<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 2000
REGISTRATION NO. 333-88769
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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
EXECUTIVE 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. [ ]
------------------------
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 January 31, 2000
PROSPECTUS
13,400,000 SHARES
QK HEALTHCARE, INC.
COMMON STOCK
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are
offering 13,400,000 shares.
No public market currently exists for our shares. The New York Stock
Exchange has approved the shares for listing 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 2,010,000 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 ,
2000.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............. 3
Risk Factors.................... 9
Use of Proceeds................. 16
Dividend Policy................. 16
Capitalization.................. 17
Dilution........................ 19
Selected Historical Financial
Data.......................... 20
Pro Forma Financial
Information................... 22
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 25
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business........................ 33
Management...................... 42
Related Party Transactions...... 48
Principal Stockholders.......... 50
Description of Capital Stock.... 52
Shares Eligible for Future
Sale.......................... 55
Underwriting.................... 57
Legal Matters................... 59
Experts......................... 59
Where You Can Find More
Information................... 60
Index to Financial Statements... F-1
</TABLE>
------------------------
Until , 2000, 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." All information in this prospectus
reflects the transfer of the pharmaceutical business of Quality King
Distributors, Inc. to us as a result of 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. 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 channel for 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
purchase significant amounts of inventory 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 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
3
<PAGE> 5
interactions by providing them with current 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 fiscal
1999, our annual net sales grew from $169.0 million to $1,012.8 million,
representing a compound annual growth rate of 56%. Our income from operations
grew over this period from $3.8 million to $55.3 million, representing a
compound annual growth rate of 95%.
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
- Efforts to minimize healthcare costs 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 selling and purchasing products from 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 $110 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 $60 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............ 13,400,000 shares
Common stock outstanding after
the offering.................... 36,400,000 shares
Use of proceeds................. We intend to use the net proceeds from this
offering to reduce our short-term borrowings
and to pay $60 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."
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 , 2000 and
excludes:
- 2,550,000 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
- 1,380,000 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
- 970,000 shares available for future grant under our option plan
- 2,010,000 shares subject to the underwriters' option to purchase
additional shares in the offering.
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<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table summarizes selected historical and pro forma financial
data for each of the five years in the period ended October 31, 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
preparing 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 certain operating
expenses. Management also identified other various 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,
warehouse square footage and other methods.
Prior to October 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>
TWELVE MONTHS ENDED OCTOBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- -------- -------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales, net........................................... $168,983 $328,307 $552,488 $772,359 $1,012,818
-------- -------- -------- -------- ----------
Gross profit......................................... 6,953 16,767 35,987 45,392 70,760
-------- -------- -------- -------- ----------
Operating expenses:
Warehouse and delivery............................. 945 1,832 3,039 4,069 5,321
Selling, general and administrative................ 2,208 10,376(1) 6,762 7,187 10,124
-------- -------- -------- -------- ----------
Total operating expenses........................ 3,153 12,208 9,801 11,256 15,445
-------- -------- -------- -------- ----------
Income from operations............................... 3,800 4,559 26,186 34,136 55,315
Interest expense -- related party(2)................. 3,937 7,649 12,984 17,370 20,737
-------- -------- -------- -------- ----------
Income (loss) before income taxes.................... (137) (3,090) 13,202 16,766 34,578
Income taxes (benefit)(3)............................ (2) (53) 224 285 237
-------- -------- -------- -------- ----------
Net income (loss).................................... $ (135) $ (3,037) $ 12,978 $ 16,481 $ 34,341
======== ======== ======== ======== ==========
Pro forma for change in tax status:
Historical income (loss) before income taxes....... $ (137) $ (3,090) $ 13,202 $ 16,766 $ 34,578
Pro forma income taxes (benefit)(4)................ (15) (1,194) 5,312 6,736 13,850
-------- -------- -------- -------- ----------
