely for the purposes of evaluating, administering and enforcing the -47- 53 transactions contemplated by this Agreement and making any necessary business judgments with respect thereto; and (iii) it will, upon demand, return (and cause each of its representatives to return) to Fleet, all documents or other written material (other than documents executed by such party) received from Fleet, as the case may be, in connection with (a)(i)(B) or (C) above and all copies thereof made by such party which contain the Program Information. (b) Availability of Confidential Information. This Section 14.07 shall be inoperative as to such portions of the Program Information which are or become generally available to the public or such party on a nonconfidential basis from a source other than Fleet or were known to such party on a nonconfidential basis prior to its disclosure by Fleet. (c) Legal Compulsion to Disclose. In the event that any party or anyone to whom such party or its representatives transmits the Program Information is requested or becomes legally compelled (by interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any of the Program Information, such party will, to the extent that it may legally do so, (i) provide Fleet with prompt written notice so that Fleet may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Section 14.07; and (ii) unless Fleet waives compliance by such party with the provisions of this Section 14.07, make a timely objection to the request or confirmation to provide such Program Information on the basis that such Program Information is confidential and subject to the agreements contained in this Section 14.07. In the event that such protective order or other remedy is not obtained, or Fleet waives compliance with the provisions of this Section 14.07, such party will furnish only that portion of the Program Information which (in such party's good faith judgment) is legally required to be furnished and will exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded the Program Information. (d) Survival. This Section 14.07 shall survive termination of this Agreement. -48- 54 SECTION 14.08. Confidentiality of Parent Information. (a) Confidential Information. Each party hereto acknowledges that Parent regards certain information to be proprietary, and each such party severally agrees that: (i) it will not disclose without the prior consent of Parent or as is required or authorized by the Transaction Documents (other than to the directors, employees, agents, auditors, counsel or affiliates (collectively, "representatives")of such party, each of whom shall be informed by such party of the confidential nature of the Parent Information (as defined below) and of the terms of this Section 14.08), any information which is furnished by Parent to such party and which is designated by Parent to such party in writing or otherwise as confidential or not otherwise available to the general public ("Parent Information"); provided, however, that such party may disclose any such Parent Information (I) to any other party to this Agreement for the purposes contemplated hereby, (II) as may be required by any Governmental Authority having or claiming to have jurisdiction over such party, (III) in order to comply with any Applicable Law, (IV) subject to subsection (c), in the event such party is legally compelled (by interrogatories, requests for information or copies, subpoena, civil investigative demand or similar process) to disclose any such Program Information, (V) to any Affected Party, (VI) to the Rating Agencies, or (VII) to any potential Liquidity Bank or any potential assignee or participant of any Liquidity Bank, and any placement agent for, or investor or potential investor in, the Commercial Paper Notes; and (ii) it will use the Parent Information solely for the purposes of evaluating, administering and enforcing the transactions contemplated by this Agreement and making any necessary business judgments with respect thereto. (b) Availability of Confidential Information. This Section 14.08 shall be inoperative as to such portions of the Parent Information which are or become generally available to the public or such party on a nonconfidential basis from a source other than Parent or were known to such party on a nonconfidential basis prior to its disclosure by Parent. (c) Legal Compulsion to Disclose. In the event that any party or anyone to whom such party or its representatives transmits the Parent Information is requested or becomes legally compelled (by interrogatories, requests for information or documents, subpoena, civil investigative demand or similar -49- 55 process) to disclose any of the Parent Information, such party will, to the extent that it may legally do so, (i) provide Parent with prompt written notice so that Parent may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Section 14.08; and (ii) unless Parent waives compliance by such party with the provisions of this Section 14.08, make a timely objection to the request or confirmation to provide such Parent Information on the basis that such Parent Information is confidential and subject to the agreements contained in this Section 14.08. In the event that such protective order or other remedy is not obtained, or Parent waives compliance with the provisions of this Section 14.08, such party will furnish only that portion of the Parent Information which (in such party's good faith judgment) is legally required to be furnished and will exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded the Parent Information. (d) Survival. This Section 14.08 shall survive termination of this Agreement. SECTION 14.09. Captions and Cross References. The various captions (including, without limitation, the table of contents) in this Agreement are provided solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement. Unless otherwise indicated, references in this Agreement to any Section, Appendix, Schedule or Exhibit are to such Section of or Appendix, Schedule or Exhibit to this Agreement, as the case may be, and references in any Section, subsection, or clause to any subsection, clause or subclause are to such subsection, clause or subclause of such Section, subsection or clause. SECTION 14.10. Integration. This Agreement and the other Transaction Documents contain a final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire understanding among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings. SECTION 14.11. GOVERNING LAW. THIS AGREEMENT, INCLUDING THE RIGHTS AND DUTIES OF THE PARTIES HERETO, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS -50- 56 PRINCIPLES THEREOF), EXCEPT TO THE EXTENT THAT THE PERFECTION OF THE INTERESTS OF THE ADMINISTRATOR IN THE POOL ASSETS IS GOVERNED BY THE LAWS OF THE JURISDICTION OTHER THAN THE STATE OF NEW YORK. SECTION 14.12. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY OTHER TRANSACTION DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT OR DOCUMENT DELIVERED OR WHICH MAY BE IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING OR OTHER RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY TRIAL. SECTION 14.13. CONSENT TO JURISDICTION; WAIVER OF IMMUNITIES. EACH OF PARENT AND SELLER HEREBY ACKNOWLEDGES AND AGREES THAT: (a) IT HEREBY IRREVOCABLY (I) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN, STATE OF NEW YORK, OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY TRANSACTION DOCUMENT; (II) AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH STATE OR UNITED STATES FEDERAL COURT; (III) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING; (IV) CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO SUCH PERSON AT ITS ADDRESS SPECIFIED IN SECTION 14.02; AND (V) TO THE EXTENT ALLOWED BY LAW, AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION 14.13 SHALL AFFECT THE ADMINISTRATOR'S OR PURCHASER'S RIGHT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING ANY ACTION OR PROCEEDING AGAINST ANY OF SELLER OR PARENT OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTIONS. -51- 57 (b) TO THE EXTENT THAT IT HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM THE JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID TO EXECUTION, EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, IT HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER OR IN CONNECTION WITH THIS AGREEMENT. SECTION 14.14. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. SECTION 14.15. No Recourse Against Other Parties. No recourse under any obligation, covenant or agreement of Purchaser contained in this Agreement shall be had against any stockholder (solely in its capacity as stockholder), employee, officer, director, member or incorporator of Purchaser, provided, however, that nothing in this Section 14.15 shall relieve any of the foregoing Persons from any liability which such Person may otherwise have for his/her or its gross negligence or willful misconduct. -52- 58 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. D&K RECEIVABLES CORPORATION, as Seller By:_____________________________________ Name Printed:___________________________ Title:__________________________________ D&K HEALTHCARE RESOURCES, INC., as initial Servicer By:_____________________________________ Name Printed:___________________________ Title:__________________________________ BLUE KEEL FUNDING, LLC, as Purchaser By:_____________________________________ Name Printed:___________________________ Title:__________________________________ FLEET NATIONAL BANK, as Administrator By:_____________________________________ Name Printed:___________________________ Title:__________________________________ RECEIVABLES PURCHASE AGREEMENT S-1 59 APPENDIX A DEFINITIONS This is Appendix A to the Receivables Purchase Agreement dated as of August 7, 1998 among D&K Receivables Corporation, as Seller, Blue Keel Funding, LLC, as Purchaser, D&K Healthcare Resources, Inc., as initial Servicer, and Fleet National Bank, as Administrator (as amended, supplemented or otherwise modified from time to time, the "Agreement"). Unless otherwise indicated, all Section, Exhibit and schedule references in this Appendix are to Sections of and Exhibits and Schedules to the Agreement. A. Defined Terms. As used in the Agreement, unless the context requires a different meaning, the following terms have the meanings indicated hereinbelow: "Accounts" means all accounts, contract rights, chattel paper, instruments and documents, whether now owned or hereafter created or acquired by Parent or in which Parent now has or hereafter acquires any interest. "Administrator" has the meaning set forth in the preamble. "Administrator's Office" means the office of the Administrator at One Federal Street, Third Floor, Boston, Massachusetts 02211 or such other address as shall be designated by the Administrator in writing to Seller and Purchaser. "Affected Party" means each of Purchaser, each Program Support Provider, any assignee or participant of Purchaser or any Program Support Provider, Fleet, any successor to Fleet as Administrator, and any sub-agent of the Administrator. "Affiliate" when used with respect to a Person means any other Person, directly or indirectly, controlling, controlled by, or under common control with such Person, except, when used with respect to the Purchaser, Affiliate shall mean the holder(s) of its limited liability company interests. "Allocation Limit" has the meaning set forth in Section 1.01. "Alternate Base Rate" means, on any date, a fluctuating rate of interest per annum equal to the higher of (a) the rate of interest most recently announced by the Liquidity Agent in Boston, Massachusetts, as its prime rate; and -1- 60 (b) the Federal Funds Rate most recently determined by the Liquidity Agent plus 0.50% per annum. The Alternate Base Rate is not necessarily intended to be the lowest rate of interest determined by the Liquidity Agent in connection with extensions of credit. "Applicable Law" means all existing and future applicable laws, rules, regulations (including proposed, temporary and final income tax regulations), statutes, treaties, codes, ordinances, permits, certificates, orders and licenses of and interpretations by any Governmental Authority, and applicable judgments, decrees, injunctions, writs, orders or like action of any court, arbitrator or other administrative, judicial or quasi-judicial tribunal or agency of competent jurisdiction. "Asset Interest" means an undivided ownership interest determined from time to time as provided in Section 1.04(b) in all Pool Assets. "Business Day" means a day other than a Saturday or a Sunday on which both (a) the Administrator at its principal office in Boston, Massachusetts is open for business and (b) commercial banks in New York City, Chicago, Illinois and St. Louis, Missouri are not authorized or required to be closed for business. "Capital" means at any time with respect to the Asset Interest an amount equal to (a) the aggregate of the amounts theretofore paid to Seller for Purchases pursuant to Section 1.01, less (b) the aggregate amount of Collections theretofore received and actually distributed to Purchaser on account of the Capital pursuant to Section 3.01. "Capital Base" at any date means the sum of (i) Consolidated Tangible Net Worth, plus (ii) the principal amount of Subordinated Debt. "Capital Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by such Person as lessee which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on a balance sheet of such Person, other than, in the case of Parent or any of its Subsidiaries, any such lease under which Parent or a wholly-owned Subsidiary of Parent is the lessor. "Capitalized Lease Obligation" means any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. -2- 61 "Change in Control" means any of the following: (a) in relation to Parent, the acquisition following the date hereof by any person or group of persons (within the meaning of Section 13 or 14 of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Exchange Act) of issued and outstanding shares of the capital stock of Parent entitled (without regard to the occurrence of any contingency) to vote for the election of members of the board of directors of Parent and having a then present right to exercise 20% or more of the voting power for the election of members of the board of directors of Parent attached to all such outstanding shares of capital stock of Parent, unless otherwise agreed in writing by the Liquidity Banks and the Administrator; or (b) the creation or imposition of any Lien on any shares of capital stock of Seller; or (c) the failure by Parent to own all of the issued and outstanding capital stock of Seller and each Originator (other than Parent). "Collections" means, with respect to any Receivable, all funds which either (a) are received by Seller, Servicer, an Originator or any other Person from or on behalf of the related Obligors in payment of any amounts owed (including, without limitation, purchase prices, finance charges, interest and all other charges) in respect of such Receivable, or applied to such amounts owed by such Obligors (including, without limitation, insurance payments that Seller, an Originator or Servicer applies in the ordinary course of its business to amounts owed in respect of such Receivable and net proceeds of sale or other disposition of repossessed goods or other collateral or property of the Obligor or any other party directly or indirectly liable for payment of such Receivable and available to be applied thereon), or (b) are deemed to have been received by Seller or any other Person as a Collection pursuant to Section 3.02. "Commercial Paper Holders" means the holders from time to time of the Commercial Paper Notes. "Commercial Paper Notes" means short-term promissory notes issued or to be issued by Purchaser, or the proceeds of which are loaned to Purchaser, to fund its investments in accounts receivable or other financial assets. -3- 62 "Commitment Fee" means, for each day, the amount equal to the product of (x) the unused Liquidity Commitment Amount on such day, times (y) the Commitment Fee Rate, times (z) 1/360. "Commitment Fee Rate" has the meaning set forth in the Fee Letter. "Concentration Limit" for any Obligor at any time means an amount equal to (i) the aggregate Unpaid Balance of all Eligible Receivables at such time times (ii) the applicable percentage as set forth below opposite the appropriate ratings of such Obligor's long-term and short-term unsecured debt, or, in the case of any Obligor listed on Schedule A hereto, the percentage set forth opposite such Obligor's name on such Schedule A. Any Obligor that has a split rating shall be deemed to be in the lower rating category.
Long Term Rating Short-Term Rating Applicable - ---------------- ----------------- Percentage ---------- S&P Moody's S&P Moody's - --- ------- --- ------- A+ or better A+ or better A-1 P-1 8.0% BBB+ to A Baa1 to A2 A-2 P-2 6.0% BBB- to BBB Baa3 to Baa2 A-3 P-3 4.0% Not Rated Not Rated 2.0%
"Consolidated" means the consolidation in accordance with GAAP of the accounts or other items as to which such term applies. "Contract" means a contract between an Originator and any Person, or an invoice from an Originator to any Person, or any purchase order from any Person to an Originator pursuant to or under which such Person shall be obligated to make payments to an Originator. A "related" Contract with respect to the Receivables means a Contract under which Receivables in the Receivables Pool arise, which evidence such Receivables, or which is relevant to the collection or enforcement of such Receivables. "Contractual Obligation" with respect to any Person, means any provision of any securities issued by such Person or any indenture, mortgage, deed of trust, contract, undertaking, agreement, instrument or other document to which such Person is party or by which it or any of its property is bound or is subject. "Cost of Funds Rate" for any period means the sum of (i) the rate equivalent to the rate (or if more than one rate, the weighted average of rates) at which Commercial Paper Notes having a term equal to such period and to be issued to fund or maintain -4- 63 the Capital may be sold by any placement agent or commercial paper dealer selected by the Purchaser or a Program Support Provider, as agreed between each such agent or dealer and the Purchaser or such Program Support Provider and notified by the Purchaser to the Agent and the Servicer; provided, however, if the rate (or rates) as agreed between any such agent or dealer and the Purchaser with regard to any period is a discount rate (or rates), the "Cost of Funds Rate" for such period shall be the rate (or if more than one rate, the weighted average of the rates) resulting from converting such discount rate (or rates) to an interest-bearing equivalent rate (or rates) per annum, plus (ii), without duplication, the commissions and charges charged as a percentage of such face amount and converted to an interest-bearing equivalent rate per anum. "Credit and Collection Policy" means those credit and collection policies and practices relating to Contracts and Receivables described in Schedule 7.01(g), as modified without violating Section 7.03(c). "Current Assets" at any date means the amount at which all of the current assets of a Person would be properly classified as current assets on a balance sheet at such date in accordance with GAAP, except that amounts due from Affiliates, investments in Affiliates and prepaid expenses shall be excluded therefrom. "Cut-Off Date" means the last day of each calendar month. "Daily Report" has the meaning set forth in Section 3.01(a). "Deemed Collection" has the meaning set forth in the Purchase Agreement. "Defaulted Receivable" means a Receivable: (a) as to which any payment, or part thereof, remains unpaid for more than 90 days from the original due date for such payment, (b) as to which the Obligor thereof is the subject of an Event of Bankruptcy, or (c) which, consistent with the Credit and Collection Policy, would be written off the Seller's books as uncollectible. "Default Ratio" means the ratio (expressed as a percentage) computed as of a Cut-Off Date by dividing (x) the aggregate Unpaid Balance of all Overdue Receivables as of such Cut-Off Date by (y) the aggregate Unpaid Balance of all Pool Receivables as of the Cut-Off Date for the third preceding month. "Delinquency Ratio" means the ratio (expressed as a percentage) computed as of a Cut-Off Date by dividing (x) the aggregate Unpaid Balance of all Overdue Receivables on such CutOff Date by (y) the aggregate Unpaid Balance of all Pool Receivables on such date. -5- 64 "Delinquent Receivable" means a Receivable that is not a Defaulted Receivable and as to which any payment, or part thereof, remains unpaid for more than 30 days from the original due date for such payment. "Dilution" means any credit, adjustment, rebate, refund or setoff with respect to any Receivable granted or allowed by Seller or any Affiliate of Seller. "Dilution Reserve" means, at any time, an amount equal to (i) the Net Pool Balance at such time times (ii) greatest of (A) 4%, (B) the most recently calculated Sales-Based Dilution Ratio and (C) the average of the three most recently calculated Sales-Based Dilution Ratios times two. "Dollars" means dollars in lawful money of the United States of America. "Dynamic Loss Reserve Percentage" shall be measured as an amount calculated pursuant to the following formula: DLRP = LR x LH x SF where: DLRP = the Dynamic Loss Reserve Percentage; LR = the Loss Ratio, which shall be equal to the highest average of the Sales-Based Default Ratios for any three consecutive calendar months during the previous twelve calendar months; LH = the Loss Horizon, which shall be equal to the cumulative Sales over the previous three months divided by the Net Pool Balance as of the most recent Cut-Off Date; and SF = the Stress Factor, which shall be 2. "Earned Discount" means for any Settlement Period: C x ER x ED + LF ----------- 360 where: C = the daily average (calculated at the close of business each day) of the Capital during such Settlement Period, ER = the Earned Discount Rate for such Settlement Period, -6- 65 ED = the actual number of days elapsed during such Settlement Period, and LF = the Liquidation Fee, if any, during such Settlement Period. "Earned Discount Rate" means for any Settlement Period: (a) in the case of any portion of the Capital funded by a Liquidity Funding, the greater of (1) the sum of (i) the Eurodollar Rate (Reserve Adjusted) for such Settlement Period, plus (ii) 2.00% per annum and (2) the then applicable interest rate pursuant to the Loan Agreement; and (b) in the case of any portion of the Capital funded by any Commercial Paper Notes, the LIBOR for such Settlement Period; provided, however, that on any day during a Settlement Period when any Liquidation Event or Unmatured Liquidation Event shall have occurred and be continuing, the Earned Discount Rate for the Capital shall mean the "Default Rate" as defined in the Loan Agreement plus 1.00% per annum or, if the Loan Agreement is not then in effect, the higher of (i) the Alternate Base Rate in effect on such day plus 2% per annum and (ii) the LIBOR for such Settlement Period plus 3.50% per annum; provided, further that, unless the foregoing proviso applies, with respect to any Incremental Capital, for the period from the date of the related Purchase to the next Settlement Date, the Earned Discount Rate shall be the Cost of Funds Rate for such period. "Eligible Contract" means a Contract in one of the forms set forth in Schedule 7.01(e) or otherwise approved by the Administrator. "Eligible Receivable" means, at any time, a Receivable: (a) which is originated by an Originator in the ordinary course of its business for the sale of pharmaceuticals and related products; (b) which constitutes an account as defined in the UCC; (c) the Obligor of which is a resident of the United States, or any of its possessions or territories, is not an Affiliate of Seller and is not a Governmental Authority; (d) which was purchased or otherwise acquired by Seller pursuant to the Purchase Agreement and which was -7- 66 designated by the related Originator as an "Eligible Receivable" pursuant to the Purchase Agreement; (e) which is not a Delinquent Receivable or a Defaulted Receivable; (f) with respect to which the warranty of Seller in Section 6.01(k) is true and correct; (g) the sale of which, or of an undivided interest in which, does not contravene or conflict with Applicable Law, or require the consent of the Obligor or any other Person; (h) which is denominated and payable only in Dollars in the United States; (i) which arises under an Eligible Contract, which contract has been duly authorized by the parties thereto and that, together with such Receivable, is in full force and effect and constitutes the legal, valid and binding obligation of the Obligor of such Receivable enforceable against such Obligor in accordance with its terms and is not subject to any defense whatsoever (other than discharge in bankruptcy and payment); (j) which, together with the Contract related thereto, does not contravene in any material respect any Applicable Law and with respect to which no party to the Contract related thereto is in violation of any Applicable Law; (k) which (i) satisfies all material applicable requirements of the Credit and Collection Policy and (ii) complies with such other criteria and requirements (other than those relating to the collectibility of such Receivable) as the Administrator may from time to time specify to Seller in the exercise of its reasonable business judgment; (l) as to which the payment terms have not been altered or extended so as to materially affect the collectibility of such Receivable; (m) the Unpaid Balance of which is payable within 30 days or less from the invoice date therefor; (n) which are not Receivables owed by an Obligor for which more than 20% of the aggregate Unpaid Balance of Receivables of such Obligor constitute Defaulted Receivables; -8- 67 (o) which arise from the completion of the sale and delivery of goods and services performed, and which do not represent an invoice in advance of such completion; and (p) which are not subject to any contingent performance requirements of the Seller or the related Originator unless such requirements are guaranteed or insured by third parties acceptable to the Administrator. "ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurodollar Rate (Reserve Adjusted)" means, with respect to any Settlement Period and any portion of the Capital, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined pursuant to the following formula: Eurodollar Rate = Eurodollar Rate (Reserve Adjusted) 1 - Eurodollar Reserve Percentage where: "Eurodollar Rate" means, with respect to any Settlement Period and any portion of the Capital, the rate per annum at which Dollar deposits in immediately available funds are offered to the Eurodollar Office of the Administrator two Eurodollar Business Days prior to the beginning of such period by prime banks in the interbank eurodollar market at or about 11:00 a.m., New York City time for delivery on the first day of such Settlement Period, for the number of days comprised therein and in an amount equal or comparable to the applicable portion of the Capital for such Settlement Period. "Eurodollar Business Day" means a day of the year on which dealings are carried on in the eurodollar interbank market and banks are open for business in London and are not required or authorized to close in New York City. "Eurodollar Reserve Percentage" means, with respect to any Settlement Period, the then maximum reserve percentage (expressed as a decimal, rounded upward to the nearest 1/100th of 1%) prescribed by the Federal Reserve Board for determining the maximum reserve requirements applicable to "Eurocurrency Liabilities" pursuant to Regulation D having a term comparable to such Settlement Period. "Event of Bankruptcy" shall be deemed to have occurred with respect to a Person if either: -9- 68 (a) any case or other proceeding shall be commenced, without the application or consent of such Person, in any court, seeking the liquidation, reorganization, debt arrangement, dissolution, winding up, or composition or readjustment of debts of such Person, the appointment of a trustee, receiver, custodian, liquidator, assignee, sequestrator or the like for such Person or all or substantially all of its assets, or any similar action with respect to such Person under any law relating to bankruptcy, insolvency, reorganization, winding up or composition or adjustment of debts, and such case or proceeding shall continue undismissed, or unstayed and in effect, for a period of 60 consecutive days; or an order for relief in respect of such Person shall be entered in an involuntary case under the federal bankruptcy laws or other similar laws now or hereafter in effect and shall either not be contested or shall remain undismissed for 60 consecutive days; or (b) such Person shall commence a voluntary case or other proceeding under any applicable bankruptcy, insolvency, reorganization, debt arrangement, dissolution or other similar law now or hereafter in effect, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) for such Person or for any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail to, or admit in writing its inability to, pay its debts generally as they become due, or, if a corporation or similar entity, its board of directors shall vote to implement any of the foregoing. "Excess Amount" as of any date, means the amount, if any, by which the sum of the Capital, plus the Required Reserves on such date exceeds the Net Pool Balance, as most recently calculated. "Exchange Act" means the Securities and Exchange Act of 1934, as amended. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal (for each day during such period) to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York; or -10- 69 (b) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Fleet from three federal funds brokers of recognized standing selected by it. "Fee Letter" has the meaning set forth in Section 4.01. "Fees" means the Commitment Fee and the Program Fee. