-----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, TjbPDnI6z1ws5j3tz6YS0WbTMED0TvFFQkqWw9XHqSBPBGfGadSg4c+TjVTed4Kw +KaMjVBfnlglTDCZ67E9Jg== 0000950134-02-011656.txt : 20020924 0000950134-02-011656.hdr.sgml : 20020924 20020924162327 ACCESSION NUMBER: 0000950134-02-011656 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020924 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20348 FILM NUMBER: 02771199 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-K 1 c71930e10vk.txt FORM 10-K 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, 2002 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 X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /x/ State the aggregate market value of the voting stock held by non-affiliates of the registrant: approximately $129,354,107 as of September 17, 2002. 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, 2002, 14,578,966 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 2002 Annual Report to Stockholders Part III - Registrant's Proxy Statement for its 2002 Annual Meeting of Stockholders PART I Item 1. Business GENERAL We are a wholesale distributor of pharmaceutical and related healthcare and beauty aid products. We serve independent pharmacies, regional pharmacy companies, national pharmacy chains and other healthcare providers. Our independent and regional pharmacy customers are located in 24 states primarily in the Midwest and South. Independent and regional pharmacies generally operate single or multi-site locations in one or more states. National pharmacy chains generally operate a large number of locations in multiple regions of the United States. Our independent and regional pharmacy business has grown from $646.1 million in net sales in fiscal 2000 to $1.095 billion in fiscal 2002. Our national pharmacy chain business has grown from $392.5 million in net sales in fiscal 2000 to $1.247 billion in fiscal 2002. We sell branded pharmaceuticals (approximately 92% of net sales in fiscal 2002), generic pharmaceuticals (approximately 6% of net sales in fiscal 2002) and over-the-counter health and beauty aids (approximately 2% of net sales in fiscal 2002). In addition to distributing products to independent, regional and national pharmacies, we also provide our products and services to other healthcare providers, including hospitals, alternate-site care providers and pharmacy benefit management companies. On March 13, 2002, the Company declared a two-for-one stock split in the form of a stock dividend, which was effective on April 11, 2002. All share and per share amounts included in this report and in the consolidated financial statements have been adjusted to retroactively reflect this stock split. On July 5, 2001, we completed a secondary stock offering of approximately 4.8 million shares of our common stock. The net proceeds from the offering were approximately $77 million, which were used to repay debt. In July 2001, as part of the secondary stock offering, we increased our ownership percentage in Pharmaceutical Buyers, Inc. (PBI) to 68% and in August 2001, we increased our ownership percentage another 2%. These additions were accomplished with individuals exchanging PBI stock for shares of our common stock. This exchange was provided for in the agreement for the original transaction pursuant to which we acquired our initial 50% ownership interest. These transactions are more fully described in Note 2 to our consolidated financial statements. On June 15, 2001, we acquired 100% of the outstanding stock of Diversified Healthcare, LLC, a pharmaceutical distribution company based in Owensboro, Kentucky that provides comprehensive pharmaceutical distribution services to customers in the Midwest region. We believe that our size, decentralized operating structure and high level of customer service provide us with competitive advantages and position us to benefit from trends impacting our industry. Our management believes that the increasing size, scale and consolidation of the wholesale pharmaceutical industry's national participants and their strategy to be primary or major distributors to national pharmacy chains and other healthcare providers create opportunities for us to effectively compete with them based on our business focus and differentiated product offering. INDUSTRY OVERVIEW Wholesale pharmaceutical distributors serve pharmacies and other healthcare providers by providing access to a single source for pharmaceutical and healthcare products from hundreds of different manufacturers. In addition, wholesale pharmaceutical distributors lower customer inventory costs, provide efficient and timely product delivery and provide valuable inventory and purchasing information. Customers also benefit from value-added programs developed by wholesale pharmaceutical distributors to reduce costs and to increase operating efficiencies for the customer, including packaging, stockless inventory and pharmacy computer systems. One industry association analysis estimates that wholesale distributors save the healthcare delivery system more than $146 billion per year compared to purchasing directly from manufacturers. Wholesale pharmaceutical distributors are an important distribution channel for pharmaceutical manufacturers, accounting for approximately 72.4% of the $174.4 billion of prescription drug sales to retailers and institutions during 2001. Wholesale pharmaceutical distribution industry sales increased from $2.4 billion in 1970 to more than $126.3 2 billion in 2001, and we expect them to continue to increase. The principal factors contributing to this historical and expected growth are the following: - AGING OF POPULATION. The number of individuals over age 50 in the United States is projected to grow from 28% of the population presently to 32% in 2010 and 35% by 2015. This demographic group represents the largest percentage of new prescriptions filled and obtains more prescriptions per capita annually than any other age group. - INCREASED DRUG UTILIZATION. In recent years, a number of factors have contributed to the increased utilization of drug-based therapies to prevent and to treat disease. These factors include increased research and development spending by pharmaceutical manufacturers leading to the introduction of new pharmaceuticals, the lower costs of drug-based therapy relative to surgery and increased direct to consumer advertising by manufacturers. - IMPORTANCE OF THE WHOLESALE DISTRIBUTION CHANNEL. Over the past decade, as the cost and complexity of maintaining inventories and arranging for delivery of pharmaceutical products has risen, manufacturers of pharmaceuticals have significantly increased the distribution of their products through wholesalers. Drug wholesalers are generally able to offer their customers and suppliers more efficient distribution and inventory management than pharmaceutical manufacturers. As a result, from 1980 to 2001, the percentage of total pharmaceutical sales through wholesale distributors increased from approximately 57.0% to approximately 72.4%. - RISING PHARMACEUTICAL COSTS. We believe that price increases for branded pharmaceutical products by manufacturers will continue to equal or exceed the overall increases in the Consumer Price Index. We believe that these increases will be due in large part to relatively inelastic demand for branded pharmaceuticals in the face of higher prices charged for patented drugs as manufacturers attempt to recoup costs associated with the development, clinical testing and FDA approval of new products. From 1990 to 2001, the average retail price of a prescription increased from $22.06 to $50.17. CUSTOMERS AND PRODUCTS Our customer base consists of independent pharmacies, regional pharmacy companies, national pharmacy chains and other healthcare providers. Independent pharmacies generally are community-based pharmacies, which we believe benefit the most from our customized sales, information systems and other value added services. Regional pharmacy companies generally focus on serving customers with multiple sites in one or more states. National pharmacy chains generally have stores located in more than one region in the United States and include the pharmacy departments of supermarkets and mass merchandisers. Other healthcare providers consist of hospitals, other alternate-site care providers (including nursing homes, clinics, home health services and managed care organizations), and pharmacy benefit management companies. We are committed to serving the unique needs of independent and regional pharmacies and have structured our business and operating model to be able to do this in an efficient and profitable manner. NET SALES
FISCAL YEARS ENDED JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2002 ------------- ------------- ------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) Independent and regional $ 646,102 44.3% $ 748,399 45.5% $1,095,120 44.6% pharmacies National pharmacy chains 392,450 26.9% 796,611 48.4% 1,246,654 50.8% Other healthcare providers 416,869 28.6% 98,148 5.9% 101,723 4.2% PBI / Software sales (1) 2,626 0.2% 2,835 0.2% 10,251 0.4% ---------- ------ ---------- ------ ---------- ------ Total $1,458,047 100.0% $1,645,993 100.0% $2,453,748 100.0% ========== ====== ========== ====== ========== ======
- ------------- (1) For FY2002, includes sales from PBI, which is now consolidated. 3 During fiscal 2000, fiscal 2001 and fiscal 2002, our 10 largest customers accounted for approximately 55.1%, 49.4%, and 56.4%, respectively, of our net sales. Our largest customer during fiscal 2002 accounted for approximately 24% of our net sales. Our largest customer in fiscal 2001 and fiscal 2000, which was a different customer in each year, accounted for approximately 16% and 18% of our net sales during those periods, respectively. In the fourth quarter of fiscal 2000, our contracts with our two largest mail-order customers were terminated by the customers. In each case, we were given the opportunity to submit proposals to renew the contracts but elected not to do so at prices that would have been required to retain the business. Sales to these customers in fiscal 2000 represented approximately 18% and 5%, respectively, of our total net sales for that period. The loss of these customers has not had a material adverse effect on our sales. See Note 16 to our consolidated financial statements for additional information regarding the impact of the loss of these customers. Independent and Regional Pharmacies Consistent with our strategy since our inception, one of our primary objectives has been to focus on serving the specialized needs of independent and regional pharmacies while our larger national competitors have increasingly organized their businesses around serving the primary needs of the national pharmacy chain companies as well as their national contracts with group purchasing organizations and pharmacy benefit managers. We have organized ourselves to profitably and efficiently provide all of our services to our independent and regional pharmacy customers from five distribution centers located in four states, serving customers in 24 states primarily in the Midwest and South. Our sales to independent and regional pharmacies grew from $646.1 million in fiscal 2000 to $1.095 billion in fiscal 2002. Each of our distribution centers has the personnel and capabilities to autonomously provide customized distribution, information systems, inventory management and other services to our local independent pharmacy and regional pharmacy customers. Our product offerings to independent and regional pharmacy companies consist 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. We deliver our products directly to the stores of our independent pharmacy customers and deliver both to retail stores and to the warehouses of our regional pharmacy customers depending on whether they have centralized inventory warehouses. Our decentralized organization allows our distribution centers to form strong, attentive and responsive business relationships with our independent and regional pharmacy customers. Our specialized infrastructure and autonomous distribution centers enable us to serve our independent and regional pharmacy customers with a high level of customer service. We believe that we fulfill our customers' orders with a high degree of accuracy and that our customers value our flexibility and willingness to meet and accommodate their special requests and needs. We believe that the large national wholesale distributors, which are focused on and organized to serve primarily large national pharmacy chains and national contracts, do not have the operating model or flexibility to service independent and regional pharmacies as we do. National Pharmacy Chains By virtue of our strong independent and regional pharmacy business and our competitive position and strong relationships with pharmaceutical manufacturers and national pharmacy chain companies, we have built a business that serves as a secondary supplier for the high-volume branded pharmaceutical distribution needs of our manufacturers and national pharmacy chain customers. We provide our national pharmacy chain customers with 700 to 800 high-volume, branded bulk pharmaceuticals that we purchase from pharmaceutical manufacturers on favorable terms. Our net revenues from these sales have grown from $392.5 million in fiscal 2000 to $1.247 billion in fiscal 2002. Our industry is subject to regulations that require organizations handling the distribution or sale of pharmaceuticals to be able to trace the detailed history of those specific products back to the manufacturer or an authorized distributor. In order to ensure that we provide our customers with products that have verifiable shipment histories, we purchase the vast majority of our pharmaceuticals directly from manufacturers with the balance coming directly from authorized distributors. As a result of our reputation and conservative business practices, we believe that we are a desirable business partner for pharmaceutical manufacturers and national pharmacy chains. 4 We utilize our longstanding manufacturer and national pharmacy chain customer relationships to provide services that benefit both our customers and our suppliers. Our management team has developed and maintains reputations and contacts that enable them to identify opportunities to purchase branded pharmaceuticals from manufacturers at attractive prices. In addition to the experience and expertise of our management team in this area, we also employ sophisticated information and inventory management systems to understand the demand for particular products in advance of buying them for distribution. We generally purchase only fast moving branded pharmaceuticals for supply to national pharmacy chains. As a result, we minimize our inventory risk exposure and have not experienced any material inventory expiration or obsolescence in this part of our business. We have, however, had situations in which we have sold pharmaceutical products to national pharmacy chains at prices lower than what we expected when we procured those products. ADDITIONAL SERVICES Consistent with our strategy to offer a high level of customer service to our pharmacy customers, we offer a number of proprietary information system, marketing, and other business management solutions to assist our customers in profitably operating and growing their businesses. Through our Tykon, Inc. subsidiary, we develop and market a proprietary order entry/order confirmation system to the drug distribution industry. We offer and fully support these services from our distribution centers. We make these services available to all of our customers, however our independent pharmacy customers have the most to gain from them and are consequently the heaviest users of these services. In providing our services and support to independent and regional pharmacy customers, we give them access to resources and tools normally associated with larger businesses. In so doing, we believe that we enable them to operate their businesses more efficiently and that we increase our value to them. We strive to offer services that enhance the operating efficiencies of our customers and assist them in competing effectively. Principal elements of our service offering to our customers include: - RESOURCE(SM) a proprietary PC based order entry/order confirmation system that completely automates all order creation, transmission and confirmation operations and PARTNERS(SM) a fully automated and customizable replenishment software system which helps pharmacies more efficiently coordinate product supply and demand. Through these proprietary order entry/order confirmation systems that completely automate all order creation, transmission and confirmation operations, our customers have the opportunity to improve their margins and significantly reduce their working capital needs through effective inventory management. - SCRIPTMASTER(R) is our pharmacy dispensing management system, which includes computerized order entry, point-of-sale capabilities, inventory control, patient histories, drug interactions and pharmacy reimbursement. This service provides cost savings and enhanced efficiencies to pharmacy customers as well as valuable information on prescription history for manufacturers. We offer a broad range of merchandising and marketing services to our independent pharmacy customers under our MedPlus(R) identity program. Under this program, we plan and coordinate cooperative advertising programs and provide for the availability of various promotional products, including a single-source supply for generics at highly competitive prices from leading pharmaceutical manufacturers. We also offer new product introduction programs, point-of-sale materials, calendars, blood pressure testing units, automatic new product distribution, rack jobbing, store fixturing and retail employee training programs. Other services offered to independent pharmacies under MedPlus(R) include: retail merchandising, inventory management systems, electronic order entry, 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. OPERATIONS We are an organization of locally managed drug wholesale distribution centers. Each distribution center has its own executive, sales and operations staff. Management compensation at each center is determined by that center's operating results. These operations utilize our corporate staff for procurement, marketing, financial, legal and executive management resources and corporate coordination of assets and working capital management. Our decentralized sales and distribution network, combined with our centralized procurement and corporate support staff structure, enable us to 5 provide high levels of specialized customer service while minimizing administrative expenses and maximizing volume discounts for product purchases. Our distribution centers include computer systems and sophisticated materials handling equipment for receiving, storing and distributing large quantities and varieties of products. We continuously seek to improve our warehouse automation technologies to maximize operational efficiencies on a cost-effective basis. We receive virtually 100% of our orders electronically and, upon receipt of the customer's order at a distribution center, our warehouse-management system produces a "picking document" containing product selection, loading and truck routing information. The system also provides customized price information (geared to local markets as determined by the customer) or individual package price stickers to accompany each shipment to facilitate the customer's pricing of the items. Virtually all items ordered from our distribution centers are available and shipped by us less than 24 hours after customers place the orders. Orders are delivered to customers by our fleet of trucks and vans or by contract carriers. SALES AND MARKETING We employ sales representatives and customer service representatives at each of our distribution centers. Our sales representatives receive regular training to help them improve customer service and to provide them with the skills and resources necessary to increase business with existing customers and establish new customer relationships. We also maintain at each of our distribution centers a telephone service department staffed with trained representatives who answer customer questions and solve problems. We focus our marketing efforts on developing and maintaining primary relationships with customers. We emphasize frequent personal interaction between our sales force and customers so that our customers learn to rely on our dependability, responsiveness, accuracy of order filling and breadth of product line. Our customers also rely on our sales force for assistance with advertising, merchandising, stocking and inventory management. We believe that our distribution center-based customer service departments differentiate us from our national competitors; they are a key element in our marketing program. Our decentralized customer service staffs focus on developing relationships with our customers, responding quickly to customer inquiries and placing orders accurately and efficiently. PURCHASING AND INVENTORY CONTROL We utilize sophisticated inventory control and purchasing software to track our inventory, to analyze demand history and to project future demand. Our system is designed to enhance profit margins by eliminating the manual ordering process, allowing for automatic inventory replenishment and identifying inventory buying opportunities. We purchase products from approximately 1,200 manufacturers. We initiate purchase orders with manufacturers through our information systems. During fiscal 2002 and fiscal 2001, our 10 largest suppliers accounted for approximately 71% and 66%, respectively, of our purchases by dollar volume. Our largest supplier accounted for approximately 22% (by dollar volume) of our purchases during fiscal 2002 and approximately 31% (by dollar volume) of our purchases during fiscal 2001. Another vendor accounted for approximately 11% (by dollar volume) of our purchases during fiscal 2002. As is common practice in our industry, the majority of our supply contracts are terminable by either party upon short notice and without penalty. We believe that our relationships with our suppliers are good. MANAGEMENT INFORMATION SYSTEMS Each of our distribution centers operates as a distinct business with complete system functionality including, order processing, inventory management, accounts receivable, accounts payable, general ledger, master file maintenance, and external and internal reporting. Historically, we have operated in a distributed data processing environment. Each distribution center maintained its own AS/400 system and Information Systems staff to support that function. Over the past year, we have consolidated certain systems into data centers located in St. Louis and Cape Girardeau. Each of the divisions is connected to the central systems in St. Louis and Cape Girardeau. In March 2000, we selected JD Edwards OneWorld(TM) product as our new Enterprise Resource Planning software package. The OneWorld(TM) product is a complete system that integrates sales order management, inventory 6 management, transportation management, customer service, accounts payable, accounts receivable, general ledger and financial reporting. Once implementation is complete, all systems will be consolidated in St. Louis and Cape Girardeau. The new system will provide us with improved operations management and financial reporting systems. Implementation of this system began in July 2000 and is expected to be completed during fiscal 2003. BUYING GROUP In November 1995, we purchased 50% of Pharmaceutical Buyers, Inc. (PBI), a Colorado-based group purchasing organization. PBI is one of the largest pharmaceutical group purchasing organizations in the United States with over 2,000 member organizations. PBI's member organizations include long-term care facilities, home infusion providers, and medical equipment distributors. In connection with the secondary stock offering in July 2001, we increased our ownership in PBI to 68% and an additional 2% was acquired in a subsequent transaction in August 2001. The resulting required consolidation of PBI's operations positively impacted our financial statements by increasing our gross profit and gross margin percentage but has had no effect on our earnings per share. See Note 13 to our consolidated financial statements. COMPETITION The wholesale distribution of pharmaceuticals, health and beauty aids, and other healthcare products is highly competitive. National and regional distributors compete primarily on the basis of service and price. Other competitive factors include delivery service, credit terms, breadth of product line, customer support, merchandising and marketing programs. We compete with national and regional wholesale distributors, manufacturers and generic pharmaceutical telemarketers and specialty distributors and with other wholesale distributors for purchases of products and financial support in the form of trade credit from manufacturers. Certain of our competitors, including McKesson Corporation, AmeriSourceBergen Corporation and Cardinal Health, Inc., have significantly greater financial and marketing resources than we do. EMPLOYEES As of August 31, 2002, we employed 456 persons, 408 of whom were full-time employees. Approximately 25 employees at our 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 2003. Approximately 11 employees at our Jewett Drug Co. subsidiary are covered by a collective bargaining agreement with the General Drivers and Helpers Union Local 749, affiliated with the International Brotherhood of Teamsters, which expires February 29, 2004. In November 2001, the National Labor Relations Board decertified the United Steelworkers of America as the collective bargaining representative for approximately 34 employees at our Cape Girardeau, Missouri distribution center. We believe that our employee relations are good. FORWARD-LOOKING STATEMENTS Certain statements in this document regarding future events, prospects, projections or financial performance are forward looking statements. Such forward looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and may also be identified by words such as "anticipates," "believes," "estimates," "expects," "intends" and similar expressions. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in or suggested by such forward looking statements. These risks and uncertainties include the Company's ability to compete in a competitive industry, with many competitors having substantially greater resources than the Company and the Company's customers and suppliers generally having the right to terminate or reduce their purchases or shipments on relatively short notice, changes in interest rates, the Company's ability to maintain or improve its operating margin with the industry's competitive pricing pressures, the changing business and regulatory environment, including possible changes in reimbursement for healthcare products and in manufacturers' pricing or distribution policies or practices, the availability of investment purchasing opportunities, the loss of one or more key suppliers for which alternative sources may not be available, and the ability to integrate recently acquired businesses. Readers are cautioned not to place undue reliance on these forward-looking statements that reflect the Company's views as of the date hereof. The Company undertakes no obligation to publicly update or revise any forward-looking statements. 7 Item 2. Properties We conduct our business from a total of nine office, warehouse and satellite depot facilities. Our primary operating facilities include:
LOCATION DESCRIPTION SQUARE FOOTAGE -------- ----------- -------------- Cape Girardeau, Missouri (1).................... Distribution and administration 66,000 Lexington, Kentucky (1)......................... Distribution and administration 61,900 Minneapolis, Minnesota (2)...................... Distribution and administration 63,000 Aberdeen, South Dakota (1)...................... Distribution and administration 40,000 Weston, Florida (1)............................. Distribution and administration 24,000 Owensboro, Kentucky (2)........................ Distribution and administration 34,000 Caguas, Puerto Rico (1)......................... Distribution and administration 5,000 Boulder, Colorado (1)........................... PBI headquarters 5,500 St. Louis, Missouri (1)......................... Corporate offices 11,500 St. Louis, Missouri (3)......................... Corporate offices 31,765
- ------------- (1) Leased. (2) Owned. (3) Leased. To be occupied during fiscal 2003. We also maintain warehouse and satellite depot facilities in Missouri and Kentucky that enable us to efficiently distribute products on a timely basis. We believe our facilities are adequate to support our present business plans. Item 3. Legal Proceedings No material legal proceedings are pending against us. Item 4. Submission of Matters to a Vote of Security Holders We did not submit any matters to a vote of our security holders during the quarter ended June 30, 2002. Item 4A. Executive Officers of the Registrant The name, age and position of each of our executive officers are set forth below. J. Hord Armstrong, III, 61, has served as our Chairman of the Board, Chief Executive Officer and Treasurer and as one of our directors since December 1987. Prior to joining us, 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. Martin D. Wilson, 41, has served as our President and Chief Operating Officer since January 1996, as Secretary from August 1993 to April 1999 and as one of our directors since 1997. Mr. Wilson previously served as our Executive Vice President, Finance and Administration from May 1995 to January 1996, as our Vice President, Finance and Administration from April 1991 to May 1995 and as our Controller from March 1988 to April 1991. Prior to joining D&K, Mr. Wilson, was associated with KPMG Peat Marwick, a public accounting firm. Thomas S. Hilton, 50, has served as our Senior Vice President and Chief Financial Officer since January 1999. Between May 1980 and June 1998, Mr. Hilton was employed by the Peabody Group, a coal mining and sales corporation, serving in a variety of management positions including Vice President and Treasurer from March 1993 to May 1995 and as Vice President and Chief Financial Officer from May 1995 to June 1998. 8 Leonard R. Benjamin, 52, has served as our Vice President, General Counsel and Secretary since April 1999. Between January 1999 and April 1999, Mr. Benjamin was Assistant General Counsel of Innovex Corporation, a provider of sales forces to the pharmaceutical industry. Between October 1998 and January 1999, Mr. Benjamin was counsel to KWS&P/SFA Inc., a software provider to the pharmaceutical industry. Between April 1994 and July 1998, Mr. Benjamin was employed by Walsh International Inc., a software provider to the pharmaceutical industry, initially as Associate General Counsel and then as Vice President, General Counsel and Secretary. Brian G. Landry, 46, has served as our Vice President and Chief Information Officer since April 2000. Mr. Landry previously served as Vice President, I.S. product management from April 1999 to April 2000 and as Vice President and General Manager of our Minneapolis distribution center from November 1996 to April 1999. From October 1992 to October 1996, Mr. Landry was employed by Cardinal Health as a general manager of a distribution center. 9 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 page 1 of the registrant's 2002 Annual Report to Stockholders is incorporated herein by this reference. The following table contains certain information concerning shares of common stock of the Company subject to options issued under the Company's 1992 Long-term Incentive Plan (as amended), 1993 Stock Option Plan (as amended) and 2001 Long-term Incentive Plan. The Company's stockholders have approved the 1992 Long-term Incentive Plan and the 2001 Long-term Incentive Plan. The 1993 Stock Option Plan (the 1993 Plan) is for employees and certain other persons (other than directors or executive officers of the Company) who perform services for the Company. Under the 1993 Plan, the Company may grant options, which do not qualify as Incentive Stock Options, at a price not less than fair market value of the Company's common stock at the time of grant. The term of the options shall not exceed 10 years from the date of grant. There were 700,000 shares authorized under the 1993 Plan. The 1993 Plan did not require stockholder approval.
