<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1999
REGISTRATION NO. 333-88769
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
QK HEALTHCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5122 11-3508451
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2060 NINTH AVENUE
RONKONKOMA, NEW YORK 11779
(631) 439-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MICHAEL W. KATZ
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
QK HEALTHCARE, INC.
2060 NINTH AVENUE
RONKONKOMA, NEW YORK 11779
(631) 439-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
CHRISTINE M. MARX, ESQ. JOHN C. KENNEDY, ESQ.
EDWARDS & ANGELL, LLP PAUL, WEISS, RIFKIND, WHARTON & GARRISON
51 JOHN F. KENNEDY PARKWAY 1285 AVENUE OF THE AMERICAS
SHORT HILLS, NEW JERSEY 07078 NEW YORK, NEW YORK 10019
(973) 376-7700 (212) 373-3000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $.001 per share..................... $293,250,000 $77,418.00(2)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o).
(2) $71,932.50 of the fee was paid with the initial filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES, IN ANY JURISDICTION WHERE THE OFFER OR SALE IS
NOT PERMITTED.
Subject to Completion, dated December 3, 1999
PROSPECTUS
15,000,000 SHARES
QK HEALTHCARE, INC.
COMMON STOCK
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are
offering 15,000,000 shares.
No public market currently exists for our shares. We propose to list the
shares on the New York Stock Exchange under the symbol "KRX". We expect the
public offering price to be between $13.00 and $17.00 per share.
INVESTING IN OUR SHARES INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public offering price................................. $ $
Underwriting discounts................................ $ $
Proceeds to QK Healthcare, Inc........................ $ $
</TABLE>
We have granted the underwriters an option for a period of 30 days to
purchase up to 2,250,000 additional shares of common stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers expects to deliver the shares on or about ,
1999.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............. 3
Risk Factors.................... 9
Use of Proceeds................. 17
Dividend Policy................. 17
Capitalization.................. 18
Dilution........................ 19
Selected Historical Financial
Data.......................... 20
Pro Forma Financial
Information................... 22
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 26
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business........................ 35
Management...................... 43
Related Party Transactions...... 49
Principal Stockholders.......... 51
Description of Capital Stock.... 53
Shares Eligible for Future
Sale.......................... 56
Underwriting.................... 58
Legal Matters................... 60
Experts......................... 60
Where You Can Find More
Information................... 61
Index to Financial Statements... F-1
</TABLE>
------------------------
Until , 1999, all dealers selling shares of the common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in the common stock. You should read the
entire prospectus carefully, especially the risks of investing in our common
stock discussed under "Risk Factors." Unless otherwise indicated, all
information in this prospectus gives effect to the transfer of the
pharmaceutical business of Quality King Distributors, Inc. to us pursuant to the
reorganization described in this prospectus for all relevant periods and assumes
that the underwriters will not exercise their option to purchase additional
shares in the offering. Unless otherwise indicated, the terms "we," "us" and
"our" refer to QK Healthcare, Inc.
THE COMPANY
We are a national wholesale distributor of selected healthcare products to
retailers, wholesale distributors and pharmacy benefit managers. Pharmacy
benefit managers are companies that manage and administer prescription benefits
for health plans and other third party payors. Our products currently include
branded and generic pharmaceutical products and medical/surgical products. As
compared to traditional wholesale distributors,
- we carry a narrow range of merchandise inventory, rather than a full line
of products
- we offer our customers a limited range of inventory, delivery and
purchasing services
- we acquire and hold significant inventory levels of specific products
when it is financially advantageous to do so
- we primarily deliver products in bulk shipments to our customers'
warehouses rather than to individual stores.
We offer pharmaceutical and other healthcare products to our customers at
superior prices. In addition, we believe that traditional wholesale distributors
do not view us as a competitor but rather as an important partner that provides
them with an alternative means of completing product sales and purchases.
We acquire products from our extensive network of over 300 suppliers,
including most of the major pharmaceutical manufacturers and wholesale
distributors. We primarily stock products that we acquire on favorable terms by
taking advantage of manufacturers' incentive discounts, various market
opportunities and anticipated price increases. We believe that our ability to
commit significant amounts of capital in short time periods makes us an
important partner to members of our network.
Our purchasing and sales systems, together with our extensive knowledge of
the pharmaceutical industry, are critical parts of our capabilities. Our
experienced buying team relies heavily on our proprietary management information
system that provides decision support in the selection, quantity and timing of
our product purchases. Quality King developed this system over 25 years and
customized it to meet the needs of our pharmaceutical business. Our direct sales
force, complemented by our telemarketing activities and our internet services,
ensures effective communication of our product offerings to our customers. We
believe our information system provides our sales personnel with a competitive
advantage in customer interactions by providing them with current
3
<PAGE> 5
information regarding product pricing and availability and manufacturers'
promotional programs.
We have grown significantly over the past five years as a result of the
expansion of our product line, customer base, supplier relationships and
management, as well as overall industry growth. From fiscal 1995 through the
twelve months ended July 31, 1999, our annual net sales grew from $169.0 million
to $959.4 million, representing a compound annual growth rate of 59%. Our income
from operations grew over this period from $3.8 million to $54.3 million,
representing a compound annual growth rate of 103%.
INDUSTRY OVERVIEW
The United States pharmaceutical industry sales grew at a 9% compound
annual growth rate between 1990 and 1997. This growth has been the result of
several factors, including:
- Aging population
- Introduction of new pharmaceuticals
- Cost containment efforts that stress drug therapies
- Pharmaceutical price increases by drug manufacturers.
Coinciding with this growth, the number of individuals who are having their
pharmaceutical products paid for through third-party payors has increased. As a
result, the principal participants in the pharmaceutical distribution
chain -- pharmaceutical manufacturers, wholesalers and retailers -- have
experienced increasing pressure upon their profitability. This pressure has led
these participants to search for additional means of increasing their profits,
including completing product sales and purchases with alternative partners.
STRATEGY
We believe that we play a unique role in the pharmaceutical distribution
chain in that our customers include both distributors and retailers. Our goal is
to enhance our market position and to continue to grow our business by pursuing
a strategy with the following core elements:
- Continue to be a valuable resource to our customers and suppliers
- Focus on providing selective lines of products
- Increase our product offerings
- Broaden our customer base and expand into other health-related
distribution businesses
- Expand our internet and telemarketing marketing sales activities.
4
<PAGE> 6
HISTORY AND REORGANIZATION
From 1987 until shortly before the offering, we were a division of Quality
King Distributors, Inc. Quality King is a promotional wholesale distributor
which previously had four separate divisions: hair care products; groceries;
health and beauty care products; and pharmaceuticals and medical supplies. Prior
to the offering, Quality King reorganized its businesses. The reorganization
included transferring the pharmaceutical business to us and distributing our
stock to the stockholders of Quality King. As a result of the reorganization, we
now conduct the pharmaceutical business independently from Quality King with our
own employees. However, Quality King continues to provide computer and warehouse
space, and warehouse management and consulting services to us.
In connection with its reorganization, Quality King, an S corporation,
allocated $109 million of its shareholders' undistributed earnings to us. Prior
to this offering, we paid a distribution in that amount to our controlling
stockholders in the form of promissory notes. We intend to use a portion of the
proceeds of this offering to pay $95 million of these notes.
Our offices are located at 2060 Ninth Avenue, Ronkonkoma, New York 11779.
Our phone number is (631) 439-2000.
THE OFFERING
Common stock offered............ 15,000,000 shares
Common stock outstanding after
the offering.................... 32,000,000 shares
Use of proceeds................. We intend to use the net proceeds from this
offering to reduce our short-term borrowings
and to pay $95 million of the notes issued
to our controlling stockholders in
connection with the S corporation
distribution made to them prior to this
offering. See "Use of Proceeds."
Proposed New York Stock Exchange
Symbol........................ "KRX"
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of , 1999 and
excludes:
- 3,010,000 shares underlying options outstanding at the closing of this
offering at an exercise price $5.00 less than the initial offering price
of the shares in this offering
- 564,000 shares underlying options outstanding at the closing of this
offering at an exercise price equal to the initial offering price of the
shares in this offering
- 726,000 shares available for future grant under our option plan
- 2,250,000 shares subject to the underwriters' option to purchase
additional shares in the offering.
5
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table summarizes selected historical and pro forma financial
data for each of the four years in the period ended October 31, 1998 and for the
nine months ended July 31, 1998 and 1999. We prepared the summary historical
financial data from the historical accounting records of Quality King. Although
we were a significant division of Quality King, separate financial statements
were not prepared in prior periods. In connection with the preparation of our
financial statements, as described in Note 1(a) of the Notes to the Financial
Statements, we identified and carved-out of the books and records of Quality
King all balance sheet and income statement accounts that were directly
traceable to our pharmaceutical business. Those accounts included accounts
receivable, inventories, advances to suppliers for future purchases, prepaid
expenses and other current assets, accounts payable, accrued expenses and other
current liabilities, net sales, cost of sales and operating expenses. Management
also identified other operating expenses that were not directly traceable to any
specific division of Quality King. We allocated a portion of these expenses
based on assumptions and methods that we consider reasonable and appropriate.
The procedures employed utilized various allocation bases including number of
transactions processed, estimated delivery miles and warehouse square footage.
In 1999, we changed our fiscal year-end from October 31 to July 31. Prior
to July 31, 1999, we valued our inventories using the last-in, first-out
("LIFO") method. We have restated the financial data presented for all periods
to report the results of operations as if inventories were valued using the
first-in, first-out ("FIFO") method.
You should read the summary historical and pro forma financial data in
conjunction with the "Selected Historical Financial Data," "Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and our financial statements and their related notes
appearing elsewhere in this prospectus.
6
<PAGE> 8
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
TWELVE MONTHS ENDED OCTOBER 31, JULY 31,
----------------------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
----------- ----------- -------- -------- ----------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales, net....................................... $168,983 $328,307 $552,488 $772,359 $568,062 $755,088
-------- -------- -------- -------- -------- --------
Gross profit..................................... 6,953 16,767 35,987 45,392 30,394 53,577
-------- -------- -------- -------- -------- --------
Operating expenses:
Warehouse and delivery......................... 945 1,832 3,039 4,069 2,976 4,162
Selling, general and administrative............ 2,208 10,376(1) 6,762 7,187 5,849 7,718
-------- -------- -------- -------- -------- --------
Total operating expenses..................... 3,153 12,208 9,801 11,256 8,825 11,880
-------- -------- -------- -------- -------- --------
Income from operations........................... 3,800 4,559 26,186 34,136 21,569 41,697
Interest expense -- related party(2)............. 3,937 7,649 12,984 17,370 12,451 15,300
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes................ (137) (3,090) 13,202 16,766 9,118 26,397
Income taxes (benefit)(3)........................ (2) (53) 224 285 155 449
-------- -------- -------- -------- -------- --------
Net income (loss)................................ $ (135) $ (3,037) $ 12,978 $ 16,481 $ 8,963 $ 25,948
======== ======== ======== ======== ======== ========
Pro forma for change in tax status:
Historical income (loss) before income taxes... $ (137) $ (3,090) $ 13,202 $ 16,766 $ 9,118 $ 26,397
Pro forma income taxes
(benefit)(4)................................. (15) (1,194) 5,312 6,736 3,672 10,573
-------- -------- -------- -------- -------- --------
Pro forma net income (loss).................... $ (122) $ (1,896) $ 7,890 $ 10,030 $ 5,446 $ 15,824
======== ======== ======== ======== ======== ========
Pro forma basic earnings (loss)
per share...................................... $ (.01) $ (.11) $ .46 $ .59 $ .32 $ .93
======== ======== ======== ======== ======== ========
Weighted average number of shares
outstanding.................................... 17,000 17,000 17,000 17,000 17,000 17,000
======== ======== ======== ======== ======== ========
Pro forma for the reorganization and the
offering(5):
Pro forma net income........................... $ 15,457 $ 19,584
======== ========
Pro forma basic earnings per share............. $ .48 $ .61
======== ========
Pro forma weighted average number of shares
outstanding.................................. 32,000 32,000
======== ========
Pro forma diluted earnings per share........... $ .47 $ .59
======== ========
Pro forma weighted average diluted shares
outstanding.................................. 33,003 33,003
======== ========
OTHER DATA(6):
Gross margin..................................... 4.1% 5.1% 6.5% 5.9% 5.4% 7.1%
Income from operations margin.................... 2.2% 1.4% 4.7% 4.4% 3.8% 5.5%
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1999
----------------------------
PRO FORMA,
HISTORICAL AS ADJUSTED(7)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets................................................ $337,985 $344,005
Advances from Quality King -- related party................. $276,454 $ 0
Total debt.................................................. $276,454 $161,454
Stockholders' equity........................................ $ 17 $121,037
</TABLE>
(See footnotes on next page)
7
<PAGE> 9
- -------------------------
(1) Includes a $6,000 write-off of accounts receivable from FoxMeyer Corporation
when it filed for Chapter 11 protection under the bankruptcy code.
(2) As described in Note 9 of the Notes to the Financial Statements, we computed
interest expense based on the average monthly balances of inventories,
accounts receivable and advances to suppliers less accounts payable.
Interest expense is based on the effective rates paid by Quality King under
its bank loan agreement for the respective periods.
(3) Represents state and local taxes as an S corporation.
(4) Reflects the pro forma provision for income taxes, primarily current, that
would have been reported had we operated as a stand-alone entity and filed
federal and state income tax returns for our operations as a C corporation.
We assumed a pro forma income tax benefit in 1995 and 1996 based on future
operating income projections.
(5) Adjusted to give effect to the interest savings from the application of
$115,000 of the net proceeds from the offering to reduce the short-term
borrowings assumed from Quality King as if these transactions had occurred
as of November 1, 1997. We calculated the reduction using Quality King's
effective interest rate.
(6) Gross margin equals gross profit as a percentage of net sales. Income from
operations margin equals income from operations as a percentage of net
sales.
(7) Gives effect to the following transactions:
- the declaration of the $109,000 dividend to our controlling stockholders
paid by delivery of promissory notes
- the capital contribution of $14,000 by Quality King
- the assumption of a portion of Quality King's short-term borrowings
- the offering and the application of its net proceeds to pay $95,000 of
the notes to the controlling stockholders and to reduce the short-term
borrowings assumed from Quality King
8
<PAGE> 10
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before buying shares of
our common stock.
BECAUSE WE WILL PAY A SIGNIFICANT PORTION OF THE PROCEEDS OF THE OFFERING TO OUR
CONTROLLING STOCKHOLDERS, LESS OF THE PROCEEDS WILL BE AVAILABLE FOR USE IN OUR
BUSINESS
In connection with its reorganization, Quality King, an S corporation,
allocated $109 million of its shareholders' undistributed earnings to us. Prior
to the offering we paid a distribution in that amount to our controlling
stockholders in the form of promissory notes. We intend to use a portion of the
proceeds of this offering to pay $95 million of these notes. As a result, $95
million of the $210 million net proceeds of the offering will not be available
to meet the working capital or growth needs of our business. If such proceeds
were available, we could use them to further reduce our debt levels and/or to
finance our inventories and receivables. Because these proceeds will not be
available for use in our business, our debt to assets ratio will be higher,
which will result in higher financing costs. These higher costs will reduce our
earnings and may produce greater earnings volatility in the future.
COMPETITION IN THE WHOLESALE PHARMACEUTICAL DISTRIBUTION MARKET COULD ADVERSELY
AFFECT OUR OPERATING RESULTS
The wholesale pharmaceutical distribution business is very competitive. We
compete on the basis of price, product availability and delivery speed with
other wholesale distributors and manufacturers who sell directly to retailers.
The wholesale pharmaceutical distribution business is dominated by five major
distributors whose aggregate annual sales exceeded $69 billion in 1998. These
major distributors, as well as many of our competitors, have greater financial
and marketing resources than we do. To the extent competitors seek to gain or
retain market share by reducing prices, changing credit terms or increasing
marketing expenditures, our sales and margins could decline, which could
seriously harm our operating results and cause the price of our stock to
decline. In addition, the development of alternative distribution channels, such
as internet-based electronic commerce, could lead manufacturers to bypass us,
which could cause our sales and margins to decline.
IF WE LOSE THE PRINCIPAL MEMBERS OF OUR MANAGEMENT, OUR RELATIONSHIPS WITH OUR
CUSTOMERS AND SUPPLIERS COULD BE HARMED
Our success depends upon the retention of the principal members of our
management team, particularly Glenn Nussdorf, our Chairman and Chief Executive
Officer, and Michael Sosnowik, our President. We believe that their
relationships with our suppliers and customers are critical to our success. The
loss of the services of Mr. Nussdorf, Mr. Sosnowik or other key members of our
management team could cause our sales and margins to decline, which could
seriously harm our operating results and cause the price of our stock to
decline. Except for Mr. Sosnowik, who has an employment agreement which expires
in 2003, we do not have employment agreements with any of our executive
officers. We also do not have life insurance policies on the lives of any
members of our management team.
9
<PAGE> 11
IF WE ARE NOT ABLE TO BORROW FUNDS UNDER OUR BANK LOAN AGREEMENT, WE MAY HAVE TO
CURTAIL OUR OPERATIONS
Our principal capital requirements are to fund our inventory and other
working capital needs to support our growth. We have had negative cash flow from
operations of $10.3 million, $75.9 million and $8.3 million for the years ended
October 31, 1997 and 1998 and the nine months ended July 31, 1999, respectively.
We expect our cash flow from operations to continue to be negative for the
foreseeable future. As a result, we are dependent on our bank loan agreement for
cash to fund our operations. Under the bank loan agreement, we are able to
borrow up to $350 million, depending primarily on our inventory and receivables
levels. As of July 31, 1999, after giving effect to this offering, the
application of its net proceeds and other related transactions, we would have
had approximately $147.5 million outstanding and approximately $86.0 million of
additional funds available to us under our bank loan agreement. Borrowings under
our bank loan agreement are subject to the satisfaction of various conditions,
including the absence of a material adverse change in our business. When our
bank loan agreement expires in 2005, we will need to refinance our bank loan
agreement and/or raise additional funds. If we are unable to borrow sufficient
amounts under the bank loan agreement or to refinance it, we may be required to
significantly curtail our operations.
OUR BANK LOAN AGREEMENT IMPOSES VARIOUS RESTRICTIONS WHICH AFFECT OUR OPERATIONS
AND LIMIT OUR ABILITY TO PAY DIVIDENDS
Our bank loan agreement contains numerous financial and operating covenants
that limit our discretion with respect to business matters. These covenants
place significant restrictions on, among other things, our ability to incur
additional indebtedness, to pay dividends and other distributions, to repay
other obligations, to create liens or other encumbrances, to make investments,
to engage in transactions with affiliates, to sell or otherwise dispose of
assets and to merge or consolidate with other entities, and will otherwise
restrict our corporate activities.
Our bank loan agreement also requires us to meet various financial ratios
and tests. We may not be able to comply with these and other provisions due to
changes in economic or business conditions or other events beyond our control.
Our failure to comply with any of these ratios and tests could result in
acceleration of the maturity of the indebtedness under our bank loan agreement
as well as the maturity of other outstanding debt. If the maturity of our
indebtedness were accelerated, we might not have sufficient assets to repay in
full such indebtedness. To secure our obligations under the bank loan agreement,
we granted a first priority pledge of and security interest in substantially all
of our assets to the lenders.
WE ARE HIGHLY LEVERAGED AND DEBT AND INTEREST EXPENSE WILL AFFECT OUR EARNINGS
AND MAY ADVERSELY AFFECT OUR OPERATIONS
We have a significant amount of indebtedness. Our total debt was
approximately $161.5 million and stockholders' equity was approximately $121.0
million at July 31, 1999 after giving effect to this offering, the application
of its net proceeds and other related transactions. We may incur significant
additional indebtedness under our bank loan
10
<PAGE> 12
agreement. Our indebtedness could negatively affect our operations in a number
of ways, including:
- We may be unable to obtain additional financing when needed for our
operations or when desired for acquisitions or expansions
- We must dedicate a large part of our cash flow to interest payments on
our debt, which reduces our funds available for other corporate purposes
- The interest rate of our debt is based on market interest rates and is
not hedged so a rise in market interest rates will increase our interest
expense
- The level of our debt could limit our flexibility in responding to
downturns in the economy or in our business.
LOSS OF ONE OR MORE OF OUR LARGEST CUSTOMERS COULD HURT OUR BUSINESS BY REDUCING
OUR REVENUES AND EARNINGS
During the nine months ended July 31, 1999, our largest 20 customers
accounted for approximately 83% of our net sales and one customer, McKessonHBOC
Corporation, accounted for approximately 24% of our net sales. As is customary
in our industry, we generally do not have long-term contracts with our
customers. Significant declines in the level of purchases by one or more of
these customers or the loss of one or more of these customers through industry
consolidation could cause our sales to decline, which could seriously harm our
operating results and cause the price of our stock to decline. An adverse change
in the financial condition or bankruptcy of any of these customers, including an
adverse change as a result of a change in governmental or private reimbursement
programs, could result in significant declines in their levels of purchases or
the loss of any of these customers, as well as lower margins and difficulty
collecting our accounts receivable.
IF OUR MANAGEMENT INFORMATION SYSTEM FAILS TO PRODUCE ACCURATE AND TIMELY
INFORMATION, OUR OPERATIONS COULD BE ADVERSELY AFFECTED
Our success depends, in part, on the accuracy and proper utilization of our
management information system, as well as those of our vendors and customers.
Our management and employees rely heavily on our system to assist them in
procurement, sales and other operating decisions. In addition, our customers
rely on our system to submit electronic orders. Our management information
system gives us the ability to manage our inventories and accounts receivable
collections, to sell and ship on an efficient and timely basis and to maintain
our operation as inexpensively as possible. If our system is not sufficient to
sustain our present operations and our anticipated growth for the foreseeable
future, our purchasing and sales operations could be disrupted, which could
seriously harm our operating results and cause the price of our stock to
decline. In order to ensure the sufficiency of our system, we may need to invest
in software enhancements and expanded capabilities, as well as in additional
computer hardware.
FAILURE TO MANAGE OUR GROWTH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS
We have recently experienced a period of rapid growth and it is our
objective to continue that growth. This growth has placed, and will continue to
place, strains on our management, operations and systems. As a result, we have
had to hire additional sales,
11
<PAGE> 13
purchasing, administrative and warehouse personnel, expand our warehouse
capacity and expand and upgrade our management information system to handle
significant increases in the volume of our sales and purchases. In order to
manage our growth, we must continue to improve our operating and administrative
systems and to attract, hire and train qualified management and operating
personnel. In today's competitive labor market, finding and hiring qualified
management and operating personnel is increasingly difficult. If we do not
effectively manage our growth, our sales and margins could decline which could
seriously harm our operating results and cause a decline of our stock price.
RECENT OPTION GRANTS WILL NEGATIVELY IMPACT FUTURE EARNINGS
Upon consummation of this offering, options to purchase up to 3,010,000
shares of our common stock will be granted to members of senior management for
past services. These options will have an exercise price $5.00 below the initial
offering price of our common stock being sold in this offering. As a result, we
will be required to take a $9.03 million net charge against our earnings in the
first quarter following this offering.
OUR RELATIONSHIP WITH QUALITY KING POSES RISKS
Three of our directors, including our Chairman of the Board, are executive
officers and/or directors of Quality King. These directors and related entities
are the controlling stockholders of both our company and Quality King. We
currently have, and will continue to have, a variety of contractual
relationships with Quality King, including an agreement by which we and Quality
King will hold harmless each other from various obligations and contingent
liabilities and a non-competition agreement. We also purchase computer and
warehouse management and consulting services from Quality King. Quality King's
interests under these contracts may be adverse to our interests and we cannot be
certain that Quality King management will not use its position in a manner
adverse to us, either in the context of these contracts or otherwise. Also,
because three of our directors are directors and controlling stockholders of
Quality King, any Board decision involving Quality King or any transaction with
Quality King may result in a conflict of interest for these directors.
Our Chairman of the Board intends to allocate his business time between
Quality King and us. In addition, another of our executive officers is expected
to provide sales services to Quality King in exchange for a commission-based fee
to be paid to us. As a result, these officers will not be available to us on a
full-time basis and they may have duties to Quality King that may interfere with
their duties to us.
As discussed above, our purchasing and sales operations are dependent on
our management information system. Under a support services agreement, Quality
King provides us with computer and warehouse management and consulting services.
Quality King's inability to provide these services for any reason could
interfere with our ability to use our management information system which could
disrupt our purchasing and sales operations. Such a disruption could seriously
harm our operating results and cause the price of our stock to decline.
IF OUR THIRD-PARTY SHIPPERS BECOME UNAVAILABLE, DELIVERY OF OUR PRODUCTS WOULD
BE DISRUPTED
Most of our sales are delivered to customers using third-party shippers,
primarily UPS. In the event these third-party shippers were to become
unavailable for any reason,
12
<PAGE> 14
such as a labor strike or natural disaster, we could experience shipping delays.
Shipping delays could result in the loss or delay of sales to our customers
which could hurt our operating results and cause a decline of our stock price.
IF WE ARE UNABLE TO EFFECTIVELY ADAPT TO CHANGES IN THE HEALTHCARE INDUSTRY, OUR
SALES AND MARGINS COULD DECLINE
In recent years, the healthcare industry has experienced significant change
driven by efforts to reduce costs and improve standards of care. These efforts
include potential national healthcare reform, trends toward managed care,
purchasing groups and pharmacy benefit managers, cuts in Medicare and horizontal
and vertical consolidation within the healthcare industry. These changes could
result in fewer attractive buying opportunities, price reductions, reduced
margins and loss of customers. If we or our customers or suppliers are unable to
react effectively to these and other changes in the healthcare industry, we
could experience a loss of customers, difficulty in collecting our accounts
receivable and decreases in sales and margins which could harm our operating
results and cause a decline of our stock price.
OUR CONTROLLING STOCKHOLDERS CAN EXERCISE SIGNIFICANT CONTROL OVER ALL MATTERS
REQUIRING STOCKHOLDER APPROVAL
After this offering, Glenn, Stephen and Arlene Nussdorf will beneficially
own in the aggregate approximately 53% of our issued and outstanding common
stock. As a result, they will control our affairs, including the election of
directors, appointment of our management and approval of any actions requiring
the approval of our stockholders, including the adoption of amendments to our
certificate of incorporation and the approval of mergers.
FAILURE TO COMPLY WITH THE EXTENSIVE GOVERNMENT REGULATIONS APPLICABLE TO OUR
BUSINESS COULD RESULT IN PENALTIES
The wholesale drug distribution industry is subject to regulation by
federal, state and local governmental agencies. The distribution of prescription
pharmaceuticals and controlled substances requires licenses and permits as well
as the implementation of an oversight and compliance program mandated by the
Prescription Drug Marketing Act of 1987. In general, regulations pertain to the
purchase, safe storage and distribution of pharmaceuticals and controlled
substances that are monitored through periodic site inspections conducted by the
Food and Drug Administration and the Drug Enforcement Agency. Failure to comply
with these requirements and regulations or to respond to changes in these
requirements and regulations could result in penalties on us such as fines,
restrictions on operations or a temporary or permanent closure of our facility.
These penalties could harm our operating results and cause a decline of our
stock price.
OUR FAILURE AND THE FAILURE OF OUR SUPPLIERS AND CUSTOMERS TO BE YEAR 2000
COMPLIANT COULD HARM OUR BUSINESS
The year 2000 computer issue creates risks for us, as is true for most
companies. If our systems do not correctly recognize date information when the
year changes to 2000, there could be an adverse impact on our operations.
13
<PAGE> 15
Our internal year 2000 compliance review focused on reviewing our internal
computer information and security systems for year 2000 compliance, and
developing and implementing remediation programs to resolve year 2000 issues in
a timely manner. To date, our aggregate year 2000 expenditures have been
primarily driven by the cost of conducting the year 2000 compliance review. The
cost of our year 2000 preparation was not material to our results of operations.
We contacted most of our third party suppliers and customers and requested
their written assurances that their systems are year 2000 compliant. Some of our
suppliers and customers have informed us that they will not fully complete their
year 2000 compliance programs and testing until late in 1999. As a result, we
will be unable to fully evaluate their readiness and its impact on our business
with them until after December 31, 1999. Our contingency plan includes having
our data processing personnel on 24-hour call for an indefinite period after
December 31, 1999 to deal with any problems that may arise.
Any failure by our suppliers to correct their year 2000 problems could
result in an interruption in, or a failure of, our normal business activities
or operations. These interruptions and failures could damage our relationships
with our customers and may result in reduced or delayed purchases and declines
in margins, which could hurt our operating results and cause a decline of our
stock price.
Our customers' purchasing plans could be affected if they fail to correct
their year 2000 problems or if they need to expend significant resources to fix
their existing systems. This may result in reduced or delayed payments or
purchases, which could reduce our net sales, which could hurt our operating
results and cause a decline of our stock price.
A DISRUPTION IN OUR COMPUTER SYSTEM OR OUR TELEPHONE SYSTEM COULD INTERFERE WITH
OUR OPERATIONS AND HURT OUR RELATIONS WITH OUR CUSTOMERS
We provide our customers with products at attractive prices that supplement
the products they obtain from their other suppliers. A significant portion of
our sales is dependent upon our ability to transmit product offerings, reserve
orders and transmit sales confirmations and invoices electronically utilizing
our management information and telephone systems. Any continuing disruption in
either our computer system or our telephone system affecting our ability to
receive and process customer orders and ship products on a timely basis could
adversely affect our relations with our customers. This could result in
customers increasing their dependency on their primary suppliers, leading to
reductions in our orders from customers or loss of customers. The resulting
declines in sales could hurt our operating results and cause a decline of our
stock price.
A LARGE NUMBER OF OUR SHARES ARE OR WILL BE ELIGIBLE FOR FUTURE SALE WHICH COULD
DEPRESS OUR STOCK PRICE
Sales of substantial amounts of common stock, or the perception that a
large number of shares will be sold, could depress the market price of our
common stock. After this offering, our controlling stockholders will own
beneficially approximately 53% of the outstanding shares of our common stock
(50% if the underwriters' option to purchase additional shares in the offering
is exercised in full). After expiration of a 360-day "lock-up" period to which
all of our controlling stockholders, directors and executive officers are
subject, these holders will in general be entitled to dispose of their shares,
although the shares of common stock held by our affiliates will continue to be
subject to the volume and other restrictions of Rule 144 under the Securities
Act. However, Lehman Brothers
14
<PAGE> 16
Inc. may, in its sole discretion and at any time without notice, release all or
any portion of the securities subject to the lock-up.
After the offering, the holders of approximately 20,574,000 shares of our
common stock (including shares issuable upon the exercise of outstanding
options) will have rights, subject to some conditions, to require us to file
registration statements covering their shares or to include their shares in
registration statements that we may file for ourselves or other stockholders. By
exercising their registration rights and selling a large number of shares, these
holders could cause the price of our common stock to decline.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION OF THE BOOK VALUE OF YOUR
INVESTMENT IN OUR COMMON STOCK
The initial public offering price of our common stock is substantially more
than the book value per share of our common stock, after giving effect to the
reorganization and other related transactions. As a result, purchasers of the
common stock pursuant to this offering will experience immediate and substantial
dilution of $11.41 per share in such net tangible book value per share of common
stock from the assumed initial public offering price of $15.00 per share. The
exercise of outstanding options with an exercise price less than the initial
public offering price of this offering will result in further dilution to you.
See "Dilution."
OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED AND ITS PRICE MAY BE VOLATILE
Prior to this offering, there has not been a public market for our common
stock. We cannot predict the extent to which investor interest in us will lead
to the development of a liquid trading market. The initial public offering price
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. The market price of our common stock could be subject to wide
fluctuations as a result of many factors, including those listed in this "Risk
Factors" section of the prospectus.
In recent years, the stock market has experienced significant price and
volume fluctuations that are often unrelated to the operating performance of
specific companies. Our market price may fluctuate based on a number of factors,
including:
- our operating performance and the performance of other similar companies
- news announcements relating to us, our industry or our competitors
- changes in earnings estimates or recommendations by research analysts
- changes in general economic conditions
- loss of significant customers or suppliers
- the number of shares to be publicly traded after the offering
- actions of our controlling stockholders
- other developments affecting us, our industry, or our competitors.
15
<PAGE> 17
OUR CERTIFICATE OF INCORPORATION, BY-LAWS AND BANK LOAN AGREEMENT COULD
DISCOURAGE OR PREVENT A POTENTIAL ACQUISITION OF OUR COMPANY THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE
Our certificate of incorporation, by-laws, bank loan agreement and Delaware
law contain provisions that may discourage, delay or prevent a merger or
acquisition of our company that stockholders may consider favorable. This may
reduce the market price of our common stock.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS AND ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM ANTICIPATED FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believes," "continues," "could," "estimates," "expects,"
"intends," "may," "plans," "seeks," "should" or "will" or the negative of these
terms or similar expressions are generally intended to identify forward-looking
statements. These statements are only predictions. Although we believe that the
expectations reflected in the forward-looking statements are reasonable,
forward-looking statements involve risks and uncertainties. There are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including the risks
outlined in this "Risk Factors" section and elsewhere in this prospectus.
16
<PAGE> 18
USE OF PROCEEDS
Our net proceeds from this offering (based on an assumed initial public
offering price of $15.00) are estimated to be approximately $210 million ($241.7
million if the underwriters' option to purchase additional shares in the
offering is exercised in full), after deducting estimated underwriting discounts
and commissions and other offering expenses payable by us. We intend to use the
net proceeds from this offering as follows:
- $95 million to pay a portion of the notes issued to our controlling
stockholders in connection with the S corporation distribution made to
them prior to this offering
- The balance to reduce our short-term borrowings.
The notes bear interest at the London inter-bank offer rate, or LIBOR, plus
1 1/2%. Principal and interest are payable quarterly over seven years. The notes
require a mandatory prepayment of $95 million upon consummation of this
offering. For more information relating to the S corporation distribution, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- History and Reorganization" and Note 12(a) of the Notes to the
Financial Statements.
We assumed a portion of Quality King's short-term borrowings under its bank
loan agreement in an amount equal to the advances to us from Quality King. We
will repay approximately $115 million of such short-term borrowings with a
portion of the net proceeds of this offering and the balance will be refinanced
concurrently with the offering with borrowings under our new bank loan
agreement. The short-term borrowings assumed from Quality King bear interest at
either LIBOR plus 1 3/8% or the prime rate (approximately 6.7% as of July 31,
1999), which is the rate under Quality King's bank loan agreement. Amounts
outstanding under Quality King's bank loan agreement are due June 30, 2001.
We will determine the amount of our short-term borrowings at the closing of
this offering based on the difference between our total assets and liabilities.
Because our total assets and liabilities vary, the amount of our short-term
borrowings will vary. We currently estimate that the amount of our short-term
borrowings immediately after the closing of this offering will be approximately
$147.5 million.
DIVIDEND POLICY
We expect to use $95 million of the net proceeds from this offering to pay
a portion of the notes issued to our controlling stockholders in connection with
the $109 million dividend which was declared to distribute the portion of
Quality King's undistributed S corporation earnings that were allocated to us.
Other than the $109 million dividend to our controlling stockholders, we have
not made any dividends in the past and do not expect to make cash dividends or
distributions in the future. Any future determination to pay cash dividends will
be at the discretion of our board of directors and will depend upon our
financial condition, results of operations, capital requirements and such other
factors as the board of directors deems relevant. In addition, our ability to
declare and pay dividends on our common stock is restricted by covenants in our
bank loan agreement.
17
<PAGE> 19
CAPITALIZATION
The following table shows our short-term debt and capitalization (i) as of
July 31, 1999, and (ii) as adjusted to give effect to:
- the declaration of a $109 million dividend to our controlling
stockholders paid by delivery of promissory notes
- the capital contribution of $14 million by Quality King
- the assumption of a portion of Quality King's short-term borrowings
- the offering and the application of its net proceeds to pay $95 million
of the notes to the controlling stockholders and to reduce the short-term
borrowings assumed from Quality King
You should read this table in conjunction with the financial statements and
related notes, "Pro Forma Financial Information" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
JULY 31, 1999
-----------------------
PRO FORMA,
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Advances from Quality King............................... $276,454 $ --
Short-term borrowings(1)................................. -- 147,454
Notes payable to stockholders(2)......................... -- 14,000
Stockholders' equity(3).................................. 17 121,037
-------- --------
Total capitalization................................... $276,471 $282,491
======== ========
</TABLE>
- -------------------------
(1) Short-term borrowings consist of borrowings under our bank loan agreement.
The bank loan agreement provides for up to $350 million in revolving loans
or a lesser limit based on our aggregate accounts receivable and
inventories. The bank loan agreement will expire five years after the
consummation of this offering. Interest payable on amounts outstanding under
the bank loan agreement are expected to be based on a LIBOR or other base
rate plus a margin depending on our financial leverage. Our ability to
borrow under the bank loan agreement is subject to various conditions,
including compliance with financial covenants.
We will determine the amount of our short-term borrowings at the closing of
this offering based on the difference between our total assets and
liabilities. Because our total assets and liabilities vary, the amount of
our short-term borrowings will vary. We currently estimate that the amount
of our short-term borrowings immediately after the closing of this offering
will be approximately $147.5 million.
(2) Consists of promissory notes issued to our controlling stockholders in
connection with the S corporation distribution made prior to this offering.
The notes bear interest at LIBOR plus 1 1/2% payable quarterly over seven
years.
(3) The amount in the Pro forma, as adjusted column excludes 2,250,000 shares
subject to an option granted to the underwriters to purchase additional
shares in the offering.
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<PAGE> 20
DILUTION
The net tangible book value per share of our common stock is the difference
between our tangible assets and our liabilities, divided by the number of shares
of common stock outstanding. For investors in the common stock, dilution is the
per share difference between the assumed $15.00 per share initial offering price
of the common stock in this offering and the net tangible book value of common
stock immediately after completing the offering. Dilution in this case results
from the fact that the per share offering price of the common stock its
substantially in excess of the book value per share attributable to the existing
stockholders for the presently outstanding stock.
On July 31, 1999, our pro forma net tangible book value, which reflects the
reorganization and the related transactions discussed in "Pro Forma Financial
Information" other than this offering, was approximately $(94,983,000) and the
pro forma per share net tangible book value based on 17,000,000 shares of common
stock outstanding was approximately $(5.59) per share.
As of July 31, 1999, without taking into account any changes in our net
tangible book value subsequent to that date other than to give effect to the
sale of the common stock in this offering at the assumed offering price of
$15.00, less the estimated offering expenses, including underwriting discounts
and commissions, the pro forma net tangible book value of each of the
outstanding shares of common stock would have been $3.59 per share after the
offering. Therefore, investors in the common stock would have paid $15.00 for a
share of common stock having a net tangible book value of approximately $3.59
per share after the offering. That is, their investment would have been diluted
by approximately $11.41 per share. At the same time, existing stockholders would
have realized an increase in net tangible book value of $9.18 per share after
the offering without further cost or risk to themselves. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of
common stock......................................... $15.00
Pro forma net tangible book value per share of common
stock before the offering.............................. $(5.59)
Increase in pro forma net tangible book value per share
of common stock attributable to investors in the
offering............................................. 9.18
------
Pro forma net tangible book value per share of common
stock after the offering(1)(2)....................... 3.59
------
Dilution per share to the new investors................ $11.41
======
</TABLE>
- -------------------------
(1) After deduction of the estimated offering expenses payable by us (including
the underwriting discounts and commissions).
(2) Does not give effect to the 2,250,000 shares subject to an option granted to
the underwriters to purchase additional shares in the offering.
The foregoing discussion and table do not give effect to 3,574,000 shares
of common stock issuable upon exercise of options granted to management as
discussed under "Management -- Stock Option Plan" or the 726,000 shares of
common stock reserved for issuance upon the exercise of options to be granted in
the future under our stock option plan.
19
<PAGE> 21
SELECTED HISTORICAL FINANCIAL DATA
We derived the following selected financial information with respect to our
financial position as of October 31, 1998 and our results of operations for the
years ended October 31, 1997 and 1998 from our audited financial statements that
appear elsewhere in this prospectus. We derived balance sheet data as of October
31, 1997 from audited financial statements that are not included in this
prospectus. We derived the following selected financial information with respect
to our financial position as of October 31, 1995 and 1996 and our results of
operations for the years ended October 31, 1995 and 1996 from our unaudited
financial statements that are not included in this prospectus. In 1999 we
changed our fiscal year from October 31 to July 31. We derived the selected
financial information with respect to our financial position as of July 31, 1999
and our results of operations for the nine months ended July 31, 1999 from our
audited financial statements that appear elsewhere in this prospectus. We
derived the selected financial information with respect to our results of
operations for the nine months ended July 31, 1998 from our unaudited financial
statements that appear elsewhere in this prospectus. We derived the selected
balance sheet data at July 31, 1998 from our unaudited financial statements that
have not been included in this prospectus.
Operating results for the nine months ended July 31, 1998 are not
necessarily indicative of the results for any other period. In the opinion of
management, the unaudited operating results for the nine months ended July 31,
1998 reflect all adjustments (consisting only of normal recurring accruals)
necessary to present fairly our results of operations.
We prepared the historical financial data from the historical accounting
records of Quality King. Although we were a significant division of Quality
King, separate financial statements were not prepared in prior periods. In
connection with the preparation of our financial statements, as described in
Note 1(a) of the Notes to the Financial Statements, we identified and carved-out
of the books and records of Quality King all balance sheet and income statement
accounts that were directly traceable to our pharmaceutical business. Those
accounts included accounts receivable, inventories, advances to suppliers for
future purchases, prepaid expenses and other current assets, accounts payable,
accrued expenses and other current liabilities, net sales, cost of sales and
operating expenses. Management also identified other operating expenses that
were not directly traceable to any specific division of Quality King. We
allocated a portion of these expenses based on assumptions and methods that we
consider reasonable and appropriate. The procedures employed utilized various
allocation bases including number of transactions processed, estimated delivery
miles and warehouse square footage.
Prior to July 31, 1999, we valued our inventories using the LIFO method. We
have restated the financial data presented for all periods to report the results
of operations as if inventories were valued using the FIFO method.
You should read the selected financial data presented below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and their related notes appearing
elsewhere in this prospectus.
20
<PAGE> 22
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
TWELVE MONTHS ENDED OCTOBER 31, JULY 31,
----------------------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
----------- ----------- -------- -------- ----------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales, net............................. $168,983 $328,307 $552,488 $772,359 $568,062 $755,088
-------- -------- -------- -------- -------- --------
Gross profit........................... 6,953 16,767 35,987 45,392 30,394 53,577
-------- -------- -------- -------- -------- --------
Operating expenses:
Warehouse and delivery............... 945 1,832 3,039 4,069 2,976 4,162
Selling, general and
administrative.................... 2,208 10,376(1) 6,762 7,187 5,849 7,718
-------- -------- -------- -------- -------- --------
Total operating expenses.......... 3,153 12,208 9,801 11,256 8,825 11,880
-------- -------- -------- -------- -------- --------
Income from operations................. 3,800 4,559 26,186 34,136 21,569 41,697
Interest expense-related party(2)...... 3,937 7,649 12,984 17,370 12,451 15,300
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes...... (137) (3,090) 13,202 16,766 9,118 26,397
Income taxes (benefit)(3).............. (2) (53) 224 285 155 449
-------- -------- -------- -------- -------- --------
Net income (loss)...................... $ (135) $ (3,037) $ 12,978 $ 16,481 $ 8,963 $ 25,948
======== ======== ======== ======== ======== ========
Pro forma for change in tax status:
Historical income (loss) before
income taxes...................... $ (137) $ (3,090) $ 13,202 $ 16,766 $ 9,118 $ 26,397
Pro forma income taxes
(benefit)(4)...................... (15) (1,194) 5,312 6,736 3,672 10,573
-------- -------- -------- -------- -------- --------
Pro forma net income (loss).......... $ (122) $ (1,896) $ 7,890 $ 10,030 $ 5,446 $ 15,824
======== ======== ======== ======== ======== ========
Pro forma basic earnings (loss) per
share............................. $ (.01) $ (.11) $ .46 $ .59 $ .32 $ .93
======== ======== ======== ======== ======== ========
Weighted average number of shares
outstanding....................... 17,000 17,000 17,000 17,000 17,000 17,000
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
----------------------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
----------- ----------- -------- -------- ----------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets......................... $67,033 $140,198 $170,922 $274,890 $262,138 $337,747
Total assets........................... $67,033 $140,198 $170,922 $274,890 $262,138 $337,985
Advances from Quality King -- related
party................................ $53,837 $126,217 $149,530 $241,916 $227,549 $276,454
Stockholders' equity................... $ 17 $ 17 $ 17 $ 17 $ 17 $ 17
</TABLE>
- -------------------------
(1) Includes a $6,000 write-off of accounts receivable from FoxMeyer Corporation
when it filed for Chapter 11 protection under the bankruptcy code.
(2) In connection with the preparation of our financial statements as described
in Notes 1(a) and 9 of the Notes to the Financial Statements, we computed
interest expense based on the average monthly balances of inventories,
accounts receivable and advances to suppliers less accounts payable. We
based interest expense on the effective rates paid by Quality King under its
bank loan agreement for the respective periods.
(3) Represents state and local taxes as an S corporation.
(4) Reflects the pro forma provision for income taxes, primarily current, that
would have been reported had we operated as a stand-alone entity and filed
federal and state income tax returns for our operations as a C corporation.
We assumed a pro forma income tax benefit in 1995 and 1996 based on future
operating income projections.
21
<PAGE> 23
PRO FORMA FINANCIAL INFORMATION
The pro forma information gives effect to the following transactions in
connection with the reorganization and this offering:
The Reorganization:
- the declaration of the $109 million dividend to our controlling
stockholders paid by delivery of promissory notes
- the capital contribution of $14 million by Quality King
- the assumption of a portion of Quality King's short-term borrowings
- the conversion from an S corporation to a C corporation for income tax
purposes
The Offering:
- this offering and the application of its net proceeds to pay $95 million
of the notes to our controlling stockholders and to reduce the short-term
borrowings assumed from Quality King
- the issuance to key management of options to purchase 3,010,000 shares of
common stock at $5.00 per share below market value.
The accompanying pro forma condensed balance sheet gives effect to these
transactions as if they had occurred at July 31, 1999. The accompanying pro
forma condensed statements of operations for the nine months ended July 31, 1999
and the year ended October 31, 1998 give effect to these transactions as if they
had occurred at November 1, 1997. See "Use of Proceeds."
The pro forma condensed statements of operations do not reflect the
non-recurring non-cash management compensation charge relating to the options
granted to key management for past services. We will record this charge in the
first quarter ending immediately after this offering.
Concurrently with the offering, we will refinance the balance of the
short-term borrowings assumed from Quality King with borrowings under our new
bank loan agreement.
This pro forma information does not purport to represent what our actual
results of operations would have been had the transactions occurred on the dates
indicated or for any future period or date. The pro forma adjustments give
effect to available information and assumptions that we believe are reasonable.
You should read this pro forma information in conjunction with our historical
financial statements and their notes, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus.
22
<PAGE> 24
QK HEALTHCARE, INC.
PRO FORMA CONDENSED BALANCE SHEET
JULY 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------- PRO FORMA,
HISTORICAL REORGANIZATION OFFERING AS ADJUSTED
---------- -------------- --------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current
Cash..................................... $ -- $ 210,000(1) $ --
(210,000)(2)
Other current............................ 337,747 337,747
-------- ---------
Total current.............................. 337,747 337,747
Deferred income taxes...................... -- 6,020(3) 6,020
Other non-current assets................... 238 238
-------- --------- --------- ---------
$337,985 $ -- $ 6,020 $ 344,005
======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Advances from Quality King -- related
party................................. $276,454 $ (14,000)(4) $ --
(262,454)(5)
Short-term borrowings.................... 262,454(5) (115,000)(2) 147,454
Notes payable to stockholders............ -- 97,000(6) (95,000)(2) 2,000
Other current liabilities................ 61,514 61,514
-------- --------- --------- ---------
Total current liabilities.................. 337,968 83,000 (210,000) 210,968
Long-term liabilities
Notes payable to stockholders............ -- 12,000(6) 12,000
-------- --------- --------- ---------
337,968 95,000 (210,000) 222,968
-------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock............................. 17 15(1) 32
Additional paid-in capital............... -- 14,000(4) 209,985(1) 239,035
15,050(3)
Retained earnings (deficit).............. --(7) (109,000)(6) (9,030)(3) (118,030)
-------- --------- --------- ---------
Total stockholders' equity................. 17 (95,000) 216,020 121,037
-------- --------- --------- ---------
$337,985 $ -- $ 6,020 $ 344,005
======== ========= ========= =========
</TABLE>
- -------------------------
(1) Reflects the estimated net proceeds from the sale of 15,000 shares of common
stock in this offering, aggregating $210,000, net of $15,000 of expenses,
including underwriting discounts and commissions.
(2) Reflects use of proceeds from this offering to pay $95,000 of the notes due
to our controlling stockholders for dividends and to reduce short-term
borrowings assumed from Quality King by $115,000.