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System, or any successor thereto or to the functions thereof. "Final Payout Date" means the date following the Termination Date on which the Capital shall have been reduced to zero and all other amounts payable by Seller to Purchaser, the Administrator, the Affected Parties and the Indemnified Parties under the Transaction Documents shall have been paid in full. "Fleet" has the meaning set forth in the preamble. "GAAP" means generally accepted accounting principles as in effect in the United States from time to time. "Governmental Action" means all permits, authorizations, registrations, consents, approvals, waivers, exceptions, variances, orders, judgements, decrees, licenses, exemptions, publications, filings, notices to and declaration of or with, or required by, any Governmental Authority, or required by any Applicable Law. "Governmental Authority" means any foreign or domestic federal, state, county, municipal or other governmental or regulatory authority, agency, board, body, commission, instrumentality, court or any political subdivision thereof. "Incremental Capital" means the amount paid to Seller for any Purchase (other than the first Purchase) that is consummated on a day other than a Settlement Date. "Indebtedness" as applied to a Person means, without duplication, (i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations, -11- 70 (ii) all obligations of other Persons which such Person has guaranteed, (iii) all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued for the account of such Person, and (iv) in the case of Parent (without duplication), the Obligations (as defined in the Loan Agreement). "Indemnified Amounts" has the meaning set forth in Section 13.01. "Indemnified Party" has the meaning set forth in Section 13.01. "Independent Director" shall mean an individual who is not, and never was, (1) a member, stockholder, director, officer, employee, Affiliate, customer or supplier of, or an individual that has received any benefit (excluding, however, any compensation received in such individual's capacity as Independent Director) in any form whatever from, or an individual who has provided any service (excluding, however, any service provided by such individual in such individual's capacity as Independent Director) in any form whatever to, the Parent or any of its subsidiaries or Affiliates, or (2) an individual owning beneficially, directly or indirectly, any interest in the Parent, or a stockholder, director, officer, employee, Affiliate, customer or supplier thereof, or an individual who has received any direct economic benefit (excluding, however, any compensation received in such individual's capacity as Independent Director) in any form whatever from, or an individual who has provided any service (excluding, however, any service provided by such individual in such individual's capacity as Independent Director) in any form whatever to, such beneficial owner or any of such beneficial owner's Affiliates, or (3) an individual who is a relative or spouse of an individual described in clause (1) or (2) above. "Interest Rate Contract" means all interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, interest rate insurance and other agreements and arrangements designed to provide protection against fluctuations in interest rates, in each case as the same may be from time to time amended, restated, renewed, supplemented or otherwise modified. "LIBOR" means, with respect to any Settlement Period or portion thereof, the rate of interest (expressed as an annual rate and rounded upwards, if necessary, to the nearest 1/16th of 1%) at which deposits in Dollars would be offered by principal -12- 71 London offices of banks at approximately 11:00 a.m. (London time) on the first day of the Settlement Period or portion thereof for the period from that day to the next Settlement Date. For periods which extend from one Settlement Date to the next Settlement Date, the applicable rate will be the one-month LIBOR rate which appears on Telerate page 3750 as of 9:00 a.m. (Boston time) or as soon thereafter as practicable. For periods which begin on a day other than a Settlement Date, the applicable rate will be the rate equal to the average (rounded up to the nearest 1/16th of 1%) of the rates shown on the display referred to as the "LIBO" page (or any display substituted therefor) of the Telerate matrix (presently page 5) for a period of time from that day to the next Settlement Date. The determination of the applicable LIBOR rate by Purchaser shall be conclusive in the absence of demonstratable error. "Lien" means any mortgage, lien, pledge, encumbrance, charge, title retention or other security interest of any kind, whether arising under a security agreement, mortgage, deed of trust, assignment, pledge or financing statement or arising as a matter of law, judicial process or otherwise. "Liquidation Event" has the meaning set forth in Section 10.01. "Liquidation Fee" means, for each day in any Settlement Period during the Liquidation Period following the occurrence of a Liquidation Event, the amount, if any, by which: (a) the additional Earned Discount (calculated without taking into account any Liquidation Fee) which would have accrued on the reductions of the Capital during such Settlement Period (as so computed) if such reductions had not been made, exceeds (b) the income, if any, received by Purchaser from investing the proceeds of such reductions of the Capital. "Liquidation Period" means the period commencing on the date on which the conditions precedent to Purchases and Reinvestments set forth in Section 5.02 are not satisfied (or expressly waived by Purchaser) and the Administrator shall have notified Seller and Servicer in writing that the Liquidation Period has commenced, and ending on the Final Payout Date. "Liquidity Agent" means Fleet, as agent for the Liquidity Banks under the Liquidity Agreement, or any successor to Fleet in such capacity. "Liquidity Agreement" means and includes the Liquidity Agreement dated as of August 7, 1998 among Purchaser, Fleet, as -13- 72 Liquidity Agent, and certain other financial institutions, party thereto as liquidity providers, and any other agreement hereafter entered into by Purchaser providing for the making of loans, purchases or undivided interests or other extensions of credit to Purchaser to support all or part of Purchaser's payment obligations with respect to the Commercial Paper Notes or to provide an alternate means of funding Purchaser's investments in accounts receivable or other financial assets, and under which the amount available from such extensions of credit is limited to an amount calculated by reference to the value or eligible unpaid balance of such accounts receivable or other financial assets or any portion thereof or the level of deal-specific credit enhancement available with respect thereto. "Liquidity Bank" means any one of, and "Liquidity Banks" means all of, Fleet and the other financial institutions that are at any time parties to a Liquidity Agreement as liquidity providers. "Liquidity Commitment Amount" means, at any time, the then aggregate amount of the Liquidity Banks' commitments under the Liquidity Agreement. "Liquidity Funding" means a loan or purchase made by the Liquidity Bank (or simultaneous loans or purchases made by the Liquidity Banks) pursuant to a Liquidity Agreement. "Loan Agreement" means the Fourth Amended and Restated Loan and Security Agreement, dated as of August 7, 1998, among Fleet Capital Corporation, Parent and Jaron, Inc. "Lock-Box" means any post office box to which Collections of Pool Receivables are sent. "Lock-Box Account" means any bank account to which Collections of Pool Receivables are sent or deposited. "Lock-Box Agreement" means a letter agreement, in substantially the form of Exhibit 5.01(f), among Seller, Parent and any Lock-Box Bank. "Lock-Box Bank" means any of the banks holding one or more Lock-Box Accounts for receiving Collections from Pool Receivables. "Loss Reserve" means the product of (A) the greater of (1) 8%; and (2) the Dynamic Loss Reserve Percentage and (B) the Net Pool Balance. "Material Adverse Effect" with respect to any event or circumstance, means a material adverse effect on: -14- 73 (i) the business, financial condition, assets, prospects or operations of Seller or Parent; (ii) the ability of Servicer or Parent to perform its obligations under this Agreement or any other Transaction Document; (iii) the validity, enforceability or collectibility of this Agreement or any other Transaction Document or the validity, enforceability or collectibility of the Receivables; or (iv) the status, existence, perfection, priority or enforceability of the Administrator's or Purchaser's interest in the Pool Assets. "Monthly Servicer's Fee" means the Servicer's Fee accrued in a calendar month. "Moody's" means Moody's Investors Service, Inc. "Net Pool Balance" at any time means an amount equal to (i) the aggregate Unpaid Balance of the Eligible Receivables in the Receivables Pool at such time, minus (ii) the aggregate amount by which the aggregate Unpaid Balance of the Eligible Receivables of each Obligor and its Affiliates exceeds the Concentration Limit for such Obligor at such time. "Obligor" means a Person obligated to make payments with respect to a Receivable, including any guarantor thereof. "Originator" means the Parent in its capacity as originator of Receivables, together with the other originators party to the Purchase Agreement. "Overdue Receivable" means a Receivable that remains unpaid for more than 60 days but no more than 90 days from the original due date for such payment, or that has been charged off before it has become 91 days past due. "Parent" has the meaning set forth in the preamble. "Past Due Receivable" means a Receivable that remains unpaid for more than 30 days but no more than 60 days from the original due date for such payment, or that has been charged off before it has become 61 days past due. "PBI" means Pharmaceutical Buyers, Inc., an Arkansas corporation. -15- 74 "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company, government or any agency or political subdivision thereof or any other entity. "Pool Assets" has the meaning set forth in Section 1.04(a). "Pool Receivable" means a Receivable in the Receivables Pool. "Program Agreement" means each Liquidity Agreement, each agreement pursuant to which Purchaser obtains funding, through the issuance of Commercial Paper Notes or otherwise, and each other agreement entered into by Purchaser in connection with its securitization program. "Program Fee" means, for each day, the amount equal to the product of (x) the Capital on such day, times (y) the Program Fee Rate, times (z) 1/360. "Program Fee Rate" has the meaning set forth in the Fee Letter. "Program Information" has the meaning set forth in Section 14.07. "Program Support Provider" means each of each entity that issues Commercial Paper Notes, each Liquidity Bank and the Administrator. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Purchase" has the meaning set forth in Section 1.01. "Purchase Agreement" means the Purchase and Sale Agreement, dated as of August 7, 1998, among Seller and the Originators. "Purchase Limit" has the meaning set forth in Section 1.01. "Purchase Termination Date" means that day (a) the Administrator declares a Purchase Termination Date in a notice to Seller in accordance with Section 10.02(a); or (b) in accordance with Section 10.02(b), becomes the Purchase Termination Date automatically. -16- 75 "Purchaser" has the meaning set forth in the preamble. "Purchaser's Share" of any amount means the then Asset Interest, expressed as a percentage, (but not greater than 100%) times such amount. "Rating Agencies" at any time means those rating agencies then rating the Commercial Paper Notes. "Receivable" means any right to payment from a Person, whether constituting an account, chattel paper, instrument or general intangible, arising under a Contract and includes the right to payment of any interest or finance charges and other obligations of such Person with respect thereto. Indebtedness and other obligations arising from any one transaction, including, without limitation, indebtedness and other obligations represented by an individual invoice or agreement, shall constitute a Receivable separate from a Receivable consisting of the indebtedness and other obligations arising from any other transaction. "Receivables Pool" means at any time all then outstanding Receivables, other than Reconveyed Receivables. "Reconveyed Receivable" means a Receivable for which an Originator has paid the full Unpaid Balance pursuant to the Purchase Agreement. "Regulation D" means Regulation D of the Federal Reserve Board, or any other regulation of the Federal Reserve Board that prescribes reserve requirements applicable to nonpersonal time deposits or "Eurocurrency Liabilities" as presently defined in Regulation D, as in effect from time to time. "Regulatory Change" means, relative to any Affected Party (a) any change in (or the adoption, implementation, change in phase-in or commencement of effectiveness of) any (i) United States federal or state law or foreign law applicable to such Affected Party; (ii) regulation, interpretation, directive, requirement or request (whether or not having the force of law) applicable to such Affected Party of (A) any court, government authority charged with the interpretation or administration of any law referred to in clause (a)(i) or of (B) any fiscal, monetary or other authority having jurisdiction over such Affected Party; or -17- 76 (iii) GAAP or regulatory accounting principles applicable to such Affected Party and affecting the application to such Affected Party of any law, regulation, interpretation, directive, requirement or request referred to in clause (a)(i) or (a)(ii) above; or (b) any change in the application to such Affected Party of any existing law, regulation, interpretation, directive, requirement, request or accounting principles referred to in clause (a)(i), (a)(ii) or (a)(iii) above. "Reinvestment" has the meaning set forth in Section 1.03. "Related Security" means, with respect to any Pool Receivable: (a) all of Seller's or the related Originator's right, title and interest in and to all Contracts that relate to such Pool Receivable; (b) all security interests or liens and property subject thereto from time to time purporting to secure payment of such Pool Receivable, whether pursuant to the Contract related to such Pool Receivable or otherwise; (c) all UCC financing statements covering any collateral securing payment of such Pool Receivable; (d) all guarantees and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Pool Receivable whether pursuant to the Contract related to such Pool Receivable or otherwise; and (e) all of Seller's and the related Originator's interest in the merchandise (including returned merchandise), if any, relating to the sale that gave rise to such Pool Receivable. "Reporting Date" has the meaning set forth in Section 3.01(a). "Required Reserves" means, on any day, an amount equal to the sum of (1) the Dilution Reserve, (2) the Loss Reserve, and (3) the Yield Reserve, in each case as most recently calculated. "Restricted Investment" means any investment made in cash or by delivery of Property to any Person, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, advance or capital contribution, or otherwise, or in any Property except the following: (i) investments in one or more Subsidiaries of Parent to the extent existing on the date hereof; (ii) Property to be used in the ordinary course of business; -18- 77 (iii) Current Assets arising from the sale of goods and services in the ordinary course of business of Parent and its Subsidiaries; (iv) investments in direct obligations of the United States of America, or any agency thereof or obligations guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof; (v) investments in certificates of deposit maturing within one year from the date of acquisition issued by a bank or trust company organized under the laws of the United States or any state thereof having capital surplus and undivided profits aggregating at least $100,000,000; (vi) investments made under and pursuant to the Transaction Documents; and (vii) investments in commercial paper given the highest rating by a national credit rating agency and maturing not more than 270 days from the date of creation thereof. "S&P" means Standard & Poor's Ratings Services. "Sales" means sales of the Originators which generate trade receivables. "Sales-Based Default Ratio" means, as of any Cut-Off Date, the ratio, expressed as a percentage, of (i) the aggregate Unpaid Balance of all Past Due Receivables for the two successive months occurring immediately prior to the month ending on such Cut-off Date, divided by (ii) the aggregate billings for the fourth and fifth preceding months. For example, as of April 30, the numerator of the Sales-Based Default Ratio would be the aggregate Unpaid Balance of all Pool Receivables that were Past Due Receivables as of February 28 and March 31; the denominator of the Sales-Based Default Ratio would be the aggregate billings for the months of December and January. "Sales-Based Dilution Ratio" as of any Cut-Off Date means (a) the aggregate reduction attributable to Dilutions occurring in the Unpaid Balance of Pool Receivables which Dilutions were granted during the month ending on such Cut-Off Date; divided by (b) the aggregate amount of Sales for the month immediately preceding the month ending as of such Cut-Off Date. "Secured Parties" means Purchaser, the Administrator, the Indemnified Parties and the Affected Parties. -19- 78 "Security" shall have the meaning as in Section 2(l) of the Securities Act of 1933, as amended. "Seller" has the meaning set forth in the preamble. "Seller's Share" of any amount means (x) 100% minus the Asset Interest (but such Asset Interest shall not be greater than 100%) times (y) such amount. "Servicer" has the meaning set forth in Section 8.01(a). "Servicer Report" has the meaning set forth in Section 3.01. "Servicer Transfer Event" has the meaning set forth in Section 8.01(b). "Servicer's Fee" means, for each day, an amount equal to (x) the Servicer's Fee Rate, times (y) the aggregate Unpaid Balance of all Pool Receivables at the close of business on such day, times (z) 1/360. "Servicer's Fee Rate" means .50% per annum or, in the event that Parent is no longer the Servicer, such higher rate as may be charged by the successor Servicer. "Settlement Date" has the meaning set forth in Section 3.01(c). "Settlement Period" means the period (i) in the case of the first Settlement Period, from, and including, the date of the initial Purchase to, but excluding the next Settlement Date and (ii) thereafter, from, and including, each Settlement Date to, but excluding, the next Settlement Date. "Subordinated Debt" means indebtedness of Parent that is expressly subordinated to the Obligations (as defined in the Loan Agreement), including, without limitation, Indebtedness evidenced by the Promissory Note of D&K in favor of Steven B. Goldfine, as agent, issued in connection with the purchase of Northern Drug Company. "Subsidiary" means a corporation of which Parent and/or its other Subsidiaries own, directly or indirectly, such number of outstanding shares as have more than 50% of the ordinary voting power for the election of directors. "Successor Notice" has the meaning set forth in Section 8.01(b). "Tangible Assets" means all assets except: -20- 79 (i) any surplus resulting from any write-up of assets after June 30, 1997; (ii) deferred assets, other than prepaid insurance and prepaid taxes; (iii) patents, copyrights, trademarks, trade names, noncompete agreements, franchises and other similar intangibles; (iv) goodwill, including any amounts, however designated on a Consolidated balance sheet of a Person and its Subsidiaries, representing the excess of the purchase price paid for assets or stock over the value assigned thereto on the books of such Person; (v) Restricted Investments; (vi) unamortized debt discount and expense; (vii) assets located and notes and receivables due from obligors outside the Untied States of America; and (viii) accounts, notes and other receivables due from Affiliates or employees. "Tangible Net Worth" at any date means a sum equal to: (i) the net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves) at which the Tangible Assets of a Person would be shown on a balance sheet at such date in accordance with GAAP, plus (ii) such Person's LIFO reserve at such date (computed in accordance with GAAP) minus (iii) the amount at which such Person's liabilities (other than capital stock and surplus) would be shown on such balance sheet in accordance with GAAP, and including as liabilities all reserves for contingencies and other potential liabilities. "Termination Date" means the earliest of (a) the date of termination (whether by scheduled expiration, termination on default or otherwise) of any Program Support Provider's commitment under any Program Agreement; (b) the Purchase Termination Date; (c) August 7, 2001; and -21- 80 (d) the date on which Seller terminates Purchaser's right to make Purchases and Reinvestments pursuant to Section 1.05. "Transaction Documents" means this Agreement, the Lock-Box Agreements, the Purchase Agreement, the Fee Letter and other documents to be executed and delivered in connection herewith. "Turnover Rate" means, as of any Cut-Off Date, the ratio (expressed as a percentage) of (i) the aggregate Unpaid Balance of the Pool Receivables as of such Cut-Off Date, divided by (ii) the aggregate Collections for the month ending on such Cut-Off Date. "UCC" means the Uniform Commercial Code as from time to time in effect in the applicable jurisdiction or jurisdictions. "Unmatured Liquidation Event" means any event which, with the giving of notice or lapse of time, or both, would become a Liquidation Event. "Unpaid Balance" of any Receivable means at any time the unpaid principal amount thereof. "Yield Reserve" means, at any time, an amount equal to the product of (i) the Net Pool Balance on such day, times (ii) the sum of (A) the LIBOR for the current Settlement Period, plus (B) 2.00%, plus (C) the Servicer's Fee Rate, divided by (iii) 12, times (iv) 2, times (v) the most recently calculated Turnover Rate. B. Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. C. Computation of Time Periods. Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". D. Interpretation. In each Transaction Document, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such -22- 81 successors and assigns are permitted by the Transaction Documents, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; (iii) reference to any gender includes each other gender; (iv) reference to any agreement (including any Transaction Document), document or instrument means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms of the other Transaction Documents and reference to any promissory note includes any promissory note which is an extension or renewal thereof or a substitute or replacement therefor; and (v) reference to any Applicable Law means such Applicable Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder and reference to any section or other provision of any Applicable Law means that provision of such Applicable Law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision. -23- 82 SCHEDULE A
Obligor Rating Percentage** ------- ------ ---------- Walmart A1/P1 25.00% Kroger BBB-/Baa3 12.00% American Drug Stores P2/F2 10.00% Eckerd*/ A 10.00% - Schnucks N/R 7.00% Pamida B1 5.00% ARH N/R 5.00% Anthem N/R 5.00%
In addition, Schnucks, Pamida and ARH combined cannot exceed 15% during any one month. - -------- */ If Eckerd is no longer a wholly owned Subsidiary of JC Penney's, the Administrator may lower the listed percentage at any time at its discretion. **/ If any rating of any Obligor is lowered or withdrawn, or any Obligor is placed on credit watch, the Administrator may lower the listed percentage of such Obligor at any time at its discretion. -24- EX-10.28 7 EXHIBIT 10.28 1 EXHIBIT 10.28 FOURTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS FOURTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is made as of this 7th day of August, 1998, by and among FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation with an office at One North Franklin, Suite 3600, Chicago, IL 60606; and D & K HEALTHCARE RESOURCES, INC., a Delaware corporation ("D&K") and JARON, INC., a Florida corporation ("Jaron"), and each of which with its chief executive office and principal place of business at 8000 Maryland Avenue, St. Louis, Missouri 63105. (D&K and Jaron are sometimes hereinafter referred to collectively as the "Borrowers" and individually as a "Borrower"). Capitalized terms used in this Agreement have the meanings assigned to them in Appendix A, General Definitions. Accounting terms not otherwise specifically defined herein shall be construed in accordance with GAAP consistently applied. PRELIMINARY STATEMENT A. D&K, certain of its former subsidiaries, and Lender entered into that certain Third Amended and Restated Loan and Security Agreement dated as of March 3, 1995 (as amended from time to time, the "Third Restated Loan Agreement"). B. D&K owns all the issued and outstanding shares of stock of Jaron, and now D&K and Jaron wish to provide for a credit facility for their respective working capital needs. C. Contemporaneously herewith, D&K, its subsidiary, D&K Receivables Corporation ("Receivables"), and certain other subsidiaries of D&K are entering into a Purchase and Sale Agreement relating to transfer of certain of their Accounts and related rights to Receivables, and D&K, Receivables, Blue Keel Funding, LLC ("Blue Keel") and Fleet National Bank ("Bank") are entering into a Receivables Purchase Agreement pursuant to which the Bank for the benefit of Blue Keel will purchase an interest in such Accounts and related rights from Receivables. Lender is providing liquidity for such transaction pursuant to a Liquidity Agreement among Blue Keel, Bank, and Lender. (The transactions to be carried out pursuant to the Purchase and Sale Agreement, the Receivables Purchase Agreement, and the Liquidity Agreement are hereinafter referred to as the "Securitization," and such Agreements, together with any and all other documents, instruments and agreements executed and delivered in connection therewith [as well as all amendments, modifications, extensions, renewals or successor facilities], are hereinafter collectively referred to as the "Securitization Documents"). D. Borrowers have requested Lender's consent to the Securitization, and in connection therewith Lender and Borrowers now desire to amend and restate the Third Restated Loan Agreement in its entirety. 2 SECTION 1. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, Lender agrees to make a Total Credit Facility of up to $75,000,000 available upon Borrower's request therefor, as follows: 2. Revolving Credit Loans. 1. Loans and Reserves. Lender agrees, for so long as no Default or Event of Default exists, to make Revolving Credit Loans to Borrowers from time to time, as requested by D&K for itself or as agent for the Borrowers in the manner set forth in subsection 3.1.1 hereof, up to a maximum principal amount at any time outstanding equal to the Borrowing Base at such time minus reserves, if any. Lender shall have the right to establish reserves in such amounts, and with respect to such matters, as Lender shall deem necessary or appropriate, against the amount of Revolving Credit Loans which Borrowers may otherwise request under this subsection, including, without limitation, with respect to (i) price adjustments, damages, unearned discounts, returned products or other matters for which credit memoranda are issued in the ordinary course of Borrowers' business; (ii) shrinkage, spoilage and obsolescence of Inventory; (iii) slow moving Inventory; (iv) other sums chargeable against Borrowers' Loan Account as Revolving Credit Loans under any section of this Agreement; (v) amounts owing by any Borrower to any Person to the extent secured by a Lien on, or trust over, any Property of such Borrower; and (vi) such other matters, events, conditions or contingencies as to which Lender, in its sole credit judgment, determines reserves should be established from time to time hereunder. Borrowers may, from time to time, enter into contracts or hedging programs, which provide certain protections with respect to interest rate fluctuations. Lender may, from time to time (but has no obligation to), provide certain limited financial assurance to the provider of such products. In addition to the foregoing, and notwithstanding anything herein to the contrary, if Lender provides any such assurances, (w) and (A) such assurances are in favor of a Person other than the Bank, or (B) a Default or Event of Default exists at any time, Lender may, in its sole discretion, establish reserves for any and all obligations, direct or indirect, liquidated or contingent, incurred by Lender in connection with Borrowers, or either of them obtaining or Lender guaranteeing any interest rate protection or hedging products (such obligations of Lender are sometimes herein collectively referred to as "Interest Rate Protection Obligations"), and (x) without, in any way limiting any liability or other obligations which Borrowers shall have to Lender under any other document, instrument or agreement, Borrowers shall be jointly and severally liable to Lender to reimburse Lender for all Interest Rate Protection Obligations incurred by Lender in connection with such products and Lender may reimburse itself for any Interest Rate Protection Obligations by making a Revolving Credit Loan without request, approval or consent of Borrowers, and (y) the obligations of Borrowers to reimburse Lender for Interest Rate Protection Obligations are, without limitation, "Obligations", as defined in this Agreement, and (z) no Interest Rate Protection Obligations shall extend beyond the Original Term. 2 3 0.0.1. Use of Proceeds. The Revolving Credit Loans shall be used solely for the expenses incurred in connection with closing this loan transaction and the Securitization and for Borrowers' general operating capital needs in a manner consistent with the provisions of this Agreement and all applicable law. 0.1. Letters of Credit; LC Guaranties. Lender agrees, for so long as no Default or Event of Default exists and if requested by D&K on its own behalf or as agent for any Borrower, to (i) issue its, or cause to be issued its Affiliate's, Letters of Credit for the account of any Borrower or (ii) execute LC Guaranties by which Lender or its Affiliate shall guaranty the payment or performance by any Borrower of its reimbursement obligations with respect to Letters of Credit and letters of credit issued for Borrower's account by other Persons in support of such Borrower's obligations (other than obligations for the repayment of Money Borrowed), provided that the LC Amount at any time shall not exceed $1,000,000. No Letter of Credit or LC Guarantee may have an expiration date that is after the last day of the Original Term. Any amounts paid by Lender under any LC Guaranty or in connection with any Letter of Credit shall be treated as Revolving Credit Loans, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolving Credit Loans. 0.1. All Loans to Constitute One Obligation; Joint and Several Liability. All Loans and all other Obligations of the Borrowers hereunder shall constitute one general obligation of Borrowers, and shall be secured by Lender's security interest in and Lien upon all of the Collateral, and by all other security interests and Liens heretofore, now or at any time or times hereafter granted by any Borrower to Lender. The Borrowers shall be primarily and jointly and severally liable for all Obligations hereunder. If and to the extent a Borrower shall be deemed a guarantor of the other Borrowers hereunder, such Borrower's joint liability for any Loans made to the other Borrowers shall be deemed to be a guaranty of payment and performance, and not of collection. To the fullest extent permitted by law, each Borrower hereby waives promptness, diligence, notice of acceptance, and any other notices of any nature whatsoever with respect to any of the Obligations, and any requirement that the Lender protect, secure, perfect or insure any security interest or Lien on any property subject thereto or exhaust any right or take any action against the other Borrowers or any other Person or entity or any Collateral. Each Borrower hereby agrees that it will not exercise any rights which it may acquire by way of subrogation hereunder, by any payment made hereunder or otherwise, until all of the Obligations shall have been paid in full and Lender shall be under no duty to extend credit to or for the benefit of any Borrower. If any amount shall be paid to a Borrower on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount(s) shall be held in trust for the sole benefit of Lender and shall forthwith be paid to Lender to be applied to the Obligations, whether matured or unmatured, in accordance with the terms of this Agreement. If (i) any Borrower shall make payment to Lender of all or any part of the Obligations and (ii) all the Obligations shall be paid in full and Lender shall be under no duty to extend credit to or for the benefit of any Borrower, then Lender will, at such Borrower's request, execute and deliver to 3 4 such Borrower appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to such Borrower of an interest in the Obligations resulting from such payment by such Borrower. The liability of each Borrower under this Section shall be absolute and unconditional irrespective of: (i) any change in the time, manner or place of payment of, or in any other term of, any of the Obligations, or any other amendment or waiver of or any consent to departure from this Agreement; (ii) any exchange, release or non-perfection of any Collateral or any release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Obligations; and (iii) any other circumstance which might otherwise constitute a defense available to, or discharge of, a Borrower or a guarantor of the Obligations. 1. Appointment of D&K as Agent. 0.1. Appointment of Agent. Jaron hereby appoints its parent corporation, D&K, as its agent and attorney-in-fact to take any action, execute any document or instrument, consent or agree to any modification or amendment hereto or waiver of or departure from any of the terms hereof, to perform any Obligation of any Borrower hereunder, and to give or receive any notice by or to any Borrower hereunder. Without limiting the generality of the foregoing, D&K may request Loans or incur any other Obligation for the account of any Borrower, may elect on behalf of the Borrowers to have interest accrued pursuant to Section 2.1.3 hereof, shall prepare and deliver to Lender all reports concerning the Collateral and all financial statements required by this Agreement, and each Borrower shall be fully bound by the statements and actions of D&K acting as agent hereunder. Lender shall be entitled to rely absolutely and without duty of inquiry or investigation upon any agreement, request, communication or other notice given by D&K hereunder. Any notice given by Lender to D&K shall be deemed given to all Borrowers, whether or not this Agreement specifically so provides. This appointment of D&K as agent shall be irrevocable, and Lender shall have no duty to act in accordance with any direction given by any other Borrower. This provision is intended, among other things, to protect Lender against inconsistent directions given by individual Borrowers. It shall be a condition to Lender's obligations hereunder that each Borrower shall at all times have appointed a single entity as its agent, which agent shall be acceptable to Lender in its sole discretion. 0.1. Revolving Credit Loans. Jaron directs the Lender to disburse the proceeds of the Revolving Credit Loans to or at the direction of D&K as its agent, as specifically set forth in Section 1.4.1 above. From time to time, D&K may further distribute certain proceeds of the Revolving Loans to Jaron. D&K shall maintain detailed accountings and records of all 4 5 disbursements and payments made by Jaron with respect to the proceeds of the Revolving Credit Loans. Not in any way in limitation of any other provisions set forth herein, such books and records may be reviewed and copied by Lender, and D&K shall provide copies of the same upon demand by Lender. Accounts receivable carried on the books of D&K with respect to such distributions shall not be sold pursuant to the Securitization Documents and shall be secured by the Jaron Security Agreement and appropriate UCC-1 financing statements, executed and delivered by Jaron, which shall constitute a lien on all of the Collateral of Jaron subject only to the lien of Lender on the Collateral subject to the terms hereof. Such accounts receivables and the collateral securing the same, including all rights under or in connection the Jaron Security Agreement, shall, in any event, be included in the Collateral and all financing statements perfecting the subordinate lien of D&K shall be assigned, of record, to Lender. 