EQUITY COMPENSATION PLAN INFORMATION NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a)) PLAN CATEGORY (a) (b) (c) - ------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by stockholders 955,866 $14.30 841,000 - ------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by stockholders 136,250 $12.04 -- - ------------------------------------------------------------------------------------------------------------- TOTAL 1,092,116 $13.96 841,000 - -------------------------------------------------------------------------------------------------------------
Item 6. Selected Financial Data The information set forth under the caption "Financial Highlights" on page 1 of the registrant's 2002 Annual Report to Stockholders is incorporated herein by this reference. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The table below sets forth certain statement of operations data for the last three fiscal years expressed as a percentage of net sales and in comparison with the prior fiscal year. Unless otherwise indicated, for purposes of this discussion, all references to "2002," "2001," and "2000" shall mean the Company's fiscal years ended June 30, 2002, June 30, 2001, and June 30, 2000, respectively.
-------------------------------------------- -------------------------------- Percentage Change from Prior Percentage of Net Sales Year -------------------------------------------- -------------------------------- 2002 2001 2000 2001-2002 2000-2001 ------------- ------------ ----------- ------------- --------------- Net sales 100.00% 100.00% 100.00% 49.1% 12.9% Gross profit 4.19% 4.18% 3.87% 49.4% 22.0% Total operating expenses (2.30%) (2.54%) (2.34%) 34.9% 22.7% ------------- ------------ ----------- Income from operations 1.89% 1.64% 1.53% 72.0% 20.8% Interest expense, net (0.40%) (0.72%) (0.66%) (18.7%) 24.1% Other, net (0.03%) 0.00% 0.05% NM NM Income tax provision (0.57%) (0.36%) (0.36%) 139.7% 13.2% Minority interest (0.03%) - - NA NA ------------- ------------ ----------- Net income 0.86% 0.56% 0.56% 130.3% 11.5% ============= ============ ===========
FISCAL YEAR ENDED JUNE 30, 2002, COMPARED WITH THE FISCAL YEAR ENDED JUNE 30, 2001 NET SALES Net sales increased $807.8 million to $2.454 billion, or 49.1%, for the fiscal year ended June 30, 2002, compared to the corresponding period of the prior year. Sales growth was primarily in the independent and regional pharmacy and national pharmacy chain groups. Sales to independent and regional pharmacies increased $346.7 million to $1.095 billion, or 46.3%, as a result of the net increase in sales to existing customers, the addition of DHI for a full year, and the addition of new customers. National pharmacy chain sales increased $450.0 million to $1.247 billion, or 56.5%, over fiscal 2001 as proceeds from our equity offering were primarily used to capitalize on opportunities in this trade class, while sales to healthcare providers increased $3.6 million to $101.7 million, or 3.6%. The increase in net sales related to the consolidation of PBI in fiscal 2002 was insignificant. We made replenishment purchases and investment purchases, including both forward purchasing and special purchasing opportunities, with our largest supplier for fiscal 2002. We continue to make replenishment and forward purchases, but do not anticipate any special purchasing opportunities in the near future, with this supplier. If we are unable to identify and benefit from other purchasing opportunities, then there could be a negative impact on our revenues and earnings in future periods. In addition, during fiscal 2002 we made $70.5 million in dock-to-dock sales, which are not included in net sales due to our accounting policy of recording only the commission on such transactions as a reduction to cost of sales in our consolidated statements of operations. Dock-to-dock sales represent bulk sales of pharmaceuticals to self-warehousing chain pharmacies for which we act 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. Dock-to-dock sales were $85.1 million during fiscal 2001. GROSS PROFIT Gross profit increased $34.0 million to $102.8 million, or 49.4%, for fiscal 2002, compared to the corresponding period of the prior year. As a percentage of net sales, gross margin increased from 4.18% to 4.19% for the fiscal year ended June 30, 2002, compared to the corresponding period of the prior year. The slight increase in gross margin percentage was due to the inclusion of PBI partially offset by competitive forces in the business and a slightly higher mix of national pharmacy chain business that normally has lower gross margins. OPERATING EXPENSES Operating expenses (including depreciation and amortization) increased $14.6 million to $56.5 million, or 34.9%, for the fiscal year ended June 30, 2002 compared to the corresponding period of the prior year. The ratio of operating expenses to net sales for fiscal 2002 was 2.30%, a 9.4% decrease from the comparable period of the prior year. The increase in operating expenses resulted from the inclusion of DHI and PBI operating 11 expenses during the year, a shift in sales mix to accounts requiring a higher level of service, and higher depreciation expense related to portions of the new ERP system being implemented. The ratio of operating expense to net sales fell as a function of the increase in sales in national pharmacy business that has lower incremental operating costs. INTEREST EXPENSE, NET Net interest expense decreased $2.2 million to $9.7 million, or 18.7%, for the fiscal year ended June 30, 2002, compared to the corresponding period of the prior year. As a percentage of net sales, net interest expense decreased to 0.40% from 0.72% for fiscal 2002, compared to the corresponding period of the prior year. The decrease in net interest expense was primarily the result of lower average borrowing rates. INCOME TAX PROVISION Our effective income tax rate was 39.3% for the fiscal year ended June 30, 2002 compared to 39.2% for the corresponding period of the prior year. These rates were different from the statutory blended federal and state rates primarily because of the amortization of intangible assets that are not deductible for federal and state income tax purposes. Our effective rate is slightly higher than the corresponding period of last year due to the impact of the sales mix on the blended state income tax rate. MINORITY INTEREST We began recording minority interest during fiscal 2002 as a result of our additional investment in PBI in July 2001. Prior to fiscal 2002, our investment was treated under the equity method and our portion of the earnings in PBI where recorded accordingly. FISCAL YEAR ENDED JUNE 30, 2001, COMPARED WITH THE FISCAL YEAR ENDED JUNE 30, 2000 NET SALES Net sales increased $187.9 million to $1.646 billion, or 12.9%, for the fiscal year ended June 30, 2001, compared to the corresponding period of the prior year. Sales growth was primarily in the independent and regional pharmacy and national pharmacy chain groups. Sales to independent and regional pharmacies increased $102.3 million to $748.4 million, or 15.8%, as a result of the net increase in sales to existing customers and the addition of new customers. National pharmacy chain sales increased $404.2 million to $796.6 million, or 103.0%, over fiscal 2000 due to infrastructure investments and a focused effort on this trade class, while sales to healthcare providers decreased $318.7 million to $98.1 million, or 76.5%, as a result of the loss of two mail order customers during the fourth quarter of fiscal 2000. In addition, during fiscal 2001 we made $85.1 million in dock-to-dock sales, which are not included in net sales due to our accounting policy of recording only the commission on such transactions as a reduction to cost of sales in our consolidated statements of operations. Dock-to-dock sales represent bulk sales of pharmaceuticals to self-warehousing chain pharmacies for which we act 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. Dock-to-dock sales were $46.8 million during fiscal 2000. GROSS PROFIT Gross profit increased $12.4 million to $68.8 million, or 22.0%, for fiscal 2001, compared to the corresponding period of the prior year. As a percentage of net sales, gross margin increased from 3.87% to 4.18% for the fiscal year ended June 30, 2001, compared to the corresponding period of the prior year. The increase in gross margin percentage was due to the discontinuance of lower gross profit business from the mail order customers mentioned above. OPERATING EXPENSES Operating expenses (including depreciation and amortization) increased $7.8 million to $41.9 million, or 22.7%, for the fiscal year ended June 30, 2001 compared to the corresponding period of the prior year. The ratio of operating expenses to net sales for fiscal 2001 was 2.54%, an 8.5% increase from the comparable period of the prior year. The increase in operating expenses and the ratio of operating expenses to net sales resulted primarily from a shift in sales mix to accounts requiring a higher level of service and related expense. INTEREST EXPENSE, NET Net interest expense increased $2.3 million to $12.0 million, or 24.1%, for the fiscal year ended June 30, 2001, compared to the corresponding period of the prior year. As a percentage of net sales, net interest expense increased to 0.72% from 0.66% for fiscal 2001, compared to the corresponding period of the prior year. The increase in net interest expense was primarily the result of higher average borrowings related to our continued growth. INCOME TAX PROVISION Our effective income tax rate was 39.2% for the fiscal year ended June 30, 2001 compared to 38.8% for the corresponding period of the prior year. These rates were different from the statutory blended federal and state rates primarily because of the amortization of intangible assets that are not deductible for federal and state 12 income tax purposes. Our effective rate is slightly higher than the corresponding period of last year due to the impact of the sales mix on the blended state income tax rate. LIQUIDITY AND CAPITAL RESOURCES Our working capital requirements are generally met through a combination of internally generated funds, borrowings under the revolving line of credit, the accounts receivable securitization program, and trade credit from our suppliers. On July 5, 2001, stockholders' equity was increased by approximately $77 million as the result of our secondary stock offering. See Note 1 of our consolidated financial statements. We use the following ratios as key indicators of our liquidity and working capital management:
JUNE 30, JUNE 30, 2002 2001 ---- ---- Working capital (000s).................................. $ 182,636 $ 97,533 Current ratio........................................... 1.79 to 1 1.57 to 1
Working capital and current ratio at June 30, 2002 are higher than June 30, 2001 levels. Increases in inventory levels are related to seasonal sales patterns and growth that have been partially offset by accounts payable increases tied to timing of inventory receipts and related payments. We invested $3.4 million in capital assets in fiscal 2002, as compared to $3.5 million in the corresponding period in the prior year. The fiscal 2002 and 2001 expenditures were primarily related to the implementation of our new Enterprise Resource Planning computer system, which is scheduled to be completed during fiscal 2003. This system integrates sales order management, inventory management, transportation management, customer service, accounts payable, accounts receivable, general ledger and financial reporting. We believe that continuing investment in capital assets is necessary to achieve our goal of improving operational efficiency, thereby enhancing our productivity and profitability. Net cash inflows from financing activities totaled $61.3 million for the year ended June 30, 2002 as compared to net cash outflows of $3.5 million for the corresponding period in the prior year. During fiscal 2002, we received proceeds from our secondary stock offering that was partially offset by increased repayments under our revolving credit agreement. During the previous year, the capacity under our accounts receivable securitization program increased which made available funds for repayment of the revolving credit facility. On June 12, 2001, our revolving line of credit was amended to increase the maximum borrowing capacity to $150 million and extend the term to August 2005. 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 (the borrowing base formula), or our maximum borrowing capacity under this agreement but may not be less than $20 million. The advances currently bear interest at a base rate of the London Interbank Offering Rate (LIBOR) plus 1.75%, or at the prime rate plus 0.25% per annum payable monthly. Through an interest rate swap agreement, we effectively fixed the interest rate on $20 million of our revolving line of credit at a nominal rate of 6.19%. At June 30, 2002 and June 30, 2001, the borrowing base formula amounted to $241.4 million and $132.2 million, respectively. The unused portion of the line of credit amounted to $71.3 million at June 30, 2002 and $56.9 million at June 30, 2001. The agreement expires in August 2005, and, therefore, the related debt has been classified as long-term. The revolving line of credit is secured by eligible inventories. In July 2002, our revolving line of credit was amended to increase the maximum borrowing capacity to $200 million. In the first quarter of fiscal 1999, we entered into an accounts receivable securitization program under an asset securitization structure with our primary lender. On June 8, 2001, this agreement was amended to increase the maximum amount of receivables eligible to be sold to $150 million and the term was extended to August 2005. At June 30, 2002, $120 million of this facility was utilized. Under the program, undivided interests in a pool of eligible trade receivables that have been contributed to the Seller are sold, without recourse, to a multi-seller, asset backed commercial paper conduit ("Conduit"). Purchases by the Conduit are financed with the sale of highly rated commercial paper. We use the proceeds from the sale of our accounts receivable to repay long-term debt, effectively reducing its overall borrowing costs. Funding costs under this program are 4.85% on the first $50 million with the rate on the excess amounts equal to the commercial paper rate. Certain program fees total an additional 0.75%. The portion of receivables not sold by the subsidiary remains an asset on the balance sheet ($31.7 million as of June 30, 2002). In 13 August 2002, this agreement was amended to increase the maximum amount of receivables eligible to be sold to $200 million. Stockholders' equity increased to $167.4 million at June 30, 2002 from $57.5 million at June 30, 2001, due to the impact of the equity offering and net earnings during the period. We believe that funds available under the line of credit and the securitization facility, together with internally generated funds, will be sufficient to meet our capital requirements for the foreseeable future. INFLATION Our financial statements are prepared on the basis of historical costs and are not intended to reflect changes in the relative purchasing power of the dollar. Because of our ability to take advantage of forward purchasing opportunities, we believe that our gross profits generally increase as a result of manufacturers' price increases in the products we distribute. Gross profits may decline if the rate of price increases by manufacturers declines. Generally, price increases are passed through to customers as they are received by us and therefore reduce the negative effect of inflation. Other non-inventory cost increases, such as payroll, supplies and services, have been partially offset during the past three years by increased volume and productivity. RECENT TRENDS During the first two months of the fiscal 2003 first quarter, the Company's internal revenue and margin objectives for its national chain business were not achieved. The sales shortfall is principally the result of fewer than expected purchasing and sales opportunities available during the period. The Company's sales in the national chain business have been variable from month to month historically, driven largely by opportunistic purchases from pharmaceutical companies for distribution primarily to national chains. Additionally, the Company's growth in sales to the independent and regional pharmacy trade class has trended below internal expectations in the first two months of the quarter of fiscal 2003. The Company now expects this trade class to achieve growth of approximately 10%, year-over-year, in the first quarter. While below expectations, this performance should enable the Company to further expand its share of this trade class, despite the unusually strong growth it achieved in the year-ago first quarter. The Company believes its sales performance in the trade class reflects a recent softening in retail sales trends now being exhibited across the country. The Company also believes the retail sales trends reflect a greater than expected revenue impact from generic drugs' encroachment on branded pharmaceuticals, the impact of increasingly higher prescription co-payment costs as well as funding challenges across most state Medicaid systems. CRITICAL ACCOUNTING POLICIES The Company's more critical accounting policies include the accounts receivable securitization program, the valuation of long-lived assets, and the use of estimates (which inherently involve judgment and uncertainties) in valuing accounts receivable. Accounts Receivable Securitization Program The Company and its wholly-owned, bankruptcy-remote subsidiary ("Seller") has an accounts receivable securitization program. Under the program, undivided interests in a pool of eligible trade receivables that have been contributed to the Seller are sold, without recourse, to a multi-seller, asset backed commercial paper conduit ("Conduit"). Purchases by the Conduit are financed with the sale of highly rated commercial paper. The Company utilizes proceeds from the sale of its accounts receivable to repay long-term debt, effectively reducing its overall borrowing costs. Under the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," (as amended by SFAS No. 140) the securitization transactions have been recorded as sales, with those accounts receivable sold to the Conduit removed from the consolidated balance sheet. The Seller is a separate legal entity from the Company. The Seller's assets are available first and foremost to satisfy the claims of its creditors. Eligible receivables, as defined in the securitization agreement, consist of trade receivables from our subsidiaries, excluding non-pharmaceutical receivables, reduced for certain items, including past due balances and 14 concentration limits. Of the eligible pool of receivables contributed to the Seller, undivided interests in only a portion of the pool are sold to the Conduit. The portion of eligible receivables not sold to the Conduit remains an asset of the Seller. The Seller's interest in these receivables is subordinate to the Conduit's interest in the event of default under the securitization agreement. Valuation of Goodwill and Intangible Assets Goodwill and certain identifiable intangibles assets are reviewed when events or circumstances indicate that the net book value may not be recoverable. Under SFAS No. 142,"Goodwill and Other Intangible Assets", goodwill and intangible assets that have indefinite lives will no longer be amortized but will be tested for impairment annually or more frequently if circumstances indicate potential impairment. Other intangible assets will continue to be amortized over their estimated useful lives. Accounts Receivable We perform ongoing credit evaluations of our customers, including reviews of their current credit information, and adjust credit limits based upon payment history and the customer's current credit worthiness. We continuously monitor collections and payments from customers and maintain a provision for estimated credit losses based upon the Company's historical experience and any specific customer collection issues that have been identified. However, the ultimate collectibility of a receivable is dependent upon the financial condition of an individual customer, which could change rapidly and without advance warning. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS 141 is effective for all business combinations completed after June 30, 2001. See Note 2 of our consolidated financial statements. The Financial Accounting Standards Board has issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under the new standard, we will no longer be required or permitted to amortize goodwill or other intangible assets with indefinite lives reflected on the balance sheet. We will, however, be required to evaluate these items reflected on the balance sheet to determine whether they are impaired under the guidelines of the standard. Other intangible assets with definite lives will continue to be amortized over their estimated useful lives. We adopted SFAS No. 142 as of July 1, 2002. As a result of this adoption, the Company will recognize an impairment loss of approximately $7.0 million ($4.2 million net of tax) during the first quarter of fiscal 2003. This will be recognized as the cumulative effect of a change in accounting principle. This impairment results from an appraisal valuation and relates to goodwill originally established for the acquisition of Jewett Drug Co. The earnings per share impact of goodwill amortization during fiscal 2002 was $0.08 per share. The Financial Accounting Standards Board has issued SFAS No. 143, "Asset Retirement Obligations" in June 2001. SFAS 143 provides guidance on accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated retirement costs. We adopted this statement in fiscal 2002, and it did not affect our consolidated financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which supersedes SFAS 121, "Accounting for Long-lived Assets and for Long-lived Assets to be Disposed Of", and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. We are in the process of evaluating the adoption of this standard, but do not believe it will have a material impact on our consolidated financial statements. The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement updates, clarifies and simplifies existing accounting pronouncements related to accounting for gains and losses from the extinguishments of debt and accounting for certain 15 lease modifications. We are in the process of evaluating the adoption of this standard, but do not believe it will have a material impact on our consolidated financial statements. The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses the accounting for costs associated with disposal activities covered by SFAS No. 144 or with exit activities previously covered by EITF 94-3. This statement will be applied prospectively to any exit or disposal activities that we initiate after December 31, 2002. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our primary exposure to market risk consists of changes in interest rates on borrowings. An increase in interest rates would adversely affect the operating results and the cash flow available to fund operations and expansion. Based on the average variable borrowings, a change of 25 basis points in the average variable borrowing rate would result in a change of approximately $0.4 million in annual interest expense. We continually monitor this risk and review the potential benefits of entering into hedging transactions, such as interest rate swap agreements, to mitigate the exposure to interest rate fluctuations. Our hedging arrangements at June 30, 2002 are described in Note 8 to our audited consolidated financial statements. Item 8. Financial Statements and Supplementary Data
PAGE --------------------------------------- Independent Auditors' Report Page 17 Consolidated Balance Sheets at June 30, 2002 and June 30, 2001 Page 19 Consolidated Statements of Operations for the years ended June 30, 2002, June 30, 2001, and June 30, 2000 Page 20 Consolidated Statements of Stockholders' Equity for the years Ended June 30, 2002, June 30, 2001, and June 30, 2000 Page 21 Consolidated Statements of Cash Flows for the years ended June 30, 2002, June 30, 2001, and June 30, 2000 Page 22 Notes to Consolidated Financial Statements Page 23
16 INDEPENDENT AUDITORS' REPORT The Board of Directors D&K Healthcare Resources, Inc.: We have audited the accompanying consolidated financial statements of D&K Healthcare Resources, Inc. and subsidiaries as of June 30, 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audit. The consolidated financial statements and the financial statement schedule of D&K Healthcare Resources, Inc. and subsidiaries as of June 30, 2001, and for each of the years in the two-year period then ended, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and financial statement schedule, before the restatement described in Note 1 to the consolidated financial statements, in their report dated August 7, 2001. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated 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, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed above, the consolidated financial statements of D&K Healthcare Resources, Inc. and subsidiaries as of June 30, 2001, and for each of the years in the two-year period then ended, were audited by other auditors who have ceased operations. As described in Note 1, the Company declared a two-for-one stock split in the form of a stock dividend during the year ending June 30, 2002, and the amounts in the consolidated financial statements as of June 30, 2001, and for each of the years in the two-year period then ended, relating to all share and per share amounts have been restated to retroactively reflect this stock split. We audited the adjustments that were applied to restate the share and per share amounts reflected in the June 30, 2001 and 2000 consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the June 30, 2001 and 2000 consolidated financial statements of D&K Healthcare Resources, Inc. and subsidiaries other than with respect to such adjustments and, accordingly, do not express an opinion or any other form of assurance on the June 30, 2001 and 2000 consolidated financial statements taken as a whole. /s/ KPMG LLP St. Louis, Missouri August 7, 2002 17 THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. ALL SHARE AND PER SHARE AMOUNTS INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL 2001 AND 2000 HAVE BEEN ADJUSTED TO RETROACTIVELY REFLECT A TWO-FOR-ONE STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND THAT OCCURRED IN FISCAL 2002. 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, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes 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 St. Louis, Missouri August 7, 2001 18 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
JUNE 30, 2002 JUNE 30, 2001 ------------- ------------- ASSETS Current Assets Cash (including restricted cash of $11,754 and $7,516 respectively) $ 11,754 $ 7,516 Receivables, net of allowance for doubtful accounts of $1,374 and $2,197, respectively 31,217 45,131 Inventories 364,244 214,739 Deferred income taxes 897 1,540 Prepaid expenses and other current assets 5,802 1,124 --------- --------- Total current assets 413,914 270,050 Property and Equipment, net of accumulated depreciation and amortization 11,104 10,865 Investment in PBI -- 4,552 Other Assets 5,024 2,758 Goodwill, net of accumulated amortization 51,131 41,979 Other Intangible Assets, net of accumulated amortization 1,965 -- --------- --------- Total assets $ 483,138 $ 330,204 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 2,270 $ 320 Accounts payable 215,777 158,930 Accrued expenses 13,231 13,267 --------- --------- Total current liabilities 231,278 172,517 Long-term Liabilities 2,757 2,300 Deferred Income Taxes 249 3,388 Long-term Debt 81,457 94,489 --------- --------- Total liabilities 315,741 272,694 Stockholders' Equity Preferred stock -- -- Common stock 151 47 Paid-in capital 124,089 34,006 Accumulated other comprehensive loss (887) (356) Retained earnings 49,590 29,359 Less treasury stock (5,546) (5,546) --------- --------- Total stockholders' equity 167,397 57,510 --------- --------- Total liabilities and stockholders' equity $ 483,138 $ 330,204 ========= =========