Pro forma net income (loss)........................ $ (122) $ (1,896) $ 7,890 $ 10,030 $ 20,728
======== ======== ======== ======== ==========
Pro forma basic earnings (loss) per share............ $ (.01) $ (.08) $ .34 $ .44 $ .90
======== ======== ======== ======== ==========
Weighted average number of shares outstanding........ 23,000 23,000 23,000 23,000 23,000
======== ======== ======== ======== ==========
Pro forma for the reorganization and the offering(5):
Pro forma net income............................... $ 23,940
Pro forma basic earnings per share................. $ .66
Pro forma weighted average number of shares
outstanding..................................... 36,400
Pro forma diluted earnings per share............... $ .64
Pro forma weighted average diluted shares
outstanding..................................... 37,250
OTHER DATA(6):
Gross margin......................................... 4.1% 5.1% 6.5% 5.9% 7.0%
Income from operations margin........................ 2.2% 1.4% 4.7% 4.4% 5.5%
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1999
----------------------------
PRO FORMA,
HISTORICAL AS ADJUSTED(7)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets................................................ $391,921 $397,021
Advances from Quality King -- related party................. $268,349 $ 0
Total debt.................................................. $268,349 $185,049
Stockholders' equity........................................ $ 23 $ 88,423
</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
$126,000 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, 1998. 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 $110,000 dividend to our controlling stockholders
paid by delivery of promissory notes
- the capital contribution of $7,300 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 prepay $60,000 of
the promissory notes delivered to our 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 $110 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 $60 million of these notes. As a result, $60
million of the $186 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 CAUSE OUR
SALES AND MARGINS TO DECLINE
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, we could lose sales or customers and our 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.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE
SIGNIFICANTLY WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE
Our quarterly revenues and operating results have varied and are likely to
continue to vary significantly due to other risk factors described in this
section and our purchasing methods. We primarily stock products that we acquire
on favorable terms by taking advantage of manufacturers' incentive discounts,
various market opportunities and anticipated price increases. Since our buying
opportunities vary from time to time, our inventory levels and resulting sales
opportunities will also vary. As a result, our quarterly operating results may
fluctuate significantly from quarter to quarter and may be below the
expectations of public market analysts and investors. If this occurs, our
stock's trading price could fluctuate significantly.
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<PAGE> 11
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 2004, 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.
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 and $75.9 million for the years ended October 31,
1997 and 1998. Due primarily to an increase in trade credit, we had cash
provided by operations of $8.3 million for the year ended October 31, 1999. We
expect our cash flow from operations 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
October 31, 1999, after giving effect to this offering, the application of its
net proceeds and other related transactions, we would have had approximately
$135.0 million outstanding and approximately $137.7 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 2004, 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 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
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<PAGE> 12
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.
SINCE WE ARE HIGHLY LEVERAGED, DEBT AND INTEREST EXPENSE WILL REDUCE FUNDS
AVAILABLE FOR CORPORATE PURPOSES AND LIMIT OUR FLEXIBILITY
We have a significant amount of indebtedness. Our total debt was
approximately $185.0 million and stockholders' equity was approximately $88.4
million at October 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 agreement. Our
indebtedness could negatively affect our operations in the following ways:
- 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 year ended October 31, 1999, our largest 20 customers accounted
for approximately 88% of our net sales and one customer, McKessonHBOC
Corporation, accounted for approximately 25% 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 PURCHASING AND SALES OPERATIONS COULD BE DISRUPTED
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
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<PAGE> 13
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 CAUSE OUR SALES AND MARGINS TO DECLINE
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, 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 RESULT IN A CHARGE AGAINST OUR FUTURE EARNINGS
Upon consummation of this offering, options to purchase up to 2,550,000
shares of our common stock will be granted to members of 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 $7.65 million net charge against our earnings in the
first quarter following this offering.
OUR RELATIONSHIP WITH QUALITY KING POSES CONFLICTS OF INTERESTS FOR THREE OF OUR
DIRECTORS
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
12
<PAGE> 14
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, 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.