(3) Reflects the issuance of options to purchase 3,010 shares of common stock at
an assumed price of $10.00 per share ($5 per share less than the assumed
initial offering price of the shares in this offering) to key management
personnel for past services which will result in an estimated special charge
of $15,050 ($9,030 after related tax effect) and an increase in additional
paid-in capital.
(4) Reflects a $14,000 one-time initial capital contribution by Quality King,
which was accomplished by forgiveness of a portion of the advances from
Quality King.
(5) Reflects the assumption of a portion of Quality King's short-term borrowings
in an amount equal to the advances from Quality King.
(6) Reflects the declaration of the $109,000 dividend payable to our controlling
stockholders. This amount represents a portion of the undistributed S
corporation earnings of Quality King. We calculated this amount based on the
provisions of the Internal Revenue Code which require an allocation of
undistributed earnings to be based on a ratio of the fair value of our
assets to the fair value of the assets of Quality King.
(7) Prior to the reorganization we operated as a division of Quality King.
Accordingly, we treated all accumulated net income as distributions to
Quality King.
23
<PAGE> 25
QK HEALTHCARE, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA,
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Sales, net.............................. $755,088 $755,088
-------- --------
Gross profit............................ 53,577 53,577
Operating expenses...................... 11,880 11,880
-------- --------
Income from operations.................. 41,697 41,697
Interest expense........................ 15,300 $(6,210)(1) 9,090
--(2)
-------- ------- --------
Income before income taxes.............. 26,397 6,210 32,607
Income taxes............................ 449 105(3) 554
-------- ------- --------
Net income.............................. $ 25,948 $ 6,105 $ 32,053
======== ======= ========
Pro forma:
Income before income taxes............ $ 26,397 $ 6,210 $ 32,607
Pro forma income taxes................ 10,573 2,450(4) 13,023
-------- ------- --------
Pro forma net income.................. $ 15,824 $ 3,760 $ 19,584
======== ======= ========
Pro forma basic earnings per share.... $ .93 $ .61
======== ========
Pro forma weighted average shares
outstanding........................ 17,000 32,000(5)
======== ========
Pro forma diluted earnings per
share.............................. $ .59
========
Pro forma weighted average diluted
shares outstanding................. 33,003(6)
========
</TABLE>
- -------------------------
(1) Reflects the interest savings from the use of $115,000 of the net proceeds
from this offering to reduce the advances from Quality King. In connection
with the reorganization, we will assume a portion of the Quality King
indebtedness representing such advances. Simultaneously with the closing of
this offering, we will refinance such indebtedness with borrowings under our
bank loan agreement. We calculated the interest expense reduction using
Quality King's effective interest rate of 7.2%. The interest rate under our
bank loan agreement is substantially the same as the rate under the Quality
King bank loan agreement.
(2) Reflects the net additional interest expense related to the notes payable to
our controlling stockholders reduced by the interest savings related to the
reduction of advances from Quality King. The interest rate used was the same
as under the Quality King bank loan agreement.
(3) Reflects the additional state income taxes attributed to the change in
interest expense.
(4) Reflects additional income taxes, primarily current, that would have been
reported had we operated as a stand-alone entity and filed federal and state
income tax returns for our operations as a C corporation.
(5) Reflects the sale of 15,000 shares of common stock.
(6) Reflects the dilutive effect (1,003 shares) of the issuance of stock options
to purchase 3,010 shares granted to key management personnel.
24
<PAGE> 26
QK HEALTHCARE, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA,
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Sales, net.............................. $772,359 $772,359
-------- --------
Gross profit............................ 45,392 45,392
Operating expenses...................... 11,256 11,256
-------- --------
Income from operations.................. 34,136 34,136
Interest expense........................ 17,370 (8,970)(1) 8,400
--(2)
-------- ------- --------
Income before provision for income
taxes................................. 16,766 8,970 25,736
Provision for income taxes.............. 285 153(3) 438
-------- ------- --------
Net income.............................. $ 16,481 $ 8,817 $ 25,298
======== ======= ========
Pro forma:
Income before income taxes............ $ 16,766 $ 8,970 $ 25,736
Pro forma income taxes................ 6,736 3,543(4) 10,279
-------- ------- --------
Pro forma net income.................. $ 10,030 $ 5,427 $ 15,457
======== ======= ========
Pro forma basic earnings per share.... $ .59 $ .48
======== ========
Pro forma weighted average shares
outstanding........................ 17,000 32,000(5)
======== ========
Pro forma diluted earnings per
share.............................. $ .47
========
Pro forma weighted average diluted
shares outstanding................. 33,003(6)
========
</TABLE>
- -------------------------
(1) Reflects the interest savings from the use of $115,000 of the net proceeds
from this offering to reduce the advances from Quality King. In connection
with the reorganization, we will assume a portion of the Quality King
indebtedness representing such advances. Simultaneously with the closing of
this offering we will refinance such indebtedness with borrowings under our
bank loan agreement. We calculated the interest expense reduction using
Quality King's effective interest rate of 7.8%. The interest rate of our
bank loan agreement is substantially the same as the rate under the Quality
King bank loan agreement.
(2) Reflects the net additional interest expense related to the notes payable to
our controlling stockholders reduced by the interest savings related to the
reduction of advances from Quality King. The interest rate used was the same
as under the Quality King bank loan agreement.
(3) Reflects the additional state income taxes attributed to the change in
interest expense.
(4) Reflects the additional income taxes, primarily current, that would have
been reported had we operated as a stand-alone entity and filed federal and
state income tax returns for our operations as a C corporation.
(5) Reflects the sale of 15,000 shares of common stock.
(6) Reflects the dilutive effect (1,003 shares) of the issuance of stock options
to purchase 3,010 shares granted to key management personnel.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a national wholesale distributor of selected healthcare products to
retailers, wholesale distributors and pharmacy benefit managers. Our products
currently include branded and generic pharmaceutical products and
medical/surgical products produced by a wide range of manufacturers.
We have grown significantly over the past five years primarily due to the
expansion of our product line, customer base, supplier relationships and
management, as well as by overall industry growth. From fiscal 1995 through the
twelve months ended July 31, 1999, our annual net sales grew from $169.0 million
to $959.4 million, representing a compound annual growth rate of 59%. Our income
from operations grew over this period from $3.8 million to $54.3 million,
representing a compound annual growth rate of 103%.
In 1999 we changed our fiscal year-end from October 31 to July 31.
HISTORY AND REORGANIZATION
In 1961 Bernard and Ruth Nussdorf formed Quality King Distributors, Inc.
Quality King was a promotional wholesale distributor with four separate
divisions: hair care products; groceries; health and beauty care products; and
pharmaceuticals. Quality King formed the pharmaceutical business in 1987. In
connection with the reorganization of Quality King, the pharmaceutical business
was transferred prior to the effective date of this offering to QK Healthcare,
Inc., a newly-formed S corporation, and its stock was distributed to the
stockholders of Quality King (the "Reorganization"). As a result of the
Reorganization, we now conduct the pharmaceutical business independently from
Quality King with our own employees. However, Quality King continues to provide
computer and warehouse management and consulting services to us pursuant to a
support services agreement and we will continue to sublease our facilities from
Quality King. See "Related Party Transactions -- Agreements with Quality King"
for a discussion of this agreement.
Since November 1, 1986, Quality King has been treated for federal income
tax purposes as an S corporation under Subchapter S of the Internal Revenue Code
of 1986, as amended (the "Code"). Since November 1, 1989, Quality King has been
treated for New York State income tax purposes as an S corporation under Section
660 of the Tax Law of the State of New York. As a result, Quality King was not
subject to federal or New York State income taxes for these years, except for
the limited franchise tax imposed by New York State on S corporations for
taxable years after 1989. Earnings of Quality King for these years were taxed,
for federal and New York State income tax purposes, on the individual tax
returns of its stockholders. In past years, Quality King made annual S
corporation distributions to provide its stockholders with funds to pay income
taxes on its earnings. These distributions aggregated $9.6 million, $9.0 million
and $10.2 million in the years ended October 31, 1996, 1997, and 1998,
respectively, and $12.8 million in the nine months ended July 31, 1999. Because
it did not distribute all of its earnings to its stockholders, Quality King
accumulated a significant amount of undistributed S corporation earnings.
In connection with the Reorganization, Quality King allocated $109 million
of its estimated undistributed S corporation earnings to QK Healthcare, Inc.,
which prior to the offering was also an S corporation. The provisions of the
Internal Revenue Code require an allocation of the undistributed earnings based
on the ratio of the fair value of our assets to
26
<PAGE> 28
the fair value of the assets of Quality King. This $109 million was based on (i)
approximately $75.6 million, representing all of the previously earned and
undistributed S corporation earnings allocated to us through October 31, 1998,
and (ii) an amount (estimated to be approximately $33.4 million) equal to the
undistributed S corporation earnings allocated to us for the period from
November 1, 1998 through the day preceding the closing date of the
reorganization. Prior to the offering, we declared a distribution (the
"Distribution") in the aggregate amount of $109 million. We paid the
Distribution by delivery of promissory notes to our existing stockholders in the
aggregate amount of the Distribution (the "Notes"). The Notes mature in 2006 and
require the mandatory prepayment of $95 million upon the closing of this
offering. The Notes bear interest at an annual rate of LIBOR plus 1 1/2%. We
will use a portion of the proceeds from this offering to pay $95 million of
these Notes. For more information relating to the Distribution, see Note 12(a)
of the Notes to the Financial Statements.
IMPACT OF THE REORGANIZATION AND OFFERING
Upon consummation of this offering, we will grant options to purchase up to
3.01 million shares to members of our senior management for past services. These
options will vest 100% upon grant and will have an exercise price $5.00 below
the initial public offering price of our stock being sold in this offering. As a
result, we will be required to record a net charge against earnings of $9.03
million.
Upon consummation of this offering, we will no longer be treated as an S
corporation. As a result, we will be subject to federal income tax and to the
ordinary rate of New York State income tax on corporations. Pro forma
adjustments are presented in the financial statements included in this
prospectus to reflect a provision for income taxes based on pro forma income
before taxes as if we had been a C corporation for all periods presented.
In connection with the Reorganization, we prepared our financial statements
by carving out of the historical books and records of Quality King all balance
sheet and income statement accounts that were directly traceable to our
pharmaceutical business. Quality King also allocated to us various operating
expenses that were not directly traceable to any specific division of Quality
King. See Note 8 of the Notes to the Financial Statements. In addition, in our
financial statements we calculated interest on advances from Quality King based
upon the average balances of inventories, accounts receivable and advances to
suppliers less accounts payable and on the effective rates paid by Quality King
under its bank loan agreement. See Note 9 of the Notes to the Financial
Statements. Upon consummation of this offering, we intend to enter into a bank
loan agreement with a group of lenders. We expect the interest rate under our
new bank loan agreement to be comparable to the interest rate under the Quality
King bank loan agreement.
Following the Reorganization and this offering, we will no longer be a
division of Quality King. We will operate on a stand-alone basis. The financial
information included in this prospectus is not necessarily indicative of our
future results of operations, financial position and cash flows.
27
<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
----------------------------- --------------------
1996 1997 1998 1998 1999
----------- ----- ----- ----------- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Gross profit................... 5.1 6.5 5.9 5.4 7.1
----- ----- ----- ----- -----
Operating expenses:
Warehouse and delivery....... 0.6 0.6 0.6 0.6 0.6
Selling, general and
administrative............ 3.1 1.2 0.9 1.0 1.0
----- ----- ----- ----- -----
Total operating
expenses................ 3.7 1.8 1.5 1.6 1.6
----- ----- ----- ----- -----
Income from operations......... 1.4 4.7 4.4 3.8 5.5
Interest expense -- related
party........................ 2.3 2.3 2.3 2.2 2.0
----- ----- ----- ----- -----
Income (loss) before income
taxes........................ (0.9) 2.4 2.1 1.6 3.5
Income taxes (benefit)......... 0.0 0.0 0.0 0.0 0.1
----- ----- ----- ----- -----
Net income (loss).............. (0.9)% 2.4% 2.1% 1.6% 3.4%
===== ===== ===== ===== =====
Pro forma for change in tax
status:
Historical income (loss)
before income taxes....... (0.9)% 2.4% 2.1% 1.6% 3.5%
Pro forma income taxes
(benefit)................. (0.4)% 1.0% 0.9% 0.7% 1.4%
----- ----- ----- ----- -----
Pro forma net income
(loss).................... (0.5)% 1.4% 1.2% 0.9% 2.1%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED JULY 31, 1999 COMPARED TO NINE MONTHS ENDED JULY 31, 1998
NET SALES. Net sales increased $187.0 million or 33% from $568.1 million
for the nine months ended July 31, 1998 to $755.1 million for the nine months
ended July 31, 1999. This increase was primarily attributable to increased sales
to our existing customers. Additional resources were made available to us during
the nine months ended July 31, 1999 through additional advances from Quality
King, enabling us to purchase more products on favorable terms.
GROSS PROFIT. Gross profit increased $23.2 million or 76% from $30.4
million for the nine months ended July 31, 1998 to $53.6 million for the nine
months ended July 31, 1999. Gross profit as a percentage of net sales increased
from 5.4% for the nine months ended July 31, 1998 to 7.1% for the nine months
ended July 31, 1999. The increase in gross profit was the result of the
increased sales volumes, lower inventory costs due to an expansion in our
supplier base which led to improved pricing opportunities, and a more profitable
product mix.
28
<PAGE> 30
OPERATING EXPENSES. Operating expenses increased $3.1 million or 35% from
$8.8 million for the nine months ended July 31, 1998 to $11.9 million for the
nine months ended July 31, 1999. This increase was due to a 40% increase in
warehouse and delivery expenses and a 32% increase in selling, general and
administrative expenses. The increase in warehouse and delivery expenses
resulted from a substantial increase in the size of our warehousing facility and
the higher costs associated with increased sales volumes. Selling, general and
administrative expenses increased primarily due to increases in sales salaries
and commissions due to higher sales volumes, although selling, general and
administrative expenses as a percentage of net sales remained at approximately
1.0%.
INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations increased $20.1 million or 93% from $21.6 million for the nine
months ended July 31, 1998 to $41.7 million for the nine months ended July 31,
1999. Income from operations as a percentage of net sales increased from 3.8%
for the nine months ended July 31, 1998 to 5.5% for the nine months ended July
31, 1999.
INTEREST EXPENSE. Interest expense increased $2.8 million or 22% from
$12.5 million for the nine months ended July 31, 1998 to $15.3 million for the
nine months ended July 31, 1999. This increase resulted primarily from a $70.2
million increase in the average advances from Quality King from $211.7 million
for the nine months ended July 31, 1998 to $281.9 million for the nine months
ended July 31, 1999.
INCOME TAXES. Our pro forma income taxes increased $6.9 million or 188%
from $3.7 million for the nine months ended July 31, 1998 to $10.6 million for
the nine months ended July 31, 1999. This increase was the result of the
increase in earnings.
YEAR ENDED OCTOBER 31, 1998 COMPARED TO YEAR ENDED OCTOBER 31, 1997
NET SALES. Net sales increased $219.9 million or 40% from $552.5 million
for the year ended October 31, 1997 to $772.4 million for the year ended October
31, 1998. This increase was primarily attributable to increased sales to our
existing customers. Additional resources were made available to us for the year
ended October 31, 1998 through additional advances from Quality King, enabling
us to purchase more products on favorable terms.
GROSS PROFIT. Gross profit increased $9.4 million or 26% from $36.0
million for the year ended October 31, 1997 to $45.4 million for the year ended
October 31, 1998. Gross profit as a percentage of net sales decreased from 6.5%
for the year ended October 31, 1997 to 5.9% for the year ended October 31, 1998.
The decrease in gross profit percentage was primarily attributable to our
strategy to expand our market share and enhance customer relationships. In order
to accomplish this, we increased our offerings of more popular items with lower
margins.
OPERATING EXPENSES. Operating expenses increased $1.5 million or 15% from
$9.8 million for the year ended October 31, 1997 to $11.3 million for the year
ended October 31, 1998. This increase was due to a 34% increase in warehouse and
delivery expenses and a 6% increase in selling, general and administrative
expenses. The increase in warehouse and delivery expenses resulted from
increased sales volumes. As a percentage of net sales, warehouse and delivery
expenses remained approximately 0.6% for each fiscal year. Selling, general and
administrative expenses increased primarily due to increases in sales salaries
and commissions due to the higher sales volumes, although selling, general
29
<PAGE> 31
and administrative expenses as a percentage of net sales decreased from 1.2% for
the year ended October 31, 1997 to 0.9% for the year ended October 31, 1998.
INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations increased $7.9 million or 30.0% from $26.2 million for the year
ended October 31, 1997 to $34.1 million for the year ended October 31, 1998.
Income from operations as a percentage of net sales was 4.7% for the year ended
October 31, 1997 and 4.4% for the year ended October 31, 1998.
INTEREST EXPENSE. Interest expense increased $4.4 million or 34% from
$13.0 million for the year ended October 31, 1997 to $17.4 million for the year
ended October 31, 1998. This increase resulted from a $52.8 million increase in
the average advances from Quality King, increasing from $169.0 million for the
year ended October 31, 1997 to $221.8 million for the year ended October 31,
1998.
INCOME TAXES. Our pro forma income taxes increased $1.4 million or 26%
from $5.3 million for the year ended October 31, 1997 to $6.7 million for the
year ended October 31, 1998. This increase was the result of the increase in
earnings.
YEAR ENDED OCTOBER 31, 1997 COMPARED TO THE YEAR ENDED OCTOBER 31, 1996
NET SALES. Net sales increased $224.2 million or 68% from $328.3 million
for the year ended October 31, 1996 to $552.5 million for the year ended October
31, 1997. This increase was primarily attributable to increased sales to
existing customers. Additional resources were made available to us during the
year ended October 31, 1997 through additional advances from Quality King,
enabling us to purchase more products on favorable terms.
GROSS PROFIT. Gross profit increased $19.2 million or 114% from $16.8
million for the year ended October 31, 1996 to $36.0 million for the year ended
October 31, 1997. Gross profit as a percentage of net sales increased from 5.1%
for the year ended October 31, 1996 to 6.5% for the year ended October 31, 1997.
The increase in gross profit was the result of the increased sales volumes,
lower inventory costs due to an expansion in our supplier base which led to
improved pricing opportunities, and a more profitable product mix.
OPERATING EXPENSES. Operating expenses decreased $2.4 million or 20% from
$12.2 million for the year ended October 31, 1996 to $9.8 million for the year
ended October 31, 1997. Warehouse and delivery expenses increased $1.2 million
or 67% from $1.8 million for the year ended October 31, 1996 to $3.0 million for
the year ended October 31, 1997. As a percentage of net sales, warehouse and
delivery expenses remained approximately 0.6% for the years ended October 31,
1997 and 1996. Selling, general and administrative expenses decreased $3.6
million or 35% from $10.4 million for the year ended October 31, 1996 to $6.8
million for the year ended October 31, 1997. Selling, general and administrative
expenses for the year ended October 31, 1996 included a $6.0 million charge
related to the write-off of an account receivable from FoxMeyer Corporation who
filed for Chapter 11 protection under the bankruptcy code. Eliminating the
effect of the write-off, selling, general and administrative expenses increased
approximately $2.4 million or 55% from $4.4 million for the year ended October
31, 1996 to $6.8 million for the year ended October 31, 1997. This increase was
a result of the increased sales volumes.
30
<PAGE> 32
INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations increased $21.6 million or 474% from $4.6 million for the year
ended October 31, 1996 to $26.2 million for the year ended October 31, 1997.
Eliminating the effect of the accounts receivable write-off during the year
ended October 31, 1996, income from operations increased $15.6 million or 147%.
INTEREST EXPENSE. Interest expense increased $5.4 million or 70% from $7.6
million for the year ended October 31, 1996 to $13.0 million for the year ended
October 31, 1997. The increase resulted from a $65.7 million increase in the
average advances from Quality King, increasing from $103.3 million for the year
ended October 31, 1996 to $169.0 million for the year ended October 31, 1997.
INCOME TAXES. Our pro forma income taxes were $5.3 million for the year
ended October 31, 1997 compared to a benefit of $1.2 million for the year ended
October 31, 1996. The benefit was the result of a loss before income taxes which
was primarily attributable to the $6.0 million write-off of accounts receivable
due to the bankruptcy filing of FoxMeyer Corporation.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Our principal working capital needs are for inventory and accounts
receivable. Our need for working capital has grown with our business. Due to our
rapid growth, we have had negative cash flow from operations of $10.3 million,
$75.9 million and $8.3 million for the years ended October 31, 1997 and 1998 and
the nine months ended July 31, 1999, respectively. Since we expect such growth
to continue, we expect our cash flow from operations to continue to be negative
for the foreseeable future.
Although we closely monitor the creditworthiness of our major customers, we
may incur some collection losses on major customer accounts receivable in the
future. In 1996, we wrote-off $6 million of accounts receivable from FoxMeyer
Corporation when it filed for Chapter 11 protection under the bankruptcy code.
The following table sets forth selected financial data with respect to our
financial position as of October 31, 1997 and 1998 and July 31, 1998 and 1999
and our results of operations for the years ended October 31, 1997 and 1998 and
the nine months ended July 31, 1998 and 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED OCTOBER 31, JULY 31,
------------------------ -----------------------
1997 1998 1998 1999
---------- ---------- ----------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Data:
Net sales...................... $552,488 $772,359 $568,062 $755,088
Net cash used in operating
activities.................. 10,339 75,906 69,057 8,277
Balance Sheet data (at period
end):
Accounts receivable............ 49,159 83,937 77,646 83,917
Inventories.................... 120,721 189,703 183,473 249,918
Accounts payable............... 19,999 31,561 33,394 58,742
Advances from Quality King..... 149,530 241,916 227,549 276,454
</TABLE>
31
<PAGE> 33
CAPITAL RESOURCES
Historically, we have financed our operations through advances from Quality
King. In connection with the Reorganization, we assumed a portion of Quality
King's short-term borrowings under its bank loan agreement in an amount equal to
the advances to us from Quality King. We will repay approximately $115 million
of such short-term borrowings with a portion of the net proceeds of this
offering and the balance will be refinanced concurrently with this offering with
borrowings under our new bank loan agreement.
To finance working capital after the Reorganization, we intend to enter
into a bank loan agreement with a group of banks to provide funds for continuing
operations, the repayment of certain debt, working capital and general corporate
purposes. We are currently negotiating with a bank to provide up to $350 million
of revolving loans. This loan will be secured by first priority liens on all of
our tangible and intangible assets. The bank loan agreement will expire five
years from the consummation of this offering. Advances under the bank loan
agreement will be limited to agreed upon percentages of our accounts receivable
and inventory. The interest rate per annum is expected to be, at our option,
either LIBOR plus 1.375% to 1.75%, depending on our financial leverage, or the
prime rate. We will be required to pay fees in connection with the bank loan
agreement, including a commitment fee of .25% to .375% on the unutilized portion
of the loan. The bank loan agreement is expected to have mandatory prepayment
provisions in the event of the issuance of debt or equity securities or the sale
of assets. We also expect the new bank loan agreement to contain a number of
financial covenants which, among other things, will require us to maintain
specified financial ratios and impose limitations on us with respect to
investments, additional indebtedness, dividends, distributions, guarantees,
transactions with affiliates, liens and encumbrances. The bank loan agreement is
also expected to provide that a change of control will constitute an event of
default.
We intend to use the proceeds of this offering
- to pay $95 million of the Notes due to our controlling stockholders,
which bear interest at an annual rate of LIBOR plus 1 1/2% and which were
issued in connection with the distribution to the controlling
stockholders of the undistributed S corporation earnings of Quality King
that were allocated to us
- to pay $115 million of the short-term borrowings we assumed from Quality
King in connection with the Reorganization.
We believe that the net proceeds of this offering, together with borrowings
from our new bank loan agreement, will be sufficient to meet our working capital
needs for at least two years.
NINE MONTHS ENDED JULY 31, 1999. Net cash used in operations was $8.3
million for the nine months ended July 31, 1999. This amount was primarily the
result of net income of $25.9 million, an increase in inventories of $60.2
million from October 31, 1998, and an increase in accounts payable of $27.2
million from October 31, 1998 which partially reduced the requirements for funds
for inventories. The increase in inventories is due to the procurement of
inventories for the increased sales and to maximize purchasing opportunities.
YEAR ENDED OCTOBER 31, 1998. Net cash used in operations was $75.9 million
for the year ended October 31, 1998. This amount was primarily the result of net
income of $16.5 million, an increase in accounts receivable and inventories of
$103.8 million from
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<PAGE> 34
October 31, 1997, and an increase in accounts payable of $11.6 million from
October 31, 1997 which partially reduced the requirements for funds for
inventories. The increase in receivables is consistent with our revenue growth.
The increase in inventories is due to the procurement of inventories for the
increased sales and to maximize purchasing opportunities.
INFLATION
We prepared our financial statements on the basis of historical costs and
not with the intention of reflecting 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, we pass price increases through to customers when we receive
them. As a result, they reduce the negative effect of inflation. Increases in
operating expenses have been partially offset during the past three years by
increased volumes and improved productivity.
YEAR 2000 COMPLIANCE
We, our vendors and customers use software and related technologies
throughout our businesses that are affected by the year 2000 problem, which is
common to most businesses, and concerns the inability of information systems,
primarily computer software programs, to properly recognize and process
date-sensitive information on and after January 1, 2000. This inability could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in other normal business activities.
We have developed and implemented a plan to modify our management
information systems to properly recognize the year 2000 and believe that the
modifications made to existing software and new software has mitigated the year
2000 issue. The cost of our year 2000 preparations, including both costs for
modification of existing software and addition of new software, was not material
to our results of operations.
We have had formal communications with all of our significant suppliers and
large customers to determine the extent to which we are vulnerable to those
third parties' failure to remediate their own year 2000 issues. Although these
suppliers and customers have assured us that they will be year 2000 compliant,
we cannot be sure that the systems of these other companies will be timely
compliant. We have taken several steps to insure the continuity of our business
services in the event that these systems are not year 2000 compliant, including
establishing a back-up power supply, providing for additional security, and
insuring information system's personnel will be available for unanticipated
events.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as commodity prices, foreign currency exchange and
interest rates. We are not exposed to market risks from changes in commodity
prices or foreign currency exchange rates. We do not hold derivative financial
instruments nor do we hold securities for trading
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<PAGE> 35
or speculative purposes. We are exposed to risk from changes in interest rates
from borrowings under our variable rate bank loan agreement. If the outstanding
balance at July 31, 1999 of $276 million was the average balance for the
following twelve month period and we experienced a 1% increase in average
interest rates, the interest expense for that period would have increased by
$2.8 million. Based on current economic conditions, we do not believe interest
rates will increase substantially in the near future. As a result, we do not
believe it is necessary to hedge our exposure against potential future interest
rate increases.
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<PAGE> 36
BUSINESS
GENERAL
We are a national wholesale distributor of selected healthcare products to
retailers, wholesale distributors and pharmacy benefit managers. Our products
currently include branded and generic pharmaceutical products and
medical/surgical products produced by a wide range of manufacturers. Our
strategy is to use our market intelligence and business relationships to procure
products on favorable terms. We carry a merchandise inventory of approximately
2,000 stock keeping units, unlike traditional wholesale distributors that
generally stock 20,000 - 25,000 stock keeping units, of pharmaceutical and other
healthcare products. Consistent with our strategy, we offer our customers a
limited range of inventory, delivery and purchasing services as compared to
traditional wholesale distributors. We also primarily deliver products in bulk
shipments to our customers' warehouses, as compared to individual stores. We
believe our strategy allows us to offer pharmaceutical and other healthcare
products to our customers at superior prices. In addition, we believe that
traditional wholesale distributors do not view us as a competitor but rather as
an important partner who provides them with an alternative means of completing
product sales and purchases.
INDUSTRY OVERVIEW
PHARMACEUTICAL INDUSTRY GROWTH. The pharmaceutical industry in the United
States has experienced significant growth in recent years. Industry sales grew
at a compound annual growth rate of 8.9% from approximately $59.9 billion in
1990 to approximately $108.9 billion in 1997.(1) Pharmaceuticals grew from 8.6%
to 10.0% of overall healthcare costs from 1990 to 1997.(1) Industry sales are
expected to increase at a compound annual growth rate of 9.6% from $108.9
billion in 1997 to $206.9 billion in 2004 and pharmaceuticals are expected to
represent 12.2% of overall healthcare costs in 2004.(1) The factors causing this
growth include the following:
- AGING POPULATION. The number of individuals over age 65 in the United
States has grown from 20.1 million in 1970 to 33.8 million in 1996.(2)
This age group, which is projected to grow to 39.6 million individuals by
2010, spends approximately 3.7 times more per capita on pharmaceuticals
and medical supplies than the rest of the population.(3)
- INTRODUCTION OF NEW PHARMACEUTICALS. Traditional research and
development as well as new technologies continue to generate new
compounds that are more effective in treating diseases. These compounds
have been responsible for significant increases in pharmaceutical sales.
In particular, the aggregate first calendar year sales of new
pharmaceutical products increased from $1.3 billion for products launched
in 1993 to $2.6 billion for products launched in 1998. We believe ongoing
research and development expenditures by pharmaceutical and biotechnology
companies will contribute to continued growth of pharmaceutical sales.
- ---------------
1 Source: U.S. Health Care Financing Administration.
2 Source: U.S. Bureau of the Census.
3 Source: U.S. Bureau of Labor Statistics.
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<PAGE> 37
- COST CONTAINMENT EFFORTS THAT STRESS DRUG THERAPIES. In response to
rising healthcare costs, government and private payors have adopted cost
containment measures that encourage the use of efficient drug therapies
to prevent or treat diseases. While national attention has been focused
on the overall increase in aggregate healthcare costs, we believe that
drug therapy has had and will continue to have a beneficial impact on
overall healthcare costs by reducing expensive surgeries and prolonged
hospital stays.
- PHARMACEUTICAL PRICE INCREASES BY DRUG MANUFACTURERS. We believe that
price increases by pharmaceutical manufacturers on selected items in
their product lines will continue to equal or exceed the overall Consumer
Price Index. We believe these increases will be due in large part to the
continued demand for newly patented drugs, the costs and prices of which
have been increasing as manufacturers have attempted to recoup costs
associated with the development, testing and regulatory approval of these
drugs. In particular, the level of price increases for branded
pharmaceuticals has been substantial; in 1998 the increase was 4.8%.
PHARMACEUTICAL REIMBURSEMENT ENVIRONMENT. Government and private payors
are facing the challenges of controlling healthcare spending in the face of
rising healthcare costs and increased spending on pharmaceuticals. In addition,
the influence of third-party payors upon pharmaceutical spending has increased
as the percentage of retail prescriptions paid for by them has increased from
34.7% in 1993 to 65.0% in 1998. Third-party payors have used their increased
influence to implement numerous cost containment measures designed to manage
their spending on pharmaceuticals, including lowering their reimbursement rates
to pharmaceutical retailers.
As a result of these cost containment measures, pharmaceutical retailers
have been facing increasing pricing pressures. From 1995 to 1999, the average
gross margin received by combination food/drug retailers on third-party payor
sales of pharmaceuticals decreased from 20% to 16%. The rapid growth of
mail-order pharmacies has caused additional pricing pressure. From 1993 to 1998,
mail-order pharmaceutical sales increased at a compound annual growth rate of
20.1% from $4.4 billion to $11.0 billion.
Healthcare institutions, which are generally reimbursed for providing
healthcare services, are also facing pricing pressures as third-party payors
seek to control healthcare spending by lowering reimbursement rates for these
services. As a result, healthcare institutions have adopted cost containment
measures to control spending on a variety of ancillary items, including
pharmaceuticals.
PHARMACEUTICAL DISTRIBUTION CHAIN. The changing reimbursement environment
together with the rapid growth of the pharmaceutical industry has led to
increased competition among the principal participants in the pharmaceutical
distribution chain -- pharmaceutical retailers, wholesalers and manufacturers.
As a result, these participants are searching for additional means of increasing
their profits, including completing product sales and purchases with alternative
partners.
- RETAILERS. Retailers are facing significant pricing pressures under the
new reimbursement environment. In order to maintain profit margins in the
face of price restraints, retailers have had to search for additional
means of lowering their costs, including procuring product at
advantageous prices from wholesalers who complement their primary
suppliers.
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<PAGE> 38
- WHOLESALE DISTRIBUTORS. Wholesale distributors provide their customers
with access to a wide range of pharmaceutical and healthcare products
from various manufacturers. Traditional wholesalers typically enter into
preferred arrangements with retailers and healthcare institutions that
include negotiated prices and require the wholesaler to provide all of
the customer's pharmaceutical products. Traditional wholesale
distributors also typically provide their customers with inventory,
delivery, and purchasing services. The need to supply a full line of
pharmaceutical products requires traditional wholesalers to allocate
their capital among a wide range of inventory and service
responsibilities in order to meet their full service obligations to their
customers. To maximize profitability and returns on capital, many
traditional wholesalers have increased their focus on using purchasing
activities to take advantage of pricing or "buy-side" opportunities
available from manufacturers, other distributors or other participants in
the marketplace.
- MANUFACTURERS. Wholesale distributors represent the most important
distribution channel for pharmaceutical manufacturers, accounting for
approximately 54.8% of the approximately $102 billion of prescription
drug sales for the year ended December 31, 1998. Manufacturers actively
seek additional wholesale relationships to increase their sales and to
manage their inventory levels.
OTHER OPPORTUNITIES. We believe that many of the same factors that are
driving the growth of the pharmaceutical market and placing pressures on
pharmaceutical reimbursement are also impacting other segments of the healthcare
product and supply market. As a result, the dental, veterinary supply and home
healthcare markets are also growing while at the same time experiencing pricing
pressures at the retail and institutional levels.
STRATEGY
We believe that we play a unique role in the pharmaceutical distribution
chain in that our customers include both distributors and retailers. Our goal is
to enhance our market position and to continue to grow our business by pursuing
a strategy with the following core elements:
- CONTINUE TO BE A VALUABLE RESOURCE TO OUR CUSTOMERS AND SUPPLIERS. We
have developed long-standing relationships with our customers and
suppliers over the last 12 years. We believe that our success has in
large part been due to our ability to provide our customers with products
at attractive prices. Through the use of our proprietary management
information system and supplier network we have developed an ability to
take advantage of pricing opportunities. At the same time, we believe we
are responsive to our suppliers and provide them with effective
distribution of significant volumes of their products to a broad range of
wholesaler and retailer accounts.
- FOCUS ON PROVIDING SELECTIVE LINES OF PRODUCTS. Rather than offering
complete lines of products and a full array of distribution services, we
currently offer to our customers selective product lines that complement
their existing supplier relationships. We believe that this product mix
does not compete with the primary businesses of the traditional wholesale
distributors. As a result, we believe we play a unique role in the
pharmaceutical distribution chain, with both retailers and distributors
as our customers.
- INCREASE OUR PRODUCT OFFERINGS. We believe that there is a substantial
opportunity to increase our business by buying additional volumes of our
existing product lines
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and expanding our network of pharmaceutical suppliers. In addition,
consistent with our focus on providing selective lines of products, we
have successfully entered into new product categories recently, including
injectibles, vaccines and medical/surgical products such as dressings and
ostomy and urological products. We believe that having additional capital
will allow us to expand our existing product lines and offer new product
lines.
- BROADEN OUR CUSTOMER BASE AND EXPAND INTO OTHER HEALTH-RELATED
DISTRIBUTION BUSINESSES. We currently sell to over 300 customers. We
intend to expand our business beyond our existing customer base of the
major retail drugstore chains, wholesalers, grocery chains and mass
merchandisers, and pharmacy benefit managers. We believe that significant
opportunities exist to market our products to smaller chains and
wholesalers. To broaden our customer base, we intend to expand our direct
sales, telemarketing and internet sales activities to target these new
customers in a cost-effective manner. We also believe that we can apply
our skills and distribution expertise to serve additional health-related
businesses. These businesses include the veterinary, dental and home
health markets.
- EXPAND OUR INTERNET AND TELEMARKETING SALES ACTIVITIES. We utilize both
the internet and telemarketing to complement our direct sales force. We
believe that devoting additional resources to enhancing these parts of
our sales effort will help grow our business and expand our customer
base.
BUSINESS STRENGTHS
Our purchasing and sales systems together with our extensive knowledge of
the pharmaceutical industry are critical parts of our capabilities. These
capabilities combine a proprietary management information system developed by
Quality King with a supply network that enables our experienced personnel to
determine which products to purchase, in what quantities and from whom to meet
our customers' needs.
PROCUREMENT. We primarily stock products that we acquire on favorable
terms by taking advantage of manufacturers' incentive discounts, various market
opportunities and price increases. Purchasing decisions are made by our buying
team which is led by a senior management group with over 55 years of experience
in purchasing healthcare products. The team utilizes our proprietary purchasing
information system which is based on a system internally-developed by Quality
King over 25 years that was customized to meet the needs of our pharmaceutical
business. Our customized system provides decision support to assist in the
selection, quantity and timing of our purchases by supplying the following
information to our experienced buying team:
- the historical sales and inventory patterns of our customers
- current market prices
- general supply information at various price levels
- expectations with respect to price increases
- expected carrying times and carrying costs.
SUPPLIER RELATIONSHIPS. We believe that our suppliers view us as a valued
customer. We have developed an extensive network of approximately 300 suppliers.
We purchase products from over 100 major pharmaceutical manufacturers and from
wholesale distributors. We maintain a regular dialogue with our suppliers to
locate desired products at the lowest prices and to generate purchasing
opportunities.
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We believe that our success in obtaining products at favorable prices from
our suppliers is attributable primarily to the following factors:
- our ability to commit significant capital quickly to any single purchase
- our strong reputation and relationships with our customers, including
retailers and wholesalers
- our prompt payment practices
- our ability to purchase in bulk quantities.
In addition, to take advantage of market opportunities we often purchase
products in excess of anticipated short-term customer demand, and then hold such
products in inventory for a longer-than-average period of time. Overall, we
usually select our purchases based on the most attractive combination of price,
payment terms, selection, quantity, market demand, pricing trends and available
supply.
SALES AND MARKETING. We have a combined sales, marketing, order entry and
customer service staff of 21 persons, including licensed pharmacists and other
pharmaceutical industry professionals.
All of our sales personnel have access to current inventory information
which is generally updated with each order, allowing immediate order
confirmation to customers and ensuring that ordered products are in stock for
prompt shipment. Our management information system affords our customers access
to current information relating to price and product availability. Customers may
elect to receive this information in any one of a variety of formats, including
on-line computer lists, computer diskettes, or magnetic tape, each of which are
updated daily. Our customers can transmit orders electronically directly to our
data processing system or by phone or purchase order.
We designed our internal marketing programs to give our customers access to
manufacturers' special price and promotional offerings to enable them to better
plan inventory investments. We disseminate information on manufacturers'
promotional programs to our direct sales representatives to give them a
competitive advantage in customer interactions.
Our sales personnel have access to a variety of management reports
generated by our proprietary management information system. These reports are
designed to demonstrate the savings that we generate for our customers. We
believe that this information helps our customers validate the value of
purchasing from us relative to other sources.
CUSTOMER RELATIONSHIPS. We strive to be a valued supplier to our
customers. Our fulfillment rate for the nine months ended July 31, 1999 was in
excess of 99.5%. We currently sell to over 300 customers, including retail
drugstore chains, traditional wholesale distributors, grocery chains and mass
merchandisers, and pharmacy benefit managers. We maintain a regular dialogue
with our customers to generate selling opportunities and to assist them in
finding scarce products at low prices.
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<PAGE> 41
The following table shows our net sales and sales mix by customer category
for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
OCTOBER 31, 1998 JULY 31, 1999
---------------- ----------------
NET SALES % NET SALES %
--------- --- --------- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Retail Chains............................... $349.1 45% $332.4 44%
Distributors................................ 328.7 43 284.6 38
Pharmacy Benefit Managers and other......... 94.6 12 138.1 18
------ --- ------ ---
Total............................. $772.4 100% $755.1 100%
====== === ====== ===
</TABLE>
During the year ended October 31, 1998 and the nine months ended July 31,
1999, our 20 largest customers accounted for approximately 91% and 83%,
respectively, of our net sales. McKessonHBOC Corporation, our largest customer
during these past two fiscal years, accounted for approximately 25% of our net
sales in the year ended October 31, 1998 and approximately 24% in the nine
months ended July 31, 1999. We believe that our 20 largest customers purchase
less than 1% of their total purchases from us.
PRODUCTS
We distribute branded and generic pharmaceutical products and
medical/surgical products produced by a wide range of manufacturers. Our branded
and generic pharmaceutical products include oral medications, injectible
pharmaceuticals and vaccines. We carry approximately 5,000 stock keeping units,
although we typically have only 2,000 stock keeping units in stock at any one
time. We carry a selection of popular products at favorable prices.
The following table shows our net sales and sales mix by product category
for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
OCTOBER 31, 1998 JULY 31, 1999
---------------- ----------------
NET SALES % NET SALES %
--------- --- --------- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Branded..................................... $720.3 93% $702.3 93%
Generic..................................... 46.5 6 40.8 5
Medical/surgical and other.................. 5.6 1 12.0 2
------ --- ------ ---
Total............................. $772.4 100% $755.1 100%
====== === ====== ===
</TABLE>
FACILITIES
Our approximately 71,000 square foot warehouse and distribution facility
and corporate headquarters is located in Ronkonkoma, New York. We believe that
centralizing our warehousing and distribution functions enables us to serve our
customers in the most cost-effective manner. We ship most of our products to our
customers by UPS.
Efficient distribution of small orders is made possible through extensive
computerization and modern warehouse techniques. These include computerized
warehouse product
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<PAGE> 42
location, routing and inventory replenishment systems, bar code technology,
mechanized order selection and efficient truck loading and routing.
We sublease our warehouse and distribution facility and corporate
headquarters from Quality King. Quality King subleases the property from
Nussdorf Associates, a real estate partnership controlled by our controlling
stockholders. Title to the property is held by the Town of Islip Industrial
Development Agency, subject to mortgages securing outstanding industrial revenue
bonds. Our sublease expires December 2004. See "Related Party
Transactions -- Agreements with Quality King" for a description of the terms of
our sublease.
We consider our facilities to be adequate for our present and foreseeable
needs and believe that we have the ability to expand our space in order to meet
our needs for the future.
MANAGEMENT INFORMATION SYSTEMS
We use a management information system that was originally developed by
Quality King and subsequently modified to meet the needs of our pharmaceutical
business. We use the system to increase efficiency, assist in procurement
decisions, improve customer access to information, decrease the time and labor
cost of receiving orders and improve the speed with which inventory is received,
stocked and monitored. The information system is intended to provide seamless,
integrated tracking of customer order entry, purchasing, restocking and invoice
preparation. We own the software utilized by this system and Quality King owns
the hardware.
Quality King uses the IBM AS400 model S20 as its primary computer system.
This system supports over 700 local and remote users, including our sales
offices. The AS400 also runs a PC server running IBM's LAN 400 with
approximately 60 personal computers attached.
All of the software running on the AS400, with the exception of the
operating system, was developed in-house and customized for the specific needs
of Quality King and its divisions. The software applications include accounts
payable, accounts receivable, order entry, electronic data interchange,
inventory control, purchasing, sales, imaging, integrated faxing, E-mail,
routing and satellite fleet communications. Currently we have approximately 20
electronic data interchange trading partners. An internet web site, available to
our authorized customers, provides company information and the ability to enter
charge card orders. These orders are uploaded to the AS400 for processing using
industry standard X12 EDI files.
The system provides sub-second response time. It is currently at 50%
capacity and is expected to meet our needs for several more years. We believe we
have significant ability to add capacity to the system in order to meet our
needs for the future.
Quality King provides computer and warehouse management and consulting
services to us pursuant to a support services arrangement. See "Related Party
Transactions -- Agreements with Quality King" for a discussion of this
agreement.
COMPETITION
Our business is highly competitive. Our principal competitors include
national and regional wholesale distributors and manufacturers, many of which
have or may obtain significantly greater financial and marketing resources than
us. The five largest national pharmaceutical wholesale distributors are
McKessonHBOC Corporation, Cardinal Health,
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<PAGE> 43
Inc., Bergen Brunswig Corporation, AmeriSource Health Corporation and Bindley
Western Industries. We compete primarily on the basis of price and product
availability.
GOVERNMENT REGULATION
Our business is subject to regulation under the Federal Food, Drug and
Cosmetic Act, the Prescription Drug Marketing Act, the Controlled Substances
Act, and state laws applicable to the distribution of pharmaceutical products
and controlled substances.
The Federal Food, Drug and Cosmetic Act generally regulates such matters as
the handling, packaging, storage, and labeling of drugs and cosmetics. The
Prescription Drug Marketing Act, which amended the Federal Food, Drug and
Cosmetic Act, establishes requirements applicable to the wholesale distribution
of prescription drugs, including the requirement that wholesale drug
distributors be licensed in accordance with federally established guidelines on
storage, handling, and records maintenance by each state in which they conduct
business. In addition, because some of the drugs that we handle are regulated
under the Controlled Substances Act (for example, those containing narcotics
such as codeine or certain stimulant or depressant medications), we also are
subject to the applicable provisions of the Prescription Drug Marketing Act,
including specific labeling, packaging and recordkeeping requirements and the
obligation to register with the federal government as a distributor of
controlled substances. Finally, we are required to maintain licenses and permits
for the distribution of pharmaceutical products and controlled substances under
the laws of each state in which we operate.
We believe that we are in compliance in all material respects with all
federal and state laws and regulations applicable to our business and possess
all material permits and licenses required for the conduct of our business.
However, federal and state regulations are subject to change. We cannot predict
what impact, if any, such changes might have on our business.
EMPLOYEES
As of September 30, 1999, we had approximately 81 employees, of which 21
were employed in sales and purchasing positions, 18 were employed in clerical
and administrative positions, and 42 were employed at our warehouse and
distribution facility. In addition, 21 employees of Quality King provide
services to us as well as Quality King pursuant to a support services agreement.
See "Related Party Transactions -- Agreements with Quality King."
We are party to a collective bargaining agreement expiring August 3, 2002
with the United Food Commercial Workers Union (AFL-CIO) covering all of our
warehouse employees. We have never experienced a work stoppage, strike, or other
interruption in our business as a result of a labor dispute, and believe our
employee relations to be good.
LEGAL PROCEEDINGS
We are a party from time to time to various legal proceedings in the
ordinary course of our business. There are no pending legal proceedings which
have had or which management expects will have a material adverse effect upon
our business, financial condition or results of operations. Quality King has
agreed to indemnify us for any liabilities, including litigation costs or
damages, arising prior to the Reorganization. See "Related Party
Transactions -- Agreements with Quality King."
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<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table shows certain information concerning our current
directors and executive officers. Effective upon consummation of this offering,
Dennis Erani and Brian Finn, neither of whom is currently an officer or
otherwise affiliated with us, will become members of our board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Glenn Nussdorf...................... 45 Chairman of the Board, Chief
Executive Officer and Director
Michael Sosnowik.................... 43 President and Director
Michael Katz........................ 51 Vice President -- Administration,
Chief Financial Officer and
Treasurer
Salvatore LaDuca.................... 37 Senior Vice President, Purchasing
Michael Ross........................ 45 Vice President, Sales and Marketing
Dennis Barkey....................... 44 Vice President, Chief Accounting
Officer
Arlene Nussdorf..................... 36 Director
Stephen Nussdorf.................... 48 Director
Dennis Erani........................ 55 Director -- Nominee
Brian Finn.......................... 39 Director -- Nominee
</TABLE>
Information with respect to the business experience and affiliations of our
directors, nominees for directors and executive officers is summarized below.
Mr. Glenn Nussdorf became our Chairman of the Board, Chief Executive
Officer and Director upon consummation of the Reorganization. Mr. Nussdorf
joined Quality King in 1970 and served Quality King in various capacities. From
1994 until 1996 he was Senior Vice President of Quality King. Since 1996 he has
served as President and Chief Executive Officer of Quality King, primarily
responsible for supervising purchasing and sales of all divisions, including
pharmaceutical, and designing and implementing the business strategy that
emphasized fostering the growth and expansion of the pharmaceutical division.
Upon consummation of the Reorganization, Mr. Nussdorf became Chairman of the
Board of Quality King and resigned as President and Chief Executive Officer of
Quality King. Mr. Nussdorf expects to devote approximately 90% of his time to
us, primarily directing management, designing and implementing business strategy
and supervising purchasing and sales. Mr. Nussdorf also serves on the Board of
Directors of Model Reorg, Inc., an affiliate of Quality King in the business of
distributing designer fragrances. Mr. Nussdorf is the brother of Stephen and
Arlene Nussdorf.
Mr. Michael Sosnowik became our President and Director upon consummation of
the Reorganization. Mr. Sosnowik joined Quality King in 1995 as Vice President
and served as President of its pharmaceutical division from 1996 until the
Reorganization. His responsibilities included directing marketing, sales and
purchasing and assuring that all quality standards in the division were
maintained. Mr. Sosnowik will have primarily the same responsibilities with us.