Preferred stock has no par value; 1 million shares are authorized. At June 30, 2002 and 2001, no shares were issued or outstanding. Common stock has a par value of $.01 per share; 25 million shares are authorized; 15,146,602 and 9,416,062 shares were issued at June 30, 2002 and 2001, respectively. At June 30, 2002, 14,553,802 shares were outstanding and 592,800 shares were held in treasury. At June 30, 2001, 8,823,262 shares were outstanding and 592,800 shares were held in treasury. The accompanying notes are an integral part of these statements. 19 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) For the Years Ended ------------------------------------------------------------- JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2000 ------------- ------------- ------------- Net Sales $ 2,453,748 $ 1,645,993 $ 1,458,047 Cost of Sales 2,350,917 1,577,169 1,401,625 ----------- ----------- ----------- Gross profit 102,831 68,824 56,422 Depreciation and Amortization 4,453 3,428 3,118 Operating Expenses 52,039 38,450 31,005 ----------- ----------- ----------- Income from operations 46,339 26,946 22,299 ----------- ----------- ----------- Other Income (Expense): Interest expense (10,386) (13,311) (10,643) Interest income 667 1,352 1,007 Equity in net income of PBI -- 607 634 Other, net (710) (563) 102 ----------- ----------- ----------- (10,429) (11,915) (8,900) ----------- ----------- ----------- Income before income tax provision and minority interest 35,910 15,031 13,399 Income Tax Provision (14,113) (5,887) (5,200) Minority Interest (738) -- -- =========== =========== =========== Net income $ 21,059 $ 9,144 $ 8,199 =========== =========== =========== Basic Earnings Per Share $ 1.48 $ 1.08 $ 0.97 =========== =========== =========== Diluted Earnings Per Share $ 1.42 $ 1.01 $ 0.92 =========== =========== ===========
The accompanying notes are an integral part of these statements. 20 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
ACCUMULATED OTHER COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCK CAPITAL LOSS EARNINGS STOCK TOTAL ----- ------- ---- -------- ----- ----- BALANCE AT JUNE 30, 1999 $ 44 $ 29,555 $ -- $ 12,232 $ (944) $ 40,887 Net Income -- -- -- 8,199 8,199 Stock options exercised, including tax benefit 1 780 -- -- -- 781 Treasury stock acquired -- -- -- -- (4,602) (4,602) --------- --------- --------- --------- --------- --------- BALANCE AT JUNE 30, 2000 45 30,335 -- 20,431 (5,546) 45,265 Comprehensive income: Net income -- -- -- 9,144 -- 9,144 Change in value of cash flow hedge, net of $227 tax benefit -- -- (356) -- -- (356) --------- Total comprehensive income 8,788 Stock options exercised, including tax benefit 2 3,671 -- -- -- 3,673 Dividends paid ($0.05/share) -- -- -- (216) -- (216) --------- --------- --------- --------- --------- --------- BALANCE AT JUNE 30, 2001 $ 47 $ 34,006 $ (356) $ 29,359 $ (5,546) $ 57,510 --------- --------- --------- --------- --------- --------- Comprehensive income: Net income -- -- -- 21,059 -- 21,059 Change in value of cash flow hedge, net of $347 tax benefit -- -- (531) -- -- (531) --------- Total comprehensive income 20,528 Secondary stock offering 24 76,838 -- -- -- 76,862 Shares issued upon acquisition of PBI 2 6,905 -- -- -- 6,907 Stock options exercised, including tax benefit 3 6,340 -- -- -- 6,343 Stock split in the form of a stock dividend 75 -- -- (75) -- -- Dividends paid ($0.0525/share) -- -- -- (753) -- (753) --------- --------- --------- --------- --------- --------- BALANCE AT JUNE 30, 2002 $ 151 $ 124,089 $ (887) $ 49,590 $ (5,546) $ 167,397
The accompanying notes are an integral part of these statements. 21 D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) For the Years Ended ------------------------------------------------------- JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2000 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 21,059 $ 9,144 $ 8,199 Adjustments to reconcile net income to net cash flows from operating activities-- Depreciation and amortization 4,453 3,428 3,118 Amortization of debt issuance costs 1,096 1,126 764 Loss / (gain) from sale of assets 333 (57) (16) Equity in net income of PBI -- (607) (634) Deferred income taxes (1,796) (1,653) 270 Decrease (increase) in receivables, net 15,478 (5,577) (15,034) (Increase) decrease in inventories (149,204) 2,472 (36,839) Increase in prepaid expenses and other current assets (5,576) (722) (792) Increase (decrease) in accounts payable 56,626 7,519 (7,526) Increase in accrued expenses 4,419 3,972 963 Other, net (1,800) 925 (427) --------- --------- --------- Net cash flows from operating activities (54,912) 19,970 (47,954) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Payments for acquisitions, net of cash acquired 961 (9,037) -- Investment in other assets (200) (650) (804) Cash dividend from PBI -- 450 350 Purchases of property and equipment (3,445) (3,450) (3,270) Proceeds from sale of assets 543 57 16 --------- --------- --------- Net cash flows from investing activities (2,141) (12,630) (3,708) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under revolving line of credit 896,667 662,183 538,303 Repayments under revolving line of credit (912,752) (667,023) (479,767) Proceeds from secondary stock offering 76,862 Proceeds from equipment loan -- -- 965 Payments of long-term debt (757) (17) (283) Payments of capital lease obligations (236) (286) (118) Proceeds from exercise of stock options 2,260 2,349 399 Payment of dividends (753) (216) -- Purchase of treasury stock -- -- (4,602) Payments of deferred debt costs -- (475) (282) --------- --------- --------- Net cash flows from financing activities 61,291 (3,485) 54,615 --------- --------- --------- Increase in cash 4,238 3,855 2,953 Cash, beginning of period 7,516 3,661 708 --------- --------- --------- Cash, end of period $ 11,754 $ 7,516 $ 3,661 --------- --------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for-- Interest $ 9,258 $ 12,139 $ 10,499 Income taxes, net $ 11,076 $ 7,168 $ 3,698
The accompanying notes are an integral part of these statements. 22 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 and majority-owned subsidiaries of D&K Healthcare Resources, Inc. (the Company). All significant intercompany accounts and transactions are eliminated. Fiscal Year The Company's fiscal year end is June 30. References to years relate to fiscal years rather than calendar years unless otherwise stated. Concentration of Credit Risk The Company is a full-service, regional wholesale drug distributor. From facilities in Missouri, Kentucky, Minnesota, South Dakota and Florida, the Company distributes a broad range of pharmaceutical products, health and beauty aids and related products to its customers in more than 24 states. The Company is focused on serving the unique needs of independent and regional pharmacies and have structured its business and operating model to be able to do this in an efficient and profitable manner. In 2002, sales to one customer represented approximately 24% of total net sales. In 2001, sales to one customer represented approximately 16% of total net sales. In 2000, sales to one customer represented approximately 18% of total net sales. The supply contracts with two customers (including the Company's then largest customer), representing approximately 23% of fiscal 2000 sales, were terminated in the fourth quarter of fiscal 2000. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Revenue Recognition Revenue is recognized when products are shipped or services are provided to customers. Shipping and handling costs associated with the shipment of goods are recorded as operating expenses in the consolidated statements of operations. During 2002, 2001 and 2000, the Company had $70.5 million, $85.1 million, and $46.8 million, respectively, of "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. Restricted Cash Restricted cash of $11.8 million and $7.5 million, respectively, at June 30, 2002 and June 30, 2001, represents cash receipts from customers that must be used to reduce borrowings under the revolving line of credit and are included in cash. 23 Inventories Inventories consist of pharmaceutical drugs and related over-the-counter items, which are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. 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. Repairs and maintenance costs are expensed as incurred. 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, including intangible assets, 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. See Note 16 regarding implementation of SFAS No. 142. Interest Rate Risk Management Effective July 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivatives and Hedging Activities", as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities." Under these standards, all derivative instruments are recorded at fair value on the balance sheet and all changes in fair value are recorded to earnings or to stockholders' equity through other comprehensive income. The adoption of these standards did not have a material impact on the Company's consolidated financial statements taken as a whole. The Company does not use derivative instruments for trading or speculative purposes. 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 basis 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 $17.1 million and $10.6 million at June 30, 2002 and June 30, 2001, respectively. Stockholders' Equity Treasury Stock. In May 1999, the board of directors authorized the repurchase of up to 600,000 shares of the Company's outstanding common stock. The shares were acquired in the open market during the twelve-month period from the date of authorization. Of the 600,000 shares authorized, 592,800 shares were purchased during the program. 24 Equity Offering. On July 5, 2001, the Company completed a secondary offering of approximately 4.8 million shares of common stock with net proceeds of approximately $77 million. Authorization of additional shares of Common Stock. In January 2002, the Board of Directors amended the Certificate of Incorporation of the Company to increase the number of authorized shares of Common Stock to 25 million shares. Stock Split. On March 13, 2002, the Company declared a two-for-one stock split in the form of a stock dividend and distributed on April 11, 2002 to shareholders of record on March 29, 2002. All share and per share amounts included in the consolidated financial statements have been adjusted to retroactively reflect this stock split. Earnings per Share Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) requires a dual presentation of basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing net income 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 stated in accordance with the provisions of SFAS No. 128 (see Note 13). NOTE 2. ACQUISITIONS: In July 2001, as part of the secondary stock offering, the Company increased its ownership percentage in Pharmaceutical Buyers, Inc. (PBI) to 68% and in August 2001, our ownership percentage increased another 2%. The aggregate purchase price was $6.9 million. The value of the 400,000 shares issued was based on the initial price of the secondary stock offering for the first increase and the closing price of the stock for the second increase. These additions were accomplished with individuals converting PBI stock to shares of our common stock. This arrangement was part of the original transaction when we acquired our initial 50% ownership interest. This transaction was accounted for under the purchase method of accounting. Goodwill recognized in this transaction amounted to $10.7 million, but is not deductible for tax purposes. Intangible assets other than goodwill recognized in this transaction amounted to $1.9 million that have a weighted-average useful life of approximately 15 years. On June 15, 2001, the Company acquired 100% of the outstanding stock of Diversified Healthcare, LLC, a pharmaceutical distribution company based in Owensboro, Kentucky, that provides comprehensive pharmaceutical distribution services to customers in the Midwest region. This transaction was accounted for under the purchase method of accounting. The purchase price for this acquisition was approximately $9.0 million, consisting of $7.5 million in cash and a $1.5 million 2-year note. Approximately $1.1 million of goodwill was recorded as part of this transaction, which will be amortized over 25 years. Results of operations were not significantly impacted during fiscal year 2001 as a result of this transaction. NOTE 3. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following (in thousands):
JUNE 30, 2002 JUNE 30, 2001 ------------- ------------- Land $ 320 $ 535 Building and improvements 2,115 3,338 Fixtures and equipment 15,605 12,547 Leasehold improvements 2,082 2,728 Vehicles 518 749 -------- -------- 20,640 19,897 Less-Accumulated depreciation and amortization (9,536) (9,032) -------- -------- $ 11,104 $ 10,865 ======== ========
Total depreciation and amortization relating to property and equipment was $2.1 million in 2002, $1.6 million in 2001, and $1.2 million in 2000. The Company leases certain properties under capital leases. Capital lease asset balances 25 consist of buildings of $1.3 million and $1.8 million as of June 30, 2002 and 2001, respectively. Related accumulated amortization amounted to approximately $358,000 and $345,000 respectively. NOTE 4. INVESTMENT IN PBI: In November 1995, the Company purchased approximately 50% of the capital stock of Pharmaceutical Buyers, Inc. ("PBI"), a Colorado-based group purchasing organization. Pursuant to the transaction, the Company acquired approximately 50% of the voting and non-voting common stock of PBI for $3.75 million in cash. The Company's investment in PBI was accounted for under the equity method until July 2001 at which time an additional 18% ownership interest was acquired and consolidated PBI for financial reporting purposes. See Note 2 for further discussion of the additional ownership. The Company's equity in the net income of PBI totaled $607,000 and $634,000, respectively, for 2001 and 2000, which is net of amortization of goodwill associated with its investment in PBI of $276,000 for each of these years. The PBI goodwill was amortized using the straight-line method over a period of 25 years. During 2001 and 2000, the Company received cash dividends of $450,000 and $350,000 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, 2001 and information for the periods ended June 30, 2002 and 2001 included (in millions) (June 30, 2002 amounts were included in the consolidated results of the Company):
JUNE 30, 2002 DECEMBER 31, 2001 JUNE 30, 2001 ------------- ----------------- ------------- (unaudited) Current assets $ 3.5 $ 3.4 $ 2.9 Non-current assets 0.5 0.5 0.6 Current liabilities 1.5 1.6 1.7 Non-current liabilities 2.5 2.5 3.4
Summarized income statement information for PBI for its fiscal year ended December 31, 2001 and information for the six months ended June 30, 2002, 2001 and 2000 included (in millions) (June 30, 2002 amounts were included in the consolidated results of the Company):
SIX MONTHS ENDED (unaudited) 12 MONTHS ENDED 12 MONTHS ENDED -------------------------------------- JUNE 30, 2002 DECEMBER 31, 2001 JUNE 30, 2001 JUNE 30, 2000 ------------- ----------------- ------------- ------------- Net revenue $ 7.5 $ 6.7 $ 3.0 $ 2.9 Net income 2.4 2.1 0.8 0.8
In connection with its investment in PBI, the Company entered into an agreement pursuant to which MassMutual is entitled to exchange its capital stock of PBI with the Company at fair market value. The Company has the right, and it is their intention, to satisfy this exchange with cash. If the Company elects not to satisfy the exchange with cash, the Company could satisfy the exchange with shares of its common stock, in which case MassMutual would have certain registration rights. Certain other shareholders of PBI had the option to exchange their combined 20% ownership interests in PBI for shares of the Company's common stock under the terms of the original purchase agreement. Those options were determined to be dilutive in 2001 and 2000 and are included in the reconciliation of the basic and the diluted earnings per share computation (See Note 13). See Note 2 regarding the conversion of these interests into the Company's stock during fiscal 2002. 26 NOTE 5. INTANGIBLE ASSETS: Intangible assets consisted of the following (in thousands):
JUNE 30, 2002 JUNE 30, 2001 ------------- ------------- Goodwill, net of accumulated amortization of $8,472 and $51,131 $41,979 $6,292, respectively Other intangible assets, net of accumulated amortization 1,965 -- of $149 ------------ ------------ $53,096 $41,979 =========== ============
The goodwill is being amortized using the straight-line method over periods of 5 to 40 years. Amortization of goodwill totaled $2.2 million in 2002, $1.9 million in 2001, and $1.8 million in 2000. Other intangible assets, which primarily represent valued placed on supplier and customer relationships, are being amortized using the straight-line method over periods of 5 to 15 years with an approximate weighted-average amortization period of 13.5 years. Amortization of intangible assets totaled $0.1 million in 2002 and is estimated to remain approximately the same for the next five years. Other intangible assets not subject to amortization total $0.2 million. Goodwill related to the Wholesale drug distribution segment, net of amortization, was $38.3 and $39.3 million as of June 30, 2002 and 2001, respectively. Goodwill related to the Company's other segments, which are combined for reporting purposes, amounted to $12.8 million and $2.7 million as of June 30, 2002 and 2001, respectively. Other intangible assets related to the Wholesale drug distribution segment, net of amortization, were $0.2 as of June 30, 2002. Other intangible assets related to the Company's other segments amounted to $1.7 million as of June 30, 2002. The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective July 1, 2002. See Note 16 for further discussion on the impact of the adoption of this statement. NOTE 6. LONG-TERM DEBT: Long-term debt consists of the following (in thousands):
JUNE 30, 2002 JUNE 30, 2001 ------------- ------------- Revolving line of credit with banks $ 77,993 $ 93,151 Other, including capital lease obligations 5,734 1,658 -------- -------- 83,727 94,809 Less--Current maturities (2,270) (320) -------- -------- $ 81,457 $ 94,489 ======== ========
As of June 30, 2002, the revolving line of credit had a maximum borrowing capacity of $150 million, expiring in August 2005. 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 (the borrowing base formula), or our maximum borrowing capacity under this agreement but may not be less than $20 million. The advances currently bear interest at a base rate of the London Interbank Offering Rate (LIBOR) plus 1.75%, or at the prime rate plus 0.25% per annum payable monthly. The Company was required to pay annual facility fees of $807,000 and $521,323, respectively, in 2002 and 2001. At June 30, 2002 and June 30, 2001, the borrowing base formula amounted to $241.4 million and $132.2 million, respectively. At June 30, 2002 and June 30, 2001, the unused portion of the line of credit amounted to $71.3 million and $56.9 million, respectively. The agreement expires August 7, 2005, and, therefore, the related debt has been classified as long-term. The revolving line of credit is secured by eligible inventories. In July 2002, this agreement was amended to increase the maximum borrowing capacity to $200 million. The Company is required under the terms of its debt agreements to comply with certain financial covenants, including those related to interest coverage ratios and cash flow to fixed charges ratios. The Company also is limited in its ability 27 to make loans and investments, enter into leases, or incur additional debt, among other things, without the consent of its lenders. The Company is in compliance with its debt covenants as of June 30, 2002. In June 2000, the Company entered into a $965,000 equipment financing arrangement with a five-year term ending July 2005. The arrangement provides for monthly payments bearing interest at LIBOR plus 1.95%. This arrangement is secured by the equipment purchased with the proceeds. At June 30, 2002, maturities of long-term debt, including capital lease obligations, were as follows (in thousands):
FISCAL YEAR ENDING JUNE 30, --------------------------- 2003 $ 2,270 2004 1,360 2005 1,383 2006 78,676 2007 38 ------- $83,727 =======
At June 30, 2002 and June 30, 2001, the fair value of long-term debt approximated its current carrying value. NOTE 7. ACCOUNTS RECEIVABLE SECURITIZATION: During 1999, the Company and its wholly-owned, bankruptcy-remote subsidiary ("Seller") established an accounts receivable securitization program. Under the program, undivided interests in a pool of eligible trade receivables that have been sold on a non-recourse basis by the Company to the Seller are then sold to a multi-seller, asset backed commercial paper conduit ("Conduit"). Purchases by the Conduit are financed with the sale of highly rated commercial paper. The Company utilizes proceeds from the sale of its accounts receivable to repay long-term debt, effectively reducing its overall borrowing costs. Funding costs under this program are 4.85% on the first $50 million with the rate on the excess amounts equal to the commercial paper rate. Certain program fees total an additional 0.75%. At June 30, 2002, the securitization program had a maximum capacity of $150 million which expires in August 2005. The funding cost of the securitization program for fiscal year 2002 and 2001 was $4.2 million and $6.0 million, respectively. In August 2002, this program was amended to increase the maximum capacity to $200 million. Under the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," (as amended by SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities") the securitization transactions have been recorded as sales, with those accounts receivable sold to the Conduit removed from the consolidated balance sheet. The amount of undivided interests in accounts receivable sold to the Conduit were $120.0 and $110.0 million at June 30, 2002 and 2001, respectively. The Seller is a separate legal entity from the Company. The Seller's assets are available first and foremost to satisfy the claims of its creditors. Eligible receivables, as defined in the securitization agreement, consist of trade receivables from our subsidiaries, excluding non-pharmaceutical receivables, reduced for certain items, including past due balances and concentration limits. Of the eligible pool of receivables contributed to the Seller, undivided interests in only a portion of the pool are sold to the Conduit. The Seller's interest in these receivables is subordinate to the Conduit's interest in the event of default under the securitization agreement. The portion of eligible receivables not sold to the Conduit remains an asset of the Seller ($31.7 million as of June 30, 2002). NOTE 8. DERIVATIVE INSTRUMENTS: In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was amended by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", which was required to be adopted in years beginning after June 15, 2000. Accordingly, the Company adopted the provisions of this standard on July 1, 2000, resulting in an increase in stockholders' equity of approximately $69,000. At June 30, 2001, the Company had recorded short-term liabilities of approximately $90,000 and long-term liabilities of approximately $640,000 relating to derivative instruments. At June 30, 2002, the Company had recorded long-term liabilities of approximately $1,461,000 related to the interest rate swap. 28 Through an interest rate swap agreement, the Company effectively fixed the interest rate on $20 million of our revolving line of credit at a nominal rate of 6.19%. This interest rate derivative instrument has been designated as a cash flow hedge. Such instruments are those that effectively convert variable interest payments on debt instruments into fixed payments. For qualifying hedges, SFAS No. 133 and No. 138 allow derivative gains and losses to offset related results on hedged items in the consolidated statements of operations. The Company formally documents, designates and assesses the effectiveness of transactions that receive hedge accounting. Changes in the fair value of interest rate agreements designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations are reported in accumulated other comprehensive loss. During fiscal 2002 and 2001, approximately $531,000 (net of $347,000 of tax) and $356,000 (net of $227,000 of tax), was recorded as other comprehensive loss, respectively. No gain or loss representing the ineffectiveness of the cash flow hedge was recognized in other expense, as this derivative instrument represents a perfect hedge. 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 $2.9 million, $2.3 million, and $1.9 million in 2002, 2001, and 2000, respectively. Minimum rental payments under these leases with initial or remaining terms of one year or more at June 30, 2002, are $11.9 million and payments during the succeeding five years are: 2003, $3.6 million; 2004, $2.6 million; 2005, $2.2 million; 2006, $2.1 million; 2007, $1.2 million; and thereafter $0.2 million. In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk, such as bank letters of credit and other guarantees, which are not reflected in the accompanying balance sheets. Such financial instruments are to be valued based on the amount of exposure under the instrument and the likelihood of performance being required. In the Company's past experience, virtually no claims have been made against these financial instruments. Management does not expect any material losses to result from these off-balance-sheet instruments and, therefore, is of the opinion that the fair value of these instruments is zero. 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. STOCK OPTIONS: In 1992, the Company adopted a Long-Term Incentive Plan that authorized the Stock Option and Compensation Committee of the Board of Directors (the Committee) to grant key employees and officers of the Company incentive or non-qualified stock options, stock appreciation rights, performance shares, restricted shares and performance units. Options to purchase up to 400,000 shares of common stock were authorized under the Long-Term Incentive Plan. The Committee determines the price (which may not be less than fair market value on the date of grant) and terms at which awards may be granted, along with the duration of the restriction periods and performance targets. In 1999, the Company's shareholders approved an Amended and Restated Long-Term Incentive Plan (Long-Term Incentive Plan) that increased the number of shares available for grant to 1,700,000 shares. Stock options granted under the Long-Term Incentive Plan are not exercisable earlier than six months from the date of grant (except in the case of death or disability of the employee holding the same), nor later than ten years from the date of grant. In February 1993, the Board of Directors of the Company adopted the D&K Wholesale Drug, Inc. 1993 Stock Option Plan (the 1993 Plan) to grant key employees of the Company non-qualified stock options to purchase up to 700,000 shares of the Company's common stock. The 1993 Plan is administered by the Company's Board of Directors, which determines the price and terms at which awards may be granted. Stock options granted under the 1993 Plan are immediately exercisable from the date of grant and expire not later than ten years from the date of grant. 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 November 2001, the Board of Directors adopted, and the Company's shareholders approved, the 2001 Long Term Incentive Plan (the 2001 Plan). Under the 2001 Plan, the Committee may grant to directors, officers and key employees of the Company up to an aggregate of 1,000,000 incentive or non-qualified stock options, stock appreciation rights, performance shares, restricted shares and performance units. The Committee determines the price of stock options 29 which may not be less than the fair market value on the date of grant. Stock options granted under the 2001 Plan vest over a three year period from the date of grant, and may be exercised no later than five years from the date of grant. The following tables summarize information about options at June 30, 2002:
Options Outstanding Options Exercisable ------------------------------------------------------------- ----------------------------------------- Range of Exercise Number Weighted Average Weighted Average Number Exercisable Weighted Average Price Outstanding Remaining Contractual Life Exercise Price Exercise Price - ----------------------------------------------------------------------------------------------------------------------------- $1.6875 to $1.8750 6,250 3.88 years $ 1.88 6,250 $ 1.88 $2.8125 to $3.3125 43,332 4.96 years $ 3.02 43,332 $ 3.02 $5.6250 to $8.3550 543,534 8.33 years $ 6.62 464,191 $ 6.59 $10.000 to $10.6875 51,000 8.62 years $10.61 51,000 $10.61 $20.6550 to $30.8550 448,000 7.46 years $24.48 310,000 $21.64 ----------------- ------------------- 1,092,116 7.83 years $13.96 874,773 $11.95 ================= ===================
Changes in options outstanding under the Company's stock option plans are as follows:
Weighted Average Number of Shares Exercise Price ---------------- -------------- OUTSTANDING AT JUNE 30, 1999 992,396 $ 5.66 Granted 2000 330,000 10.12 Exercised 2000 (160,400) 2.36 Canceled 2000 (643,600) 10.20 ------------------------------------------------ OUTSTANDING AT JUNE 30, 2000 518,396 3.88 Granted 2001 1,017,000 6.81 Exercised 2001 (430,000) 5.46 Canceled 2001 (52,000) 10.55 ------------------------------------------------ OUTSTANDING AT JUNE 30, 2001 1,053,396 5.69 Granted 2002 477,000 24.09 Exercised 2002 (424,946) 4.75 Canceled 2002 (13,334) 6.50 ------------------------------------------------ OUTSTANDING AT JUNE 30, 2002 1,092,116 $ 13.96 =========