0.1. Consent to Securitization and Securitization Documents. Lender hereby consents to the Securitization and the Securitization Documents. SECTION 1. INTEREST, FEES AND CHARGES 1. Interest. 0.1. 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. 0.1. 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 as agent for Jaron, shall elect to pay interest on any Revolving Credit Loan pursuant to Section 2.1.3 below, the Borrowers shall pay interest on (i) each Revolving Credit Loan, from and including the date of such Loan and (ii) any other Obligation under the Loan Documents 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 the Applicable Margin with respect to the LIBO Rate. 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 Closing Date shall be the LIBO Rate effective as of the opening of business on the Closing Date. 5 6 0.1. BASE RATE LOANS D&K, on its own behalf and as agent for Jaron, 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 the Applicable Margin with respect to the Base Rate 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. 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 at the Default Rate. 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 the Applicable Margin shall be the Base Rate effective as of the opening of business on such date. 0.1. 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) Business Days' notice by Lender to D&K the rate of interest on all such LIBO Rate Loans shall thereupon be determined under Section 2.1.3, and the right of D&K, on its own behalf and as agent for Jaron, 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 as agent for Jaron, 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 the Applicable Margin with respect to the LIBO Rate. 0.1. 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 6 7 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 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. 0.0.1. MINIMUM INTEREST RATE. Notwithstanding the foregoing, in no event shall the per annum rate of interest on any Revolving Credit Loan be less than five percent (5.0%). 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. 0.0.1. DEFAULT RATE. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of the Obligations under this Loan Agreement shall bear interest, calculated daily (computed on the actual days elapsed over a year of 360 days), at a fluctuating rate per annum equal to three and one-quarter percent (3.25%) above the interest rate that would otherwise apply under Sections 2.1.2 and 2.1.3 hereof (the "Default Rate"). 7 8 0.0.1. Usury. In no contingency or event whatsoever shall the aggregate of all amounts deemed interest hereunder and charged or collected pursuant to the terms of this Agreement 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 the highest applicable rate, Lender shall apply any such excess to any Obligation hereunder 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. 0.1. Computation of Interest and Fees. Interest, Letter of Credit and LC Guaranty fees, unused line fees and collection charges hereunder shall be calculated daily and shall be computed on the actual number of days elapsed over a year of 360 days. For the purpose of computing interest hereunder, all items of payment received by Lender shall be deemed applied by Lender on account of the Obligations (subject to final payment of such items) on the same Business Day as receipt by Lender of such items in Lender's account located in Chicago, Illinois. 0.1. Letter of Credit and LC Guaranty Fees. Borrowers shall pay to Lender: (i) for standby Letters of Credit and LC Guaranties of standby Letters of Credit, a fee equal to 1.375% per annum of the aggregate face amount of such Letters of Credit and LC Guaranties outstanding from time to time during the term of this Agreement, which fee shall be deemed fully earned upon issuance of each such Letter of Credit or LC Guaranty and shall be due and payable upon the issuance of such Letter of Credit or execution of such LC Guaranty, plus all normal and customary charges associated with the issuance thereof, which charges shall be deemed fully earned upon issuance of each such Letter of Credit or LC Guaranty, shall be due and payable on the first Business Day of each month and shall not be subject to rebate or proration upon the termination of this Agreement for any reason; and (ii) for documentary Letters of Credit and LC Guaranties of documentary Letters of Credit, a fee equal to 1.375% per annum of the face amount of each such Letter of Credit or LC Guaranty, and an additional fee equal to 1.375% per annum of the face amount of such Letter of Credit or LC Guaranty for each renewal and each extension thereof plus the normal and customary charges associated with the issuance and administration of each such Letter of Credit or LC Guaranty (which fees and charges shall be fully earned upon issuance, renewal or extension (as the case may be) of each such Letter of Credit or LC Guaranty, shall be due and payable on the first Business Day of each month, and shall not be subject to rebate or proration upon the termination of this Agreement for any reason). 8 9 0.1. Reimbursement of Expenses. If, at any time or times regardless of whether or not an Event of Default then exists, Lender incurs legal or accounting expenses or any other costs or out-of-pocket expenses in connection with (i) the negotiation and preparation of this Agreement or any of the other Loan Documents, any amendment of or modification of this Agreement or any of the other Loan Documents; (ii) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby; (iii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, any Borrower or any other Person) in any way relating to the Collateral, this Agreement or any of the other Loan Documents or Borrowers' affairs; (iv) any attempt to enforce any rights of Lender against any Borrower or any other Person which may be obligated to Lender by virtue of this Agreement or any of the other Loan Documents, including, without limitation, the Account Debtors; or (v) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then all such legal and accounting expenses, other costs and out of pocket expenses of Lender shall be charged to Borrowers. All amounts chargeable to Borrowers under this Section shall be Obligations secured by all of the Collateral, shall be payable on demand to Lender or to such Participating Lender, as the case may be, and shall bear interest from the date such demand is made until paid in full at the rate applicable to Revolving Credit Loans from time to time. Borrowers shall also reimburse Lender for expenses incurred by Lender in its administration of the Collateral to the extent and in the manner provided in Section 6 hereof. SECTION 1. LOAN ADMINISTRATION. 0.1. Manner of Borrowing Revolving Credit Loans. Borrowings under the credit facility established pursuant to Section 1 hereof shall be as follows: 0.0.1. Loan Requests. A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (i) D&K on its own behalf or as agent for any Borrower may give Lender notice of its intention to borrow, in which notice D&K shall specify the amount of the proposed borrowing and the proposed borrowing date, no later than 11:00 a.m. central time on the proposed borrowing date, provided, however, that no such request may be made at a time when there exists a Default or an Event of Default; and (ii) the becoming due of any amount required to be paid under this Agreement, whether as interest or for any other Obligation, shall be deemed irrevocably to be a request for a Revolving Credit Loan on the due date in the amount required to pay such interest or other Obligation. As an accommodation to D&K, Lender may permit telephonic requests for loans and electronic transmittal of instructions, authorizations, agreements or reports to Lender by D&K. Unless D&K specifically directs Lender in writing not to accept or act upon telephonic or electronic communications from any Borrower, Lender shall have no liability to any Borrower for any loss or damage suffered by such Borrower as a result of Lender's honoring 9 10 of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically or electronically and purporting to have been sent to Lender by D&K, for itself or as agent for any Borrower, and Lender shall have no duty to verify the origin of any such communication or the authority of the person sending it. 0.0.1. Disbursement. Borrowers hereby irrevocably authorize Lender to disburse the proceeds of each Revolving Credit Loan requested, or deemed to be requested, pursuant to this subsection as follows: (i) the proceeds of each Revolving Credit Loan requested under subsection 3.1.1(i) shall be disbursed by Lender in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from D&K, for itself and as agent for the Borrower, and in the case of each subsequent borrowing, by wire transfer to such bank account as may be agreed upon by D&K, for itself or as agent for any Borrower and Lender from time to time or elsewhere if pursuant to a written direction from D&K, for itself or as agent for any Borrower; and (ii) the proceeds of each Revolving Credit Loan requested under subsection 3.1.1(ii) shall be disbursed by Lender by way of direct payment of the relevant interest or other Obligation. 0.0.1. Authorization. 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 to pay all interest accrued on the Obligations during the immediately preceding month and to pay all costs, fees and expenses at any time owed by any Borrower to Lender hereunder. 0.1 Payments. Except where evidenced by notes or other instruments issued or made by any Borrower to Lender specifically containing payment provisions which are in conflict with this Section (in which event the conflicting provisions of said notes or other instruments shall govern and control), the Obligations shall be payable as follows: 0.0.1. Principal. Principal payable on account of Revolving Credit Loans shall be payable by Borrowers to Lender immediately upon the earliest of (i) the receipt by Lender or Borrower of any proceeds of any of the Collateral (after any prior liens thereon are paid in full), to the extent of said proceeds, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement pursuant to Section 4 hereof; provided, however, that if an Overadvance shall exist at any time, Borrowers shall, on demand, repay the Overadvance. 10 11 0.0.1. Interest. Interest accrued on account of Revolving Credit Loans shall be due on the earliest of (1) the first calendar day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (2) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations or (3) termination of this Agreement pursuant to Section 4 hereof. 0.0.1. Costs, Fees and Charges. Costs, fees and charges payable pursuant to this Agreement shall be payable by Borrower as and when provided in Section 2 hereof, to Lender or to any other Person designated by Lender in writing. 0.0.1. Other Obligations. The balance of the Obligations requiring the payment of money, if any, shall be payable by Borrowers to Lender as and when provided in this Agreement, the Other Agreements or the Security Documents, or on demand, whichever is later. 0.1. Prepayments. 0.0.1. Proceeds of Sale, Loss, Destruction or Condemnation of Collateral. If any of the Collateral is lost, damaged or destroyed or taken by condemnation, Borrower shall pay to Lender, unless otherwise agreed by Lender, as and when received by Borrower and as a mandatory prepayment of the Loans, a sum equal to the proceeds (including insurance payments) received by Borrowers from such sale, damage, loss, destruction or condemnation. 0.0.1. Other Mandatory Prepayments. Borrowers shall pay to Lender, unless otherwise agreed by Lender, as and when received by Borrower and as a mandatory prepayment of the Loans, a sum equal to the proceeds received by Borrowers as a result of any tax refund, indemnity payment, pension reversion or issuance of additional debt or equity of the Borrowers. 0.1. Application of Payments and Collections. All items of payment received by Lender by 12:00 noon, central time, on any Business Day shall be deemed received on that Business Day. All items of payment received after 12:00 noon, central time, on any Business Day shall be deemed received on the following Business Day. Borrowers irrevocably waive the right to direct the application of any and all payments and collections at any time or times hereafter received by Lender from or on behalf of Borrowers, and Borrowers do hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Lender or 11 12 its agent against the Obligations, in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. If as the result of collections of Accounts as authorized by this Agreement a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrowers, but shall be available to Borrowers at any time or times for so long as no Default or Event of Default exists. 0.1. All Loans to Constitute One Obligation. The Loans shall constitute one general Obligation of Borrowers, and shall be secured by Lender's Lien upon all of the Collateral. 0.1. Loan Account. Lender shall enter all Loans as debits to the Loan Account and shall also record in the Loan Account all payments made by Borrowers on any Obligations and all proceeds of Collateral which are finally paid to Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to Borrowers. 0.1. Statements of Account. Lender will account to D&K monthly with a statement of Loans, charges and payments made pursuant to this Agreement, and such account rendered by Lender shall be deemed final, binding and conclusive upon Borrowers unless Lender is notified by D&K in writing to the contrary within 60 days of the date each accounting is mailed to D&K. Such notice shall only be deemed an objection to those items specifically objected to therein. SECTION 1. TERM AND TERMINATION 0.1. Term of Agreement. Subject to Lender's right to cease making Loans to Borrowers upon or after the occurrence of any Default or Event of Default, this Agreement shall be in effect for a period from the date hereof, through and including August 6, 2001 (the "Original Term"). 0.1. Termination. 0.0.1. Termination by Lender. Lender may terminate this Agreement without notice upon or after the occurrence of an Event of Default. 12 13 0.0.1. Termination by Borrower. Upon at least 30 days prior written notice to Lender, D&K in its own behalf and as agent for the Borrowers, may, at its option, terminate this Agreement; provided, however, no such termination shall be effective until Borrowers have paid all of the Obligations in immediately available funds and all Letters of Credit and LC Guaranties have expired or have been secured by cash collateral to Lender's satisfaction. Any notice of termination given by D&K shall be irrevocable unless Lender otherwise agrees in writing, and Lender shall have no obligation to make any Loans or issue or procure any Letters of Credit or LC Guaranties on or after the termination date stated in such notice. Borrowers may elect to terminate this Agreement in its entirety only, and no Borrower may terminate this Agreement or its liability hereunder unless all Borrowers terminate this Agreement. No section of this Agreement or type of Loan available hereunder may be terminated singly. 0.0.1. Termination Charges. At the effective date of termination of this Agreement prior to the end of the Original Term for any reason, 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) as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to 1.0% of the average of each month's Average Monthly Loan Balance for the period from the date of this Agreement 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. If termination occurs on the last day of the Original Term or any extension of the Original Term (provided, that Lender has no obligation to extend the Original Term), no termination charge shall be payable. 0.0.1 Effect of Termination. All of the Obligations shall be immediately due and payable upon the termination date stated in any notice of termination of this Agreement. All undertakings, agreements, covenants, warranties and representations of Borrowers contained in the Loan Documents shall survive any such termination and Lender shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents notwithstanding such termination until Borrowers have irrevocably paid the Obligations to Lender, in full, in immediately available funds, together with the applicable termination charge, if any. Notwithstanding the payment in full of the Obligations, Lender shall not be required to terminate its security interests in the Collateral unless, with respect to any loss or damage Lender may incur as a result of dishonored checks or other items of payment received by Lender from Borrowers or any Account Debtor and applied to the Obligations, Lender shall, at its option, (i) have received a written agreement, executed by Borrowers and by any Person whose loans or other advances to Borrowers are used in whole or in part to satisfy the Obligations, indemnifying Lender from any such loss or damage; or (ii) have retained such monetary reserves and Liens on the Collateral for such period of time as 13 14 Lender, in its reasonable discretion, may deem necessary to protect Lender from any such loss or damage. SECTION 1. SECURITY INTERESTS 0.1. Security Interest in Collateral. To secure the prompt payment and performance to Lender of the Obligations, Borrowers hereby grant to Lender a continuing Lien upon all of the following Property and interests in Property of each of the Borrowers (but specifically excluding any Accounts and General Intangibles and related rights which are, from time to time, owned or purported to be owned by, or are subject to a security interest for the benefit of, a party other than either of the Borrowers as a result of a transfer pursuant to the Securitization Documents), whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (i) Accounts; (ii) Inventory; (iii) General Intangibles; (iv) Investment Property; (v) All monies and other Property of any kind now or at any time or times hereafter in the possession or under the control of Lender or a bailee or Affiliate of Lender; (vi) All accessions to, substitutions for and all replacements, products and cash and non-cash proceeds of (i) through (v) above, including, without limitation, proceeds of and unearned premiums with respect to insurance policies insuring any of the Collateral; and (vii) All books and records (including, without limitation, customer lists, credit files, computer programs, print-outs, and other computer materials and records and all records of purchases and sales of prescription drugs and controlled substances required to be kept by the Federal or any state government or agency thereof) of Borrower pertaining to any of (i) through (vi) above. 1. Lien Perfection; Further Assurances. Borrowers shall execute such UCC-1 financing statements as are required by the Code and such other instruments, assignments or documents as are necessary to perfect Lender's Lien upon any of the Collateral and shall take such other action as may be required to perfect or to continue the perfection of Lender's Lien upon the Collateral. 14 15 Unless prohibited by applicable law, each Borrower hereby authorizes Lender to execute and file any such financing statement on Borrower's behalf. The parties agree that a carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. At Lender's request, Borrowers shall also promptly execute or cause to be executed and shall deliver to Lender any and all documents, instruments and agreements deemed necessary by Lender to give effect to or carry out the terms or intent of the Loan Documents. SECTION 1. COLLATERAL ADMINISTRATION 1. General 0.1. Location of Collateral. All Collateral, other than Inventory in transit and motor vehicles, will at all times be kept by Borrowers and their respective Subsidiaries at one or more of the business locations set forth in EXHIBIT B hereto and shall not, without the prior written approval of Lender, be moved therefrom except, prior to an Event of Default and Lender's acceleration of the maturity of the Obligations in consequence thereof, for (i) sales of Inventory in the ordinary course of business; and (ii) the storage of Inventory at locations within the continental United States other than those shown on EXHIBIT B if (A) Borrowers give Lender written notice of the new storage location at least thirty (30) days prior to storing Inventory at such location, (B) Lender's security interest in such Inventory is and continues to be a duly perfected, first priority Lien thereon (subject only to Permitted Liens), (C) neither Borrowers' nor Lender's right of entry upon the premises where such Inventory is stored, or its right to remove the Inventory therefrom, in any way is restricted, (D) the owner of such premises agrees in writing pursuant to a waiver agreement, in form and substance acceptable to Lender, among other things, not to assert any landlord's, bailee's or other Lien in respect of the Inventory for unpaid rent or storage charges, and (E) all negotiable documents and receipts in respect of any Collateral maintained at such premises are delivered promptly to Lender. 0.1. Insurance of Collateral. Borrowers shall maintain and pay for insurance upon all Collateral wherever located and with respect to Borrowers' business, covering casualty, hazard, public liability and such other risks in such amounts and with such insurance companies as are reasonably satisfactory to Lender. Borrowers shall deliver the originals of such policies to Lender with satisfactory lender's loss payable endorsements, naming Lender as sole loss payee, assignee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever and a clause specifying that the interest of Lender shall not be impaired or invalidated by any act or neglect of Borrowers or the owner of the Property or by the occupation of the premises for purposes more hazardous than are permitted by said policy. 15 16 In the event Borrowers, at any time, fail to provide Lender with evidence of the insurance coverage as required by this Agreement, Lender may, but shall not be obligated to, purchase the insurance coverage at Borrowers' expense to protect Lender's interests in the Collateral. Such insurance may, but need not, protect Borrowers' interests. The insurance coverage that Lender purchases on behalf of Borrowers may not pay any claim that Borrowers make or any claim that is made against Borrowers in connection with the Collateral. Borrowers may later cancel any insurance coverage purchased by Lender, but only after providing Lender with evidence that insurance coverage has been obtained as provided for in this Agreement. In the event Lender purchases all or any portion of the insurance coverage for the Collateral or as otherwise required hereunder, Borrowers will be responsible for all costs and expenses of such insurance coverage, with the purchase of the insurance coverage including, but not limited to interest and any other charges imposed by Lender in connection with the purchase of the insurance coverage until the effective date of the cancellation or expiration of the insurance coverage. The costs and expenses of any insurance coverage purchased by Lender shall be added to the Obligations. Borrowers acknowledge that the costs and expenses of the insurance coverage purchased by Lender pursuant hereto may be more than the cost of insurance Borrowers may be able to obtain on their own. Borrowers shall deliver to Lender in kind, all instruments representing proceeds of insurance received by Borrowers. Borrowers agree to deliver to Lender, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. Pursuant to Mo. Rev. Stat. Section 427.120, Borrower acknowledges receipt of the following notice: "Unless you [Borrower] provide evidence of the insurance coverage required by your agreement with us [Lender], we may purchase insurance at you expense to protect our interests in your collateral. This insurance may, but need not, protect your interests. The coverage that we purchase may not pay any claim that you make or any claim that is made against you in connection with the collateral. You may later cancel any insurance purchased by us, but only after providing evidence that you have obtained insurance as required by our agreement. If we purchase insurance for the collateral, you will be responsible for the costs of that insurance, including the insurance premium, interest and any other charges we may impose in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to your total outstanding balance or obligation. The costs of the insurance may be more than the cost of insurance you may be able to obtain on your own." 0.1. Protection of Collateral. All expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, and any and all excise, property, sales, and use taxes imposed by any state, federal, or local authority on any of the Collateral or in respect of the sale thereof shall be borne and paid by Borrowers. If Borrowers fail to promptly pay any portion thereof when due, Lender may, at its option, but shall not be required to, pay the same and charge Borrowers therefor. Lender shall not be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto (except for reasonable care 16 17 in the custody thereof while any Collateral is in Lender's actual possession) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other person whomsoever, but the same shall be at Borrowers' sole risk. 1. Administration of Inventory. 0.1. Records and Reports of Inventory. Borrowers shall keep accurate and complete records of all Inventory. Borrowers shall furnish to Lender Inventory reports in form and detail satisfactory to Lender at such times as Lender may request, but at least once each week, not later than each Monday, for the immediately preceding week, or more frequently if requested by Lender. Borrowers shall conduct a physical inventory no less frequently than annually and shall provide to Lender a report based on each such physical inventory promptly thereafter, together with such supporting information as Lender shall request. No Inventory will at any time be misbranded or adulterated, and all Inventory shall bear all labels and warnings required by all federal or state laws, rules and regulations. 0.1. Returns of Inventory. If at any time or times hereafter any Account Debtor returns to Borrowers any Inventory the shipment of which generated an Account on which such Account Debtor is obligated in excess of $250,000, Borrowers shall immediately notify Lender of the same, specifying the reason for such return and the location, condition and intended disposition of the returned Inventory. 1. Payment of Charges. All amounts chargeable to Borrowers under Section 6 hereof shall be Obligations secured by all of the Collateral, shall be payable on demand and shall bear interest from the date such advance was made until paid in full at the rate applicable to Revolving Credit Loans from time to time. SECTION 1. REPRESENTATIONS AND WARRANTIES 1. General Representations and Warranties. To induce Lender to enter into this Agreement and to make advances hereunder, Borrowers jointly and severally warrant, represent and covenant to Lender that: 0.1 Organization and Qualification. Each Borrower and each of their respective Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each Borrower and each of their respective Subsidiaries is duly qualified and is authorized to do business and is in good standing as a foreign corporation in 17 18 each state or jurisdiction listed on EXHIBIT C hereto and in all other states and jurisdictions where the character of its Properties or the nature of its activities make such qualification necessary and in which the failure of such Borrower or any of its Subsidiaries to be so qualified would have a material adverse effect on the financial condition, business or Properties of such Borrower or any of its Subsidiaries. 0.1. Corporate Power and Authority. Each Borrower and each of their respective Subsidiaries is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the shareholders of any Borrower or any of its Subsidiaries; (ii) contravene any Borrower's or any of its Subsidiaries' charter, articles or certificate of incorporation or by-laws; (iii) violate, or cause any Borrower or any of its Subsidiaries to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to such Borrower or any of its Subsidiaries; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower or any of its Subsidiaries is a party or by which it or its Properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than Permitted Liens) upon or with respect to any of the Properties now owned or hereafter acquired by any Borrower or any of its Subsidiaries. 0.1. Legally Enforceable Agreement. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, a legal, valid and binding joint and several obligation of each Borrower and each of their respective Subsidiaries enforceable against each such entity in accordance with its respective terms. 0.1. Capital Structure. EXHIBIT D hereto states (i) the correct name of each of the Subsidiaries of each Borrower, its jurisdiction of incorporation and the percentage of its Voting Stock owned by such Borrower, (ii) the name of all of each Borrower's corporate or joint venture Affiliates and the nature of the affiliation, (iii) the number, nature and holder of all outstanding Securities of each Borrower and each Subsidiary of such Borrower and (iv) the number of authorized, issued and treasury shares of each Borrower and each Subsidiary of such Borrower. Each Borrower has good title to all of the shares it purports to own of the stock of each of its Subsidiaries, free and clear in each case of any Lien other than Permitted Liens. All such shares have been duly issued and are fully paid and non-assessable. There are no outstanding options to purchase, or any rights or warrants to subscribe for, or any commitments or agreements to issue or sell, or any Securities or obligations convertible into, or any powers of attorney relating to, shares of the capital stock of any Borrower or any of its Subsidiaries. There are no outstanding agreements or instruments binding upon any of any Borrower's shareholders relating to the ownership of its shares of capital stock. 18 19 0.1. Corporate Names. Neither Borrowers nor any of their respective Subsidiaries has been known as or used any corporate, fictitious or trade names except those listed on EXHIBIT E hereto. Except as set forth on EXHIBIT E, neither Borrowers nor any of their respective Subsidiaries has been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person. 0.1. Business Locations; Agent for Process. Each Borrower's and its Subsidiaries' chief executive office and other places of business are as listed on EXHIBIT B hereto. During the preceding one-year period, neither Borrowers nor any of their respective Subsidiaries has had an office, place of business or agent for service of process other than as listed on EXHIBIT B. Except as shown on EXHIBIT B, no Inventory is stored with a bailee, warehouseman or similar party, nor is any Inventory consigned to any Person. 0.1. Title to Properties; Priority of Liens. Each Borrower and its Subsidiaries has good, indefeasible and marketable title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of its real Property, and good title to all of the Collateral and all of its other Property, in each case, free and clear of all Liens except Permitted Liens. Each Borrower has paid or discharged all lawful claims, which, if unpaid, might become a Lien against any of Borrower's Properties that is not a Permitted Lien. The Liens granted to Lender under Section 5 hereof are first priority Liens, subject only to Permitted Liens. 0.1. Financial Statements; Fiscal Year. The consolidated and consolidating balance sheets of Borrowers and such other Persons described therein (including the accounts of all Subsidiaries of Borrowers for the respective periods during which a Subsidiary relationship existed) as of June 30, 1997, and the related statements of income, changes in stockholder's equity, and changes in financial position for the periods ended on such dates, have been prepared in accordance with GAAP, and present fairly the financial positions of Borrowers and such Persons at such dates and the results of Borrowers' operations for such periods. Since June 30, 1997, there has been no material change in the condition, financial or otherwise, of Borrower and such other Persons as shown on the Consolidated balance sheet as of such date and no change in the aggregate value of Equipment and real Property owned by any Borrower or such other Persons, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. The fiscal year of each Borrower and its Subsidiaries ends on June 30 of each year. 0.1. Full Disclosure. The financial statements referred to in subsection 7.1.8 hereof do not, nor does this Agreement or any other written statement of Borrowers to Lender, contain any untrue statement of a material fact or omit a material fact necessary to make the 19 20 statements contained therein or herein not misleading. There is no fact which Borrowers have failed to disclose to Lender in writing which materially affects adversely or, so far as Borrowers can now foresee, will materially affect adversely the Properties, business, prospects, profits or condition (financial or otherwise) of any Borrowers or any of its Subsidiaries or the ability of any Borrowers or its Subsidiaries to perform this Agreement or the other Loan Documents. 0.1. Solvent Financial Condition. Each Borrower and its Subsidiaries is now and, after giving effect to the Loans to be made and the Letters of Credit and LC Guaranties to be issued hereunder, at all times will be, Solvent. 