Prior to joining Quality King, Mr. Sosnowik was the Executive Vice President of
Choice Drug Systems, responsible for overseeing the operations of long-term care
and correctional institution pharmacies. Mr. Sosnowik is a licensed pharmacist
and member of the American Pharmaceutical Association, the
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<PAGE> 45
Association of Managed Care Pharmacists, the National Association of Chain Drug
Stores, the National Wholesale Druggists' Association and the Academy of Managed
Care Pharmacists.
Mr. Michael Katz became our Vice President -- Administration, Chief
Financial Officer and Treasurer upon consummation of the Reorganization. Mr.
Katz joined Quality King in 1991 and served in various capacities, primarily
responsible for overseeing administration, finance and trucking. From 1994 until
1996 he was Senior Vice President of Quality King. From 1996 until the
Reorganization he served as Executive Vice President of Quality King. Mr. Katz
has participated in the design and implementation of the business strategy which
has fostered the growth of the pharmaceutical division with particular emphasis
on administration and finance. In addition, he served in the Office of the Chief
Executive from September 1996 until the Reorganization and is a Director of
Model Reorg, Inc., an affiliate of Quality King in the business of distributing
designer fragrances. Mr. Katz is a Certified Public Accountant in the State of
New York and is a member of the American Institute of Certified Public
Accountants and the Institute of Management Accountants.
Mr. Salvatore LaDuca became our Senior Vice President, Purchasing upon
consummation of the Reorganization. Mr. LaDuca joined Quality King in 1980 and
served Quality King in various capacities. Mr. LaDuca was instrumental in
developing the inventory management department at Quality King and designing and
developing the automated systems and analysis tools which are the framework for
many of the sophisticated programs utilized in our management information
system. Mr. LaDuca was the Director of the health and beauty care division of
Quality King from 1989 until 1997. From 1997 until the Reorganization he was the
Director of Purchasing of the pharmaceutical division.
Mr. Michael Ross became our Vice President, Sales and Marketing upon
consummation of the Reorganization. Mr. Ross joined Quality King in 1977 and was
primarily involved in marketing and sales. From 1994 until the Reorganization he
served as Vice President of Sales, primarily responsible for all marketing
efforts, key account relationships and designing and coordinating major
corporate sales programs. Mr. Ross is a member of the National Association of
Chain Drug Stores, the General Merchandise Distributors Council and the National
Wholesale Druggists' Association.
Mr. Dennis Barkey became our Vice President, Chief Accounting Officer upon
the consummation of the Reorganization. Mr. Barkey joined Quality King in 1990
as Chief Financial Officer with primary responsibilities in the areas of
accounting, budgeting, financial planning and cash management. Prior to joining
Quality King, Mr. Barkey served as an Audit Manager for Margolin, Winer & Evens,
a public accounting firm. Mr. Barkey is a Certified Public Accountant in the
State of New York, a Certified Financial Planner and a member of the American
Institute of Certified Public Accountants.
Ms. Arlene Nussdorf became a director upon the consummation of the
Reorganization. Ms. Nussdorf joined Quality King in 1989 and is a Senior Vice
President of Quality King with experience in the purchasing, sales and
distribution of grocery and health and beauty care products. Ms. Nussdorf is
primarily responsible for the growth of the grocery division of Quality King.
Ms. Nussdorf is the sister of Glenn and Stephen Nussdorf.
Mr. Stephen Nussdorf became a director upon consummation of the
Reorganization. Mr. Nussdorf joined Quality King in 1972 and has served Quality
King in various capacities in all divisions of its business. Mr. Nussdorf
presently also serves in the Office of
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<PAGE> 46
The Chief Executive and as a Director of Model Reorg, Inc., an affiliate of
Quality King in the business of distributing designer fragrances. Upon
consummation of the Reorganization, Mr. Nussdorf will assume the
responsibilities of President and Chief Executive Officer of the health and
beauty care division of Quality King. Mr. Nussdorf is the brother of Glenn and
Arlene Nussdorf.
Mr. Dennis Erani will become a director upon consummation of this offering.
Mr. Erani is an equity owner in and the Executive Vice President and General
Merchandise Manager of A&E Stores, Inc. In this capacity, he is responsible for
supervising all purchasing and store operations for this 69-store chain.
Mr. Brian Finn will become a director upon consummation of this offering.
Since 1997, Mr. Finn has been a Principal in Clayton Dubilier & Rice, Inc., a
private investment firm. From 1991 to 1997 Mr. Finn was a Managing Director at
the investment banking firm of Credit Suisse First Boston and was promoted to
Co-Head of Mergers and Acquisitions during that period. He currently serves as a
director of U.S. Office Products Company, Dynatech Corporation, iShip.Com and
Telemundo Holdings, Inc. Mr. Finn holds a degree from the Wharton School of the
University of Pennsylvania and presently serves on the Wharton Undergraduate
Executive Board.
TERM OF EXECUTIVE OFFICERS AND DIRECTORS
Upon consummation of this offering, the number of members of our board of
directors will be increased from four to six, and Messrs. Erani and Finn will be
elected directors by the board of directors. In addition, our board of directors
will be divided into three classes, with two directors in each class. The term
of Class I directors, composed of Mr. Finn and Stephen Nussdorf, expires in
2000; the term of Class II directors, composed of Mr. Sosnowik and Ms. Nussdorf,
expires in 2001; and the term of Class III directors, composed of Mr. Erani and
Glenn Nussdorf, expires in 2002. Thereafter, each director will serve for a term
of three years. Directors hold office until the annual meeting of stockholders
in the year in which the term of their class expires and until their successors
have been duly elected and qualified. Executive officers are appointed by the
board of directors and serve at the discretion of the board.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established, effective upon consummation of this
offering, an audit committee, the members of which will be Messrs. Erani and
Finn, and a compensation committee, the members of which will also be Messrs.
Erani and Finn. The audit committee will oversee actions taken by our
independent auditors and review our internal audit controls and procedures. The
compensation committee will review and approve the compensation of our officers
and management personnel and administer our employee benefit plans. We also
adopted a policy that, following this offering, all future material agreements
between us and Quality King or its other affiliates, including our controlling
stockholders and their family members, will be reviewed and passed on for
fairness by a committee of our board of directors comprised of independent
directors.
DIRECTORS' COMPENSATION
Directors who are not executive officers will receive an annual fee of
$20,000 and $1,000 for each board meeting they attend and $500 for each
committee meeting they attend which is not held on the same day as a board
meeting. Directors will be reimbursed
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<PAGE> 47
for out-of-pocket expenses incurred in connection with attending meetings of the
board of directors and its committees.
COMPENSATION OF EXECUTIVE OFFICERS
ANNUAL COMPENSATION. The following table shows certain information
concerning the annual compensation paid or to be paid to our five most highly
paid executive officers whose cash compensation exceeded $100,000 and other
employees for services rendered in all capacities during the twelve months ended
July 31, 1999 and October 31, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2)
--------------------------- ---- --------- --------
<S> <C> <C> <C>
Glenn Nussdorf................................... 1999 $400,032 --
Chief Executive Officer 1998 $400,032 --
Michael Sosnowik................................. 1999 $749,996 $795,137
President 1998 $706,728 $827,950
Michael Katz..................................... 1999 $ 87,543 --
Vice President -- Administration, Chief
Financial 1998 $ 73,190 --
Officer and Treasurer
Salvatore LaDuca................................. 1999 $436,940 --
Senior Vice President, Purchasing 1998 $516,814 --
Michael Ross..................................... 1999 $287,874 --
Vice President, Sales and Marketing 1998 $172,179 --
</TABLE>
- -------------------------
(1) Messrs. Sosnowik and LaDuca performed services solely for the pharmaceutical
division of Quality King prior to the Reorganization. Their compensation
represents the entire compensation they received in the periods indicated.
Messrs. Nussdorf, Katz and Ross performed services for various divisions of
Quality King prior to the Reorganization. As a result, their salaries were
allocated. The aggregate salaries for Messrs. Nussdorf, Katz and Ross for
the twelve months ended July 31, 1999 were $500,032, $260,000 and $678,517,
respectively, and for the twelve months ended October 31, 1998 were
$500,032, $260,000 and $489,980, respectively. After the consummation of
this offering, we will bear the entire compensation expense of these
officers.
(2) All bonuses are discretionary and are included in the period earned.
STOCK OPTION PLAN. Pursuant to our stock option plan, employees and other
persons who perform services for us are eligible to receive incentive stock
options (as defined in Section 422 of the Internal Revenue Code) and stock
options that do not qualify as incentive stock options, which are known as
non-qualified stock options. Our stock option plan authorizes the grant of
options with respect to a maximum of 4,300,000 shares of our common stock. If
any shares covered by an option granted under our stock option plan are
forfeited or if an option expires, terminates or is canceled for any reason
whatsoever, then those shares will again be available for grant under our plan.
Stock options that are intended to qualify as incentive stock options will
be subject to terms and conditions that comply with the rules prescribed by
Section 422 of the Internal Revenue Code. Payment in respect of the exercise of
an option granted under our stock option plan may be made in cash or its
equivalent, or by exchanging shares of our common
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<PAGE> 48
stock owned by the optionee for at least six months or by a combination of the
foregoing, provided that the combined value of all cash and cash equivalents and
the fair market value of such shares so tendered to us as of the date of tender
is at least equal to the aggregate exercise price of the option. No stock
options may be granted under the stock option plan after July 31, 2009.
Following this offering, the stock option plan will be administered by the
compensation committee. Subject to the provisions of the stock option plan, the
compensation committee will have the authority, among other things, to determine
the individuals to whom awards are to be granted and the terms and conditions of
such awards, including the number of shares to be covered by such awards and the
exercise price of stock options.
The compensation committee may amend, suspend, discontinue, or terminate
our stock option plan at any time, subject to stockholder approval if necessary
to comply with any tax or other regulatory requirement. If our stock option plan
is terminated, any unexercised option will continue to be exercisable except in
the case of a change of control. The plan and all unexercised options terminate
upon a change in control unless other provisions are made.
STOCK OPTION AWARDS TO DATE. We granted stock options to purchase an
aggregate of 3,574,000 shares of our common stock to our employees under our
stock option plan as of the effective date of this offering, including Messrs.
Sosnowik, Katz, LaDuca and Ross. These options, which include noncompetition
agreements, were granted on the following terms:
- Incentive stock options to purchase 154,000 shares at an exercise price
equal to the initial offering price of the shares in this offering will
vest in four equal annual installments and will be exercisable for 10
years
- Incentive stock options to purchase 410,000 shares at an exercise price
equal to the initial offering price of the shares in this offering will
be fully vested and exercisable for 10 years but the shares acquired upon
exercise will be subject to various restrictions on resale of the shares
as described below
- Non-qualified stock options to purchase 3,010,000 shares at an exercise
price $5.00 less than the initial offering price of the shares in this
offering will be fully vested and exercisable for 10 years but the shares
acquired upon exercise will be subject to various restrictions on resale
of the shares as described below.
Since the exercise price of the non-qualified stock options is below the
initial offering price of the stock being sold in this offering, upon the
closing of the offering we will be required to incur a net charge of $9,030,000
against our earnings.
The option agreements provide that any shares acquired upon exercise of the
fully vested options may not be resold for 42 months following the date of grant
except as follows:
- Up to 10% of the total number of shares underlying the options may be
sold each quarter commencing with the 27th month after the date of grant
- If we file a registration statement with respect to any shares owned by
our controlling stockholders, each of the option holders will have the
right to sell the same percentage of their option shares as the selling
stockholders are selling of their shares of our common stock under the
registration statement
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<PAGE> 49
- If the option holder dies or becomes disabled, is terminated without
cause or if there is a change of control of our company, all restrictions
on resale of the shares issued upon exercise of the holder's options
terminate as of the date of the applicable event
- If the option holder voluntarily terminates his or her employment with
us, that option holder's options will terminate 45 days after the date of
termination of employment.
EMPLOYMENT AGREEMENT
Mr. Sosnowik has entered into a four-year employment agreement with us
which commences on the effective date of this offering. The agreement provides
for a base salary of $650,000 and the grant for past services of a non-qualified
stock option to purchase 1,300,000 shares of our common stock at an exercise
price of $5.00 less than initial offering price of the shares sold in this
offering. See "Stock Option Awards to Date" above for a description of these
options.
Mr. Sosnowik is restricted from competing with us during the term of the
agreement and for one year after its termination and is prohibited from
disclosing confidential information regarding us. If Mr. Sosnowik resigns or we
terminate his employment for cause, he is entitled to receive his salary accrued
through the date of termination. If we terminate him without cause, he is
entitled to receive his salary through six months after termination. In the
event of his death, we will pay his accrued salary through the last day of the
month in which he dies.
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<PAGE> 50
RELATED PARTY TRANSACTIONS
REORGANIZATION AND S CORPORATION DISTRIBUTION
In connection with the Reorganization, Quality King transferred its
pharmaceutical business to QK Healthcare, Inc., a newly-formed S corporation,
and the common stock of QK Healthcare was distributed to our controlling
stockholders. As a result of the Reorganization, we now conduct the
pharmaceutical business independently from Quality King with our own employees.
However, Quality King provides computer and warehouse management and consulting
services to us pursuant to the support services agreement described below.
In connection with the Reorganization, Quality King allocated $109 million
of its estimated undistributed S corporation earnings to us. Prior to this
offering, we declared a distribution to our controlling stockholders in the
aggregate amount of $109 million which was paid by delivery to them of
promissory notes in such amount. The Notes mature in 2006 and require the
mandatory prepayment of $95 million upon consummation of this offering. The
Notes bear interest at an annual rate of LIBOR plus 1 1/2%. A portion of the
proceeds from this offering will be used to pay $95 million of these Notes. For
more information relating to the Distribution, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- History and
Reorganization" and Note 12(a) of the Notes to the Financial Statements.
AGREEMENTS WITH QUALITY KING
In connection with the Reorganization, we entered into the agreements
described below with Quality King. We also adopted a policy that, following this
offering, all future material agreements between us and Quality King or its
other affiliates, including our controlling stockholders and their family
members, will be reviewed and passed on for fairness by a committee of the Board
of Directors comprised of independent directors.
INDEMNIFICATION, NONCOMPETITION AND TAX COOPERATION AGREEMENT. We entered
into an agreement with Quality King and Pro's Choice Beauty Care, Inc., another
entity formed in connection with the Reorganization to which Quality King
transferred its assets relating to its haircare business. Under this agreement,
Quality King will indemnify us for any losses arising prior to the
Reorganization, regardless of the division to which the liability relates. Any
liabilities arising after the Reorganization will be borne by the entity to
whose business the liability relates. To our knowledge, there are no such
liabilities existing at this time.
We also agreed with Quality King and Pro's Choice under this agreement not
to compete with each other's businesses in the United States for five years and
to cooperate with each other in supplying any information that may be requested
in connection with the preparation and filing of tax returns or audits.
SUPPORT SERVICES AGREEMENT. We also entered into a support services
agreement with Quality King. After this offering, Quality King will continue to
provide all of the computer and warehouse management and consulting services it
provided to us prior to the Reorganization. We will pay Quality King a fee equal
to 0.065% of our net sales for such services, which amount will be payable
quarterly based on the prior quarter's net sales. We calculated this fee based
on the historical relationship between the number of transactions processed and
net sales. This agreement may be terminated by us upon 180 days notice. Quality
King has no right to terminate during the first three years and after that
period may terminate the agreement only upon 365 days notice.
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<PAGE> 51
This agreement also provides that Quality King will pay us a commission of
0.55% of any net sales of Quality King or any of its affiliates other than us
which arise due to the sales services of one of our officers.
SUBLEASE. In connection with the Reorganization, we entered into a
five-year sublease agreement with Quality King for our 71,000 square foot
warehouse and distribution facility and corporate headquarters located in
Ronkonkoma, New York. Under the terms of this sublease, we will pay $33,689 per
month in rent, plus increases in real estate taxes. We are also required to pay
36.5% of all increases in charges after the commencement date of the sublease.
If we terminate the sublease, we must pay a termination fee of $101,067. Quality
King leases this site from Nussdorf Associates, a partnership controlled by our
controlling stockholders.
REGISTRATION RIGHTS
CONTROLLING STOCKHOLDERS. The controlling stockholders have been granted
registration rights with respect to the common stock held by them. Subject to
timing, size and other limitations, the controlling stockholders have the right
to require us to register their common stock for sale under the Securities Act
on up to five occasions, but not more than once every six months. The
controlling stockholders also have the right to include their shares in other
registration statements filed by us. We are required to pay expenses other than
underwriting discounts and commissions incurred by us in connection with these
registrations. In connection with such registrations, we will indemnify the
controlling stockholders against various liabilities, including liabilities
under the Securities Act.
OPTION HOLDERS. Under our existing option agreements with members of
management, the option holders have the right to join in any registration
statement filed by us in which any of our controlling stockholders are selling
our common stock. Each option holder may register and sell up to the same
percentage of such option holder's aggregate number of shares held or then
issuable upon exercise of his options as is then being sold by the controlling
stockholders. We are required to pay expenses other than underwriting discounts
and commissions incurred by us in connection with these registrations. In
connection with such registrations, we will indemnify the option holders against
various liabilities, including liabilities under the Securities Act.
TRANSACTIONS WITH AFFILIATES
We have a freight-forwarding and paying agent arrangement with Quality
Consolidators, Inc., a company controlled by our controlling stockholders. We
pay a monthly fee of approximately $30,000 for these services.
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<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table summarizes certain information regarding the beneficial
ownership of our outstanding common stock as of the date of the Reorganization
for:
- each person or group who beneficially owns more than 5% of the common
stock
- our chief executive officer
- each person named in the Summary Compensation Table above
- each of our directors and nominees for directors
- all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Except as
indicated by footnote, each person identified in the table possesses sole voting
and investment power with respect to all shares of common stock held by them.
Shares of common stock subject to options currently exercisable or exercisable
within 60 days are deemed outstanding for computing the percentage of the person
holding these options, but are not deemed outstanding for computing the
percentage of any other person. Applicable percentage ownership in the following
table is based on 17,000,000 shares of common stock outstanding before the
offering and 32,000,000 shares of common stock outstanding after the completion
of this offering. Unless otherwise indicated, the address of each of the named
individuals is c/o QK Healthcare, Inc., 2060 Ninth Avenue, Ronkonkoma, NY 11779.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES ISSUABLE SHARES
OUTSTANDING PURSUANT TO OPTIONS ----------------------
SHARES OF EXERCISABLE WITHIN BEFORE THE AFTER THE
NAME COMMON STOCK 60 DAYS OFFERING OFFERING
- ---- ------------ ------------------- ---------- ---------
<S> <C> <C> <C> <C>
Glenn Nussdorf Trust dated
November 1, 1998(1)......... 2,833,333 -- 16.67% 8.85%
Glenn Nussdorf Trust dated
November 2, 1998(1)........... 2,833,333 -- 16.67% 8.85%
Stephen Nussdorf Trust dated
November 1, 1998(1)......... 2,833,333 -- 16.67% 8.85%
Stephen Nussdorf Trust dated
November 2, 1998(1)......... 2,833,333 -- 16.67% 8.85%
Arlene Nussdorf Trust dated
November 1, 1998(1)......... 2,833,333 -- 16.67% 8.85%
Arlene Nussdorf Trust dated
November 2, 1998(1)......... 2,833,333 -- 16.67% 8.85%
</TABLE>
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<PAGE> 53
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES ISSUABLE SHARES
OUTSTANDING PURSUANT TO OPTIONS ----------------------
SHARES OF EXERCISABLE WITHIN BEFORE THE AFTER THE
NAME COMMON STOCK 60 DAYS OFFERING OFFERING
- ---- ------------ ------------------- ---------- ---------
<S> <C> <C> <C> <C>
Glenn Nussdorf(1)............. 17,000,000 -- 100% 53.13%
Michael Sosnowik.............. -- 1,300,000 -- 3.90%
Michael Katz.................. -- 200,000 -- *
Salvatore LaDuca.............. -- 1,300,000 -- 3.90%
Michael Ross.................. -- 200,000 -- *
Stephen Nussdorf(1)........... 17,000,000 -- 100% 53.13%
Arlene Nussdorf(1)............ 17,000,000 -- 100% 53.13%
Dennis Erani.................. -- -- -- --
Brian Finn.................... -- -- -- --
All directors and executive
officers as a group (9
persons).................... 17,000,000 3,120,000 100% 57.29%
</TABLE>
- -------------------------
* Less than 1%
(1) Glenn, Stephen and Arlene Nussdorf are co-trustees under each of the Glenn
Nussdorf Trusts dated November 1, 1998 and November 2, 1998, the Stephen
Nussdorf Trusts dated November 1, 1998 and November 2, 1998 and the Arlene
Nussdorf Trusts dated November 1, 1998 and November 2, 1998. As a result,
each of the co-trustees has shared investment power over these shares and
is therefore deemed to have shared beneficial ownership of all of these
shares.
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<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock currently consists of 100 million shares of
common stock and 20 million shares of preferred stock. After consummation of the
Reorganization and this offering, we will have 32,000,000 shares of common stock
and no preferred stock outstanding.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors. The common stock does not have cumulative voting rights, which means
that the holders of a majority of the outstanding common stock voting for the
election of directors can elect all directors then being elected. The holders of
our common stock are entitled to receive dividends when, as, and if declared by
our board of directors out of legally available funds. Upon our liquidation or
dissolution, the holders of common stock will be entitled to share ratably in
our assets legally available for the distribution to stockholders after payment
of liabilities and subject to the prior rights of any holders of preferred stock
then outstanding. All of the outstanding shares of common stock are, and the
shares of common stock to be sold in the offering when issued and paid for will
be, fully paid and nonassessable. The rights, preferences and privileges of
holders of common stock are subject to the rights of the holders of shares of
any series of preferred stock which may be issued in the future.
PREFERRED STOCK
The preferred stock may be issued from time to time in one or more series.
Our board of directors is authorized to fix the dividend rights, dividend rates,
any conversion rights or right of exchange, any voting rights, rights and terms
of redemption, the redemption price or prices, the payments in the event of
liquidation, and any other rights, preferences, privileges, and restrictions of
any series of preferred stock and the number of shares constituting such series
and their designation. We have no present plans to issue any shares of preferred
stock.
Depending upon the rights of such preferred stock, the issuance of
preferred stock could have an adverse effect on holders of our common stock by
delaying or preventing a change in control, making removal of the present
management more difficult, or resulting in restrictions upon the payment of
dividends and other distributions to the holders of common stock.
CERTAIN CERTIFICATE OF INCORPORATION, BY-LAW AND STATUTORY PROVISIONS
The provisions of our certificate of incorporation and by-laws and of the
Delaware General Corporation Law summarized below may have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that
you might consider in your best interest, including an attempt that might result
in your receipt of a premium over the market price for your shares.
DIRECTORS' LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS. Our
certificate of incorporation provides that a director will not be personally
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, except:
- for any breach of the duty of loyalty
- for acts or omissions not in good faith or which involve intentional
misconduct or knowing violations of law
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<PAGE> 55
- for liability under Section 174 of the Delaware General Corporation Law
(relating to unlawful dividends, stock repurchases, or stock redemptions)
- for any transaction from which the director derived any improper personal
benefit.
This provision does not limit or eliminate our rights or those of any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. These provisions will not
alter the liability of directors under federal securities laws. In addition, our
by-laws provide that we indemnify each director and such officers, employees,
and agents as the board of directors shall determine from time to time to the
fullest extent provided by the laws of the State of Delaware.
CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation provides
for our board of directors to be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board of
directors will be elected each year. The stockholders may not amend or repeal
this provision except upon the affirmative vote of holders of not less than 75%
of the outstanding shares of capital stock entitled to vote thereon. Holders of
a majority of the outstanding shares of capital stock entitled to vote with
respect to an election of directors may remove directors only for cause.
Vacancies on the board of directors may be filled only by the remaining
directors and not by our stockholders. Our classified board of directors could
have the effect of increasing the length of time necessary to change the
composition of a majority of the board of directors. In general, at least two
annual meetings of stockholders would be necessary for stockholders to effect
such a change.
SPECIAL MEETINGS OF STOCKHOLDERS. Our certificate of incorporation
provides that special meetings of stockholders may be called only by the
chairman or by a majority of the members of the board of directors. Stockholders
are not permitted to call a special meeting of stockholders, to require that the
chairman call such a special meeting, or to require that the board of directors
request the calling of a special meeting of stockholders.
AMENDMENT OF CERTAIN PROVISIONS. Our certificate of incorporation
generally requires the affirmative vote of the holders of at least 75% of our
outstanding voting stock in order to amend its provisions, including any
provisions concerning
- the classified board
- the amendment of our by-laws
- any proposed compromise or arrangement between us and our creditors
- the liability of directors
- the required vote to amend the certificate of incorporation.
The requirement for approval by at least a 75% shareholder vote will enable the
holders of a minority of the voting securities to prevent the holders of a
majority or more of such securities from amending these provisions of the
certificate of incorporation. After giving effect to the offering, the existing
stockholders will hold in the aggregate approximately 53% (assuming the
underwriters' option to purchase additional shares in the offering is not
exercised) of the voting power. As a result, if two or more of those persons act
in unison, they would have the ability to impede the amendment of any such
provision.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our by-laws establish an advance notice procedures for
- stockholders to nominate candidates for election as director
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<PAGE> 56
- stockholders to propose topics at stockholders' meetings.
Stockholders must notify our corporate secretary in writing prior to the
meeting at which the matters are to be acted upon or the directors are to be
elected. The notice must contain the information specified in our by-laws. To be
timely, the notice must be received at our principal executive offices not less
than 90 days prior to the anniversary of the immediately preceding annual
meeting of stockholders. If the annual meeting is called for a date that is not
within 30 days of the anniversary date of the prior year's meeting, the notice
must be received not later than the tenth day following the day on which we
notify stockholders of the date of the annual meeting, either by mail or other
public disclosure. In the case of a special meeting of stockholders called to
elect directors, the stockholder notice must be received not later than the
tenth day following the day on which we notify stockholders of the date of the
special meeting, either by mail or other public disclosure. These provisions may
preclude some stockholders from bringing matters before the stockholders at an
annual or special meeting or from nominating candidates for director at an
annual or special meeting.
AMENDMENT TO BY-LAWS PROVISIONS. Our certificate of incorporation provides
that our by-laws are subject to adoption, amendment, repeal or rescission either
by (a) a majority of the authorized number of directors or (b) the affirmative
vote of the holders of not less than 75% of the outstanding shares of voting
stock. The 75% vote will allow the holders of a minority of the voting
securities to prevent the holders of a majority or more of voting securities
from amending the by-laws. After giving effect to the offering, the existing
stockholders will hold in the aggregate approximately 53% of the outstanding
voting power (assuming the underwriters' option to purchase additional shares in
the offering is not exercised). Accordingly, if two or more of those persons act
in unison, they would have the ability to impede the amendment of the by-laws.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION. As a Delaware corporation, we are subject to Section 203 of the
Delaware General Corporation Law which, in general, prevents an interested
stockholder (defined generally as a person owning 15% or more of the
corporation's outstanding voting stock) from engaging in a business combination
(as defined) for three years following the date that person became an interested
stockholder unless various conditions are satisfied. Our certificate of
incorporation and by-law provisions and Delaware law could diminish the
opportunities for a stockholder to participate in certain tender offers,
including tender offers at prices above the then-current fair market value of
our common stock that could result from takeover attempts. In addition, our
certificate of incorporation allows our board of directors to issue, without
further stockholder approval, preferred stock that could have the effect of
delaying, deferring or preventing a change of control. The issuance of preferred
stock also could adversely affect the voting power of the holders of our common
stock, including the loss of voting control to others. We have no present plans
to issue any preferred stock. The provisions of our certificate of incorporation
and by-laws, as well as certain provisions of Delaware law, may have the effect
of discouraging or preventing an acquisition, or disposition of, our business.
These provisions, which may be in the best interests of all our stockholders,
could limit the price that investors might be willing to pay in the future for
shares of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer and Trust Company. Its telephone number is (212) 509-4000.
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<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding 32,000,000 shares
of common stock (34,250,000 shares if the underwriters' option to purchase
additional shares in the offering is exercised in full). Of these shares, the
15,000,000 shares sold in the offering will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the company, which will be subject to the
limitations of Rule 144 under the Securities Act. The remaining outstanding
shares of common stock (the "Restricted Shares") will be "restricted securities"
as defined in Rule 144 under the Securities Act and may not be resold in the
absence of registration under the Securities Act or pursuant to an exemption
from such registration, including exemptions provided by Rule 144 under the
Securities Act. In addition, we and the controlling stockholders, directors and
executive officers have agreed not to offer, sell, contract to sell or otherwise
dispose of any common stock or any securities convertible into or exchangeable
for common stock for a period of 360 days after the date of this prospectus
without the prior written consent of Lehman Brothers Inc.
Immediately following this offering, the controlling stockholders will own
17,000,000 Restricted Shares, representing approximately 53% (50% if the
underwriters' option to purchase additional shares in the offering is exercised
in full) of the then outstanding shares of common stock. In addition, options to
acquire 3,574,000 shares of common stock were granted prior to the consummation
of the offering. We intend to register under the Securities Act all of the
shares of the common stock issuable upon exercise of stock options granted or to
be granted under the stock option plan, which will allow such shares, other than
those held by members of management who are deemed to be "affiliates", to be
eligible for resale under the Securities Act without restriction or further
registration upon issuance to participants.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares must be aggregated) who has beneficially owned Restricted Shares
for at least one year, including "affiliates", would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
- 1% percent of the then outstanding shares of the common stock
(approximately 320,000 shares immediately after the offering) or
- the reported average weekly trading volume of our common stock during the
four calendar weeks preceding a sale by such person.
Sales under Rule 144 are also subject to manner-of-sale provisions, notice
requirements, and the availability of current public information about us. Under
Rule 144, however, a person (or persons whose shares must be aggregated) who has
held Restricted Shares for a minimum of two years and who is not, and for three
months prior to the sale of such shares has not been, an affiliate is free to
sell such shares without regard to the volume, manner-of-sale, and other
limitations contained in Rule 144. As defined in Rule 144 under the Securities
Act, an "affiliate" of an issuer is a person that directly, or indirectly
through the use of one or more intermediaries, controls, is controlled by or is
under common control with such issuer.
Prior to the offering, there has been no established market for the common
stock and no predictions can be made about the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
of the common stock prevailing
56
<PAGE> 58
from time to time. Nevertheless, sales of substantial amounts of the common
stock in the public market, or the perception that such sales may occur, may
have an adverse impact on the market price for the common stock.
See "Related Party Transactions -- Registration Rights" for a description
of the registration rights of our controlling stockholders and option holders.
57
<PAGE> 59
UNDERWRITING
Subject to the terms and conditions set forth in an agreement among us and
the underwriters, each of the underwriters named below, for whom Lehman Brothers
Inc., Credit Suisse First Boston Corporation and Salomon Smith Barney Inc. are
acting as representatives, has severally agreed to purchase from us the
aggregate number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ----------
<S> <C>
Lehman Brothers Inc........................................
Credit Suisse First Boston Corporation.....................
Salomon Smith Barney Inc. .................................
----------
Total................................................. 15,000,000
==========
</TABLE>
The underwriting agreement provides that the underwriters' obligation to
purchase shares of common stock depends on the satisfaction of the conditions
contained in the underwriting agreement, and that if the underwriters purchase
any of the shares of common stock under the underwriting agreement, then they
must purchase all of the shares of common stock that they have agreed to
purchase under the underwriting agreement. The conditions contained in the
underwriting agreement include the requirement that the representations and
warranties we make to the underwriters are true, that there is no material
change in the financial markets and that we deliver customary closing documents
to the underwriters.
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and at that price less a concession not in excess of $ per share
of common stock to other dealers. The underwriters may allow, and these dealers
may reallow, concessions not in excess of $ per share of common stock to
brokers and dealers. After the offering, the underwriters may change the
offering price, concessions and other selling terms. The common stock is offered
subject to receipt and acceptance by the underwriters and to other conditions,
including the right to reject orders in whole or in part.
We have granted a 30-day option to the underwriters to purchase up to an
aggregate of 2,250,000 additional shares of common stock exercisable at the
public offering price less the underwriting discounts and commissions set forth
on the cover page of this prospectus. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of common
stock proportionate to the underwriter's initial commitment as indicated in the
table above, and we will be obligated, under the option, to sell those shares of
common stock to the underwriters. The underwriters may purchase these shares
only to cover over-allotments made in connection with the offering.
The underwriting agreement provides that we and our controlling
stockholders will indemnify the underwriters against certain liabilities under
the Securities Act or will contribute to payments that the underwriters may be
required to make in respect of these liabilities.
58
<PAGE> 60
All of our directors, executive officers and controlling stockholders have
agreed pursuant to lock-up agreements not to sell or offer to sell or otherwise
dispose of any shares of common stock, or any securities which may be converted
into or exchanged for shares of common stock, subject to exceptions, for a
period of 360 days after the date of this prospectus without the prior written
consent of Lehman Brothers Inc.
In addition, we have agreed that for a period of 360 days after the date of
this prospectus we will not, without the prior written consent of Lehman
Brothers Inc., offer, sell or otherwise dispose of any shares of common stock or
any securities which may be converted into or exchanged for shares of common
stock, except for the shares of common stock offered in this offering and the
shares issued and options granted pursuant to our stock option plan or to
newly-hired management level employees.
Prior to the offering, there has been no public market for our common
stock. Consequently, the initial offering price for the common stock will be
determined by negotiation among us and the representatives of the underwriters.
Among the factors considered in such negotiations will be the following:
- our results of operations in recent periods
- estimates of our business potential and earnings prospects and the
industry in which we compete
- an overall assessment of our management
- the general state of the securities markets at the time of the offering
- the prices of similar securities of generally comparable companies.
We intend to apply for listing of our common stock on the New York Stock
Exchange, under the symbol "KRX." However, we cannot assure you that an active
or orderly trading market will develop for the common stock or that our common
stock will trade in the public markets subsequent to the offering at or above
the initial offering price.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information relating to this offering to
its brokerage customers, by way of outgoing emails, pager messages, and postings
on Fidelity's Internet web pages. A copy of the preliminary prospectus in
electronic format will be made available on the Internet website hosted by
Fidelity, which is accessible to all Fidelity brokerage customers. All final
prospectuses will be delivered to Fidelity brokerage customers by regular mail.
Brokerage customers of Fidelity may not place indications of interest, orders
and confirmations by online means and such customer transactions are only made
possible by telephone conversations with Fidelity representatives.
Until the distribution of the shares is completed, rules of the Securities
and Exchange Commission may limit the ability of the underwriters and selling
group members to bid for and purchase shares. As an exception to these rules,
the representatives are permitted to engage in transactions that stabilize the
price of the shares. These transactions may consist of bids or purchases for the
purposes of pegging, fixing or maintaining the price of the shares.
The underwriters may create a short position in the shares in connection
with the offering, which means that they may sell more shares than are set forth
on the cover page of this prospectus. If the underwriters create a short
position, then the representatives may reduce that short position by purchasing
shares in the open market. The representatives
59
<PAGE> 61
also may elect to reduce any short position by exercising all or part of the
underwriters' option to purchase additional shares.
The representatives may impose a penalty bid on underwriters and selling
group members. This means that if the representatives purchase shares in the
open market to reduce the underwriters' short position or to stabilize the price
of the shares, it may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those shares as part of the
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage purchasers in an offering from reselling
their shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the shares. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
LEGAL MATTERS
Edwards & Angell, LLP (a limited liability partnership including
professional corporations), New York, New York, will pass upon the validity of
the common stock and other legal matters related to the offering for us. Paul,
Weiss, Rifkind, Wharton & Garrison, New York, New York, will pass upon legal
matters relating to the offering for the underwriters.
EXPERTS
The financial statements and schedules as of July 31, 1999 and October 31,
1998 and for the nine months ended July 31, 1999 and the two years ended October
31, 1998 included in this prospectus and elsewhere in the registration statement
have been audited by BDO Seidman, LLP, independent certified public accountants,
as indicated in their reports appearing in this prospectus and elsewhere in the
registration statement and have been included in reliance upon the authority of
that firm as experts in accounting and auditing.
60
<PAGE> 62
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the shares of
common stock offered under this prospectus. This prospectus does not contain all
the information set forth in the registration statement and the schedules and
exhibits to the registration statement. For more information with respect to us
and our common stock, we refer you to the registration statement and to the
schedules and exhibits to the registration statement. Statements contained in
this prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance we refer you to the copy of
the contract or other document filed as an exhibit to the registration
statement. You may inspect a copy of the registration statement and the exhibits
and schedules to the registration statement without charge at the SEC's
principal office in Washington, DC, and copies of all or any part of the
registration statement may be obtained from the public reference section of the
SEC at 450 Fifth Street, NW, Washington, DC 20549 upon payment of fees
prescribed by the SEC. In addition, the SEC maintains a web site that contains
reports, proxy statements, information statements and other information that is
filed electronically with the SEC. The web site can be accessed at
http://www.sec.gov. The SEC's toll free investor information service can be
reached at 1-800-SEC-0330.
Information contained on our website does not constitute part of this
prospectus.
Upon completion of the offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file periodic and other reports, proxy statements and other information
with the SEC.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent certified public accountants.
61
<PAGE> 63
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2
FINANCIAL STATEMENTS:
Balance sheets -- October 31, 1998 and July 31, 1999...... F-3
Statements of operations for the years ended October 31,
1997 and 1998 and the nine months ended July 31, 1998
(unaudited) and 1999................................... F-4
Statements of stockholders' equity for the years ended
October 31, 1997 and 1998 and for the nine months ended
July 31, 1999.......................................... F-5
Statements of cash flows for the years ended October 31,
1997 and 1998 and for the nine months ended July 31,
1998 (unaudited) and 1999.............................. F-6
Notes to financial statements............................. F-7
</TABLE>
F-1
<PAGE> 64
[THE FOLLOWING REPORT IS IN THE FORM THAT WILL BE SIGNED PRIOR TO EFFECTIVENESS
OF THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
QK Healthcare, Inc.
Ronkonkoma, New York
We have audited the accompanying balance sheets of QK Healthcare, Inc. as
of October 31, 1998 and July 31, 1999 and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended October 31, 1998 and for the nine months ended July 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of QK Healthcare, Inc. as of
October 31, 1998 and July 31, 1999 and the results of their operations and their
cash flows for each of the two years in the period ended October 31, 1998 and
for the nine months ended July 31, 1999 in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
New York, New York
September 28, 1999,
except for the reorganization
discussed in Note 1(a), which is
as of , 1999
F-2
<PAGE> 65
QK HEALTHCARE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1998 1999
----------- --------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents............................. $ -- $ --
Accounts receivable, net of allowance for possible
losses of $863 and $1,071.......................... 83,937 83,917
Inventories........................................... 189,703 249,918
Advances to suppliers for future purchases............ 796 2,449
Prepaid expenses and other current assets............. 454 1,463
-------- --------
TOTAL CURRENT ASSETS............................... 274,890 337,747
Property and equipment, less accumulated depreciation
and amortization................................... -- 238
-------- --------
$274,890 $337,985
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Advances from Quality King -- related party........... $241,916 $276,454
Accounts payable...................................... 31,561 58,742
Accrued expenses and other............................ 1,396 2,772
-------- --------
TOTAL CURRENT LIABILITIES.......................... 274,873 337,968
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value -- shares authorized
20,000; none issued and outstanding................ -- --
Common stock, $.001 par value -- shares authorized
100,000; issued and outstanding 17,000............. 17 17
Retained earnings..................................... -- --
-------- --------
TOTAL STOCKHOLDERS' EQUITY......................... 17 17
-------- --------
$274,890 $337,985
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 66
QK HEALTHCARE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, JULY 31,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales, net.............................. $552,488 $772,359 $568,062 $755,088
Cost of sales........................... 516,501 726,967 537,668 701,511
-------- -------- -------- --------
Gross profit............................ 35,987 45,392 30,394 53,577
-------- -------- -------- --------
Operating Expenses:
Warehouse and delivery................ 3,039 4,069 2,976 4,162
Selling, general and administrative... 6,762 7,187 5,849 7,718
-------- -------- -------- --------
Total operating expenses........... 9,801 11,256 8,825 11,880
-------- -------- -------- --------
Income from operations.................. 26,186 34,136 21,569 41,697
Interest expense -- related party....... 12,984 17,370 12,451 15,300
-------- -------- -------- --------
Income before income taxes.............. 13,202 16,766 9,118 26,397
Income taxes............................ 224 285 155 449
-------- -------- -------- --------
Net income.............................. $ 12,978 $ 16,481 $ 8,963 $ 25,948
======== ======== ======== ========
Pro forma for change in tax status:
Historical income before income
taxes.............................. $ 13,202 $ 16,766 $ 9,118 $ 26,397
Pro forma income taxes (Note 6)....... 5,312 6,736 3,672 10,573
-------- -------- -------- --------
Pro forma net income.................. $ 7,890 $ 10,030 $ 5,446 $ 15,824
======== ======== ======== ========
Pro forma basic earnings per share.... $ .46 $ .59 $ .32 $ .93
======== ======== ======== ========
Weighted average number of shares
outstanding........................ 17,000 17,000 17,000 17,000
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 67
QK HEALTHCARE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK,
$.001 PAR VALUE
------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1996............... 17,000 $ 17 $ -- $ 17
Net income.............................. 12,978 12,978
Distribution to Quality King -- related
party................................. (12,978) (12,978)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1997............... 17,000 17 -- 17
Net income.............................. 16,481 16,481
Distribution to Quality King -- related
party................................. (16,481) (16,481)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1998............... 17,000 17 -- 17
Net income.............................. 25,948 25,948
Distribution to Quality King -- related
party................................. (25,948) (25,948)
-------- -------- -------- --------
BALANCE, JULY 31, 1999.................. 17,000 $ 17 $ -- $ 17
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 68
QK HEALTHCARE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 12,978 $ 16,481 $ 8,963 $ 25,948
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... -- -- -- 75
Write-off of bad debts..................... 35 122 5 28
Allowance for possible losses.............. 6 169 279 236
Decrease (increase) in:
Accounts receivable...................... (2,011) (35,070) (28,772) (244)
Inventories.............................. (30,256) (68,982) (62,752) (60,215)
Advances to suppliers for future
purchases............................. 1,258 (21) (76) (1,653)
Prepaid expenses and other current
assets................................ 244 (186) 100 (1,009)
Increase (decrease) in:
Accounts payable......................... 6,394 11,562 13,395 27,181
Accrued expenses and other............... 1,013 19 (199) 1,376
-------- -------- -------- --------
Net cash used in operating
activities(1)......................... (10,339) (75,906) (69,057) (8,277)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in property and equipment............ -- -- -- (313)
-------- -------- -------- --------
Net cash used in investing
activities(1)......................... -- -- -- (313)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in advances from Quality
King -- related party...................... 23,317 92,387 78,020 34,538
Distribution to Quality King -- related
party...................................... (12,978) (16,481) (8,963) (25,948)
-------- -------- -------- --------
Net cash provided by financing
activities(1)......................... 10,339 75,906 69,057 8,590
-------- -------- -------- --------
Net increase (decrease) in cash................. -- -- -- --
Cash and cash equivalents, beginning of
period........................................ -- -- -- --
-------- -------- -------- --------
Cash and cash equivalents, end of period........ $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
- -------------------------
(1) The Company did not maintain a separate cash account and accordingly all
receipts and disbursements were allocated from Quality King -- related party
(See Note 1 (a)).
See accompanying notes to financial statements.
F-6
<PAGE> 69
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED JULY 31, 1998 IS AUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
(a) BACKGROUND AND BASIS OF PRESENTATION
QK Healthcare, Inc. (the "Company") is a wholesale distributor of selected
healthcare products that are delivered to retailers, wholesale distributors and
pharmacy benefit managers in the United States. The Company procures products on
favorable terms and resells these products within the traditional healthcare
distribution channels. The Company primarily delivers products in bulk shipment
form to customers' warehouses, as compared to customers' individual stores. The
Company's operations consist solely of this single segment.
Prior to its formation the operations of the Company were a division of
Quality King Distributors, Inc. ("Quality King"), an S corporation, which is a
wholesale distributor of hair care products, groceries, health and beauty care
products, and pharmaceuticals. On , 1999 Quality King reorganized
its business (the "Reorganization"). In connection with the Reorganization, the
pharmaceutical business (the "Business") was transferred to a newly-formed S
corporation and its stock was distributed to the stockholders of Quality King.
Subsequent to the Reorganization and in connection with its initial public
offering (the "Offering"), the Company's tax status will change from an S
corporation to a C corporation.
Although the Business was a significant division of Quality King, separate
financial statements were not prepared in prior periods. The accompanying
financial statements have been prepared from the historical accounting records
of Quality King, and present all of the operations of the Business for the two
years in the period ended October 31, 1998, as well as for the nine month
periods ended July 31, 1998 (unaudited) and 1999. The financial statements
reflect various allocated costs and expenses as described herein (see Notes 8
and 9). The Company's management believes the allocations are reasonable and
appropriate; however, these allocated costs and expenses are not necessarily
indicative of costs and expenses that would have been incurred had the Business
been operated as a separate entity. The Reorganization has been retroactively
reflected in these financial statements.
(b) INVENTORY VALUATION
Prior to the formation of the Company, inventory costs were calculated
under the last-in, first-out ("LIFO") method. In connection with the
Reorganization, the Company will change the method used in determining inventory
cost. Management has concluded that for reporting purposes, the first-in,
first-out ("FIFO") method would provide a more accurate valuation of inventory
based on current market prices. The change in inventory costing from the LIFO
method to the FIFO method is considered a change in accounting principle and
requires retroactive restatement of financial statements. As a result,
inventories and cost of sales for all periods presented are reported based on
the FIFO valuation method.
F-7
<PAGE> 70
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(c) PRO FORMA ADJUSTMENTS
Pro forma adjustments are presented to reflect a provision for income taxes
based on income before taxes, as if the Company had been a C corporation for all
periods presented.
2. SUMMARY OF ACCOUNTING POLICIES
(a) FISCAL YEAR
The Company, effective November 1, 1998, elected to change its fiscal
year-end for reporting purposes from October 31 to July 31.
(b) INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
by the FIFO method. The Company's policy is to evaluate and specifically
identify obsolete, slow-moving and non-saleable inventory and to provide a
reserve for impairment.
(c) REVENUE RECOGNITION
Revenues are recognized when products are shipped. Provisions for estimated
sales allowances, returns and losses are accrued at the time revenues are
recognized, based on historical experience.
(d) INCOME TAXES
Prior to the Reorganization, the Company had been taxed as an S corporation
pursuant to the Internal Revenue Code and New York State tax laws and,
accordingly, was not subject to Federal and most state income taxes. The Company
had been subject to other New York State income taxes. In connection with the
Offering the Company will become taxed as a C corporation.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this standard, deferred income taxes are
provided for those items for which the reporting period and methods for income
tax purposes differ from those used for financial statement purposes using the
asset and liability method. Deferred income taxes are insignificant.
(e) PROPERTY AND EQUIPMENT
Property and equipment, which include leasehold improvements, are stated at
cost. Depreciation and amortization are computed by the straight-line and
accelerated methods over the estimated useful lives of the related assets, which
range from 5 to 7 years. Leasehold improvements are amortized over their
estimated useful lives.
(f) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, accounts payable and accrued
expenses approximate fair value due to the short-term maturity of these
financial instruments. Advances from Quality King approximates fair value as the
effective interest rate on the advances is the same as the rate which Quality
King pays for its borrowings.
F-8
<PAGE> 71
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(g) LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of," long-lived assets (e.g., property and
equipment) are evaluated for impairment when events or changes in circumstances
indicate that the carrying amounts of the assets may not be recoverable through
the estimated undiscounted future cash flows from the use of these assets. When
any such impairment exists, the related assets will be written down to their
fair value. No write-downs have been necessary through July 31, 1999.
(h) COMPUTATION OF PRO FORMA EARNINGS PER COMMON SHARE
Pro forma basic earnings per share includes no dilution and has been
computed by dividing pro forma net income by the weighted average number of
common shares considered to be outstanding for the period. Pro forma diluted
earnings per share is the same as the basic amounts for all periods presented
and thus has not been presented.
(i) CONCENTRATIONS OF CREDIT RISK
The Company is potentially subject to a concentration of credit risk with
respect to its trade receivables, the majority of which are due from wholesale
distributors and drugstore chains. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains allowances to cover potential or anticipated losses for
uncollectible accounts.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company 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.
(k) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the statement of operations and
the statement of stockholders' equity for the nine months ended July 31, 1998
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the information set forth therein. The results of operations
for the nine months ended July 31, 1998 are not necessarily indicative of the
results for any other period.
F-9
<PAGE> 72
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
JULY 31, 1999
-------------
<S> <C>
Machinery and equipment.................................... $685
Leasehold improvements..................................... 117
----
802
Less accumulated depreciation and amortization............. 564
----
$238
====
</TABLE>
Quality King was deemed to have contributed these assets to the Company as
of November 1, 1998.