Stock options exercisable at June 30, 2002, June 30, 2001, and June 30, 2000 were 874,773, 857,396, and 498,396, respectively, with a weighted average exercise price of $11.95, $5.18, and $3.71, respectively. Shares available to be granted at June 30, 2002, June 30, 2001, and June 30, 2000 were 841,000, 212,138, and 564,938, respectively. 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 and earnings per share would have been as follows (in thousands, except per share data):
2002 2001 2000 ---- ---- ---- Net income - as reported $ 21,059 $ 9,144 $ 8,199 Net income - pro forma $ 19,000 $ 7,496 $ 7,579 Earnings per share: Basic - as reported $ 1.48 $ 1.08 $ 0.96 Basic - pro forma $ 1.33 $ 0.88 $ 0.90 Diluted - as reported $ 1.42 $ 1.01 $ 0.92 Diluted - pro forma $ 1.29 $ 0.83 $ 0.85
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: 30
2002 2001 2000 ---- ---- ---- Risk free interest rates 4.19% 4.81% 6.30% Expected life of options 5.0 years 5.0 years 5.0 years Volatility of stock price 43% 46% 42% Expected dividend yield 0.002% 0.01% N/A Fair value of options granted $10.50 $2.99 $5.18
NOTE 11. INCOME TAXES: The components of the income tax provision were as follows (in thousands):
2002 2001 2000 ---- ---- ---- Current tax provision $ 15,909 $ 7,540 $ 4,893 Deferred tax provision (1,796) (1,653) 307 -------- -------- -------- Income tax provision $ 14,113 $ 5,887 $ 5,200 ======== ======== ========
The actual income tax provision differs from the expected income tax provision, computed by applying the U.S. statutory Federal tax rates of 35.0%, 34.3%, and 34.1% in 2002, 2001 and 2000, respectively, to income before income tax provision, as follows (in thousands):
2002 2001 2000 ---- ---- ---- Expected income tax provision $12,569 $ 5,156 $ 4,570 Amortization of intangible assets not deductible for income tax purposes 120 210 203 Equity in net income of PBI not taxable for income tax purposes -- (242) (248) State income taxes, net of Federal benefit 1,276 531 569 Other, net 148 232 106 ------- ------- ------- $14,113 $ 5,887 $ 5,200 ======= ======= =======
At June 30, 2002 and June 30, 2001, the tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities are as follows (in thousands):
2002 2001 ---- ---- Deferred tax assets: Allowance for doubtful accounts $ 473 $ 739 Accrued expenses 1,450 986 Capital lease obligations 112 112 Inventories 1,048 830 Net operating loss carryforwards 555 555 Items related to DHI acquisition -- 927 Costs related to derivative instruments 584 -- Other 617 168 ------- ------- Total deferred tax assets $ 4,839 $ 4,317 ------- ------- Deferred tax liabilities: Property and equipment $ (256) $ (470) Inventories (1,831) (3,709) Intangibles (1,018) (1,014) Accounts receivable (156) (156) Other (930) (816) ------- ------- Total deferred tax liabilities $(4,191) $(6,165) ------- ------- Net deferred tax assets / (liabilities) $ 648 $(1,848) ======= =======
The use of pre-acquisition operating losses is subject to limitations imposed by the Internal Revenue Code or individual states and if not utilized by the Company, the net operating loss carryforwards will expire beginning in 2007. The Company believes that the net deferred tax assets are fully recoverable. 31 NOTE 12. 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 was equivalent to 50% of employees' contributions up to a maximum contribution based on 6% of eligible compensation. Expenses related to the plan were $260,000 in 2002, $234,000 in 2001, and $176,000 in 2000. Jewett Drug Company (Jewett) has a defined contribution 401(k)/profit sharing plan covering substantially all of its employees. Jewett made a discretionary contribution of $100,000 to this plan in 2002 and 2001. Jewett also participates in the Central States Pension, a multi-employer pension plan, on behalf of its union employees in accordance with the union agreement. The expenses relating to this plan during 2002 and 2001 were approximately $21,000 and 23,000, respectively. 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 three times the participant's annual salary. 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 $75,000 in 2002, $241,000 in 2001, and $213,000 in 2000. In July 2002, this plan was terminated with participants receiving their vested retirement income benefit balance in the plan. There was no income statement impact as a result of this termination. The life insurance benefit will continue for each participant. NOTE 13. EARNINGS PER SHARE: SFAS No. 128, "Earnings Per Share", requires dual presentation of basic and diluted earnings per share and requires reconciliation of the numerators and denominators of the basic and diluted earnings per share calculation. The reconciliation of the numerator and denominator of the basic and diluted earnings per common share computations are as follows (in thousands, except for shares and per share amounts):
2002 ------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ BASIC EARNINGS PER SHARE: Net income available to common shareholders $ 21,059 14,246,751 $ 1.48 EFFECT OF DILUTED SECURITIES: Options and warrants -- 419,852 Convertible securities (169) 11,178 ------------------------ DILUTED EARNINGS PER SHARE: Net income available to common shareholders plus assumed conversions $ 20,890 14,677,781 $ 1.42 ------------------------ 2001 ----------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ BASIC EARNINGS PER SHARE: Net income available to common shareholders $ 9,144 8,478,198 $ 1.08 EFFECT OF DILUTED SECURITIES: Options and warrants -- 253,316 Convertible securities 95 400,000 --------------------- DILUTED EARNINGS PER SHARE: Net income available to common shareholders plus assumed conversions $ 9,239 9,131,514 $ 1.01 ---------------------
32
2000 ----------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ BASIC EARNINGS PER SHARE: Net income available to common shareholders $ 8,199 8,481,902 $ 0.97 EFFECT OF DILUTED SECURITIES: Options and warrants -- 217,850 Convertible securities 152 400,000 --------------------- DILUTED EARNINGS PER SHARE: Net income available to common shareholders plus assumed conversions $ 8,351 9,099,752 $ 0.92 ---------------------
NOTE 14. EFFECT OF NEW ACCOUNTING STANDARDS: The Financial Accounting Standards Board has issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS 141 is effective for all business combinations completed after June 30, 2001. See Note 2 of our consolidated financial statements. The Financial Accounting Standards Board has issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under the new standard, we will no longer be required or permitted to amortize goodwill or other intangible assets with indefinite lives reflected on the balance sheet. We will, however, be required to evaluate these items reflected on the balance sheet to determine whether they are impaired under the guidelines of the standard. Other intangible assets with definite lives will continue to be amortized over their estimated useful lives. We adopted SFAS No. 142 as of July 1, 2002. The impact of this adoption is explained in Note 16 of our consolidated financial statements. The Financial Accounting Standards Board has issued SFAS No. 143, "Asset Retirement Obligations" in June 2001. SFAS 143 provides guidance on accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated retirement costs. We adopted this statement in fiscal 2002, and it did not affect our consolidated financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which supersedes SFAS 121, "Accounting for Long-lived Assets and for Long-lived Assets to be Disposed Of", and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. We are in the process of evaluating the adoption of this standard, but do not believe it will have a material impact on our consolidated financial statements. The FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement updates, clarifies and simplifies existing accounting pronouncements related to accounting for gains and losses from the extinguishments of debt and accounting for certain lease modifications. We are in the process of evaluating the adoption of this standard, but do not believe it will have a material impact on our consolidated financial statements. The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses the accounting for costs associated with disposal activities covered by SFAS No. 144 or with exit activities previously covered by EITF 94-3. This statement will be applied prospectively to any exit or disposal activities that we initiate after December 31, 2002. 33 NOTE 15. BUSINESS SEGMENTS: SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for the way public companies report information about operating segments that is consistent with that made available to management of the Company in allocating resources and assessing performance. After application of the aggregation criteria, the Company has three identifiable business segments, only one of which, Wholesale drug distribution, meets the quantitative thresholds for separate disclosure prescribed in SFAS No. 131. This segment is described in Note 1. The Company's ownership of PBI (see Note 4) is a second segment. Two wholly-owned software subsidiaries; Viking Computer Services, Inc. and Tykon, Inc. constitute the third segment. Viking markets a pharmacy management software system and Tykon developed and markets a proprietary PC-based order entry/order confirmation system to the drug distribution industry. These two segments are combined as Other in the table that follows. Though the Wholesale drug distribution segment operates from several different facilities, the nature of its products and services, the types of customers and the methods used to distribute its products are similar and thus they have been aggregated for presentation purposes. During fiscal 2002, approximately 92% of net sales were branded pharmaceuticals, 6% were generic pharmaceuticals, and 2% were various health and beauty products. The Company operates principally in the United States. Intersegment sales have been recorded at amounts approximating market. Interest and corporate expenses are allocated to wholly-owned subsidiaries only. Assets have been identified with the segment to which they relate.
FOR THE YEARS ENDED ------------------------------------------------------- (IN THOUSANDS) JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2000 ------------- ------------- ------------- Sales to unaffiliated customers -- Wholesale drug distribution $ 2,444,290 $ 1,643,594 $ 1,455,421 Other 9,458 2,399 2,626 ----------- ----------- ----------- Total $ 2,453,748 $ 1,645,993 $ 1,458,047 Intersegment sales -- Wholesale drug distribution $ -- $ -- $ -- Other 1,197 891 329 Intersegment eliminations (1,197) (891) (329) ----------- ----------- ----------- Total $ -- $ -- $ -- Gross profit -- Wholesale drug distribution $ 92,578 $ 66,070 $ 53,923 Other 10,253 2,754 2,499 ----------- ----------- ----------- Total $ 102,831 $ 68,824 $ 56,422 Depreciation and amortization -- Wholesale drug distribution $ 4,107 $ 3,177 $ 2,884 Other 346 527 510 Less: PBI amortization (1) -- (276) (276) ----------- ----------- ----------- Total $ 4,453 $ 3,428 $ 3,118 Interest expense - Wholesale drug distribution $ 9,955 $ 13,148 $ 10,517 Other 431 163 126 ----------- ----------- ----------- Total $ 10,386 $ 13,311 $ 10,643 Earnings before income tax provision - Wholesale drug distribution $ 31,271 $ 14,150 $ 12,692 Other 4,639 881 707 ----------- ----------- ----------- Total $ 35,910 $ 15,031 $ 13,399
34
FOR THE YEARS ENDED --------------------------------------------- (IN THOUSANDS) JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2000 ------------- ------------- ------------- Purchases of property and equipment - Wholesale drug distribution $ 988 $ 555 $ 1,913 Other 63 46 111 Other unallocated Corporate amounts 2,394 2,849 1,246 --------- --------- --------- Total $ 3,445 $ 3,450 $ 3,270 Identifiable assets - Wholesale drug distribution $ 464,494 $ 316,211 $ 422,508 Other 6,111 7,050 10,141 Other unallocated Corporate amounts (2) 12,533 6,943 3,391 Elimination of receivables from Corporate -- -- (141,621) --------- --------- --------- Total $ 483,138 $ 330,204 $ 294,419
(1) Amortization of PBI goodwill is netted against Equity in net income of PBI in the accompanying Consolidated Statements of Operations in 2001 and 2000. (2) Amounts represent assets at Corporate Headquarters consisting primarily of deferred tax assets, property and equipment and deferred debt costs. NOTE 16. SUBSEQUENT EVENT: The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective July 1, 2002. As a result of this adoption, the Company will recognize an impairment loss of approximately $7.0 million ($4.2 million net of tax) during the first quarter of fiscal 2003. This will be recognized as the cumulative effect of a change in accounting principle. This impairment results from an appraisal valuation and relates to goodwill originally established for the acquisition of Jewett Drug Co. The earnings per share impact of goodwill amortization during fiscal 2002 was $0.08 per share. NOTE 17. QUARTERLY RESULTS (UNAUDITED) Quarterly results are determined in accordance with annual accounting policies. They include certain items based upon estimates for the entire year. Summarized quarterly results for the last two years were as follows:
(in thousands, except per share data) 2002 QUARTER 2002 -------------------------------------------------- ------------ FIRST SECOND THIRD FOURTH YEAR Net sales $ 529,091 $ 591,698 $ 695,241 $ 637,718 $2,453,748 Gross profit 21,858 24,495 30,347 26,131 102,831 Net income 3,586 4,642 7,302 5,529 21,059 Basic earnings per share $ 0.26 $ 0.33 $ 0.51 $ 0.38 $ 1.48 Diluted earnings per share 0.25 0.31 0.49 0.37 1.42 (in thousands, except per share data) 2001 QUARTER 2001 -------------------------------------------------- ------------ FIRST SECOND THIRD FOURTH YEAR Net sales $ 350,902 $ 355,275 $ 490,469 $ 449,347 $1,645,993 Gross profit 14,601 15,415 20,573 18,235 68,824 Net income 1,542 1,777 3,200 2,625 9,144 Basic earnings per share $ 0.18 $ 0.21 $ 0.38 $ 0.31 $ 1.08 Diluted earnings per share 0.18 0.20 0.35 0.28 1.01
35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Effective June 11, 2002, the Board of Directors of the Registrant, upon recommendation of its audit committee, dismissed Arthur Andersen LLP ("Andersen") as the Registrant's independent public accountants and engaged KPMG LLP ("KPMG") to serve as the principal accountant to audit the Registrant's financial statements for the fiscal year ending June 30, 2002. Andersen audited the Registrant's financial statements for fiscal years 1999, 2000 and 2001, and served as the Registrant's principal accountant since 1989. In connection with its audit for fiscal years 2000 and 2001, and during the subsequent interim period preceding the engagement of KPMG, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. Andersen's report on the financial statements for fiscal years 2000 and 2001 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the last two fiscal years, and during the subsequent interim period preceding the engagement of KPMG, Andersen did not advise, and has not indicated to the Registrant that it had reason to advise, the Registrant of any reportable event, as defined in Item 304(a) of Regulation S-K of the Exchange Act. The Registrant requested that Andersen furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the statements made in the Form 8-K filed on June 11, 2002. A copy of the letter from Andersen dated June 11, 2002, stating its agreement with the foregoing disclosures is filed as Exhibit 16.1 to the Form 8-K filed on June 11, 2002. During the last two fiscal years, and during the subsequent interim period preceding the engagement of KPMG, the Registrant had not consulted KPMG regarding the application of accounting principles to a specified transaction, either contemplated or proposed, or the type of audit opinion that might be rendered on the Registrant's financial statements or any other matter that would be required to be reported. 36 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 2002 Annual Meeting of Stockholders (the "2002 Proxy Statement") is incorporated herein by this reference. The Company will file the 2002 Proxy Statement with the Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year. Information regarding executive officers is set forth in Part I of this report. Item 11. Executive Compensation The information set forth under the captions "Directors' Fees" and "Compensation of Executive Officers" in the registrant's 2002 Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act 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 2002 Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions The information set forth under the caption "Certain Transactions" in the registrant's 2002 Proxy Statement to be filed with the SEC pursuant to Regulation 14A of the Exchange Act is incorporated herein by this reference. Item 14. Controls and Procedures The registrant does not need to comply with the requirements of this item until their first quarter filing for fiscal 2003, which will be their first report for a period ending on or after August 29, 2002. Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K (a)(1) Financial statements: See Item 8 above. (2) The following financial statement schedule and auditors' report thereon are included in Part IV of this report: Page ---- Schedule II - Valuation and Qualifying Accounts 41 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 On June 11, 2002, the registrant filed a Current Report on Form 8-K under Item 4 that announced the change in auditors for the fiscal year ending June 30, 2002. 37 On June 27, 2002, the registrant filed a Current Report on Form 8-K under Item 4 that announced the change in auditors for its 401-k Profit Sharing Plan and Trust for the year ending December 31, 2001. (c) See Item 15(a)(3) above. (d) See Item 15(a)(2) above. 38 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 24, 2002 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 24, 2002 - ------------------------------- Treasurer and Director J. Hord Armstrong, III /s/ Martin D. Wilson President, Chief Operating Officer September 24, 2002 - ------------------------------- and Director Martin D. Wilson /s/ Thomas S. Hilton Senior Vice President, Chief Financial September 24, 2002 - ------------------------------- Officer (Principal financial and Thomas S. Hilton accounting officer) /s/ Richard F. Ford Director September 24, 2002 - ------------------------------- Richard F. Ford /s/ Bryan H. Lawrence Director September 24, 2002 - ------------------------------- Bryan H. Lawrence /s/ Robert E. Korenblat Director September 24, 2002 - ------------------------------- Robert E. Korenblat /s/ Thomas F. Patton Director September 24, 2002 - ------------------------------- Thomas F. Patton /s/ Louis B. Susman Director September 24, 2002 - ------------------------------- Louis B. Susman /s/ Harvey C. Jewett, IV Director September 24, 2002 - ------------------------------- Harvey C. Jewett, IV
39 CERTIFICATIONS I, J. Hord Armstrong, III, certify that: 1. I have reviewed this annual report on Form 10-K of D&K Healthcare Resources, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 24, 2002 /s/ J. Hord Armstrong, III -------------------------- J. Hord Armstrong, III Chairman & Chief Executive Officer I, Thomas S. Hilton, certify that: 1. I have reviewed this annual report on Form 10-K of D&K Healthcare Resources, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 24, 2002 /s/ Thomas S. Hilton -------------------- Thomas S. Hilton Senior Vice President & Chief Financial Officer 40 D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL 2000, FISCAL 2001, AND FISCAL 2002
Additions ---------------------------------- Balance at Beginning of Charged to Costs Balance at End Description Period and Expenses Acquisitions Deductions of Period ----------- ------ ------------ ------------ ---------- --------- Valuation Allowances for Doubtful Receivables: Fiscal Year 2000 $ 1,142,000 $ 269,000 $ -- $ -- $ 1,411,000 =========== =========== ========= =========== =========== Fiscal Year 2001 $ 1,411,000 $ 436,000 $ 670,000 $ (320,000) $ 2,197,000 =========== =========== ========= =========== =========== Fiscal Year 2002 $ 2,197,000 $ 525,000 $ -- $(1,348,000) $ 1,374,000 =========== =========== ========= =========== ===========
41 EXHIBIT INDEX Exhibit No. Description 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 an exhibit to the registrant's Annual Report on Form 10-K for the year ended March 28, 1997. 2.2* Stock Purchase Agreement dated June 1, 1999 by and between the registrant and Harvey C. Jewett, IV, filed as an exhibit to Form 8-K dated June 14, 1999. 3.1* Restated Certificate of Incorporation, filed as an exhibit to registrant's Registration Statement on Form S-1 (Reg. No. 33-48730). 3.2* Certificate of Amendment to the Restated Certificate of Incorporation of D&K Wholesale Drug, Inc filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1998. 3.3* Certificate of Designations for Series B Junior Participating Preferred Stock of D&K Healthcare Resources, Inc. filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 3.4* By-laws of the registrant, as currently in effect, filed as an exhibit to registrant's Registration Statement on Form S-1 (Reg. No. 33-48730). 3.5* Certificate of Amendment of Certificate of Incorporation of D&K Healthcare Resources, Inc., dated March 13, 2002, filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 4.1* Form of certificate for Common Stock, filed as an exhibit to registrant's Registration Statement on Form S-1 (Reg. No. 33-48730). 4.2* Form of Rights Agreement dated as of November 12, 1998 between registrant and Harris Trust and Savings Bank as Rights Agent, which includes as Exhibit B the form of Right Certificate, filed as an exhibit to Form 8-K dated November 17, 1998. 10.1* D & K Healthcare Resources, Inc., Amended and Restated 1992 Long Term Incentive Plan, filed as Annex A to the registrant's 1999 Proxy Statement. 10.2* D & K Wholesale Drug, Inc. 401(k) Profit Sharing Plan and Trust, dated January 1, 1995, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended March 29, 1996. 10.2a* Amendment Number 1 to D & K Wholesale Drug, Inc. 401(k) Profit Sharing Plan and Trust, dated December 20, 1996, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 2000. 10.2b* Amendment Number 2 to D & K Wholesale Drug, Inc. 401(k) Profit Sharing Plan and Trust, dated September 17, 1997, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 2000. 10.2c* Resolution to D & K Wholesale Drug, Inc. 401(k) Profit Sharing Plan and Trust, dated March 27, 2000, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 2000. 42 EXHIBIT INDEX Exhibit No. Description 10.3* Amended and Restated Lease Agreement, dated as of January 16, 1996, by and between Morhaert Development, L.L.C. and the registrant, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended March 29, 1996. 10.4* Purchase and Sale Agreement dated as of August 7, 1998 between registrant, certain of its subsidiaries and D&K Receivables Corporation, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1998. 10.5* Fifth Amended and Restated Loan and Security Agreement dated September 30, 2000, by and among Fleet Capital Corporation, the registrant, Jaron Inc., and Jewett Drug Co., filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. 10.5a* First Amendment to Fifth Amended and Restated Loan and Security Agreement, dated as of March 7, 2001, by and among Fleet Capital Corporation, the registrant, Jaron, Inc, and Jewett Drug Co., filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.5b* Third Amendment to Fifth Amended and Restated Loan and Security Agreement, dated as of June 12,2001, by and among Fleet Capital Corporation, the registrant, Jaron, Inc., and Jewett Drug Co, filed as an exhibit to the registrant's Current Report on Form 8-K dated June 14, 2001. 10.5c** Ninth Amendment to Fifth Amended and Restated Loan and Security Agreement, dated July 9, 2002, by and among Fleet Capital Corporation, the registrant, Jaron, Inc., and Jewett Drug Co, Diversified Healthcare, LLC, and Medical and Vaccine Products, Inc. 10.6* Amended and Restated Receivables Purchase Agreement, dated June 8, 2001, by and among D&K Receivables Corporation, the registrant, Blue Keel Funding, LLC, Market Street Funding Corporation, PNC Bank, N.A. and Fleet National Bank, filed as an exhibit to the registrant's Current Report on Form 8-K dated June 14, 2001. 10.6a** Third Amendment to the Amended and Restated Receivables Purchase Agreement, dated August 9, 2002, by and among D&K Receivables Corporation, the registrant, Blue Keel Funding, LLC, Market Street Funding Corporation, Fifth Third Bank, Indiana, PNC Bank, N.A. , Fifth Third Bank, and Fleet National Bank. 10.7* Prime Vendor Agreement dated as of August 25, 1999, between Tennessee Pharmacy Purchasing Alliance and the registrant, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1999. 10.7a* First Amendment to Prime Vendor Agreement dated effective as of April 1, 2001 between The Pharmacy Cooperative formerly known as Tennessee Pharmacy Purchasing Alliance and the registrant filed as an exhibit to the registrant's Registration Statement, Amendment No. 2 to Form S-3 dated June 27, 2001. 10.8* Lease Agreement, dated as of May 18, 1999, by and between BSRT Lexington Trust and the registrant, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1999. 10.9* Lease Agreement, dated as of January 1, 1997, by and between Jewett Family Investments, LLC and Jewett Drug Co, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1999. 43 EXHIBIT INDEX Exhibit No. Description 10.10* First Amendment to Lease, dated as of June 1, 1999, by and between Jewett Family Investments, LLC and Jewett Drug Co, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1999. 10.11* Lease Agreement dated as of July 1, 1997 by and between Jewett Family Investments, LLC and the registrant, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1999. 10.12* First Amendment to Lease, dated as of June 1, 1999, by and between Jewett Family Investments, LLC and Jewett Drug Co, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 1999. 10.13* Employment agreement for J. Hord Armstrong, III dated September 15, 2000, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 2000. 10.14* Employment agreement for Martin D. Wilson dated August 28, 2000, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 2000. 10.15* Employment agreement for Thomas S. Hilton dated August 31, 2000, filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 2000. 10.16* D&K Healthcare Resources, Inc. Executive Retirement Benefit Plan, dated January 1, 1998. filed as an exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30, 2000. 10.17* D & K Healthcare Resources, Inc. 2001 Long Term Incentive Plan, dated November, 2001, filed as an exhibit to the registrant's 2001 Proxy Statement. 10.18** Lease Agreement dated as of October 10, 2001 by and between Forsyth Centre Associates, L.L.C., and the registrant. 10.18a** Amendment to Lease Agreement dated February 26, 2002 by and between Forsyth Centre Associates, L.L.C., and the registrant. 10.19* Lease Agreement, dated February 7, 2001, by and between Industrial Property Fund III, L.P. and the registrant, filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 13** Registrant's 2002 Annual Report to Stockholders. 21** Subsidiaries of the registrant. 23.1** Consent of KPMG LLP. 23.2** Consent of Arthur Andersen LLP * Incorporated by reference. ** Filed herewith. *** Incorporated by reference. Confidential portion omitted and filed separately with the Commission. 44 EX-10.5C 3 c71930exv10w5c.txt AMENDED/RESTATED LOAN AND SECURITY AGREEMENT EXHIBIT 10.5c NINTH AMENDMENT TO FIFTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS NINTH AMENDMENT TO FIFTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Ninth Amendment") is made as of July 9, 2002, by and among FLEET CAPITAL CORPORATION, a Rhode Island corporation (the "Lender"), and D&K HEALTHCARE RESOURCES, INC., a Delaware corporation ("D&K"), JARON, INC., a Florida corporation ("Jaron"), JEWETT DRUG CO., a South Dakota corporation ("Jewett"), DIVERSIFIED HEALTHCARE, LLC, a Kentucky limited liability company ("DH"), and MEDICAL & VACCINE PRODUCTS, INC. d/b/a DEVICTORIA MEDICAL, a Puerto Rico corporation ("MVP"; D&K, Jaron, Jewett, DH and MVP are sometimes hereinafter referred to individually as "Borrower" and collectively as "Borrowers"). Preliminary Statements A. Lender, D&K, Jaron, Jewett, DH and MVP are parties to that certain Fifth Amended and Restated Loan and Security Agreement dated as of September 30, 2000, as amended by that certain First Amendment to Fifth Amended and Restated Loan and Security Agreement, dated as of March 7, 2001, as amended by that certain Second Amendment to Fifth Amended and Restated Loan and Security Agreement, dated as of May 7, 2001, as amended by that certain Third Amendment to the Fifth Amended and Restated Loan and Security Agreement, dated as of June 12, 2001, as amended by that certain Fourth Amendment to Fifth Amended and Restated Loan and Security Agreement, dated as of June 15, 2001, as amended by that certain Fifth Amendment to Fifth Amended and Restated Loan and Security Agreement dated as of June 29, 2001, as amended by that certain Sixth Amendment to Fifth Amended and Restated Loan and Security Agreement dated as of September 28, 2001, as amended by that certain Seventh Amendment to Fifth Amended and Restated Loan and Security Agreement, dated as of November 20, 2001, as amended by that certain Eighth Amendment to Fifth Amended and Restated Loan and Security Agreement, dated as of January 14, 2002 (as amended, and as hereafter amended, restated or renewed from time to time, the "Loan Agreement"). Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Loan Agreement. B. Borrowers and Lender have agreed to restructure and amend the Loans and the Loan Agreement as set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Amendments to Loan Agreement. The Loan Agreement and the Appendix to the Loan Agreement are hereby amended as follows: (a) Total Credit Facility. Effective July 9, 2002, the references to $150,000,000.00 on the cover page of the Loan Agreement and in the unnumbered paragraph following Section 1 are each hereby deleted and $200,000,000.00 is inserted therefor. (b) Fee Letter. The definition of "Fee Letter" in Appendix A [RELATING TO GENERAL DEFINITIONS] is deleted and replaced with the following: Fee Letter - that certain fee letter from Borrowers to Lender dated on or about the date of the Ninth Amendment. (c) Total Credit Facility. Effective July 9, 2002, the definition of "Total Credit Facility" in Appendix A [RELATING TO GENERAL DEFINITIONS] is deleted and replaced with the following: Total Credit Facility - $200,000,000. 2. Conditions Precedent to Effectiveness of Agreement. This Ninth Amendment shall not be effective unless and until each of the following conditions shall have been satisfied in Lender's sole discretion: (a) Opinion of Counsel. Lender shall have received an opinion of counsel to Borrowers, in form and substance satisfactory to Lender, pursuant to which Borrowers' counsel shall opine as to, among other things, (i) the good standing of Borrowers, (ii) Borrowers' authorizations of this Ninth Amendment, (iii) the execution and delivery of this Ninth Amendment, and (iv) the enforceability of the Loan Agreement as amended by this Ninth Amendment against Borrowers. (b) Resolutions of the Board or Members. Lender shall have received a resolution from each of the board of directors or of the members of each Borrower authorizing the execution and delivery of this Ninth Amendment. (c) Officer's Certificate. Borrowers shall have delivered to Lender an Officer's Certificate in form and content acceptable to Lender, pursuant to which the chief executive officer of each Borrower shall have certified certain documents, instruments, agreements and resolutions to Lender. (d) Fee Letter. Lender shall have received the Fee Letter executed by Borrowers and all fees and expenses which are payable thereunder and under the Loan Agreement. (e) Amended and Restated Participation Agreement. Lender shall have received a Third Amendment to Second Amended and Restated Participation Agreement, fully executed and delivered, in form and content acceptable to Lender, between and among Lender, U.S. Bank d/b/a Firstar Bank, N.A., Bank One, Kentucky, N.A., LaSalle Business Credit, Inc., PNC Business Credit, Inc., and Union Planters Bank, N.A. 3. Representations and Warranties. Borrowers hereby represent and warrant to Lender as follows: (a) Recitals. The Recitals in this Ninth Amendment are true and correct in all respects. (b) Incorporation of Representations. All representations and warranties of Borrowers in the Loan Agreement are incorporated herein in full by this reference and are true and correct as of the date hereof. (c) Corporate Power; Authorization. Borrowers have the organizational power, 2 and have been duly authorized by all requisite organizational action, to execute and deliver this Ninth Amendment and to perform the obligations hereunder and thereunder. This Ninth Amendment has been duly executed and delivered by Borrowers. (d) Enforceability. This Ninth Amendment is the legal, valid and binding obligation of Borrowers, enforceable against Borrowers in accordance with its terms. (e) No Violation. Borrowers' execution, delivery and performance of this Ninth Amendment does not and will not (i) violate any law, rule, regulation or court order to which Borrowers are subject; (ii) conflict with or result in a breach of any Borrower's Articles of Incorporation, Bylaws, Articles of Organization or Operating Agreement or any agreement or instrument to which any Borrower is party or by which it or its properties are bound, or (iii) result in the creation or imposition of any lien, security interest or encumbrance on any property of Borrowers, whether now owned or hereafter acquired, other than liens in favor of Lender. (f) Obligations Absolute. The obligation of Borrowers to repay the Loans, together with all interest accrued thereon, is absolute and unconditional, and there exists no right of setoff or recoupment, counterclaim or defense of any nature whatsoever. 4. No Claims. Borrowers acknowledge that there are no existing claims, defenses (personal or otherwise) or rights of set-off or recoupment whatsoever with respect to any of the Loan Documents. Borrowers agree that this Ninth Amendment in no way acts as a release or relinquishment of any Liens in favor of the Lender securing payment of the Obligations. 5. Miscellaneous. Except as expressly set forth herein, there are no agreements or understandings, written or oral, between any Borrower and Lender relating to the Loan Agreement and the other Loan Documents that are not fully and completely set forth herein or therein. Except to the extent specifically waived or amended herein or in any of the documents, instruments, or agreements delivered in connection herewith, all terms and provisions of the Loan Agreement and the other Loan Documents are hereby ratified and reaffirmed and shall remain in full force and effect in accordance with the respective terms thereof. This Ninth Amendment may be executed in one or more counterparts, and by different parties on different counterparts. All such counterparts shall be deemed to be original documents and together shall constitute one and the same agreement. A signature of a party delivered by facsimile or other electronic transmission shall be deemed to be an original signature of such party. 3 IN WITNESS WHEREOF, this Ninth Amendment has been executed and delivered by the duly authorized representatives of the parties as of the date first above written. FLEET CAPITAL CORPORATION By: /s/ EDWARD M. BARTKOWSKI ------------------------------------------------ Edward M. Bartkowski, Senior Vice President D & K HEALTHCARE RESOURCES, INC. By: /s/ THOMAS S. HILTON ----------------------------------------------- Name: Thomas S. Hilton ----------------------------------------------- Title: SR Vice President & CFO ----------------------------------------------- JARON, INC. By: /s/ THOMAS S. HILTON ----------------------------------------------- Name: Thomas S. Hilton ---------------------------------------------- Title: Vice President ---------------------------------------------- JEWETT DRUG CO. By: /s/ THOMAS S. HILTON ------------------------------------------------ Name: Thomas S. Hilton ----------------------------------------------- Title: Vice President ---------------------------------------------- DIVERSIFIED HEALTHCARE, LLC By: /s/ THOMAS S. HILTON ----------------------------------------------- Name: Thomas S. Hilton ----------------------------------------------- Title: Vice President ---------------------------------------------- MEDICAL & VACCINE PRODUCTS, INC. d/b/a DEVICTORIA MEDICAL By: /s/ THOMAS S. HILTON ----------------------------------------------- Name: Thomas S. Hilton ----------------------------------------------- Title: Vice President ---------------------------------------------- EX-10.6A 4 c71930exv10w6a.txt AMENDED/RESTATED RECEIVABLES PURCHASE AGREEMENT EXHIBIT 10.6a THIRD AMENDMENT TO AMENDED AND RESTATED RECEIVABLES PURCHASE AGREEMENT This Third Amendment to Amended and Restated Receivables Purchase Agreement, dated as of August 9, 2002 (this "Amendment"), is among D&K RECEIVABLES CORPORATION, a Delaware corporation ("Seller"), D&K HEALTHCARE RESOURCES, INC., a Delaware corporation ("Parent"), BLUE KEEL FUNDING, LLC, a Delaware limited liability company ("Blue Keel"), MARKET STREET FUNDING CORPORATION, a Delaware corporation ("Market Street"), FIFTH THIRD BANK, INDIANA, an Indiana banking corporation ("Fifth Third Indiana"; and, together with Blue Keel, and Market Street, the "Purchasers"), PNC BANK, NATIONAL ASSOCIATION, a national banking association, as agent for Market Street (the "Market Street Agent"), FIFTH THIRD BANK, an Ohio banking corporation, as agent for Fifth Third Indiana (the "Fifth Third Agent"), and FLEET SECURITIES, INC., a New York corporation (as assignee of Fleet National Bank), as agent for Blue Keel (in such capacity, the "Blue Keel Agent") and as administrator for Purchasers (in such capacity, the "Administrator"). BACKGROUND 1. Seller, Parent, Blue Keel, Market Street, the Market Street Agent, the Blue Keel Agent and the Administrator are parties to that certain Amended and Restated Receivables Purchase Agreement, dated as of June 8, 2001, as amended by the First Amendment to Amended and Restated Receivables Purchase Agreement, dated as of December 20, 2001, and the Second Amendment to Amended and Restated Receivables Purchase Agreement, dated as of January 15, 2002 (the "Receivables Purchase Agreement"). 2. The parties hereto desire to amend the Receivables Purchase Agreement to add Fifth Third Indiana as a Purchaser and in certain other respects as set forth herein. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Definitions. Capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings assigned thereto in the Receivables Purchase Agreement. SECTION 2. Purchase Limit. Section 1.01 of the Receivables Purchase Agreement is hereby amended by deleting the phrase: "$175,000,000 for the period from and including January 15, 2002 to but excluding April 16, 2002 and $150,000,000 thereafter" where it appears in clause (a) of the proviso thereto and substituting therefor the following: "$200,000,000". SECTION 3. Certain Definitions. Appendix A to the Receivables Purchase Agreement is hereby amended by deleting the definitions of "Agent", "Commitment", and "Purchaser" in their entirety and substituting therefor the following: "Agent" means each of the Market Street Agent, the Blue Keel Agent and the Fifth Third Agent. "Commitment" means (i) with respect to Blue Keel, $75,000,000, (ii) with respect to Market Street, $75,000,000 and (iii) with respect to Fifth Third Indiana, $50,000,000. "Purchaser" means each of Blue Keel, Market Street, Fifth Third Indiana and their successors and permitted assigns. The following definitions shall be added to Appendix A to the Receivables Purchase Agreement, in the appropriate alphabetical order: "Fifth Third Agent" means Fifth Third Bank, an Ohio banking corporation, as agent for Fifth Third Indiana. "Fifth Third Indiana" means Fifth Third Bank, Indiana, an Indiana banking corporation. The definition of "Fee Letter" set forth in Appendix A to the Receivables Purchase Agreement shall include the Fee Letter, dated as of August 9, 2002, among Seller, Parent and the Fifth Third Agent, as amended from time to time. SECTION 4. Deemed Collections. Section 3.02 of the Receivables Purchase Agreement is hereby amended by (i) deleting the word "or" at the end of clause (ii) of paragraph (a) thereof, (ii) adding the word "or" at the end of clause (iii) of paragraph (a) thereof, (iii) adding a new clause to paragraph (a) thereof as follows: (iv) Seller or Servicer does not apply any payment by an Obligor in accordance with Section 8.06,", (iv) deleting the word "and" at the end of clause (II) of paragraph (a), (v) deleting the period at the end of clause (III) of paragraph (a), and substituting therefor the word "; and", and (vi) adding a new clause at the end of paragraph (a) as follows: "(IV) in a case of clause (iv) above, in the amount of such misapplied payment." SECTION 5. Business Day. The definition of "Business Day" that appears in Appendix A to the Receivables Purchase Agreement is hereby amended by adding the phrase "Cincinnati, Ohio, Evansville, Indiana" after the words "Chicago, Illinois" where they appear in clause (ii) thereof. SECTION 6. Majority Purchasers. The definition of "Majority Purchasers" that appears in Appendix A to the Receivables Purchase Agreement is hereby amended by deleting the number "66-2/3%" where it appears therein and substituting therefor the number "51%". SECTION 7. Cost of Funds. The definition of "Cost of Funds Rate" that appears in Appendix A to the Receivables Purchase Agreement is hereby amended by adding a new clause at the end thereof as follows: "and (C) with respect to Fifth Third Indiana, a rate calculated by the Fifth Third Agent equal to the per annum rate equivalent to the "weighted average cost" (as defined below) related to the issuance of Fountain Square Commercial Paper Corporation's ("Fountain Square") Commercial Paper Notes that are allocated, in whole or in part, by Fountain 2 Square (or by the Fifth Third Agent) to fund or maintain such portion of Capital (and which may also be allocated in part to the funding of other portions of Capital hereunder or of other assets of Fountain Square); provided, however, that if any component of such rate is a discount rate, in calculating the "Cost of Funds Rate" for such portion of Capital for such Earned Discount Period, Fountain Square shall for such component use the rate resulting from converting such discount rate to an interest bearing equivalent rate per annum. As used in this definition, Fountain Square's "weighted average cost" shall consist of (x) the actual interest rate (or discount) paid to purchasers of Fountain Square's Commercial Paper Notes, together with the commissions of placement agents and dealers in respect of such Notes, to the extent such commissions are allocated, in whole or in part, to such Commercial Paper Notes by Fountain Square (or by the Fifth Third Agent) and (y) any incremental carrying costs incurred with respect to Fountain Square's Commercial Paper Notes maturing on dates other than those on which corresponding funds are received by Fountain Square. In the event that Fifth Third Indiana's portion of the Capital is funded by a conduit (the "New Conduit") other than Fountain Square, the phrase "Fountain Square" wherever it is used in this definition shall be replaced with the name of the New Conduit. SECTION 8. Notice Address. The notice address for Fifth Third Indiana and the Fifth Third Agent shall be as follows: Gerald Slaton/Judy Huls Fifth Third Bank 38 Fountain Square Plaza MD: 1090h9 Cincinnati, OH 45263 Telephone: 513-534-8446 Facsimile: 513-534-0875 SECTION 9. Addition of Fifth Third Indiana. On such Business Day as the Agents shall mutually agree on, Fifth Third Indiana shall purchase from Market Street and Blue Keel, and Market Street and Blue Keel shall assign to Fifth Third Indiana (and each of them does hereby assign effective as of such date), 25% of the Asset Interest, which purchase shall be made for an amount equal to 25% of the outstanding Capital on such day. Until such purchase by Fifth Third Indiana, Fifth Third Indiana shall have no outstanding Capital and shall not be accruing Earned Discount until such purchase. SECTION 10. Assignment by Fleet National Bank. Fleet National Bank ("Fleet") hereby assigns to Fleet Securities, Inc. ("FSI"), and FSI hereby accepts and assumes, all of Fleet's right, claims and obligations as the Administrator and as Blue Keel Agent. From and after the date of this Amendment, each and every reference in the Transaction Documents to the Administrator and the Blue Keel Agent shall be deemed to be references to FSI. Fleet and the other parties hereto hereby authorize FSI to file assignments of, and amendments to, the UCC financing statements filed in connection with the transactions contemplated by the Transaction Documents in order to reflect the assignment to FSI. 3 SECTION 11. Representations and Warranties; Further Assurance. Each of Parent and Seller hereby represents and warrants that, after giving effect to this Amendment, (i) the representations and warranties contained in Article VI of the Receivables Purchase Agreement are true and correct on and as of the date hereof and shall be deemed to have been made on such date (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) and (ii) no Liquidation Event or Unmatured Liquidation Event has occurred and is continuing. Each of Parent and Seller hereby (i) authorizes the Administrator to file any amendments to the UCC financing statements filed in connection with the transactions contemplated by the Receivables Purchase Agreement as the Administrator may reasonably deem appropriate to reflect the terms of this Amendment and (ii) agrees to promptly deliver such certificates, opinions and other documents as the Administrator or any Agent may request in connection with this Amendment. SECTION 12. Miscellaneous. The Receivables Purchase Agreement, as amended hereby, remains in full force and effect. Any reference to the Receivables Purchase Agreement from and after the date hereof shall be deemed to refer to the Receivables Purchase Agreement as amended hereby. This Amendment may be executed in 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. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. Seller, on demand, shall pay, or reimburse the Administrator for, all of the costs and expenses, including legal fees and disbursements, incurred by the Administrator or any Purchaser in connection with this Amendment. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] 4 IN WITNESS WHEREOF, each of the undersigned has caused this Amendment to be executed and delivered by its duly authorized officer as of the date first above written. D&K RECEIVABLES CORPORATION By: /s/ THOMAS S. HILTON --------------------------------- Name: Thomas S. Hilton ------------------------------- Title: Vice President ------------------------------ D&K HEALTHCARE RESOURCES, INC. By: /s/ THOMAS S. HILTON --------------------------------- Name: Thomas S. Hilton ------------------------------- Title: Senior Vice President & CFO ------------------------------ S-1 BLUE KEEL FUNDING, LLC, as a Purchaser By: /s/ ANDREW M. YEARDE --------------------------------- Name: Andrew M. Yearde ------------------------------- Title: Vice President ------------------------------ S-2 FLEET NATIONAL BANK (for purposes of Section 10 of the foregoing amendment) By: /s/ G. ALISTER BARAZ --------------------------------- Name: G. Alister Baraz ------------------------------- Title: Sr Vice President ------------------------------ FLEET SECURITIES, INC., as Blue Keel Agent and as the Administrator By: /s/ AMY S. ROBERTS --------------------------------- Name: Amy S. Roberts ------------------------------- Title: Managing Director ------------------------------ S-3 MARKET STREET FUNDING CORPORATION, as a Purchaser By: /s/ EVELYN ECHEVARRIA -------------------------------- Name: EVELYN ECHEVARRIA ------------------------------ Title: VICE PRESIDENT ----------------------------- S-4 PNC BANK, NATIONAL ASSOCIATION, as Market Street Agent By: /s/ WILLIAM P. FALCON -------------------------------- Name: WILLIAM P. FALCON ------------------------------ Title: ASSISTANT VICE PRESIDENT ----------------------------- S-5 FIFTH THIRD BANK, INDIANA, as a Purchaser By: /s/ SHAWN D. HAGAN -------------------------------- Name: SHAWN D. HAGAN ------------------------------ Title: VICE PRESIDENT ----------------------------- S-6 FIFTH THIRD BANK, as Fifth Third Agent By: /s/ ROBERT O. FINLEY ---------------------------- Name: Robert O. Finley -------------------------- Title: Vice President ------------------------- S-7 EX-10.18 5 c71930exv10w18.txt LEASE AGREEMENT EXHIBIT 10.18 LEASE AGREEMENT This Lease ("Lease") is made this 10th day of October, 2001, between Forsyth Centre Associates, L.L.C., a Missouri limited liability company ("Landlord") and D&K Healthcare Resources, Inc., a Delaware corporation ("Tenant"). RECITALS A. Landlord is the owner of certain real property located at 8235 Forsyth Boulevard, Clayton, Missouri, the legal description of which is contained in Exhibit "A" hereto (the "Land"). Landlord has constructed a 14 story office building upon the Land consisting of approximately 245,000 square feet of gross floor area (the "Building"). The atrium lobby of the Building will adjoin the existing lobby of the building located at 8182 Maryland Avenue, Clayton, Missouri (the "Adjoining Building"). B. Landlord has the right to use certain parking spaces within a multi-level parking garage (the "Parking Garage") connected to the Building and situated on certain real property which abuts the Land, the legal description of which is contained in Exhibit "B" hereto. C. Landlord wishes to lease a portion of the Building to Tenant, and Tenant wishes to lease the same from Landlord, upon the terms set forth herein. AGREEMENT In consideration of the foregoing, the mutual covenants herein contained and other good and valuable consideration (the receipt, adequacy and sufficiency of which are hereby acknowledged by the parties by their execution hereof), the parties agree as follows: ARTICLE I DEMISE 1.1 Leased Premises. Subject to the terms and conditions hereof, Landlord hereby demises and leases to Tenant, and Tenant hereby leases and rents from Landlord, the entire tenth floor of the Building consisting of approximately 16,400 rentable square feet, a portion of the ninth floor of the Building consisting of approximately 10,922 rentable square feet as outlined on Exhibit 1.1 hereto, and a portion of the third floor of the Building consisting of approximately 3,000 rentable square feet as outlined on Exhibit 1.1A hereto on which floor Tenant's computer equipment will be located (the "Leased Premises") (the actual rentable square feet shall be determined according to ANSI/ BOMA Z65.1-1996 and set forth in an addendum hereto to be executed by both parties), together with the right to use in common with the other tenants in the Building, and their invitees, the hallways, corridors, lobbies, lavatories (on multi-tenant floors), elevators, stairways, entrances, exits, sidewalks, driveways, parking facilities and all other common areas and facilities appurtenant to the Building (collectively the "Appurtenances"). 1.2 Square Footage. The rentable square footage of the Building is 217,564 square feet. The rentable square footage of the Leased Premises shall be determined upon completion of construction 1 according to ANSI/BOMA Z65.1-1996 and set forth in an Addendum hereto to be executed by both parties. 1.3 Parking Spaces. Landlord agrees to provide to Tenant, at Tenant's option which Tenant may amend from time to time, during the term of the Lease (a) up to three (3) parking spaces per every 1,000 rentable square feet, five (5) of which will be located on the main level of the Parking Garage on a reserved basis and the balance of which will be located in the Parking Garage on an unallocated basis (the "Parking Spaces"). Further, Landlord agrees to provide to Tenant, during the term of the Lease, additional reserved parking spaces (the location of which shall be determined by Landlord) for the purpose of locating/storing Tenant's generator. Notwithstanding anything to the contrary contained herein, at no time will Tenant be obliged to acquire a license for the use of a minimum number of parking spaces. Landlord has the exclusive right to determine which parking spaces in the Parking Garage will be Parking Spaces. Should Tenant require parking spaces in addition to the Parking Spaces, Landlord will use commercially reasonable efforts to provide such additional parking spaces to Tenant in the Parking Garage at the rate set forth in this Agreement. ARTICLE II TERM 2.1 Initial Term. The term of this Lease is for a period of 120 months commencing on August 1, 2002 (the "Commencement Date"). The term of this Lease ends (the "Expiration Date") at midnight on the last day of the tenth Lease Year (as hereinafter defined) (the "Lease Term"). Notwithstanding the foregoing, if Tenant is delayed in the completion of the Leasehold Improvements due to interference caused by Landlord, the Commencement Date shall be postponed one day for each day of such delay. 2.2 Early Entry. During the 60 days prior to the Commencement Date, Tenant, along with its contractors, may enter the Leased Premises, with no obligation to pay rent, for the purpose of installing Tenant's furniture and business and trade fixtures and equipment. Such installation is to be performed in accordance with the applicable provisions of Section 4.2. Such prior occupancy by Tenant is to be arranged so as not to result in any delay in the overall construction effort of, or additional cost to, Landlord and so as not to create a jurisdictional dispute with any of the building trades employed by Landlord. Tenant will not be charged for the use of elevators, hoists or Building services during such installation work in the Leased Premises or Tenant's actual move into the Building, unless such use results in an additional charge to Landlord, in which case Tenant is to reimburse Landlord upon demand the amount of the additional charge. Prior to any such early entry, Tenant must give Landlord reasonable prior written notice, and, as a condition to such entry by Tenant for such purposes, Tenant is to deliver to Landlord evidence that the insurance required to be carried by Tenant pursuant to the provisions of Section 7.2 is in effect. If Tenant's prior occupancy under this Section results in a delay in the overall construction effort of, or additional cost to, Landlord, Landlord is to give Tenant written notice thereof, and Tenant is to, on demand, reimburse Landlord for all such costs or damages incurred by Landlord. Notwithstanding anything herein to the contrary, if the Leased Premises are available for occupancy prior to August 1, 2002, Tenant may move in and occupy the premises prior to August 1, 2002 with no obligation to pay rent and such prior occupancy will not affect the Commencement Date. 2.3 Lease Year. For purposes hereof, "Lease Year" means a 12 month period the first month of which commences on (a) the Commencement Date if the Commencement Date is the first day of a month or (b) the first day of the month immediately following the Commencement Date if the Commencement Date is not the first day of a month. At any time after the Commencement Date, at the request of either party, both parties shall execute a supplemental agreement to this Lease stating the Commencement Date and the Expiration Date. 2 2.4 Option to Renew. Tenant is hereby granted the option to extend the Lease Term for two additional terms of five years each. Such extended terms will be on the same terms and conditions as are set forth in this Lease, except that the Base Rent (as hereinafter defined) payable by Tenant during such extended terms shall be equal to 95% of the prevailing fair rental which non-renewing, non-equity tenants are then receiving in connection with the lease of comparable space and length at Class A office space in Clayton, Missouri and constructed in or after calendar year 2000. Fair rental shall mean and take into account in addition the age of the building, location and floor level, definition of rentable square footage, leasehold improvement allowances, rental concessions and/or abatements, moving expenses, term of lease under consideration and extent of services provided, base year operating expenses and any other relevant term or condition in making such evaluation. At least nine (9) months (but no greater than 12 months) prior to the end of the Lease Term, or, if applicable, the first extended term, Tenant shall notify Landlord, in writing, of its desire to renew; within thirty (30) days of receipt of such notice by Landlord, Landlord shall notify Tenant, in writing, of Landlord's estimation of the prevailing fair rental for the Leased Premises. If, within the next thirty (30) days, Landlord and Tenant cannot agree as to the prevailing fair rental, then they each shall immediately select an MAI appraiser with at least ten (10) years experience in the appraisal of office space in the St. Louis metropolitan area. Upon selection, such appraisers shall work together in good faith to agree upon the prevailing fair rental of the Leased Premises. If said appraisers cannot agree within twenty (20) days after their appointment, then, within ten (10) days after the expiration of such twenty (20) day period, such appraisers shall select a third MAI appraiser with at least ten (10) years of experience in the appraisal of office space in the St. Louis metropolitan area. Once the third appraiser has been selected, then such third appraiser shall within ten (10) days after appointment make its determination of the prevailing fair rental amount and such determination shall be binding upon both Landlord and Tenant as the rental rate for such extended term. The parties shall each bear the costs of their own appraiser and shall share equally in the costs of the third appraiser. ARTICLE III RENT 3.1 Base Rent. During the Original Lease Term, Tenant is to pay Landlord in advance on the first day of each calendar month as base rent for the Leased Premises the monthly sums for each Lease Year (the "Base Rent") as set forth in Exhibit 3.1 hereto. The base rental rate for any period of less than one month prior to the first Lease Year is the monthly Base Rent for the first Lease Year, calculated as set forth in the next sentence, and is included in the term "Base Rent". Base Rent and Additional Rent (as hereinafter defined) for any period of less than one calendar month is to be apportioned based on the number of days in that month (with annual rent based on a 365 day year) and is payable on the first day of that period. 