CONTROL BY OUR EXISTING STOCKHOLDERS WILL LIMIT YOUR ABILITY TO INFLUENCE THE
OUTCOME OF MATTERS REQUIRING STOCKHOLDER APPROVAL AND COULD DISCOURAGE POTENTIAL
ACQUISITIONS OF OUR COMPANY BY THIRD PARTIES
After this offering, Glenn, Stephen and Arlene Nussdorf will beneficially
own in the aggregate approximately 63% 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. This concentration of
ownership could have the effect of delaying or preventing a change in control of
our company or otherwise discouraging a potential acquiror from attempting to
obtain control of us, which in turn could have an adverse effect on the market
price of our common stock or prevent our stockholders from realizing a premium
over the market price for their shares.
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,
13
<PAGE> 15
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.
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 63% of the outstanding shares of our common stock
(60% 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 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 26,700,000 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 $12.57 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."
14
<PAGE> 16
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT
OR ABOVE THE OFFERING PRICE
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.
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.
15
<PAGE> 17
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 $186 million
(approximately $214 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:
- $60 million (up to $80 million if the underwriters' option to purchase
additional shares in the offering is exercised) 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 an annual rate of 8 1/2% and mature in 2006.
Principal and accrued interest will be paid in quarterly installments commencing
in 2001. The notes require a mandatory prepayment of $60 million upon
consummation of this offering. In addition, if the underwriters exercise their
option to purchase additional shares in the offering, the notes require a
mandatory prepayment of the first $20 million from the proceeds of the exercise
of the option. 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 $126 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 7.2% as of October 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
$125 million.
DIVIDEND POLICY
We expect to use $60 million (up to $80 million if the underwriters' option
to purchase additional shares in the offering is exercised) of the net proceeds
from this offering to pay a portion of the notes issued to our controlling
stockholders in connection with the $110 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 $110 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.
16
<PAGE> 18
CAPITALIZATION
The following table shows our short-term debt and capitalization as of
October 31, 1999, on an actual basis and on a pro forma as adjusted basis to
reflect the reorganization and the offering. The pro forma adjustments reflect
the following:
(i) the reorganization:
- the declaration of a $110 million dividend to our controlling
stockholders paid by delivery of promissory notes
- the capital contribution of $7.3 million by Quality King
- the assumption of a portion of Quality King's short-term borrowings,
(ii) the offering:
- the offering and the application of its net proceeds to pay $60
million of the notes to the controlling stockholders and to reduce
the short-term borrowings assumed from Quality King
- the issuance to key management of options to purchase 2.550 million
shares of common stock at an exercise price $5.00 less than the
initial offering price of the shares in the offering.
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>
OCTOBER 31, 1999
------------------------------------------------------
PRO FORMA ADJUSTMENTS(4)
--------------------------- PRO FORMA
ACTUAL REORGANIZATION OFFERING AS ADJUSTED
-------- -------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Advances from Quality King....... $268,349 $ (7,300) $ -- $ --
(261,049)
Short-term borrowings(1)......... -- 261,049 (126,000) 135,049
Notes payable to stockholders -
short-term(2).................. -- 60,000 (60,000) --
-------- --------- --------- ---------
Total short-term borrowings...... 268,349 52,700 (186,000) 135,049
-------- --------- --------- ---------
Notes payable to stockholders -
long-term(2)................... -- 50,000 -- 50,000
-------- --------- --------- ---------
Total debt....................... 268,349 102,700 (186,000) 185,049
-------- --------- --------- ---------
Stockholders' equity(3)
Common stock, $.001 par value,
shares authorized 100,000;
23,000 issued and outstanding
on an actual basis; 36,400
issued and outstanding on a
pro-forma as adjusted basis.... 23 -- 13 36
Additional paid-in capital..... -- 7,300 185,987 206,037
12,750
Retained earnings (deficit).... -- (110,000) (7,650) (117,650)
-------- --------- --------- ---------
Total Stockholders' equity....... 23 (102,700) 191,100 88,423
-------- --------- --------- ---------
Total capitalization............. $268,372 $ -- $ 5,100 $ 273,472
======== ========= ========= =========
</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
17
<PAGE> 19
our aggregate accounts receivable and inventories. The bank loan agreement
will expire four and a half 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 $125 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 an annual rate of 8 1/2% and mature in 2006.