4. ADVANCES FROM QUALITY KING -- RELATED PARTY
For all periods presented, Quality King maintained a loan agreement with a
syndicate of banks. In connection with the preparation of the financial
statements of the Company (See Note 1(a)), advances from Quality King (total
assets in excess of other current liabilities) were treated as loans between
Quality King and the Company. Interest expense on these advances was based on
the effective rates paid by Quality King under its loan agreement (see Note 9).
In connection with the Reorganization and concurrent with the Offering, the
Company has entered into a new bank loan agreement (see Note 12(c)).
5. COMMITMENTS AND CONTINGENCIES
(a) LEASE
The Company leases warehouse and office space from a related party under an
agreement which expires on December 31, 2004 (See Note 7). Minimum annual lease
commitments under this lease are $404, plus increases in real estate taxes. Rent
expense allocated to the Company for the years ended October 31, 1997 and 1998
was $212 and $223, respectively, and $159 and $307 for the nine months ended
July 31, 1998 and 1999, respectively. Rent was allocated based on space used by
the Company.
(b) UNION CONTRACTS
The Company's warehouse employees are members of the United Food Commercial
Workers Union. The Company is party to a collective bargaining agreement with
the union, which is effective through August 2002.
F-10
<PAGE> 73
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. PRO FORMA INCOME TAXES
The pro forma income taxes represent the amount that would have been
reported had the Company operated as a stand-alone entity and filed Federal and
state income tax returns as a C corporation.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
---------------- -----------------
1997 1998 1998 1999
------ ------ ------ -------
<S> <C> <C> <C> <C>
Federal.................................. $4,115 $5,218 $2,845 $ 8,191
State.................................... 1,197 1,518 827 2,382
------ ------ ------ -------
Pro forma income taxes................... $5,312 $6,736 $3,672 $10,573
====== ====== ====== =======
</TABLE>
The pro forma income taxes on historical income differs from amounts
computed by applying the applicable Federal statutory rates due to state income
taxes.
7. RELATED PARTY TRANSACTIONS
In connection with the Reorganization, Quality King will provide the
Company with various services pursuant to a support services agreement dated
, 1999. These services primarily include computer and warehouse
management and consulting services. Based on the terms of the agreement, the
Company will be obligated to pay a management fee for services rendered by
Quality King. The fee will be based on .065% of net sales of the Company.
The Company also rents warehouse and office space from a related party
pursuant to a sublease agreement (See Note 5(a)).
The Company has an arrangement with an affiliate to provide logistical
assistance relating to certain purchases made by the Company. The Company
reimburses the affiliate for its expenses of approximately $30 per month.
8. ALLOCATIONS
In connection with the preparation of the Company's financial statements as
described in Note 1(a), all balance sheet and income statement accounts that
were directly attributable to the Business were identified and carved-out of the
books and records of Quality King. Those accounts include accounts receivable,
inventories, advances to suppliers for future purchases, prepaid expenses and
other current assets, accounts payable, accrued expenses and other current
liabilities, net sales, cost of sales and certain operating expenses. Management
also identified various other operating expenses that were not directly
attributable to any specific division of Quality King. A portion of these
expenses was allocated to the Company based on different assumptions and
methods. The procedures employed utilized various allocation bases, including
the number of transactions
F-11
<PAGE> 74
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
processed, estimated delivery miles and warehouse square footage. The following
table summarizes the expenses which were allocated to the Company:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
----------------- -----------------
1997 1998 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
WAREHOUSE AND DELIVERY
Delivery expenses...................... $1,695 $ 854 $ 701 $ 510
Rent................................. 106 213 157 306
Payroll and related expenses......... 99 271 151 236
Repairs and maintenance.............. 53 77 55 162
Union expenses....................... 48 78 59 80
Supplies............................. 29 59 40 89
Other................................ 37 131 62 170
------ ------ ------ ------
$2,067 $1,683 $1,225 $1,553
====== ====== ====== ======
SELLING, GENERAL AND ADMINISTRATIVE:
Payroll and related expenses......... $1,282 $1,479 $1,135 $1,743
Insurance............................ 465 572 482 576
Office expenses...................... 206 279 211 346
Telephone............................ 176 244 170 206
Professional fees.................... 172 275 196 124
Computer services.................... 102 155 115 125
Sales expenses....................... -- 174 74 117
Other................................ 83 93 89 20
------ ------ ------ ------
2,486 3,271 2,472 3,257
------ ------ ------ ------
Total.................................. $4,553 $4,954 $3,697 $4,810
====== ====== ====== ======
</TABLE>
The above expenses were allocated as follows:
WAREHOUSE AND DELIVERY
Warehouse expenses, including rent, payroll, repairs and maintenance, union
expenses, and supplies, were primarily allocated based on warehouse square
footage. Payroll taxes were allocated primarily based on payroll dollars. Other
warehouse and delivery expenses, which includes utilities, office expenses,
security and depreciation, were allocated based on warehouse square footage.
Delivery expenses were allocated based on estimated delivery miles.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses, including office payroll,
office expenses, telephone, professional fees, computer services and sales
expense, were allocated primarily based on the ratio of the number of
transactions processed. Officers' payroll was allocated primarily based on an
estimate of the ratio of time apportioned to the Company. Payroll taxes were
allocated based on payroll dollars and the ratio of the number of transactions
processed. Other selling, general and administrative expenses, which include
utilities and depreciation, were allocated based on a ratio of the number of
transactions processed.
F-12
<PAGE> 75
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the methods used to allocate expenses:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED JULY 31,
----------------- -----------------
1997 1998 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Ratio of the number of transactions
processed............................ $1,480 $2,279 $1,582 $2,231
Estimated delivery miles............... 1,695 853 701 510
Warehouse square footage............... 287 751 465 918
Payroll dollars........................ 344 253 239 440
Estimate of time-officers.............. 359 400 300 300
Inventory ratios....................... 157 194 168 123
Sales ratios........................... 140 145 125 99
Purchases ratios....................... 73 73 57 167
Other.................................. 18 6 60 22
------ ------ ------ ------
Total.................................. $4,553 $4,954 $3,697 $4,810
====== ====== ====== ======
</TABLE>
The Company believes that the allocated expenses are reasonable and
approximate those expenses that would have been incurred had the Company
operated as a separate entity.
9. INTEREST EXPENSE
In connection with the preparation of the Company's financial statements
(see Notes 1(a) and 9), interest expense was charged by Quality King to the
Company based on the Company's average monthly balances of accounts receivable,
inventories and advances to suppliers less accounts payable. Interest expense
was based on the effective rates paid by Quality King under its loan agreement
for the respective periods. Interest rates charged for the years ended October
31, 1997 and 1998 were approximately 7.7% and 7.8%, respectively, and for the
nine months ended July 31, 1998 and 1999 were approximately 7.8% and 7.2%,
respectively.
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
(a) COMMON STOCK
In connection with the Reorganization, the Company issued 17,000 shares of
common stock, $.001 par value per share.
(b) STOCK OPTION PLAN
The Company established a stock option plan for employees and other persons
who perform services for it. The Company has authorized a maximum of 4,300
shares of common stock for incentive stock options and non-qualified stock
options under this plan.
Concurrent with the Offering, the Company will issue options to purchase an
aggregate of 3,574 shares of common stock. These options will be granted on the
following terms: incentive stock options to purchase 154 shares at an exercise
price equal to the offering price of the shares sold in the Offering that will
vest over four years and will be exercisable for 10 years; incentive stock
options to purchase 410 shares at an exercise price
F-13
<PAGE> 76
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equal to the offering price of the shares sold in the Offering that will vest
immediately but will be subject to various restrictions upon sale and will be
exercisable for 10 years; and non-qualified stock options, issued for past
services, to purchase 3,010 shares at an exercise price of $5.00 per share less
than the offering price of the shares sold in the Offering that will vest
immediately but will be subject to various restrictions on sale and will be
exercisable for 10 years.
Since the non-qualified stock options have an exercise price below the
offering price of the shares sold in the Offering, the Company will record a
significant non-recurring non-cash charge to operations in an amount equal to
the excess of the fair value of the common stock underlying the options over the
exercise price of the options. This charge (aggregating $9,030 after income tax
effect) will reduce income from operations in the quarter immediately following
the Offering.
11. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
For the nine months ended July 31, 1998 and 1999 and the years ended
October 31, 1997 and 1998 two customers accounted for approximately 28%, 32%,
36% and 34% of net sales, respectively. These customers accounted for
approximately the same percentage of accounts receivable at July 31, 1999 and
October 31, 1998, respectively, as their sales for these periods.
12. SUBSEQUENT EVENTS
(a) CORPORATE REORGANIZATION
In conjunction with the Reorganization and immediately prior to the
Offering, the Company declared a dividend of $109,000, which was paid in the
form of promissory notes (the "Notes"). This amount represents a portion of the
undistributed S corporation earnings of Quality King. This amount was calculated
based on the provisions of the Internal Revenue Code which requires an
allocation of undistributed earnings to be based on a ratio of the fair value of
the Company to the fair value of Quality King. In conjunction with the
Reorganization, Quality King will contribute $14,000 to the capital of the
Company.
(b) INITIAL PUBLIC OFFERING
The Company is in the process of filing a registration statement covering
the Offering under which it anticipates generating net proceeds of approximately
$210,000 upon the sale of its common stock.
The net proceeds will be used to pay $95,000 of the Notes (see Note 12(a))
and reduce short-term borrowings assumed from Quality King by $115,000.
(c) NEW LOAN AGREEMENT
In connection with the Reorganization and the Offering, the Company entered
into a loan agreement with a syndicate of lenders. The five year loan agreement
is for $350,000 and provides for borrowings based on 85% of receivables and 65%
of inventory, as defined. Interest accrues at margins above the Federal Funds
rate or prime rate or LIBOR. The loan agreement provides for certain financial
ratios, warranties and other covenants.
F-14
<PAGE> 77
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it is
unlawful. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
<PAGE> 78
[MAP GRAPHIC]
15,000,000 Shares
QK HEALTHCARE, INC.
COMMON STOCK
----------------------------
PROSPECTUS
, 1999
----------------------------
LEHMAN BROTHERS
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the common stock registered hereby:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 71,933
NASD fee.................................................... 26,375
Printing and engraving expenses............................. 170,000
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Blue Sky fees and expenses.................................. *
NYSE listing application fee................................ 84,600
Transfer agent fees and expenses............................ *
Miscellaneous............................................... *
--------
TOTAL.................................................. $ *
========
</TABLE>
- -------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTOR AND OFFICERS.
Our officers and directors are covered by provisions of the Delaware
General Corporation Law and our certificate of incorporation and by-laws, which
serve to limit, and, in some instances, to indemnify them against, liabilities
which they may incur in their respective capacities. Our certificate of
incorporation limits the liability of our directors to the fullest extent
permitted by Delaware law. Specifically, our directors will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to us or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derives an improper personal
benefit.
Our by-laws provide for the indemnification of our directors and officers
(as well as certain other persons) if the person acted in good faith and in a
manner reasonably believed to be in or not opposed to our best interests, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe the conduct was unlawful. In an action by or in the right of us, no
indemnification may be made if the person shall have been adjudged to be liable
to us unless the court in which the action was brought determines upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for the expenses which the court deems proper. Our by-laws also
provide that any indemnification (unless ordered by a court) may be made by us
only as authorized in the specific case
II-1
<PAGE> 80
upon a determination that indemnification is proper in the circumstances because
the person has met the applicable standard of conduct. This determination must
be made (i) by the board of directors by a majority vote of a quorum consisting
of directors who were not parties to the action, (ii) if a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by our
stockholders. If an indemnified person has been successful on the merits or
otherwise in defense of any action described above, or in the defense of any
matter in the action, the person will be indemnified against expenses (including
attorneys' fees) incurred in connection with the action, without the necessity
of authorization in the specific case. Expenses incurred in defending or
investigating a threatened or pending action may be paid by us in advance of the
final disposition of the action upon receipt of an undertaking by the person to
repay the amount if it is ultimately determined that indemnification is not
proper. The indemnification and advancement of expenses provided by or granted
under our by-laws are not exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any by-law,
agreement, contract, vote of stockholders or disinterested directors or
otherwise, it being our policy that indemnification of the persons specified in
the by-laws shall be made to the fullest extent permitted by law. The
indemnification and advancement of expenses provided by our by-laws, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director or officer and inure to the benefit of the heirs,
executors and administrators of that person.
We carry directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the Reorganization of Quality King, the pharmaceutical
business of Quality King was transferred prior to the effective date of this
registration statement to QK Healthcare, Inc., a newly-formed S corporation, and
17,000,000 shares of common stock of QK Healthcare, Inc. were distributed to the
shareholders of Quality King. The issuance of the shares was a transaction
exempt from the registration requirements under Section 4(2) of the Securities
Act.
In connection with the Reorganization, $109 million of the undistributed S
corporation earnings of Quality King were allocated to QK Healthcare, Inc. Prior
to the offering, we declared a distribution to our existing stockholders, in the
aggregate amount of $109 million which was paid by delivery to them of
promissory notes in such aggregate amount. The issuance of the notes was a
transaction exempt from the registration requirements under Section 4(2) of the
Securities Act.
Stock options to purchase an aggregate of 3,574,000 shares of our common
stock have been granted to our employees under our stock option plan effective
upon the closing of this offering. These options were granted on the following
terms:
- Incentive stock options to purchase 154,000 shares at an exercise price
equal to the initial offering price of the shares in the offering will
vest in four equal annual installments and will be exercisable for 10
years;
- Incentive stock options to purchase 410,000 shares at an exercise price
equal to the initial offering price of the shares in the offering will be
fully vested and exercisable for 10 years but will be subject to various
restrictions on resale of the shares acquired upon exercise of the
options; and
II-2
<PAGE> 81
- Non-qualified stock options to purchase 3,010,000 shares at an exercise
price $5.00 less than the initial offering price of the shares in the
offering will be fully vested and exercisable for 10 years but will be
subject to various restrictions on resale of the shares acquired upon
exercise of the options. The issuance of the options was a transaction
exempt from the registration requirements under Section 4(2) of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. Exhibits:
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Plan of Reorganization
3.1 Form of Amended and Restated Certificate of Incorporation
3.2 By-Laws
4.1 Form of Registration Rights Agreement between the Company
and Arlene, Stephen and Glenn Nussdorf, as trustees
4.2 Form of Promissory Notes to Controlling Stockholders
5.1* Opinion of Edwards & Angell, LLP
10.1 Form of Support Services Agreement between the Company and
Quality King Distributors, Inc.
10.2 Form of Indemnification, Noncompetition and Tax Cooperation
Agreement among Quality King Distributors, Inc., QK
Healthcare, Inc. and Pro's Choice Beauty Care, Inc.
10.3 Form of Sublease with Quality King Distributors, Inc.
10.4 Form of Stock Option Plan
10.5 Form of incentive stock option agreements with four year
vesting
10.6 Form of incentive stock option agreements with immediate
vesting
10.7 Form of non-qualified stock option agreements
10.8 Form of Employment Agreement between the Company and Michael
Sosnowik
10.9* Bank Loan Agreement
23.1* Consent of Edwards & Angell, LLP (included in Exhibit 5.1)
23.2 Consent of BDO Seidman, LLP
24.1** Power of Attorney
27.1** Financial Data Schedule
99.1** Consent of Dennis Erani
99.2** Consent of Brian Finn
</TABLE>
- -------------------------
* To be filed by amendment
** Previously filed
II-3
<PAGE> 82
b. Financial Statement Schedules
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Ronkonkoma,
State of New York, on December 3, 1999.
QK Healthcare, Inc.
By: /s/ MICHAEL W. KATZ
-----------------------------------
Name: Michael W. Katz
Title: Vice
President -- Administration
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities indicated on December 3, 1999.
<TABLE>
<C> <S>
* Chairman, Chief Executive Officer and
- --------------------------------------------------- Director (Principal Executive
Glenn Nussdorf Officer)
/s/ MICHAEL W. KATZ Vice President -- Administration,
- --------------------------------------------------- Chief Financial Officer and Treasurer
Michael W. Katz (Principal Financial Officer)
/s/ DENNIS BARKEY Vice President, Chief Accounting
- --------------------------------------------------- Officer (Principal Accounting
Dennis Barkey Officer)
* President and Director
- ---------------------------------------------------
Michael Sosnowik
* Director
- ---------------------------------------------------
Arlene Nussdorf
* Director
- ---------------------------------------------------
Stephen Nussdorf
*By: /s/ MICHAEL W. KATZ
---------------------------------------------
Michael W. Katz,
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 84
[THE FOLLOWING OPINION IS IN THE FORM THAT WILL BE SIGNED PRIOR TO EFFECTIVENESS
OF THE REGISTRATION STATEMENT.]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audit referred to in our report to QK Healthcare, Inc. (the "Company"),
dated September 28, 1999, except for Note 1 which is as of ,
which is contained in the Prospectus constituting part of this Registration
Statement included the audit of the schedule listed under Item 16(b) for the
nine months ended July 31, 1999 and the years ended October 31, 1998 and 1997,
respectively. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
New York, New York
December 3, 1999
S-1
<PAGE> 85
SCHEDULE II
QK HEALTHCARE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSE(a) WRITE-OFFS CHANGES END OF PERIOD
- ----------- ---------- ---------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted from
asset accounts:
Allowance for possible losses
Year ended October 31, 1997......... $845,000 $ 6,000 $ 35,000 $-- $ 816,000
Year ended October 31, 1998......... $816,000 $169,000 $122,000 $-- $ 863,000
Nine months ended July 31, 1999..... $863,000 $236,000 $ 28,000 $-- $1,071,000
</TABLE>
- -------------------------
(a) charged to bad debts
S-2
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF CORPORATE SEPARATION
AND REORGANIZATION FOR QK HEALTHCARE, INC.
Agreement made as of , 1999 among Quality King Distributors,
Inc., a New York corporation (the "Company"), and each of Stephen Nussdorf and
Arlene Nussdorf as Trustees U/D Glenn Nussdorf Trusts dated November 1, 1998 and
November 2, 1998, Glenn Nussdorf and Arlene Nussdorf, Trustees U/D Stephen
Nussdorf Trusts dated November 1, 1998 and November 2, 1998 and Stephen Nussdorf
and Glenn Nussdorf, Trustees U/D Arlene Nussdorf Trusts dated November 1, 1998
and November 2, 1998 (collectively, the "Shareholders").
RECITALS
A. The Shareholders will be the owners of all of the issued and
outstanding stock of the Company on the Closing Date (as hereinafter defined).
B. The Company has been engaged for more than five years in the
business of distributing pharmaceutical products (the "Pharmaceutical Business")
and the business of distributing groceries, hair care products and health and
beauty products (the "Other Business").
C. A separation of the Pharmaceutical Business from the Other Business
is deemed advisable by the parties.
D. The Company has received a ruling by the Internal Revenue Service to
the effect that the transactions herein agreed upon will qualify as a tax-free
exchange and distribution under Section 355 of the Internal Revenue Code of
1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises and the obligations of
the parties pursuant hereto, the parties hereto agree as follows.
1. Separation of Businesses. The Company having received a ruling by
the Internal Revenue Service to the effect that the transactions herein agreed
upon will qualify as a tax-free exchange and distribution under Section 355 of
the Internal Revenue Code of 1986, as amended, the Company's Pharmaceutical
Business and Other Business will be separated in the manner provided for herein.
2. New Corporation. The Company has formed a corporation under the laws
of Delaware, QK Healthcare, Inc. (the "New Company"), with the powers and
capitalization set out in the Amended and Restated Certificate of Incorporation
attached hereto as Exhibit A.
3. Transfer of Pharmaceutical Business. In exchange for all of the
authorized shares of the New Company, the Company shall transfer the following
assets of the Pharmaceutical Business, as more fully described in Exhibit B,
subject to the liabilities allocable to the Pharmaceutical Business as listed in
Exhibit C:
a. All of the inventory of the Pharmaceutical Business;
<PAGE> 2
b. All equipment and leasehold improvements upon the site on which the
Pharmaceutical Business is operated;
c. All vehicles, trademarks, trade names, lists of customers and other
assets identified with the Pharmaceutical Business;
d. All the software used by the Company in the operation of the
Pharmaceutical Business;
e. Working capital equal to [ ].
4. Sublease. On the Closing Date the Company will deliver or cause to
be delivered to the New Company a sublease for the premises from which the
Pharmaceutical Business is conducted, substantially in the form of Exhibit D
attached hereto.
5. Credit Facility. On the Closing Date, the New Company will assume a
portion equal to $_______ of the Company's current revolving credit facility and
the New Company shall execute and deliver the appropriate documentation
evidencing its status as a co-borrower under such facility. The Company shall
negotiate a credit facility in the aggregate principal amount of at least $325
million for the New Company on similar or better terms than the Company's
existing Credit Facility (the "New Credit Facility"), such facility to be
effective as of the Closing Date.
6. Distribution. Promptly after the transfers, delivery and execution
of documents provided for in Sections 3, 4 and 5 herein, the Company shall
distribute all of its stock in the New Company to the Shareholders, in
proportion to their ownership of stock in the Company.
7. Further Instruments. Each party shall execute and deliver such
further instruments as may be reasonably requested by any other party to carry
out the purpose and intent of this Agreement, including but not limited to, the
following:
a. Indemnification, Noncompetition and Tax Cooperation Agreement among
the Company, the New Company and Pro's Choice Beauty Care, Inc., substantially
in the form of Exhibit E attached hereto.
b. Support Services Agreement between the Company and the New Company
substantially in the form attached hereto as Exhibit F.
8. Closing. The transfers contemplated by this Agreement shall take
place at the offices of Edwards & Angell, LLP, 750 Lexington Ave., New York, New
York 10022 on or about _______________, 1999 (the "Closing Date").
9. Entire Agreement. This Agreement contains the entire agreement
between the parties hereto pertaining to the subject matter hereof and
supersedes all prior and contemporaneous agreements, except those contemplated
hereunder or not inconsistent herewith.
10. Governing Law. This Agreement has been executed in the State of New
York and shall be governed by the laws thereof.
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first written above.
QUALITY KING DISTRIBUTORS, INC.
By:______________________
Name:
Title:
U/D GLENN NUSSDORF TRUST DATED
NOVEMBER 1, 1998
By:_________________________
Arlene Nussdorf, Trustee
By: _________________________
Stephen Nussdorf, Trustee
U/D GLENN NUSSDORF TRUST DATED
NOVEMBER 2, 1998
By:_________________________
Arlene Nussdorf, Trustee
By: _________________________
Stephen Nussdorf, Trustee
<PAGE> 4
U/D STEPHEN NUSSDORF TRUST DATED
NOVEMBER 1, 1998
By:_________________________
Arlene Nussdorf, Trustee
By: _________________________
Glenn Nussdorf, Trustee
U/D STEPHEN NUSSDORF TRUST DATED
NOVEMBER 2, 1998
By:_________________________
Arlene Nussdorf, Trustee
By: _________________________
Glenn Nussdorf, Trustee
U/D ARLENE NUSSDORF TRUST DATED
NOVEMBER 1, 1998
By:_________________________
Glenn Nussdorf, Trustee
By: _________________________
Stephen Nussdorf, Trustee
U/D ARLENE NUSSDORF TRUST DATED
NOVEMBER 2, 1998
By:_________________________
Glenn Nussdorf, Trustee
By: _________________________
Stephen Nussdorf, Trustee
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
QK HEALTHCARE, INC.
------------
Pursuant to the provisions of Sections 242, 245 and 228 of the General
Corporation Law of Delaware, the undersigned Corporation adopts the following
Amended and Restated Certificate of Incorporation:
FIRST: The name of the Corporation is QK Healthcare, Inc. (the
"Corporation").
SECOND: The following Amended and Restated Certificate of Incorporation
has been adopted by the sole stockholder of the Corporation by written consent
in accordance with Sections 228, 242 and 245 of the General Corporation Law of
Delaware.
The Certificate of Incorporation of the Corporation (originally filed
under the name of QKRX, Inc.) incorporated on April 5, 1999, as previously
amended, is hereby deleted in its entirety and is amended and restated as
follows:
ARTICLE I
FIRST: The name of the corporation (hereinafter called the
"Corporation") is QK Healthcare, Inc.
SECOND: The address, including street, number, city, and county, of the
registered office of the Corporation in the State of Delaware is 1209 Orange
Street, Wilmington, Delaware 19801, County of New Castle; and the name of the
registered agent of the Corporation in the State of Delaware at such address is
The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted by and
promoted by the Corporation is: for any lawful business, to promote any lawful
purpose, and to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is as follows:
<TABLE>
<CAPTION>
Class Number of Shares Par Value
----- ---------------- ---------
<S> <C> <C>
Common 100,000,000 $.001
Preferred 20,000,000 $.001
</TABLE>
The designations and the powers, preferences and rights, and the
qualifications or restrictions thereof are as follows:
<PAGE> 2
The Preferred Stock shall be issued from time to time
in one or more series, with such distinctive serial
designations as shall be stated and expressed in the
resolution or resolutions providing for the issuance of such
shares from time to time adopted by the Board of Directors
pursuant to authority so to do, which is hereby vested in the
Board of Directors; and in such resolution or resolutions
providing for the issuance of shares of each particular
series, the Board of Directors is expressly authorized to fix
the annual rate or rates of dividends for the particular
series; the dividend payment dates for the particular series
and the date from which dividends on all shares of such
series issued prior to the record date for the first dividend
payment date shall be cumulative; the redemption price or
prices for the particular series; the voting powers for the
particular series; the rights, if any, of holders of the
shares of the particular series to convert the same into
shares of any other series or class or other securities of
the Corporation, with any provisions for the subsequent
adjustment of such conversion rights; and to classify or
reclassify any unissued shares by fixing or altering from
time to time any of the foregoing or any other rights,
privileges and qualifications.
All shares of Preferred Stock of any one series shall
be identical with each other in all respects, except that
shares of any one series issued at different times may differ
as to the dates from which dividends thereon shall be
cumulative; and all Preferred Stock shall be of equal rank,
regardless of series, and shall be identical in all respects
except as to the particulars fixed by the Board of Directors
as hereinabove provided or as fixed herein.
FIFTH: No Director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director; provided, however, that the foregoing clause shall not apply
to any liability of a Director (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv)
for any transaction from which the Director derived an improper personal
benefit, it being the intention of the foregoing provision to eliminate the
liability of the Corporation's directors to the Corporation or its stockholders
to the fullest extent permitted by Section 102(b)(7) of the Delaware General
Corporation Law as amended from time to time. This Article shall not eliminate
or limit the liability of a Director for any act or omission occurring prior to
the time this Article became effective.
SIXTH:
(i) The number of directors which will constitute the whole Board of
Directors of the Corporation shall be fixed exclusively by one or more
resolutions adopted by the Board of Directors of the Corporation or as otherwise
provided in the By-Laws of the Corporation.
- 2 -
<PAGE> 3
(ii) Upon the closing of an initial public offering of the
Corporation's Common Stock ("Public Offering"), the directors shall be divided
into three classes, as nearly equal in number as possible, designated as Class
I, Class II, and Class III, respectively, and assigned to such classes in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the closing of the Public
Offering, (i) the Class I directors shall be nominated for election for a term
of one year, (ii) the Class II directors shall be nominated for election for a
term of two years, and (iii) the Class III directors shall be nominated for
election for a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
Stockholders may not amend or repeal this provision except upon the affirmative
vote of not less than 75% of the outstanding shares of capital stock entitled to
vote hereon.
(iii) Notwithstanding the foregoing provisions of this ARTICLE VI, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. Neither the Board of Directors nor any
individual director may be removed without cause. Subject to any limitation
imposed by law, any individual director or directors may be removed with cause
by the holders of a majority of the voting power of the Corporation entitled to
vote at an election of directors. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
(iv) Vacancies in the Board of Directors may be filled by a majority of
the remaining directors, though less than a quorum, or by a sole remaining
director.
(v) Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
(vi) Holders of a majority of the outstanding shares of capital stock
entitled to vote with respect to an election of directors may remove directors
only for cause.
SEVENTH: The Corporation is to have perpetual existence.
EIGHTH: The Corporation shall indemnify and hold harmless any director
or officer of the Corporation from and against any and all expenses and
liabilities that may be imposed upon or incurred by such person in connection
with, or as a result of, any proceeding in which such person may become
involved, as a party or otherwise, by reason of the fact that such person is or
was such a director or officer of the Corporation, whether or not such person
continues to be such at the time such expenses and liabilities shall have been
imposed or incurred. It is the intention of this Article VIII to provide
indemnification to the fullest extent permitted by the laws of the State of
Delaware, as they may be amended from time to time.
NINTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors of the Corporation is
authorized and empowered to adopt, alter, amend and repeal the Bylaws of the
Corporation in any manner not inconsistent with the laws of the State of
Delaware. The Bylaws of the Corporation may be adopted, amended, altered, or
repealed by
- 3 -
<PAGE> 4
(a) a majority of the authorized number of directors or (b) the affirmative vote
of not less than 75% of the outstanding shares of voting stock.
TENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 Title 8 of the Delaware
Code order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders of this Corporation, as the case may be,
and also on this Corporation.
ELEVENTH: Meetings of the stockholders may be held within or without
the State of Delaware, as the By-Laws may provide. The books of the Corporation
may be kept (subject to any provision contained in the statutes) outside the
State of Delaware at such place or places as may be designated from time to time
by the Board of Directors or in the By-Laws of the Corporation. Special meetings
of stockholders may be called only by the Chairman of the Board or by a majority
of the members of the Board of Directors.
TWELFTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute; provided, however, that the
affirmative vote of at least 75% of the outstanding stock is required to amend
the provisions of this Certificate of Incorporation.
I, the undersigned, being the Vice President of the Corporation, hereby declare,
under penalties of perjury, that this is the act and deed of the Corporation and
the facts stated herein are true, and accordingly I have executed this Amended
and Restated Certificate of Incorporation as of the ___ day of _______, 1999.
__________________________
Michael Katz
- 4 -
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
QK HEALTHCARE, INC.
ARTICLE 1.
OFFICES
SECTION 1.01. Registered Office. The registered office of the
Corporation in the State of Delaware shall be at 1209 Orange Street, in the City
of Wilmington, County of New Castle 19801. The name of its registered agent in
charge thereof shall be the Corporation Trust Company.
SECTION 1.02. Other Offices. The Corporation may also have an office in
the State of New York, and at such other place or places either within or
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the Corporation require.
ARTICLE 2.
MEETINGS OF STOCKHOLDERS
SECTION 2.01. Place of Meetings. All meetings of the Stockholders of
the Corporation shall be held at such place either within or without the State
of Delaware as shall be fixed by the Board of Directors and specified in the
respective notices or waivers of notice of said meetings.
SECTION 2.02. Annual Meetings.
(a) The annual meeting of the stockholders for the election of
directors and for the transaction of such other business as may come before the
meeting shall be held at the principal office of the Corporation, or such place
as shall be fixed by the Board of Directors, at 3:00 in the afternoon, local
time, on the second Wednesday in December in each year, if not a legal holiday
at the place where such meeting is to be held, and if a legal holiday, then on
the next succeeding business day not a legal holiday at the same hour.
(b) In respect of the annual meeting for any particular year the Board
of Directors may, by resolution, fix a different day, time or place (either
within or without the State of Delaware) for the annual meeting.
(c) If the election of directors shall not be held on the day
designated herein or the day fixed by the Board, as the case may be, for any
annual meeting, or on the day of any adjourned session thereof, the Board of
Directors shall cause the election to be held at a special meeting as soon
thereafter as conveniently may be. At such special meeting the stockholders
<PAGE> 2
may elect the directors and transact other business with the same force and
effect as at an annual meeting duly called and held.
(d) At an annual meeting of the stockholders of the Corporation, only
such business shall be conducted as shall have been properly brought before such
meeting. To be properly brought before an annual meeting, business must be (i)
specified in the notice of such meeting (or any supplement thereto) given by or
at the direction of the Board of Directors, (ii) otherwise properly brought
before such meeting by or at the direction of the Board of Directors, or (iii)
otherwise properly brought before such meeting by a stockholder. Without
limiting the foregoing, for business to be properly brought before an annual
meeting by a stockholder, such stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation. To be timely, such stockholder's
notice must be delivered in writing either by personal delivery or by registered
or certified mail, return receipt requested, to the principal executive offices
of the Corporation (addressed to the Secretary) not less than ninety (90)
calendar days prior to the anniversary date of the release of the Corporation's
proxy statement to its stockholders in connection with the preceding year's
annual meeting of its stockholders, except that if no annual meeting of its
stockholders was held in the previous year or the date of the annual meeting of
its stockholders has been changed by more than thirty (30) calendar days from
the anniversary of the annual meeting of its stockholders stated in the previous
year's proxy statement, notice by the shareholder in order to be timely must be
received not later than the close of business on the tenth day following the day
on which said notice of the date of the annual meeting was mailed or public
disclosure of the date of the annual meeting was made, whichever first occurs.
Such stockholder's notice shall set forth, as to each matter such stockholder
proposes to bring before an annual meeting, (i) a brief description of the
business desired to be brought before such annual meeting and the reasons for
conducting such business at the annual meeting, (ii) a representation that such
stockholder is a holder of record of stock of the Corporation entitled to vote
with respect to such business and that such stockholder intends to appear in
person or by proxy at the annual meeting to move the consideration of such
business, (iii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business, (iv) the class and number of shares
of stock of the Corporation which are beneficially owned by such stockholder,
and (v) any interest of such stockholder in such business. Notwithstanding
anything in the Bylaws of the Corporation to the contrary, no business shall be
conducted at an annual meeting except in accordance with the procedures set
forth in this Section 2.02. The Chairman of an annual meeting may refuse to
acknowledge a motion to consider any business that he/she determines was not
made in compliance with the foregoing procedures and if he/she should so
determine and declare to such meeting, then any such business not properly
brought before such meeting shall not be transacted.
(e) Only persons who are nominated in accordance with the procedures
set forth in this Section 2.02 shall be eligible for election as directors.
Without limiting the foregoing, nomination of persons for election to the Board
of Directors may be made at a meeting of stockholders (i) by or at the direction
of the Board of Directors or any nominating or similar committee thereof, or
(ii) by any stockholder entitled to vote for the election of directors of the
Corporation at such meeting who complies with the notice procedures set forth in
this Section 2.02. Such nominations, other than those made by or at the
direction of the Board of
-2-
<PAGE> 3
Directors or any nominating or similar committee thereof, shall be made pursuant
to timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered in writing either by personal delivery
or by registered or certified mail, return receipt requested, to the principal
executive offices of the Corporation (addressed to the Secretary) not less than
ninety (90) calendar days prior to the anniversary date of the immediately
preceding annual meeting of its stockholders, except that if no annual meeting
of its stockholders was held in the previous year or the date of the annual
meeting of its stockholders has been changed by more than thirty (30) calendar
days from the anniversary of the annual meeting of its stockholders stated in
the previous year's proxy statement, notice by the shareholder in order to be
timely must be received not later than the close of business on the tenth day
following the day on which said notice of the date of the annual meeting was
mailed or public disclosure of the date of the annual meeting was made,
whichever first occurs. Such stockholder's notice shall set forth (i) as to each
person whom such stockholder proposes to nominate for election or re-election as
a director (A) the name, age, business address and residence address of such
nominee, (B) the principal occupation or employment of such nominee, (C) the
class and number of shares of the Corporation, if any, which are beneficially
owned by such nominee, (D) a description of all arrangements or understandings
between such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which such nomination is made by
such stockholder, and (E) any other information relating to such nominee that is
required to be disclosed in solicitations of proxies for election of directors,
or as otherwise required, in each case, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including, without limitation, such
nominee's written consent to being named in the proxy statement as a nominee and
to serving as a director of the Corporation if elected); and (ii) as to such
stockholder (A) the name and address, as they appear on the Corporation's books,
of such stockholder, (B) a representation that such stockholder is a holder of
record of stock of the Corporation entitled to vote at such meeting and that
such stockholder intends to appear in person or by proxy at such meeting to
nominate the person or persons specified in such notice, and (C) the class and
number of shares of stock of the Corporation which are beneficially owned by
such stockholder. At the request of the Board of Directors, any person nominated
by the Board of Directors for election as a director of the Corporation shall
furnish to the Secretary of the Corporation that information required to be set
forth in a stockholder's notice of nomination, as provided above in this clause
(e), which pertains to such nominee. No person shall be eligible for election as
a director of the Corporation unless nominated in accordance with the procedures
set forth in this Section 2.02. The chairman of the meeting may refuse to
acknowledge a motion to consider any nominee as a director that he/she
determines was not made in compliance with the foregoing procedures and if
he/she should so determine and declare to such meeting, then the defective
nomination shall be disregarded.
SECTION 2.03. Special Meetings. (a) A special meeting of the
stockholders for any purpose or purposes may be called at any time only by the
Chairman of the Board, or by order of the Board of Directors.
(b) In the case of a special meeting of stockholders called for the
purpose of electing directors, notice of stockholder nominations must be made
not later than the close of business on
-3-
<PAGE> 4
the tenth day following the day on which notice of the special meeting was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs.
SECTION 2.04. Notice of Meetings.
(a) Except as otherwise required by statute, notice of each annual or
special meeting of the stockholders shall be given to each stockholder of record
entitled to vote at such meeting not less than ten days nor more than fifty days
before the day on which the meeting is to be held by delivering written notice
thereof to him or her personally or by mailing such notice, postage prepaid,
addressed to him or her at his or her post-office address last shown in the
records of the Corporation or by transmitting notice thereof to him or her at
such address by telegraph, cable or any other available method. Every such
notice shall state the time and place of the meeting and, in case of a special
meeting, shall state briefly the purposes thereof.
(b) Notice of any meeting of stockholders shall not be required to be
given to any stockholder who shall attend such meeting in person or by proxy or
who shall in person or by attorney thereunto authorized, waive such notice in
writing or by telegraph, cable or any other available method either before or
after such meeting. Notice of any adjourned meeting of the stockholders shall
not be required to be given except when expressly required by law.
SECTION 2.05. Quorum.
(a) At each meeting of the stockholders, except where otherwise
provided by statute, the Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation") or these By-Laws, the holders of record of a
majority of the issued and outstanding shares of stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum for the transaction of business.
(b) In the absence of a quorum, a majority in interest of the
stockholders of the Corporation entitled to vote, present in person or
represented by proxy or, in the absence of all such stockholders, any officer
entitled to preside at, or act as secretary of, such meeting, shall have the
power to adjourn the meeting from time to time, until stockholders holding the
requisite amount of stock shall be present or represented. At any such adjourned
meeting at which a quorum shall be present any business may be transacted which
might have been transacted at the meeting as originally called.
SECTION 2.06. Organization. At each meeting of the stockholders, the
Chairman of the Board, or in his or her absence, the President, any Vice
President, or any other officer designated by the Board of Directors, shall act
as chairman, and the Secretary or an Assistant Secretary of the Corporation, or
in the absence of the Secretary and all Assistant Secretaries, a person whom the
chairman of such meeting shall appoint shall act as secretary of the meeting and
keep the minutes thereof.
-4-
<PAGE> 5
SECTION 2.07. Voting.
(a) Except as otherwise provided by law or by the Certificate of
Incorporation or these By-Laws, at every meeting of the stockholders each
stockholder shall be entitled to one vote, in person or by proxy, for each share
of capital stock of the Corporation registered in his or her name on the books
of the Corporation:
(i) on the date fixed pursuant to Section 9.03 of these By-Laws
as the record date for the determination of stockholders entitled to
vote at such meeting; or
(ii) if no such record date shall have been fixed, then the
record date shall be at the close of business on the day next preceding
the day on which notice of such meeting is given.
(b) Persons holding stock in a fiduciary capacity shall be entitled to
vote the shares so held. In the case of stock held jointly by two or more
executors, administrators, guardians, conservators, trustees or other
fiduciaries, such fiduciaries may designate in writing one or more of their
number to represent such stock and vote the shares so held, unless there is a
provision to the contrary in the instrument, if any, defining their powers and
duties.
(c) Persons whose stock is pledged shall be entitled to vote thereon
until such stock is transferred on the books of the Corporation to the pledgee,
and thereafter only the pledgee shall be entitled to vote.
(d) Any stockholder entitled to vote may do so in person or by his or
her proxy appointed by an instrument in writing subscribed by such stockholder
or by his or her attorney thereunto authorized, or by a telegram, cable or any
other available method delivered to the secretary of the meeting; provided,
however, that no proxy shall be voted after three years from its date, unless
said proxy provides for a longer period.
(e) At all meetings of the stockholders, all matters (except where
other provision is made by law or by the Certificate of Incorporation or these
By-Laws) shall be decided by the vote of a majority in interest of the
stockholders entitled to vote thereon, present in person or by proxy, at such
meeting, a quorum being present. The vote upon any matter, including the
election of directors, need not be by written ballot.
SECTION 2.08. Inspectors. The chairman of the meeting may at any time
appoint one or more inspectors to serve at a meeting of the stockholders. Such
inspectors shall decide upon the qualifications of voters, accept and count the
votes for and against the questions presented, report the results of such votes,
and subscribe and deliver to the secretary of the meeting a certificate stating
the number of shares of stock issued and outstanding and entitled to vote
thereon and the number of shares voted for and against the questions presented.
The inspectors need not be stockholders of the Corporation, and any director or
officer of the Corporation may be an inspector on any question other than a vote
for or against his or her election to any position
-5-
<PAGE> 6
with the Corporation or on any other question in which he or she may be directly
interested. Before acting as herein provided, each inspector shall subscribe an
oath faithfully to execute the duties of an inspector with strict impartiality
and according to the best of his or her ability.
SECTION 2.09. List of Stockholders.
(a) It shall be the duty of the Secretary or other officer of the
Corporation who shall have charge of its stock ledger to prepare and make, or
cause to be prepared and made, at least ten days before every meeting of the
stockholders, a complete list of the stockholders entitled to vote thereat,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of such stockholder. Such list shall
be open during ordinary business hours to the examination of any stockholder for
any purpose germane to the meeting for a period of at least ten days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held.
(b) Such list shall be produced and kept at the time and place of the
meeting during the whole time thereof and may be inspected by any stockholder
who is present.
(c) The stock ledger shall be conclusive evidence as to who are the
stockholders entitled to examine the stock ledger and the list of stockholders
required by this Section 2.09 on the books of the Corporation or to vote in
person or by proxy at any meeting of stockholders.
ARTICLE 3.
BOARD OF DIRECTORS
SECTION 3.01. General Powers. The business, property and affairs of the
Corporation shall be managed by the Board of Directors.
SECTION 3.02. Number, Qualifications, Terms and Removal from Office.
(a) The number of directors of the Corporation on the date of adoption
of these Bylaws shall be four; provided, however, that upon the closing of a
Public Offering (as defined in Article Sixth of the Certificate of
Incorporation), the number of directors of the Corporation shall be as set forth
in one or more resolutions adopted by the Board of Directors of the Corporation.
The number of directors of the Corporation may be increased or decreased by
resolution of the Board of Directors of the Corporation. All directors of the
Corporation shall hold office for the term for which they are elected or until
their successors shall have been elected and qualified, whichever period is
longer. The directors of the Corporation need not be residents of the State of
Delaware.
(b) A director need not be a stockholder.
(c) Except as otherwise contemplated by written agreement among the
stockholders of the Corporation, or the Certificate of Incorporation, vacancies
and newly created directorships
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<PAGE> 7
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director, and the directors so chosen shall hold office until
the next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by statute. Except as
otherwise contemplated by written agreement among the stockholders of the
Corporation, or the Certificate of Incorporation, whenever the holders of any
class or classes of stock or series thereof are entitled to elect one or more
directors by the provisions of the Certificate of Incorporation, vacancies and
newly created directorships of such class or classes or series may be filled by
a majority of the directors elected by such class or classes or series thereof
then in office, or by a sole remaining director so elected. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding, on a common equivalent
basis, having the right to vote for such directors, summarily order an election
to be held to fill any such vacancies or newly created directorships, or to
replace the directors chosen by the directors then in office.
SECTION 3.03. Quorum and Manner of Acting.
(a) Except as otherwise provided by statute or by the Certificate of
Incorporation, a majority of the directors at the time in office shall
constitute a quorum for the transaction of business at any meeting and the
affirmative action of a majority of the directors present at any meeting at
which a quorum is present shall be required for the taking of any action by the
Board of Directors.
(b) In the event one or more of the directors shall be disqualified to
vote at such meeting, then the required quorum shall be reduced by one for each
such director so disqualified; provided, however, that in no event shall the
quorum as adjusted be less than one third of the total number of directors.
(c) In the absence of a quorum at any meeting of the Board such meeting
need not be held; or a majority of the directors present thereat or, if no
director be present, the Secretary may adjourn such meeting from time to time
until a quorum shall be present. Notice of any adjourned meeting need not be
given.
SECTION 3.04. Offices, Place of Meeting and Records. The Board of
Directors may hold meetings, have an office or offices and keep the books and
records of the Corporation at such place or places within or without the State
of Delaware as the Board may from time to time determine. The place of meeting
shall be specified or fixed in the respective notices or waivers of notice
thereof, except where otherwise provided by statute, by the Certificate of
Incorporation or these By-Laws.
SECTION 3.05. Annual Meeting. The Board of Directors shall meet for the
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable
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following each annual election of directors. Such meeting shall be called and
held at the place and time specified in the notice or waiver of notice thereof
as in the case of a special meeting of the Board of Directors.
SECTION 3.06. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such places and at such times as the Board shall from
time to time by resolution determine. If any day fixed for a regular meeting
shall be a legal holiday at the place where the meeting is to be held, then the
meeting which would otherwise be held on that day shall be held at said place at
the same hour on the next succeeding business day. Notice of regular meetings
need not be given.
SECTION 3.07. Special Meetings; Notice. Special meetings of the Board
of Directors shall be held whenever called by the Chairman of the Board, the
President or by any two (2) of the directors. Notice of each such meeting shall
be mailed to each director, addressed to him or her at his or her residence or
usual place of business, at least two days before the day on which the meeting
is to be held, or shall be sent to him or her at his or her residence or at such
place of business by telegraph, cable or other available means, or shall be
delivered personally or by telephone, not later than one day before the day on
which the meeting is to be held. Each such notice shall state the time and place
of the meeting but need not state the purposes thereof except as otherwise
herein expressly provided. Notice of any such meeting need not be given to any
director, however, if waived by him or her in writing or by telegraph, cable or
otherwise, whether before or after such meeting shall be held, or if he or she
shall be present at such meeting.
SECTION 3.08. Organization. At each meeting of the Board of Directors,
the Chairman of the Board, or in his or her absence, the President or, in his or
her absence, a director chosen by a majority of the directors present, shall act
as chairman. The Secretary or, in his or her absence an Assistant Secretary or,
in the absence of the Secretary and all Assistant Secretaries, a person whom the
chairman of such meeting shall appoint shall act as secretary of such meeting
and keep the minutes thereof.
SECTION 3.9. Order of Business. At all meetings of the Board of
Directors business shall be transacted in the order determined by the Board.
SECTION 3.10. Resignation. Any director of the Corporation may resign
at any time by giving written notice of his or her resignation to the Board of
Directors, the Chairman of the Board, the President, any Vice President or the
Secretary of the Corporation. Such resignation shall take effect at the date of
receipt of such notice or at any later time specified therein; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
SECTION 3.11. Compensation. Each director, in consideration of serving
as such, who is neither an employee of nor a compensated consultant to the
Corporation, shall be entitled to receive from the Corporation such amount per
annum or such fees for attendance at directors' meetings, or both, as the Board
of Directors shall from time to time determine. Each director shall be entitled
to reimbursement for the reasonable expenses incurred by him or her in
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connection with the performance of his or her duties; provided that nothing
herein contained shall be construed to preclude any director from serving the
Corporation or its subsidiaries in any other capacity and receiving proper
compensation therefor.
ARTICLE 4.
COMMITTEES
SECTION 4.01. Executive Committee. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole Board, appoint an
Executive Committee to consist of two or more members of the Board of Directors,
including the President, and shall designate one of the members as its chairman.
Each member of the Executive Committee shall hold office, so long as he
or she shall remain a director, until the first meeting of the Board of
Directors held after the next annual election of directors and until his or her
successor is duly appointed and qualified. The chairman of the Executive
Committee or, in his or her absence, a member of the Committee chosen by a
majority of the members present shall preside at meetings of the Executive
Committee and the Secretary or an Assistant Secretary of the Corporation, or
such other person as the Executive Committee shall from time to time determine,
shall act as secretary of the Executive Committee.
The Board of Directors, by action of the majority of the whole Board,
shall fill vacancies in the Executive Committee.
SECTION 4.02. Powers. During the intervals between the meetings of the
Board of Directors, the Executive Committee shall have and may exercise all of
the powers of the Board of Directors in all cases in which specific directions
shall not have been given by the Board of Directors.
SECTION 4.03. Procedure; Meetings; Quorum. The Executive Committee
shall fix its own rules of procedure subject to the approval of the Board of
Directors, and shall meet at such times and at such place or places as may be
provided by such rules. At every meeting of the Executive Committee the presence
of a majority of all the members shall be necessary to constitute a quorum and
the affirmative vote of a majority of the members present shall be necessary for
the adoption by it of any resolution. In the absence of a quorum at any meeting
of the Executive Committee such meeting need not be held, or a majority of the
members present thereat or, if no members be present, the secretary of the
meeting may adjourn such meeting from time to time until a quorum be present.