3.2 Payment of Rent. All Base Rent, Additional Rent and other payments to be made to Landlord hereunder are payable, in legal tender, at the office of Landlord at 8182 Maryland Avenue, Suite 307, Clayton, Missouri 63105, attention: P.A. Novelly II, or such other place as Landlord may direct Tenant, in writing, from time to time. Such payments are to be made without any prior demand therefor and without any deduction or setoff whatsoever (unless specifically authorized herein). 3 3.3 Additional Rent. (a) Defined. Tenant is to pay Landlord, as "Additional Rent", any amount designated as "Additional Rent" hereunder and Tenant's Proportional Share (as hereinafter defined) of Operating Expenses (as hereinafter defined). (b) Payment of Additional Rent. Unless otherwise specifically set forth herein, Tenant is to pay Landlord Additional Rent on the first day of each calendar month. (c) Parking Rental. For the first Lease Year, Tenant is to pay Landlord in advance on the first day of each month as Additional Rent for each reserved Parking Space the monthly sum of $120 and for each unreserved/unallocated Parking Space the monthly sum of $85. After the first Lease Year and for each Lease Year thereafter, Landlord may increase the parking rental rate to the prevailing fair rental rate if the prevailing fair rental for comparable parking spaces in Clayton, Missouri, increases, but in no event shall such increase exceed $10 per Lease Year. (d) Tenant's Proportional Share of Operating Expenses. (i) For purposes of this Lease, "Base Year" shall mean the calendar year 2002. 4 (ii) For purposes of this Lease, "Operating Expenses" means the total, reasonable (commensurate with the maintenance and operation of a first class office building) costs and expenses incurred by Landlord or paid on behalf of Landlord (grossed up to reflect 95% occupancy) and which are properly chargeable to the operation and maintenance of the Land and Building, including the cost and expense of the following: (A) real estate taxes and assessments for public improvements levied or imposed on the Land and Building and which are payable for a tax fiscal period falling within the Lease Term; (B) snow removal, gardening, replanting and replacing flowers and shrubbery (Operating Expenses do not include the cost of original installations, i.e., landscaping and planting, but do include maintenance); (C) public liability, property damage and fire insurance for the Building and Land; (D) repair, maintenance, and redecorating of common areas in the Building; (E) electricity, water, gas and other utilities (including, without limitation, all capital expenditures intended to reduce the cost of any utilities); (F) maintenance and repair of fixtures and replacement of bulbs; (G) maintenance and repair of elevators and service contracts thereon; (H) sanitary control and extermination; (I) removal of rubbish, garbage and other refuse; (J) maintenance and repair of security systems and policing; (K) sewer charges; (L) maintenance and repair of machinery and equipment used in the operation and maintenance of the common areas other than the garage areas (including the costs of inspection); (M) maintenance and repair of paving, curbs and walkways and drainage facilities; (N) music program services and loud speaker systems; (O) operation and maintenance of the heating, ventilating and air-conditioning systems; (P) cleaning and janitorial services; (Q) maintenance and repair of decorations and lavatories; (R) maintenance and repair of all doors and glass in the common areas of the Building and roof and exterior walls and glass; (S) maintenance and repair of the fire sprinkler systems; (T) cost of Landlord personnel directly involved in implementing all the aforementioned (including fringe benefits, employment taxes, and workman's compensation insurance); (U) the cost of any capital improvements not included or accounted for in the above listings made after the initial construction of the Building which actually reduce other operating expenses to the extent of such savings during the term of this Lease; and (V) a management fee at market rate not to exceed 5% of Base Rent. Notwithstanding anything contained herein to the contrary, Operating Expenses do not include any of the following costs and expenses: (1) costs of capital investment or capital improvements, including depreciation or amortization (except as otherwise expressly provided above); (2) the cost or expense of any work or service performed or supplied at Landlord's cost or expense for any other tenant of the Building, to the extent Landlord is not obligated under this Lease to similarly furnish such work or service to Tenant; (3) the cost or expense of maintaining or operating any facility or furnishing any work or service in any instance where such facility or work or service is made available or furnished to Tenant hereunder at an additional charge, including overtime HVAC and excess electric use; (4) any franchise or federal or state income taxes based on the Land or Building or their value, (5) any item charged to Tenant elsewhere within this Lease or to other tenants in the Building, (6) charges for which Landlord has established a reserve but such charges have not been incurred or paid, (7) leasing commissions, advertising and space planning expenses, (8) salaries and other compensation paid to officers or executives of Landlord or managing company senior to the building manager, (9) costs of enforcing provisions of other leases in the Building, (10) interest and principal payments on mortgage debt, or (11) repairs incurred by reason of casualty or condemnation to the extent Landlord is compensated through insurance or otherwise. (iii) From and after the Commencement Date and throughout the balance of the Lease Term, Tenant is to reimburse (pursuant to the terms hereof) Landlord Tenant's Proportional Share of the amount, if any, by which Operating Expenses exceed the Base Year. Tenant's "Proportional Share" is equal to the ratio of the rentable square footage of the Leased Premises to the total rentable square footage of the Building (minus any square footage that Landlord does not provide services to), adjusted from time to time, as required, to reflect increases or decreases or adjustments in the rentable square footage in the Leased Premises or the Building. 5 (iv) On or within ninety days after the commencement of calendar year 2003 and each subsequent year, Landlord is to give Tenant a detailed statement of estimated excess Operating Expenses payable hereunder for the current year (which estimate is payable in equal monthly installments in advance) and of actual excess Operating Expenses for the preceding year, if any. If such statement is delivered after the first month of any such year, the monthly installments of estimated excess Operating Expenses which have accumulated for such year are to be paid within 20 days after such statement has been given to Tenant. (v) Upon receipt of Landlord's statement, Tenant does hereby covenant and agree promptly to pay Tenant's Proportional Share of the excess Operating Expenses as and when the same becomes due and payable, without further demand therefor, and without any setoff or deduction whatsoever except as herein expressly provided. (vi) If the statement furnished by Landlord in a year subsequent to the first day of such year shows that the estimate for the preceding year exceeded the actual excess Operating Expenses for such year, Landlord will at Tenant's election (which election must be made within 20 days of receipt of such statement) forthwith pay the amount of the excess directly to Tenant within 30 days of delivering such statement or permit Tenant to credit the amount of the excess against the subsequent payments of rent hereunder. If Tenant fails to make its election within such 20 day period, Tenant is deemed to have elected to credit the amount of the excess against the subsequent payment of rents hereunder. If, however, such statement shows that the actual excess Operating Expenses for the preceding Operational Year exceeded the estimate for such year, Tenant must within 30 days after Tenant receives such statement pay the amount of such excess to Landlord. (vii) Landlord will maintain or cause to be maintained complete and accurate records and accounts in such manner and detail as to provided a proper basis for analysis of the statements to be furnished by Landlord. For a period of 90 days after receipt of the statement furnished Tenant by Landlord hereunder, Tenant or its authorized representative has the right for the purpose of verifying the information in such statement to inspect, upon reasonable written notice, the books of Landlord during the business hours of Landlord at Landlord's office in the Building or, at Landlord's option, at such other location in the St. Louis metropolitan area that Landlord may specify. Unless Tenant asserts specific error within 90 days after delivery of such statement, the statement is deemed to be correct for all purposes hereunder except for items of manifest error. If Landlord and Tenant do not agree as to the amount or propriety of any item contained in such statement, the dispute is to be referred to the local St. Louis office of an internationally recognized accounting firm for final decision. The accounting firm is to be approved by both Landlord and Tenant. Such accounting firm's decision is to be made within 60 days after the accounting firm is so chosen, and such decision is binding upon both parties. If Landlord and Tenant are unable to agree on an accounting firm within ten days after the dispute arises, each party is to choose its own accounting firm and the two accounting firms so chosen are to choose a third accounting firm with offices in the St. Louis metropolitan area. The third accounting firm so chosen is to make a final decision within 30 days after being so chosen, and such decision is binding upon both parties. Pending the receipt of such decision and subject to adjustment and payment, refund or credit, as appropriate, following resolution, Additional Rents, including advance, estimated payments of such Additional Rent, are to be calculated and paid based on Landlord's statement. The cost of the service of such accounting firms is to be paid equally by Tenant and Landlord. (iiii) The obligation of Tenant and Landlord with respect to the payment or refund of Additional Rent hereunder survives the termination of this Lease. Any payment, refund, or credit pursuant to this Section is to be made without prejudice to any right of Tenant to dispute, or of Landlord to correct, any items as billed pursuant to the provisions hereof. Operating Expenses for any 6 partial year within the Lease Term are to be properly apportioned based on the number of days of occupancy by Tenant in such partial year. (ix) No decrease in Landlord's Operating Expenses reduces Tenant's rent below the annual Base Rent. 3.4 Past Due Rent. If Tenant fails to pay (a) Base Rent or Additional Rent by the tenth day of the calendar month for which it is due, or (b) any other amount or charge payable hereunder when due, interest at the per annum rate of 12% will be charged on each unpaid amount, retroactive to the first day of the calendar month in the case of clause (a) and from the date such amount is due and payable in the case of clause (b). ARTICLE IV USE OF LEASED PREMISES 4.1 Use of Leased Premises. Tenant is to use the Leased Premises solely for general office use and purposes incidental thereto. The Parking Spaces are to be used solely for the parking of automobiles and other vehicles belonging to Tenant's employees, customers and visitors and purposes incidental thereto. Subject to the terms and conditions of this Lease, Tenant may have full and complete access to the Leased Premises and common areas of the Building at all times. The Parking Garage will be open to the public from the hours of 7 a.m. to 7 p.m. five days per week. Tenant will be provided one access card for each of its parking spaces utilized by Tenant's employees, which access cards will provide Tenant with full and complete access to the Parking Garage 24 hours per day, seven days per week. Tenant agrees to pay Landlord $20 for the replacement of any lost access card. 4.2 Restrictions on Use. Tenant may not use or occupy any part of the Leased Premises for any unlawful business, use or purpose and may not commit or allow to be committed or to exist on the Leased Premises any nuisance or other act which violates any Applicable Law (as hereinafter defined) or which may disturb the quiet enjoyment of any other tenant of the Building or which may reasonably be expected to disturb or inconvenience occupants of property in proximity to the Leased Premises. Movement in and out of the Building of furniture or equipment, or dispatch or receipt by Tenant of any merchandise or materials, may be done only during the hours reasonably designated by Landlord and by means of elevators and exits reasonably designated by Landlord. 4.3 Right of Entry. Notwithstanding Tenant's use of the Leased Premises, Landlord or its representatives may enter the Leased Premises at any reasonable time, upon 48 hours advance written notice to Tenant (except in the case of an emergency in which case no notice is required), for the purpose of: (a) inspecting the Leased Premises; (b) performing Landlord's obligations under the Lease; (c) performing any work which Landlord elects to undertake for the safety, preservation, benefit or welfare of the Leased Premises or other tenants of the Building; (d) exhibiting the Building or Leased Premises for sale, lease or financing (but in the case of leasing, only during the last 180 days of the Tenant's occupancy of the space to be exhibited); or (e) performing any work which Landlord elects to undertake made necessary by reason of Tenant's default hereunder. Landlord's right of entry pursuant to this Section may not unreasonably interrupt the conducting of Tenant's business at the Leased Premises. Subject to Section 14.2, Landlord will promptly reimburse Tenant for any damage to Tenant's property caused by Landlord in exercising its right of entry under this Section, except with respect to Section 4.3(e) and except for any damage resulting from Tenant's negligence or wilful misconduct. Landlord's right of entry under this Section does not constitute an eviction of Tenant, in whole or in part, and no Base Rent or other amounts payable hereunder will be reduced or abated, in whole or in part, as a result of Landlord exercising its right of entry hereunder. This "right of entry" is not intended, nor may it be construed, to be limited to its technical legal meaning. 7 ARTICLE V SERVICES TO BE PROVIDED BY LANDLORD 5.1 Services Provided. (a) Landlord will provide and maintain throughout the Lease Term: (i) heating, ventilation and air-conditioning from 7 a.m. to 6 p.m. on business days and from 8 a.m. to 1 p.m. on Saturdays (excluding New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day, collectively "Legal Holidays") to maintain the Leased Premises at reasonable temperatures for normal occupancy and use; (ii) hot and cold water and sewer services, as applicable, for lavatory and drinking purposes; (iii) electric current consumed by the elevator and the heating, ventilating and air-conditioning, lighting and power systems of the Building's common areas; and (iv) janitorial services, including window washing (inside and out) and refuse removal for reasonable neatness and cleanliness. Landlord's base Building HVAC systems serving the Leased Premises shall provide sufficient capacity to maintain an inside base temperature within the Leased Premises of not more than 75 degrees Fahrenheit dry bulb when the outside temperature is not more than 95 degrees Fahrenheit dry bulb, 78 degrees Fahrenheit wet bulb and an inside temperature of not less than 72 degrees Fahrenheit dry bulb when the outside temperature is not less than 0 degrees Fahrenheit (dry bulb). (b) Landlord will, upon request of Tenant via computer card usage, supply heating or air-conditioning during other than the hours provided in Section 5.1(a)(i), and Tenant will reimburse Landlord at Landlord's average cost per kilowatt-hours of electricity consumed, without markup, it being the intent of the parties that Landlord will not profit from such additional HVAC usage by Tenant. (c) Tenant is to use the service provided by Landlord pursuant to this Section in accordance with the criteria set forth in the rules and regulations of the utility company or the governmental agency supplying the same. Tenant may not at any time overburden or exceed the capacity of the mains, feeders, conduits or other facilities by which such services are supplied to, distributed in or serve the Building. (d) Unless otherwise specified, the services to be provided by Landlord pursuant to this Section are to be available to Tenant seven days a week, 24 hours a day and without additional charge. Landlord will also engage a security guard to patrol the common areas of the Building seven days a week, 24 hours a day. 5.2 Interruption of Service. No interruption, change or malfunction of any of the services or facilities to be furnished by Landlord hereunder, nor any interruptions, restrictions or allocation of utility services either by the utility or as a result of governmental action constitutes a deliberate eviction or constructive eviction or disturbance of Tenant's use and possession of the Leased Premises or a breach by Landlord of any of its obligations hereunder or renders Landlord liable for damages except to the extent such interruption is caused by Landlord's deliberate act or omission. In any such event, Landlord is to use reasonable diligence to restore such service or facility except where such event is required by governmental authority. 8 ARTICLE VI REPAIRS AND MAINTENANCE 6.1 Tenant's Obligations. Tenant will not damage the Leased Premises, will maintain and keep in good repair Tenant's improvements made pursuant to Article VIII, as well as Tenant's other property located in or on the Leased Premises, and will maintain the Leased Premises in a clean condition (subject to Landlord providing the cleaning services to be rendered by Landlord as set forth herein). 6.2 Landlord's Obligations. Landlord will, except as otherwise expressly provided herein as to Tenant's obligations, maintain and keep in good repair (including replacement when necessary), the Building, the Leased Premises and the Appurtenances, including the main lobbies and lobbies on multi-tenant floors, elevators, electrical lines, plumbing fixtures not part of Tenant's Leasehold Improvements, heating, ventilating and air-conditioning equipment not part of Tenant's Leasehold Improvements, landscaping, restrooms, outside walls, windows, the roof, gutters and downspouts, sanitary sewers, the Parking Garage and lights, the sidewalks, the common area and all other structural parts of the Building. Landlord will keep the driveways, serviceways and walkways reasonably free of snow, ice and debris, and keep all other equipment used to provide the services furnished by Landlord under this Section in good repair. At Tenant's sole cost, Landlord will make repairs necessitated by reason of the negligence or omission or wilful misconduct of Tenant, Tenant's agents, employees or invitees, or by reason of the failure of Tenant to perform or observe any condition or agreement contained in this Lease, or caused by alterations, additions or improvements made by Tenant, Tenant's agents, employees or invitees. Landlord is not in any way liable to Tenant for failure to make repairs herein required of Landlord unless Tenant has previously notified Landlord, in writing, of the need for such repairs and Landlord fails to make such repairs within a reasonable period of time following receipt of Tenant's written notice. 6.3 Rights Upon Failure to Repair or Maintain. (a) Of Landlord. If Tenant, following ten days written notice from Landlord, refuses or neglects to make any repairs to the Leased Premises, or part thereof, for which it is responsible pursuant to this Lease, Landlord has the right (but is not obligated), upon giving Tenant reasonable written notice of its election to do so, to make such repairs or perform such maintenance on behalf of and for the account of Tenant. In so doing, Landlord may make any payment of money or perform any other reasonable act. All sums so paid by Landlord and all incidental costs and expenses incurred in connection with the performance of any such act by Landlord, is Additional Rent and is payable to Landlord immediately upon demand. Landlord may exercise the foregoing rights without waiving any other of its rights against Tenant or without releasing Tenant from any of its obligations under this Lease. (b) Of Tenant. If Landlord defaults in the performance of its obligations under Section 6.2, which default interrupts Tenant's business being conducted at the Leased Premises, and Landlord does not cure such default within a reasonable time after written notice thereof from Tenant, Tenant may (without being obligated to), without waiving any claim for damages for such breach, cure such default for the account of Landlord. Nothing herein shall preclude Tenant from making repairs in an emergency. Any amount paid or any contractual liability incurred by Tenant in so doing is to be paid by Landlord to Tenant within ten days after demand therefor. Notwithstanding the foregoing, Tenant may not make repairs to the Parking Garage or to that portion of the Building which does not constitute Leased Premises, but may only make repairs to the Leased Premises, subject to the other provisions of this Section 6.3(b). Nothing herein shall preclude Tenant from making reasonable repairs in an emergency. 9 ARTICLE VII INSURANCE 7.1 Cost of Insurance to Landlord. If the cost of insurance to Landlord is increased by reason of the occupancy and use of the Leased Premises by Tenant, or by reason of alterations, additions or improvements to the Leased Premises made by or for Tenant and not required to be furnished by Landlord under this Lease, such increase is to be paid by Tenant to Landlord as Additional Rent on demand and presentation to Tenant by Landlord of proof of such increase. No such increase may be deemed to have resulted from the Leasehold Improvements (as hereinafter defined) or Tenant's use and occupancy of the Leased Premises in a manner customary to the purpose set forth in Section 4.1. 7.2 Tenant's Insurance. From and after the Commencement Date, Tenant is to carry and maintain, at its sole cost and expense, the following types of insurance, in the amount specified and in the form hereinafter provided. (a) Tenant is to maintain bodily injury insurance with limits of not less than $500,000 per person and $1,000,000 per occurrence, insuring against any and all liability of the insured with respect to the Leased Premises or arising out of the maintenance, use or occupancy thereof, and property damage liability insurance with a limit of not less than $500,000 per accident or occurrence. (b) Tenant is to maintain fire and extended coverage insurance, together with insurance against sprinkler leakage, vandalism and malicious mischief, covering Tenant's trade fixtures, furniture, equipment and other items of personal property located on or at the Leased Premises. (c) All such insurance maintained by Tenant pursuant to this Section must specifically name Landlord as an additional insured, and the interests of the Mortgagee (as hereinafter defined) are to be insured under a standard mortgagee clause. All such insurance must also insure the performance by Tenant of Tenant's indemnity under Article XIV and contain an endorsement stating that such policy may not be canceled or modified by the insurer or Tenant without Landlord having been given at least 30 days prior written notice by the insurer. (d) On the Commencement Date, Tenant is to provide Landlord with a certificate of insurance evidencing the coverage required under this Section. Tenant must also provide Landlord with a certificate of insurance evidencing a new policy with at least the same coverage no less than 30 days prior to the expiration of the old policy. 7.3 Landlord's Insurance From and after the Commencement Date, Landlord is to carry and maintain the following types of insurance, in the amount specified and in the form hereinafter provided. (a) Landlord is to maintain all-risk casualty insurance, written at replacement cost value and with a replacement cost endorsement, on the Building, the Appurtenances and the Leasehold Improvements. (b) Landlord is to maintain comprehensive general liability insurance covering claims for bodily injury or death, property damage or personal injury arising from the use of the Building or the Appurtenances, however caused, with per occurrence limits of not less than $1,000,000 for bodily injury and $500,000 for property damage. 10 (c) If requested by Tenant, Landlord is to furnish Tenant with a certificate of insurance for each required coverage, and renewal thereof, showing that the required insurance is in force. 