0.1. Surety Obligations. No Borrower nor any of its Subsidiaries is obligated as surety or indemnitor under any surety or similar bond or other contract issued or entered into any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person. 0.1. Taxes. D&K's federal tax identification number is 43-1465483. Jaron's federal tax identification number is 65-0662045. The federal tax identification number of each of Borrowers' Subsidiaries is shown on EXHIBIT F hereto. Each Borrower and each of its Subsidiaries has filed all federal, state and local tax returns and other reports it is required by law to file and has paid, or made provision for the payment of, all taxes, assessments, fees, levies and other governmental charges upon it, its income and Properties as and when such taxes, assessments, fees, levies and charges that are due and payable, unless and to the extent any thereof are being actively contested in good faith and by appropriate proceedings and Borrowers maintain reasonable reserves on its books therefor. The provision for taxes on the books of Borrowers and their Subsidiaries are adequate for all years not closed by applicable statutes, and for its current fiscal year. 0.1. Brokers. There are no claims for brokerage commissions, finder's fees or investment banking fees in connection with the transactions contemplated by this Agreement. 0.1. Patents, Trademarks, Copyrights and Licenses. Each Borrower and its Subsidiaries owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and planned future conduct of its business without any known conflict with the rights of others. All such patents, trademarks, service marks, tradenames, copyrights, licenses and other similar rights are listed on EXHIBIT G hereto. 0.1. Governmental Consents. Each Borrower and its Subsidiaries has, and is in good standing with respect to, all governmental consents, approvals, licenses, authorizations, 20 21 permits, certificates, inspections and franchises necessary to continue to conduct its business as heretofore or proposed to be `conducted by it and to own or lease and operate its Properties as now owned or leased by it. 0.1. Compliance with Laws. Each Borrower and its Subsidiaries has duly complied with, and its Properties, business operations and leaseholds are in compliance in all material respects with, the provisions of all federal, state and local laws, rules and regulations applicable to such Borrower or such Subsidiary, as applicable, its Properties or the conduct of its business and there have been no citations, notices or orders of noncompliance issued to such Borrower or any of its Subsidiaries under any such law, rule or regulation. Each Borrower and its Subsidiaries has established and maintains an adequate monitoring system to insure that it remains in compliance with all federal, state and local laws, rules and regulations applicable to it. No Inventory has been produced in violation of the Fair Labor Standards Act (29 U.S.C. Section 201 et seq.), as amended. 0.1. Restrictions. No Borrower nor any of such Borrower's Subsidiaries is a party or subject to any contract, agreement, or charter or other corporate restriction, which materially and adversely affects its business or the use or ownership of any of its Properties. No Borrower nor any of such Borrower's Subsidiaries is a party or subject to any contract or agreement which restricts its right or ability to incur Indebtedness, other than as set forth on Exhibit H hereto, none of which prohibit the execution of or compliance with this Agreement or the other Loan Documents by such Borrower or any of its Subsidiaries, as applicable. 0.1. Litigation. Except as set forth on EXHIBIT I hereto, there are no actions, suits, proceedings or investigations pending, or to the knowledge of any Borrower, threatened, against or affecting any Borrower or any of its Subsidiaries, or the business, operations, Properties, prospects, profits or condition of any Borrower or any of its Subsidiaries. No Borrower nor any of its Subsidiaries is in default with respect to any order, writ, injunction, judgment, decree or rule of any court, governmental authority or arbitration board or tribunal. 0.1. No Defaults. No event has occurred and no condition exists which would, upon or after the execution and delivery of this Agreement or Borrowers' performance hereunder, constitute a Default or an Event of Default. No Borrower nor any of its Subsidiaries is in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any Indebtedness to any Person for Money Borrowed. 0.1. Leases. EXHIBIT J hereto is a complete listing of all capitalized leases of each Borrower and its Subsidiaries and EXHIBIT K hereto is a complete listing of all operating 21 22 leases of each Borrower and its Subsidiaries. Each Borrower and its Subsidiaries is in full compliance with all of the terms of each of its respective capitalized and operating leases. 0.1. Pension Plans. Except as disclosed on EXHIBIT L hereto, no Borrower nor any of its Subsidiaries has any Plan. Each Borrower and each of its Subsidiaries is in full compliance with the requirements of ERISA and the regulations promulgated thereunder with respect to each Plan. No fact or situation that could result in a material adverse change in the financial condition of any Borrower or any of its Subsidiaries exists in connection with any Plan. No Borrower nor any of its Subsidiaries has any withdrawal liability in connection with a Multiemployer Plan. O.1. Trade Relations. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between any Borrower or any of its Subsidiaries and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of such Borrower or any of its Subsidiaries, or with any material supplier, and there exists no present condition or state of facts or circumstances which would materially affect adversely any Borrower or any of its Subsidiaries or prevent any Borrower or any of its Subsidiaries from conducting such business after the consummation of the transaction contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted. 0.1. Labor Relations. Except as described on EXHIBIT M hereto, no Borrower nor any of its Subsidiaries is a party to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or any other organization of any Borrower's or any of its Subsidiaries' employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. 0.1. Environmental Matters. Except as described in EXHIBIT N, each Borrower and its Subsidiaries and/or each property, operations and facility that any Borrower or any Subsidiary may own, operate or control (i) is in compliance with, in all material respects, all applicable Environmental Laws; (ii) is not subject to any judicial or administrative proceeding or order alleging the violation of any Environmental Law; (iii) has not received any written notice (A) that it may be in violation of any Environmental Law, (B) threatening the commencement of any proceeding relating to any Adverse Environmental Condition, (C) alleging that it is or may be responsible (in whole or in part) for any Adverse Environmental Condition, or (D) ordering or directing any Borrower or any Subsidiary to take any action or refrain from taking any action because of an Adverse Environmental Condition; (iv) to the best of each Borrower's knowledge, is not the subject of any federal, state or local investigation evaluating whether any investigation, remedial action or other response is needed to respond to an Adverse Environmental Condition; and (v) has not filed any notice indicating or reporting any Adverse Environmental Condition 22 23 except for such notices or reports required by Environmental Laws as a result of routine business operations. 0.1. Securitization. No default has occurred under any of the Securitization Documents 0.1. Plotnik Subordinated Note. The Plotnik Subordinated Note was retired and paid in full, and cancelled by Ricky Plotnik, effective June 30, 1998, in exchange for the issuance of common stock of D&K. D&K has no Indebtedness to Ricky Plotnik. 1. Continuous Nature of Representations and Warranties. Each representation and warranty contained in this Agreement and the other Loan Documents shall be continuous in nature and shall remain accurate, complete and not misleading at all times during the term of this Agreement, except for changes in the nature of any Borrower's or its Subsidiaries' business or operations that would render the information in any exhibit attached hereto either inaccurate, incomplete or misleading, so long as Lender has consented to such changes or such changes are expressly permitted by this Agreement. 1. Survival of Representations and Warranties. All representations and warranties of Borrowers contained in this Agreement or any of the other Loan Documents shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. SECTION 1 COVENANTS AND CONTINUING AGREEMENTS 1. Affirmative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, each Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: 0.1. Visits and Inspections. Permit representatives of Lender, from time to time, as often as may be reasonably requested, but only during normal business hours, to visit and inspect the Properties of each Borrower and each of its Subsidiaries, inspect, audit (which shall, prior to a Default, be at Lender's cost) and make extracts from its books and records, and discuss with its officers, its employees and its independent accountants, such Borrower's and each of its Subsidiaries' business, assets, liabilities, financial condition, business prospects and results of operations. 23 24 0.1. Notices. Promptly notify Lender in writing of the occurrence of any event or the existence of any fact which renders any representation or warranty in this Agreement or any of the other Loan Documents inaccurate, incomplete or misleading. 0.1. Financial Statements. Keep, and cause each Subsidiary to keep, adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP reflecting all its financial transactions; and cause to be prepared and furnished to Lender and to each Participating Lender the following (all to be prepared in accordance with GAAP applied on a consistent basis, unless such Borrower's certified public accountants concur in any change therein and such change is disclosed to Lender and is consistent with GAAP): (i) not later than 90 days after the close of each fiscal year of Borrowers, unqualified audited financial statements of each Borrower and its Subsidiaries as of the end of such year, on a Consolidated and consolidating basis, certified by a firm of independent certified public accountants of recognized standing selected by Borrowers but acceptable to Lender (except for a qualification for a change in accounting principles with which the accountant concurs); (ii) not later than 30 days after the end of each month hereafter, including the last month of each Borrower's fiscal year, unaudited interim financial statements of each Borrower and its Subsidiaries as of the end of such month and of the portion of such Borrower's financial year then elapsed, on a Consolidated and consolidating basis, certified by the principal financial officer of such Borrower as prepared in accordance with GAAP and fairly presenting the Consolidated financial position and results of operations of each Borrower and its Subsidiaries for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; (iii) as soon as possible, but no later than 30 days after the close of each fiscal year of the Borrowers, quarterly Projections for all Borrowers for the following year on a consolidated and consolidating basis; (iv) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which any Borrower has made available to its shareholders and copies of any regular, periodic and special reports or registration statements which any Borrower files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or any national securities exchange; 24 25 (v) promptly after the filing thereof, copies of any annual report to be filed with ERISA in connection with each Plan; and (vi) such other data and information (financial and otherwise) as Lender, from time to time, may reasonably request, bearing upon or related to the Collateral or any Borrower's and any of such Borrower's Subsidiaries' financial condition or results of operations. Concurrently with the delivery of the financial statements described in clause (i) of this subsection, each Borrower shall forward to Lender a copy of the accountants' letter to such Borrower's management that is prepared in connection with such financial statements and also shall cause to be prepared and shall furnish to Lender a certificate of the aforesaid certified public accountants certifying to Lender that, based upon their examination of the financial statements of such Borrower and its Subsidiaries performed in connection with their examination of said financial statements, they are not aware of any Default or Event of Default, or, if they are aware of such Default or Event of Default, specifying the nature thereof, and acknowledging, in a manner satisfactory to Lender, that they are aware that Lender is relying on such financial statements in making its decisions with respect to the Loans. Concurrently with the delivery of the financial statements described in clauses (i) and (ii) of this subsection, or more frequently if requested by Lender, each Borrower shall cause to be prepared and furnished to Lender a Compliance Certificate in the form of EXHIBIT O hereto executed by the Chief Financial Officer of such Borrower. 0.0.1. Landlord and Storage Agreements. Provide Lender with copies of all agreements between any Borrower or any of its Subsidiaries and any landlord or warehouseman which owns any premises at which any Inventory may, from time to time, be kept. 0.0.1. Year 2000. Take all action necessary to assure that at all times Borrowers' computer-based systems are able to process data effectively, including dates after December 31, 1999. At Lender's request, Borrowers shall provide to Lender assurance reasonably acceptable to Lender that Borrowers' computer-based systems are or will be, prior to June 20, 1999, year 2000 compatible. 0.0.1 Subordinations. Provide Lender with a debt subordination agreement, in form and substance satisfactory to Lender, executed by such Borrower and any Person who is an officer, director or Affiliate of such Borrower to whom such Borrower is or hereafter becomes indebted for Money Borrowed, subordinating in right of payment and claim all of such Indebtedness and any future advances thereon to the full and final payment and performance of the Obligations. 25 26 0.0.1. Further Assurances. At Lender's request, promptly execute or cause to be executed and delivered to Lender any and all documents, instruments and agreements deemed necessary by Lender to perfect or to continue the perfection of Lender's Liens, to facilitate the collection of the Collateral or otherwise to give effect to or carry out the terms or intent of this Agreement or any of the other Loan Documents. Without limiting the generality of the foregoing, if any of the Accounts, the face value of which exceeds $10,000, arises out of a contract with the United States of America, or any department, agency, subdivision or instrumentality thereof, Borrowers shall promptly notify Lender thereof in writing and shall execute any instruments and take any other action required or requested by Lender to comply with the provisions of the Federal Assignment of Claims Act. 0.0.1 Compliance with Subordination Agreements and Intercreditor Agreement. Comply at all times (within any applicable grace or cure period) with all the terms of the Subordination Agreements and the Intercreditor Agreement, to the extent not inconsistent with this Agreement. 0.0.1 Retirement of Jaron Indebtedness to Capital Business Credit, Inc.. Retire and irrevocably pay in full all of Jaron's outstanding Indebtedness to Capital Business Credit, Inc. on or before August 31, 1998. 0.1. Negative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, each Borrower covenants that, unless Lender has first consented thereto in writing, it will not: 0.0.1. Mergers; Consolidations; Acquisitions. Except as otherwise provided in this Section 8.2.1, merge or consolidate, or permit any Subsidiary of any Borrower to merge or consolidate, with any Person; nor acquire, nor permit any of its Subsidiaries to acquire, all or any substantial part of the Properties of any Person; provided that the consolidation of PBI with D&K shall not constitute a violation of this covenant so long as such consolidation does not involve a merger and so long as D&K does not become directly or indirectly liable for any Indebtedness of PBI; and further provided that the Borrowers may make acquisitions of the Properties of any Person so long as the aggregate purchase price (however structured or denominated) for all acquisitions by the Borrowers for any fiscal year does not exceed $2,000,000. 0.0.1. Loans. Make, or permit any Subsidiary of any Borrower to make, any loans or other advances of money (other than pursuant to the Securitization Documents, and 26 27 other than for salary, travel advances, advances against commissions and other similar advances in the ordinary course of business) to any Person in excess of $100,000. 0.0.1. Total Indebtedness. Create, incur, assume, or suffer to exist, or permit any Subsidiary of any Borrower to create, incur or suffer to exist, any Indebtedness, except: (i) Obligations owing to Lender; (ii) Subordinated Debt existing on the date of this Agreement; (iii) Indebtedness of any Subsidiary of any Borrower to such Borrower; (iv) accounts payable to trade creditors and current operating expenses (other than for Money Borrowed) which are not aged more than 60 days from billing date or more than 30 days from the due date, in each case incurred in the ordinary course of business and paid within such time period, unless the same are being actively contested in good faith and by appropriate and lawful proceedings; and Borrower or such Subsidiary shall have set aside such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by Borrower or such Subsidiary and its independent accountants; (v) Obligations to pay Rentals permitted by subsection 8.2.13; (vi) Permitted Purchase Money Indebtedness; (vii)contingent liabilities arising out of endorsements of checks and other negotiable instruments for deposit or collection in the ordinary course of business; (viii) Indebtedness pursuant to the Securitization Documents; (ix) Until August 31, 1998, Indebtedness of Jaron, Inc. to Capital Business Credit, Inc., in an amount of up to $10,000,000; and (x) the Indebtedness to Magna Bank, N.A., which is subject to the Intercreditor Agreement. 0.0.1. Affiliate Transactions. Enter into, or be a party to, or permit any Subsidiary of any Borrower to enter into or be a party to, any transaction with any Affiliate of such Borrower or stockholder, except in the ordinary course of and pursuant to the reasonable requirements of such Borrower's or such Subsidiary's business and upon fair and reasonable terms which are fully disclosed to Lender and are no less favorable to such Borrower than would obtain in a comparable arm's length transaction with a Person not an Affiliate or stockholder of such Borrower or such Subsidiary. The parties hereto acknowledge that the conduct by 27 28 Borrowers or their Subsidiaries of the transactions contemplated by and in accordance with the Securitization Documents shall not violate the provisions of this Section. 0.0.1. Limitation on Liens. Create or suffer to exist, or permit any Subsidiary of any Borrower to create or suffer to exist, any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Lender; (ii) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due, or being contested in the manner described in subsection 7.1.12 hereto, but only if in Lender's judgment such Lien does not adversely affect Lender's rights or the priority of Lender's Lien in the Collateral; (iii) Liens arising in the ordinary course of Borrower's business by operation of law or regulation, but only if payment in respect of any such Lien is not at the time required and such Liens do not, in the aggregate, materially detract from the value of the Property of Borrower or materially impair the use thereof in the operation of Borrower's business; (iv) Purchase Money Liens securing Permitted Purchase Money Indebtedness; (v) Liens securing Indebtedness of one of Borrower's Subsidiaries to Borrower or another such Subsidiary; (vi) such other Liens as appear on EXHIBIT O hereto; (vii) Liens arising out of the Securitization Documents; and (viii) such other Liens as Lender may hereafter approve in writing. 0.0.1. Subordinated and Intercreditor Debt. Make, or permit any Subsidiary of any Borrower to make, any payment of any part or all of any Subordinated Debt or take any other action or omit to take any other action in respect of any Subordinated Debt, except in accordance with the Subordination Agreement relative thereto. Make, or permit any Subsidiary of any Borrower to make, any amendment to the documents executed in connection with D&K's Indebtedness to Magna Bank, N.A. which is subject to the Intercreditor Agreement which would increase the amount or extend the maturity thereof. 0.0.1. Distributions. Declare or make, or permit any Subsidiary of Borrower to declare or make, any Distributions, except for dividends of Jaron to D&K, provided that not less 28 29 than 5 business days prior to the payment of such dividend, D&K shall give Lender written notice describing the amount of such dividend. 0.0.1. Capital Expenditures. Make Capital Expenditures (including, without limitation, by way of capitalized leases) which, in the aggregate, as to Borrower and its Subsidiaries, exceed $1,500,000 during any fiscal year of Borrowers. 0.0.1. Disposition of Assets. Sell, lease or otherwise dispose of any of, or permit any Subsidiary of any Borrower to sell, lease or otherwise dispose any of, its Properties, including any disposition of Property as part of a sale and leaseback transaction, to or in favor of any Person, except (i) sales of Inventory in the ordinary course of business for so long as no Event of Default exists hereunder, (ii) disposition of worn out, obsolete or damaged Equipment in the ordinary course of business, (iii) transfer of Property to a Borrower by a Subsidiary of such Borrower, (iv) dispositions expressly authorized by this Agreement or (v) dispositions under or pursuant to the Securitization. 0.0.1. Stock of Subsidiaries. Permit any of its Subsidiaries to issue any additional shares of its capital stock except director's qualifying shares. 0.0.1. Bill-and-Hold Sales, Etc. Make a sale to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on approval or consignment basis, or any sale on a repurchase or return basis. 0.0.1 Restricted Investment. Make or have, or permit any Subsidiary of any Borrower to make or have, any Restricted Investment. 0.0.1. Leases. Become, or permit any of its Subsidiaries to become, a lessee under any operating lease (other than a lease under which a Borrower or any of its Subsidiaries is lessor) of Property if the aggregate Rentals payable during any current or future period of 12 consecutive months under the lease in question and all other leases under which Borrowers or any of their Subsidiaries is then 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. 0.0.1. Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary of D&K. 29 30 0.0.1. Amendment of Securitization Documents. Request any waiver of or consent to any default under the terms of the Securitization Documents. 0.0.1. API. Permit API, as a Subsidiary of D&K, to own any property other than the real property currently owned by such Subsidiary. 0.1. Specific Financial Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, each Borrower covenants that, unless otherwise consented to by Lender in writing, it and all other Borrowers shall (all financial covenants being computed on a consolidated basis): (A) Current Ratio. Maintain at all times a ratio of Consolidated Current Assets to Consolidated Current Liabilities of not less than 1.25 to 1.0. For purposes of computing the ratio contemplated herein, the amount of Borrowers' Inventory comprising Consolidated Current Assets shall be computed on a first in, first out basis in accordance with GAAP. (B) Interest Coverage Ratio. Maintain at all times for each period of three (3) consecutive months (computed on a rolling-basis commencing with the three month period ending March 31, 1995) a ratio of Net Cash Flow plus Interest Expense to Interest Expense of not less than 1.75 to 1.00. (C) Debt Service Coverage Ratio. Maintain for each fiscal year of Borrowers 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. (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 July 1, 1998 through June 30, 1999 $10,000,000 July 1, 1999 through June 30, 2000 $12,500,000 July 1, 2000 and thereafter $15,000,000 SECTION 1. CONDITIONS PRECEDENT 30 31 Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Lender under the other sections of this Agreement, Lender shall not be required to make any Loan under this Agreement unless and until each of the following conditions has been and continues to be satisfied: 0.1. Documentation. Lender shall have received, in form and substance satisfactory to Lender and its counsel, a duly executed copy of this Agreement and the other Loan Documents, together with such additional documents, instruments, certificates and opinions of Borrowers' counsel as Lender and its counsel shall require in connection therewith from time to time, all in form and substance satisfactory to Lender and its counsel, including without limitation, the Jaron Security Agreement along with all filed copies of all UCC-1 Financing Statements naming D&K as the secured party, and assigned to Lender. 0.1. No Default. No Default or Event of Default shall exist. 0.1. Other Loan Documents. Each of the conditions precedent set forth in the other Loan Documents shall have been satisfied. 0.1. No Litigation. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby. 0.1. Securitization. The Securitization shall have been consummated substantially in accordance with the terms of the Securitization Documents. 0.1. Environmental. Lender shall be satisfied as to the existing and potential liability of the Borrowers and their respective Subsidiaries with respect to any environmental matters including, without limitation, compliance with Environmental Laws and regulations. 0.1. No Material Adverse Change. There shall have occurred no material adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower or its Subsidiaries since June 30, 1997. 0.1. Fee Letter. Borrowers shall have paid to Lender the fees payable under the Fee Letter which are due and payable on the Closing Date. 31 32 SECTION 1. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 0.1. Events of Default. The occurrence of one or more of the following events shall constitute an "Event of Default": 0.0.1. Default under Securitization Documents. Any default, liquidation event, or termination (other than a voluntary termination by Borrower), or any event giving rise to a right of liquidation or termination, shall occur under the Securitization Documents. 0.0.1. Payment of Other Obligations. Borrowers shall fail to pay any of the Obligations within ten (10) days after the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise). 0.0.1. Misrepresentations. Any representation, warranty or other statement made or furnished to Lender by or on behalf of any Borrower or any Subsidiary of any Borrower in this Agreement, any of the other Loan Documents or any instrument, certificate or financial statement furnished in compliance with or in reference thereto proves to have been false or misleading in any material respect when made or furnished or when reaffirmed pursuant to Section 7.2 hereof. 0.0.1. Breach of Specific Covenants. Any Borrower shall fail or neglect to perform, keep or observe any covenant contained in Sections 5.2, 6.1.1, 6.2, 8.1.1, 8.1.3, 8.1.8, 8.1.9, 8.2, or 8.3 hereof on the date that such Borrower is required to perform, keep or observe such covenant. 0.0.1. Breach of Other Covenants. Any Borrower shall fail or neglect to perform, keep or observe any covenant contained in this Agreement (other than a covenant which is dealt with specifically elsewhere in Section 10.1 hereof) and the breach of such other covenant is not cured to Lender's satisfaction within 30 days after the sooner to occur of D&K's receipt of notice of such breach from Lender or the date on which such failure or neglect first becomes known to any officer of such Borrower. 0.0.1. Default Under Security Documents/Other Agreements. Any event of default shall occur under, or any Borrower shall default in the performance or observance of any 32 33 term, covenant, condition or agreement contained in, any of the Security Documents; or the Other Agreements and such default shall continue beyond any applicable grace period. 0.0.1. Other Defaults. There shall occur any default or event of default on the part of any Borrower under any agreement, document or instrument to which such Borrower is a party or by which such Borrower or any of its Property is bound, creating or relating to any Indebtedness in excess of $10,000 (other than the Obligations) if the payment or maturity of such Indebtedness is accelerated in consequence of such event of default or demand for payment of such Indebtedness is made. 0.0.1. Uninsured Losses. Any material loss, theft, damage or destruction of any of the Collateral not fully covered (subject to such deductibles as Lender shall have permitted) by insurance. 0.0.1. Insolvency and Related Proceedings. Any Borrower shall cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against any Borrower under the Bankruptcy Code (if against any Borrower, the continuation of such proceeding for more than 60 days), or any Borrower shall make any offer of settlement, extension or composition to their respective unsecured creditors generally. 0.0.1. Business Disruption; Condemnation. There shall occur a cessation of a substantial part of the business of any Borrower, or any Subsidiary of any Borrower for a period which significantly affects Borrower's capacity to continue its business, on a profitable basis; or any Borrower or any Subsidiary of any Borrower shall suffer the loss or revocation of any material license or permit now held or hereafter acquired by any Borrower or such Subsidiary which is necessary to the continued or lawful operation of its business; or any Borrower shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business affairs; or any material lease or agreement pursuant to which any Borrower leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term; or any part of the Collateral shall be taken through condemnation or the value of such Property shall be impaired through condemnation. 0.0.1. ERISA. A Reportable Event shall occur which Lender, in its sole discretion, shall determine in good faith constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or if any Plan shall be terminated or any such trustee shall be requested or appointed, or if any Borrower, or any Subsidiary of any Borrower is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan 33 34 resulting from such Borrower's, such Subsidiary's or such Guarantor's complete or partial withdrawal from such Plan. 0.0.1. Challenge to Agreement. Any Borrower, or any Subsidiary of any Borrower, or any Affiliate of any of them, shall challenge or contest in any action, suit or proceeding the validity or enforceability of this Agreement, or any of the other Loan Documents, the legality or enforceability of any of the Obligations or the perfection or priority of any Lien granted to Lender. 0.0.1. Repudiation of or Default Under Guaranty. Any Guarantor shall revoke or attempt to revoke any guaranty signed by such Guarantor, or shall repudiate such Guarantor's liability thereunder or shall be in default under the terms thereof. 0.0.1. Criminal Forfeiture. Any Borrower, or any Subsidiary of any Borrower shall be criminally indicted or convicted under any law that could lead to a forfeiture of any Property of Borrower, any Subsidiary of Borrower or any Guarantor. 0.0.1. Change of Management. Armstrong shall cease to be employed by D&K as its Chief Executive Officer, and to perform the duties ordinarily attendant to such office. 0.0.1. Judgments. Any money judgment, writ of attachment or similar process in an amount in excess of $1,000,000 is filed against any Borrower or any Subsidiary of any Borrower, or any of their respective Property. 0.1. Acceleration of the Obligations. Without in any way limiting the right of Lender to demand payment of any portion of the Obligations payable on demand in accordance with this Agreement, upon or at any time after the occurrence of an Event of Default, all or any portion of the Obligations shall, at the option of Lender and without presentment, demand, protest or further notice by Lender, become at once due and payable and Borrowers shall forthwith pay to Lender, the full amount of such Obligations, provided, that upon the occurrence of an Event of Default specified in subsection 10.1.9 hereof (relating to insolvency), all of the Obligations shall become automatically due and payable without declaration, notice or demand by Lender. In connection with any Letter of Credit issued or guaranteed pursuant to this Agreement, Borrowers shall deliver to Lender cash collateral to be held interest-free by Lender in the aggregate maximum amount of all letters of Credit then issued and outstanding. If Borrowers fail to so deliver cash collateral, Lender may sell Collateral pursuant to this Agreement and hold the proceeds thereof as cash collateral. 