SECTION 4.04. Compensation. Each member of the Executive Committee
shall be entitled to receive from the Corporation reimbursement for the
reasonable expenses incurred by him or her in connection with the performance of
his or her duties, and, with respect to any member of the Executive Committee
who is neither an employee of nor a compensated consultant to the Corporation,
such fee, if any, as shall be fixed from time to time by the Board of Directors.
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SECTION 4.05. Nominating Committee. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole Board, appoint a
Nominating Committee to consist of two or more members of the Board of
Directors, including the President, and shall designate one of the members as
its chairman.
Each member of the Nominating Committee shall hold office, so long as
he or she shall remain a director, until the first meeting of the Board of
Directors held after the next annual election of directors and until his or her
successor is duly appointed and qualified. The chairman of the Nominating
Committee or, in his or her absence, a member of the Committee chosen by a
majority of the members present shall preside at meetings of the Nominating
Committee and the Secretary or an Assistant Secretary of the Corporation, or
such other person as the Nominating Committee shall from time to time determine,
shall act as secretary of the Nominating Committee.
The Board of Directors, by action of the majority of the whole Board,
shall fill vacancies in the Nominating Committee.
SECTION 4.06. Powers. The Nominating Committee shall have the power to
nominate such persons as it may determine to stand for election to the Board of
Directors, all in accordance with the Certificate of Incorporation and By-Laws.
SECTION 4.07. Procedure; Meetings; Quorum. The Nominating Committee
shall fix its own rules of procedure subject to the approval of the Board of
Directors, and shall meet at such times and at such place or places as may be
provided by such rules. At every meeting of the Nominating Committee the
presence of a majority of all the members shall be necessary to constitute a
quorum and the affirmative vote of a majority of the members present shall be
necessary for the adoption by it of any resolution. In the absence of a quorum
at any meeting of the Nominating Committee such meeting need not be held, or a
majority of the members present thereat or, if no members be present, the
secretary of the meeting may adjourn such meeting from time to time until a
quorum be present.
SECTION 4.08. Compensation. Each member of the Nominating Committee
shall be entitled to receive from the Corporation reimbursement for the
reasonable expenses incurred by him or her in connection with the performance of
his or her duties, and, with respect to any member of the Nominating Committee
who is neither an employee of nor compensated consultant to the Corporation,
such fee, if any, as shall be fixed from time to time by the Board of Directors.
SECTION 4.09. Other Board Committees. The Board of Directors may from
time to time, by resolution passed by a majority of the whole Board, designate
one or more committees in addition to the Executive Committee and Nominating
Committee, each committee to consist of two or more of the directors of the
Corporation. Any such committee, to the extent provided in the resolution or in
the By-Laws of the Corporation, shall have and may exercise the powers of the
Board of Directors in the management of the business and affairs of the
Corporation, including the power or authority to authorize the issuance of
stock, and may authorize the seal of
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the Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation
under Section 251 or 252 of the Delaware General Corporation Law ("DGCL"),
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
amending the By-Laws of the Corporation, declaring a dividend, or adopting a
certificate of ownership and merger pursuant to Section 253 of the DGCL. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors. Each committee so
formed shall keep regular minutes of its meetings and report the same to the
Board of Directors when required.
A majority of all the members of any such committee may determine its
action and fix the time and place of its meetings, unless the Board of Directors
shall otherwise provide. The Board of Directors shall have power to change the
members of any committee at any time, to fill vacancies and to discharge any
such committee, either with or without cause, at any time.
SECTION 4.10. Alternates. The Chairman of the Board or the President
may designate one or more directors as alternate members of any committee who
may act in the place and stead of members who temporarily cannot attend any such
meeting.
SECTION 4.11. Additional Committees. The Board of Directors may from
time to time create such additional committees of directors, officers, employees
or other persons designated by it (or any combination of such persons) for the
purpose of advising the Board, the Executive Committee and the officers and
employees of the Corporation in all such matters as the Board shall deem
advisable and with such functions and duties as the Board shall by resolutions
prescribe.
A majority of all the members of any such committee may determine its
action and fix the time and place of its meetings, unless the Board of Directors
shall otherwise provide. The Board of Directors shall have the power to change
the members of any committee at any time, to fill vacancies and to discharge any
such committee, either with or without cause, at any time.
ARTICLE 5.
ACTION BY CONSENT
SECTION 5.01. Consent by Directors. Any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if prior to such action a written consent thereto
is signed by all members of the Board or of such committee, as the case may be,
and such written consent is filed with the minutes of the proceedings of the
Board or such committee.
SECTION 5.02. Consent of Stockholders. Any action required to be taken
at any annual or special meeting of stockholders of the Corporation, or any
action which may be taken at any
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annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Every written consent shall bear the date
of signature of each stockholder who signs the consent and no written consent
shall be effective to take the corporate action referred to therein unless,
within sixty days of the earliest dated consent delivered in the manner required
above to the Corporation, written consents signed by a sufficient number of
holders to take action are delivered to the Corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing.
ARTICLE 6.
OFFICERS
SECTION 6.01. Number. The principal officers of the Corporation shall
be a Chief Executive Officer, President, a Secretary and a Treasurer. The Board
of Directors may also elect a Chairman of the Board and one or more Vice
Presidents (the number thereof and variations in title to be determined by the
Board of Directors). In addition, there may be such other or subordinate
officers, agents and employees as may be appointed in accordance with the
provisions of Section 6.03.
SECTION 6.02. Election, Qualifications and Term of Office. Each officer
of the Corporation, except such officers as may be appointed in accordance with
the provisions of Section 6.03, shall be elected annually by the Board of
Directors and shall hold office until a successor shall have been duly elected
and qualified, or until death, or until he or she shall have resigned or shall
have been removed in the manner herein provided.
SECTION 6.03. Other Officers. The Corporation may have such other
officers, agents, and employees as the Board of Directors may deem necessary,
including a Controller, one or more Assistant Controllers, one or more Assistant
Treasurers and one or more Assistant Secretaries, each of whom shall hold office
for such period, have such authority, and perform such duties as the Board of
Directors may from time to time determine. The Board of Directors may delegate
to any principal officer the power to appoint or remove any such subordinate
officers, agents or employees.
SECTION 6.04. Removal. Any officer may be removed, either with or
without cause, by the vote of a majority of the whole Board of Directors or,
except in case of any officer elected by the Board of Directors, by any
committee of officers upon whom the power of removal may be conferred by the
Board of Directors.
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SECTION 6.05. Resignation. Any officer may resign at any time by giving
written notice to the Board of Directors or the President. Any such resignation
shall take effect at the date of receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 6.06. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed in these By-Laws for
regular election or appointment to such office.
SECTION 6.07. Powers of Officers. The Board of Directors shall have the
authority to fix or limit the powers and authority of the officers of the
Corporation to conduct transactions between the Corporation and other parties,
contracts proposed to be entered into by or on behalf of the Corporation, and
all other areas of business operation in which the officers of the Corporation
may engage.
SECTION 6.08. Chairman of the Board. The Chairman of the Board, if one
is elected, shall be a director and shall preside at all meetings of the Board
of Directors and shareholders. The Chairman shall have such specific powers and
duties as from time to time may be conferred or assigned by the Board of
Directors.
SECTION 6.09. Chief Executive Officer. The Chief Executive Officer
shall be responsible for directing the management of the Company and shall have
such specific powers and duties as from time to time maybe conferred upon or
assigned to him or her by the Board of Directors.
SECTION 6.10. President. Subject to determination by the Board of
Directors, the President shall have general executive powers and shall have such
specific powers and duties as from time to time may be conferred upon or
assigned to him or her by the President or the Board of Directors.
SECTION 6.11. Vice President. Each Vice President shall have such
powers and perform such duties as the Board of Directors or the Executive
Committee may from time to time prescribe or as shall be assigned by the Chief
Executive Officer.
SECTION 6.12. Treasurer. The Treasurer shall have charge and custody
of, and be responsible for, all funds and securities of the Corporation, and
shall deposit all such funds to the credit of the Corporation in such banks,
trust companies or other depositories as shall be selected in accordance with
the provisions of these By-Laws. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board of Directors or the Executive
Committee, making proper vouchers for such disbursements, and shall render to
the Board of Directors or the stockholders, whenever the Board may so require, a
statement of all transactions as Treasurer or the financial condition of the
Corporation; and, in general, the Treasurer shall perform all the duties as from
time to time may be assigned by the Board of Directors, any committee of the
Board designated by it so to act or the Chief Executive Officer.
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SECTION 6.13. Secretary. The Secretary shall record or cause to be
recorded in books provided for the purpose the minutes of the meetings of the
stockholders, the Board of Directors, and all committees of which a secretary
shall not have been appointed; shall see that all notices are duly given in
accordance with the provisions of these By-Laws and as required by law; shall be
custodian of all corporate records (other than financial) and of the seal of the
Corporation and see that the seal is affixed to all documents the execution of
which on behalf of the Corporation under its seal is duly authorized in
accordance with the provisions of these By-Laws; shall keep, or cause to be
kept, the list of stockholders as required by Section 2.09, which include the
post-office addresses of the stockholders and the number of shares held by them,
respectively, and shall make or cause to be made, all proper changes therein,
shall see that the books, reports, statements, certificates and all other
documents and records required by law are properly kept and filed; and, in
general, shall perform all duties incident to the office of Secretary and such
other duties as may from time to time be assigned by the Board of Directors, the
Executive Committee or the Chief Executive Officer.
SECTION 6.14. Salaries. The salaries of the principal officers of the
Corporation shall be fixed from time to time by the Board of Directors or a
special committee thereof, and none of such officers shall be prevented from
receiving a salary by reason of the fact that he or she is a director of the
Corporation.
ARTICLE 7.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND
OTHER AUTHORIZED REPRESENTATIVES
SECTION 7.01. Indemnification of Authorized Representatives in Third
Party Proceedings. The Corporation shall indemnify any person who was or is an
authorized representative of the Corporation, and who was or is a party, or is
threatened to be made a party to any third party proceeding, by reason of the
fact that such person was or is an authorized representative of the Corporation,
against expenses, judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such third
party proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Corporation and, with respect to any criminal third party proceeding, had no
reasonable cause to believe such conduct was unlawful. The termination of any
third party proceeding by judgment, order, settlement, indictment, conviction or
upon a plea of nolo contendere or its equivalent, shall not of itself create a
presumption that the authorized representative did not act in good faith and in
a manner which such person reasonably believed to be in or not opposed to, the
best interests of the Corporation, and, with respect to any criminal third party
proceeding, had reasonable cause to believe that such conduct was unlawful.
SECTION 7.02. Indemnification of Authorized Representatives in
Corporate Proceedings. The Corporation shall indemnify any person who was or is
an authorized representative of the Corporation and who was or is a party or is
threatened to be made a party to any corporate proceeding, by reason of the fact
that such person was or is an authorized
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representative of the Corporation, against expenses actually and reasonably
incurred by such person in connection with the defense or settlement of such
corporate action if such person acted in good faith and in a manner reasonably
believed to be in, or not opposed to, the best interests of the Corporation,
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery or the
court in which such corporate proceeding was pending shall determine upon
application that, despite the adjudication or liability but in view of all the
circumstances of the case, such authorized representative is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
SECTION 7.03. Mandatory Indemnification of Authorized Representatives.
To the extent that an authorized representative of the Corporation has been
successful on the merits or otherwise in defense of any third party or corporate
proceeding or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses actually and reasonably incurred by such
person in connection therewith.
SECTION 7.04. Determination of Entitlement to Indemnification. Any
indemnification under Section 7.01, 7.02 or 7.03 of this Article (unless ordered
by a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the authorized representative
is proper in the circumstances because such person has either met the applicable
standard of conduct set forth in Section 7.01 or 7.02 or has been successful on
the merits or otherwise as set forth in Section 7.03 and that the amount
requested has been actually and reasonably incurred. Such determination shall be
made:
(a) By the Board of Directors by a majority of a quorum consisting of
directors who were not parties to such third party or corporate proceeding, or
(b) If such a quorum is not obtainable, or, even if obtainable, a
majority vote of such a quorum so directs, by independent legal counsel in a
written opinion, or
(c) By the stockholders.
SECTION 7.05. Advancing Expenses. Expenses actually and reasonably
incurred in defending a third party or corporate proceeding may be paid on
behalf of an authorized representative by the Corporation in advance of the
final disposition of such third party or corporate proceeding upon receipt of an
undertaking by or on behalf of such authorized representative to repay such
amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the Corporation as authorized in this Article. The financial
ability of such authorized representative to make such repayment shall not be a
prerequisite to the making of an advance.
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SECTION 7.06. Definitions. For purposes of this Article:
(a) "authorized representative" shall mean a director or officer of the
Corporation, or a person serving at the request of the Corporation as a
director, officer, or trustee, of another Corporation, partnership, joint
venture, trust or other enterprise;
(b) "Corporation" shall include, in addition to the resulting
corporation, any constituent Corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent Corporation, or is or
was serving at the request of such constituent Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Article with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its separate
existence had continued.
(c) "corporate proceeding" shall mean any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor or investigative proceeding by the Corporation;
(d) "criminal third party proceeding" shall include any action or
investigation which could or does lead to a criminal third party proceeding;
(e) "expenses" shall include attorneys' fees and disbursements;
(f) "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan;
(g) "not opposed to the best interest of the Corporation" shall include
actions taken in good faith and in a manner the authorized representative
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan;
(h) "other enterprises" shall include employee benefit plans;
(i) "party" shall include the giving of testimony or similar
involvement;
(j) "serving at the request of the Corporation" shall include any
service as a director, officer or employee of the Corporation which imposes
duties on, or involves services by, such director, officer or employee with
respect to an employee benefit plan, its participants, or beneficiaries; and
(k) "third party proceeding" shall mean any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative, other than an action by or in the right of the Corporation.
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SECTION 7.07. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power or the obligation to
indemnify such person against such liability under the provisions of this
Article.
SECTION 7.08. Scope of Article. The indemnification of authorized
representatives and advancement of expenses, as authorized by the preceding
provisions of this Article, shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any statute, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action in another
capacity. The indemnification and advancement of expenses provided by or granted
pursuant to this Article shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be an authorized
representative and shall insure to the benefit of the heirs, executors and
administrators of such a person.
SECTION 7.09. Reliance on Provisions. Each person who shall act as an
authorized representative of the Corporation shall be deemed to be doing so in
reliance upon the rights of indemnification provided by this Article.
ARTICLE 8.
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 8.01. Execution of Contracts. Unless the Board of Directors or
the Executive Committee shall otherwise determine, (a) the Chairman of the
Board, the Chief Executive Officer, the President, any Vice President or the
Treasurer, and (b) the Secretary or any Assistant Secretary, may enter into any
contract or execute any contract or other instrument, the execution of which is
not otherwise specifically provided for, in the name and on behalf of the
Corporation. The Board of Directors, or any committee designated thereby with
power so to act, except as otherwise provided in these By-Laws, may authorize
any other or additional officer or officers or agent or agents of the
Corporation, and such authority may be general or confined to specific
instances. Unless authorized so to do by these By-Laws or by the Board of
Directors or by any such committee, no officer, agent or employee shall have any
power or authority to bind the Corporation by any contract or engagement or to
pledge its credit or to render it liable pecuniarily for any purpose or to any
amount.
SECTION 8.02. Loans. No loan shall be contracted on behalf of the
Corporation, and no evidence of indebtedness shall be issued, endorsed or
accepted in its name, unless authorized by the Board of Directors or Executive
Committee or other committee designated by the Board to act. Such authority may
be general or confined to specific instances. When so authorized, the officer or
officers thereunto authorized may effect loans and advances at any time for the
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Corporation from any bank, trust company or other institution, or from any firm,
corporation or individual, and for such loans and advances may make, execute and
deliver promissory notes or other evidences of indebtedness of the Corporation,
and, when authorized as aforesaid, as security for the payment of any and all
loans, advances, indebtedness and liabilities of the Corporation, may mortgage,
pledge, hypothecate or transfer any real or personal property at any time owned
or held by the Corporation, and to that end execute instruments of mortgage or
pledge or otherwise transfer such property.
SECTION 8.03. Checks, Drafts, etc. All checks, drafts, bills or
exchange or other orders for the payment of money, obligations, notes, or other
evidence of indebtedness, bills of lading, warehouse receipts and insurance
certificates of the Corporation, shall be signed or endorsed by such officer or
officers, agent or agents, attorney or attorneys, employee or employees, of the
Corporation as shall from time to time be determined by resolution of the Board
of Directors or Executive Committee or other committee designated by the Board
so to act.
SECTION 8.04. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
or Executive Committee or other committee designated by the Board so to act may
from time to time designate, or as may be designated by any officer or officers
or agent or agents of the Corporation to whom such power may be delegated by the
Board of Directors or Executive Committee or other committee designated by the
Board so to act and, for the purpose of such deposit and for the purposes of
collection for the account of the Corporation may be endorsed, assigned and
delivered by any officer, agent or employee of the Corporation or in such other
manner as may from time to time be designated or determined by resolution of the
Board of Directors or Executive Committee or other committee designated by the
Board so to act.
SECTION 8.05. Proxies in Respect of Securities of Other Corporations.
Unless otherwise provided by resolution adopted by the Board of Directors or the
Executive Committee or other committee so designated to act by the Board, the
President may from time to time appoint an attorney or attorneys or agent or
agents of the Corporation, in the name and on behalf of the Corporation, to cast
the votes that the Corporation may be entitled to cast as the holder of stock or
other securities in any other corporation, association or trust any of whose
stock or other securities may be held by the Corporation, at meetings of the
holders of the stock or other securities of such other corporation, association
or trust, or to consent in writing, in the name of the Corporation as such
holder, to any action by such other corporation, association or trust, and may
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent, and may execute or cause to be executed in the
name and on behalf of the Corporation and under its corporate seal, or
otherwise, all such written proxies or other instruments as he or she may deem
necessary or proper in the premises.
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<PAGE> 19
ARTICLE 9.
BOOKS AND RECORDS
SECTION 9.01. Place. The books and records of the Corporation may be
kept at such places within or without the State of Delaware as the Board of
Directors may from time to time determine. The stock record books and the blank
stock certificate books shall be kept by the Secretary or by any other officer
or agent designated by the Board of Directors.
SECTION 9.02 Addresses of Stockholders. Each stockholder shall furnish
to the Secretary of the Corporation or to the transfer agent of the Corporation
an address at which notices of meetings and all other corporate notices may be
served upon or mailed to him, and if any stockholder shall fail to designate
such address, corporate notices may be served upon him or her by mail, postage
prepaid, to him or her at his or her post-office address last known to the
Secretary or to the transfer agent of the Corporation or by transmitting a
notice thereof to him or her at such address by telegraph, cable or other
available method.
SECTION 9.03. Record Dates. The Board of Directors may fix in advance a
date, not exceeding sixty days nor fewer than ten days preceding the date of any
meeting of stockholders, or the date for the payment of any dividend, or the
date for the allotment of any rights, or the date when any change or conversion
or exchange of capital stock of the Corporation shall go into effect, or a date
in connection with obtaining such consent, as a record date for the
determination of the stockholders entitled to notice of, and to vote at, any
such meeting or any adjournment thereof, or entitled to receive payment of any
such dividend, or to any such allotment of rights, or to exercise the rights in
respect of any change, conversion or exchange or capital stock of the
Corporation, or to give such consent, and in each such case such stockholders
and only such stockholders as shall be stockholders of record on the date so
fixed shall be entitled to notice of, or to vote at, such meeting and any
adjournment thereof, or to receive payment of such dividend, or to receive such
allotment of rights, or to exercise such rights or to give such consent, as the
case may be, notwithstanding any transfer of any stock on the books of the
Corporation after any such record date fixed as aforesaid.
SECTION 9.04. Audit of Books and Accounts. The books and accounts of
the Corporation shall be audited at least once in each fiscal year by certified
public accountants of good standing selected by the Board of Directors.
ARTICLE 10.
SHARES AND THEIR TRANSFER
SECTION 10.01. Certificates of Stock. Every owner of stock of the
Corporation shall be entitled to have a certificate certifying the number of
shares owned by him or her in the Corporation and designating the class of stock
to which such shares belong, which shall otherwise be in such form as the Board
of Directors shall prescribe. Every such certificate shall be signed by the
President or a Vice President, and by the Treasurer or any Assistant Treasurer
or
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<PAGE> 20
the Secretary or any Assistant Secretary of the Corporation; provided, however,
that where such certificate is signed or countersigned by a transfer agent or
registrar the signatures of such officers of the Corporation and the seal of the
Corporation may be in facsimile form. In case any officer or officers who shall
have signed, or whose facsimile signature or signatures shall have been used on,
any such certificate or certificates shall cease to be such officer or officers
of the Corporation, whether because of death, resignation or otherwise, before
such certificate or certificates shall have been delivered by the Corporation,
such certificate or certificates may nevertheless be issued and delivered by the
Corporation as though the person or persons who signed such certificate or whose
facsimile signature or signatures shall have been used thereof had not ceased to
be such officer or officers of the Corporation.
SECTION 10.02 Record. A record shall be kept of the name of the person,
firm or corporation owning the stock represented by each certificate for stock
of the Corporation issued, the number of shares represented by each such
certificate, and the date thereof, and, in case of cancellation, the date of
cancellation. The person in whose name shares of stock stand on the books of the
Corporation shall be deemed the owner thereof for all purposes as regards the
Corporation.
SECTION 10.03. Transfer of Stock. Transfers of shares of the stock of
the Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by his or her attorney thereunto authorized, and
on the surrender of the certificate or certificates for such shares properly
endorsed.
SECTION 10.04. Transfer Agent and Registrar; Regulations. The
Corporation shall, if and whenever the Board of Directors or Executive Committee
shall so determine, maintain one or more transfer offices or agencies, each in
charge of a transfer agent designated by the Board of Directors, where the
shares of the capital stock of the Corporation shall be directly transferable,
and also if and whenever the Board of Directors shall so determine, maintain one
or more by the Board of Directors, where such shares of stock shall be
registered. The Board of Directors may make such rules and regulations as it may
deem expedient, not inconsistent with these By-Laws, concerning the issue,
transfer and registration of certificates for shares of the capital stock of the
Corporation.
SECTION 10.05. Lost, Destroyed or Mutilated Certificates. In case of
the alleged loss or destruction or the mutilation of a certificate representing
capital stock of the Corporation, a new certificate may be issued in place
thereof, in the manner and upon such terms as the Board of Directors may
prescribe.
ARTICLE 11.
SEAL
The Board of Directors shall provide a corporate seal, which shall be
in the form of a circle and shall bear the name of the Corporation and the state
and year of incorporation.
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<PAGE> 21
ARTICLE 12.
FISCAL YEAR
The fiscal year of the Corporation shall commence on the first day of
November and shall end on the last day of October in each year, except as
otherwise provided from time to time by the Board of Directors.
ARTICLE 13.
WAIVER OF NOTICE
Whenever any notice whatever is required to be given by statute, these
By-Laws or the Certificate of Incorporation, a waiver thereof in writing, signed
by the person or persons entitled to said notice, whether before or after the
time stated therein, shall be deemed equivalent thereto.
ARTICLE 14.
AMENDMENTS
Subject to the provisions of the Certificate of Incorporation, these
By-Laws may be altered, amended or repealed or new By-Laws may be adopted by the
stockholders or by the Board of Directors, when such power is conferred upon the
Board of Directors by the Certificate of Incorporation, at any regular meeting
of the stockholders or of the Board of Directors or at any special meeting of
the stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new By-Laws is contained in the notice of such
special meeting.
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EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and entered
into as of _____________, 19__ between QK Healthcare, Inc., a Delaware
corporation (the "Company"), and those entities whose names appear on the
signature pages hereof (the "Holders").
This Agreement is made in connection with the Agreement and Plan of
Corporate Separation dated the date hereof (the "Reorganization Agreement")
between the Company and the Holders, pursuant to which the Holders are acquiring
Common Stock of the Company.
The parties hereby agree as follows:
1. Certain Definitions.
As used in this Agreement, the following terms shall have the following
respective meanings:
(a) "Business Day" means any day, other than a Saturday, Sunday or legal
holiday, on which banks in the State of New York are open for business.
(b) "Commission" means the Securities and Exchange Commission.
(c) "Common Stock" means the Common Stock, par value $.001 per share, of
the Company, as constituted on the date hereof, any shares into which such
Common Stock shall have been changed, or any shares resulting from any
reclassification of such Common Stock.
(d) "Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute thereto, and the rules and regulations of the
Commission promulgated thereunder, all as the same shall be in effect at the
time.
(e) "Holders" means the Holders referred to in the Preamble and any other
person holding Registrable Securities to whom these registration rights have
been assigned pursuant to Section 9(f) of this Agreement.
(f) "Lock-Up Period" shall mean the period of time, as specified in the
underwriting agreement or related lock-up agreements entered into in connection
with a public offering of the Company's equity securities, during which there
are restrictions on transfers of shares of Common Stock by the Company or any of
the Holders.
(g) "Person" shall mean an individual, partnership, corporation,
association, trust, joint venture, unincorporated organization and any
government, governmental department or agency or political subdivision thereof.
(h) "Registrable Securities" means (i) the Common Stock issued to the
Holders; and (ii) any shares of capital stock of the Company issued or issuable
with respect to the securities referred to in clause (i) by way of a stock split
or stock dividend or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. For
<PAGE> 2
purposes of this Agreement, a Person will be deemed to be a holder of
Registrable Securities upon conversion or exercise in connection with a transfer
of securities or otherwise, but disregarding any restrictions or limitations
upon the exercise of such right, whether or not such acquisition has actually
been effected. Such securities will cease to be Registrable Securities when sold
pursuant to Rule 144 or any offering registered under the Securities Act.
(i) "Registration Expenses" means all expenses incident to the Company's
performance of or compliance with this Agreement, including, without limitation,
all registration, filing, listing and National Association of Securities
Dealers, Inc. ("NASD") fees, all fees and expenses of complying with securities
or blue sky laws, all word processing, duplicating and printing expenses, all
messenger and delivery expenses, any transfer taxes, the fees and expenses of
the Company's legal counsel and independent public accountants, including the
expenses of any special audits or "cold comfort" letters required by or incident
to such performance and compliance, fees and disbursements of one counsel for
all of the Holders, and any fees and disbursements of underwriters customarily
paid by insurers or sellers of securities; provided, however, that Registration
Expenses shall not include underwriting discounts and commissions.
(j) "Securities Act" means the Securities Act of 1933, as amended, or any
successor statute thereto, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect at the time.
2. Registration.
(a) Requested Registration. At any time after the earlier to occur of (A)
the first anniversary of the date hereof and (B) the Company's initial public
offering of equity securities, so long as no Lock-Up Period is then in effect,
upon written request by the Holders of at least 20% of the Registrable
Securities outstanding at the time of the request to the Company, that the
Company effect the registration under the Securities Act of all or part of the
Registrable Securities (a "Requested Registration"), the Company will use its
best efforts to effect the registration under the Securities Act of the
Registrable Securities which the Company has been so requested to register by
the Holders within sixty (60) days after receipt of such request or within
thirty (30) days after receipt of such request if the Company is qualified to
file a registration statement on Commission Form S-3 or any successor or similar
short-form registration statement (collectively, "Form S-3")); provided,
however, that the Company shall not be obligated to effect a Requested
Registration pursuant to this subdivision during the 180 day period immediately
following the commencement of the Company's public offering of equity securities
or during any Lock-Up Period. The Company must effect an unlimited number of
registrations pursuant to this subdivision (a) to the extent such registrations
may be effected on Form S-3, but the Company shall not be obligated to effect
more than five Requested Registrations in the aggregate for the Holders
hereunder other than on Form S-3. The Company shall not be obligated to effect
more than one Registration Statement every six months. Subject to subdivision
(f), the Company may include in such Requested Registration other securities of
the Company for sale, for the Company's account or for the account of any other
person, if and to the extent that the managing underwriter determines that the
inclusion of such additional shares will not interfere with the orderly sale of
the underwritten securities at a price range acceptable to
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<PAGE> 3
the requesting Holders. Upon receipt of a written request pursuant to this
subdivision (a), the Company shall promptly give written notice of such request
to all Holders, and all Holders shall be afforded the opportunity to participate
in such request. The Company will be obligated to include in the Requested
Registration such number of Registrable Securities of any Holder joining in such
request as are specified in a written request by the Holder received by the
Company within 20 days after receipt of such written notice from the Company.
(b) Incidental Registration. If the Company for itself or any of its
security holders shall at any time or times after the date hereof determine to
register under the Securities Act any shares of its capital stock or other
securities (other than: (i) the registration of an offer, sale or other
disposition of securities solely to employees of, or other persons providing
services to, the Company, or any subsidiary pursuant to an employee or similar
benefit plan; or (ii) relating to a merger, acquisition or other transaction of
the type described in Rule 145 under the Securities Act or a comparable or
successor rule, registered on Form S-4 or similar or successor forms), on each
such occasion the Company will notify each Holder of such determination at least
thirty (30) days prior to the filing of such registration statement, and upon
the request of any Holder given in writing within twenty (20) days after the
receipt of such notice, the Company will use its best efforts as soon as
practicable thereafter to cause any of the Registrable Securities specified by
any such Holder to be included in such registration statement to the extent such
registration is permissible under the Securities Act and subject to the
conditions of the Securities Act (an "Incidental Registration").
(c) Registration Statement Form. The Company shall, if permitted by law,
effect any registration requested under Section 2 by the filing of a
registration statement on Form S-3 and shall use its best efforts to take any
action necessary to maintain its eligibility to utilize Form S-3 to permit
resales as requested by the Holders with respect to Transactions Involving
Secondary Offerings as described in General Instruction I.B.3 of Form S-3.
(d) Expenses. The Company shall pay all Registration Expenses incurred in
connection with any Incidental Registration and any Requested Registrations.
(e) Effective Registration Statement. A Requested Registration or an
Incidental Registration requested pursuant to Section 2(a) or Section 2(b),
respectively, shall not be deemed to have been effected unless it has been
declared effective by the Commission. Notwithstanding the foregoing, a
registration statement will not be deemed to have been effected if: (i) after it
has become effective with the Commission, such registration is interfered with
by any stop order, injunction, or other order or requirement of the Commission
or other governmental agency or any court proceeding for any reason other than a
misrepresentation or omission by any Holder; or (ii) the conditions to closing
specified in the purchase agreement or underwriting agreement entered into in
connection with such registration are not satisfied, other than solely by reason
of some act or omission by any Holder.
(f) Priority in Incidental Registration. If an Incidental Registration is
an underwritten registration initiated by the Company, and the managing
underwriters shall give written advice to the Company that, in their opinion,
market conditions dictate that no more than a specified
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<PAGE> 4
maximum number of securities (the "Underwriter's Maximum Number") could
successfully be included in such Incidental Registration, then the Company will
include in such registration:
(i) first, that number of securities which the Company proposes to
offer and sell for its own account in such registration and which
does not exceed the Underwriter's Maximum Number; and
(ii) second, that number of Registrable Securities which shall have
been requested by the Holders thereof having registration rights
hereunder which does not exceed the difference between the
Underwriter's Maximum Number and that number of securities which the
Company is entitled to include therein pursuant to clause (i) above.
If less than all of the Registrable Securities requested to be included in
any such registration by the Holders can be so included due to these priority
requirements, then each requesting Holder's request shall be granted on an pro
rata basis with the other requesting Holders.
(g) Notwithstanding anything in paragraphs (a) and (b) of this Section 2,
the Company shall have the right to delay any registration of Registrable
Securities requested pursuant to paragraph (a) or (b) of this Section 2 for up
to ninety (90) days if such registration would, in the judgment of the Company's
Board of Directors, substantially interfere with any material transaction being
considered at the time of receipt of the request from the Holders.
3. Registration Procedures.
(a) If and whenever the Company is required to use its best efforts to
effect the registration of any Registrable Securities under the Securities Act
as provided in Section 2, the Company, as expeditiously as possible and subject
to the terms and conditions of Section 2, will:
(i) prepare and file with the Commission the requisite registration
statement to effect such registration and use its best efforts to cause such
registration to become and remain effective;
(ii) permit any Holder which, in the reasonable judgment of the
Holder, might be deemed to be an underwriter or a controlling person of the
Company, to participate in the preparation of such registration statement and to
require the insertion therein of material furnished to the Company in writing,
which in the reasonable judgment of such Holder and its counsel should be
included;
(iii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement until the
earlier of such time as all of such securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
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<PAGE> 5
thereof set forth in such registration statement or the expiration of 180 days
after such registration statement becomes effective;
(iv) furnish to the Holders such number of conformed copies of such
registration statement and of each such amendment and supplement thereto (in
each case including all exhibits), such number of copies of the prospectus
contained in such registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed under Rule 424 under
the Securities Act, in conformity with the requirements of the Securities Act,
and such other documents, as the purchaser or any Holder of Registrable
Securities to be sold under such registration statement may reasonably request;
(v) use its best efforts to register or qualify all Registrable
Securities covered by such registration statement under such other United States
state securities or blue sky laws of such jurisdictions as any Holder of
Registrable Securities to be sold under registration statement shall reasonably
request, to keep such registration or qualification in effect for so long as
such registration remains in effect, and take any other action which may be
reasonably necessary or advisable to enable the Holder of Registrable Securities
to be sold under such registration statement to consummate the disposition in
such jurisdictions of the securities owned by such Holder, except that the
Company shall not for any such purpose be required to (a) qualify generally to
do business as a foreign corporation in any jurisdiction wherein it would not
but for the requirements of this subdivision (v) be obligated to be so
qualified, or (b) subject itself to taxation in any such jurisdiction, or (c)
consent to general service of process in any such jurisdiction;
(vi) use its best efforts to cause all Registrable Securities covered
by such registration statement to be registered with or approved by such other
United States state governmental agencies or authorities as may be necessary to
enable the Holder of Registrable Securities to be sold under such registration
statement to consummate the intended disposition of such Registrable Securities;
(vii) in the event of the issuance of any stop order suspending the
effectiveness of the registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Registrable Securities included in such registration statement for sale in
any jurisdiction, the Company shall use its best efforts promptly to obtain the
withdrawal of such order;
(viii) use it best efforts to furnish to the Holders of Registrable
Securities to be sold under such registration statement (1) an opinion, dated
the effective date of the registration statement, of the independent counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, if any, and to the Holders making such request, stating that such
registration statement has become effective under the Securities Act and that
(i) to the best knowledge of such counsel, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Securities Act; (ii)
the
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<PAGE> 6
registration statement, the related prospectus, and each amendment or supplement
thereto, comply as to form in all material respects with the requirements of the
Securities Act and the applicable rules and regulations of the Commission
thereunder (except that such counsel need express no opinion as to financial
statements contained therein); (iii) such counsel has no reason to believe that
either the registration statement or the prospectus, or any amendment or
supplement thereto, contains any untrue statement of a material fact or omits a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; (iv) the descriptions
in the registration statement or the prospectus, or any amendment or supplement
thereto, of all legal and governmental matters and contracts and other legal
documents or instruments are accurate and fairly present the information
required to be shown; (v) such counsel does not know of any legal or
governmental proceedings, pending or contemplated, required to be described in
the registration statement or prospectus, or any amendment or supplement
thereto, which are not described as required nor of any contracts or documents
or instruments of a character required to be described in the registration
statement or prospectus, or any amendment or supplement thereto or to be filed
as exhibits to the registration statement which are not described and filed as
required; and (vi) such other legal matters with respect to the registration in
respect of which such opinion is being given as the Holders may reasonably
request; and (2) a letter, dated the effective date of the registration
statement, from the independent certified public accountants of the Company,
addressed to the underwriters, if any, and to the Holders making such request,
stating that they are independent certified public accountants within the
meaning of the Securities Act and that in the opinion of such accountants, the
financial statements and other financial data of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereto, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and such other financial matters
(including information as to the period ending not more than five business days
prior to the date of such letter) with respect to the registration in respect of
which such letter is being given as the Holders may reasonably request;
(ix) immediately notify the Holders of Registrable Securities
included in such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the happening
of any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
under which they were made, and at the request of the Holders promptly prepare
and furnish to the Holders a reasonable number of copies of a supplement to or
an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made;
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<PAGE> 7
(x) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first full calendar month after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder, and not file any amendment
or supplement to such registration statement or prospectus to which any Holder
shall have reasonably objected in writing on the grounds that such amendment or
supplement does not comply in all material respects with the requirements of the
Securities Act or of the rules or regulations thereunder, having been furnished
with a copy thereof at least two business days prior to the filing thereof;
(xi) provide a transfer agent for all Registrable Securities covered
by such registration statement not later than the effective date of such
registration statement; and
(xii) use its best efforts to list all Registrable Securities covered
by such registration statement on any securities exchange on which any of the
Registrable Securities are then listed.
(b) The Company may require each Holder of Registrable Securities to be
sold under such registration statement, at the Company's expense, to furnish the
Company with such information and undertakings as it may reasonably request
regarding such Holder and the distribution of such securities as the Company may
from time to time reasonably request in writing.
(c) Each Holder, by execution of this Agreement, agrees (A) that upon
receipt of any notice of the Company of the happening of any event of the kind
described in subdivision (a)(ix) of this Section 3, such Holder will forthwith
discontinue its disposition of Registrable Securities pursuant to the
registration statement relating to such Registrable Securities until the receipt
by such Holder of the copies of the supplemented or amended prospectus
contemplated by subdivision (a)(ix) of this Section 3 and, if so directed by the
Company, will deliver to the Company all copies, other than permanent file
copies, then in possession of the Holders of the prospectus relating to such
Registrable Securities current at the time of receipt of such notice and (B)
that it will immediately notify the Company, at any time when a prospectus
relating to the registration of such Registrable Securities is required to be
delivered under the Securities Act, of the happening of any event as a result of
which information previously furnished by such Holder to the Company for
inclusion in such prospectus contains an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
under which they were made. In the event the Company or any such Holder shall
give any such notice, the period referred to in subdivision (a)(iii) of this
Section 3 shall be extended by a number of days equal to the number of days
during the period from and including the giving of notice pursuant to
subdivision (a)(ix) of this Section 3 to and including the date when such Holder
shall have received the copies of the supplemented or amended prospectus
contemplated by subdivision (a)(ix) of this Section 3.
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<PAGE> 8
(d) Each Holder, by execution of this Agreement, agrees that it will not
affect any sale or distribution of a Registrable Security during the Lock-Up
Period specified in the underwriting agreement entered into in connection with
the Company's public offering.
4. Underwritten Offerings.
(a) Underwritten Offering. In connection with any underwritten offering
pursuant to a registration requested under Section 2(a), the Company will enter
into an underwriting agreement with the underwriters for such offering, such
agreement to be in form and substance reasonably satisfactory to all Holders
requesting such registration and such Holders' underwriters in their reasonable
judgment and to contain such representations and warranties by the Company and
such other terms as are customarily contained in agreements of that type,
including, without limitation, indemnities to the effect and to the extent
provided in Section 6. Each such Holder shall be a party to such underwriting
agreement and may, at its or their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of each such Holder and that any or all of the conditions
precedent to the obligations of such underwriters under such underwriting
agreement be conditions precedent to the obligations of each such Holder. No
Holder requesting such registration shall be required to make any
representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements regarding such
Holder and its intended method of distribution and any other representation
required by law.
(b) Selection of Underwriters. If a Requested Registration pursuant to
Section 2(a) involves an underwritten offering, then the Company shall select
the underwriter from underwriting firms of national reputation, subject to the
approval of the Holders of a majority of the Registrable Securities to be
included in such registration, which approval will not be unreasonably withheld.
(c) Holdback Agreements. Each Holder agrees, if so reasonably required by
the managing underwriter in a registration pursuant to Section 2, not to effect
any public sale or distribution of Registrable Securities or sales of such
Registrable Securities pursuant to Rule 144 or Rule 144A under the Securities
Act, during the seven (7) days prior to and the 180 days after any firm
commitment underwritten registration pursuant to Section 2 has become effective
(except as part of such underwritten registration) or, if the managing
underwriter advises the Company that, in its opinion, no such public sale or
distribution should be effected for a period of not more than 180 days after
such underwritten registration in order to complete the sale and distribution of
securities included in such registration and the Company gives notice to such
effect to such Holders of such advice, each Holder shall not effect any public
sale or distribution of Registrable Securities or sales of such Registrable
Securities pursuant to Rule 144 or Rule 144A under the Securities Act during
such period after such underwritten registration, except as part of such
underwritten registration, whether or not such Holder participates in such
registration.
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<PAGE> 9
5. Preparation, Reasonable Investigation.
In connection with the preparation and filing of each registration
statement under the Securities Act, the Company will give the Holders of
Registrable Securities to be sold under such registration statement, the
underwriters, if any, and their respective counsel and accountants, drafts and
final copies of such registration statement, each prospectus included therein or
filed with the Commission and each amendment thereof or supplement thereto, at
least 5 business days prior to the filing thereof with the Commission, and will
give each of them such access to its books and records and such opportunities to
discuss the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of such Holders and such underwriters' respective counsel, to
conduct a reasonable investigation within the meaning of the Securities Act.
6. Indemnification and Contribution.
(a) Indemnification by the Company. In the event of any registration under
the Securities Act pursuant to Section 2 of any Registrable Securities covered
by such registration, the Company will, and hereby does, indemnify and hold
harmless each Holder of Registrable Securities to be sold under such
registration statement, each such Holder's legal counsel, each other person who
participates as an underwriter in the offering or sale of such securities (if so
required by such underwriter as a condition to including the Registrable
Securities of the Holders in such registration) and each other person, if any,
who controls any such Holder or any such underwriter within the meaning of the
Securities Act (collectively, the "Indemnified Parties"), against any losses,
claims, damages or liabilities, joint or several, to which the Holders or
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein or any document
incorporated therein by reference, or any amendment or supplement thereto, or
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
arise out of any violation by the Company of any rule or regulation promulgated
under the Securities Act or state securities law applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration, and the Company will reimburse the Indemnified Parties for
any legal or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, liability, action or
proceeding; provided, however, that the Company shall not be liable to any
Indemnified Party in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company by such Indemnified Party.
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<PAGE> 10
(b) Indemnification by the Holders. The Company may require, as a condition
to including any Registrable Securities of any person or entity in any
registration statement filed pursuant to Section 2, that the Company shall have
received an undertaking reasonably satisfactory to it from such person or entity
to indemnify and hold harmless (in the same manner and to the same extent as set
forth in subdivision (a) of this Section 6) the Company, each director of the
Company, each officer of the Company and each other person, if any, who controls
the Company within the meaning of the Securities Act, with respect to any
statement or alleged statement in or omission or alleged omission from such
registration statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, if, and
only if, such statement or alleged statement or omission or alleged omission was
made in reliance upon and in conformity with information furnished in writing to
the Company directly by such person or entity specifically for use therein;
provided, however, that the obligation of any Holder hereunder shall be limited
to an amount equal to the proceeds received by such Holder upon the sale of
Registrable Securities sold in the offering covered by such registration.
(c) Notices of Claims, etc. Promptly after receipt by an Indemnified Party
of notice of the commencement of any action or proceeding involving a claim
referred to in the preceding subdivisions of this Section 6, such Indemnified
Party will, if a claim in respect thereof is to be made against a party required
to provide indemnification (an "Indemnifying Party"), give written notice to the
latter of the commencement of such action, provided, however, that the failure
of any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligation under the preceding subdivisions of this
Section 6, except to the extent that the Indemnifying Party is actually
prejudiced by such failure to give notice. In case any such action is brought
against an Indemnified Party, unless in such Indemnified Party's reasonable
judgment a conflict of interest between such Indemnified and indemnifying
parties may exist in respect of such claim, the Indemnifying Party shall be
entitled to participate in and to assume the defense thereof, jointly with any
other Indemnifying Party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such Indemnified Party, and after notice from
the Indemnifying Party to such Indemnified Party of its election so to assume
the defense thereof, the Indemnifying Party shall not be liable to such
Indemnified Party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation. No Indemnifying Party shall consent to entry of any judgment or
enter into any settlement without the consent of the Indemnified Party which
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.
(d) Other Indemnification. Indemnification similar to that specified in the
preceding subdivisions of this Section 6 (with appropriate modifications) shall
be given by the Company and each Holder of Registrable Securities included in
any registration statement with respect to any required registration or other
qualification of securities under any Federal or state law or regulation of any
governmental authority, other than the Securities Act.
(e) Indemnification Payment. The indemnification required by this Section 6
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
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<PAGE> 11
(f) Survival of Obligations. The obligations of the Company and of the
Holders under this Section 6 shall survive the completion of any offering of
Registrable Securities under this Agreement.
(g) Contribution. If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an Indemnified Party, then each
Indemnifying Party shall contribute to the amount paid or payable to such
Indemnified Party as a result of the losses, claims, damages or liabilities
referred to in this Section 6 an amount or additional amount, as the case may
be, in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party or parties on the one hand and the Indemnified Party on the
other in connection with the statements or omissions which resulted in such
losses, claims, demands or liabilities as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Indemnifying Party or parties on the one hand or the
Indemnified Party on the other and the parties' relative, intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid to an Indemnified Party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this Section 6(g) shall be deemed to include any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any action or claim which is the subject of this Section 6. No
person guilty of fraudulent misrepresentation within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
7. Covenants Relating to Rule 144.
With a view to making available the benefits of certain rules and
regulations of the Commission which may at any time permit the sale of
securities of the Company to the public without registration after such time as
a public market exists for the Common Stock of the Company, the Company agrees:
(a) to make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date of the first registration under the Securities Act filed by
the Company for an offering of its securities to the general public;
(b) to use its best efforts to then file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act, as amended (at any time after it has become
subject to such reporting requirements); and
(c) so long as a Holder owns any Registrable Securities, to furnish
to the Holder forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company for an offering of its securities to the general public), and of
the Securities Act and the Exchange Act (at any
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<PAGE> 12
time after it has become subject to such reporting requirements) a copy of the
most recent annual or quarterly report of the Company, and such other reports
and documents of the Company as a Holder may reasonably request in availing
itself of any rule or regulation of the Commission allowing a Holder to sell any
such securities without registration.
8. Other Registration Rights.
The Company represents and warrants that it has not granted any
registration rights to any Person other than as described on Exhibit A attached
hereto. The Company shall not grant to any Person any registration rights more
favorable than or inconsistent with any of those contained herein, so long as
any of the registration rights under this Agreement remain in effect.
9. Miscellaneous.
(a) Specific Performance. The parties hereto acknowledge that there may be
no adequate remedy at law if any party fails to perform any of its obligations
hereunder and that each party may be irreparably harmed by any such failure, and
accordingly agree that each party, in addition to any other remedy to which it
may be entitled at law or in equity, shall be entitled to compel specific
performance of the obligations of any other party under this Agreement in
accordance with the terms and conditions of this Agreement.
(b) Notices. All demands, requests, notices and other communications
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given if delivered personally or sent by
United States first class mail, postage prepaid, and to the parties hereto at
the following address or at such other address as any party hereto shall
hereafter specify by notice to the other party hereto:
(i) if to the Company, addressed to:
QK Healthcare, Inc.
2060 Ninth Avenue
Ronkonkoma, New York 11779
Attention: Michael W. Katz
with a copy to:
Edwards & Angell, LLP
750 Lexington Ave.
New York, N.Y. 10022
Attention: Patricia Kantor
(ii) if to the Holders, to their addresses set forth on Schedule 1
attached hereto
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<PAGE> 13
Except as otherwise provided herein, all such demands, requests, notices and
other communications shall be deemed to have been received on the date of
personal delivery thereof or on the third business day after the mailing
thereof.
(c) Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of New York, without regard to conflicts of
law principles thereof.
(d) Headings. The descriptive headings of the several sections and
paragraphs of this Agreement are inserted for convenience only, and do not
constitute a part of this Agreement and shall not affect in any way the meaning
or interpretation of this Agreement.
(e) Entire Agreement; Amendments. This Agreement and the other writings
referred to herein or delivered pursuant hereto which form a part hereof contain
the entire understanding of the parties with respect to its subject matter. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to its subject matter. This Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by a written
instrument duly executed by the Company and those Holders holding a majority of
Registrable Securities. Each Holder of any Registrable Securities at the time or
thereafter outstanding shall be bound by an amendment or waiver authorized by
this Section 9(e), whether or not any such Registrable Securities shall have
been marked to indicate such consent.
(f) Assignability. This Agreement and all of the provisions hereof will be
assigned, without the consent of the Company, by any Holder to, and shall inure
to the benefit of, any purchaser, transferee or assignee of any Registrable
Security, unless the Holder specifies otherwise in connection with particular
transfers of Registrable Securities. However, the Company shall not be required
to recognize any such purchaser, transferee or assignee as a Holder under this
Agreement unless and until either (i) such person becomes the holder of record
of Registrable Securities or (ii) the Company receives written notice of such
purchase, transfer or assignment.
(g) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
QK Healthcare, Inc.