7.4 Mutual Release of Insured Risks. Notwithstanding anything herein to the contrary, Landlord and Tenant and all parties claiming under them hereby mutually release and forever discharge the other from all claims and liabilities from or caused by any hazard or incident covered by insurance on the Building or Leased Premises or covered by insurance in connection with property on or at the Building or Leased Premises, regardless of the cause of the damage or loss. This release applies only to the extent that such loss or damage is covered by insurance and only so long as applicable insurance policies contain a clause to the effect that this release does not affect the right of the insured to recover under such policies. ARTICLE VIII TENANT'S IMPROVEMENTS 8.1 Leasehold Improvements. (a) No alteration, addition, improvement, or refinishing of or to the Leased Premises may be made by Tenant without the prior written consent of Landlord and without Landlord's approval of Tenant's plans and specifications therefor, which consent and approval may not be unreasonably withheld or delayed. Any permanent improvement made by Tenant becomes the property of Landlord upon the installation of such permanent improvement. Any other alteration, addition or improvement made by Tenant and any building fixture installed by Tenant which constitutes a fixture (including wall-to-wall carpeting, light and plumbing fixtures, wall paneling and air-conditioning equipment) becomes the property of Landlord upon the expiration or sooner termination of this Lease. At the termination of this Lease, Tenant is to surrender the Leased Premises as provided in Article XIII. Tenant is to pay or cause to be paid all costs for work done by it or caused to be done by it on the Leased Premises. Tenant agrees to indemnify and hold Landlord free and harmless against liability, loss, damage, costs, reasonable attorneys' fees and all other expenses on account of claims or liens of laborers or materialmen or others for work performed or materials or supplies furnished for Tenant or persons claiming under Tenant. This indemnity survives the expiration or earlier termination of this Lease. Notwithstanding the foregoing, Tenant may make minor improvements to the Leased Premises without the prior written consent of Landlord so long as such minor improvements do not (i) affect the structural, mechanical, electrical, security, sprinkler, energy management, or life safety systems of the Building or Leased Premises, (ii) require the issuance of a building permit, or (iii) exceed $5,000.00. (b) Without limiting Landlord's right to otherwise reasonably reject any proposed alteration, addition or improvement, Landlord will not be deemed unreasonable for rejecting any alteration or addition which (i) affects any structural or exterior element of the Building, any area or element outside of the Leased Premises or any facility serving any area of the Building outside of the Leased Premises, or (ii) will require unusual expense to readapt the Leased Premises to normal use after the Expiration Date or increase the cost of insurance on the Building unless Tenant first gives assurance acceptable to Landlord for payment of such increased cost or that such readaptation will be made prior to the Expiration Date without expense to Landlord. (c) All of Tenant's alterations are to be performed by Landlord's general contractor or by contractors or workmen first approved by Landlord, which approval will not be unreasonably withheld or delayed. Except for work to be performed by Landlord's general contractor, Tenant, before its work is started, must: (i) secure all licenses and permits necessary therefore; (ii) deliver to Landlord 11 a statement of the names of all its contractors and subcontractors and the estimated cost of all labor and material to be furnished by them; and (iii) cause each contractor to: (A) carry workmen's compensation insurance in statutory amounts covering all the contractor's and subcontractor's employees and comprehensive public liability insurance and property damage insurance with such limits as Landlord may reasonably require, and (B) deliver to Landlord certificates of all such insurance. Tenant agrees to pay promptly when due the entire cost of any work done on the Leased Premises by Tenant, its agents, employees or independent contractors. If Landlord so requests and the cost of such work exceeds $5,000, Tenant must promptly obtain from Tenant's contractors performing any such work a performance and payment bond on the latest AIA form covering such contractor's obligees and in which Landlord is named as a dual obligee. Tenant must provide Landlord drawings of any alterations made by Tenant, which drawings are to depict the location of all such alterations, including wall and door locations, electrical services and mechanical systems. All improvements by Tenant hereunder must be consistent with Applicable Law and the general demeanor of the Building. All such work must be done in a good and workmanlike manner and be diligently prosecuted, and may not interfere with any trade union or the like performing work on the Building, the Adjoining Building or Parking Garage on behalf of Landlord, or Landlord's relationship (including a strike or work stoppage) with such trade union or the like. 8.2 Trade Fixtures and Personal Property. All articles of personal property, all furniture, and all business and trade fixtures, machinery and equipment owned by Tenant or installed by Tenant at its expense in the Leased Premises ("Tenant's Property") are and remain the property of Tenant. Subject to the applicable provisions of this Lease, Tenant's Property may be removed at any time during or at the end of the Lease Term, provided that Tenant repairs any damage to the Leased Premises or Building caused by such removal. If Tenant fails, for whatever reason, to remove all of Tenant's Property from the Leased Premises upon termination of the Lease Term, Landlord may, at its option, upon five (5) days written notice to Tenant and without liability to Tenant for loss of such Tenant's Property: (a) remove such Tenant's Property in any reasonable manner that Landlord chooses and store the same; or (b) sell such Tenant's Property, or any portion thereof, at private sale and without legal process for such price as Landlord may obtain. Tenant agrees to pay Landlord, upon demand, any and all expenses reasonably incurred by Landlord in connection with such storage or sale, as the case may be. The proceeds of any sale are to be applied by Landlord in the following order: (i) to the expenses and costs of such sale; (ii) to amounts due Landlord from Tenant under the Lease; and (iii) the excess, if any, to Tenant. 8.3 Mechanics Liens. Tenant may not suffer any mechanic's or materialman's lien to be filed against the Leased Premises, the Building or the Land by reason of work, labor, services or materials performed or furnished to Tenant or anyone holding any part of the Leased Premises under Tenant. If any such lien is at any time so filed, Tenant must, within 30 days of the filing thereof, cause such lien to be released of record. If Tenant fails to have such lien released of record within such 30 day period, Landlord may (but is not obligated to) remove such lien without investigating the validity thereof and irrespective of the fact that Tenant may contest the propriety or amount thereof. Tenant, upon demand, is to pay Landlord as Additional Rent the amount so paid out by Landlord in connection with the discharge of such lien, including reasonable attorneys' fees and expenses. Nothing contained herein is a consent on the part of Landlord to subject Landlord's estate in the Leased Premises to any lien or liability under Applicable Law. 12 ARTICLE IX CASUALTY AND EMINENT DOMAIN 9.1 Casualty. If any portion of the Leased Premises is damaged or destroyed by fire or other casualty, or if the Building is materially damaged or destroyed by fire or other casualty, Landlord is to repair or restore the Leased Premises (but excluding Tenant's Property) or the Building, as the case may be, with reasonable diligence to the condition the Leased Premises or the Building was in immediately preceding the occurrence of such damage or destruction. From the date of such damage or destruction and continuing throughout the period of such restoration or repair, the Base Rent, Additional Rent, and other charges, if any, payable hereunder equitably abate to the extent the Leased Premises or Tenant's use and occupancy thereof are materially affected thereby. However, if such damage is so extensive that such repair or restoration cannot be completed by Landlord within a period of 150 days following the date of such damage, or more than 50% of the net rentable square footage of the Leased Premises is damaged, Landlord or Tenant has the right to terminate this Lease by giving notice thereof to the other within 30 days following the occurrence of such casualty. In such case, (a) Landlord has no obligation to repair or restore the Leased Premises or Building, (b) this Lease automatically terminates as of the date of such notice, (c) the Base Rent, Additional Rent, and other charges, if any, are to be adjusted as of the date of the occurrence of such casualty, and (d) neither party has any liability by reason of such termination or further obligation to the other hereunder except the obligations under Article XIV and such other obligations which survive the termination of this Lease. Except for the abatement of rent and other charges as set forth above, Tenant is not entitled to, and hereby waives all claims against Landlord for, any compensation or damage for loss of use of the whole or any part of the Leased Premises or Appurtenances, or for any inconvenience or annoyance occasioned by any such damage, destruction, repair or restoration except for any claim based upon the negligence or wilful misconduct of Landlord or its agents or employees. The provisions of any Applicable Law under which a lease is automatically terminated or a tenant is given the right to terminate a lease upon the occurrence of any such damage or destruction, are hereby expressly waived by Tenant to the maximum extent permitted under Applicable Law. 9.2 Eminent Domain. (a) If 50% or more of the Building, or such amount of the Leased Premises that leaves the remaining Leased Premises unsuitable for Tenant's continued occupancy for the uses and purposes for which leased, is taken by any public or quasi-public authority under the power of condemnation, eminent domain or expropriation, or in the event of a conveyance subsequent to the commencement of an action under such power, both Landlord and Tenant have the right to terminate this Lease by giving notice thereof to the other, such termination to be effective on the last day of the month following the month in which the notice is given. (b) If this Lease is terminated as a result of either party exercising its option under Section 9.2(a), Base Rent, Additional Rent and other charges, if any, payable hereunder are to be adjusted as of the date of taking, and any such rents or charges paid for any period after the date of taking are to be promptly repaid to Tenant, whereupon neither party has any further obligation to the other hereunder except the obligations under Article XIV and the other obligations which survive the termination of this Lease. If this Lease, notwithstanding any such taking or conveyance, continues in effect as to any part of the Leased Premises: (i) the Base Rent, Additional Rent and other charges, if any, payable hereunder, are to be apportioned and adjusted as of the date of taking on the basis of the area (in usable square feet) of the part taken or conveyed in lieu thereof and the part that continues to be leased hereunder, and any such rent and charges paid for the part so taken or conveyed for any period after the date of taking is to be promptly repaid to Tenant and for the part not so taken continues 13 to be payable, as herein provided, subject to equitable abatement to the extent Tenant's use of such part is materially affected pending completion by Landlord of the alterations required herein; and (ii) Tenant's Proportional Share of Operating Expenses and other items are to be recalculated. (c) If this Lease, notwithstanding any such taking or conveyance, continues in effect, Landlord will, at its expense, make all necessary alterations as soon as reasonably practicable so as to constitute the remaining Building and Leased Premises a complete architectural and tenantable unit, except for Tenant's Property. (d) All awards and compensation for any such taking or conveyance, whether for the whole or a part of the Building, including the Leased Premises, are the property of Landlord. Tenant hereby assigns to Landlord all of Tenant's right, title and interest in and to any and all such awards and compensation, excluding, however, any separately segregated award or compensation for the value of the unexpired portion of the Lease Term which award or compensation shall be the property of Tenant. Nothing herein shall preclude Tenant from having the right to claim and recover from a condemning authority compensation for any loss to which Tenant may be entitled for Tenant's moving expenses or other relocation costs and for reimbursement of unamortized Tenant improvements or alterations. ARTICLE X TENANT'S DEFAULTS The occurrence of any one or more of the following events, acts or occurrences constitutes an event of default ("Event of Default") hereunder: 10.1 Rent. Tenant defaults in the payment of Base Rent or Additional Rent due hereunder for more than ten days after written notice of failure to pay; 10.2 Other Monetary Obligations. Tenant defaults in the payment of any monetary obligation due hereunder other than Base Rent or Additional Rent for more than ten days after written notice of failure to pay; 10.3 Other Covenants. Tenant defaults in the performance of any other covenant, agreement, condition, rule or regulation herein contained or provided for, or hereafter validly established, for more than 30 days after Landlord gives Tenant notice of such default, or, if such default is not capable of being cured within such 30 day period, Tenant has not commenced such performance in good faith within such ten day period and is not diligently and continuously proceeded therewith to completion; 10.4 Insolvency. (a) Tenant admits in writing its inability to pay its debts generally; (b) Tenant makes a general assignment for the benefit of creditors; (c) any proceeding is instituted by or against Tenant (i) seeking to adjudicate it a bankrupt or insolvent, (ii) seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or (iii) seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against Tenant, either such proceeding remains undismissed or unstayed for a period of 30 days or any of the actions sought in such proceeding occurs; or (d) Tenant takes any action to authorize any of the actions set forth in this Section 10.4. 14 ARTICLE XI LANDLORD'S REMEDIES Upon the happening of an Event of Default, in addition to all other remedies that Landlord may have hereunder or under Applicable Law, Landlord has the following rights and remedies. 11.1 Right of Re-Entry. Landlord has the right to peaceably re-enter and take possession of the Leased Premises and dispose of and remove therefrom Tenant, or other occupants thereof, and their effects, and alter the locks and other security devices at the Leased Premises. Landlord may do the above without service of notice or resort to legal process and without being deemed guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby. Notwithstanding such retaking of possession by Landlord, Tenant's liability for Base Rent, Additional Rent and other monetary payments provided for herein are not extinguished except as otherwise set forth in this Article. 11.2 Right to Terminate. Landlord may exercise its right to re-enter under Section 11.1, or take possession pursuant to legal proceeding or pursuant to any notice provided for by Applicable Law, and terminate this Lease. If Landlord terminates this Lease, Tenant is to immediately pay to landlord a sum equal to any and all Base Rent, Additional Rent and other monetary payments that are then due and which will become due under this Lease for the balance of the Lease Term, subject to Landlord's obligation to mitigate its damages. If Landlord elects to terminate this Lease, the amount to be collected by Landlord is the present value of any and all Base Rent, Additional Rent and other monetary payments that are then due and which will become due under the Lease for the balance of the Lease Term, such present value to be calculated by Landlord using the then prevailing interest rate for U.S. Treasury Notes which have a maturity date equal to or most equal to the remaining term of the Lease. In addition, Landlord may recover all other damages it incurs as a result of such default from Tenant. 11.3 Right to Re-Let. Landlord may exercise its right to re-enter under Section 11.1 or take possession pursuant to legal proceedings or pursuant to any notice provided for by Applicable Law and, without terminating this Lease, make such reasonable alterations and repairs as may be necessary to relet the Leased Premises, and relet all or any part of the Leased Premises as the agent of and for the account of Tenant upon such terms and conditions as Landlord may deem advisable. Upon any such relettings, the rents received therefrom are to be applied to (a) the expenses of reletting and collection of rents, including the costs of the renovation and alteration of the Leased Premises, or portion thereof, (b) reasonable attorneys' fees and real estate commissions and other repossession costs paid, and (c) thereafter to make such payment of all sums due or to become due Landlord under this Lease. If a sufficient sum is not then realized from such reletting to pay such amounts set forth in the immediately preceding sentence, Tenant is to pay Landlord any such deficiency, on demand, and Landlord may bring an action against Tenant therefor as each and every such deficiency arises. Notwithstanding any reletting pursuant to this Section, Landlord may at any time thereafter elect to terminate this Lease for such Event of Default. 11.4 Re-Entry Not An Election To Terminate. No re-entry or taking possession of the Leased Premises by Landlord is an election on Landlord's part to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination is decreed by a court of competent jurisdiction. 11.5 Determination of Additional Rent. In determining Additional Rent which would be payable by Tenant hereunder subsequent to an Event of Default, the average annual Additional Rent paid by Tenant from the Commencement Date to the time of default or during the preceding three full calendar years, whichever period is shorter, is to be utilized. 15 11.6 Waivers. Except as otherwise provided herein, to the maximum extent permitted by Applicable Law, Tenant waives demand for rent, demand for possession, notice of forfeiture, notice of termination and any and all demands or notices required by Applicable Law. Tenant hereby expressly waives any right to assert a defense based on merger and agrees that neither the commencement of any action or proceeding, nor the settlement thereof, nor the entry of judgment thereon bars Landlord from bringing any subsequent actions or proceedings from time to time. ARTICLE XII SELF HELP 12.1 By Landlord. If Tenant, following ten days written notice from Landlord, refuses or neglects to perform any act for which it is responsible under this Lease, Landlord has the right (but is not obligated), upon giving Tenant reasonable written notice of its election to do so, to perform and act on behalf of and for the account of Tenant. In so doing, Landlord may make any payment of money or perform any other act. All sums so paid by Landlord and all incidental costs and expenses incurred in connection with the performance of any such act by Landlord, is Additional Rent and is payable to Landlord immediately upon demand. Landlord may exercise the foregoing rights without waiving any of its other rights against Tenant or without releasing Tenant from any of its obligations under this Lease. 12.2 By Tenant. If Landlord defaults in the performance of any of its obligations under this Lease, which default interrupts Tenant's business being conducted at the Leased Premises, and Landlord does not cure such default within a reasonable time after written notice thereof from Tenant, Tenant may (without being obligated to), without waiving any claim for damages for such breach, cure such default for the account of Landlord, subject to the last sentence of Section 6.3(b). Any amount paid or any contractual liability incurred by Tenant in so doing is to be paid by Landlord to Tenant within ten days after demand therefor. ARTICLE XIII SURRENDER OF PREMISES; HOLDING OVER 13.1 Surrender of Premises. At the expiration of the Lease Term or earlier termination of this Lease, Tenant must quit and surrender the Leased Premises, together with all keys and combinations to locks, to Landlord, broom-clean and free of disrepair that is the obligation of Tenant hereunder to make, normal wear and tear and minor damage excepted. Prior to the expiration of the Lease Term, or upon the earlier termination of this Lease, Tenant must remove all of Tenant's Property from the Leased Premises and Building and repair all damage caused by such removal. Tenant may not remove from the Leased Premises any property that is or becomes Landlord's pursuant to this Lease. If the Leased Premises are not surrendered pursuant to this Section, Tenant agrees to indemnify Landlord against all loss or liability resulting from the delay by Tenant, including any claims made by any succeeding occupant founded on such delay. Tenant's obligations under this Section survive the expiration or sooner termination of this Lease. 13.2 Holding Over. If Tenant remains in possession of the Leased Premises after the expiration of this Lease without having exercised an option to renew or without having a new lease reduced to writing and duly executed, even if Tenant has paid and Landlord has accepted rent in respect of such holding, Landlord may, at its sole election, deem Tenant to be occupying the Leased Premises as a month-to-month tenant, subject to all the provisions of this Lease insofar as they are applicable to a month-to-month tenancy. There is no renewal of this Lease by operation of Applicable Law. During the period of any such holding over, all provisions of this Lease that are applicable to a month-to-month tenancy remain in effect except that the monthly rental is equal to 150% of the monthly Base Rent and 16 Additional Rent payable for the last calendar month of the Lease Term (collectively "Post-Term Rent Rate"). This Section shall not be deemed a consent by Landlord for Tenant to hold over. ARTICLE XIV INDEMNITY 14.1 Indemnity. Tenant hereby agrees to defend, pay, indemnify and save free and harmless Landlord from and against any and all claims, demands, fines, suits, actions, proceedings, orders, decrees and judgments of any kind or nature by or in favor of anyone whomsoever and from and against any and all reasonable out-of-pocket costs and expenses, including reasonable attorneys' fees, resulting from or in connection with loss of life, bodily or personal injury or property damage arising, directly or indirectly, out of, from, or on account of any occurrence in, upon, at or from the Leased Premises which arises from Tenant's occupancy thereof except to the extents due to the negligence or wilful misconduct of Landlord or Landlord's officers, employees, agents, contractors or invitees, and, if due to Tenant's or Tenant's officers', employees', agents', contractors' or invitees' negligence or wilful misconduct, the Appurtenances. Except as otherwise set forth in Section 4.3, Landlord agrees to defend, pay, indemnify and save free and harmless Tenant from and against any and all claims, demands, fines, suits, actions, proceedings, orders, decrees and judgments of any kind or nature by or in favor of anyone whomsoever and from and against any and all reasonable attorney's fees, resulting from or in connection with loss of life, bodily or personal injury or property damage arising, directly or indirectly, out of, from or on account of any occurrence in, upon, at, or from the Building and Appurtenances except to the extent due to the negligence or wilful misconduct of Tenant or Tenant's officers, employees, agents, contractors or invitees. 14.2 Exceptions to Indemnity. Notwithstanding Section 14.1, Landlord is not responsible or liable at any time to Tenant for any loss of life, bodily or personal injury, damage to property or business, or business interruption caused by persons other than Landlord and Landlord's employees, agents and invitees. Landlord is not responsible or liable at any time for loss of life, or injury or damage to any person or to any property or business of Tenant, or those claiming by, through or under Tenant, (a) caused by or resulting from the bursting, breaking, leaking, running, seeping, overflowing or backing up of water, steam, gas, sewage, snow or ice in any part of the Leased Premises unless due to the negligence of Landlord, or (b) caused by or resulting from acts of God or the elements. 14.3 Survival. The obligations of the parties under this Article survive the expiration or earlier termination of this Lease. ARTICLE XV ASSIGNMENT AND SUBLETTING 15.1 To Third Parties. Tenant may not assign, sublet or permit the use by others of the Leased Premises, or any part thereof, without in each instance the prior written consent of Landlord, which consent may not be unreasonably withheld or conditioned. 15.2 To Affiliates. Notwithstanding Section 15.1, Tenant may, upon prior written notice to Landlord, assign or sublet all or any part of its interest in the Leased Premises to an Affiliate of Tenant. 15.3 Effect of Assignment or Sublease/Profit Split. No assignment or sublease by Tenant of its interest in the Leased Premises, whether to a third person or an Affiliate, whether with or without the consent of Landlord, and whether or not Landlord has accepted the assignee or sub-tenant, releases Tenant from the further performance by Tenant of any of Tenant's obligations under this Lease unless Landlord specifically agrees otherwise, nor relieves Tenant from obtaining Landlord's consent in 17 accordance with this Article for any further assignment or subletting. If Tenant assigns or sublets the Leased Premises, any amount payable by such sub-tenant over and above the amount due and payable under this Lease (the "Profit") shall be split equally between Landlord and Tenant hereunder. 15.4 Sale by Landlord. In the event of any sale or exchange of the Leased Premises or Building by Landlord or the assignment by Landlord of this Lease (all of which may be done without Tenant's consent), Landlord is entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease arising out of any act, occurrence or omission relating to the Leased Premises occurring after the consummation of such sale, exchange or assignment. Regardless of such sale, exchange or assignment, this Lease remains in full force and effect and the purchaser or assignee assumes all of the responsibilities and obligations of Landlord under this Lease. ARTICLE XVI ATTORNMENT; SUBORDINATION; ESTOPPEL CERTIFICATE; AND QUIET ENJOYMENT 16.1 Attornment. Tenant must, in the event of a sale, transfer or assignment by Landlord of the Building or Leased Premises or any portion thereof or of this Lease, or in the event any proceedings are brought for the foreclosure of any Mortgage (as hereinafter defined) or in the event of an exercise of the power of sale under any Mortgage, attorn to and recognize such transferee, purchaser or Mortgagee (as hereinafter defined) as Landlord under this Lease, and promptly execute and deliver any instrument that such successor Landlord may reasonably request to evidence such attornment provided Tenant's occupancy is not disturbed and such purchaser, transferee or assignee (other than for security purposes) assumes Landlord's obligations under this Lease. Upon such attornment, this Lease or such parts thereof to which the successor Landlord succeeded, shall continue in full force and effect as a direct lease between the successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Lease and as are relevant to such interest. Notwithstanding the above, as to the Mortgagee or a purchaser at a foreclosure or other sale under the Mortgage, such successor Landlord is not (a) liable for any previous act or omission of Landlord, (b) subject to any offset which theretofore may have accrued to Tenant against Landlord, (c) bound by any previous modification of this Lease or by any previous prepayment of more than one month's rent, unless such modification or prepayment was made prior to the making of such Mortgage or was expressly approved in writing by the Mortgagee through which the successor Landlord succeeded to the rights of Landlord under this Lease, or (d) liable for any security deposits not actually received in cash by such successor Landlord. 16.2 Subordination. A. This Lease is and shall be expressly subject and subordinate at all times to the lien of any Mortgage, and all amendments, restatements, renewals, modifications, consolidations, assignments and extensions thereof, without the necessity of any further instrument or act on the part of Tenant. This subordination shall be self-operative and no further certificate or instrument of subordination need be required by any Mortgagee. In confirmation of such subordination, however, upon the written request of the holder (the "Mortgagee") of any mortgage now or hereafter encumbering the Land or Building, including the Leased Premises and Appurtenances or any part thereof, Tenant shall, within 15 days of Tenant's receipt thereof, execute any reasonable certificate or instrument that Landlord or Mortgagee may request confirming subordination of Tenant's rights under this Lease to the lien of such mortgage ("Mortgage"). Notwithstanding the foregoing, if at any time the Mortgagee elects to have this Lease or Tenant's rights hereunder superior to its Mortgage, then such Mortgagee may subordinate its Mortgage to this Lease without Tenant's consent by notice in writing to Tenant, and thereupon this Lease shall be 18 deemed prior to such Mortgage without regard to their respective dates of execution, delivery or recording, and in that event such Mortgagee shall have the same rights with respect to this Lease as though the Lease had been executed prior to the execution, delivery or recording, and in that event such Mortgagee shall have the same rights with respect to this Lease as though the Lease had been executed prior to the execution, delivery and recording of such Mortgage and had been assigned to such Mortgagee (subject to the provisions of Section 16.1 hereof). B. Tenant agrees that neither any foreclosure of any such Mortgage nor the institution of any such action or proceeding against Landlord, or any foreclosure proceeding brought by any such Mortgagee to recover possession of the Building, Land or Leased Premises, shall by operation of law or otherwise, except at the express election of the Mortgagee, result in the cancellation or termination of this Lease or the obligations of Tenant hereunder and upon the request of any such Mortgagee, Tenant covenants and agrees to execute an instrument in writing satisfactory to such Mortgagee or to the purchaser at foreclosure whereby Tenant attorns to such successor in interest. 