Principal and accrued interest will be paid in quarterly installments
commencing in 2001.
(3) The amount in the pro forma as adjusted column excludes 2,010,000 shares
subject to an option granted to the underwriters to purchase additional
shares in the offering.
(4) See "Pro Forma Financial Information -- Pro Forma Condensed Balance Sheet"
for additional information about the pro forma adjustments.
18
<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 is
substantially in excess of the book value per share attributable to the existing
stockholders for the presently outstanding stock.
On October 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
$(102,677,000) and the pro forma per share net tangible book value based on
23,000,000 shares of common stock outstanding was approximately $(4.46) per
share.
As of October 31, 1999, without taking into account any changes in our net
tangible book value subsequent to that date other than 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,
and the net effect on net tangible book value of the issuance of options to key
management at an exercise price $5.00 per share less than the assumed initial
offering price, the pro forma net tangible book value of each of the outstanding
shares of common stock would have been $2.43 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 $2.43 per share
after the offering. That is, their investment would have been diluted by
approximately $12.57 per share. At the same time, existing stockholders would
have realized an increase in net tangible book value of $6.89 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............................ $(4.46)
Increase in pro forma net tangible book value per share
of common stock attributable to investors in the
offering............................................. 6.89
------
Pro forma net tangible book value per share of common
stock after the offering(1)(2)....................... 2.43
------
Dilution per share to the new investors................ $12.57
======
</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 2,010,000 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 3,930,000 shares
of common stock issuable upon exercise of options granted to management as
discussed under "Management -- Stock Option Plan" or the 970,000 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 1999 and our results of operations
for the years ended October 31, 1997, 1998 and 1999 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.
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
preparing 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 October 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>
YEARS ENDED OCTOBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- -------- -------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales, net..................................... $168,983 $328,307 $552,488 $772,359 $1,012,818
-------- -------- -------- -------- ----------
Gross profit................................... 6,953 16,767 35,987 45,392 70,760
-------- -------- -------- -------- ----------
Operating expenses:
Warehouse and delivery....................... 945 1,832 3,039 4,069 5,321
Selling, general and administrative.......... 2,208 10,376(1) 6,762 7,187 10,124
-------- -------- -------- -------- ----------
Total operating expenses.................. 3,153 12,208 9,801 11,256 15,445
-------- -------- -------- -------- ----------
Income from operations......................... 3,800 4,559 26,186 34,136 55,315
Interest expense-related party(2).............. 3,937 7,649 12,984 17,370 20,737
-------- -------- -------- -------- ----------
Income (loss) before income taxes.............. (137) (3,090) 13,202 16,766 34,578
Income taxes (benefit)(3)...................... (2) (53) 224 285 237
-------- -------- -------- -------- ----------
Net income (loss).............................. $ (135) $ (3,037) $ 12,978 $ 16,481 $ 34,341
======== ======== ======== ======== ==========
Pro forma for change in tax status:
Historical income (loss) before income
taxes..................................... $ (137) $ (3,090) $ 13,202 $ 16,766 $ 34,578
Pro forma income taxes (benefit)(4).......... (15) (1,194) 5,312 6,736 13,850
-------- -------- -------- -------- ----------
Pro forma net income (loss).................. $ (122) $ (1,896) $ 7,890 $ 10,030 $ 20,728
======== ======== ======== ======== ==========
Pro forma basic earnings (loss) per share.... $ (.01) $ (.08) $ .34 $ .44 $ .90
======== ======== ======== ======== ==========
Weighted average number of shares
outstanding............................... 23,000 23,000 23,000 23,000 23,000
======== ======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- -------- -------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................. $67,033 $140,198 $170,922 $274,890 $ 391,665
Total assets................................... $67,033 $140,198 $170,922 $274,890 $ 391,921
Advances from Quality King -- related party.... $53,831 $126,211 $149,524 $241,910 $ 268,349
Stockholders' equity........................... $ 23 $ 23 $ 23 $ 23 $ 23
</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 $110 million dividend to our controlling
stockholders paid by delivery of promissory notes
- the capital contribution of $7.3 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 $60 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 2,550,000 shares of
common stock at an exercise price $5.00 per share less than the initial
offering price of the shares in the offering.