34 35 0.1. Other Remedies. Upon and after the occurrence of an Event of Default, Lender shall have and may exercise from time to time the following rights and remedies: 0.0.1. All of the rights and remedies of a secured party under the Code or under other applicable law, and all other legal and equitable rights to which Lender may be entitled, all of which rights and remedies shall be cumulative and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents, and none of which shall be exclusive. 0.0.1. The right to take immediate possession of the Collateral, and to (i) require Borrowers to assemble the Collateral, at Borrowers' expense, and make it available to Lender at a place designated by Lender which is reasonably convenient to both parties, and (ii) enter any premises where any of the Collateral shall be located and to keep and store the Collateral on said premises until sold (and if said premises be the Property of a Borrower, such Borrower agrees not to charge Lender for storage thereof). 0.0.1. The right to sell or otherwise dispose of all or any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all as Lender, in its sole discretion, may deem advisable. Borrowers agree that 10 days written notice to D&K of any public or private sale or other disposition of Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Lender may designate in said notice. Lender shall have the right to conduct such sales on Borrowers' premises, without charge therefor, and such sales may be adjourned from time to time in accordance with applicable law. Lender shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. The proceeds realized from the sale of any Collateral may be applied, after allowing 1 Business Day for collection, first to the costs, expenses and attorneys' fees incurred by Lender in collecting the Obligations, in enforcing the rights of Lender under the Loan Documents and in collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivering any Collateral, second to the interest due upon any of the Obligations; and third, to the principal of the Obligations. If any deficiency shall arise, Borrowers shall remain jointly and severally liable to Lender therefor. In the event of a sale of Collateral on credit terms, the Borrowers' Obligations shall be reduced only to the extent that Lender receives cash payment in respect of such credit sale. 35 36 0.0.1. Lender is hereby granted a license or other right to use, without charge, Borrowers' labels, patents, copyrights, rights of use of any name, trade secrets, tradenames, trademarks and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrowers' rights under all licenses and all franchise agreements shall inure to Lender's benefit. 0.0.1. Lender may, at its option, require Borrowers to deposit with Lender funds equal to the LC Amount and, if Borrower fails to promptly make such deposit, Lender may advance such amount as a Revolving Credit Loan (whether or not an Overadvance is created thereby). Any such deposit or advance shall be held by Lender as a reserve to fund future payments on such LC Guaranties and future drawings against such Letters of Credit. At such time as all LC Guaranties have been paid or terminated and all Letters of Credit have been drawn upon or expired, any amounts remaining in such reserve shall be applied against any outstanding Obligations, or, if all Obligations have been indefeasibly paid in full, returned to Borrowers. 0.1. Remedies Cumulative; No Waiver. All covenants, conditions, provisions, warranties, guaranties, indemnities, and other undertakings of Borrowers contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule or in any guaranty given to Lender or contained in any other agreement between Lender and any Borrower, heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of Borrowers herein contained. The failure or delay of Lender to require strict performance by any Borrower of any provision of this Agreement or to exercise or enforce any rights, Liens, powers, or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such performance, Liens, rights, powers and remedies, but all such requirements, Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and all other Obligations owing or to become owing from Borrowers to Lender shall have been fully satisfied. None of the undertakings, agreements, warranties, covenants and representations of Borrowers contained in this Agreement or any of the other Loan Documents and no Event of Default by any Borrower under this Agreement or any other Loan Documents shall be deemed to have been suspended or waived by Lender, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Lender and directed to D&K, as agent for the Borrowers. SECTION 1. MISCELLANEOUS 0.1. Power of Attorney. Borrowers hereby irrevocably designate, make, constitute and appoint Lender (and all Persons designated by Lender) as Borrowers' true and lawful attorney 36 37 (and agent-in-fact) and Lender, or Lender's agent, may, without notice to any Borrower and in either any Borrower's or Lender's name, but at the cost and expense of Borrowers: 0.0.1. At such time or times upon or after the occurrence of a Default or an Event of Default as Lender or said agent, in its sole discretion, may determine, endorse any Borrower's name on any checks, notes, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Lender or under Lender's control. 0.0.1. At such time or times upon or after the occurrence of an Event of Default as Lender or its agent in its sole discretion may determine: (i) demand payment of any Accounts which are part of the Collateral from the Account Debtors, enforce payment of such Accounts by legal proceedings or otherwise, and generally exercise all of Borrower's rights and remedies with respect to the collection of such Accounts; (ii) settle, adjust, compromise, discharge or release any of such Accounts or other Collateral or any legal proceedings brought to collect any of such Accounts or other Collateral; (iii) sell or assign any of such Accounts and other Collateral upon such terms, for such amounts and at such time or times as Lender deems advisable; (iv) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign any Borrower's name to a proof of claim in bankruptcy or similar document against any Account Debtor of an Account which is part of the Collateral or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and dispose of all mail addressed to any Borrower and to notify postal authorities to change the address for delivery thereof to such address as Lender may designate; (vii) endorse the name of any Borrower upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Lender on account of the Obligations; (viii) endorse the name of any Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (ix) use any Borrower's stationery and sign the name of any Borrower to verifications of the Accounts which are part of the Collateral and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory, Investment Property, and any other Collateral; (xi) make and adjust claims under policies of insurance; and (xii) do all other acts and things necessary, in Lender's determination, to fulfill Borrowers' obligations under this Agreement. 0.0.1. Indemnity. Borrowers hereby jointly and severally agree to indemnify and hold harmless each Indemnified Party from and against any liability, loss, damage, suit, action or proceeding ever suffered or incurred by such Indemnified Party (including reasonable attorneys fees and legal expenses) arising out of or in connection with the Securitization Documents or the closing of the transaction described therein, or as a result of any Borrower's failure to observe, perform or discharge Borrower's duties hereunder. In addition, Borrowers shall jointly and 37 38 severally be obligated to defend each Indemnified Party against and save it harmless from all claims of any Person with respect to the Collateral. Without limiting the generality of the foregoing, these indemnities shall extend to any claims asserted against any Indemnified Party by any Person under any Environmental Laws or similar laws by reason of any Borrower's or any other Person's failure to comply with laws applicable to solid or hazardous waste materials or other toxic substances. Notwithstanding any contrary provision in this Agreement, the obligation of Borrowers under this Section shall survive the payment in full of the Obligations and the termination of this Agreement. 0.0.1. Modification of Agreement; Sale of Interest. This Agreement may not be modified, altered or amended, except by an agreement in writing signed by Borrowers and Lender. Borrowers may not sell, assign or transfer any interest in this Agreement, any of the other Loan Documents, or any of the Obligations, or any portion thereof, including, without limitation, Borrowers' rights, title, interests, remedies, powers, and duties hereunder or thereunder. Borrowers hereby consent to Lender's participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, including, without limitation, Lender's rights, title, interests, remedies, powers, and duties hereunder or thereunder. In the case of an assignment, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were "Lender" hereunder and in the case of a total assignment Lender shall be relieved of all obligations hereunder upon any such assignments. Each Borrower agrees that it will use its best efforts to assist and cooperate with Lender in any manner reasonably requested by Lender to effect the sale of participations in or assignments of any of the Loan Documents or any portion thereof or interest therein, including, without limitation, assisting in the preparation of appropriate disclosure documents. Each Borrower further agrees that Lender may disclose credit information regarding such Borrower and its Subsidiaries to any potential participant or assignee. 0.0.1. Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 0.1. Successors and Assigns. This Agreement, the Other Agreements and the Security Documents shall be binding upon and inure to the benefit of the successors and assigns of Borrowers and Lender permitted hereunder. 0.1. Cumulative Effect; Conflict of Terms. The provisions of the Other Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. 38 39 Except as otherwise provided in Section 3.2 hereof and except as otherwise provided in any of the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 0.1. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument, subject to Section 11.14. 0.1. Notice. Except as otherwise provided herein, all notices, requests and demands to or upon a party hereto, to be effective, shall be in writing and shall be sent by certified or registered mail, return receipt requested, by personal delivery against receipt, by overnight courier or by facsimile and, unless otherwise expressly provided herein, shall be deemed to have been validly served, given or delivered immediately when delivered against receipt, one Business Day after deposit in the mail, postage prepaid, or with an overnight courier or, in the case of facsimile notice, when sent, addressed as follows: If to Lender: Fleet Capital Corporation 20800 Swenson Dr., Suite 350 Waukesha, WI 53186 Attention: Loan Administration Manager Facsimile No.: 414/798-4882 With a copy to: Husch & Eppenberger, LLC 100 N. Broadway, Suite 1300 St. Louis, MO 63102 Attention: Maury B. Poscover, Esq. Facsimile No.: 314/421-0239 39 40 If to Borrowers: D & K Healthcare Resources, Inc. 8000 Maryland Avenue St. Louis, MO 63105 Attention: J. Hord Armstrong Facsimile No.:314/727-5759 With a copy to: Armstrong, Teasdale, Schlafly & Davis One Metropolitan Square Suite 2600 St. Louis, MO 63102 Attention: John L. Sullivan Facsimile No.:314/621-5065 or to such other address as each party may designate for itself by no in accordance with this Section; provided, however, that any notice, request or demand to or upon Lender pursuant to subsection 3.1.1 or 4.2.2 hereof shall not be effective until received by Lender. 0.1. Lender's Consent. Whenever Lender's consent is required to be obtained under this Agreement, any of the Other Agreements or any of the Security Documents as a condition to any action, inaction, condition or event, Lender shall be authorized to give or withhold such consent in its sole and absolute discretion and to condition its consent upon the giving of additional collateral security for the Obligations, the payment of money or any other matter. 0.1. Credit Inquiries. Each Borrower hereby authorizes and permits Lender to respond to usual and customary credit inquiries from third parties concerning such Borrower or any of its Subsidiaries, subject to Section 11.14. 0.1. Time of Essence. Time is of the essence of this Agreement, the Other Agreements and the Security Documents. 0.1. Entire Agreement. This Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. 0.1. Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by 40 41 any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 0.1. GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN CHICAGO, ILLINOIS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS: PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN ILLINOIS, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF ILLINOIS. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF ANY BORROWER OR LENDER, EACH BORROWER HEREBY CONSENTS AND AGREES THAT ANY STATE OR FEDERAL COURT LOCATED IN THE CITY OR COUNTY OF ST. LOUIS, MISSOURI, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. EACH BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH BORROWER HEREBY WAIVES ANY OBJECTION WHICH SUCH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO ANY BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH BORROWER'S ACTUAL RECEIPT THEREOF OR 3 DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF 41 42 ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. 0.1. WAIVERS BY BORROWERS. EACH BORROWER WAIVES (i) THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL: (ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER ON WHICH EACH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD; (iii) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; AND (v) NOTICE OF ACCEPTANCE HEREOF. EACH BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER. EACH BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 0.1. Private Sale; Commercial Reasonableness. The Borrowers acknowledge that a significant portion of the Collateral consists of prescription drugs and controlled substances that are subject to applicable federal and state regulations which, among other things, restrict the right to sell and purchase such drugs and controlled substances to certain licensed or otherwise authorized Persons. In view of these restrictions on the ability to sell and purchase such Collateral, the Borrowers acknowledge that a public sale of such Collateral under the UCC would be legally impossible or otherwise impractical. Accordingly, the Borrowers agree that a private sale of any such Collateral, and any other Collateral sold in connection therewith, shall not be deemed a commercially unreasonable sale under the UCC by virtue of the Lender selling, or offering to sell, such Collateral only to Persons who are licensed or otherwise authorized to purchase such Collateral. The Borrowers further recognize that, in connection with the disposition of such Collateral subject to federal and state regulations, the Lender may incur 42 43 additional costs and expenses such as, by way of example and not as a limitation, obtaining certain federal and state licenses or other authorizations to permit the Lender to sell or purchase such Collateral, retaining the services of auctioneers or other persons licensed or otherwise authorized to dispose of such Collateral, retaining legal counsel and experts in the area of prescription drugs and controlled substances to advise Lender on the disposition of such Collateral, and verifying that any purchasers of such Collateral are licensed or otherwise authorized to acquire such Collateral. Any such reasonable additional costs and expenses incurred by the Lender shall be added to the Obligations and be payable on demand and shall not affect the commercial reasonableness of any such sale. Borrowers hereby agree to cooperate with any such sale to the extent reasonably requested by Lender. 0.1. Confidentiality. Lender agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" or "secret" by Borrower and provided to it by the Borrower or any Subsidiary, under this Agreement or any other Loan Document, and neither such Lender nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the others Loan Documents or in connection with other business now or hereafter existing or contemplated with the Borrower or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by Lender, or (ii) was or becomes available on a non-confidential basis from a source other than the Borrower, provided that such source is not bound by a confidentiality agreement with the Borrower or any Subsidiary known to Lender; provided, however that any Lender may disclose such information (A) at the request or pursuant to any requirement of any governmental authority to which Lender is subject or in connection with an examination of Lender by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable requirement of law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Lender or any of their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to Lender's independent auditors and other professional advisors; (G) to any participant or assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Lender hereunder; (H) as to any Lender or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Borrower or any Subsidiary is party or is deemed party with Lender or Such Affiliate; and (I) to its Affiliates. 43 44 IN WITNESS WHEREOF, this Agreement has been duly executed on the day and year specified at the beginning of this Agreement. D & K HEALTHCARE RESOURCES, INC. By: ________________________________ Name: Title: JARON, INC. By: ________________________________ Name: Title: FLEET CAPITAL CORPORATION By: ________________________________ Name: Title: 44 45 APPENDIX A GENERAL DEFINITIONS When used in the Loan and Security Agreement dated as of August 7, 1998, by and among Fleet Capital Corporation, D & K Healthcare Resources, Inc., and Jaron, Inc., the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): Account Debtor - any Person who is or may become obligated under or on account of an Account. Accounts - all Accounts (as defined in the Code), contract rights, chattel paper, instruments and documents, whether now owned or hereafter created or acquired by Borrower or in which Borrower now has or hereafter acquires any interest. Adjusted Net Earnings From Operations - with respect to any fiscal period, means the net earnings (or loss) after provision for income taxes for such fiscal period of a Borrower, as reflected on the financial statement of such Borrower supplied to Lender pursuant to the Agreement, but excluding: (i) any gain or loss arising from the sale of capital assets; (ii) any gain arising from any write-up of assets; (iii) earnings of any Subsidiary of any Borrower accrued prior to the date it became a Subsidiary; (iv) earnings of any corporation, substantially all the assets of which have been acquired in any manner by a Borrower, realized by such corporation prior to the date of such acquisition; (v) net earnings of any business entity (other than a Subsidiary of a Borrower) in which Borrower has an ownership interest unless such net earnings shall have actually been received by a Borrower in the form of cash distributions; (vi) any portion of the net earnings of any Subsidiary of a Borrower which for any reason is unavailable for payment of dividends to such Borrower; (vii) the earnings of any Person to which any assets of a Borrower shall have been sold, transferred of disposed of, or into which a Borrower shall have merged, or been a party to any consolidation or other form of reorganization, prior to the date of such transaction; 1 46 (viii) any gain arising from the acquisition of any Securities of a Borrower; and (ix) any gain arising from extraordinary or non-recurring items. Adverse Environmental Condition shall mean (i) any release, spill, emission, leaking, pumping, injection, presence, deposit, abandonment, disposal, discharge, dispersal, emission, leaching or migration in, into, on, or emanating from the indoor or outdoor environment (including, without limitation, the air, ground, water, groundwater, or any surface) of any substance, chemical, material, pollutant, hazardous material, gas, odor or audible noise related to the conduct of a Borrower's or any of its Subsidiaries' businesses; (ii) any complaint, citation, notice of violation, request for information, claim, demand or order by any governmental authority or any person for the personal injury, property damage, damage to the environment, or adverse effect on the environmental resulting from (i) above; and (iii) the violation, or alleged violation of, or liability under any applicable Environmental Law, permits, approvals, directives, injunctions, orders, licenses or judgments of, by or from any governmental authority, agency, person or court relating to environmental matters connected with any Borrower's or any of its Subsidiaries' businesses. Affiliate - a Person (other than a Subsidiary): (i) which directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, a Person; (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of a Person; or (iii) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by a Person or a Subsidiary of a Person. Agreement - the Fourth Amended and Restated Loan and Security Agreement referred to in the first sentence of this Appendix A, all Exhibits thereto and this Appendix A. API - Associated Pharmacies, Inc. Applicable Margin - for any period or date, the margin with respect to the Base Rate or the LIBO Rate as applicable, set forth in the chart below corresponding to the Interest Coverage Ratio for the immediately preceding 12 month period ending each December 31 and June 30, as reflected by the most recently delivered financial statements for the period ending on such date, of Borrowers and their Subsidiaries pursuant to Section 8.1.3(i) (for the twelve month periods ending on June 30 of each year) and pursuant to Section 8.1.3(ii) (for the twelve month periods ending on December 31 of each year). The Applicable Margin shall be effective from and after the date of delivery of such financial statements: 2 47
Interest Coverage Ratio for preceding Applicable Margin Applicable Margin twelve month period Base Rate LIBO Rate ============================== ================================== ================================== < 1.75 to 1.0 1.00% 2.25% < 2.00 to 1.0 and 0.75% 2.00% > 1.75 to 1.0 - < 2.50 to 1.0 and 0.50% 1.70% > 2.00 to 1.0 - <3.00 to 1.0 and 0.00% 1.50% >2.50 to 1.0 - >3.00 to 1.0 0.00% 1.25% - - ------------------------------ ---------------------------------- ----------------------------------
In calculating the Interest Coverage 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. Armstrong - J. Hord Armstrong III. Average Monthly Loan Balance - The amount obtained by adding the unpaid balance of all Loans owing by the Borrowers to Lender at the end of each day for each day during the month in question and by dividing such sum by the number of days in such month. Bank - Fleet National Bank. Base Rate - the rate of interest generally announced or quoted by Bank from time to time as its base rate for commercial loans, whether or not such rate is the lowest rate charged by Bank to its most preferred borrowers; and if such base rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate. Borrowing Base - as at any date of determination thereof, an amount equal to the lesser of: (i) $75,000,000; or 3 48 (ii) an amount equal to 60% of the value of Eligible Inventory at such date calculated on the basis of the lower of cost or market with the cost of raw materials and finished goods calculated on a first-in, first-out basis, MINUS an amount equal to the sum of (A) the face amount of all letters of credit issued or guaranteed by Lender or any Affiliate of Lender for the account of a Borrower and outstanding at such date, and (B) any amounts which Lender may be obligated to pay in the future for the account of a Borrower. Notwithstanding anything else herein to the contrary, Advances to or on behalf of Jaron will be limited at all times to the sum of 60% of the value of Jaron's Eligible Inventory, calculated as set forth above, MINUS the aggregate amount of Indebtedness of Jaron to D&K. Business Day - any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of Missouri or the State of Illinois or is a day on which banking institutions located in either of such states are closed. Capital Base - At any date means the sum of (i) Consolidated Tangible Net Worth, plus (ii) the principal amount of Subordinated Debt. Capital Expenditures - expenditures made and liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total payments with respect to Capitalized Lease Obligations. Capitalized Lease Obligation - any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. Closing Date - the date on which all of the conditions precedent in Section 9 of the Agreement are satisfied and the initial Loan is made or the initial Letter of Credit or LC Guaranty is issued under the Agreement. Code - the Uniform Commercial Code as adopted and in force in the State of Illinois, as from time to time in effect. Collateral - all of the Property and interests in Property described in Section 5 of the Agreement, and all other Property and interests in Property that now or hereafter secure the payment and performance of any of the Obligations. 4 49 Consolidated - the consolidation in accordance with GAAP of the accounts or other items as to which such term applies. Control - means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract, or otherwise. Current Assets - at any date means the amount at which all of the current assets of a Person would be properly classified as current assets shown on a balance sheet at such date in accordance with GAAP, except that amounts due from Affiliates and investments in Affiliates and prepaid expenses shall be excluded therefrom. Current Liabilities - at any date means the amount at which all of the current liabilities of a Person would be properly classified as current liabilities on a balance sheet at such date in accordance with GAAP excluding the Loans. Debt Service - for any period, all scheduled principal payments payable on Indebtedness, whether at maturity or regularly scheduled payments, mandatory prepayments, by acceleration or otherwise. Default - an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default. Default Rate - as defined in subsection 2.1.2 of the Agreement. Distribution - in respect of any corporation means and includes: (i) the payment of any dividends or other distributions on capital stock of the corporation (except distributions in such stock) and (ii) the redemption or acquisition of Securities unless made contemporaneously from the net proceeds of the sale of Securities. Eligible Inventory - such Inventory of a Borrower (other than packaging materials and supplies) which Lender, in its sole credit judgment, deems to be Eligible Inventory. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory if: (i) it is not raw materials or finished goods, or work-in-process that is, in Lender's opinion, readily marketable in its current form; or (ii) it is not in good, new and saleable condition; or (iii) it is slow-moving, obsolete or unmerchantable; or (iv) it does not meet all standards imposed by any governmental agency or authority; or 5 50 (v) it does not conform in all respects to the warranties and representations set forth in the Agreement; or (vi) it is not at all times subject to Lender's duly perfected, first priority security interest and no other Lien except a Permitted Lien; (vii) it is not situated at a location in compliance with the Agreement; (viii) it consists of supplies or labels; or (ix) in the case of Jaron, no Inventory shall be Eligible Inventory while Jaron has any Indebtedness outstanding to Capital Business Credit, Inc., has any commitment for credit from Capital Business Credit, Inc., or any financing statement naming Capital Business Credit, Inc. as secured party and Jaron as debtor remains filed in any filing office. Environmental Laws - all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidances, orders and consent decrees relating to health, safety and environmental matters. Equipment - all machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles and other tangible personal Property (other than Inventory) of every kind and description used in any Borrower's operations or owned by any Borrower in which any Borrower has an interest, whether now owned or hereafter acquired by any Borrower and wherever located, and all parts, accessories and special tools and all increases and accessions thereto and substitutions and replacements thereof. ERISA - the Employee Retirement Income Security Act of 1974, as amended, and all rules and regulations from time to time promulgated thereunder. Event of Default - as defined in Section 10.1 of the Agreement. Fee Letter - that certain fee letter from Borrowers to Lenders dated on or about the Closing Date. GAAP - generally accepted accounting principles in the United States of America in effect from time to time. General Intangibles - all General Intangibles (as defined in the Code) of Borrower, whether now owned or hereafter created or acquired by the Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, deposit accounts, inventions, designs, patents, patent applications, trademarks, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, tax refund claims, computer programs, all claims under guaranties, security interests 6 51 or other security held by or granted to Borrower to secure payment of any of the Accounts by an account debtor, all rights to indemnification and all other intangible property of every kind and nature (other than Accounts). Guarantor - Any Person who may hereafter guarantee payment or performance of the whole or any part of the Obligations. Indebtedness - as applied to a Person means, without duplication (i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations, (ii) all obligations of other Persons which such Person has guaranteed, (iii) all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued for the account of such Person, and (iv) in the case of any Borrower (without duplication), the Obligations. Indemnified Parties - the Lender and any Participating Lender and each of their respective Affiliates and their respective officers, directors, employees, agents and advisors. Intercreditor Agreement - that certain Intercreditor Agreement between Lender and Magna Bank, N.A., predecessor to Magna Bank, N.A., relating to a loan made by such Bank to D&K in the original principal amount of $1,495,000, as the same may be amended, restated, extended or modified from time to time. Interest Coverage Ratio - with respect to any period of determination, the ratio of Consolidated (i) Net Cash Flow for such period to (ii) Interest Expense for such period, all as determined in accordance with GAAP. Interest Expense - with respect to any fiscal period, the sum of (i) the interest expense incurred for such period as determined in accordance with GAAP, plus (ii) the Letter of Credit and LC Guaranty fees owing for such period, and (iii) the Earned Discount charged under and defined in the Securitization Documents. Inventory - all of Borrower's Inventory (as defined in the Code), whether now owned or hereafter acquired including, but not limited to, all goods intended for sale or lease by Borrower, or for display or demonstration; all work in process; all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, printing, packing, shipping, advertising, selling, leasing or furnishing of such goods or otherwise used or consumed in Borrower's 7 52 business; and all documents evidencing and General Intangibles relating to any of the foregoing, whether now owned or hereafter acquired by Borrower. Investment Property - all of the Borrower's Investment Property (as defined in the Code), whether now owned or hereafter acquired, including but not limited to all securities, security entitlements, securities accounts, commodity contracts, commodity accounts, stocks, bonds, mutual fund shares, money market shares, and U.S. Government securities. Jaron SecurityAgreement - that certain security agreement from Jaron, in favor of D&K, securing Jaron's open account with D&K with respect to proceeds of the Revolving Credit Loans pursuant to Section 1.4 of the Agreement. LC Amount - at any time, the aggregate undrawn face amount of all Letters of Credit and LC Guaranties then outstanding. LC Guaranty - any guaranty pursuant to which Lender or any Affiliate of Lender shall guaranty the payment or performance by Borrower of its reimbursement obligation under any letter of credit. Legal Requirement - any requirement imposed on Lender by any law, regulation, order, interpretation, ruling or official directive (whether or not having the force of law) of any board, central bank or governmental or administrative agency, institution or authority. Letter of Credit - any letter of credit issued by Lender or any of Lender's Affiliates for the account of Borrower. LIBO Rate - a fluctuating interest rate per annum equal to the rate (rounded upwards, if necessary, to the next higher 1/16 of 1%) at which deposits of U.S. Dollars approximately equal in principal amount to the outstanding amount of Revolving Credit Loans are offered to Lender for a 30-day period by Bank in the London interbank foreign currency deposits market at approximately 11:00 a.m., London time, on any Business Day. Each determination by Lender of any LIBO Rate shall, in the absence of manifest error, be conclusive. The foregoing notwithstanding, in the event deposits of U.S. dollars are not offered to Lender by Bank for a 30-day period in the London Interbank foreign currency deposits markets, then LIBO Rate shall mean London Interbank offered rate for a 30-day period as published from time to time by the Wall Street Journal, or if not published in the Wall Street Journal, the Financial Times of London. Lien - any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on common law, statute or contract. The term "Lien" shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of the 8 53 Agreement, Borrowers shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. Loan Account - the loan account established on the books of Lender pursuant to Section 3.6 of the Agreement. Loan Documents - the Agreement, the Other Agreements and the Security Documents. Loans - all loans and advances of any kind made by Lender pursuant to the Agreement. Money Borrowed - means (i) Indebtedness arising from the lending of money by any Person to a Borrower; (ii) Indebtedness, whether or not in any such case arising from the lending by any Person of money to a Borrower, (A) which is represented by notes payable or drafts accepted that evidence extensions of credit, (B) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (C) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit and (v) Indebtedness of a Borrower under any guaranty of obligations that would constitute Indebtedness for Money Borrowed under clauses (i) through (iii) hereof, if owed directly by such Borrower. Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of ERISA. Net Cash Flow - For any period means Consolidated Adjusted Net Earnings from Operations during such period, plus amounts deducted in the computation thereof for depreciation, amortization and deferred taxes, plus or minus, as the case may be, the net change in the D&K's Consolidated LIFO reserve during such period. Obligations - all Loans and all other advances, debts, liabilities, obligations, covenants and duties, together with all interest, fees and other charges thereon, owing, arising, due or payable from any Borrower to Lender of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under the Agreement or any of the other Loan Documents or otherwise whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired, and any replacements, renewals, extensions or other modifications of any of them. Original Term - as defined in Section 4.1 of the Agreement. 9 54 Other Agreements - any and all agreements, instruments and documents (other than the Agreement and the Security Documents), heretofore, now or hereafter executed by any Borrower, any Subsidiary of any Borrower or any other third party and delivered to Lender in respect of the transactions contemplated by the Agreement, including, without limitation, the Jaron Security Agreement and the Fee Letter. Overadvance - the amount, if any, by which the outstanding principal amount of Revolving Credit Loans plus the LC Amount exceeds the Borrowing Base. Participating Lender - each Person who shall be granted the right by Lender to participate in any of the Loans described in the Agreement and who shall have entered into a participation agreement in form and substance satisfactory to Lender. PBI - Pharmaceutical Buyers, Inc., an Arkansas corporation. Permitted Liens - any Lien of a kind specified in subsection 8.2.5 of the Agreement. Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of a Borrower incurred after the date hereof which is secured by a Purchase Money Lien and which, when aggregated with the principal amount of all other such Indebtedness and Capitalized Lease Obligations of all Borrowers at the time outstanding, does not exceed $1,000,000. For the purposes of this definition, the principal amount of any Purchase Money Indebtedness consisting of capitalized leases shall be computed as a Capitalized Lease Obligation. Person - an individual, partnership, corporation, limited liability company, joint stock company, land trust, business trust, or unincorporated organization, or a government or agency or political subdivision thereof. Plan - an employee benefit plan now or hereafter maintained for employees of Borrower that is covered by Title IV of ERISA. Plotnik Subordinated Note - that certain Promissory Note in the face amount of $1,000,000 given by D&K to Ricky Plotnik and dated March 17, 1998, as the same may be amended or restated from time to time, which such note was retired and paid in full, effective June 30, 1998. Projections - Borrowers' forecasted Consolidated and consolidating (a) balance sheets, (b) profit and loss statements, (c) cash flow statements, and (d) capitalization statements, all prepared on a consistent basis with Borrowers' historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. 10 55 Property - any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Purchase Money Indebtedness - means and includes (i) Indebtedness (other than the Obligations) for the payment of all or any part of the purchase price of any fixed assets, (ii) any Indebtedness (other than the Obligations) incurred at the time of or within 10 days prior to or after the acquisition of any fixed assets for the purpose of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time. Purchase Money Lien - a Lien upon fixed assets which secures Purchase Money Indebtedness, but only if such Lien shall at all times be confined solely to the fixed assets the purchase price of which was financed through the incurrence of the Purchase Money Indebtedness secured by such Lien. Rentals - as defined in subsection 8.2.13 of the Agreement. Reportable Event - any of the events set forth in Section 4043(b) of ERISA. Restricted Investment - any investment made in cash or by delivery of Property to any Person, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, advance or capital contribution, or otherwise, or in any Property except the following: (i) investments in one or more Subsidiaries of any Borrower to the extent existing on the Closing Date; (ii) Property to be used in the ordinary course of business; (iii) Current Assets arising from the sale of goods and services in the ordinary course of business of a Borrower and its Subsidiaries; (iv) investments in direct obligations of the United States of America, or any agency thereof or obligations guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof; (v) investments in certificates of deposit maturing within one year from the date of acquisition issued by a bank or trust company organized under the laws of the United States or any state thereof having capital surplus and undivided profits aggregating at least $100,000,000; (vi) investments made under and pursuant to the Securitization Documents; and 11 56 (vii) investments in commercial paper given the highest rating by a national credit rating agency and maturing not more than 270 days from the date of creation thereof. Revolving Credit Facility - means the amounts available to be borrowed under Section 1.1 of the Agreement. Revolving Credit Loan - a Loan made by Lender as provided in Section 1.1 of the Agreement. Security - shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. Security Documents - All the instruments and agreements now or at any time hereafter securing the whole or any part of the Obligations. Solvent - as to any Person, such Person (i) owns Property whose fair saleable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (ii) is able to pay all of its Indebtedness as such Indebtedness matures and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. Subordinated Debt - Indebtedness of Borrower that is subordinated to the Obligations in a manner satisfactory to Lender, including, without limitation, the Promissory Note of D&K in favor of Steven B. Goldfine, as agent, issued in connection with the purchase of Northern Drug Company. Subordination Agreements - the Subordination Agreements relating to each of the notes evidencing the Subordinated Debt between Lender and the holders of such notes. Subsidiary - any corporation of which a Person owns, directly or indirectly through one or more intermediaries, more than 50% of the Voting Stock at the time of determination. Tangible Assets - All assets except: (i) any surplus resulting from any write-up of assets after June 30, 1997; (ii) deferred assets, other than prepaid insurance and prepaid taxes; (iii) patents, copyrights, trademarks, trade names, non-compete agreements, franchises and other similar intangibles; 12 57 (iv) goodwill, including any amounts, however designated on a Consolidated balance sheet of a Person and its Subsidiaries, representing the excess of the purchase price paid for assets or stock over the value assigned thereto on the books of such Person; (v) restricted Investments; (vi) unamortized debt discount and expense; (vii) assets located and notes and receivables due from obligors outside of the United States of America; and (viii) accounts, notes, and other receivables due from Affiliates or employees. Tangible Net Worth - At any date means a sum equal to: (i) the net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves) at which the Tangible Assets of a Person would be shown on a balance sheet at such date in accordance with GAAP, plus (ii) such Person's LIFO reserve at such date (computed in accordance with GAAP) minus (iii) the amount at which such Person's liabilities (other than capital stock and surplus) would be shown on such balance sheet in accordance with GAAP, and including as liabilities all reserves for contingencies and other potential liabilities. Total Credit Facility - $75,000,000. Voting Stock - Securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). Other Terms. All other terms contained in the Agreement shall have, when the context so indicates, the meanings provided for by the Code to the extent the same are used or defined therein. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of the Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any of the Loan Documents shall include any and all modifications thereto and any and all extensions or renewals thereof. 13 58 LIST OF EXHIBITS Exhibit A Omitted Exhibit B Borrowers' and each Subsidiary's Business Locations Exhibit C Jurisdictions in which each Borrower and each Subsidiary is Authorized to do Business Exhibit D Capital Structure of Borrowers Exhibit E Corporate Names Exhibit F Tax Identification Numbers of Subsidiaries Exhibit G Patents, Trademarks, Copyrights and Licenses Exhibit H Contracts Restricting Borrowers' Right to Incur Debts Exhibit I Litigation Exhibit J Capitalized Leases Exhibit K Operating Leases Exhibit L Pension Plans Exhibit M Labor Contracts Exhibit N Environmental Matters Exhibit O Compliance Certificate Exhibit P Permitted Liens
14 59 EXHIBIT B BUSINESS LOCATIONS 1. Each Borrower currently has the following business locations, and no others: Chief Executive Office: Other Locations: 2. Each Borrower maintains its books and records relating to Accounts and General Intangibles at: 3. Each Borrower maintains Inventory at the following locations owned or leased by such Borrower: Address Owner 4. Each Borrower has had no office, place of business or agent for process located in any county other than as set forth above, except: 5. Each Subsidiary currently has the following business locations, and no others: Chief Executive Office: Other Locations: 6. Each Subsidiary maintains its books and records relating to Accounts and General Intangibles at: 1 60 7. Each Borrower maintains Inventory at the following locations owned or leased by such Borrower: Address Owner 8. Each Subsidiary has had no office, place of business or agent for process located in any county other than as set forth above, except: 9. The following bailees, warehouseman, similar parties and consignees hold inventory of any Borrower or any Subsidiary:
============================================================================================================================ Name and Address of Party Nature of Relationship Amount of Inventory Owner of Inventory - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- ============================================================================================================================
2 61 EXHIBIT C JURISDICTIONS IN WHICH EACH BORROWER AND ITS SUBSIDIARIES ARE AUTHORIZED TO DO BUSINESS
- -------------------------------------------------------------------------------- Name of Entity Jurisdictions - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
1 62 EXHIBIT D CAPITAL STRUCTURE 1. The classes and number of authorized shares of each Borrower and each Subsidiary and the record owner of such shares are as follows: Borrowers:
========================================================================================== Class of Stock Number of Shares Record Owners Number of Shares Issued and Authorized but Outstanding Unissued - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ ==========================================================================================
Subsidiaries:
========================================================================================== Class of Stock Number of Shares Record Owners Number of Shares Issued and Authorized but Outstanding Unissued - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ ==========================================================================================
2. The number, nature and holder of all other outstanding Securities of each Borrower and each Subsidiary are as follows: 3. The correct name and jurisdiction of incorporation of each Subsidiary of each Borrower and the percentage of its issued and outstanding shares owned by each Borrower are as follows: 1 63
==================================================================================== Name Jurisdiction of Incorporation Percentage of Shares Owned by Borrower - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------ ====================================================================================
4. The name of each of any Borrower's corporate or joint venture Affiliates and the nature of the affiliation are as follows: 2 64 EXHIBIT E CORPORATE NAMES 1. D&K's correct corporate name, as registered with the Secretary of State of the State of Delaware, is: 2. In the conduct of its business, D&K has used the following names: 3. Of D&K's Subsidiaries, the correct corporate name, as registered with the Secretary of State of the State of its incorporation of each, is: 4. In the conduct of its business, each Subsidiary of D&K has used the following names: 5. Jaron's correct corporate name, as registered with the Secretary of State of the State of Florida, is: 6. In the conduct of its business, Jaron has used the following names: 7. Of Jaron's Subsidiaries, the correct corporate name, as registered with the Secretary of State of the State of its incorporation of each, is: 8. In the conduct of its business, each Subsidiary of Jaron has used the following names: 1 65 EXHIBIT F TAX IDENTIFICATION NUMBERS OF SUBSIDIARIES Subsidiary Number 1 66 EXHIBIT G PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES 1. Each Borrower's and each Subsidiaries' patents:
================================================================================================== Patent Owner Status in Patent Federal Registration Date Office Registration Number - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- ==================================================================================================
2. Each Borrower's and each Subsidiaries' trademarks:
================================================================================================== Patent Owner Status in Patent Federal Registration Date Office Registration Number - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- ==================================================================================================
3. Each Borrower's and each Subsidiaries' copyrights:
================================================================================================== Patent Owner Status in Patent Federal Registration Date Office Registration Number - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- ==================================================================================================
1 67 4. Each Borrower's and each Subsidiaries' licenses (other than routine business licenses, authorizing them to transact business in local jurisdictions):
======================================================================================================================= Name of License Nature of License Licensor Term of License - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- =======================================================================================================================
2 68 EXHIBIT H CONTRACTS RESTRICTING ANY BORROWER'S RIGHT TO INCUR DEBTS Contracts that restrict the right of any Borrower to incur Indebtedness:
======================================================================================================================== Title of Contract Identity of Parties Nature of Restriction Term of Contract - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ ========================================================================================================================
1 69 EXHIBIT I LITIGATION 1. Actions, suits, proceedings and investigations pending against any Borrower or any Subsidiary:
=========================================================================================================================== Title of Action Nature of Action Complaining Parties Jurisdiction or Tribunal - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- ===========================================================================================================================
2. The only threatened actions, suits, proceedings or investigations of which any Borrower or any Subsidiary is aware are as follows: 1 70 EXHIBIT J CAPITALIZED LEASES Each Borrower and each Subsidiary has the following capitalized leases:
======================================================================================================================== Lessee Lessor Term of Lease Property Covered - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ ========================================================================================================================
1 71 EXHIBIT K OPERATING LEASES Each Borrower and each Subsidiary has the following operating leases:
======================================================================================================================== Lessee Lessor Term of Lease Property Covered - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ ========================================================================================================================
1 72 EXHIBIT L PENSION PLANS Each Borrower and each Subsidiary has the following Plans:
================================================================================ Party Type of Plan - -------------------------------------------------------------------------------- Borrower - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [Subsidiaries] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
1 73 EXHIBIT M COLLECTIVE BARGAINING AGREEMENTS; LABOR CONTROVERSIES 1. Each Borrower and each Subsidiary is a party to the following collective bargaining agreements:
================================================================================ Type of Agreement Parties Term of Agreement - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
2. Material grievances, disputes of controversies with employees are as follows:
================================================================================ Parties Involved Nature of Grievance, Dispute or Controversy - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
3. Threatened strikes, work stoppages and asserted pending demands for collective bargaining are as follows:
================================================================================ Parties Involved Nature of Matter - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
1 74 EXHIBIT N ENVIRONMENTAL MATTERS 1 75 EXHIBIT O COMPLIANCE CERTIFICATE [Letterhead of D&K] __________________, 19__ Fleet Capital Corporation 20800 Swenson Drive, Suite 350 Waukesha, WI 53186 Attention: Loan Administration Manager The undersigned, the chief financial officer of D & K Healthcare Resources, Inc., a Delaware corporation ("D&K"), gives this certificate to Fleet Capital Corporation ("Lender") in accordance with the requirements of subsection 8.1.2 of that certain Loan and Security Agreement dated ______________, 19__, among D&K, Jaron, Inc. (collectively with D&K, the "Borrowers") and Lender ("Loan Agreement"). Capitalized terms used in this Certificate, unless otherwise defined herein, shall have the meanings ascribed to them in the Loan Agreement. 1. Based upon my review of the balance sheets and statements of income of Borrowers for the [fiscal year] [quarterly period] ending __________________, 19__, copies of which are attached hereto, I hereby certify that: (a) The Current Ratio is ____ to 1; (b) The Interest Coverage Ratio is ____ to ____; (c) Debt Service Coverage Ratio is ____ to ____; (d) Capital Base is $_______; and (e) Capital Expenditures during the period and for the fiscal year to date total $__________ and $__________, respectively. 2. No Default exists on the date hereof, other than: ________________________________________________ [if none, so state]; and 3. No Event of Default exists on the date hereof, other than ____________________________________________________ [if none, so state]. 1 76 Very truly yours, __________________________ Chief Financial Officer 2 77 EXHIBIT P PERMITTED LIENS
================================================================================ Secured Party Nature of Lien - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
1 78 -------------------------------------------------- D & K HEALTHCARE RESOURCES, INC. AND JARON, INC. -------------------------------------------------- ================================================== FOURTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Dated: as of August 7, 1998 $75,000,000.00 ================================================== ================================================================================ FLEET CAPITAL CORPORATION ================================================================================ 1 79 TABLE OF CONTENTS
Page ---- SECTION 1. CREDIT FACILITY............................................................2 1.1 Revolving Credit Loans...................................................2 1.2 Letters of Credit; LC Guaranties.........................................3 1.3 All Loans to Constitute One Obligation; Joint and Several Liability......3 1.4 Appointment of D&K as Agent..............................................4 SECTION 2. INTEREST, FEES AND CHARGES.................................................5 2.1 Interest.................................................................5 2.2 Computation of Interest and Fees.........................................7 2.5 Letter of Credit and LC Guaranty Fees....................................7 2.7 Reimbursement of Expenses................................................8 SECTION 3. LOAN ADMINISTRATION........................................................8 3.1 Manner of Borrowing Revolving Credit Loans...............................8 3.2 Payments.................................................................9 3.3 Prepayments.............................................................10 3.4 Application of Payments and Collections.................................10 3.5 All Loans to Constitute One Obligation..................................10 3.6 Loan Account............................................................11 3.7 Statements of Account...................................................11 SECTION 4. TERM AND TERMINATION......................................................11 4.1 Term of Agreement.......................................................11 4.2 Termination.............................................................11 SECTION 5. SECURITY INTERESTS.......................................................12 5.1 Security Interest in Collateral.........................................12 5.2 Lien Perfection; Further Assurances.....................................13 SECTION 6. COLLATERAL ADMINISTRATION.................................................13 6.1 General.................................................................13 6.2 Administration of Inventory.............................................15 6.3 Payment of Charges......................................................15
i 80 SECTION 7. REPRESENTATIONS AND WARRANTIES............................................15 7.1 General Representations and Warranties..................................15 7.2 Continuous Nature of Representations and Warranties.....................20 7.3 Survival of Representations and Warranties..............................20 SECTION 8. COVENANTS AND CONTINUING AGREEMENTS.......................................21 8.1 Affirmative Covenants...................................................21 8.2 Negative Covenants......................................................23 8.3 Specific Financial Covenants............................................26 SECTION 9. CONDITIONS PRECEDENT......................................................27 9.1 Documentation...........................................................27 9.2 No Default..............................................................27 9.3 Other Loan Documents....................................................27 9.4 No Litigation...........................................................27 9.5 Securitization..........................................................27 9.6. Environmental..........................................................28 9.7. No Material Adverse Change.............................................28 9.8. Fee Letter.............................................................28 SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT........................28 10.1 Events of Default......................................................28 10.2 Acceleration of the Obligations........................................30 10.3 Other Remedies.........................................................30 10.4 Remedies Cumulative; No Waiver.........................................31 SECTION 11. MISCELLANEOUS............................................................32 11.1 Power of Attorney......................................................32 11.2 Indemnity..............................................................33 11.3 Modification of Agreement; Sale of Interest............................33 11.4 Severability...........................................................33 11.5 Successors and Assigns.................................................34 11.6 Cumulative Effect; Conflict of Terms...................................34 11.7 Execution in Counterparts..............................................34 11.8 Notice.................................................................34 11.9 Lender's Consent.......................................................35 11.10 Credit Inquiries......................................................35 11.11 Time of Essence.......................................................35 11.12 Entire Agreement......................................................35 11.13 Interpretation........................................................35 11.14 GOVERNING LAW; CONSENT TO FORUM.......................................35
ii 81 11.15 WAIVERS BY BORROWERS..................................................36 11.16. Private Sale; Commercial Reasonableness..............................37 11.14 Confidentiality.......................................................38
iii EX-13 8 EXHIBIT 13 1 EXHIBIT 13 FINANCIAL HIGHLIGHTS
Fiscal Year Ended -------------------------------------------------------------- June 30, March 28, March 29, March 31, April 1, 1998(1) 1997 1996 1995 1994 -------------------------------------------------------------- INCOME STATEMENT DATA (in thousands, except share and per share data) Net sales $612,427 $479,524 $425,333 $319,958 $211,196 Gross profit 29,662 21,640 20,272 16,095 11,397 Income from operations 8,555 4,224 1,947 4,441 2,077 Net income (loss) 3,327 739 (1,109) 1,409 374 Basic earnings (loss) per share $0.99 $0.24 $(0.37) $0.55 $0.16 Diluted earnings (loss) per share $0.90 $0.24 $(0.37) $0.49 $0.16 Basic common shares outstanding 3,345,261 3,033,536 2,971,117 2,547,334 2,394,022 Diluted common shares outstanding 3,766,352 3,588,943 2,971,117 3,114,129 2,925,439
June 30, March 28, March 29, March 31, April 1, 1998(1) 1997 1996 1995 1994 -------------------------------------------------------------- BALANCE SHEET DATA (in thousands) Current assets $145,492 $74,932 $68,938 $73,338 $35,569 Working capital 52,250 24,270 25,224 27,395 14,154 Total assets 170,350 101,065 94,937 95,787 43,352 Long-term debt 61,156 41,530 43,190 39,991 17,858 Stockholders' equity 15,952 8,873 8,033 8,784 4,078
[BAR GRAPH]
94 95 96 97 98 ------------ ------------ ------------ ---------- ---------- Net Sales ($) $ 211,196 $ 319,958 $ 425,333 $ 479,524 $ 612,427 Income From Operations ($) $ 2,077 $ 4,441 $ 1,947 $ 4,224 $ 8,555 Stockholders' Equity ($) $ 4,078 $ 8,784 $ 8,033 $ 8,873 $ 15,952 Gross Profit ($) $ 11,397 $ 16,095 $ 20,272 $ 21,640 $ 29,662
(1) Fiscal year end changed to June 30. 3 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal Year Ended June 30, 1998, compared with the Fiscal Year Ended March 28, 1997 NET SALES. Net sales increased $132.9 million, or 27.7%, for the fiscal year ended June 30, 1998, compared with the fiscal year ended March 28, 1997. Sales to healthcare institutions increased by $55.2 million, or 44.3%, compared with fiscal 1997, due to increased sales to a prescription benefit management company added as a customer in August 1996 coupled with higher sales to new and existing hospital, clinic and nursing home accounts. Independent pharmacy sales increased by $77.8 million, or 34.8%, compared with fiscal 1997, from higher sales to existing and new retail accounts, including $53.6 million to an association of retail pharmacies added as a customer in May 1997 and $6.2 million to independent pharmacies that became customers as a result of the Company's acquisition of a drug wholesaler in October 1997. The Company experienced a net decrease in retail chain sales of $0.1 million, compared to fiscal 1997, primarily due to the termination of the Company's relationship with a large regional retail chain customer on September 30, 1997, (a decrease of approximately $68.5 million) partially offset by increased sales to other existing and new retail chain customers of approximately $68.4 million. Excluding sales made to the former large regional retail chain customer from both fiscal 1998 and fiscal 1997, net sales would have increased 52.2%. In addition, during fiscal 1998, the Company made $62.1 million in "dock-to-dock" sales, which are not included in net sales due to the Company's accounting policy of recording only the commission on such transactions as a reduction of cost of goods sold. There were no dock-to-dock sales in fiscal 1997. Dock-to-dock sales represent bulk sales of pharmaceuticals to self-warehousing retail chains for which the Company acts only as an intermediary in the order and subsequent delivery of products to the customers' warehouses. The commission on dock-to-dock sales is typically lower than the gross profit realized on sales of products from inventory. GROSS PROFIT. Gross profit increased 37.1%, to $29.7 million in fiscal 1998 compared with fiscal 1997. As a percentage of net sales, gross margin increased from 4.51% to 4.84% in fiscal 1998 compared with fiscal 1997. The increase in gross margin percentage was due mainly to a shift in customer mix to higher-margin business, higher sales of more profitable generic pharmaceutical products and sales of inventory acquired through advantageous purchasing. OPERATING EXPENSES. Total operating expenses increased $3.7 million, or 21.2%, to $21.1 million in fiscal 1998, compared with fiscal 1997. As a percentage of net sales, total operating expenses decreased from 3.63% to 3.44% in fiscal 1998 compared with fiscal 1997. The increase in operating expenses in fiscal 1998 resulted primarily from incremental warehouse and distribution costs associated with increased sales activity, higher personnel and occupancy costs related to additional managerial positions in several major functional areas of the Company, and legal fees associated with the conclusion of the Company's relationship with its previously largest customer. NET INTEREST EXPENSE. Net interest expense increased $184,000, or 5.4%, in fiscal 1998, compared with fiscal 1997. As a percentage of net sales, net interest expense decreased from 0.71% to 0.59% in fiscal 1998 compared to fiscal 1997. The increase in net interest expense was primarily the result of higher average outstanding borrowings offset by lower interest rates on the Company's line of credit. In addition, the collection of approximately $9.5 The table below sets forth for the years indicated certain statement of operations data for the last three fiscal years 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 "1998," "1997," and "1996" shall mean the Company's fiscal years ended June 30, 1998, March 28, 1997, and March 29, 1996, respectively. See Note 1 of "Notes to Consolidated Financial Statements."