16.3 SNDA Certificate. Tenant agrees to execute contemporaneously herewith the subordination, non-disturbance and attornment agreement attached hereto as Exhibit 16.3, and, from time to time, within fifteen days after Tenant's receipt of written request by Landlord, to execute, acknowledge and deliver to Landlord a statement in writing prepared by Landlord certifying that this Lease is unmodified and in full force and effect (to the extent accurate) and that Tenant has no defenses, offsets or counterclaims against its obligations to pay the Base Rent and Additional Rent and to perform its other covenants under this Lease and that there are no uncured defaults of Landlord or Tenant under this Lease (or, if there have been any modifications that the same is in full force and effect as modified and stating the modifications and, if there are any defenses, offsets, counterclaims or defaults, setting them forth in reasonable detail), and the dates to which the Base Rent, Additional Rent and other charges have been paid. Any such statement delivered pursuant to this Section may be relied upon by a prospective purchaser or Mortgagee of the Leased Premises or any prospective assignee of any Mortgagee of the Leased Premises. Tenant agrees to provide the above information substantially in the form of the SNDA Certificate, and including any additional information as may reasonably be requested by Landlord or any such prospective Mortgagee or purchaser. 16.4 Right of Mortgagee to Notice of Default and Cure. No act or failure to act on the part of Landlord which would entitle Tenant under the terms of this Lease, or under Applicable Law, to take any action, cure any default or withhold any sums due under this Lease, or to be relieved of Tenant's obligations hereunder or to terminate this Lease, results in a release or termination of such obligations or a termination of this Lease, unless (a) Tenant has first given written notice of Landlord's act or failure to act to the Mortgagee of record with respect to the Building or Land, if any, specifying the act or failure to act on the part of Landlord which could or would give basis to Tenant's rights; and (b) such Mortgagee, after receipt of such notice, fails or refuses to correct or cure the condition complained of within a reasonable time thereafter (including any delays resulting from force majeure or other circumstances beyond the control of such Mortgagee). Nothing contained in this Section imposes any obligation on any such Mortgagee to correct or cure any condition. 16.5 Quiet Enjoyment. Upon payment by Tenant of the monetary obligations herein provided, and upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, Tenant may peaceably and quietly hold and enjoy the Leased Premises for the term hereby demised without hindrance or interruption by Landlord or any other person lawfully or equitably claiming by, through or under Landlord, subject, nevertheless, to the terms and conditions of this Lease and to existing deeds of trust, easements, restrictions, if any, of record and the rights of other tenants of the Building. 19 ARTICLE XVII CONSTRUCTION 17.1 Construction of Leasehold Improvements. (a) For purposes of this Lease, "Leasehold Improvements" means all materials and work to be added to the core and shell of the Building, the Parking Garage and Appurtenances to finish the Leased Premises for Tenant in addition to the materials and work necessary to deliver the Leased Premises in White Box Condition (as defined in Exhibit 17.1 attached hereto). As part of its Leasehold Improvements, Tenant may install a generator in the Parking Garage, subject to the approval of the City of Clayton and/or County of St. Louis, the location of which shall be determined by Landlord. Such generator shall be enclosed and such enclosure shall be compatible with the design of the Parking Garage. Also as part of its Leasehold Improvements, Tenant may, as a backup source of electricity, connect its systems to the electrical substation servicing the Adjoining Building. (b) Landlord will grant Tenant an allowance of $30 per rentable square foot of the Leased Premises to construct the Leasehold Improvements. Tenant is responsible for all costs for the Leasehold Improvements to the extent such costs for the Leasehold Improvements exceed $30 per rentable square foot ("Tenant Plan Excess Costs"). If cost of the Leasehold Improvements is less than $30 per rentable square foot, the difference shall be a credit towards Tenant's Base Rent first due or other payments due Landlord hereunder. Except as otherwise may be approved by Landlord, all Leasehold Improvements, including work to be performed at Tenant's expense, shall be performed by contractors employed by Landlord. Construction of Leasehold Improvements shall be performed in accordance with the terms of this Lease and a Work Agreement to be prepared and executed by the parties prior to commencement of construction of Leasehold Improvements. Such Work Agreement shall identify the approved plans and specifications for Tenant's Leasehold Improvements, the contractor and subcontractors to perform the work, the agreed upon method for payment/reimbursement of the allowance and such other terms and provisions reasonably requested by Landlord. In addition to the allowance for Leasehold Improvements, Landlord will reimburse Tenant for 50% of the costs incurred by it to construct an internal stairwell between the tenth and ninth floors of the Leased Premises. ARTICLE XVIII REPRESENTATIONS AND WARRANTIES 18.1 Landlord. Landlord makes the following representations and warranties to Tenant: (a) The common areas of the Building will be constructed in compliance with all requirements of the Americans with Disabilities Act of 1990 (the "ADA") as the same relates to the Building. 20 (b) On the Commencement Date, the Leased Premises will be in material compliance with all laws, ordinances, rules, regulations, orders and other governmental requirements relating to the use, condition and occupancy (except that a certificate of occupancy is required to be issued with respect to Tenant's occupancy of the Leased premises) of the Leased Premises, and all rules, ordinances, orders and regulations of the board of fire underwriters or insurance service office, or any similar body having jurisdiction over the Leased Premises and the Building. 18.2 Tenant. Tenant will keep the Leased Premises free from any architectural barrier (installed by Tenant with or without the approval of Landlord) as are necessary and readily achievable to comply with the ADA. ARTICLE XIX MISCELLANEOUS 19.1 Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than the Basic Rent, Additional Rent or other amounts to be paid hereunder is to be other than on account of the earliest of such items then due, nor may any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such amount due or pursue any other remedy in this Lease provided. 19.2 Rules. Landlord, from time to time, has the right to make, establish and promulgate reasonable and nondiscriminatory rules and regulations for the Building, and all of the occupants and tenants thereof, and Tenant must observe, keep and comply with and cause its employees and invitees to observe, keep and comply with such rules and regulations. No such rule or regulation may be inconsistent with this Lease or proscribe Tenant's use and occupancy of the Leased Premises or use of the Appurtenances in a customary manner for a first class office building. 19.3 Landlord's Liability. Anything in this Lease to the contrary notwithstanding, Tenant agrees that, but for claims covered by Landlord's insurance, Tenant must look solely to the estate of Landlord in the Land and Building for the collection of any judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms and provisions of this Lease to be observed or performed by Landlord, subject, however, to the prior rights of the holder of any Mortgage. No other assets of Landlord are subject to levy, execution or other judicial process for the satisfaction of Tenant's claim, and Landlord is not liable for any such default or breach except to the extent of Landlord's estate in the Land and Building. 19.4 Definitions. For purposes of this Lease, the following capitalized terms have the following meanings: (a) "Affiliate" means (i) any person which, directly or indirectly, is in control of, is controlled by or is under common control with the party for whom an affiliate is being determined, or (ii) any person who is a director or officer of any person described in (i) above, or who is the beneficial owner of at least 5% of the voting stock of such person, or (iii) any partner (general or limited) of the party for whom an affiliate is being determined. For purposes hereof, control of a Person means the power, direct or indirect, to (A) vote 50% or more of the securities having ordinary voting power for the election of directors of such person or (B) direct or cause the direction of the management and policies of such person, whether by contract or otherwise and either alone or in conjunction with others. 21 (b) "Applicable Law" with respect to any matter or person means any law, rule, regulation, order, decree or other requirement having the force of law relating to such matter or person and, where applicable, any interpretation thereof by any authority having jurisdiction with respect thereto or charged with the administration thereof. 19.5 Signs, Awnings, Etc. (a) Tenant may not erect, install, paint, affix or maintain any signs, notices or other advertising or display devices, illuminated or otherwise, on any part of the inside or outside of the Building or Parking Garage, without the prior approval thereof in writing by Landlord. Tenant may not install any draperies, shades, venetian blinds, mini-blinds or the like visible from the exterior of the Building unless the color, materials, shape, style and size have been approved by Landlord. Tenant must promptly, on written notice from Landlord, remove any of the above erected or maintained in violation of this Section. If Tenant fails to remove such item promptly upon receipt of notice from Landlord to such effect, Landlord may peaceably enter upon the Leased Premises and cause such item to be removed. The cost of such removal and restoration is to be paid by Tenant as Additional Rent for the month next following such removal. (b) Tenant may not decorate, paint or in any other manner alter, and may not install or affix any device, fixture or attachment upon or to, the exterior of the Building or Parking Garage, including the roof or canopy thereof, without the prior written consent thereto of Landlord. If Tenant does any of the foregoing acts in contravention of this Section, Landlord has the right to remove any such decoration, paint, alteration, device, fixture or attachment and restore the Building or Parking Garage to the condition thereof prior to such act and the cost of such removal and restoration is to be paid by Tenant as Additional Rent payable for the month next following such removal and restoration. 19.6 Amendment and Modification. No amendment, modification, supplement, termination, consent or waiver of any provision of this Lease, nor consent to any departure therefrom, will in any event be effective unless the same is in writing and is signed by the party against whom enforcement of the same is sought. Any waiver of any provision of this Lease and any consent to any departure from the terms of any provision of this Lease is to be effective only in the specific instance and for the specific purpose for which given. 19.7 Approvals and Consents. If any provision hereof requires the approval or consent of any party to any act or omission, such approval or consent is not to be unreasonably withheld or delayed except as set forth herein. 19.8 Brokers. Landlord shall be responsible for any commission payable to its listing broker, Desco Commercial. Landlord shall pay to Trammell Crow Company a fee equal to 2.25% of the Base Rent of the initial Lease Term, payable 1/2 upon execution by all parties of this Agreement and the balance upon the Commencement Date. Should any additional claim for a commission be established or any other claim be established by a broker, agent or finder other than Desco Commercial or Trammell Crow Company, the parties hereto expressly agree to hold one another harmless with respect thereto to the extent that one or the other is shown to be responsible for the creation of such claim. 19.9 Captions. Captions contained in this Lease and the table of contents preceding this Lease have been inserted herein only as a matter of convenience and in no way define, limit, extend or describe the scope of this Lease or the intent of any provision hereof. 22 19.10 Construction. Unless the context of this Lease clearly requires otherwise: (a) references to the plural include the singular and vice versa; (b) references to any person include such person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Lease; (c) references to one gender include all genders; (d) "including" is not limiting; (e) "or" has the inclusive meaning represented by the phrase "and/or"; (f) the words "hereof", "herein", "hereby", "hereunder" and similar terms in this Lease refer to this Lease as a whole and not to any particular provision of this Lease; (g) article, section, subsection, Exhibit and Schedule references are to this Lease unless otherwise specified; (h) reference to any agreement (including this Lease), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof; and (i) references to any Applicable Law means such Applicable Law as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time, unless the effect thereof is to reduce, limit or otherwise prejudicially affect any obligation or any right, power or remedy hereunder, in which case such amendment, modification, codification or reenactment will not, to the maximum extent permitted by Applicable Law, form part of this Lease and is to be disregarded for purposes of the construction and interpretation hereof. 19.11 Counterpart Facsimile Execution. For purposes of executing this Lease, a document signed and transmitted by facsimile machine or telecopier is to be treated as an original document. The signature of any party thereon, for purposes hereof, is to be considered as an original signature, and the document transmitted is to be considered to have the same binding effect as an original signature on an original document. At the request of any party, any facsimile or telecopy document is to be re-executed in original form by the parties who executed the facsimile or telecopy document. No party may raise the use of a facsimile machine or telecopier or the fact that any signature was transmitted through the use of a facsimile or telecopier machine as a defense to the enforcement of this Lease or any amendment or other document executed in compliance with this Section. 19.12 Counterparts. This Lease may be executed by the parties on any number of separate counterparts, and all such counterparts so executed constitute one agreement binding on all the parties notwithstanding that all the parties are not signatories to the same counterpart. 19.13 Confidentiality. Without the prior written consent of the other party, and except as required by law, neither party nor any of its agents, representatives, affiliates, employees or consultants shall disclose to any person any of the terms, conditions or other provisions of this Lease and both parties shall keep such information in strict confidence. 19.14 Roof Access. Subject to the provisions of Article VIII herein and further subject to the approval of the City of Clayton and/or the County of St. Louis, Tenant may, at its expense (but without any payment of rent) install a rooftop mounted satellite dish/antenna on its pro-rata share (after first deducting for the Building's mechanicals) of the Building's roof. 19.15 Entire Agreement. This Lease and the Work Agreement constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, letters of intent, understandings, negotiations and discussions of the parties, whether oral or written. 19.16 Exhibits. All of the Exhibits attached to this Lease are deemed incorporated herein by reference. 19.17 Failure or Delay. No failure on the part of any party to exercise, and no delay in exercising, any right, power or privilege hereunder operates as a waiver thereof; nor does any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof, 23 or the exercise of any other right, power or privilege. No notice to or demand on any party in any case entitles such party to any other or further notice or demand in similar or other circumstances. 19.18 Further Assurances. The parties will execute and deliver such further instruments and do such further acts and things as may be required to carry out the intent and purpose of this Lease. 19.19 Governing Law. This Lease and the rights and obligations of the parties hereunder are to be governed by and construed and interpreted in accordance with the laws of the State of Missouri applicable to contracts made and to be performed wholly within Missouri, without regard to choice or conflict of laws rules. 19.20 Legal Fees. Except as otherwise provided herein, all legal and other costs and expenses incurred in connection with this Lease and the transactions contemplated hereby are to be paid by the party incurring such costs and expenses. In the event any party brings suit to construe or enforce the terms hereof, or raises this Lease as a defense in a suit brought by another party, the prevailing party is entitled to recover its attorneys' fees and expenses. 19.21 Notices. All notices, consents, requests, demands and other communications hereunder are to be in writing, and are deemed to have been duly given or made: (a) when delivered in person, (b) three days after deposited in the United States mail, first class postage prepaid, (c) in the case of telegraph or overnight courier services, one business day after delivery to the telegraph company or overnight courier service with payment provided for, or (d) in the case of telex or telecopy or fax, when sent, verification received, in each case addressed as follows: (i) if to Landlord: Forsyth Centre Associates, L.L.C. c/o MDR Properties Suite 307 8182 Maryland Avenue Clayton, Missouri 63105 Fax #: (314) 854-8322 (ii) if to Tenant (prior to occupancy of Leased Premises): D&K Healthcare Resources, Inc. c/o Vice President and General Counsel 8000 Maryland Avenue Clayton, Missouri 63105 if to Tenant (subsequent to occupancy of Leased Premises): D&K Healthcare Resources, Inc. c/o Vice President and General Counsel 8235 Forsyth Blvd., Suite 1000 Clayton, Missouri 63105 or to such other address as any party may designate by notice to the other party in accordance with the terms of this Section. 24 19.22 Remedies Cumulative. Each and every right granted hereunder and the remedies provided for under this Lease are cumulative and are not exclusive of any remedies or rights that may be available to any party at law, in equity, or otherwise. 19.23 Severability. Any provision of this Lease which is prohibited, unenforceable or not authorized in any jurisdiction is, as to such jurisdiction, ineffective to the extent of any such prohibition, unenforceability or nonauthorization without invalidating the remaining provisions hereof, or affecting the validity, enforceability or legality of such provision in any other jurisdiction, unless the ineffectiveness of such provision would result in such a material change as to cause completion of the transactions contemplated hereby to be unreasonable. 19.24 Successors and Assigns. All provisions of this Lease are binding upon, inure to the benefit of, and are enforceable by or against, the parties and their respective heirs, executors, administrators or other legal representatives and permitted successors and assigns. 19.25 Third-party Beneficiary. This Lease is solely for the benefit of the parties and their respective successors and permitted assigns, and no other person has any right, benefit, priority or interest under, or because of the existence of, this Lease. 19.26 Signatory Warranty. Each person executing this Lease warrants that he is authorized to do so on behalf of the party for whom he signs this Lease. 19.27 Acceptance. Each party hereto acknowledges that it has read this Lease and that its signature hereto signifies acceptance of each and every term hereof. FORSYTH CENTRE ASSOCIATES, L.L.C. By /s/ John L. Hank ---------------- D&K HEALTHCARE RESOURCES, INC. By /s/ J. Hord Armstrong, III -------------------------- 25 EX-10.18A 6 c71930exv10w18a.txt AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.18a AMENDMENT TO LEASE AGREEMENT AMENDMENT date February 26, 2002, between Forsyth Centre Associates, L.L.C. ("Landlord") and D&K Healthcare Resources, Inc. ("Tenant"). RECITALS A. Landlord and Tenant entered into and executed that certain Lease Agreement dated October 10, 2001 (the "Lease"); B. Pursuant to the Lease, the "Lease Premises" consist of the entire tenth floor of the Building, a portion of the ninth floor of the Building and a portion of the third flo0r of the Building; the third floor space, as outlined on Exhibit 1.1A, is not sufficient for Tenant's needs and Tenant wishes to lease additional space on the fifth floor of the Building in lieu of the space of the third floor. AGREEMENT In consideration of the foregoing, the mutual covenants herein contained and other good and valuable consideration (the receipt, adequacy and sufficiency of which are hereby acknowledged by the parties by their execution hereof), the parties agree as follows: 1. Defined Terms. Unless otherwise defined herein, all capitalized terms used in this Amendment have the meanings ascribed to them in the Lease. 2. Leased Properties. The definition of Leased Properties is amended to provide that Landlord demises and leases to Tenant, and Tenant leases and rents from Landlord, a portion of the fifth floor of the Building consisting of approximately 4,086 rentable square feet; the fifth floor space is in lieu of the third floor space and in addition to the entire tenth floor and a portion of the ninth floor of the Building. The fifth floor space is outlined on Exhibit 1.1A attached hereto which exhibit shall replace and become the new Exhibit 1.1A to the Lease. The actual rentable square feet shall be determined after completion of construction of the Lease Premises and shall be determined according to ANSI/BOMA Z65.1-1996. 3. No Other Modifications. Nothing herein contained in any way impairs the Lease, or alters, waives, annuls, varies or affects any provisions, condition or covenant therein, except as specifically set forth in this Amendment. All other provisions of the Lease remain in full force and effect. 4. Further Assurances. The parties will execute and deliver such further instruments and do such further acts and things as may be required to carry out the intent and purpose of this Amendment. 5. Amendments. This Amendment may be amended, modified or supplemented only by written agreement of the parties hereto. "LANDLORD" FORSYTH CENTRE ASSOCIATES, L.L.C. By /s/ John L. Hank ------------------ `TENANT' D&K HEALTHCARE RESOURCES, INC. By /s/ Martin D. Wilson ------------------------ EX-13 7 c71930exv13.txt 2002 ANNUAL REPORT EXHIBIT 13 REGISTRANT'S 2002 ANNUAL REPORT TO SHAREHOLDERS FINANCIAL HIGHLIGHTS:
Fiscal Year Ended ------------------------------------------------------------------------------ Income Statement Data June 30, June 30, 2001 June 30, 2000 June 30, 1999 June 30, 1998 - --------------------- 2002 (in thousands, except share and per share data) Net sales $ 2,453,748 $1,645,993 $1,458,047 $ 815,319 $ 612,427 Gross profit 102,831 68,824 56,422 41,536 30,654 Income from operations 46,339 26,946 22,299 14,842 9,770 Net income $ 21,059 $ 9,144 $ 8,199 $ 6,625 $ 3,942 Basic earnings per share (1) $ 1.48 $ 1.08 $ 0.97 $ 0.86 $ 1.09 Diluted earnings per share (1) $ 1.42 $ 1.01 $ 0.92 $ 0.79 $ 1.04 Basic common shares outstanding (1) 14,246,751 8,478,198 8,481,902 7,693,674 6,690,522 Diluted common shares outstanding (1) 14,677,781 9,131,514 9,099,752 8,439,752 7,532,704 Balance Sheet Data - ------------------ June 30, June 30, June 30, June 30, June 30, (in thousands) 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------- Current assets $413,914 $270,050 $237,494 $181,824 $153,513 Working capital 182,636 97,533 93,556 28,525 60,549 Total assets 483,138 330,204 294,419 236,990 178,371 Long-term debt 81,457 94,489 99,647 40,449 61,156 Stockholders' equity 167,397 57,510 45,265 40,887 20,719
(1) Adjusted for 2-for-1 stock split in April 2002 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 6,000. Set forth below are the high and low transaction prices as reported by the NASDAQ stock market for the periods indicated (adjusted for 2-for-1 stock split in April 2002). Such prices reflect interdealer prices, without retail markup, markdown, or commission:
2002 Low High First Quarter $17.75 $24.07 Second Quarter 21.40 29.60 Third Quarter 25.31 32.87 Fourth Quarter 27.39 39.50
45
2001 Low High First Quarter $ 4.69 $ 7.25 Second Quarter 5.75 8.00 Third Quarter 6.82 11.10 Fourth Quarter 9.22 18.53
CORPORATE OFFICES: D&K Healthcare Resources, Inc. 8000 Maryland Ave. Suite 920 St. Louis, Missouri 63105 (888) 727-3485 (314) 727-3485 Fax: (314) 727-5759 web: www.dkwd.com TRANSFER AGENT REGISTRAR: Computershare Investor Services LLC 2 North Lasalle Street Chicago, Illinois 60602 (312) 588-4700 AUDITORS: KPMG LLP St. Louis, Missouri COUNSEL: Armstrong Teasdale LLP St. Louis, Missouri FORM 10-K: Copies of form 10-K filed by D&K Healthcare Resources, Inc. for the year ended June 30, 2002, are available without charge upon request. Requests should be directed to the Company's corporate office address, marked attention: Investor Relations. ANNUAL MEETING: The annual meeting of stockholders will be held at 10:00 a.m. Wednesday, November 13, 2002, at The Ritz-Carlton, 100 Carondelet Plaza, St. Louis, MO. 46 EX-21 8 c71930exv21.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY NAME STATE OF INCORPORATION % OWNED --------------- ---------------------- ------- Associated Pharmacies, Inc. (inactive) Arkansas 100% VC Services, Inc. Minnesota 100% Pharmaceutical Buyers, Inc. Arkansas 70% Jaron, Inc. Florida 100% D & K Receivables Corporation Delaware 100% Jewett Drug Co. South Dakota 100% Tykon, Inc. Wisconsin 100% Southwest Computer Systems, Inc. Arkansas 100% (inactive) U.P.C., Inc. (inactive) Minnesota 100% Diversified Healthcare, LLC Kentucky 100%
47 EX-23.1 9 c71930exv23w1.txt CONSENT OF KPMG LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors D&K Healthcare Resources, Inc.: We consent to the incorporation by reference in registration statements Nos. 333-67976 and 333-60146 on Form S-3, No. 333-64112 on Form S-3 MEF, and Nos. 333-98437, 333-50506, and 333-24263 on Form S-8 of D&K Healthcare Resources, Inc. of our report dated August 7, 2002, with respect to the consolidated balance sheet of D&K Healthcare Resources, Inc. and subsidiaries as of June 30, 2002 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended June 30, 2002, and the related financial statement schedule, which report appears in the June 30, 2002 annual report on Form 10-K of D&K Healthcare Resources, Inc. Our report dated August 7, 2002, contains an explanatory paragraph that states that the consolidated financial statements of D&K Healthcare Resources, Inc. and subsidiaries as of June 30, 2001, and for each of the years in the two-year period then ended, were audited by other auditors who have ceased operations. The Company declared a two-for-one stock split in the form of a stock dividend during the year ending June 30, 2002, and the amounts in the consolidated financial statements as of June 30, 2001, and for each of the years in the two-year period then ended, relating to all share and per share amounts have been restated to retroactively reflect this stock split. We audited the adjustments that were applied to restate the share and per share amounts reflected in the June 30, 2001 and 2000 consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the June 30, 2001 and 2000 consolidated financial statements of D&K Healthcare Resources, Inc. and subsidiaries other than with respect to such adjustments and, accordingly, do not express an opinion or any other form of assurance on the June 30, 2001 and 2000 consolidated financial statements taken as a whole. /s/ KPMG LLP St. Louis, Missouri September 24, 2002 48 EX-23.2 10 c71930exv23w2.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We have not been able to obtain, after reasonable efforts, the written consent from our former independent public accountant, Arthur Andersen LLP, to our incorporation by reference on Form 10-K pertaining to D&K Healthcare Resources, Inc. of their report dated August 7, 2001 with respect to the financial statements and the supplemental schedule of D&K Healthcare Resources, Inc. included in this Annual Report on Form 10-K for the year ended June 30, 2001, as required by Section 7 of the Securities Act of 1933, as amended. Accordingly, you will be unable to recover amounts sought in any action against Arthur Andersen LLP, the former independent public accountant, pursuant to the Securities Act of 1933 and the regulations thereunder, and therefore any right of recovery may be limited as a result of the lack of that consent. 49 -----END PRIVACY-ENHANCED MESSAGE-----