By: ___________________________________
Name:
Title:
[ ]
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<PAGE> 14
By: ___________________________________
Name:
Title:
[ ]
By: ___________________________________
Name:
Title:
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<PAGE> 15
SCHEDULE 1
Names and Addresses of Each Shareholder
<PAGE> 1
EXHIBIT 4.2
PROMISSORY NOTE
$__________ Ronkonkoma, New York
__________, 1999
FOR VALUE RECEIVED, the undersigned QK HEALTHCARE, INC., a Delaware
corporation (the "Corporation"), and its successors and assigns, having an
office at 2060 Ninth Avenue, Ronkonkoma, New York 11779, promises to pay to the
order of ____________, having an address of __________________________ (the
"Holder"), the principal sum of______________________ DOLLARS ($________) as
hereinafter provided, together with interest (computed on the basis of a 360-day
year of twelve 30-day months) on the unpaid principal amount hereof at a rate
equal to the London Inter-Bank Offering Rate ("LIBOR") plus one and one-half
percent (1-1/2%) per annum from the date hereof to maturity, whether by
acceleration or otherwise, payable quarterly on March 31, June 30, September 30,
and December 31 in each year commencing on March 31, 2000.
Upon the consummation of the Corporation's initial public offering,
$_________ shall be due and payable. The balance of the unpaid principal
together with any accrued and unpaid interest shall be due and payable in full
on December 31, 2006. All payments of principal and interest are to be made in
lawful money of the United States of America at Lender's aforesaid address or at
such other place or places as the holder hereof may from time to time designate
in writing.
The undersigned hereby waives all applicable exemption rights as well
as valuation and appraisement, presentment and demand for payment, protest and
notice of protest, notice of dishonor, protest and demand, demand and dishonor,
and non-payment of this Note, and expressly agrees that its liability under this
Note shall not be affected by any renewal or extension in the time of payment of
the principal and/or interest due and payable hereunder, regardless of the
number of such renewals and extensions. No extension of time for repayment of
the principal and/or interest due and payable hereunder or any alternative
amount and no waiver of any of the provisions of this Note shall similarly
release, modify or affect the liability of the undersigned hereunder.
If this Note (a) is not paid when due or (b) is collected through a
bankruptcy, receivership or other court proceeding, whether before or after this
Note is due, or (c) is placed in the hands of attorneys for collection, the
undersigned agrees to pay, in addition to the then outstanding balance of the
principal sum, any accrued and unpaid interest thereon and all other fees, sums,
charges and amounts due and payable under this Note, all costs of collecting or
attempting to collect the same (including, but not limited to, attorney' fees
and disbursements) incurred by the holder hereof.
This Note may not be altered, amended, canceled, changed, discharged,
modified, terminated or waived orally, but only by an agreement in writing dated
and executed by
<PAGE> 2
the party against which enforcement of such alteration, amendment, change,
cancellation, discharge, modification, termination or waiver is sought.
Any notice, request, demand, consent, approval or other communication
which the holder hereof or the undersigned is obligated or may elect to give
hereunder ("Notice") shall be given by registered or certified mail, return
receipt requested, postage prepaid, addressed to the party to receive such
Notice at such party's address first above set forth. Either party may, by
Notice given as aforesaid, change its address for all subsequent Notices.
Notices shall be deemed given as of the second business day following the date
when mailed as aforesaid.
The provisions of this Note shall be binding upon and inure to the
benefit of the undersigned and the holder hereof and their respective heirs,
legal representatives, successors and assigns. For the purposes of this Note,
the phrase "holder hereof" shall mean and include all subsequent holders of this
Note.
In case any one or more of the provisions contained in this Note shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provisions hereof, but this Note shall be construed as if such invalid, illegal
or unenforceable provision had never been included.
This Note shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York.
QK HEALTHCARE, INC.
By:__________________________
Name:
Title:
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<PAGE> 1
Exhibit 10.1
SUPPORT SERVICES AGREEMENT
AGREEMENT dated as of the ____ day of _________, 1999, between QK
Healthcare, Inc., a corporation organized under the laws of Delaware
("Healthcare"), and Quality King Distributors, Inc., a corporation organized
under the laws of New York ("QK").
W I T N E S S E T H:
WHEREAS, Healthcare is acquiring the assets and business of the
pharmaceutical products distribution division of QK (the "Pharmaceutical
Business"); and
WHEREAS, QK desires to continue to provide to Healthcare, and
Healthcare desires to continue to obtain from QK, all of the computer and
warehouse management and consulting services which QK currently provides to the
pharmaceutical division of QK being acquired by Healthcare ("Existing
Services"); and
WHEREAS, QK and Healthcare desire to set forth the terms and conditions
on which Healthcare shall obtain from QK and QK shall provide to Healthcare such
services; and
WHEREAS, capitalized terms not otherwise defined shall have the meaning
set forth in Article 2 of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
ARTICLE 1. AGREEMENT AND TERM
1.01 Agreement. During the term of and on the terms and conditions set
forth in this Agreement, QK shall supply to Healthcare, and Healthcare shall
purchase from QK, the Services.
1.02 Term. The term of this Agreement shall begin on [ ], 1999 (the
"Effective Date") and shall expire on [ ], 2002 (the "Initial Term") unless
terminated earlier pursuant to Article 9. This Agreement shall automatically
renew thereafter for additional terms of one year each (each such one-year term,
a "Renewal Term") unless terminated earlier pursuant to Article 9.
ARTICLE 2. DEFINITIONS
The following terms, when capitalized, are defined as follows:
2.01 "Affiliate" of a party shall mean any entity controlled by,
controlling or under common control with that party. For purposes of this
definition, "control" when used with respect to any party, individual or entity
means the power to direct the management and policies of such party, individual
or entity, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
<PAGE> 2
2.02 "Data Center" shall mean QK's existing data center located at 2060
Ninth Avenue, Ronkonkoma, New York 11779.
2.03 "Losses" shall mean all losses, liabilities, damages, actions,
disputes, arbitration and claims (including taxes); and all related costs and
expenses (including any and all reasonable attorneys' fees and costs of
investigation, litigation, settlement, judgment, interest and penalties).
2.04 "Maintain" or "Maintenance" shall mean any correction or
modification of any of the Systems to correct bugs or errors which: (1) does not
materially improve or add functionality or feature to any of the Systems or (2)
is required to cause any of the Systems to comply with any new statutory,
federal, state or local regulatory or other governmental requirements.
2.05 "Services" shall mean the Existing Services, together with any
other services and products as may be agreed upon by the parties to be part of
this Agreement from time to time.
2.06 "Systems" shall mean all computer programs, the tangible media on
which they are recorded and their supporting documentation, including input and
output formats program listings (including source code and object code),
narrative descriptions and operating instructions used in providing the
Services.
ARTICLE 3. SERVICES TO BE PROVIDED BY QK
3.01 Services. QK shall provide the Services to Healthcare from the
Data Center or such other location as QK may, upon notice to Healthcare, move
the Data Center. As part of the Services, QK shall:
(1) Operate, manage and Maintain the Systems in accordance
with the terms of this Agreement.
(2) Furnish such information and reports as the Pharmaceutical
Business had been receiving from QK immediately prior to the Effective
Date, on approximately the same time schedule and in the same format as
was in effect immediately prior to the Effective Date, unless QK and
Healthcare otherwise agree.
(3) Store and safeguard (under the retention schedule in
effect on the Effective Date until changed by written agreement of the
parties) storage media containing Healthcare Data when in the custody
of QK in accordance with the safeguards specified in Section 6.02. If
any regulatory body requires or Healthcare requests a longer retention
schedule for such storage media or the data contained on such storage
media, QK shall comply with such additional requirements or requests
and Healthcare shall reimburse QK for any additional costs incurred in
complying with such requirements or requests.
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<PAGE> 3
(4) Maintain and update the Systems and user documentation for
all Systems (and modifications, updates and enhancements to the
Systems), for as long as QK operates such Systems for Healthcare under
this Agreement, to at least the same extent such documentation was
maintained and updated by QK as of the Effective Date for so long as
such Systems are operated by QK.
3.02 Additional Services. At Healthcare's request, QK may perform
additional services not currently encompassed by this Agreement. QK shall
advise Healthcare in writing that a requested service is an additional service
and whether QK desires to perform such additional service. If QK elects to
perform the additional service, it shall provide Healthcare with a description
of the work to be performed by each party, the parties' responsibilities with
respect to that work and QK's schedule and QK's charges for that work. The
parties shall execute a written amendment to this Agreement setting forth any
special terms and conditions applicable to such additional service.
ARTICLE 4. SYSTEMS AND RELATED PROPRIETARY RIGHTS
4.01 Healthcare Systems. Healthcare hereby grants to QK, at no charge
to QK, the unrestricted, non-transferable, exclusive right to use (but not title
to) any Healthcare Systems solely to provide the Services. Upon expiration of
this Agreement or termination of this Agreement for any reason, the rights
granted QK in this Section 4.01 shall immediately revert to Healthcare and QK
shall deliver to Healthcare, at no extra cost, source code (and related
documentation) in a form compatible with Healthcare's operating system in effect
as of the date of such termination or expiration for each of the Systems owned
by Healthcare which QK is using at that time to provide the Services.
4.02 QK Systems. QK Systems are and shall remain QK's property and
Healthcare shall have no rights or interests to the QK Systems except as
described in this Section 4.02. QK hereby grants to Healthcare a perpetual,
non-transferable, non-exclusive, restricted license to use the application and
utilities software programs (including all related documentation) of any of the
QK Systems being used by QK to provide the Services upon termination of this
Agreement as a result of QK's default. The license granted in this Section 4.02
is restricted in that Healthcare may: (1) use the licensed programs only to
process the work of Healthcare and not to provide services to third parties and
(2) not disclose the licensed programs or related documentation to third
parties; provided, however, that Healthcare may disclose the licensed programs
and related documentation to third parties who have executed QK's standard
non-disclosure arrangement as necessary for the operation or maintenance of the
licensed programs to provide services to Healthcare.
ARTICLE 5. HEALTHCARE'S OBLIGATIONS
5.01 Healthcare. Healthcare shall:
(1) Supply in a timely fashion to QK for processing, as
required by QK, complete and accurate source data and machine-readable
data with applicable
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<PAGE> 4
control totals, in the form used by the Pharmaceutical Business
immediately before the Effective Date, for Healthcare Systems and in
the form reasonably required by QK for other Systems.
(2) Review all reports prepared by QK and reject all incorrect
or incomplete reports within thirty (30) days following Healthcare's
receipt of such reports. Failure to reject a report within the
appropriate time period shall constitute acceptance of such report.
(3) Maintain procedures manuals provided to Healthcare by QK
by distributing and inserting updates provided by QK.
(4) Provide the necessary transportation for the physical
delivery of data and other input to, and for the distribution of
reports and other output from, the Data Center.
(5) Cooperate with QK generally, and in particular make
available, as may be reasonably requested by QK, personnel,
information, approvals and acceptances relating to this Agreement and
inform QK of any management decisions relevant to QK and relating to
this Agreement.
ARTICLE 6. SAFEGUARDING HEALTHCARE DATA, CONFIDENTIALITY AND AUDIT RIGHTS
6.01 Healthcare Data. The data of Healthcare provided to QK for
processing under this Agreement ("Healthcare Data") and any data of the
Pharmaceutical Business in the possession of QK prior to the date of this
Agreement shall be and remain the property of Healthcare. Upon expiration of
this Agreement or termination of this Agreement for any reason, such Healthcare
Data shall be either erased from the data files maintained by QK or, if
Healthcare so elects, returned by QK, at QK's expense, to Healthcare in the form
in use as of the date of termination. Without the written approval of
Healthcare, Healthcare Data shall not be: (1) used by QK for any purpose other
than that of providing the Services; (2) disclosed, sold, assigned, leased or
otherwise disposed of to third parties by QK; or (3) commercially exploited by
or on behalf of QK, its employees or agents.
6.02 Safeguarding Healthcare Data. QK shall establish and maintain
safeguards against the destruction, loss or alteration of Healthcare Data in the
possession of QK which are no less rigorous than those in effect at the Data
Center as of the Effective Date. Upon request by Healthcare, QK shall provide
Healthcare with such access to the backup data and data files in respect of such
Healthcare Data as Healthcare may reasonably require. Healthcare shall reimburse
QK for QK's reasonable cost in preparing any copies of such backup data and data
files requested by Healthcare. In the event that additional safeguards for
Healthcare Data are reasonably requested by Healthcare or any governmental
regulatory body, QK shall provide such additional safeguards and Healthcare
shall reimburse QK for QK's reasonable cost in providing such additional
safeguards. Healthcare shall have the right, at its own expense, to establish
its own backup security procedures for Healthcare Data and to keep backup data
and data files in respect of such
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<PAGE> 5
Healthcare Data in its possession. Upon request by QK, Healthcare shall provide
QK with access to such backup data and data files as may be available and as QK
may reasonably require to perform its obligations under this Agreement.
6.03 Confidentiality. QK and Healthcare each agree that all information
(including Healthcare Data) communicated to it by the other, whether before or
after the Effective Date (collectively, "Confidential Information"), was and
shall be received in strict confidence, shall be used only for purposes in
connection with performance under this Agreement and that no such information,
including the provisions of this Agreement, shall be disclosed by the recipient
party, its agents or employees without the prior written consent of the other
party, except as may be necessary: (1) by reason of legal, accounting or
regulatory requirements beyond the reasonable control of the recipient party,
and (2) in connection with a legal action against the other party arising out of
the breach of this Agreement.
6.04 Injunctive Relief. Each party recognizes that its disclosure of
Confidential Information of the other party may give rise to irreparable injury
to such party and acknowledges that remedies other than injunctive relief may
not be adequate. Accordingly, each party has the right to seek equitable and
injunctive relief to prevent the unauthorized use or disclosure of any of its
Confidential Information, as well as to seek such damages or other relief as is
occasioned by such unauthorized use or disclosure and recoverable under this
Agreement.
6.05 Security at Data Center. QK shall adhere to its normal security
procedures at any place where the Services are performed by QK for Healthcare;
provided, however, that the security procedures at the Data Center shall be no
less rigorous than those in effect at the Data Center immediately prior to the
Effective Date. In the event that additional security procedures are
reasonably requested by Healthcare for any location from which QK is providing
the Services to Healthcare, QK shall perform such additional security
procedures and Healthcare shall reimburse QK for QK's reasonable cost in
providing such additional safeguards. QK's personnel shall comply with the
reasonable rules of Healthcare (which shall not unreasonably impede QK in the
performance of its obligations under this Agreement) with respect to access to
Healthcare's offices, the Healthcare Data and data files.
6.06 Audit Rights. QK shall provide such auditors and inspectors as
Healthcare may from time to time designate (upon ten (10) days' prior notice
except for internal audits or inspections or those conducted by federal or state
regulators) with reasonable access to the Data Center, for the limited purpose
of performing, at Healthcare's expense, audits or inspections of the business of
Healthcare (including QK's provision of the Services to Healthcare). QK shall
provide to such auditors and inspectors any assistance that they reasonably
require.
6.07 Cost of Audit. Unless an audit or inspection arises as a result of
QK's misfeasance, in which case QK shall provide assistance to the auditors or
inspectors at its own expense, Healthcare shall pay QK for QK's reasonable cost
for any resources required by the auditors or inspectors in addition to the
resources that QK would otherwise use in the performance of this Agreement.
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<PAGE> 6
6.08 Incorrect Charges. In the event it is conclusively determined
after an audit that QK has overcharged Healthcare, QK shall pay to Healthcare
the amount of the overcharge, plus interest in an amount equal to one percent
per month (or the maximum interest allowed by law, if less) calculated from the
date of receipt of QK of the overcharged amount until the date of payment to
Healthcare. In the event it is conclusively determined after an audit that QK
has undercharged Healthcare, Healthcare shall pay QK the amount of the
undercharge.
6.09 Third Party Discovery. If any governmental agency (other than a
regulatory agency having authority over Healthcare) or any third party shall
seek in any way to discover or otherwise gain access to or production of any
Systems, Confidential Information or any other data or records of one party that
may be in the possession of the other party ("Discovery"), the other party shall
immediately notify the first party and shall, at the first party's written
request and at the first party's expense, oppose such Discovery and cooperate
with the first party in the first party's efforts to preclude, quash, limit or
impose protective orders or similar restrictions on such Discovery. Healthcare
shall notify QK in the event a regulatory agency having authority over
Healthcare seeks Discovery of any Systems, Confidential Information or any other
data or records of QK.
ARTICLE 7. PAYMENTS TO QK
7.01 Fees. In consideration for the services of QK hereunder,
Healthcare shall pay to QK an amount equal to .065% of the net sales of
Healthcare from and after the date hereof, payable as set forth in Section 7.03
hereof.
7.02 Out-of-Pocket Expenses. Subject to Section 12.05, Healthcare shall
pay or reimburse QK for the reasonable, documented out-of-pocket expenses,
including travel and travel-related expenses, incurred by QK in connection with
its performance of Services. All expenses shall be incurred and documented
according to QK's expense guidelines (a copy of which shall be provided to
Healthcare by QK upon request of Healthcare). Such expenses shall be payable by
Healthcare on or before the 30th calendar day after receipt by Healthcare of the
documentation for such expenses.
7.03 Time and Manner of Payment. Healthcare shall provide to QK a copy
of each quarterly report on Form 10-Q and each annual report on Form 10-K filed
with the Securities and Exchange Commission by Healthcare within 5 business days
of such filing, which filing shall set forth the net sales of Healthcare for the
quarter ended as of the relevant period. On or before the 30th calendar day
after receipt by Healthcare of an invoice from QK for the fees computed as set
forth in Section 7.01, Healthcare shall pay QK the amount set forth on such
invoice.
7.04 Taxes. Healthcare shall pay, or reimburse QK for payment of, any
taxes or amounts paid in lieu of taxes, including privilege or excise taxes
based on the gross revenue of QK, however designated or levied, based upon this
Agreement, the charges of QK, the Systems, the Services or materials provided
under this Agreement. QK is only responsible for the payment of franchise taxes,
state and local personal property taxes, employment taxes for its employees and
taxes based on the net income of QK.
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<PAGE> 7
7.05 Proration. All periodic charges under this Agreement are to be
computed on a fiscal quarter basis and will be prorated for any partial quarter.
7.06 Rights of Set-off. With respect to any amount to be reimbursed to
Healthcare or otherwise payable to Healthcare by QK pursuant to this Agreement,
QK may, at its option and upon notice to Healthcare, pay that amount by giving
Healthcare a credit of the entire amount owed to Healthcare against the charges
otherwise payable or expenses owed to QK under this Agreement until such time as
the entire amount owed to Healthcare has been paid. Healthcare shall be relieved
of its obligation to make any payments to QK until such time as all amounts
set-off by QK have been credited to Healthcare.
ARTICLE 8. REPRESENTATIONS AND WARRANTIES
8.01 By Healthcare. Healthcare represents and warrants to QK as
follows:
(1) Healthcare: (a) is a corporation domiciled, validly
existing and in good standing under the laws of the State of Delaware;
and (b) has full corporate power to own, lease and operate its
properties and assets, to conduct its business as that business is
currently being conducted and to consummate the transactions
contemplated by this Agreement to be consummated by Healthcare.
(2) This Agreement has been duly authorized, executed and
delivered by it and constitutes a valid and binding agreement of it,
enforceable against it in accordance with this Agreement's terms,
subject to the effect of bankruptcy, insolvency, moratorium and other
laws now or hereafter in effect relating to and affecting the rights of
creditors generally and to equitable principles of general application.
(3) Neither the execution nor delivery by it of this Agreement
nor the consummation by it of any of the transactions contemplated by
this Agreement will result in the breach of any term or provision of,
or constitute a default under, any charter provision or bylaw or
material agreement, order, law, rule or regulation to which it is a
party or which is otherwise applicable to it.
8.02 By QK. QK represents and warrants to Healthcare as follows:
(1) QK: (a) is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of New York,
and (b) has full corporate power to own, lease and operate its
properties and assets, to conduct its business as that business is
currently being conducted and to consummate the transactions
contemplated by this Agreement to be consummated by QK.
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<PAGE> 8
(2) This Agreement has been duly authorized, executed and
delivered by it and constitutes a valid and binding agreement of it,
enforceable against it in accordance with this Agreement's terms,
subject to the effect of bankruptcy, insolvency, moratorium and other
laws now or hereafter in effect relating to and affecting the rights of
creditors generally and to equitable principles of general application.
(3) Neither the execution nor delivery by it of this
Agreement, nor the consummation by it of any of the transactions
contemplated by this Agreement, will result in the breach of any term
or provision of, or constitute a default under, any charter provision
or bylaw or material agreement, order, law, rule or regulation to which
it is a party or which is otherwise applicable to it.
(4) The Services shall be rendered by qualified personnel and
in a manner consistent with good commercial practice.
8.03 Disclaimer. This is a services agreement. ACCORDINGLY, EXCEPT AS
SPECIFIED IN SECTION 8.02(4) IN RESPECT OF QK, NEITHER QK NOR HEALTHCARE MAKES
ANY OTHER WARRANTIES IN RESPECT OF THE SERVICES OR OTHER SYSTEMS AND EACH
EXPLICITLY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A SPECIFIC PURPOSE.
ARTICLE 9. TERMINATION
9.01 Termination for Convenience. During the Initial Term and any
Renewal Term, provided that Healthcare gives at least 180 days' notice,
Healthcare may terminate this Agreement in its sole discretion. During any
Renewal Term, provided that QK gives at least 365 days notice, QK may terminate
this Agreement in its sole discretion.
9.02 Termination for Failure to Provide the Services. If QK materially
or repeatedly fails to provide the Services and QK does not, within ten (10)
days after being given notice of such failure, cure such failure or if such
failure cannot be cured within such ten (10) day period, provide Healthcare with
a workaround that allows Healthcare to perform its normal business operations,
then Healthcare may, by giving notice to QK, terminate this Agreement as of a
date specified in the notice of termination.
9.03 Rights Upon Termination or Expiration.
(1) Upon termination of this Agreement or expiration of this
Agreement, QK shall provide to Healthcare those Services requested by Healthcare
at any time
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<PAGE> 9
from the date of Healthcare's requests for such Services until 180 days
following expiration or termination of this Agreement. Healthcare shall pay QK
for such Services as set forth in Article 7.
(2) Upon expiration or termination of this Agreement for any
reason, Healthcare shall immediately pay QK for all Services performed and
Systems or equipment delivered through the date of expiration or termination.
(3) Upon expiration or termination of this Agreement, each
party shall have the rights specified in Article 4 in respect to the Systems.
ARTICLE 10. INDEMNITIES
10.01 Indemnity by Healthcare. Healthcare shall indemnify, defend and
hold harmless QK and its respective officers, directors, employees, agents,
successors and assigns, in
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<PAGE> 10
accordance with the procedures described in Section 11.04, from any and all
Losses arising from or in connection with:
(1) the inaccuracy as of the Effective Date of any of the
representations or warranties by Healthcare set forth in this
Agreement;
(2) any claims of infringement made against QK of any United
States letters patent, trade secret, copyright, trademark service mark,
trade name or similar proprietary right conferred by contract or by
common law or by any law of the United States or any state, alleged to
have occurred because of any resources or items provided to QK by
Healthcare (except as may have been caused by a modification by QK).
10.02 Indemnity by QK. QK shall indemnify, defend and hold harmless
Healthcare and its officers, directors, employees, agents, successors and
assigns, in accordance with the procedures described in Section 11.04, from any
and all Losses arising from or in connection with:
(1) the inaccuracy as of the Effective Date of any of the
representations or warranties by QK set forth in this Agreement;
(2) any claims of infringement made against Healthcare of any
United States letters patent, trade secret, copyright, trademark,
service mark, trade name or similar proprietary right conferred by
contract or by common law or by any law of the United States or any
state, alleged to have occurred because of Systems (including
modifications to Healthcare Systems performed by QK) or other resources
or items provided to Healthcare by QK.
10.03 Cross Indemnity. Each of QK and Healthcare shall indemnify,
defend and hold harmless the other, its officers, directors, employees, agents,
successors and assigns in accordance with the procedures described in Section
10.04, from any and all Losses arising from or in connection with: (1) the death
or bodily injury of any agent, employee, customer, business invitee or business
visitor of the indemnitor; or (2) the damage, loss or destruction of any real or
tangible personal property in the possession or under the control of the
indemnitor. The employees or agents of either party shall not, when at the
premises of the other party, be deemed the other party's business invitee or
business visitor.
10.04 Indemnification Procedures. Promptly after receipt by any person
entitled to indemnification under Section 10.01, Section 10.02 or Section 10.03
(an "Indemnified Party") of notice of the commencement (or threatened
commencement) of any civil, criminal, administrative or investigative action or
proceeding involving a claim in respect of which the Indemnified Party will seek
indemnification, the Indemnified Party shall notify the party which is obligated
to provide such indemnification (an "Indemnifying Party") of such claim in
writing. No failure to notify the Indemnifying Party shall relieve it of its
obligations under this Agreement except to the extent that it can demonstrate
damages attributable to the Indemnified
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<PAGE> 11
Party's failure to notify. The Indemnifying Party shall be entitled to have sole
control over the defense and/or settlement of such claim, provided that, within
15 days after receipt of such notice, the Indemnifying Party notifies the
Indemnified Party of its election to so assume full control. In that event: (1)
the Indemnified Party shall be entitled to participate in the defense of such
claim and to employ counsel at its own expense to assist in the handling of such
claim, and (2) the Indemnifying Party shall obtain the prior written approval of
the Indemnified Party before entering into any settlement of such claim or
ceasing to defend against such claim if such settlement or cessation would cause
injunctive or other relief to be imposed against the Indemnified Party. After
notice by the Indemnifying Party to the Indemnified Party of its election to
assume full control of the defense of any such action, the Indemnifying Party
shall not be liable to the Indemnified Party for any legal expenses incurred by
such Indemnified Party in connection with the defense of that claim. If the
Indemnifying Party does not assume sole control over the defense of such claim
as provided in this Section 10.04, the Indemnifying Party may participate in
such defense and the Indemnified Party shall have the right to defend the claim
in such manner as it may deem appropriate, at the cost and expense of the
Indemnifying Party. The Indemnifying Party shall promptly reimburse the
Indemnified Party for such costs and expenses, in accordance with the applicable
Section of this Article 10. An Indemnifying Party shall not be required to
indemnify any Indemnified Party for any amount paid or payable by such
Indemnified Party in the settlement of any such claim which was agreed to
without the written consent of the Indemnifying Party.
10.05 Subrogation. In the event that an Indemnifying Party shall be
obligated to indemnify an Indemnified Party pursuant to Section 11.01, Section
10.02 or Section 10.03, the Indemnifying Party shall, upon payment of such
indemnity in full, be subrogated to all rights of the Indemnified Party with
respect to the claims to which such indemnification relates.
10.06 QK's Obligation to Replace. If: (1) the sale, license or use of
any of the Systems or any other materials furnished to Healthcare hereunder is
held to infringe upon the rights of any third party; or (2) Healthcare's use of
any of the Systems is permanently enjoined (or if the parties shall determine
that a likelihood of a permanent injunction exists), QK shall, at QK's own cost
and expense and in such a manner as to minimize disturbance to Healthcare's
business activities, either:
(a) obtain for Healthcare the right to continue using any of
the Systems or any other materials;
(b) modify any of the Systems or any other materials so that
it is no longer infringing (provided that such modification does not
adversely affect Healthcare's intended use of same as contemplated
hereunder); or
(c) replace any of the Systems or any other materials with a
non-infringing functional equivalent.
10.07 Exclusive Remedy. Except as provided in Section 11.06, the
indemnification rights of each Indemnified Party pursuant to Section 11.01,
Section 10.02 or Section 10.03 shall
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<PAGE> 12
be the exclusive remedy of such Indemnified Party with respect to the claims to
which such indemnification relates; provided, however, that such Indemnified
Party shall retain the right to seek injunctive or other non-monetary equitable
remedies with respect to such claims.
ARTICLE 11. MISCELLANEOUS
11.01 Binding Nature and Assignment. This Agreement shall bind the
parties and their successors and permitted assigns. Neither party may assign
this Agreement, without the prior written consent of the other, which consent
shall not be unreasonably withheld or delayed. Any other assignment attempted
without the written consent of the other party shall be void.
11.02 Notices. All notices, requests, approvals and consents given
under this Agreement shall be in writing. When one party is required or
permitted to give notice to the other, such notice shall be deemed given when
delivered by hand or when mailed by United States mail, registered or certified
mail, return receipt requested, postage prepaid and addressed as follows:
In the case of QK: Quality King Distributors, Inc.
2060 Ninth Ave.
Ronkonkoma, New York 11779
Attn: President
In the case of Healthcare: QK Healthcare, Inc..
2060 Ninth Ave.
Ronkonkoma, New York 11779
Attn: President
Any party may change its address for notification purposes by giving
the other party notice of the new address and the date upon which it will become
effective.
11.03 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one single agreement
between the parties.
11.04 Headings. The article and section headings and the table of
contents are for reference and convenience only and shall not be considered in
the interpretation of this Agreement.
11.05 Relationship of Parties. QK, in furnishing services to
Healthcare, in acting only as an independent contractor. Except where this
Agreement expressly provides otherwise, QK does not undertake by this Agreement
or otherwise to perform any obligation of Healthcare, whether regulatory or
contractual or to assume any responsibility for Healthcare's business or
operations. QK has the sole right and obligation to supervise, manage, contract,
direct, procure, perform or cause to be performed, all work to be performed and
resources used by QK under this Agreement, except where it is specifically
stated that Healthcare must give approval or consent. QK shall be responsible
for its expenses incurred in connection with the provision of Services
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<PAGE> 13
including, without limitation, the salaries, benefits and costs of all QK
personnel, office space, accounting and clerical services.
11.06 Approvals and Similar Actions. Where agreement, approval,
acceptance, consent or similar action by a party to this Agreement is required
by any provision of this Agreement, such action shall not be unreasonably
delayed or withheld, unless specifically permitted by this Agreement.
11.07 Force Majeure. Each party shall be excused from performance under
this Agreement for any period and to the extent that it is prevented from
performing any of its obligations as a result of delays caused by the other
party or an act of God, war, civil disturbance, court order, labor dispute,
third party non-performance, or other cause beyond its reasonable control,
including failures or fluctuations in electrical power, heat, light, air
conditioning or telecommunications equipment, and such non-performance shall not
be a default under this Agreement or a ground for termination of this Agreement,
provided QK shall use all reasonable efforts to re-establish full capabilities
and services as soon as possible, including use of alternative subcontractors or
suppliers. However, QK's delay or failure to perform shall not be excused as a
result of failure by any of its subcontractors or suppliers to perform unless
such failure is attributable to the factors set forth above. QK shall take all
reasonable steps to prevent and to minimize the impact of any interruption or
disruption that may result from a default, delay or failure to perform by a
subcontractor or supplier. In the event of any default, delay or failure to
perform by any subcontractor or supplier, QK shall use all reasonable efforts to
re-establish full capabilities and services as soon as possible, including use
of alternative subcontractors or suppliers.
11.08 Severability. If any provision of this Agreement is held to be
unenforceable, then both parties shall be relieved of all obligations arising
under such provision, but only to the extent that such provision is
unenforceable, and this Agreement shall be deemed amended by modifying such
provision to the extent necessary to make it enforceable while preserving its
intent or, if that is not possible, by substituting another provision that is
enforceable and achieves the same objective and economic result. If such
unenforceable provision does not relate to the payments to be made to QK and if
the remainder of this Agreement is capable of substantial performance, then the
remainder of this Agreement shall be enforced to the extent permitted by law. IT
IS EXPRESSLY UNDERSTOOD AND AGREED THAT EACH PROVISION OF THIS AGREEMENT WHICH
PROVIDES FOR A LIMITATION OF LIABILITY, DISCLAIMER OF WARRANTIES,
INDEMNIFICATION OR EXCLUSION OF DAMAGES OR OTHER REMEDIES IS INTENDED TO BE
SEVERABLE AND INDEPENDENT OF ANY OTHER PROVISION AND TO BE ENFORCED AS SUCH.
FURTHER, IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT IN THE EVENT ANY REMEDY
UNDER THIS AGREEMENT IS DETERMINED TO HAVE FAILED OF ITS ESSENTIAL PURPOSE, ALL
LIMITATIONS OF LIABILITY AND EXCLUSIONS OF DAMAGES OR OTHER REMEDIES SHALL
REMAIN IN EFFECT.
11.09 Waiver. No delay or omission by either party to exercise any
right or power it has under this Agreement shall impair or be construed as a
waiver of such right or power. A waiver by any party of any covenant or breach
shall not be construed to be a waiver of any succeeding
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<PAGE> 14
breach or of any other covenant. All waivers must be in writing and signed by
the party waiving its rights.
11.10 Attorneys' Fees. If any legal action or other proceeding is
brought for the enforcement of this Agreement or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, in
addition to any other relief to which it may be entitled.
11.11 No Third Party Beneficiaries. The parties agree that this
Agreement is for the benefit of the parties hereto and is not intended to confer
any legal rights or benefits on any third party and that there are no third
party beneficiaries to this Agreement or any part or specific provision of this
Agreement.
11.12 Entire Agreement. This Agreement is the entire agreement between
the parties with respect to its subject matter and there are no other
representations, understandings or agreements between the parties relative to
such subject matter. No amendment to, or change, waiver or discharge of, any
provision of this Agreement shall be valid unless in writing and signed by an
authorized representative of the party against which such amendment, change,
waiver or discharge is sought to be enforced.
11.13 Governing Law and Dispute. This Agreement shall be governed by
the laws, other than choice of law rules, of the State of New York.
11.14 Survival. The terms of Article 4, Article 6, Article 8, Article
10, Section 9.03, Section 11.10, Section 11.11, Section 11.13 and Section 12.14
shall survive any termination or expiration of this Agreement.
ARTICLE 12. COMMISSIONS
12.1 So long as Michael Ross is an employee of Healthcare, QK will pay
to Healthcare a commission on net sales generated by Mr. Ross on behalf of QK
("Ross Sales") .
12.2 The commissions payable by QK shall be equal to 0.55% of Ross
Sales.
12.3 The commissions on Ross Sales shall be payable within 30 days
after the end of QK's fiscal quarter. Payment of the commissions shall be
accompanied by a copy of QK's accounting records detailing its sales.
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<PAGE> 15
IN WITNESS WHEREOF, QK and Healthcare have each caused this Agreement
to be signed and delivered by its duly authorized representative.
QK HEALTHCARE, INC.
By:___________________________
Name:
Title:
QUALITY KING DISTRIBUTORS, INC.
By:_____________________________
Name:
Title
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<PAGE> 1
Exhibit 10.2
INDEMNIFICATION, NONCOMPETITION AND TAX COOPERATION AGREEMENT
This Indemnification, Noncompetition and Tax Cooperation Agreement is
made as of this _____ day of _________________, 1999, by and among QUALITY KING
DISTRIBUTORS, INC., a New York corporation having an address of 2060 Ninth
Avenue, Ronkonkoma, New York 11779 ("QK"), PRO'S CHOICE BEAUTY CARE, INC., a
New Jersey corporation having an address of 2060 Ninth Avenue, Ronkonkoma, New
York 11779 ("Pro's Choice"), and QK HEALTHCARE, INC., a Delaware corporation
having an address of 2060 Ninth Avenue, Ronkonkoma, New York 11779
("Healthcare").
RECITALS
A. QK has been engaged in the business of distributing pharmaceutical
products (the "Pharmaceutical Business"), the business of distributing hair care
products (the "Hair Care Business"), the business of distributing health and
beauty products (the "Health and Beauty Business") and the business of
distributing grocery products (the "Grocery Distribution Business").
B. On the date hereof, QK is transferring all of its assets relating to
its Hair Care Business (the "Pro's Choice Assets") and all of its liabilities
relating to its Hair Care Business (the "Pro's Choice Liabilities") to Pro's
Choice pursuant to Sections 351, 368(a)(1)(D) and 355 of the Internal Revenue
Code of 1986, as amended, and the treasury regulations promulgated thereunder
(the "Code"), all as set forth in the Agreement and Plan of Corporate
Reorganization and Separation dated _____________, 1999.
C. On the date hereof, QK is transferring all of its assets relating to
its Pharmaceutical Business (the "Healthcare Assets") and liabilities relating
to its pharmaceuticals business (the "Healthcare Liabilities") to Healthcare
pursuant to Sections 351, 368(a)(1)(D) and 355 of the Code, all as set forth in
the Agreement and Plan of Corporate Reorganization and Separation dated _______,
1999.
D. All other assets of QK which are not Pro's Choice Assets or
Healthcare Assets (the "QK Assets") and all other liabilities of QK which are
not Pro's Choice Liabilities or Healthcare Liabilities (the "QK Liabilities")
are to be retained by QK.
E. Entering into this agreement by the parties hereto is a condition
precedent to QK making the transfers described above.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, it is agreed as follows:
1. Definitions.
<PAGE> 2
a. As used herein, the term "Losses" shall mean losses
(including lost revenues), damages, costs, obligations, claims, actions,
disputes, arbitrations, liabilities, expenses (including costs of
investigations, defending or prosecuting litigation and reasonable fees,
disbursements and other charges of attorneys), suits, demands, judgments, or
diminutions in value suffered or incurred.
b. As used herein, "Taxes" shall mean all Federal, state,
local and foreign income, sales, use, property, payroll and other taxes
(including any applicable penalties and interest) imposed by any governmental
authority with respect to the ownership, operation, transfer or use of the
business or assets.
c. As used herein, "Affiliate" shall mean any party,
individual or entity that directly or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with,
the specified party. For purposes of this definition, "control" when used with
respect to any party, individual or entity means the power to direct the
management and policies of such party, individual or entity, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise.
d. As used herein, the Closing Date shall mean _____________,
1999.
2. Indemnification by QK.
a. QK shall reimburse, indemnify and hold harmless Pro's
Choice and its respective successors and assigns, and any director, stockholder,
employee, agent or officer of Pro's Choice (the "Pro's Choice Group"), from and
against any and all Losses and/or Taxes, whether or not now known or asserted,
arising out of (i) the Pro's Choice Assets or the operation of the Hair Care
Business on or prior to the Closing Date, and (ii) the assets and the operation
of all businesses of QK which have not been transferred to Pro's Choice,
regardless of whether they arise before, on or after the Closing Date.
b. QK shall reimburse, indemnify and hold harmless Healthcare
and its respective successors and assigns, and any director, stockholder,
employee, agent or officer of Healthcare (the "Healthcare Group"), from and
against any and all Losses and/or Taxes, whether or not now known or asserted,
arising out of (i) the Healthcare Assets or the operation of the Pharmaceutical
Business on or prior to the Closing Date, and (ii) the assets and the operation
of all businesses of QK which have not been transferred to Healthcare, including
without limitation the Pro's Choice Assets and the operation of the Hair Care
Business, regardless of whether they arise before, on or after the Closing Date,
except for those Losses and/or Taxes for which QK and Pro's Choice jointly
indemnify the Healthcare Group under Section 3(b) below.
3. a. Indemnification by Pro's Choice. Pro's Choice shall reimburse,
indemnify and hold harmless QK and its respective successors and assigns, and
any director, shareholder, employee, agent or officer of QK (the "QK Group")
from and against any and all Losses and/or Taxes, whether or not now known or
asserted, arising out of the operation of the Pro's Choice Assets or the Hair
Care Business after the Closing Date.
b. Indemnification by Pro's Choice and QK. Pro's Choice and QK, jointly
and severally, shall reimburse, indemnify and hold harmless the Healthcare Group
from and against any and all Losses and/or Taxes, whether or not
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<PAGE> 3
now known or asserted, arising out of the operation of the Pro's Choice Assets
or the Hair Care Business after the Closing Date.
4. Indemnification by Healthcare. Healthcare shall reimburse, indemnify
and hold harmless the QK Group and the Pro's Choice Group from and against any
and all Losses and/or Taxes, whether or not now known or asserted, arising out
of the operation of the Healthcare Assets or the Pharmaceutical Business after
the Closing Date.
5. Notice of Claims; Defense of Third Party. A party claiming
indemnification hereunder (the "Asserting Party") must notify (in writing, in
reasonable detail and within a reasonable period of time after the Asserting
Party becomes aware of such claim) the party or parties from which
indemnification is sought (the "Defending Party") of the nature and basis of
such claim for indemnification. No failure to notify the Asserting Party shall
relieve it of its obligations under this Agreement except to the extent that it
can demonstrate damages attributable to the Defending Party's failure to notify.
If such claim relates to a claim, suit, litigation or other action by a third
party against the Asserting Party or any fixed or contingent liability to a
third party (a "Third Party Claim"), the Defending Party may elect to assume and
control the defense of the Third Party Claim at its own expense with counsel
selected by the Defending Party (and reasonably acceptable to the Asserting
Party) from and after such time as the Defending Party unconditionally agrees in
writing to accept, as against the Asserting Party, all liabilities on account of
such Third Party Claim. Assumption of such liability, as against the Asserting
Party, shall not be deemed an admission of liability as against any such third
party. Notwithstanding the foregoing, the Defending Party may not assume or
control the defense if the named parties to the Third Party Claim include both
the Defending Party and the Asserting Party and representation of both parties
by the same counsel would be inappropriate due to actual or potential differing
interests between them, in which case the Asserting Party shall have the right
to defend the Third Party Claim and to employ counsel reasonably approved by the
Defending Party, and to the extent the matter is determined to be subject to
indemnification hereunder, the Defending Party shall reimburse the Asserting
Party for the reasonable costs, disbursements and other charges of its counsel.
If the Defending Party assumes liability for the Third Party Claim as against
the Asserting Party and assumes the defense and control of the Third Party Claim
pursuant to this Section 5, the Defending Party shall not be liable for any fees
and expenses of counsel for the Asserting Party incurred thereafter in
connection with the Third Party Claim (except in the case of actual or potential
differing interests, as provided in the preceding sentence), but shall not agree
to any settlement of such Third Party Claim which does not include an
unconditional release of the Asserting Party by the third party claimant on
account thereof, provided that such requirement shall be deemed waived to the
extent that the Asserting Party does not undertake to provide and promptly
execute and, concurrently with the delivery of any such release, deliver a
corresponding release of the third party claimant with respect to such Third
Party Claim. If the Defending Party does not assume liability for and the
defense of the Third Party Claim pursuant to this Section 5, the Asserting Party
shall have the right (i) to control the defense thereof and (ii), if the
Asserting Party shall have notified the Defending Party of the Asserting Party's
intention to negotiate a settlement of the Third Party Claim (at the Defending
Party's expense to the extent the matter is determined to be subject to
indemnification hereunder), which notice shall include the material terms of any
proposed settlement in reasonable detail, to settle the Third Party Claim (at
the Defending Party's expense to the extent the matter is determined to be
subject to indemnification hereunder) on terms not materially inconsistent with
those set forth in such notice, unless the Defending Party
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shall have notified the Asserting Party in writing of the Defending Party's
election to assume liability for and the defense of the Third Party Claim
pursuant to this Section 5 within ten days after receipt of such notice, and the
Defending Party promptly thereafter shall have taken appropriate action to
implement such defense, including paying fees and expenses of counsel. The
Asserting Party shall not be entitled to settle any such Third Party Claim
pursuant to the preceding sentence unless such settlement includes an
unconditional release of the Defending Party by the third party claimant on
account thereof, provided that such requirement shall be deemed waived to the
extent that the Defending Party does not undertake to provide and promptly
execute and, concurrently with delivery of any such release, deliver a
corresponding release of the third party claimant with respect to such Third
Party Claim. The Asserting Party and the Defending Party shall use all
reasonable efforts to cooperate fully with respect to the defense and settlement
of any Third Party Claim covered hereunder.
6. Cooperation with Respect to Tax Matters
QK, Pro's Choice and Healthcare will cooperate with each other
in supplying information as may be requested by any of them in connection with
the preparation and timely completion of returns or audits relating to Taxes.
7. QK Noncompetition Agreement
a. QK agrees, for a period of five years from the Closing Date
(the "Noncompetition Term"), that neither it nor any Affiliate (other than
Healthcare, with respect to the Pharmaceutical Business) will directly or
indirectly, either through any form of ownership or as an agent, adviser,
consultant, shareholder (except for an interest of 5% or less in any entity),
partner or any other individual or representative capacity whatsoever, either
for its own benefit or for the benefit of any other person, firm, corporation,
governmental or private entity, or any other entity of any kind which is
competitive with the Pharmaceutical Business or the Hair Care Business, compete
with Healthcare or Pro's Choice in the United States, in any business activity
of the Pharmaceutical Business or the Hair Care Business as it was conducted
prior to the Closing Date or any business activities which constitute the
business of Pro's Choice or Healthcare on the Closing Date. Additionally, during
the Noncompetition Term, neither QK nor any member of the QK Group shall
directly or indirectly request or advise any customer or supplier of the
Pharmaceutical Business or the Hair Care Business to withdraw, curtail or cancel
its business activities with Healthcare or Pro's Choice.
b. If during any period QK is not in compliance with the terms
of this Section 7, Pro's Choice or Healthcare, as the case may be, shall be
entitled to, among other remedies, compliance by QK with the terms of this
Section 7 for an additional period equal to the period of non-compliance. For
purposes of this Agreement, the term "Noncompetition Term" shall also include
this additional period. QK acknowledges that the geographic boundaries, scope of
prohibited activities and time of duration of the provisions of this Section 7
are reasonable and no broader than necessary to protect the legitimate business
interests of Pro's Choice and Healthcare.
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<PAGE> 5
8. Pro's Choice Noncompetition Agreement
a. Pro's Choice agrees, for a period of five years from the
Closing Date (the "Noncompetition Term"), that neither it nor any Affiliate will
directly or indirectly, either through any form of ownership or as an agent,
adviser, consultant, shareholder (except for an interest of 5% or less in any
entity), partner or any other individual or representative capacity whatsoever,
either for its own benefit or for the benefit of any other person, firm,
corporation, governmental or private entity, or any other entity of any kind
which is competitive with the Pharmaceutical Business, the Grocery Business or
the Health and Beauty Business, compete with Healthcare or QK in the United
States, in any business activity of the Pharmaceutical Business, the Grocery
Business or the Health and Beauty Business as it was conducted prior to the
Closing Date or any business activities which constitute the business of QK or
Healthcare on the Closing Date. Additionally, during the Noncompetition Term,
neither Pro's Choice nor any member of the Pro's Choice Group shall directly or
indirectly request or advise any customer or supplier of the Pharmaceutical
Business, the Grocery Business or the Health and Beauty Business to withdraw,
curtail or cancel its business activities with QK or Healthcare.
b. If during any period Pro's Choice is not in compliance with
the terms of this Section 8, QK or Healthcare, as the case may be, shall be
entitled to, among other remedies, compliance by Pro's Choice with the terms of
this Section 8 for an additional period equal to the period of non-compliance.
For purposes of this Agreement, the term "Noncompetition Term" shall also
include this additional period. Pro's Choice acknowledges that the geographic
boundaries, scope of prohibited activities and time of duration of the
provisions of this Section 8 are reasonable and no broader than necessary to
protect the legitimate business interests of QK and Healthcare.
9. Healthcare Noncompetition Agreement
a. Healthcare agrees, for a period of five years from the
Closing Date (the "Noncompetition Term"), that neither it nor any Affiliate
(except QK, with respect to the Grocery Business and the Health and Beauty
Business) will directly or indirectly, either through any form of ownership or
as an agent, adviser, consultant, shareholder (except for an interest of 5% or
less in any entity), partner or any other individual or representative capacity
whatsoever, either for its own benefit or for the benefit of any other person,
firm, corporation, governmental or private entity, or any other entity of any
kind which is competitive with the Hair Care Business, the Health and Beauty
Business or the Grocery Business, compete with Pro's Choice or QK in the
United States, in any business activity of the Grocery Business, the Health and
Beauty Business or the Hair Care Business as it was conducted prior to the
Closing Date or any business activities which constitute the business of QK or
Pro's Choice on the Closing Date. Additionally, during the Noncompetition Term,
neither Healthcare nor any member of the Healthcare Group shall directly or
indirectly request or advise any customer or supplier of the Hair Care Business,
the Health and Beauty Business or the Grocery Business to withdraw, curtail or
cancel its business activities with Pro's Choice or QK.
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<PAGE> 6
b. If during any period Healthcare is not in compliance with
the terms of this Section 9, QK or Pro's Choice, as the case may be, shall be
entitled to, among other remedies, compliance by Healthcare with the terms of
this Section 9 for an additional period equal to the period of non-compliance.
For purposes of this Agreement, the term "Noncompetition Term" shall also
include this additional period. Healthcare acknowledges that the geographic
boundaries, scope of prohibited activities and time of duration of the
provisions of this Section 9 are reasonable and no broader than necessary to
protect the legitimate business interests of QK and Pro's Choice.
10. Reformation of Sections 7, 8 and 9
The parties hereto agree and stipulate that the agreements and
covenants not to compete contained in Sections 7, 8 and 9 are fair and
reasonable in light of all the facts and circumstances of the relationships
between and among the parties; however, the parties are aware that in certain
circumstances courts have refused to enforce certain agreements not to compete.