PERCENTAGE CHANGE FROM PERCENTAGE OF NET SALES PRIOR YEAR - ---------------------------------------------------------------------------- 1998 1997 1996 1997-98 1996-97 - ---------------------------------------------------------------------------- Net sales 100.00% 100.00% 100.00% 27.7% 12.7% Gross profit 4.84% 4.51% 4.77% 37.1% 6.7% Total operating expenses (3.44%) (3.63%) (4.31%) 21.2% (5.0%) --------------------------- Income from operations 1.40% 0.88% 0.46% 102.5% 116.9% Interest expense, net (0.59%) (0.71%) (0.80%) 5.4% (0.3%) Other income, net 0.08% 0.09% (0.01%) 16.5% -- Income tax provision (benefit) 0.35% 0.11% (0.09%) 302.6% -- Net income (loss) 0.54% 0.15% (0.26%) 350.2% 166.6% ---------------------------
18 3 million of accounts receivable on September 30, 1997, from the Company's then largest customer, with which the Company's relationship was mutually terminated in September 1997, reduced the Company's working capital requirements and its borrowings. OTHER INCOME, NET. Other income, net increased from $455,000 to $530,000 in fiscal 1998 compared with fiscal 1997. The increase in other income, net, was primarily due to gains on sales of investments partially offset by lower recorded earnings from the Company's equity interest in the net income of PBI during fiscal 1998, which totaled $389,000, compared with $410,000 in fiscal 1997. The Company's effective income tax rates of 39.5% in fiscal 1998 and 42.2% in fiscal 1997 differed from the statutory 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 effect of price inflation, as measured by the excess of LIFO costs over FIFO costs, was $1.0 million in fiscal 1998 and $1.2 million in fiscal 1997. The decrease in the LIFO provision was due to changes in the Company's inventory mix to include higher levels of generic pharmaceuticals and modifications made in investment buying practices. Fiscal Year Ended March 28, 1997, compared with the Fiscal Year Ended March 29, 1996 NET SALES. Net sales increased $54.2 million, or 12.7%, to $479.5 million in fiscal 1997 compared with fiscal 1996. Sales to healthcare institutions increased $41.0 million, or 49.1%, primarily due to the addition of a prescription benefit management company in August 1996. Retail chain sales decreased $3.1 million, or 2.3%, primarily due to a reduction of $13.7 million in sales to a group of regional pharmacies which discontinued using the Company as its primary supplier effective June 30, 1995, offset by a $10.6 million increase in sales to several retail chains, including $6.0 million to a large regional retail chain. The remaining increase in sales of $16.3 million in 1997 was due to the growth in sales to independent pharmacies. GROSS PROFIT. Gross profit as a percentage of net sales declined from 4.77% in fiscal 1996 to 4.51% in fiscal 1997. The decrease in gross margin in fiscal 1997 reflected the impact of sales to the new prescription benefit management company which yielded relatively low selling margins but generated favorable working capital benefits by reducing the Company's overall borrowing costs. In addition, a significant reduction in sales to certain retail chain customers which carried more favorable selling margins, combined with increased sales to other retail chain customers which carried lower selling margins, contributed to the decline in the gross margin in fiscal 1997. Despite the reduction in gross margin during fiscal 1997, gross margin dollars increased $1.4 million, or 6.7%, due to overall increased sales levels compared to the prior year. The Company believes that the declining gross margin is consistent with the experience of the industry as a whole. OPERATING EXPENSES. As a percentage of net sales, total operating expenses declined from 4.31% in fiscal 1996 to 3.63% in fiscal 1997. The decrease in total operating expenses as a percentage of sales was attributable primarily to $1.3 million of nonrecurring expenses incurred in fiscal 1996 in connection with the Company's consolidation of its Minnesota facilities. The Company acquired these facilities when it acquired Northern Drug Company ("Northern") and Krelitz Industries, Inc. ("Krelitz") in fiscal 1995. The Company consolidated its Northern and Krelitz operations to eliminate redundant fixed overhead expenses. The improvement in total operating expenses as a percentage of net sales in fiscal 1997 also reflected enhanced operating efficiencies in the warehouse and delivery areas which were realized principally on sales to the Company's large prescription benefit management company. In addition, the implementation of various cost-management measures contributed to the decline in operating expenses during fiscal 1997. Total operating expenses for fiscal 1997 reflected additional selling, administrative, information services, and warehouse costs associated with supporting increased sales levels. In fiscal 1997, the Company made significant investments in personnel, computer hardware and software, and warehouse systems. Management believes that these moves have positioned it to realize continued improvements in its operating expense ratio in future periods. Depreciation and amortization decreased from $1.8 million in fiscal 1996 to $1.5 million in fiscal 1997 due to certain adjustments made in fiscal 1996 to the recorded Northern and Krelitz 19 4 goodwill balances coupled with the discontinuance of depreciation on the Northern property which had been held for sale since the 1996 consolidation of the Company's Minnesota facilities. NET INTEREST EXPENSE. As a percentage of net sales, net interest expense decreased from 0.90% in fiscal 1996 to 0.78% in fiscal 1997. This decrease 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 Company's November 1995 investment in PBI and the addition of an equipment loan in fiscal 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 fiscal 1996 and continued to fiscal 1997. OTHER INCOME, NET. Other income, net increased $511,000 in fiscal 1997 compared with fiscal 1996 primarily due to $410,000 of income in fiscal 1997 from the Company's investment in PBI, compared with $88,000 in the prior year. These amounts are net of amortization expense of $276,000 and $92,000, respectively, for fiscal 1997 and fiscal 1996 associated with goodwill incurred in conjunction with the Company's investment in PBI. In addition, the Company recorded a $287,000 charge in fiscal 1996 to fully reserve for its investment in a wholesale alliance, after the Company determined that the probability of fully recovering its investment in the alliance was remote. The effective tax rates (tax benefit in fiscal 1996) of 42.2% in fiscal 1997, and (26.0%) in fiscal 1996 differed from the statutory 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 effect of price inflation, as measured by the excess of LIFO costs over FIFO costs, was $1.2 million in fiscal 1997 and $663,000 in fiscal 1996. The increase in the LIFO provision was due to increased sales levels and to comparatively higher product price inflation. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital requirements generally are met through a combination of internally generated funds, borrowings under 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: JUNE 30, 1998 MARCH 28, 1997 - ------------------------------------------------------------------- Working capital (000's) $52,250 $24,270 Current ratio 1.56 to 1 1.48 to 1 The $28.0 million increase in working capital at June 30, 1998 was due primarily to an increase in inventories of $40.4 million and an increase in accounts receivable of $28.2 million, offset by an increase in accounts payable of $39.7 million. The increase in inventories was due to the increased level of business and the expansion of inventory investment buying opportunities at favorable prices during the current fiscal year. The increase in accounts receivable was primarily due to an increase in net sales, including dock-to-dock sales activity. The increase in accounts payable reflects higher inventory levels and the timing of cash disbursements. The Company invested $863,000 in capital assets in fiscal 1998 and $2.2 million in fiscal 1997. The fiscal 1997 investment included approximately $1.3 million of warehouse and computer equipment and leasehold and site improvements at the Company's 66,000 square-foot warehouse facility located in Cape Girardeau, Missouri. The Company believes that continued investment in capital assets is necessary to achieve its goal of improving operating efficiency and information services capabilities, thereby improving its productivity and ratio of operating expenses to net sales. During the three-month period ended June 30, 1997, the Company sold an idle distribution facility with a carrying value of $0.7 million for net cash proceeds of $0.9 million. The gain on the sale is included in other income, net, in the consolidated statements of operations for the three months ended June 30, 1997. 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 20 5 at its leased Cape Girardeau, Missouri, facility. During the first year of the four-year agreement, the Missouri First loan required monthly interest payments. In December 1997, the Company made a $182,500 principal payment to Missouri First and in December 1998 is required to make a $437,500 principal payment. Thereafter, the loan requires monthly principal payments of $36,458 plus interest until maturity in December 2000. The Missouri First loan bears interest at 70% of the bank's prime rate (8.5% at June 30, 1998) plus 1/2%, or 6.45%. In November 1997, the Company's revolving line of credit was amended to increase the maximum borrowings from $60 million to $75 million, including a $5 million supplemental facility that expired August 3, 1998. At June 30, 1998, and March 28, 1997, the unused portions of the line of credit were $14.8 million and $10.2 million, respectively,. Interest on borrowings under the line of credit was reduced in April 1998 to daily LIBOR plus 1.25%. In August 1998, the revolving line of credit was amended to be secured solely by eligible inventories, to increase the facility to $75 million and to extend its maturity through August 2001. Borrowings under the line of credit are limited to 60% of eligible inventories. In August 1998, the Company finalized a $45 million accounts receivable purchase facility under an asset securitization structure (the "Securitization") with its primary lender. The Securitization carries an initial term of three years, with annual renewal options, and bears interest at the 30-day LIBOR rate (5.6875% at June 30, 1998) plus program and liquidity fees of 0.71% payable monthly. Under the Securitization, the Company's accounts receivable are being sold on a non-recourse basis to a bankruptcy-remote subsidiary of the Company as security for commercial paper issued by an affiliate of the lender. Based upon the structure of the arrangement, the subsidiary's assets and liabilities, consisting of accounts receivable and long-term debt, are no longer consolidated with those of the Company. The Company believes that funds available under the line of credit and the Securitization facility, together with internally generated funds, will be sufficient to meet its capital requirements for the foreseeable future. YEAR 2000 The Company is dependent upon its software programs and operating systems for internal operations (e.g., inventory and warehouse management) and for processing product orders with its customers and suppliers. The Company has made a preliminary determination that it will not incur any significant costs to make the Company's software programs and operating systems Year 2000 compliant and is making inquiries regarding the magnitude of any Year 2000 problems that may be resident in the software programs and operating systems of its customers and suppliers, or the impact that any such problems could have on the sales made and services provided by the Company to such customers or suppliers. The Company is in the process of modifying and testing its affected software programs and operating systems to make them Year 2000 compliant and is developing a contingency plan to address the possibility of Year 2000 related failures. The Company expects these processes to be completed by the end of fiscal 1999. The occurrence of Year 2000-related failures in the software programs and operating systems of any of the Company's significant customers or suppliers could have a material adverse effect on the Company's business, results of operations, or financial condition. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board recently issued SFAS No. 130 "Reporting Comprehensive Income," which requires that an enterprise report, by major component and as a single total, the change in its net assets during the period from nonowner sources; SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers; SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits," which standardizes the disclosure requirements for pension and other postretirement benefits and expands disclosures on changes in benefit obligations and fair values of plan assets; and SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which requires that all derivatives be recognized as either assets or liabilities in the statement of financial position at fair value. The Company is required to adopt the provisions of SFAS 130, 131 and 132 in fiscal 1999 and SFAS 133, in fiscal 2000. Adoption of these statements is not expected to affect the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. 21 6 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To D&K Healthcare Resources, Inc.: We have audited the accompanying consolidated balance sheets of D&K Healthcare Resources, Inc. , (a Delaware corporation) and subsidiaries as of June 30, 1998, and March 28, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the fiscal year ended June 30, 1998, for the three months ended June 30, 1997, and for each of the two 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 Healthcare Resources, Inc., and subsidiaries as of June 30, 1998, and March 28, 1997, and the results of their operations and their cash flows for the fiscal year ended June 30, 1998, for the three months ended June 30, 1997, and for each of the two fiscal years in the period ended March 28, 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP St. Louis, Missouri August 11, 1998 22 7 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
JUNE 30, 1998 MARCH 28, 1997 - ----------------------------------------------------------------------------------- ASSETS Current Assets Cash (including restricted cash) $ 4,051 $ 2,213 Receivables, net of allowance for doubtful accounts of $700 and $697, respectively 50,496 22,247 Inventories 90,413 49,991 Prepaid expenses and other current assets 532 481 ------------------------------ Total current assets 145,492 74,932 Property and Equipment, net of accumulated depreciation and amortization of $5,990 and $5,038, respectively 5,924 6,242 Investment in PBI 4,129 4,039 Deferred Income Taxes 2,842 889 Other Assets 228 338 Intangible Assets, net of accumulated amortization 11,735 14,625 ------------------------------ Total assets $ 170,350 $ 101,065 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 6,448 $ 3,138 Accounts payable 80,659 41,009 Accrued expenses 3,161 2,673 Deferred income taxes 2,974 3,842 ------------------------------ Total current liabilities 93,242 50,662 Long-Term Debt 61,156 41,530 ------------------------------ Total liabilities 154,398 92,192 Stockholders' Equity Preferred stock; no par value, 1,000,000 shares -- -- authorized, no shares issued or outstanding Common stock; $.01 par value, 10,000,000 shares authorized, 3,746,275 and 3,044,717 shares issued and outstanding, respectively 37 30 Paid-in capital 15,075 11,693 Retained earnings (accumulated deficit) 840 (2,850) ------------------------------ Total stockholders' equity 15,952 8,873 ------------------------------ Total liabilities and stockholders' equity $170,350 $101,065 ==============================
The accompanying notes are an integral part of these statements. 23 8 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) For the Three For the Years Ended Months Ended - ----------------------------------------------------------------------------------------------- JUNE 30, 1998 MARCH 28, 1997 MARCH 29, 1996 JUNE 30, 1997 ============================================================ Net Sales $612,427 $479,524 $425,333 $144,473 Cost of Sales 582,765 457,884 405,061 138,457 ------------------------------------------------------------ Gross profit 29,662 21,640 20,272 6,016 Depreciation and Amortization 1,468 1,523 1,754 384 Nonrecurring Expenses -- -- 1,317 -- Operating Expenses 19,639 15,893 15,254 4,385 ------------------------------------------------------------ Income from operations 8,555 4,224 1,947 1,247 ------------------------------------------------------------ Other Income (Expense): Interest expense (3,857) (3,738) (3,813) (903) Interest income 273 338 424 83 Equity in net income of PBI 389 410 88 51 Other, net 141 45 (144) 165 ------------------------------------------------------------ (3,054) (2,945) (3,445) (604) ------------------------------------------------------------ Income (loss) before income tax provision (benefit) 5,501 1,279 (1,498) 643 Income Tax Provision (benefit) 2,174 540 (389) 280 ------------------------------------------------------------ Net income (loss) $3,327 $739 $(1,109) $363 ------------------------------------------------------------ Basic Earnings (loss) Per Share $0.99 $0.24 $(0.37) $0.12 ------------------------------------------------------------ Diluted Earnings (loss) Per Share $0.90 $0.24 $(0.37) $0.11 ------------------------------------------------------------
The accompanying notes are an integral part of these statements. 24 9 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) - -------------------------------------------------------------------------------- RETAINED EARNINGS PAID-IN (ACCUMULATED COMMON STOCK CAPITAL DEFICIT) TOTAL - -------------------------------------------------------------------------------- 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 Common stock issued -- 49 -- 49 Stock option and warrant expense -- 77 -- 77 Stock options exercised -- 16 -- 16 Net income -- -- 363 363 ------------------------------------------- BALANCE AT JUNE 30, 1997 30 11,835 (2,487) 9,378 Common stock issued upon debt conversions 6 2,744 -- 2,750 Stock options and warrants exercised 1 496 -- 497 Net income -- -- 3,327 3,327 ------------------------------------------- BALANCE AT JUNE 30, 1998 $37 $15,075 $840 $15,952 =========================================== The accompanying notes are an integral part of these statements. 25 10 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) For the Three For the Years Ended Months Ended - --------------------------------------------------------------------------------------------------------------------- June 30, 1998 March 28, 1997 March 29, 1996 June 30, 1997 - --------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income (loss) $3,327 $739 $(1,109) $363 Adjustments to reconcile net income (loss) to net cash flows from operating activities - Depreciation and amortization 1,468 1,523 1,754 384 Amortization of debt issuance costs 59 73 71 20 Stock option and warrant expense -- 3 15 77 (Gain) loss from sale of assets (32) (6) 2 (217) Equity in net income of PBI (389) (410) (88) (51) Deferred income taxes 1,241 363 655 105 (Increase) decrease in receivables, net (16,500) 3,214 3,197 (7,069) (Increase) decrease in inventories (47,799) (10,491) 2,154 8,600 (Increase) decrease in prepaid expenses and other current assets 633 1,884 (76) (160) Increase (decrease) in accounts payable 31,491 4,318 (2,192) 6,529 Increase (decrease) in accrued expenses 213 754 (2,212) (69) Other, net 154 22 866 9 ---------------------------------------------------------- Net cash flows from operating activities (26,134) 1,986 3,037 8,521 ---------------------------------------------------------- Cash Flows from Investing Activities Payments for acquisitions, net of cash acquired (1,256) -- -- -- Investment in PBI -- -- (3,842) -- Cash dividend from PBI 350 300 -- -- Purchases of property and equipment (863) (2,198) (963) (180) Proceeds from sale of assets 32 6 10 956 ---------------------------------------------------------- Net cash flows from investing activities (1,737) (1,892) (4,795) 776 ---------------------------------------------------------- Cash Flows from Financing Activities Borrowings under revolving line of credit 427,164 306,471 307,623 82,138 Repayments under revolving line of credit (397,997) (306,471) (303,213) (91,990) Net borrowings (repayments) under revolving accounts receivable credit facility 2,267 -- -- -- Proceeds from equipment loan -- 1,495 -- -- Payments of long-term debt (1,571) (1,287) (1,563) (2) Payments of capital lease obligations -- (94) (206) (10) Proceeds from exercise of stock options and warrants 413 94 221 -- Payments of deferred debt costs -- (36) -- -- ---------------------------------------------------------- Net cash flows from financing activities 30,276 172 2,862 (9,864) ---------------------------------------------------------- Increase (decrease) in cash 2,405 266 1,104 (567) Cash, Beginning of Period 1,646 1,947 843 2,213 ---------------------------------------------------------- Cash, End of Period $4,051 $2,213 $1,947 $1,646 ========================================================== Supplemental Disclosure of Cash Flow Information Cash paid (refunded) during the period for -- Interest $3,601 $3,689 $3,914 $1,029 Income taxes, net $1,151 $(1,089) $427 $31
The accompanying notes are an integral part of these statements. 26 11 D&K HEALTHCARE RESOURCES, 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 wholly owned subsidiaries of D&K Healthcare Resources, Inc. (the "Company"). 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 more than 20 states. The Company focuses primarily on a target market sector that includes independent retail, institutional, franchise, chain store, and alternate site pharmacies in the Midwest and South. The Company presently operates in one business segment. The Company had one customer that comprised approximately 18%, 20% and 21%, respectively, of net sales for the three months ended June 30, 1997, in 1997 and 1996 and approximately 22% of the March 28, 1997 accounts receivable balance. The supply agreement with this customer was terminated on September 30, 1997, upon the acquisition of the customer by a third party. Upon termination of the supply agreement, the Company collected the entire amount of its then accounts receivable due from this customer of approximately $9.5 million. In 1998, sales to one customer represented approximately 13% of total net sales. 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. CHANGE IN FISCAL YEAR On June 30, 1997, the Company changed from a fiscal year ending the Friday closest to March 31 in each year to a fiscal year ended June 30 of each year. Therefore, fiscal 1998 ended on June 30, 1998. Fiscal years 1997 and 1996 ended on March 28, 1997, and March 29, 1996, respectively, and each included 52 weeks. References to years relate to fiscal years rather than calendar years unless otherwise stated. BULK PURCHASES During 1996, the Company purchased pharmaceuticals from an industry trade association of which an officer of the Company was formerly chairman of the board of directors. Purchases of pharmaceuticals from this association amounted to $5.1 million for 1996. No material balances were payable to or receivable from this association at the end of any of the fiscal years presented. NAME CHANGE TO D&K HEALTHCARE RESOURCES, INC. In 1998, through an amendment to its Certificate of Incorporation and with the approval of its stockholders, the Company changed its corporate name from D&K Wholesale Drug, Inc., to D&K Healthcare Resources, Inc. RESTRICTED CASH Restricted cash of $4.0 million and $0.8 million, respectively, at June 30, 1998, and March 28, 1997, represents cash receipts from customers that must be used to reduce borrowings under the revolving line of credit and are included in cash. REVENUE RECOGNITION Revenue is recognized when products are shipped or services are provided to customers. During 1998, the Company made $62.1 million in "dock-to-dock" sales, which are excluded from net sales due to the Company's policy of recording only the commission on such transactions as a reduction against cost of goods sold in the consolidated statements of operations. Dock-to-dock sales represent large volume sales of pharmaceuticals to major self-warehousing retail chain pharmacies whereby the Company acts as an intermediary in the order and subsequent delivery of products to the customers' warehouses. The Company had no dock-to-dock sales during the three-month period ended June 30, 1997 or in 1997 or 1996. 27 12 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 shorter of the estimated useful lives of the various classes of assets, which vary from 2 to 30 years, or the lease term for leasehold improvements. For income tax purposes, accelerated depreciation methods are used. 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 $14.1 million and $5.3 million at June 30, 1998 and March 28, 1997, respectively. ACCOUNTING CHANGE In 1998, the Company adopted SFAS No. 128 "Earnings Per Share," which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. All share and per share amounts have been restated in accordance with the provisions of SFAS No. 128. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. NOTE 2 ACQUISITIONS During 1998, the Company made two acquisitions of pharmaceutical distribution companies for aggregate consideration of $2.6 million, including cash payments and the issuance of notes payable. 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 $8.0 million and $7.0 million higher than reported at June 30, 1998 and March 28, 1997, respectively. 28 13 NOTE 4 PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): JUNE 30, 1998 MARCH 28, 1997 - -------------------------------------------------------------------------------- Land $407 $528 Building and improvements 3,436 3,296 Fixtures and equipment 6,478 5,669 Leasehold improvements 749 735 Vehicles 844 1,052 - -------------------------------------------------------------------------------- 11,914 11,280 Less - Accumulated depreciation & amortization (5,990) (5,038) - -------------------------------------------------------------------------------- $5,924 $6,242 ================================================================================ During the three-month period ended June 30, 1997, the Company sold an idle distribution facility, with a carrying value of $0.7 million, for cash proceeds of $0.9 million. The gain on the sale is included in other, net, in the consolidated statements of operations for the three months ended June 30, 1997. NOTE 5 INVESTMENT IN PBI In November 1995, the Company completed the purchase of 50% of the capital stock of Pharmaceutical Buyers, Inc. ("PBI"), a Colorado-based group purchasing organization. Pursuant to the transaction, the Company acquired 50% of the voting and nonvoting common stock of PBI for $3.8 million in cash. The Company's investment in PBI is accounted for under the equity method. The Company's equity in the net income of PBI totaled $389,000, $410,000, $88,000, and $51,000, respectively, for 1998, 1997, 1996, and for the three months ended June 30, 1997, which is net of amortization of goodwill associated with its investment in PBI of $276,000, $276,000, $92,000 and $69,000 for these respective fiscal periods. The PBI goodwill is being amortized using the straight line method over a period of 25 years. During 1998 and 1997, the Company received cash dividends of $350,000 and $300,000, respectively, from PBI, which were recorded as a reduction in the carrying amount of the investment. Summarized balance sheet information for PBI for its fiscal year ended December 31, 1997, and unaudited information for the periods ended June 30, 1998 and 1997, included current assets of $3.0 million, $2.3 million and $2.5 million, noncurrent assets of $1.0 million, $0.8 million and $1.0 million, current liabilities of $1.1 million, $1.0 million and $1.2 million and noncurrent liabilities of $7.0 million, $6.3 million, and $7.1 million, respectively. Summarized income statement information for PBI for its fiscal year ended December 31, 1997, and unaudited information for the six months ended June 30, 1998, and for the three months ended June 30, 1997 included net revenues of $5.6 million, $2.8 million and $1.3 million and income from continuing operations and net income of $1.3 million, $0.6 million and $0.3 million, respectively. The remaining shareholders of PBI have the option to exchange their ownership interests in PBI for shares of the Company's common stock under the terms of the original purchase agreement. The potential impact of any such conversions has been determined to be anti-dilutive in all periods presented. NOTE 6 OTHER ASSETS Other assets include deferred debt issuance costs of $0.7 million and $0.7 million, respectively, at June 30, 1998, and March 28, 1997, that are being amortized over the periods the related debt is outstanding. Accumulated amortization amounted to $0.6 million and $0.5 million, respectively, at June 30, 1998, and March 28, 1997. Amortization of deferred debt issuance costs totaled $59,000 in 1998, $73,000 in 1997, $71,000 in 1996, and $20,000 for the three-month period ended June 30, 1997, and is included in interest expense in the consolidated statements of operations. 29 14 NOTE 7 INTANGIBLE ASSETS Intangible assets consisted of the following (in thousands): JUNE 30, 1998 MARCH 28, 1997 Excess of purchase price over fair value of net assets acquired $14,065 $16,475 Less - Accumulated amortization (2,330) (1,850) - -------------------------------------------------------------------------------- $11,735 $14,625 ================================================================================ The excess of purchase price over the fair value of net assets acquired is being amortized using the straight-line method over periods of 20 to 40 years. Amortization of intangible assets totaled $0.4 million in 1998, $0.4 million in 1997, $0.4 million in 1996, and $0.1 million for the three-month period ended June 30, 1997. During 1998, the excess of purchase price over the fair value of net assets acquired was reduced by $4.1 million to reflect the reversal of the deferred tax asset valuation allowance related to acquired net operating loss, alternative minimum tax, and charitable contribution carryforwards. NOTE 8 LONG-TERM DEBT Long-term debt consisted of the following (in thousands): JUNE 30, 1998 MARCH 28, 1997 Revolving line of credit with banks $60,185 $40,000 Revolving accounts receivable credit facility 5,139 -- Subordinated notes payable to insurance company -- 1,083 Convertible subordinated notes payable to insurance company -- 1,750 Missouri First Link loan 1,312 1,495 Subordinated notes to former shareholders 217 325 Notes payable for acquired companies 331 -- Other, including capital lease obligations 420 15 - -------------------------------------------------------------------------------- $67,604 $44,668 Less - Current maturities (6,448) (3,138) - -------------------------------------------------------------------------------- $61,156 $41,530 ================================================================================ 30 15 As of June 30, 1998, the revolving line of credit had a maximum borrowing capacity of $70 million, plus a supplemental facility in an aggregate amount of up to $5 million expiring August 3, 1998. 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 $70 million, plus the supplemental facility, if applicable. Generally, advances bear interest at the London Interbank Offered Rate (LIBOR) plus 1.25% or at the prime rate (8.5% prime rate at June 30, 1998) per annum payable monthly. At June 30, 1998, and March 28, 1997, the Company's borrowings under the revolving line of credit bore interest at weighted average LIBOR-based rates of 6.938% and 7.938%, respectively. The Company was required to pay annual facility fees of $289,000 and $223,000, respectively, in 1998 and 1997. At June 30, 1998, and March 28, 1997, the borrowing base formula amounted to $92.6 million and $50.7 million, respectively. At June 30, 1998 and March 28, 1997, the unused portions of the line of credit amounted to $14.8 million and $10.2 million, respectively. The agreement expires December 10, 2000, and, therefore, the related debt has been classified as long-term. The revolving line of credit is secured by eligible accounts receivable and inventories. The Company also had a revolving accounts receivable credit facility with a maximum borrowing capacity of $10 million at June 30, 1998. Under the facility, the total amount of loans outstanding may not exceed the lesser of eligible accounts receivable or $10 million. Advances bear interest at the prime rate (8.5% at June 30, 1998) plus 2.0%. At June 30, 1998, the unused portion of the facility was $4.6 million. The facility expires August 31, 1998, and therefore the related debt has been classified as current. In the first quarter of fiscal 1999, the Company expects to finalize the terms of a $45 million accounts receivable purchase facility under an asset securitization structure (the "Securitization") with its primary lender. Once finalized, the Securitization will have an initial term of three years, with annual renewal options, and bear interest at the LIBOR rate (5.6875% at June 30, 1998) plus program and liquidity fees of 0.71% payable monthly. Under the Securitization, accounts receivable will be sold on a nonrecourse basis to a bankruptcy-remote subsidiary of the Company as security for commercial paper issued by an affiliate of the lender. Based upon the structure of the arrangement, the subsidiary's assets and liabilities, consisting of accounts receivable and long-term debt, will not be consolidated with those of the Company. Also, in conjunction with the Securitization, the revolving line of credit will be amended to be secured solely by eligible inventories, to increase the facility to $75 million, and to extend its maturity through August 2001. The subordinated notes payable to an insurance company bore interest at 11%, payable semiannually, and were comprised of nonconvertible notes of $1.1 million and convertible notes of $1.75 million. Principal on the nonconvertible notes was paid in full in December 1997, and the convertible notes payable were converted into 530,978 shares of the Company's common stock. In June 1998, a $1.0 million convertible note payable was converted into 59,880 shares of the Company's common stock. The debt conversions were recorded as a component of stockholders' equity in the June 30, 1998, consolidated balance sheets. The Missouri First Link loan ("Missouri First") was used to finance and is secured by certain capital expenditures at a leased distribution facility. The Missouri First loan bears interest at a fixed rate of 70% of the bank's prime rate (8.5% at June 30, 1998) plus 1/2%, or 6.45%. A $437,500 principal reduction is required in December 1998; after such time, the loan requires monthly payments of $36,458 plus interest until maturity in December 2000. 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, to enter into leases, to make capital expenditures, and/or to incur additional debt, among other things, without the consent of its lenders. 31 16 At June 30, 1998, maturities of long-term debt, excluding capital lease obligations, were as follows (in thousands): FISCAL YEAR ENDING JUNE 30, 1999 $ 6,448 2000 731 2001 60,425 - -------------------------------------------------- $67,604 ================================================== At June 30, 1998, and March 28, 1997, 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 $0.9 million, $0.7 million, $0.4 million, and $0.2 million in 1998, 1997, 1996, and for the three-month period ended June 30, 1997, respectively. Minimum rental payments under these leases with initial or remaining terms of one year or more at June 30, 1998, are $2.8 million. Payments during the succeeding five years are: 1999, $0.8 million; 2000, $0.6 million; 2001, $0.5 million; 2002, $0.5 million; 2003, $0.4 million. 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 1996, the Company completed the consolidation of the operations of two acquired companies into one facility. As a result of the acquisition and consolidation of the facilities, the Company incurred additional nonrecurring expenses of $1.3 million. Prior to the consolidation, the Company incurred approximately $0.8 million of fixed operating expenses at one of the acquired companies, which were not expected to be incurred at the consolidated facility. In addition, approximately $0.5 million of costs were incurred in conjunction with the Company's decision to consolidate the facilities. 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 nonqualified stock options, stock appreciation rights, performance shares, restricted shares and performance units. Options to purchase up to 200,000 shares of common stock were authorized under the Long-Term Incentive Plan. The Committee determines the price (generally no less than fair market value on the date of grant) and the terms on which awards may be granted, along with the duration of the restriction periods and performance targets. In 1998, the Company's shareholders approved an amendment to the Plan to increase the number of shares available for grant to 500,000. 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 10 years from the date of grant. In January 1997, 67,999 nonqualified and incentive 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 and incentive options with an exercise price equal to the then fair market price of the stock, $3.75 per share. 32 17 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 by which awards may be granted. Stock options granted under the 1993 Plan are immediately exercisable from the date of grant and expire not later than 10 years from the date of grant. 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 nonqualified 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 nonqualified stock options with an exercise price equal to the then fair market price of the stock, $3.75 per share. Stock options exercisable at June 30, 1998, March 28, 1997, and March 29, 1996, were 409,998, 179,699 and 159,197, respectively, with a weighted average exercise price of $6.43, $3.78 and $5.25, respectively. The weighted average remaining contractual terms for all outstanding options was 8.35 years at June 30, 1998. 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 account for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense has been recognized in the consolidated financial statements for the stock option plans. 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): 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 March 31, 1995 160,865 $4.42 Granted 1996 94,664 7.00 Exercised 1996 (43,834) 5.05 Canceled 1996 (19,998) 6.14 - ------------------------------------------------------------------------- Outstanding at March 29, 1996 191,697 5.35 Granted 1997 252,332 4.74 Canceled 1997 (209,164) 6.31 Exercised 1997 (25,666) 3.65 - ------------------------------------------------------------------------- Outstanding at March 28, 1997 209,199 3.84 Granted three months ended June 30, 1997 86,000 5.63 - ------------------------------------------------------------------------- Outstanding at June 30, 1997 295,199 4.36 Granted 1998 175,999 11.30 Exercised 1998 (29,200) 4.26 - ------------------------------------------------------------------------- Outstanding at June 30, 1998 441,998 $7.13 ========================================================================= 33 18 Three Months Ended June 30, 1998 1997 1996 1997 - -------------------------------------------------------------------------------- Net income (loss) --as reported $3,327 $739 $(1,109) $363 Net income (loss) --pro forma $2,392 $464 $(1,398) $208 Earnings (loss) per share: Basic--as reported $0.99 $0.24 $(0.37) $0.12 Basic--pro forma $0.72 $0.15 $(0.47) $0.07 Diluted--as reported $0.90 $0.24 $(0.37) $0.11 Diluted--pro forma $0.65 $0.15 $(0.47) $0.07 The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model and the following weighted-average assumptions: Three Months Ended June 30, 1998 1997 1996 1997 - -------------------------------------------------------------------------------- Risk free interest rates 5.50% 5.78% 5.68% 5.49% Expected life of options (years) 5.0 6.2 6.1 6.8 Volatility of stock price 138% 83% 85% 60% Expected divided yield 0% 0% 0% 0% Fair value of options $10.13 $3.43 $5.22 $3.59 Compensation expense based on the fair value of options granted prior to April 1, 1995, was 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 June 30, 1998, and will expire in December 1999. The Company does not 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. 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 were 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. The Company recorded total expense of $70,000 ($9,000 in 1996) related to these warrants. During the three-month period ended June 30, 1997, the Company agreed to extend the expiration of the warrants through June 1998 in exchange for additional research reports. The Company recorded expense of $77,000 based upon the estimated fair value of the warrants, as amended, during the three-month period ended June 30, 1997. In 1998, the research firm exercised the warrants, resulting in the issuance of 70,000 shares of common stock of the Company, recorded at $288,750. NOTE 13 OTHER INCOME (EXPENSE) The Company recorded a $0.3 million charge in 1996 to fully reserve for its investment in a wholesale alliance in which the probability of fully recovering its investment was remote. 34 19 NOTE 14 INCOME TAXES The components of the income tax provision (benefit) were as follows (in thousands):
THREE MONTHS 1998 1997 1996 ENDED JUNE 30, 1997 - ------------------------------------------------------------------------------------- Current tax provision (benefit) $ 933 $177 $(1,044) $175 Deferred tax provision 1,241 363 655 105 - ------------------------------------------------------------------------------------- Income tax provision (benefit) $2,174 $540 $(389) $280 =====================================================================================
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):
THREE MONTHS 1998 1997 1996 ENDED JUNE 30, 1997 - ------------------------------------------------------------------------------------------------------ Current expected income tax provision (benefit) $1,870 $435 $(509) $219 Amortization of intangible assets not deductible for income tax purposes 222 234 172 58 Equity in net income of PBI not taxable for income tax purposes (181) (186) (49) (33) State income taxes, net of federal benefit 293 61 (49) 29 Other, net (30) (4) 46 7 - ----------------------------------------------------------------------------------------------------- $2,174 $540 $(389) $280 =====================================================================================================
At June 30, 1998, and March 28, 1997, the tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities were as follows (in thousands):
1998 1997 - ------------------------------------------------------------------------------------------ DEFERRED TAX ASSETS: Allowance for doubtful accounts $280 $299 Accrued liabilities 277 235 Capital lease obligations 41 29 Inventories 832 671 Net operating loss carryforwards 2,854 4,172 Alternative minimum tax and contribution carryforwards 331 201 Other 150 43 - ------------------------------------------------------------------------------------------ Total deferred tax assets $4,765 $5,650 ========================================================================================== DEFERRED TAX LIABILITIES: Property and equipment $(302) $(167) Inventories (4,167) (4,160) Accounts receivable (346) -- Other (82) (45) - ------------------------------------------------------------------------------------------ Total deferred tax liabilities $(4,897) $(4,372) - ------------------------------------------------------------------------------------------ Valuation allowance -- (4,231) - ------------------------------------------------------------------------------------------ Net deferred tax liabilities $(132) $(2,953) ==========================================================================================
35 20 In connection with the acquisitions of two companies in fiscal 1995, net deferred tax liabilities of $4.1 million 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 $4.0 million were recorded with respect to net operating loss carryforwards, contribution carryforwards, and alternative minimum tax carryforwards that were generated by the companies prior to their 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 2007. At March 28, 1997, the Company recorded a valuation allowance of $4.2 million primarily due to the uncertainty of utilizing the pre-acquisition operating losses and other carryforwards. During the three-month period ended June 30, 1997, the Company utilized $306,000 of the net operating loss carryforwards as a deduction against taxable income for that period. Accordingly, the recorded valuation allowance and the excess of purchase price over the fair value of net assets acquired were adjusted by $122,000 to reflect the utilization at June 30, 1997. In 1998, based upon its current and forecasted taxable earnings levels for future years, the Company determined that it was more likely than not that the remaining acquired net operating loss, contribution, and alternative minimum tax credit carryforwards would be utilized against consolidated taxable income in the current and future years. Therefore, the remaining valuation allowance of $4.1 million was released. This resulted in a corresponding increase to deferred tax assets and a reduction in the excess of purchase price over the fair value of net assets acquired. The Company anticipates that it will be able to utilize $3.2 million of the net operating loss carryforwards against its consolidated taxable income in 1998. The annual net operating loss limitation for future years is $1.0 million and begins to expire in 2007. NOTE 15 EMPLOYEE BENEFIT PLANS The Company has a defined contribution 401(k) plan covering substantially all of its employees. Plan participants may contribute up to 20% of their annual compensation, subject to certain limitations. The Company contribution is discretionary and is currently equivalent to 25% of employees contributions up to a maximum contribution based on 6% of eligible compensation. Expenses related to the plan were $45,000 in 1998, $49,000 in 1997, $54,000 in 1996 and $20,000 for the three-month period ended June 30, 1997. The Company also has an executive retirement benefit plan, implemented in 1998, that provides supplemental pre-retirement life insurance plus supplemental retirement income to key executives. The life insurance benefit is calculated at 3 times annual salary as of the date of participant enrollment. The retirement income benefit is provided through discretionary contributions to each participant's account, which vest 20% annually and are fully vested upon attaining age 65. Upon retirement, the accumulated account balance is paid to the participant over 15 years in quarterly benefit payments. The Company's expense related to the plan was $176,000 in 1998. 36 21 NOTE 16 EARNINGS (LOSS) PER SHARE The Company adopted SFAS 128 in 1998. All earnings and share amounts have been restated in accordance with SFAS 128. The reconciliation of the numerator and denominator of the basic and diluted earnings per common share computations are as follows (in thousands, except for shares and per share amounts):
1998 Income Shares Per-Share Basic Earnings Per Share: (Numerator) (Denominator) Amount Net income available to common shareholders $3,327 3,345,261 $0.99 Effect of Diluted Securities: Options and warrants 138,940 Convertible subordinated notes 70 282,151 - ------------------------------------------------------------------------------ Diluted Earnings Per Share: Net income available to common shareholders plus assumed conversions $3,397 3,766,352 $0.90 - ------------------------------------------------------------------------------ 1997 Income Shares Per-Share Basic Earnings Per Share: (Numerator) (Denominator) Amount Net income available to common shareholders $739 3,033,536 $0.24 Effect of Diluted Securities: Options and warrants 24,429 Convertible subordinated notes 116 530,978 - ------------------------------------------------------------------------------ Diluted Earnings Per Share: Net income available to common shareholders plus assumed conversions $855 3,588,943 $0.24 - ------------------------------------------------------------------------------ 1996 Income Shares Per-Share Basic Earnings Per Share: (Numerator) (Denominator) Amount Net income (loss) available to common shareholders ($1,109) 2,971,117 $(0.37) Effect of Diluted Securities: Options and warrants(1) Convertible subordinated notes(1) - ------------------------------------------------------------------------------ Diluted Earnings Per Share: Net income (loss) available to common shareholders plus assumed conversions ($1,109) 2,971,117 $(0.37) - ------------------------------------------------------------------------------
(1)Effect of securities is anti-dilutive. 37 22
THREE MONTHS ENDED JUNE 30, 1997 Income Shares Per-Share BASIC EARNINGS PER SHARE: (Numerator) (Denominator) Amount Net income available to common shareholders $363 3,054,994 $0.12 EFFECT OF DILUTED SECURITIES: Options and warrants 40,859 Convertible subordinated notes 29 530,978 - ------------------------------------------------------------------------------ DILUTED EARNINGS PER SHARE: Net income available to common shareholders plus assumed conversions $392 3,626,831 $0.11 - ------------------------------------------------------------------------------
NOTE 17 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board recently issued SFAS No. 130, "Reporting Comprehensive Income," which requires that an enterprise report, by major component and as a single total, the change in its net assets during the period from nonowner sources; SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers; SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits," which standardizes the disclosure requirements for pensions and other postretirement benefits and expands disclosures on changes in benefit obligations and fair values of plan assets; and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires that all derivatives be recognized as either assets or liabilities in the statement of financial position at fair value. The Company is required to adopt the provisions of SFAS 130, 131 and 132 in fiscal 1999 and SFAS 133 in fiscal 2000. Adoption of these statements is not expected to impact the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. NOTE 18 SUBSEQUENT EVENT In July 1998, the Company filed a Registration Statement on Form S-2 for the offering of 1.63 million shares of the Company's common stock for sale to the public (the Offering). The Offering includes 1.2 million shares to be sold by the Company, 250,000 shares to be sold by existing shareholders, and 180,000 shares to be sold by the holder upon the Company's exchange of such shares for an additional 18% equity interest in PBI to occur simultaneous with the Offering. If consummation of this transaction occurs, the Company will own 68% of the capital stock of PBI. Accordingly, the financial statements of PBI would be consolidated with those of the Company for all periods subsequent to the transaction. 38 23 Price Range Per Common Share The Company's common stock (symbol: "DKWD") is traded on the NASDAQ national market. The number of beneficial holders of the Company's common stock is approximately 1,450. 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 markup, markdown, or commission: 1998 - ----------------------------------------- HIGH LOW ---- --- First Quarter 8 1/8 5 1/8 Second Quarter 9 1/4 7 11/16 Third Quarter 14 3/4 8 3/8 Fourth Quarter 23 1/2 13 3/8 1997 - ----------------------------------------- HIGH LOW ---- --- First Quarter 8 1/2 5 1/8 Second Quarter 6 1/8 4 5/8 Third Quarter 4 7/8 3 3/8 Fourth Quarter 5 7/8 3 9/16 Three Months Ended 6/30/97 5 5/8 4 3/8 CORPORATE OFFICES: D&K HEALTHCARE RESOURCES, INC. 8000 Maryland Ave., Suite 920 St. Louis, Missouri 63105 (314) 727-3485 Fax: (314) 727-5759 TRANSFER AGENT/REGISTRAR: Harris Trust & Savings Bank 111 West Monroe Street Chicago, Illinois 60690 (312) 461-2121 AUDITORS: Arthur Andersen LLP St. Louis, Missouri COUNSEL: Armstrong, Teasdale, Schlafly & Davis St. Louis, Missouri FORM 10-K: Copies of form 10-K filed by D&K Healthcare Resources, Inc., for the year ended June 30, 1998, are available without charge upon request. Requests should be directed to the Company's corporate office address, marked attention: Investor Relations. EX-21 9 EXHIBIT 21 1 SUBSIDIARIES EXHIBIT 21
SUBSIDIARY NAME STATE OF INCORPORATION % OWNED - -------------------------------------------------------------------------------------------------------------------- Associated Pharmacies, Inc. Arkansas 100% VC Services, Inc. Minnesota 100% Pharmaceutical Buyers, Inc. Arkansas 50% Jaron, Inc. Florida 100% Southwest Computer Systems, Inc. (inactive) Arkansas 100% U.P.C., Inc. (inactive) Minnesota 100% D&K Receivables Corporation Delaware 100%
EX-23 10 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated August 11, 1998, included in and incorporated by reference in this Form 10-K for the year ended June 30, 1998, into the Company's previously filed Registration Statements on Form S-3 (Nos. 333-56929, 33-99210 and 333-3262) and Form S-8 (Nos. 33-88714 and 333-24263). ARTHUR ANDERSEN LLP St. Louis, Missouri, September 28, 1998 EX-27 11 EXHIBIT 27
5 1,000 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 4,051 0 51,196 700 90,413 145,492 11,914 5,990 170,350 93,242 0 0 0 37 15,915 170,350 612,427 612,957 582,765 603,872 0 0 3,584 5,501 2,174 3,327 0 0 0 3,327 .99 .90
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