Therefore, in furtherance of and not in derogation of the provisions of Sections
7, 8 and 9, the parties agree that, in the event a court should decline to
enforce the provisions of Sections 7, 8 or 9, the provisions of any of such
sections which a court has declined to enforce shall be modified or reformed to
restrict the party's competition, as applicable, to the maximum extent, as to
time, geography and business scope, which the court shall find enforceable;
provided, however, in no event shall the provisions of Sections 7, 8 or 9 be
deemed to be more restrictive to any of the parties than those contained
therein.
11. Covenants of QK and Pro's Choice. Each of QK and Pro's Choice
hereby agree that it shall not enter into any merger, consolidation, business
combination, or sale or distribution of all or substantially all of its assets,
or any transaction that would have a material adverse effect upon its ability to
perform its obligations under this Agreement unless provision shall have been
made for the performance of its obligations under Sections 2, 3, 6, 7, and 8,
which provision shall be determined to be satisfactory by the members of the
Board of Directors of Healthcare who shall be deemed to be independent under the
rules of the New York Stock Exchange.
12. General Provisions.
(a) No Waiver. Waiver of any provision of this Agreement, in whole or
in part, in any one instance shall not constitute a waiver of any other
provision in the same instance, nor any waiver of the same provision in another
instance, but each provision shall continue in full force and effect with
respect to any other then-existing or subsequent breach.
(b) Notice. Any notice required or permitted under this Agreement shall
be given in writing by (i) postage prepaid, United States first class,
registered or certified mail, return receipt requested, (ii) prepaid courier
requiring receipt, or (iii) personal delivery, to the parties at their
respective addresses specified above, or at such other address for a party as
that party may specify by notice. Notice shall be effective upon receipt.
(c) Severability and Reformation. Subject to the reformation provision
of Section 10, if any provision of this Agreement is held to be illegal, invalid
or unenforceable under any
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<PAGE> 7
current or future law, and if the rights and obligations of the parties under
this Agreement would not be materially and adversely affected thereby, such
provision shall be fully separable and this Agreement shall be construed as if
such illegal, invalid or unenforceable provisions had never comprised a part
thereof, the remaining provisions of this Agreement shall remain in full force
and effect and shall not be affected by the illegal, invalid or unenforceable
provisions or its severance therefrom. In lieu of such illegal, invalid or
unenforceable provisions, there shall be added automatically as a part of this
Agreement, a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible and the parties
hereto request the court or any arbitrator to whom disputes involving this
Agreement are submitted to reform the otherwise illegal, invalid or
unenforceable provision in accordance with this Section 12 (c).
Governing Law and Dispute. This Agreement shall be governed by the laws
other than choice of law rules of the State of New York.
(e) Miscellaneous. This Agreement: (i) may be executed in any number of
counterparts, each of which, when executed by both parties to this Agreement
shall be deemed to be an original, and all of which counterparts together shall
constitute one and the same instrument; (ii) shall be governed by and construed
under the laws of the State of New York applicable to contracts made, accepted,
and performed wholly within the State, without application of principles of
conflicts of laws; (iii) constitutes the entire agreement of the parties with
respect to its subject matter, superseding all prior oral and written
communications, proposals, negotiations, representations, understandings,
courses of dealing, agreements, contracts, and the like between the parties in
such respect; (iv) may be amended, modified, or terminated, and any right under
this Agreement may be waived in whole or in part, only by a writing signed by
all parties of this Agreement and with the consent of the independent directors
of Healthcare; (v) contains headings only for convenience, which headings do not
form part, and shall not be used in construction, of this Agreement; and (vi)
shall bind and inure to the benefit of the parties and their respective
successors and assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
QUALITY KING DISTRIBUTORS, INC.
By: _________________________________________
Name: ___________________________________
Title: __________________________________
PRO'S CHOICE BEAUTY CARE, INC.
By: _________________________________________
Name: ___________________________________
Title: __________________________________
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<PAGE> 8
QK HEALTHCARE, INC.
By: _________________________________________
Name: ___________________________________
Title: __________________________________
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<PAGE> 1
Exhibit 10.3
SUBLEASE
This Sublease ("Sublease") is made as of the ___ day of _________,
1999, by and between QUALITY KING DISTRIBUTORS, INC., having an address at 2060
9th Avenue, Ronkonkoma, New York 11779 ("Sublessor") and QK HEALTHCARE, INC., a
Delaware corporation, having an address at 2060 9th Avenue, Ronkonkoma, New York
11779 ("Sublessee").
W I T N E S S E T H:
WHEREAS, Sublessor is the Tenant under that certain Lease Agreement
dated as of March 1, 1986 with Nussdorf Associates ("Landlord"), (said Lease
Agreement is hereinafter referred to as the "Prime Lease"), for certain premise
(the "Premises") located at 2060 Ninth Avenue, Ronkonkoma, New York (the
"Building"); and
WHEREAS, Sublessee wishes to sublet from Sublessor and Sublessor wishes
to sublet to Sublessee a portion of the Premises leased by Sublessor;
NOW, THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
1. DEFINITIONS
All capitalized terms used herein and not otherwise defined herein
shall have the meanings set forth in the Prime Lease.
2. SUBLEASE
Sublessor hereby subleases to Sublessee and Sublessee hereby subleases
from Sublessor, subject to the terms, provisions and covenants of the Prime
Lease and as hereinafter provided and as same may be expressly modified herein,
that portion of the Premises constituting a portion of the office space and
warehouse space in the Building (the "Subleased Premises"). The parties hereto
agree that for the purposes of this Sublease, the Subleased Premises consist of
71,425 square feet of rentable area and are shown on Exhibit "A" attached hereto
and made a part hereof.
3. TERM
(a) This Sublease shall be for a term of 5 years, commencing on
effective date of the Sublessee's initial public offering (the "Commencement
Date") and, unless earlier terminated pursuant to the terms hereof or pursuant
to the terms of the Prime Lease, terminating on ________ __, 20__ (the
"Termination Date"). If the term of this Sublease exceeds the term of the Prime
Lease, then effective immediately upon the termination of the Prime Lease
(except if the term of the Prime Lease terminates due to a default by Sublessee
under the terms of this
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<PAGE> 2
Sublease), this Sublease shall automatically be deemed a lease (the "Lease")
between Quality King Distributors, Inc, as landlord, and QK Healthcare, Inc., as
tenant. The Lease shall be on the same terms and conditions as contained in this
Sublease, and all references to provisions in the Prime Lease herein shall be
incorporated into the Lease.
4. USE
Sublessee may use the Subleased Premises for any use permitted under
the Prime Lease.
5. RENT
(a) From and after the Commencement Date, Sublessee shall pay equal
monthly installments of rent of $33,689 per month (the "Sublease Rent") to
Sublessor for the Subleased Premises, in advance, on or before the first day of
each calendar month, without any offsets or deductions and without prior demand
therefor.
(b) Sublessee shall pay its proportionate share of all other charges
arising after the commencement date of the lease due under Prime Lease,
including but not limited to, Additional Rent as same is defined in the Prime
Lease. For the purposes of this Sublease, Sublessor and Sublessee agree that the
Sublessee's proportionate share is 36 1/2%.
(c) Rent shall be payable to the attention of Sublessor at Quality King
Distributors, Inc., 2060 9th Avenue, Ronkonkoma, New York 11779, or at such
other place as Sublessor may designate in writing.
(d) If Sublessee fails to make any payment of Sublease Rent within
fifteen business days after the date such payment is due and payable, Sublessee
shall pay to Sublessor a late charge on the amount of such delinquent payment at
the rate of 2% above the prime interest rate then being charged by Fleet, N.A.,
as published at the main branch bank in New York City. Nothing contained herein
shall be construed as permitting Sublessor to charge or receive interest in
excess of the maximum legal rate then allowed by law.
6. CONDITION OF PREMISES
(a) Possession of the Subleased Premises shall be delivered to
Sublessee in "broom clean" condition, but otherwise in "as is" condition.
(b) Upon the Termination Date or any earlier termination pursuant to
the terms hereof, Sublessee shall deliver the Subleased Premises to Sublessor
free of all of Sublessee's furniture and personal property and otherwise in
accordance with the provisions of the Prime Lease.
(c) Sublessee shall take good care of the Subleased Premises and the
fixtures and appurtenances therein, and shall make all repairs thereto.
Sublessee shall not look to Sublessor for nor shall Sublessor be responsible
for, any such repairs unless caused by the act or omission of Sublessor.
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<PAGE> 3
(d) All alterations, installations and improvements made in the
Subleased Premises by either Sublessee or Sublessor shall, subject to the terms
of the Prime Lease, become the property of Sublessor and shall remain upon and
be surrendered with the Subleased Premises upon expiration of the term hereof.
7. BROKER
Each of the parties hereto represents and warrants to the other that it
has not dealt with any broker in connection with this Sublease.
8. ASSIGNMENT OR FURTHER SUBLETTING
Sublessee may not assign this Sublease or further sublease the
Subleased Premises during the term hereof without the prior consent of
Sublessor, which consent shall not be unreasonably withheld or delayed.
9. ALTERATIONS
Sublessee shall not make, nor shall Sublessee permit anyone to
make, any structural improvements to the Subleased Premises without first (a)
submitting copies of all plans, drawings and specifications for all such
proposed structural improvements to Sublessor and (b) obtaining the prior
written consent of Landlord if same is required under the terms of the Prime
Lease. All permitted structural improvements to the Subleased Premises shall be
made by Sublessee in accordance with the terms of the Prime Lease.
10. PRIME LEASE
Sublessor represents to Sublessee that attached hereto as Exhibit B is
a true and complete copy of the Prime Lease. Sublessee covenants that it will
not do any act or thing which will be, result in or constitute a violation or
breach of or a default under the Prime Lease and any such violation, breach or
default shall constitute a violation and the breach by Sublessee of a
substantial obligation under this Sublease.
Sublessee shall not be liable for any damage to persons or property
sustained by Sublessor and others by reason of Sublessee's use and occupancy of
the Subleased Premises or by reason of any act, accident or occurrence in the
Subleased Premises, unless such act, accident or occurrence was the result of
the gross negligence or willful misconduct of Sublessee, its agents or
employees.
This Sublease is separate from and subordinate to the Prime Lease.
Sublessor warrants to Sublessee that (i) the Prime Lease has not been
amended or modified except as set forth herein; (ii) Sublessor is not now, and
as of the Commencement Date will not be, in default or breach of any of the
material obligations of the Prime Lease; (iii)
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<PAGE> 4
Sublessor has full right, power and authority to execute this Sublease; and (iv)
Sublessor has no knowledge of any claim by Landlord that Sublessor is in default
or breach of any of the provisions of the Prime Lease as of the date hereof.
11. INSURANCE/CASUALTY/CONDEMNATION
Sublessee shall at its own cost and expense obtain and carry such
insurance with respect to the Subleased Premises as may be reasonably required
by Sublessor throughout the term of this Sublease. Such insurance shall cover
Landlord, Sublessor and Sublessee, as their interests may appear. In the event
of damage or destruction to the Subleased Premises or any taking thereof or in
the event of any interruption of services to the Subleased Premises which
results in an abatement of rent payable under the Prime Lease, such abatement
shall inure to the benefit of the Sublessee hereunder. In the event of
condemnation, Sublessor and Sublessee shall be entitled to the amount of any
condemnation award to which they may be respectively entitled in connection with
the Subleased Premises. Sublessor and Sublessee mutually waive their respective
rights of recovery against each other for any loss of, or damage to, their
respective property, to the extent same is insured against at such time.
12. RIGHT TO TERMINATE
(a) Sublessee shall have the right (the "Termination Right") to
terminate this Sublease, provided that:
(i) Sublessee shall give Sublessor written notice (the
"Termination Notice") of Sublessee's election to exercise the Termination Right
on or prior to a date that is at least ninety days prior to the date Sublessee
desires to terminate this Sublease (the "Termination Effective Date"); and
(ii) In consideration of Sublessee's exercise of the Termination
Right, Sublessee shall pay to Sublessor (with the Termination Notice) $101,067
(the "Termination Payment").
(b) If Sublessee properly exercises the Termination Right, then,
effective as of the Termination Effective Date, this Sublease shall terminate
and end as fully and completely as if the Termination Effective Date was the
last date of the term hereof. Accordingly, and without limiting the generality
of the foregoing (i) on or prior to the Termination Effective Date, Sublessee
shall (and shall cause each of its subtenants, if any) to vacate and surrender
the Subleased Premises in accordance with the provisions of this Sublease, (ii)
as of the Termination Effective Date, Sublease Rent shall be apportioned in the
same manner and to the same extent as if the Termination Effective Date was the
end of the Sublease term and (iii) from and after the Termination Effective
Date, neither party shall have any further rights against or obligations to the
other by reason of this Sublease or the estate created hereby, except for such
rights and obligations which by the terms of this Sublease survive the
expiration or termination hereof.
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<PAGE> 5
13. MISCELLANEOUS
(a) All prior understandings and agreements between the parties are
merged within this Sublease which alone fully sets forth the understandings of
the parties. This Sublease may be changed or terminated only by an agreement in
writing and signed by the party against whom enforcement of the change or
termination is sought.
(b) Any notice, demand or other communication required or permitted to
be given or made by either party under this Sublease shall be in writing and
shall be deemed properly given three (3) days after sent by certified mail,
return receipt requested, addressed to the parties at the addresses set forth
below. Either party may, by notice aforesaid, designate a different address for
communications intended for it.
To Sublessor: Quality King Distributors, Inc.
2060 9th Avenue
Ronkonkoma, New York 11779
Attention:
with a copy to: Dennis M. Apfel, Esq.
2070 Deer Park Avenue
Deer Park, New York 11729
To Sublessee: at its offices at the Building
Attention: President
with a copy to: Edwards & Angell, LLP
750 Lexington Avenue
New York, New York 10022
Attention: Patricia L. Kantor, Esq.
(c) This Sublease will be binding on, and inure to the benefit of, the
parties hereto and their respective successors and permitted assigns.
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<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Sublease as of the
day and year first above written.
QUALITY KING DISTRIBUTORS, INC.
By:__________________________________
Title:_________________________
QK HEALTHCARE, INC.
By:_________________________________
Title:_________________________
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<PAGE> 1
Exhibit 10.4
QK HEALTHCARE, INC.
1999 STOCK OPTION PLAN
1. NAME AND PURPOSE. This Plan shall be known as the QK Healthcare,
Inc. 1999 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to
advance the interests and increase the value of QK Healthcare, Inc., a Delaware
corporation (the "Company"), by providing key and valuable employees and others
doing business with the Company with opportunities to participate in the
ownership of the Company and its future growth. Awards under the Plan shall be
granted in the form of incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended ("ISOs"), or non-qualified
stock options.
2. DEFINITIONS. For purposes of this Plan, the following terms shall
have the meanings set forth below:
"ADMINISTRATOR" shall mean the Board or the Compensation Committee of
the Board or such other person(s) to whom the Board has delegated the
responsibility of administering the Plan.
"BOARD" shall mean the Board of Directors of the Company.
"CAUSE" shall mean the definition of "Cause" set forth in any
employment agreement between the relevant Optionee and the Company, or, in the
absence of any employment agreement, "Cause" shall mean as determined in good
faith by the Board of Directors of the Company, (1) the Optionee's gross
negligence in the performance of any of his material duties and responsibilities
to the Company (other than as a result of total or partial incapacity due to
physical or mental illness); (2) the Optionee's willful dishonesty or fraud with
respect to the business or affairs of the Company; (3) the Optionee's conviction
of a felony crime; or (4) chronic alcohol abuse or illegal drug abuse by the
Optionee.
"CHANGE IN CONTROL" shall mean the consolidation or merger of the
Company with or into other person(s) or entity(ies) (other than a consolidation
or merger with an entity controlled by members of the Nussdorf family or in
which the Company is the surviving corporation and upon consummation of which
the holders of voting capital stock of the Company immediately prior to such
transaction continue to own directly or indirectly no less than a majority of
the voting capital stock of the Company, as the surviving corporation,
immediately following such transaction), sale of all or substantially all of the
assets of the Company or a sale or other disposition of more than 50% of the
voting capital stock of the Company (whether issued and outstanding, newly
issued or from treasury, or any combination thereof) or other similar
transaction. For purposes of this definition, a sale (whether in a single
transaction or a series of related transactions) of substantially all of the
assets of the Company shall mean the sale or other disposition, other than in
the ordinary course of business, of more than 50% of such assets, as determined
by reference to the fair market value of the Company immediately prior to the
completion of the first of such transactions.
<PAGE> 2
"COMMON SHARES" shall mean shares of the Company's common stock, $.001
par value, reserved for issuance under the Plan.
"FAIR MARKET VALUE" shall mean the fair market value of the Common
Shares as determined by the Administrator in its sole discretion, unless the
Common Shares are traded on a national exchange, in which case fair market value
for any given day shall mean the average of the high and low prices of the
Common Shares reported by such applicable exchange on the next preceding trading
day.
"OPTION" shall mean any option granted under the Plan.
"OPTIONEE(S)" shall mean employees and other persons to whom options
have been granted hereunder.
3. ADMINISTRATION. The Plan shall be administered by the Administrator.
The Administrator may establish, subject to the provisions of the Plan, such
rules and regulations as it deems necessary for the proper administration of the
Plan, and make such determinations and take such action in connection therewith
or in relation to the Plan as it deems necessary or advisable, consistent with
the terms of the Plan. The interpretation and construction by the Administrator
of any provisions of the Plan or of any Option granted hereunder are final and
conclusive.
4. ELIGIBILITY. All regular full-time employees of the Company and
other persons who perform services for the Company ("Eligible Persons") shall be
eligible to participate in the Plan, as determined by the Administrator.
5. SHARES SUBJECT TO THE PLAN.
(a) The Common Shares to be issued and delivered by the Company upon
exercise of Options granted under the Plan may be either authorized but unissued
shares of Common Stock or treasury shares.
(b) The aggregate number of Common Shares of the Company which may be
issued under the Plan shall not exceed 4,300,000 shares; subject, however, to
the adjustment provided in Section 9 in the event of certain changes in the
Company's capital structure. No option may be granted under this Plan which
could cause such maximum limit to be exceeded.
(c) Common Shares covered by an Option which is no longer exercisable
with respect to such shares shall again be available for issuance under this
Plan.
6. GRANT OF OPTIONS. The Administrator may from time to time, in its
sole discretion and subject to the provisions of the Plan, grant Options to
Eligible Persons, provided however, that any grant of an ISO prior to the
approval of the Plan by the Company's stockholders shall be conditioned on and
subject to stockholder approval of the Plan. Each
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<PAGE> 3
Option shall be embodied in an option agreement signed by the Optionee and the
Company providing that the Option shall be subject to the provisions of this
Plan and containing such other provisions as the Administrator may prescribe not
inconsistent with the Plan. The option agreement shall specify whether the
Option is a non-qualified option or an ISO. No ISO may be granted subsequent to
October 31, 2009.
7. TERMS AND CONDITIONS OF OPTIONS. All Options granted under the Plan
shall contain such terms and conditions as the Administrator may from time to
time determine, in its sole discretion, subject to the foregoing and following
limitations and requirements:
(a) Option price: The price of Common Shares covered by any Option
granted under the Plan shall be determined by the Administrator, in its sole
discretion, at the time such Option is granted; provided, however, that in the
case of an ISO the option price shall not be less than 100% of the Fair Market
Value of the Common Shares on the date of the grant.
(b) Period within which Option may be exercised: The period of each
Option shall be fixed by the Administrator in its sole discretion, but no ISO
may be exercised after the expiration of ten years from the date the Option is
granted. The Administrator may, in its sole discretion, determine as a condition
of any Option that all or a stated percentage of the Common Shares covered by
such Option shall become exercisable, in installments or otherwise, only after
the completion of a specified service requirement by the Optionee. In addition,
the Administrator may impose such other restrictions and conditions on the
exercisability of Options as the Administrator, in its sole discretion, may
determine.
(c) 10% Shareholder: Notwithstanding any other provision of this Plan,
the price per Common Share covered by an ISO granted to an Optionee who, at the
time such option is granted, owns shares possessing more than 10% of the total
combined voting power of all classes of shares of the Company or its
subsidiaries shall be at least 110% of the Fair Market Value of the Common
Shares subject to the option. In addition, any such option may not be exercised
after the expiration of five years from the date the ISO is granted.
(d) Grant limitation: The aggregate Fair Market Value of Common Shares
with respect to which ISOs are exercisable for the first time by any Optionee
during any calendar year (determined at the time the option is granted) shall
not exceed $100,000.
(e) Termination of Option by reason of termination of employment:
Unless the Administrator in its discretion determines otherwise, if an
Optionee's employment (or contractual relationship to provide services, which
shall hereafter be referred to as employment) with the Company terminates for
reasons including death or disability (within the meaning of Section 22(e)(3) of
the Internal Revenue Code), any portion of Optionee's Options which is not
exercisable on the date of such termination shall immediately terminate. Unless
the Administrator in its discretion determines otherwise, any remaining portion
of such Options shall terminate if not exercised within the thirty (30) day
period commencing with the date of termination of employment unless such
termination of employment is by reason of the Optionee's death or disability, in
which event such period shall be three (3) years.
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<PAGE> 4
Notwithstanding the foregoing, if an Optionee's employment is
terminated for Cause, all outstanding Options held by such Optionee, whether
vested or unvested, shall terminate immediately unless the Administrator in its
discretion determines otherwise.
(f) Non-transferability: Except to the extent provided in any option
agreement and permitted under applicable law, each Option and all rights
thereunder shall be exercisable during the Optionee's lifetime only by him and
shall be non-assignable and non-transferable by the Optionee other than, in the
event of the Optionee's death, by his will or by the laws of descent and
distribution. In the event the death of an Optionee occurs, the representative
or representatives of the estate, or the person or persons who acquired (by
bequest or inheritance) the rights to exercise the Options may exercise such
Options in whole or in part prior to the expiration of the applicable exercise
period.
(g) Compliance with securities laws: Options granted and shares issued
by the Company upon exercise of Options shall be granted and issued only in full
compliance with all applicable securities laws, including laws, rules and
regulations of the Securities and Exchange Commission and applicable state Blue
Sky Laws. With respect thereto, the Administrator may impose such conditions on
transfer, restrictions and limitations as it may deem necessary and appropriate
to assure compliance with such applicable securities laws.
(h) Modification or cancellation of Option: The Administrator shall
have the authority to effect, at any time and from time to time, with the
consent of the affected Optionee or Optionees, the modification of the terms of
any option agreement, including, but not limited to, the acceleration of any
vesting or exercisability requirements upon the occurrence of a Change in
Control or otherwise.
(i) Disposition of shares: No Option granted under this Plan shall
qualify as an ISO within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, if the Common Shares acquired pursuant to the exercise of
the Option are transferred, other than by will or by the laws of descent and
distribution, within two years of the date such option was granted or within one
year after the transfer of Common Shares to the Optionee pursuant to such
exercise.
8. METHOD OF EXERCISE. An Option granted under this Plan may be
exercised by written notice to the Administrator, signed by the Optionee, or by
such other person as is entitled to exercise such Option. The notice of exercise
shall state the number of Common Shares in respect of which the Option is being
exercised, and shall either be accompanied by the payment of the full option
price for such Common Shares, or shall fix a date (not more than ten business
days from the date of such notice) for the payment of the full option price of
the Common Shares being purchased. The purchase price may be paid (i) in cash or
by check in the form satisfactory to the Company, (ii) subject to the approval
of the Administrator, by delivery to the Company of Common Shares already owned
by the Optionee (which shall be valued for this purpose at the Fair Market Value
on the date of transfer to the Company as determined by the Administrator in its
sole discretion), or (iii) any combination of the above. A certificate or
certificates for the
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<PAGE> 5
Common Shares of the Company purchased through the exercise of an Option shall
be issued in regular course after the exercise of the Option and payment
therefor. During the Option period no person entitled to exercise any Option
granted under this Plan shall have any of the rights or privileges of a
shareholder with respect to any Common Shares issuable upon exercise of such
Option until certificates representing such Common Shares shall have been issued
and delivered.
9. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE.
(a) The existence of outstanding Options shall not affect in any way
the right or ability of the Company or its shareholders to make or authorize any
or all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Common Shares or the rights hereof, or the
dissolution or liquidation of the Company, or any sale or transfer of all or any
part of its assets or business or any of the outstanding stock of the Company,
or any other corporate act or proceeding, whether of a similar character or
otherwise, except pursuant to a Change in Control to the extent and in the
manner expressly provided herein.
(b) If the Company shall effect a subdivision, consolidation or
reclassification of shares or other capital readjustment or recapitalization,
the payment of a stock dividend, or other increase or reduction in the number of
Common Shares outstanding, without receiving compensation therefor in money,
services or property, then the number, class and per share price of Common
Shares shall be appropriately adjusted in such a manner as to entitle an
Optionee, upon exercise of an option, to receive the same aggregate cash
consideration, the same total number and class of shares as he would have
received as a result of the event requiring the adjustment.
(c) Except as hereinbefore expressly provided, the issue by the Company
of shares of stock of any class, for cash or property, or for labor or services,
either upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company convertible
into such shares or other securities, shall not affect, and no adjustment by
reason thereof shall be made with respect to, the number or price of Common
Shares then subject to outstanding Options.
(d) In the event of a Change in Control while Options remain
outstanding, all outstanding Options under the Plan shall accelerate and become
immediately exercisable for a period of 30 days, or such longer or shorter
period as the Board may prescribe (the "Notice Period") immediately prior to the
scheduled consummation of such Change in Control, provided, however, that any
such acceleration and any exercise of options during the notice period shall be
(i) conditioned upon the consummation of the Change in Control and (ii)
effective only immediately before the consummation of such Change in Control.
(e) Upon consummation of a Change in Control, the Plan and all
outstanding but unexercised options shall terminate. Notwithstanding the
foregoing, to the extent provision is made in writing in connection with such
Change in Control for the continuation of the Plan and
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<PAGE> 6
the assumption of Options under the Plan theretofore granted, or for the
substitution for such Options of new options covering the stock of a successor
company, or a parent or subsidiary thereof, with appropriate adjustments as to
the number and kinds of shares or units and exercise prices, then the Plan and
Options theretofore granted shall continue in the manner and under the terms so
provided, and the acceleration and termination provisions set forth in the first
two sentences of this Section 9(d) shall be of no effect. The Company shall send
written notice of a Change in Control to all individuals who hold options not
later than the time at which the Company gives notice thereof to its
stockholders.
10. INITIAL PUBLIC OFFERING. In the event of any initial public
offering of any class of common stock of the Company ("IPO Stock") during the
term of any Option granted under the Plan, the number, class and per share price
of Common Shares may be appropriately adjusted in such a manner as to entitle
the Optionee to receive upon exercise of such option, for the same aggregate
cash consideration, shares of IPO Stock which, in the judgment of the
Administrator, are substantially equivalent in value to the Common Shares.
Unless otherwise determined by the Administrator, all other terms of such
Options shall remain the same.
11. AMENDMENT OR TERMINATION. The Administrator may, in its sole
discretion, terminate this Plan at any time, and may amend the Plan at any time
or from time to time; provided, however, that any amendment that would increase
the aggregate number of shares that may be issued under the Plan, materially
increase the benefits accruing to employees under the Plan, or materially modify
the requirements as to eligibility for participation in the Plan shall be
subject to the approval of the Company's stockholders to the extent required by
Internal Revenue Code Section 422, other applicable laws or any other governing
rules or regulations, except that such increase or modification that may result
from adjustments authorized by Section 9 does not require such approval. If the
Plan is terminated, any unexercised option shall continue to be exercisable in
accordance with its terms, except as provided in Section 9 above.
12. COMPANY RESPONSIBILITY. All expenses of this Plan, including the
cost of maintaining records, shall be borne by the Company. The Company shall
have no responsibility or liability (other than under applicable securities
laws) for any act or thing done or left undone with respect to the price, time,
quantity, or other conditions and circumstances of the purchase of the Common
Shares under the terms of the Plan, so long as the Company acts in good faith.
13. TAX WITHHOLDING. Any grant of an Option hereunder shall provide, as
determined by the Administrator in its sole discretion, for appropriate
arrangements for the satisfaction by the Company and the Optionee of all
federal, state, local or other income, excise or employment taxes or tax
withholding requirements applicable to the exercise of the Option or a related
tandem right, or the later disposition of the Common Shares thereby acquired and
all such additional taxes or amounts as determined by the Administrator in its
sole discretion, including, without limitation, the right of the Company to
receive transfers of Common Shares or other property from the Optionee or to
deduct or withhold in the form of Common Shares from any transfer to an
Optionee, in such amount or amounts deemed required or appropriate by the
Administrator in its sole and absolute discretion.
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<PAGE> 7
14. IMPLIED CONSENT. Every Optionee, by the acceptance of an Option
under this Plan shall be deemed to have consented to be bound, on his or her own
behalf and on behalf of his or her heirs, assigns, and legal representatives, by
all of the terms and conditions of this Plan.
15. NO EFFECT ON EMPLOYMENT STATUS. The fact that an employee or any
other person has been granted an Option under this Plan shall not limit or
otherwise qualify the right of the Company to terminate such person's employment
at any time.
16. DURATION AND TERMINATION OF THE PLAN. The Plan shall become
effective on ______________, 1999, which is the date the stockholders of the
Company approved the Plan. No ISO shall be granted subsequent to the tenth
anniversary of such date, or subsequent to any earlier date as of which the Plan
is terminated.
17. LAW TO GOVERN. This Plan shall be construed and administered in
accordance with and governed by the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this 1999 Stock Incentive
Plan to be executed by its duly authorized officer as of the ____ day of
___________, 1999.
QK HEALTHCARE, INC.
By:____________________________
Title: ________________________
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<PAGE> 1
EXHIBIT 10.5
QK HEALTHCARE, INC.
INCENTIVE STOCK OPTION AGREEMENT
AGREEMENT made this_____day of_____________, 1999 , by and between QK
HEALTHCARE, INC., a Delaware corporation (the "Corporation"), and
_____________________(the "Employee").
1. Grant of Option. Subject to the terms and conditions set forth in this
Agreement and the QK Healthcare, Inc. 1999 Stock Option Plan ( the "Plan"), the
Corporation hereby grants to the Employee the option (the "Option") to purchase
from the Corporation, during the term set forth in Section 2 below, an aggregate
of shares ("Option Shares") of the Corporation's common
stock, par value $.001 per share (the "Common Stock"), at a price of $ per
share, such price being not less than l00% of the Fair Market Value of the
Common Stock on the date of this Agreement; provided, however, that if the
Employee owns, immediately prior to the grant of the Option Shares, stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Corporation (a "Ten Percent Owner"), such price shall be at least
110% of the Fair Market Value of the Common Stock on the date of this Agreement.
This Option is intended to be an "incentive stock option" as defined in Section
422(b) of the Internal Revenue Code. The Option hereby granted shall expire 30
days after the delivery of this Agreement to the Employee unless the Employee
signs and returns this Agreement to the Corporation within such 30 days. Unless
otherwise defined herein, capitalized terms used herein shall have the same
meaning as provided in the Plan.
2. Term. This Option shall commence on the date of this Agreement and
shall terminate in accordance with the provisions of Section 8 below.
<PAGE> 2
3. Exercise.
(a) Prior to termination of this Agreement, this Option may be exercised
and shall vest in the installments and during the periods set forth on Exhibit A
to this Agreement, except as such periods may be extended pursuant to Section
4(a) below.
(b) During the lifetime of the Employee, this Option may be exercised
only by the Employee. Following the death of the Employee, this Option may be
exercised by the Employee's legatee(s), heir(s), or personal representative(s)
(collectively, "Legal Representative") during the periods and in the manner set
forth in Sections 3(c) and 4(a) below.
(c) The Employee (or in the case of the Employee's death, his Legal
Representative) may exercise this Option by giving written notice of exercise of
the Option to the Corporation at its then principal office on the form annexed
as Exhibit B to this Agreement. Such notice shall state the number of whole
shares with respect to which this Option is being exercised and shall be
accompanied by the full purchase price for such shares, payable either: (i) in
cash or certified or bank cashier's check, (ii) by transfer to the Corporation
by the Employee or his Legal Representative of Common Stock of the Corporation
owned by the Employee having a Fair Market Value as of the date the Option is
exercised equal to such purchase price, or (iii) by a combination of (i) and
(ii).
4. Limitations on Exercise.
(a) Except as provided in subsections (i) - (iii) below, this Option
cannot be exercised unless the Employee is then employed by the Corporation.
(i) Within 12 months after the Employee's retirement (at the normal
retirement date prescribed from time to time under any policy of the Corporation
then in effect, or at any other
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<PAGE> 3
date with the consent of the Corporation) from or termination of employment, for
reason other than Cause, with the Corporation, the Employee may exercise this
Option to the extent of the number of shares that he shall have been entitled to
purchase on the date of such retirement or termination of employment.
(ii) Within 12 months after the Employee shall cease to be employed by
the Corporation because of disability (within the meaning of Section 22(e)(3) of
the Internal Revenue Code), the Employee may exercise this Option to the extent
of the number of shares that he shall have been entitled to purchase on the date
his employment terminated.
(iii) Within 12 months after the Employee dies: (A) while he is employed
by the Corporation, (B) within 12 months after his retirement pursuant to
subsection (i) above, or (C) within 12 months after his employment ceases due to
disability pursuant to subsection (ii) above, this Option shall be exercisable
by the Legal Representative, to the extent of the number of shares that the
holder shall have been entitled to purchase on the date of his death.
(b) The Option shall not be exercised in whole or in part until the
Corporation has effected any of the following conditions that the Board of
Directors of the Corporation ("Board"), in its discretion, determines at the
time of exercise of the Option to be necessary or desirable as a condition of,
or in connection with, the issuance and purchase of shares under this Option:
(i) the listing, registration or qualification of the Corporation or of
the shares subject to this Option upon any securities exchange or under any
federal or state laws;
(ii) the giving of any investment representation by the Employee or his
Legal Representative;
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<PAGE> 4
(iii) the notation of any restriction on transfer on the certificate or
certificates representing such shares; or (iv) the execution and delivery by the
Employee of a "lock-up" or similar agreement in the form requested by the
Corporation's underwriter from time to time.
5. Delivery of Option Shares. As soon as possible after receipt by the
Corporation of a notice of exercise hereunder, of payment therefor, and of
evidence of compliance with any conditions that may be required by the Board
under Section 4, the Corporation shall deliver to the Employee, or to his Legal
Representative, as the case may be, one or more certificate(s) for the number of
shares with respect to which this Option shall have been so exercised. No shares
shall be delivered pursuant to any exercise hereto until the requirements of
such laws and regulations as may be deemed by the Board to be applicable thereto
are satisfied.
6. Restrictions upon Transfer.
(a) This Agreement and the Option granted hereunder shall not be
assignable or transferable otherwise than by will or the laws of descent and
distribution. In the event of any attempt to assign or to transfer this
Agreement or the Option or any of the rights hereunder other than by will or the
laws of descent and distribution, whether voluntarily or involuntarily, by
operation of law or otherwise, this Agreement and the Option granted hereunder
shall thereupon immediately terminate and be of no further force or effect and
no interest or right hereunder shall vest in any other person.
(b) Nothing in this Agreement shall be construed in limitation of any
restrictions upon transfer of the Option Shares contained elsewhere, including
any restrictions that may be contained in the Certificate of Incorporation or
the By-Laws of the Corporation.
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<PAGE> 5
(c) Nothing in this Agreement shall be construed as a modification of any
existing agreements with respect to the gift, sale, purchase, transfer, pledge,
hypothecation, or other disposition or encumbrance of Option Shares between the
parties to this Agreement, or between or among either or both of the parties to
this Agreement and one or more persons not party to this Agreement.
(d) Option Shares received upon exercise of this Option in whole or part
shall not be transferred within two years from the date of this Agreement or one
year from the date the Option Shares are delivered to the Employee, without the
express written consent of the Corporation. The provisions of this Section 6(d)
shall survive any termination of this Agreement.
7. Assumption of Options. Subject to the provisions of Section 8, upon
dissolution or liquidation of the Corporation, or consolidation of the
Corporation into a new entity, or merger, acquisition, or reorganization of the
Corporation into or with one or more other corporations, the surviving,
resulting or acquiring corporation, as the case may be, or a parent or
subsidiary corporation of such corporation, may (but shall not be obligated to)
substitute a new Option for this Option, or may (but shall not be obligated to)
assume this Option, if:
(a) the Employee is then employed by such surviving, resulting or
acquiring corporation, or a parent or subsidiary corporation of such
corporation;
(b) the excess of the aggregate Fair Market Value of the shares subject
to the Option immediately after the substitution or assumption over the
aggregate Option price of such shares does not exceed the excess of the
aggregate Fair Market Value of the Option Shares immediately
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<PAGE> 6
before such substitution or assumption over the aggregate purchase price of the
Option Shares; and
(c) the new option or the assumption of this Option does not give the
Employee additional benefits that the Employee did not have under this Option,
as determined in accordance with Section 424(a) of the Internal Revenue Code
8. Termination. This Agreement (other than Sections 6(a), 6(d) and 18),
the Option, and all of the rights hereunder shall terminate upon the first to
occur of the following events:
(a) Immediately upon the Employee's termination for Cause of employment
with the Corporation;
(b) Three months after the Employee's termination by the Corporation
without Cause of employment with the Corporation, or with a corporation or a
parent or subsidiary corporation of such corporation issuing or assuming a stock
option in a transaction to which Section 7 of this Agreement applies;
(c) Twelve months after the retirement of the Employee or after the death
of the Employee: (i) while an employee, (ii) within 12 months after termination
of employment on account of retirement or (iii) within twelve months after
termination of employment on account of his Disability with the Corporation, or
with a corporation or a parent or subsidiary corporation of such corporation
issuing or assuming a stock option in a transaction to which Section 7 of this
Agreement applies;
(d) Ten years after the date of this Agreement, provided, however, that
with respect to a Ten Percent Owner, five years after the date of this
Agreement; or
(e) The expiration of the period for exercise of this Option set forth on
Exhibit A.
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<PAGE> 7
9. Rights upon Termination. Upon termination of this Agreement, this
Option shall terminate and shall no longer be exercisable by the Employee or his
Legal Representative.
10. Cancellation of Options. In its sole discretion, the Board may, in
cases involving a serious breach of conduct by an Employee or former Employee,
or activity of a former Employee in competition with the business of the
Corporation, cancel any Option, whether vested or not, in whole or in part.
11. No Rights as Stockholder.
(a) The Employee shall have none of the rights of a stockholder with
respect to any of the Option Shares until this Option shall have been exercised
in whole or in part and until such shares shall have been issued to the
Employee. The Employee shall not have voting or other rights with respect to the
Option Shares prior to the delivery to him of such shares.
(b) Nothing in the Plan or this Agreement shall affect in any way the
rights or powers of the Corporation, or any of the directors or stockholders of
any of such corporation, to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Corporation's capital
structure or business, or any merger or consolidation of the Corporation, or any
issue of bonds, debentures, preferred or prior preference stocks or other
classes of securities ahead of or affecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Corporation, or any sale or
transfer of all or any part of the Corporation's assets or business, or any
grant of Options to purchase securities of the Corporation otherwise than under
the Plan, or to effect any other corporate act or proceeding, whether of a
similar character or otherwise.
12. Adjustment of Shares. The Option Shares are shares of the Common
Stock as constituted on the date of this Agreement. Except to the extent such a
change would cause
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<PAGE> 8
compensation payable to the Employee to fail to satisfy Section 162 of the
Internal Revenue Code of 1986, as amended, if the Corporation shall effect a
subdivision, consolidation or reclassification of shares or other capital
readjustment or recapitalization, the payment of a stock dividend or other
increase or reduction in the number of shares of Common Stock outstanding
without receiving compensation therefor in money, services or property, then the
number, class and per share price of the Option Shares shall be appropriately
adjusted in such a manner as to entitle the Employee, upon exercise of the
Option to receive the same aggregate cash consideration, the same total number
and class of shares as he or she would have received as a result of the event
requiring adjustment. Any adjustment so made shall be final and binding on the
Employee.
13. Change in Control.
(a) In the event of a Change in Control, the Option will become
immediately vested and exercisable for a period of 30 days or such longer or
shorter period as the Board may prescribe immediately prior to such scheduled
consummation of such Change of Control, irrespective of the original vesting
schedule set forth in Exhibit A hereto, provided, however, that any such
acceleration and exercise of options during the notice period shall be (i)
conditioned upon the consummation of the Change of Control and (ii) effective
only immediately before the consummation of such Change of Control. Upon
consummation of a Change of Control, the Plan and all outstanding options shall
terminate.
(b) Notwithstanding Section 13(a), to the extent a provision is made in
writing in connection with such Change of Control for the continuation of the
Plan and assumption of the Options granted under the Plan or for the
substitution for such Options of new options covering
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<PAGE> 9
the stock of a successor company, or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kinds of shares or units and
exercise prices pursuant to Section 7 above, then the Plan and Options
theretofore granted shall continue in the manner and under the terms so
provided, and the acceleration and termination provisions set forth in Section
13(a) shall be of no effect.
14. No Liability. Neither any officer or employee of the Corporation, nor
any member of the Board, nor the Corporation shall be liable for any action or
determination made in good faith in respect of this Option.
15. Reservation. The Corporation agrees, at all times during the term of
this Option, to reserve and keep available such number of shares of the Common
Stock as will be sufficient to satisfy the requirements of this Option and shall
pay all original issue taxes, if any, with respect to issuance of shares
hereunder and all other fees and expenses necessarily incident thereto.
16. No Rights to Continued Employment. Nothing in the Plan, or in this
Agreement, shall confer on the Employee, nor imply in favor of the Employee, any
right to continue in the employ of the Corporation, or its subsidiaries, or
prevent, or in any way impair the right of the employer to terminate the
employment of the Employee at any time, with or without Cause, and with or
without notice.
17. Tax Consequences and Withholding. The Employee agrees that the
Corporation is not responsible for the tax consequences to him of the granting
of this Option or its subsequent exercise by the Employee, and that it is the
responsibility of the Employee to consult with his personal tax advisor
regarding all matters with respect to the tax consequences of the granting of
this Option and its exercise by the Employee. The Employee hereby authorizes the
Corporation
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<PAGE> 10
to withhold from the Option Shares to Employee, pursuant to the exercise of the
Option, that number of Option Shares to be issued that would satisfy the
Corporation's tax withholding requirements in respect of the Employee, unless
the Employee pays an equivalent amount to the Corporation at or prior to the
delivery of the Option shares.
18. Non-Competition Agreement.
(a) The Employee shall not, during the period of the Employee's
employment by or with the Corporation, and for a period of one year immediately
following the termination of the Employee's employment for any reason whatsoever
other than termination by the Corporation without Cause, directly or indirectly,
for the Employee or on behalf of or in conjunction with any other person,
persons, corporation, partnership, corporation or business of whatever nature:
(i) engage, as an officer, director, stockholder, owner, partner, joint
venturer, or in a managerial, consulting or advisory capacity, whether as an
employee, independent contractor, consultant or advisor, or as a sales
representative, in any business which offers any services or products in direct
competition with the Corporation within the United States of America ("USA");
(ii) call upon any person who is, at that time, within the USA, an
employee of the Corporation in a managerial capacity for the purpose or with the
intent of enticing such employee away from or out of the employ of the
Corporation;
(iii) call upon any person or entity which is, at that time, or which has
been, within one year prior to that time, a client of the Corporation within the
USA for the purpose of soliciting or selling products or services in direct
competition with the Corporation within the USA; or
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<PAGE> 11
(iv) induce or attempt to induce any person known by the Employee to be
a customer, supplier, or business relation of the Corporation to cease doing
business with the Corporation or in any way interfere with the relationship
between the Corporation and any person known by the Employee to be a customer,
supplier, licensee, or business relation of the Corporation.
(b) Because of the difficulty of measuring economic losses to the
Corporation as a result of a breach of the foregoing covenants, and because of
the immediate and irreparable damage that could be caused to the Corporation for
which the Corporation would have no other adequate remedy, the Employee agrees
that the foregoing covenants may be enforced by the Corporation in the event of
breach by the Employee, by injunctions and restraining orders.
(c) The covenants in this Section 18 are severable and separate, and
the unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the event any court of competent jurisdiction
shall determine that the scope, time or territorial restrictions set forth are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(d) The Employee acknowledges that the covenants in this Section 18:
(i) are agreed to by the Employee as an inducement for and in consideration of
the Corporation's entering into this Agreement; and (ii) contain limitations as
to time, geographic area and scope of activity to be restrained that are
reasonable and do not impose a greater restraint than is necessary to protect
the goodwill or other business interests of Corporation.
(e) The Employee agrees that all of the covenants in this Section 18
shall be construed as an agreement independent of any other provision in this
Agreement, that the
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<PAGE> 12
Corporation shall be the beneficiary of and have the right to enforce such
covenants, and that the existence of any claim or cause of action of the
Employee against the Corporation, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Corporation
of such covenants. It is specifically agreed that the period of one year
following termination of the Employee's employment stated at the beginning of
this Section 18, during which the agreements and covenants of the Employee made
in this Section 18 shall be effective, shall be computed by excluding from such
computation any time during which the Employee is in violation of any provision
of this Section 18.
19. General Provisions.
(a) No Waiver. Waiver of any provision of this Agreement, in whole or in
part, in any one instance shall not constitute a waiver of any other provision
in the same instance, nor any waiver of the same provision in another instance,
but each provision shall continue in full force and effect with respect to any
other then-existing or subsequent breach.
(b) Designation of Beneficiary. Subject to the rules and regulations of
the Board, the Employee may designate a beneficiary or beneficiaries and may
change such designation from time to time by filing a written designation of
beneficiary with the Board on a form prescribed by it. No such designation shall
be effective unless filed prior to the death of the Employee.
(c) Notice. Any notice required or permitted under this Agreement shall
be given in writing by delivery in hand or by postage prepaid, United States
certified mail, return receipt requested, as follows: to the Corporation
(Attention: Vice President-Administration), at 2060 Ninth Avenue, Ronkonkoma,
New York 11779 or at such other address as the Corporation, by notice to the
Employee, may designate in writing from time to time; and to the Employee, at
the
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<PAGE> 13
address specified below, or at such other address as the Employee, by notice to
the Corporation, may designate in writing from time to time. Notice shall be
effective upon receipt.
(d) Miscellaneous. This Agreement: (i) may be executed in any number of
counterparts, each of which, when executed by both parties to this Agreement
shall be deemed to be an original, and all of which counterparts together shall
constitute one and the same instrument; (ii) shall be governed by and construed
under the laws of the State of New York applicable to contracts made, accepted,
and performed wholly within New York, without application of principles of
conflicts of laws; (iii) constitutes the entire agreement of the parties with
respect to its subject matter, except as set forth in Section l of this
Agreement, superseding all prior oral and written communications, proposals,
negotiations, representations, understandings, courses of dealing, agreements,
contracts, and the like between the parties in such respect; (iv) may be
amended, modified, or terminated, and any right under this Agreement may be
waived in whole or in part, only by a writing signed by both parties; except
that no termination, modification or amendment shall affect the rights of the
Employee without the Employee's consent; (v) contains headings only for
convenience, which headings do not form part, and shall not be used in
construction, of this Agreement; and (vi) shall bind and inure to the benefit of
the parties and their respective legal representatives, successors and assigns,
except that no party may delegate any of its obligations under this Agreement or
assign this Agreement, without the prior written consent of the other party, or
unless permitted in Section 3(b) of this Agreement.
(e) Availability of Equitable Relief. The obligations imposed by this
Agreement are unique. Breach of any of such obligations would injure the parties
to this Agreement; such
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<PAGE> 14
injury is likely to be difficult to measure; and monetary damages, even if
ascertainable, are likely to be inadequate compensation for such injury.
Therefore, the parties to this Agreement acknowledge and agree that protection
of the respective interests in this Agreement would require equitable relief,
including specific performance and injunctive relief, in addition to any other
remedy or remedies that the parties may have at law or under this Agreement,
including, without limitation, entitlement to reimbursement by the breaching
party or parties of the legal fees and expenses of the injured party or parties
prevailing in any such suit.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date first above written.
QK HEALTHCARE, INC.
By:________________________________
EMPLOYEE
By:________________________________
Address____________________________
SS No._____________________________
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<PAGE> 16
QK HEALTHCARE, INC.
EXHIBIT A
INCENTIVE STOCK OPTION AGREEMENT
The Option shall be exercisable in installments as follows:
(a) The Employee may exercise the Option for up to twenty-five
percent (25%) of the total number of Option Shares granted on or after
the first anniversary of the date of this Agreement.
(b) The Employee may exercise the Option for up to fifty
percent (50%) of the total number of Option Shares granted on or after
the second anniversary of the date of this Agreement.
(c) The Employee may exercise the Option for up to
seventy-five percent (75%) of the total number of Option Shares granted
on or after the third anniversary of the date of this Agreement.
(d) The Employee may exercise the Option for up to one hundred
percent (100%) of the total number of Option Shares granted on or after
the fourth anniversary of the date of this Agreement.
Name of Employee:
Date of Grant:
No. of Option Shares Granted:
Exercise Price: :
<PAGE> 17
QK HEALTHCARE, INC.
EXHIBIT B
INCENTIVE STOCK OPTION AGREEMENT
Form of Exercise
The undersigned employee of QK Healthcare, Inc. (the "Corporation"),
pursuant to the the QK Healthcare, Inc. 1999 Stock Option Plan (the "Plan"), and
pursuant to an Incentive Stock Option Agreement dated ___________, 1999, hereby
agrees to purchase from the Corporation ________ shares of common stock, par
value $.001 per share ("Stock"), at a purchase price of $_____ per share.
EMPLOYEE:_______________________________________________________________________
First Middle Last
(Print name exactly as it will appear on your stock certificate)
Social Security Number: __________________________
Address: ____________________________________________________________________
The undersigned employee has delivered the following consideration to the
Corporation in exchange for the Stock:
(1) $_____ in cash or by certified or Bank cashier's check;
and/or
(2) ______ shares of the Corporation's common stock, par value $.001 per
share, having a Fair Market Value (as defined in the Plan)of
$____________ as of ________________________.
___________________________________
Employee Signature
Date:____________________
<PAGE> 1
Exhibit 10.6
QK HEALTHCARE, INC.
INCENTIVE STOCK OPTION AGREEMENT
AGREEMENT made this_____day of_____________, 1999, by and between QK
HEALTHCARE, INC., a Delaware corporation (the "Corporation"), and
_____________________(the "Employee").
1. Grant of Option. Subject to the terms and conditions set forth in this
Agreement and the QK Healthcare, Inc. 1999 Stock Option Plan ( the "Plan"), the
Corporation hereby grants to the Employee the option (the "Option") to purchase
from the Corporation, during the term set forth in Section 2 below, an aggregate
of ________________ shares ("Option Shares") of the Corporation's common stock,
par value $.001 per share (the "Common Stock"), at a price of $__________ per
share, such price being not less than l00% of the Fair Market Value of the
Common Stock on the date of this Agreement; provided, however, that if the
Employee owns, immediately prior to the grant of the Option Shares, stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Corporation (a "Ten Percent Owner"), such price shall be at least
110% of the Fair Market Value of the Common Stock on the date of this Agreement.
This Option is intended to be an "incentive stock option" as defined in Section
422(b) of the Internal Revenue Code. The Option hereby granted shall expire 30
days after the delivery of this Agreement to the Employee unless the Employee
signs and returns this Agreement to the Corporation within such 30 days. Unless
otherwise defined herein, capitalized terms used herein shall have the same
meaning as provided in the Plan.
2. Term. This Option shall commence on the date of this Agreement and
shall terminate in accordance with the provisions of Section 8 below.
<PAGE> 2
3. Exercise.
(a) Upon execution of this Agreement, this Option shall be fully vested
and may be exercised prior to termination of this Agreement, except as such
periods may be extended pursuant to Section 4(a) below.
(b) During the lifetime of the Employee, this Option may be exercised
only by the Employee. Following the death of the Employee, this Option may be
exercised by the Employee's legatee(s), heir(s), or personal representative(s)
(collectively, "Legal Representative") during the periods and in the manner set
forth in Sections 3(c) and 4(a) below.
(c) The Employee (or in the case of the Employee's death, his Legal
Representative) may exercise this Option by giving written notice of exercise of
the Option to the Corporation at its then principal office on the form annexed
as Exhibit A to this Agreement. Such notice shall state the number of whole
shares with respect to which this Option is being exercised and shall be
accompanied by the full purchase price for such shares, payable either: (i) in
cash or certified or bank cashier's check, (ii) by transfer to the Corporation
by the Employee or his Legal Representative of Common Stock of the Corporation
owned by the Employee having a Fair Market Value as of the date the Option is
exercised equal to such purchase price, or (iii) by a combination of (i) and
(ii).
4. Limitations on Exercise.
(a) Except as provided in subsections (i) - (iii) below, this Option
cannot be exercised unless the Employee is then employed by the Corporation.
(i) Within 12 months after the Employee's retirement (at the normal
retirement date prescribed from time to time under any policy of the Corporation
then in effect, or at any other
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<PAGE> 3
date with the consent of the Corporation) from or termination of employment, for
reason other than Cause, with the Corporation, the Employee may exercise this
Option to the extent of the number of shares that he shall have been entitled to
purchase on the date of such retirement or termination of employment.
(ii) Within 12 months after the Employee shall cease to be employed by
the Corporation because of disability (within the meaning of Section 22(e)(3) of
the Internal Revenue Code), the Employee may exercise this Option to the extent
of the number of shares that he shall have been entitled to purchase on the date
his employment terminated.
(iii) Within 12 months after the Employee dies: (A) while he is employed
by the Corporation, (B) within 12 months after his retirement pursuant to
subsection (i) above, or (C) within 12 months after his employment ceases due to
disability pursuant to subsection (ii) above, this Option shall be exercisable
by the Legal Representative, to the extent of the number of shares that the
holder shall have been entitled to purchase on the date of his death.
(b) The Option shall not be exercised in whole or in part until the
Corporation has effected any of the following conditions that the Board of
Directors of the Corporation ("Board"), in its discretion, determines at the
time of exercise of the Option to be necessary or desirable as a condition of,
or in connection with, the issuance and purchase of shares under this Option:
(i) the listing, registration or qualification of the Corporation or of
the shares subject to this Option upon any securities exchange or under any
federal or state laws;
(ii) the giving of any investment representation by the Employee or his
Legal Representative;
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<PAGE> 4
(iii) the notation of any restriction on transfer on the certificate or
certificates representing such shares; or
(iv) the execution and delivery by the Employee of a "lock-up" or
similar agreement in the form requested by the Corporation's underwriter from
time to time.
5. Delivery of Option Shares. As soon as possible after receipt by the
Corporation of a notice of exercise hereunder, of payment therefor, and of
evidence of compliance with any conditions that may be required by the Board
under Section 4, the Corporation shall deliver to the Employee, or to his Legal
Representative, as the case may be, one or more certificate(s) for the number of
shares with respect to which this Option shall have been so exercised. No shares
shall be delivered pursuant to any exercise hereto until the requirements of
such laws and regulations as may be deemed by the Board to be applicable thereto
are satisfied.
6. Restrictions upon Transfer.
(a) This Agreement and the Option granted hereunder shall not be
assignable or transferable otherwise than by will or the laws of descent and
distribution. In the event of any attempt to assign or to transfer this
Agreement or the Option or any of the rights hereunder other than by will or the
laws of descent and distribution, whether voluntarily or involuntarily, by
operation of law or otherwise, this Agreement and the Option granted hereunder
shall thereupon immediately terminate and be of no further force or effect and
no interest or right hereunder shall vest in any other person.
(b) Nothing in this Agreement shall be construed in limitation of any
restrictions upon transfer of the Option Shares contained elsewhere, including
any restrictions that may be contained in the Certificate of Incorporation or
the By-Laws of the Corporation.
- 4 -
<PAGE> 5
(c) Nothing in this Agreement shall be construed as a modification of any
existing agreements with respect to the gift, sale, purchase, transfer, pledge,
hypothecation, or other disposition or encumbrance of Option Shares between the
parties to this Agreement, or between or among either or both of the parties to
this Agreement and one or more persons not party to this Agreement.
(d) Option Shares received upon exercise of this Option in whole or part
shall not be transferred within 42 months from the date of this Agreement,
except as provided herein and in Section 6(e) and Section 6(f) below.
Notwithstanding the preceding sentence, the Employee may sell up to 10% of the
total number of the Option Shares granted to the Employee pursuant to this
Option during each fiscal quarter beginning with the 27th month after the date
of this Agreement. The provisions of this Section 6(d) shall survive any
termination of this Agreement.
(e) If, during the term of this Agreement: (i) the Employee dies, (ii)
the Employee becomes disabled, (iii) the Employee is terminated without Cause or
(iv) there is a Change of Control, the restrictions on resale of the Option
Shares set forth in Section 6(d) above shall terminate as of the date of the
applicable event.
(f) In the event the Corporation files a Registration Statement on Form
S-3 or any successor or similar short-form registration statement with respect
to shares of Common Stock owned by the Glenn Nussdorf Trust, the Stephen
Nussdorf Trust and the Arlene Nussdorf Trust (the "Selling Shareholders"), the
Employee shall have the right to sell the same percentage of the Employee's
Option Shares as the Selling Shareholders are selling of their shares of Common
Stock pursuant to such registration statement.
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<PAGE> 6
7. Assumption of Options. Subject to the provisions of Section 8, upon
dissolution or liquidation of the Corporation, or consolidation of the
Corporation into a new entity, or merger, acquisition, or reorganization of the
Corporation into or with one or more other corporations, the surviving,
resulting or acquiring corporation, as the case may be, or a parent or
subsidiary corporation of such corporation, may (but shall not be obligated to)
substitute a new Option for this Option, or may (but shall not be obligated to)
assume this Option, if:
(a) the Employee is then employed by such surviving, resulting or
acquiring corporation, or a parent or subsidiary corporation of such
corporation;
(b) the excess of the aggregate Fair Market Value of the shares subject
to the Option immediately after the substitution or assumption over the
aggregate Option price of such shares does not exceed the excess of the
aggregate Fair Market Value of the Option Shares immediately before such
substitution or assumption over the aggregate purchase price of the Option
Shares; and
(c) the new option or the assumption of this Option does not give the
Employee additional benefits that the Employee did not have under this Option,
as determined in accordance with Section 424(a) of the Internal Revenue Code
8. Termination. This Agreement (other than Sections 6(a), 6(d) and 18
hereof), the Option, and all of the rights hereunder shall terminate upon the
first to occur of the following events:
(a) Immediately upon the Employee's termination for Cause of employment
with the Corporation;
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<PAGE> 7
(b) Three months after the Employee's termination by the Corporation
without Cause of employment with the Corporation, or with a corporation or a
parent or subsidiary corporation of such corporation issuing or assuming a stock
option in a transaction to which Section 7 of this Agreement applies;
(c) Forty-five days after the Employee voluntarily terminates his or
her employment with the Corporation;
(d) Twelve months after the retirement of the Employee or after the
death of the Employee: (i) while an employee, (ii) within 12 months after
termination of employment on account of retirement or (iii) within twelve months
after termination of employment on account of his disability with the
Corporation, or with a corporation or a parent or subsidiary corporation of such
corporation issuing or assuming a stock option in a transaction to which Section
7 of this Agreement applies; or
(e) Ten years after the date of this Agreement, provided, however, that
with respect to a Ten Percent Owner, five years after the date of this
Agreement.
9. Rights upon Termination. Upon termination of this Agreement, this
Option shall terminate and shall no longer be exercisable by the Employee or his
Legal Representative.
10. Cancellation of Options. In its sole discretion, the Board may, in
cases involving a serious breach of conduct by an Employee or former Employee,
or activity of a former Employee in competition with the business of the
Corporation, cancel any Option, in whole or in part.
11. No Rights as Stockholder.
(a) The Employee shall have none of the rights of a stockholder with
respect to any of the Option Shares until this Option shall have been exercised
in whole or in part and until such
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<PAGE> 8
shares shall have been issued to the Employee. The Employee shall not have
voting or other rights with respect to the Option Shares prior to the delivery
to him of such shares.
(b) Nothing in the Plan or this Agreement shall affect in any way the
rights or powers of the Corporation, or any of the directors or stockholders of
any of such corporation, to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Corporation's capital
structure or business, or any merger or consolidation of the Corporation, or any
issue of bonds, debentures, preferred or prior preference stocks or other
classes of securities ahead of or affecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Corporation, or any sale or
transfer of all or any part of the Corporation's assets or business, or any
grant of Options to purchase securities of the Corporation otherwise than under
the Plan, or to effect any other corporate act or proceeding, whether of a
similar character or otherwise.
12. Adjustment of Shares. The Option Shares are shares of the Common
Stock as constituted on the date of this Agreement. Except to the extent such a
change would cause compensation payable to the Employee to fail to satisfy
Section 162 of the Internal Revenue Code of 1986, as amended, if the Corporation
shall effect a subdivision, consolidation or reclassification of shares or other
capital readjustment or recapitalization, the payment of a stock dividend or
other increase or reduction in the number of shares of Common Stock outstanding
without receiving compensation therefor in money, services or property, then the
number, class and per share price of the Option Shares shall be appropriately
adjusted in such a manner as to entitle the Employee, upon exercise of the
Option to receive the same aggregate cash consideration, the same total number
and class of shares as he or she would have received as a
- 8 -
<PAGE> 9
result of the event requiring adjustment. Any adjustment so made shall be final
and binding on the Employee.
13. Change in Control.
(a) In the event of a Change in Control, the Option will be exercisable
for a period of 30 days or such longer or shorter period as the Board may
prescribe immediately prior to such scheduled consummation of such Change of
Control, provided, however, that any such exercise of options during the notice
period shall be (i) conditioned upon the consummation of the Change of Control
and (ii) effective only immediately before the consummation of such Change of
Control. Upon consummation of a Change of Control, the Plan and all outstanding
options shall terminate.
(b) Notwithstanding Section 13(a), to the extent a provision is made in
writing in connection with such Change of Control for the continuation of the
Plan and assumption of the Options granted under the Plan or for the
substitution for such Options of new options covering the stock of a successor
company, or a parent or subsidiary thereof, with appropriate adjustments as to
the number and kinds of shares or units and exercise prices pursuant to Section
7 above, then the Plan and Options theretofore granted shall continue in the
manner and under the terms so provided, and the acceleration and termination
provisions set forth in Section 13(a) shall be of no effect.
14. No Liability. Neither any officer or employee of the Corporation, nor
any member of the Board, nor the Corporation shall be liable for any action or
determination made in good faith in respect of this Option.
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<PAGE> 10
15. Reservation. The Corporation agrees, at all times during the term of
this Option, to reserve and keep available such number of shares of the Common
Stock as will be sufficient to satisfy the requirements of this Option and shall
pay all original issue taxes, if any, with respect to issuance of shares
hereunder and all other fees and expenses necessarily incident thereto.
16. No Rights to Continued Employment. Nothing in the Plan, or in this
Agreement, shall confer on the Employee, nor imply in favor of the Employee, any
right to continue in the employ of the Corporation, or its subsidiaries, or
prevent, or in any way impair the right of the employer to terminate the
employment of the Employee at any time, with or without Cause, and with or
without notice.
17. Tax Consequences and Withholding. The Employee agrees that the
Corporation is not responsible for the tax consequences to him of the granting
of this Option or its subsequent exercise by the Employee, and that it is the
responsibility of the Employee to consult with his personal tax advisor
regarding all matters with respect to the tax consequences of the granting of
this Option and its exercise by the Employee. The Employee hereby authorizes the
Corporation to withhold from the Option Shares to Employee, pursuant to the
exercise of the Option, that number of Option Shares to be issued that would
satisfy the Corporation's tax withholding requirements in respect of the
Employee, unless the Employee pays an equivalent amount to the Corporation at or
prior to the delivery of the Option shares.
18. Non-Competition Agreement.
(a) The Employee shall not, during the period of the Employee's
employment by or with the Corporation, and for a period of one year immediately
following the termination of the Employee's employment for any reason whatsoever
other than termination by the Corporation
- 10 -
<PAGE> 11
without cause, directly or indirectly, for the Employee or on behalf of or in
conjunction with any other person, persons, corporation, partnership,
corporation or business of whatever nature:
(i) engage, as an officer, director, stockholder, owner, partner, joint
venturer, or in a managerial, consulting or advisory capacity, whether as an
employee, independent contractor, consultant or advisor, or as a sales
representative, in any business which offers any services or products in direct
competition with the Corporation within the United States of America ("USA");
(ii) call upon any person who is, at that time, within the USA, an
employee of the Corporation in a managerial capacity for the purpose or with the
intent of enticing such employee away from or out of the employ of the
Corporation;
(iii) call upon any person or entity which is, at that time, or which has
been, within one year prior to that time, a client of the Corporation within the
USA for the purpose of soliciting or selling products or services in direct
competition with the Corporation within the USA; or
(iv) induce or attempt to induce any person known by the Employee to be a
customer, supplier, or business relation of the Corporation to cease doing
business with the Corporation or in any way interfere with the relationship
between the Corporation and any person known by the Employee to be a customer,
supplier, licensee, or business relation of the Corporation.
(b) Because of the difficulty of measuring economic losses to the
Corporation as a result of a breach of the foregoing covenants, and because of
the immediate and irreparable damage that could be caused to the Corporation for
which the Corporation would have no other adequate remedy, the Employee agrees
that the foregoing covenants may be enforced by the Corporation in the event of
breach by the Employee, by injunctions and restraining orders.
- 11 -
<PAGE> 12
(c) The covenants in this Section 18 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. Moreover, in the event any court of competent jurisdiction shall
determine that the scope, time or territorial restrictions set forth are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(d) The Employee acknowledges that the covenants in this Section 18: (i)
are agreed to by the Employee as an inducement for and in consideration of the
Corporation's entering into this Agreement; and (ii) contain limitations as to
time, geographic area and scope of activity to be restrained that are reasonable
and do not impose a greater restraint than is necessary to protect the goodwill
or other business interests of Corporation.
(e) The Employee agrees that all of the covenants in this Section 18
shall be construed as an agreement independent of any other provision in this
Agreement, that the Corporation shall be the beneficiary of and have the right
to enforce such covenants, and that the existence of any claim or cause of
action of the Employee against the Corporation, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by the
Corporation of such covenants. It is specifically agreed that the period of one
year following termination of the Employee's employment stated at the beginning
of this Section 18, during which the agreements and covenants of the Employee
made in this Section 18 shall be effective, shall be computed by excluding from
such computation any time during which the Employee is in violation of any
provision of this Section 18.
19. General Provisions.
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<PAGE> 13
(a) No Waiver. Waiver of any provision of this Agreement, in whole or in
part, in any one instance shall not constitute a waiver of any other provision
in the same instance, nor any waiver of the same provision in another instance,
but each provision shall continue in full force and effect with respect to any
other then-existing or subsequent breach.
(b) Designation of Beneficiary. Subject to the rules and regulations of
the Board, the Employee may designate a beneficiary or beneficiaries and may
change such designation from time to time by filing a written designation of
beneficiary with the Board on a form prescribed by it. No such designation shall
be effective unless filed prior to the death of the Employee.
(c) Notice. Any notice required or permitted under this Agreement shall
be given in writing by delivery in hand or by postage prepaid, United States
certified mail, return receipt requested, as follows: to the Corporation
(Attention: Vice President-Administration), at 2060 Ninth Avenue, Ronkonkoma,
New York 11779 or at such other address as the Corporation, by notice to the
Employee, may designate in writing from time to time; and to the Employee, at
the address specified below, or at such other address as the Employee, by notice
to the Corporation, may designate in writing from time to time. Notice shall be
effective upon receipt.
(d) Miscellaneous. This Agreement: (i) may be executed in any number of
counterparts, each of which, when executed by both parties to this Agreement
shall be deemed to be an original, and all of which counterparts together shall
constitute one and the same instrument; (ii) shall be governed by and construed
under the laws of the State of New York applicable to contracts made, accepted,
and performed wholly within New York, without application of principles of
conflicts of laws; (iii) constitutes the entire agreement of the parties with
respect to its subject matter, except as set forth in Section l of this
Agreement, superseding
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<PAGE> 14
all prior oral and written communications, proposals, negotiations,
representations, understandings, courses of dealing, agreements, contracts, and
the like between the parties in such respect; (iv) may be amended, modified, or
terminated, and any right under this Agreement may be waived in whole or in
part, only by a writing signed by both parties; except that no termination,
modification or amendment shall affect the rights of the Employee without the
Employee's consent; (v) contains headings only for convenience, which headings
do not form part, and shall not be used in construction, of this Agreement; and
(vi) shall bind and inure to the benefit of the parties and their respective
legal representatives, successors and assigns, except that no party may delegate
any of its obligations under this Agreement or assign this Agreement, without
the prior written consent of the other party, or unless permitted in Section
3(b) of this Agreement.
(e) Availability of Equitable Relief. The obligations imposed by this
Agreement are unique. Breach of any of such obligations would injure the parties
to this Agreement; such injury is likely to be difficult to measure; and
monetary damages, even if ascertainable, are likely to be inadequate
compensation for such injury. Therefore, the parties to this Agreement
acknowledge and agree that protection of the respective interests in this
Agreement would require equitable relief, including specific performance and
injunctive relief, in addition to any other remedy or remedies that the parties
may have at law or under this Agreement, including, without limitation,
entitlement to reimbursement by the breaching party or parties of the legal fees
and expenses of the injured party or parties prevailing in any such suit.
- 14 -
<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date first above written.
QK HEALTHCARE, INC.
By:_____________________________
EMPLOYEE
By:_____________________________
Address_________________________
SS No.__________________________
- 15 -
<PAGE> 16
QK HEALTHCARE, INC.
EXHIBIT A
INCENTIVE STOCK OPTION AGREEMENT
Form of Exercise
The undersigned employee of QK Healthcare, Inc. (the "Corporation"),
pursuant to the QK Healthcare, Inc. 1999 Stock Option Plan (the "Plan"), and
pursuant to an Incentive Stock Option Agreement dated , 1999, hereby agrees to
purchase from the Corporation shares of common stock, par value $.001 per share
("Stock"), at a purchase price of $_____ per share.
EMPLOYEE:__________________________________________________________________
First Middle Last
(Print name exactly as it will appear on your stock certificate)
Social Security Number: ________________________
Address: ____________________________________________________________________
The undersigned employee has delivered the following consideration to the
Corporation in exchange for the Stock:
(1) $____in cash or by certified or Bank cashier's check;
and/or
(2) _________ shares of the Corporation's common stock, par value
$.001 per share, having a Fair Market Value (as defined in the
Plan)of $_________as of _____________.
______________________________
Employee Signature
Date:____________________
<PAGE> 1
EXHIBIT 10.7
QK HEALTHCARE, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT made as of the_________day of _____________, 1999 by and
between QK HEALTHCARE, INC., a Delaware corporation (the "Corporation") and
______________________ (the "Optionee")
WITNESSETH:
WHEREAS, the Optionee is a ____________ to the Corporation and the
Corporation desires to afford the Optionee the opportunity to acquire, or
enlarge, his or her stock ownership in the Corporation so that the Optionee may
have a direct proprietary interest in the Corporation's success; and
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties hereto hereby agree as follows:
1. Grant of Stock Option. Pursuant to the provisions of the QK
Healthcare, Inc. 1999 Stock Option Plan (the "Plan"), the Corporation hereby
grants to the Optionee, subject to the terms and conditions of the Plan and
subject further to the terms and conditions set forth herein, a non-qualified
stock option entitling the Optionee, during the period set forth in Article 2 of
this Agreement, to purchase from the Corporation up to, but not exceeding in the
aggregate, ______ shares of the Corporation's Common Stock, $.001 par value (the
"Option Shares"), at a price per share of $_____ (the "Option"). The Option is
granted effective as of the date hereof (the "Date of Option Grant"). Unless
otherwise defined herein, capitalized terms used herein shall have the same
meaning as provided in the Plan.
<PAGE> 2
2. Term of the Option. The Option shall terminate and may no longer be
exercised after _________, 2009 (the "Option Term Date").
3. Exercise of the Option.
(a) Right to Exercise. Subject to the other terms of this Agreement
regarding the exercisability of this option, the Option shall be immediately
vested and fully exercisable upon execution of this Agreement.
(b) Method of Exercise. The Option may be exercised only by written
notice to the Corporation in the form attached hereto as Exhibit A, signed by
the Optionee and delivered in person or by certified or registered mail, return
receipt requested, to the President of the Corporation, or other authorized
representative of the Corporation, prior to the termination of the Option as set
forth in paragraph 2 above, accompanied by full payment of the exercise price
for the number of Option Shares being purchased in a form permitted under the
terms of the Plan.
(c) Withholding. At the time the Option is exercised, in whole or in
part, or at any time thereafter as requested by the Corporation, the Optionee
shall make adequate provision for the federal and state tax withholding
obligations of the Corporation, if any, which arise in connection with the
Option, including, without limitation, obligations arising upon: (i) the
exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in
part, of any Option Shares acquired on exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any Option Shares acquired
on exercise of the Option.
4. Restrictions on Grant of the Option and Issuance of Shares. The
grant of the Option and the issuance of the Option Shares upon exercise of the
Option shall be subject to
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<PAGE> 3
compliance with all applicable requirements of federal or state law with respect
to such securities. The Option may not be exercised if the issuance of Option
Shares upon such exercise would constitute a violation of any applicable federal
or state securities laws or other law or regulation. In addition, the Option may
not be exercised unless (a) a registration statement under the Securities Act of
1933, as amended, and any applicable state "Blue Sky" laws shall at the time of
exercise of the Option be in effect with respect to the Option Shares issuable
upon exercise of the Option or (b) in the opinion of legal counsel to the
Corporation, the Option Shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from such
registration requirements. As a condition to exercise of the Option, the
Optionee shall satisfy any qualifications that may be necessary or appropriate
to evidence compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto, as requested by the
Corporation.
5. Non-Transferability of the Option. The Option may be exercised
during the lifetime of the Optionee only by the Optionee and may not be assigned
or transferred in any manner except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order, as set forth
in the Plan.
6. Non-Transferability of the Option Shares.
(a) Option Shares received upon exercise of this Option in whole or
part shall not be transferred within 42 months from the date of this Agreement,
except as provided herein and in Section 6(b) and Section 6(c) below.
Notwithstanding the preceding sentence, the Optionee may sell up to 10% of the
total number of the Option Shares granted to the Optionee pursuant to this
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<PAGE> 4
Option during each fiscal quarter beginning with the 27th month after the date
of this Agreement. The provisions of this Section 6(a) shall survive any
termination of this Agreement.
(b) If, during the term of this Agreement: (i) the Optionee dies, (ii)
the Optionee becomes disabled (within the meaning of Section 22(e)(3) of the
Internal Revenue Code), (iii) the Optionee is terminated without Cause or (iv)
there is a Change of Control, the restrictions on resale of the Option Shares
set forth in Section 6(a) above shall terminate as of the date of the applicable
event.
(c) In the event the Corporation files a Registration Statement on Form
S-3 or any successor or similar short-form registration statement with respect
to shares of Common Stock owned by the Glenn Nussdorf Trust, the Stephen
Nussdorf Trust and the Arlene Nussdorf Trust (the "Selling Shareholders"), the
Optionee shall have the right to sell the same percentage of the Optionee's
Option Shares as the Selling Shareholders are selling of their shares of Common
Stock pursuant to such registration statement.
7. Assumption of Options. Subject to the provisions of Section 8, upon
dissolution or liquidation of the Corporation, or consolidation of the
Corporation into a new entity, or merger, acquisition, or reorganization of the
Corporation into or with one or more other corporations, the surviving,
resulting or acquiring corporation, as the case may be, or a parent or
subsidiary corporation of such corporation, may (but shall not be obligated to)
substitute a new Option for this Option, or may (but shall not be obligated to)
assume this Option, if:
(a) the Optionee is then retained as an employee/consultant by such
surviving, resulting or acquiring corporation, or a parent or subsidiary
corporation of such corporation;
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<PAGE> 5
(b) the excess of the aggregate Cause of the shares subject to the Option
immediately after the substitution or assumption over the aggregate Option price
of such shares does not exceed the excess of the aggregate Fair Market Value of
the Option Shares immediately before such substitution or assumption over the
aggregate purchase price of the Option Shares; and
(c) the new option or the assumption of this Option does not give the
Employee additional benefits that the Employee did not have under this Option,
as determined in accordance with Section 424(a) of the Internal Revenue Code
8. Termination. This Agreement (other than Sections 6(a) and 18), the
Option, and all of the rights hereunder shall terminate upon the first to occur
of the following events:
(a) Immediately upon: (i) termination of the Optionee's employment for
Cause by the Corporation or (ii) termination of the Optionee's consulting
agreement for Cause by the Corporation.
(b) Three months after the Optionee's termination by the Corporation
without Cause of employment with the Corporation or with a corporation or a
parent or subsidiary corporation of such corporation issuing or assuming a stock
option in a transaction to which Section 7 of this Agreement applies;
(c) Forty-five days after (i) the Optionee voluntarily terminates his or
her employment with the Corporation or (ii) the Optionee voluntarily terminates
his or her consulting agreement with the Corporation;
(d) Twelve months after the retirement of the Optionee or after the death
of the Optionee: (i) while an employee, (ii) within 12 months after termination
of employment on account of retirement or (iii) within 12 months after
termination of employment on account of his
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<PAGE> 6
disability with the Corporation, or with a corporation or a parent or subsidiary
corporation of such corporation issuing or assuming a stock option in a
transaction to which Section 7 of this Agreement applies; or
(e) Ten years after the date of this Agreement, provided, however, that
with respect to an Optionee possessing more than ten percent of the total
combined voting power of all classes of stock of the Corporation, five years
from the date of this Agreement.
9. Change of Control
(a) In the event of a Change in Control, the Option will be exercisable
for a period of 30 days or such longer or shorter period as the Board may
prescribe immediately prior to such scheduled consummation of such Change of
Control, provided, however, that any such exercise of options during the notice
period shall be (i) conditioned upon the consummation of the Change of Control
and (ii) effective only immediately before the consummation of such Change of
Control. Upon consummation of a Change of Control, the Plan and all outstanding
options shall terminate.
(b) Notwithstanding Section 9(a), to the extent a provision is made in
writing in connection with such Change of Control for the continuation of the
Plan and assumption of the Options granted under the Plan or for the
substitution for such Options of new options covering the stock of a successor
company, or a parent or subsidiary thereof, with appropriate adjustments as to
the number and kinds of shares or units and exercise prices pursuant to Section
7 above, then the Plan and Options theretofore granted shall continue in the
manner and under the terms so provided, and the acceleration and termination
provisions set forth in Section 9(a) shall be of no effect.
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<PAGE> 7
10. Adjustment of Shares. The Option Shares are shares of the Common
Stock as constituted on the date of this Agreement. Except to the extent such a
change would cause compensation payable to the Optionee to fail to satisfy
Section 162 of the Internal Revenue Code of 1986, as amended, if the Corporation
shall effect a subdivision, consolidation or reclassification of shares or other
capital readjustment or recapitalization, the payment of a stock dividend or
other increase or reduction in the number of shares of Common Stock outstanding
without receiving compensation therefor in money, services or property, then the
number, class and per share price of the Option Shares shall be appropriately
adjusted in such a manner as to entitle the Optionee, upon exercise of the
Option to receive the same aggregate cash consideration, the same total number
and class of shares as he or she would have received as a result of the event
requiring adjustment. Any adjustment so made shall be final and binding on the
Optionee.
11. Rights as a Stockholder. The Optionee shall have no rights as a
stockholder with respect to any shares of Common Stock covered by the Option
until the date of the issuance of a certificate or certificates for the shares
for which the Option has been exercised. No adjustment shall be made for
dividends or distributions or other rights for which the record date is prior to
the date such certificate or certificates are issued, except as provided in
Section 10 above.
12. Binding Effect. This Option Agreement shall inure to the benefit of
the successors and assigns of the Corporation and be binding upon the Optionee
and the Optionee's heirs, executors, administrators, successors and assigns.
13. Termination or Amendment. The Board may terminate or amend the Plan
and may amend this Option at any time, provided, however, that no such
termination or amendment
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<PAGE> 8
may adversely affect the Option or any unexercised portion thereof without the
consent of the Optionee unless such amendment is required to enable the Option
to qualify as an incentive stock option.
14. Integrated Agreement. This Option Agreement and the Plan constitute
the entire understanding and agreement of the Optionee and the Corporation with
respect to the subject matter contained herein and therein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Corporation other than those as set forth or provided for
herein and therein. To the extent contemplated herein and therein, the
provisions of the Option Agreement and the Plan shall survive any exercise of
the Option and shall remain in full force and effect.
15. Applicable Law. This Option Agreement shall be governed by the laws
of the State of New York.
16. Subject to Plan. Except as may be specifically set forth herein,
the rights of the Optionee are subject to all of the terms and conditions of the
Plan, the provisions of which are hereby incorporated by reference herein. The
Optionee hereby acknowledges receipt of a copy of the Plan and agrees to by
bound by all terms and provisions thereof and further agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement or the Plan.
17. Non-Competition Agreement.
(a) The Optionee shall not, during the period of the Optionee's
employment or consulting arrangement by or with the Corporation, and for a
period of one year immediately
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<PAGE> 9
following the termination of the Optionee's employment or consulting arrangement
for any reason whatsoever other than the termination by Corporation without
Cause, directly or indirectly, for the Optionee or on behalf of or in
conjunction with any other person, persons, corporation, partnership,
corporation or business of whatever nature:
(i) engage, as an officer, director, stockholder, owner, partner, joint
venturer, or in a managerial, consulting or advisory capacity, whether as an
employee, independent contractor, consultant or advisor, or as a sales
representative, in any business which offers any services or products in direct
competition with the Corporation within the United States of America ("USA");
(ii) call upon any person who is, at that time, within the USA, an
employee of the Corporation in a managerial capacity for the purpose or with the
intent of enticing such employee away from or out of the employ of the
Corporation;
(iii) call upon any person or entity which is, at that time, or which has
been, within one (1) year prior to that time, a client of the Corporation within
the USA for the purpose of soliciting or selling products or services in direct
competition with the Corporation within the USA; or
(iv) induce or attempt to induce any person known by the Optionee to be a
customer, supplier, or business relation of the Corporation to cease doing
business with the Corporation or in any way interfere with the relationship
between the Corporation and any person known by the Optionee to be a customer,
supplier, licensee, or business relation of the Corporation.
(b) Because of the difficulty of measuring economic losses to the
Corporation as a result of a breach of the foregoing covenants, and because of
the immediate and irreparable
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<PAGE> 10
damage that could be caused to the Corporation for which the Corporation would
have no other adequate remedy, the Optionee agrees that the foregoing covenants
may be enforced by the Corporation in the event of breach by the Optionee, by
injunctions and restraining orders.
(c) The covenants in this Section 17 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. Moreover, in the event any court of competent jurisdiction shall
determine that the scope, time or territorial restrictions set forth are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(d) The Optionee acknowledges that the covenants in this Section 17: (i)
are agreed to by the Optionee as an inducement for and in consideration of the
Corporation's entering into this Agreement; and (ii) contain limitations as to
time, geographic area and scope of activity to be restrained that are reasonable
and do not impose a greater restraint than is necessary to protect the goodwill
or other business interests of Corporation.
(e) The Optionee agrees that all of the covenants in this Section 17
shall be construed as an agreement independent of any other provision in this
Agreement, that the Corporation shall be the beneficiary of and have the right
to enforce such covenants, and that the existence of any claim or cause of
action of the Optionee against the Corporation, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by the
Corporation of such covenants. It is specifically agreed that the period of one
year following termination of the Optionee's employment or consulting
arrangement stated at the beginning of this Section 17, during which the
agreements and covenants of the Optionee made in this Section 17 shall be
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<PAGE> 11
effective, shall be computed by excluding from such computation any time during
which the Optionee is in violation of any provision of this Section 17.
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
QK HEALTHCARE, INC.
By:_____________________________________
Name:
Title:
OPTIONEE
_______________________________________
Address:_______________________________
S.S. No._______________________________
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QK HEALTHCARE, INC.
EXHIBIT A
Form of Exercise
The undersigned, pursuant to the QK Healthcare, Inc. 1999 Stock Option
Plan (the "Plan") and pursuant to a Non-Qualified Stock Option Agreement
dated_______________, 1999, hereby agrees to purchase from the QK Healthcare,
Inc.(the "Corporation") __________ shares of Common Stock, par value $.001 per
share ("Common Stock"), at a purchase price of $_____ per share.
OPTIONEE:____________________________________________________________
First Middle Last
(Print name exactly as it will appear on your stock certificate.)
Social Security Number:____________________________________________________
Address:___________________________________________________________________
___________________________________________________________________________
The undersigned has delivered the following consideration to the
Corporation in exchange for Common Stock:
(1) $___________ in cash or by certified or cashier's check; and/or
(2) __________ shares of the Corporation's Common Stock, having a fair
market value equal in amount to the exercise price of the options being
exercised.
OPTIONEE
By:_____________________________________
Date:____________________
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), entered into as of the [ ]
day of December, 1999, is by and among QK HEALTHCARE, INC., a Delaware
corporation (the "Company"), and Michael Sosnowik (the "Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ the Executive as President of
the Company under the terms and conditions specified herein, and the Executive
desires to be so employed by the Company.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties do hereby agree as follows:
1. EMPLOYMENT AND DUTIES.
(a) Effective as of the effective date of the Company's initial public
offering and through the four year period ending on the fourth annual
anniversary of such effective date, the Company hereby agrees to employ the
Executive as President of the Company. As such, the Executive shall have the
responsibilities, duties and authority reasonably accorded to and expected of
such position. The Executive will report directly to the Board of Directors of
the Company and carry out its directives.
(b) The Executive hereby agrees to accept the employment,
responsibilities and duties described in subparagraph (a) above upon the terms
and conditions herein contained. The Executive agrees to devote all of his
business and productive time, skill, attention and efforts to promote and
further the business of the Company. In all aspects of his employment, the
Executive shall faithfully adhere to, execute and fulfill all directives,
policies and standards established by the Company. The Executive shall not,
during the term of the Executive's employment hereunder, be engaged in any other
business activity pursued for gain, profit or other pecuniary advantage if such
activity interferes with the Executive's duties and responsibilities hereunder.
2. COMPENSATION. For all services rendered by the Executive, the
Company shall compensate the Executive as follows:
(a) BASE SALARY. The Company shall pay to the Executive base salary at
the rate of $12,500 per week. Base salary shall be paid in accordance with the
Company's standard payroll procedures.
(b) STOCK OPTIONS. Effective as of the effective date of the Company's
initial public offering, the Company agrees to award the Executive,
<PAGE> 2
a non-qualified stock option to purchase 1,300,000 shares of the common
stock of the Company, $.001 par value (the "Common Stock") at an exercise price
equal to the initial offering price of the Company's Common Stock being offered
in its initial public offering (the "IPO Price") less $5.00 per share. The
options shall have a term of 10 years except as otherwise provided in the stock
option agreement and will be immediately exercisable. The shares issued upon
exercise will be subject to restrictions on resale. The options shall be
embodied in a written option agreement between the Company and the Executive in
the form attached hereto as Exhibit A, the terms of which shall be conclusive
and binding.
(c) WELFARE AND RETIREMENT BENEFITS. During the term of the Executive's
employment with the Company, the Executive may participate in such employee
benefit plans, including but not limited to 401(k), and health insurance plans,
as the Company makes available generally to executives of the Company.
(d) BUSINESS EXPENSES. During the term of this Agreement, the Company
will reimburse the Executive in a manner consistent with Company practice for
any reasonable travel and out-of-pocket expenses actually incurred by the
Executive in connection with his employment hereunder. The Company's agreement
under this subparagraph (d) is subject to the Executive's substantiation and
reporting of such expenses in accordance with Company policy and federal and
state income tax laws.
(e) VACATION. The Executive shall be entitled to vacation in accordance
with standard policy for all executives of the Company.
3. NON-COMPETITION AGREEMENT.
(a) The Executive shall not, during the period of the Executive's
employment by or with the Company, and for a period of one (1) year immediately
following the termination of the Executive's employment under this Agreement,
for any reason whatsoever, directly or indirectly, for the Executive or on
behalf of or in conjunction with any other person, persons, company,
partnership, corporation or business of whatever nature:
(i) engage, as an officer, director, stockholder,
owner, partner, joint venturer, or in a managerial, consulting
or advisory capacity, whether as an employee, independent
contractor, consultant or advisor, or as a sales
representative, in any business which offers any services or
products in direct competition with the Company within the
United States of America ("USA");
(ii) call upon any person who is, at that time,
within the USA, an employee of the Company in a managerial
capacity for the purpose or with the intent of enticing such
employee away from or out of the employ of the Company;
(iii) call upon any person or entity which is, at
that time, or which has been, within one (1) year prior to
that time, a client of the Company within the
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<PAGE> 3
USA for the purpose of soliciting or selling products or
services in direct competition with the Company within the
USA;
(iv) call upon any prospective acquisition candidate,
on the Executive's own behalf or on behalf of any competitor,
which candidate was, to the Executive's actual knowledge after
due inquiry, either called upon by the Company or for which
the Company made an acquisition analysis, for the purpose of
acquiring such entity; or
(v) induce or attempt to induce any person known by
the Executive to be a customer, supplier, or business relation
of the Company to cease doing business with the Company or in
any way interfere with the relationship between the Company
and any person known by the Executive to be a customer,
supplier, licensee, or business relation of the Company.
Notwithstanding the above, the foregoing covenants shall not be deemed
to prohibit the Executive from acquiring as an investment not more than one
percent (1%) of the capital stock of a competing business, whose stock is traded
on a national securities exchange or over-the-counter.
(b) Because of the difficulty of measuring economic losses to the
Company as a result of a breach of the foregoing covenants, and because of the
immediate and irreparable damage that could be caused to the Company for which
the Company would have no other adequate remedy, the Executive agrees that the
foregoing covenants may be enforced by the Company in the event of breach by the
Executive, by injunctions and restraining orders.
(c) The covenants in this Paragraph 3 are severable and separate, and
the unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the event any court of competent jurisdiction
shall determine that the scope, time or territorial restrictions set forth are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
(d) The Executive acknowledges that the covenants in this Paragraph 3:
(i) are agreed to by the Executive as an inducement for and in consideration of
the Company's entering into this Agreement; and (ii) contain limitations as to
time, geographic area and scope of activity to be restrained that are reasonable
and do not impose a greater restraint than is necessary to protect the goodwill
or other business interests of Company.
(e) The Executive agrees that all of the covenants in this Paragraph 3
shall be construed as an agreement independent of any other provision in this
Agreement, that the Company shall be the beneficiary of and have the right to
enforce such covenants, and that the existence of any claim or cause of action
of the Executive against the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
such covenants. It is specifically agreed that the period of one (1) year
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<PAGE> 4
following termination of the Executive's employment stated at the beginning of
this Paragraph 3, during which the agreements and covenants of the Executive
made in this Paragraph 3 shall be effective, shall be computed by excluding from
such computation any time during which the Executive is in violation of any
provision of this Paragraph 3.
4. TERM AND TERMINATION.
(a) TERM. The Executive's employment pursuant to this Agreement shall
begin on the effective date of the Company's initial public offering, and shall
terminate on the fourth anniversary of such effective date. This Agreement may
be extended only by a further written agreement between the parties.
Notwithstanding the foregoing, either party may terminate this Agreement as
described below.
(b) EXECUTIVE RESIGNATION. The Executive may terminate the Agreement by
providing the Company with at least five (5) business days advance written
notice. Upon termination of this Agreement by the Executive, the Executive shall
be entitled to receive base salary accrued through the date of termination.
(c) COMPANY TERMINATION WITHOUT CAUSE. The Company may terminate this
Agreement without Cause (as defined below) by providing the Executive at least
five (5) business days advance written notice. Upon termination of this
Agreement by the Company without Cause, the Executive shall be entitled to
receive base salary for six months subsequent to the date of termination as
provided in Paragraph 2(a) hereof.
(d) TERMINATION FOR CAUSE. The Company may terminate this Agreement
without notice for Cause (as defined below). In the event the Company terminates
the Executive's employment for Cause, the Executive shall be entitled to base
salary accrued through the date of termination, but shall be entitled to no
further rights or benefits hereunder. For purposes of this Agreement, "Cause"
means, as determined in good faith by the Board of Directors of the Company, (1)
the Executive's material and irreparable breach of this Agreement, (2) the
Executive's gross negligence in the performance of any of his material duties
and responsibilities hereunder (other than as a result of total or partial
incapacity due to physical or mental illness); (3) the Executive's willful
dishonesty or fraud with respect to the business or affairs of the Company; (4)
the Executive's conviction of a felony crime; or (5) chronic alcohol abuse or
illegal drug abuse by the Executive.
(e) DEATH. Upon the death of the Executive during the term of this
Agreement, the Company shall pay to the Executive's designated beneficiary(ies)
base salary accrued through the last day of the month in which the date of death
occurs.
5. RETURN OF COMPANY PROPERTY. All records, files, business plans,
financial statements, manuals, memoranda, lists, designs, patents, and other
property delivered to or compiled by the Executive by or on behalf of the
Company or any of its representatives, vendors or clients which pertain to the
business of the Company shall be and remain the property of the Company and be
subject at all times to its discretion and control. Likewise, all
correspondence,
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<PAGE> 5
reports, records, charts, advertising materials and other similar data
pertaining to the business, activities or future plans of the Company which is
collected by the Executive shall be delivered promptly to the Company without
request by it upon termination of the Executive's employment.
6. INVENTIONS AND WORKS. The Executive shall disclose promptly to the
Company any and all significant conceptions and ideas for inventions,
improvements and valuable discoveries, whether patentable or not, and any and
all works of authorship (including computer software), whether copyrightable or
not, which are conceived or made by the Executive, solely or jointly with
another, during the period of employment or within six (6) months thereafter and
which are directly related to the business or activities of Company and which
the Executive conceives as a result of the Executive's employment by the
Company. The Executive hereby assigns and agrees to assign all the Executive's
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, the Executive shall execute any and all applications, assignments
or other instruments that the Company shall deem necessary to apply for and
obtain copyright registration or Letters Patent of the United States or any
foreign country or to otherwise protect the Company's interest therein.
7. TRADE SECRET, PROPRIETARY AND CONFIDENTIAL INFORMATION. The
Executive acknowledges and agrees that during the course of the Executive's
employment with the Company, the Executive may learn about, develop or be
entrusted with Trade Secret, Proprietary and Confidential Information. The
Company has in the past and will in the future use reasonable efforts to keep
secret the Trade Secret, Proprietary and Confidential Information. The Executive
expressly acknowledges and agrees that unless the Trade Secret, Proprietary and
Confidential Information becomes publicly known through legitimate means not
involving an act or omission by the Executive: (i) the Trade Secret, Proprietary
and Confidential Information is, and at all times shall remain, the sole and
exclusive property of the Company, (ii) the Executive shall use the utmost
diligence to guard and protect the Trade Secret, Proprietary and Confidential
Information from disclosure to any other person or entity except in the scope of
the discharge of his duties to the Company; (iii) the Executive shall not use
for his own benefit, or for the benefit of any other person or entity other than
the Company, and shall not disclose, directly or indirectly, to any other person
or entity, any of the Trade Secret, Proprietary and Confidential Information
except in the scope of the discharge of his duties to the Company; and (iv)
except in the scope of the discharge of his duties to the Company, the Executive
shall not seek or accept any of the Trade Secret, Proprietary and Confidential
Information from any former, present, or future employee of the Company.
For purposes of this Agreement, "Trade Secret, Proprietary or
Confidential Information" means any and all confidential, trade secret and/or
proprietary information of the Company or its clients, including without
limitation financial information, projected budgets, marketing strategies, past
performances, client lists, pricing policies, operational methods, marketing
plans or strategies, product development techniques or plans, flowcharts,
software programs, data, systems, techniques, business acquisition plans,
inventions and research projects and other business affairs or any other
documents or materials, whether or not reduced to tangible form, pertaining to
the business of Company.
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<PAGE> 6
8. COMPLETE AGREEMENT. This Agreement is not a promise of future
employment. This written Agreement is the final, complete and exclusive
statement and expression of the agreement between the Company and the Executive
and of all the terms of this Agreement, and it cannot be varied, contradicted or
supplemented by evidence of any prior or contemporaneous oral or written
agreements. This written Agreement may not be later modified or extended except
by a further writing signed by a duly authorized officer of the Company and the
Executive, and no term of this Agreement may be waived except by writing signed
by the party waiving the benefit of such term.
9. NOTICE. Whenever notice is required hereunder, it shall be given in
writing and addressed to the Company at the main business office, and to the
Executive at the address reflected in the payroll records of the Company.
10. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of New York.
11. ARBITRATION. Except where equitable relief is sought, any dispute,
controversy or claim arising out of or relating to this Agreement, or breach
thereof, shall be settled by arbitration in accordance with the rules of the
American Arbitration Association by a single arbitrator. The arbitrator's award
shall be final and binding upon both parties, and judgment upon the award may be
entered in any court of competent jurisdiction in any state of the United States
or country or application may be made to such court for a judicial acceptance of
the award and an enforcement as the law of such jurisdiction may require or
allow. Each party shall pay its own costs of arbitration, including attorney's
fees.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
QK HEALTHCARE, INC.
By:_____________________________________
Title:__________________________________
MICHAEL SOSNOWIK
________________________________________
Michael Sosnowik
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<PAGE> 1
EXHIBIT 23.2
[THE FOLLOWING CONSENT IS IN THE FORM THAT WILL BE SIGNED UPON EFFECTIVENESS OF
THE REGISTRATION STATEMENT]
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
QK HEALTHCARE, INC.
RONKONKOMA, NEW YORK
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement (Form S-1 No. 333-88769) of our report dated September
28, 1999, except for the reorganization discussed in Note 1 which is as of
, 1999, relating to the financial statements of QK Healthcare,
Inc., which is contained in that Prospectus, and of our report dated September
28, 1999, relating to the schedule, which is contained in Part II of the
Registration Statement.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
New York, New York
December 3, 1999