The accompanying pro forma condensed balance sheet gives effect to these
transactions as if they had occurred at October 31, 1999. The accompanying pro
forma condensed statement of operations for the year ended October 31, 1999 give
effect to these transactions as if they had occurred at November 1, 1998. See
"Use of Proceeds."
In connection with the reorganization, we issued 23 million shares of our
common stock to the stockholders of Quality King. We restated our historical
financial statements retroactively to reflect the issuance in the earliest
periods presented as if we had been a stand-alone entity for all periods
presented. The shares were issued to the stockholders on a pro rata basis based
on their respective ownership interests in Quality King.
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
OCTOBER 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........................................... $ -- $ 186,000(1) $ --
(186,000)(2)
Other current.................................. 391,665 391,665
-------- ---------
Total current.................................... 391,665 391,665
Deferred income taxes............................ -- 5,100(3) 5,100
Other non-current assets......................... 256 256
-------- --------- --------- ---------
$391,921 $ -- $ 5,100 $ 397,021
======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Advances from Quality King -- related party.... $268,349 $ (7,300)(4) $ --
(261,049)(4)(5)
Short-term borrowings.......................... 261,049(5) (126,000)(2) 135,049
Notes payable to stockholders.................. -- 60,000(6) (60,000)(2) --
Other current liabilities...................... 123,549 123,549
-------- --------- --------- ---------
Total current liabilities........................ 391,898 52,700 (186,000) 258,598
Long-term liabilities
Notes payable to stockholders.................. -- 50,000(6) 50,000
-------- --------- --------- ---------
391,898 102,700 (186,000) 308,598
-------- --------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, shares
authorized 100,000; 23,000 issued and
outstanding on a historical basis, 36,400
issued and outstanding on a pro-forma as
adjusted basis............................... 23 13(1) 36
Additional paid-in capital..................... -- 7,300(4) 185,987(1) 206,037
12,750(3)
Retained earnings (deficit).................... --(7) (110,000)(6) (7,650)(3) (117,650)
-------- --------- --------- ---------
Total stockholders' equity....................... 23 (102,700) 191,100 88,423
-------- --------- --------- ---------
$391,921 $ -- $ 5,100 $ 397,021
======== ========= ========= =========
</TABLE>
- -------------------------
(1) Reflects the estimated net proceeds from the sale of 13,400 shares of common
stock in this offering, aggregating $186,000, net of $15,000 of expenses,
including underwriting discounts and commissions.
(2) Reflects use of proceeds from this offering to pay $60,000 of the notes due
to our controlling stockholders for dividends and to reduce short-term
borrowings assumed from Quality King by $126,000.
(3) Reflects the issuance of options to purchase 2,550 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 $12,750 ($7,650 after related tax effect) and an increase in additional
paid-in capital.
(4) The historical advances from Quality King of $268,349 was based on the
difference between our assets and our liabilities to third parties. In
connection with the reorganization and to comply with a ruling from the
Internal Revenue Service, Quality King allocated $261,049 of the historical
advances to us, which is a portion of its bank obligations based in part on
its borrowing base formula. Quality King then forgave the remaining advances
of $7,300, which was treated as a capital contribution by 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) In connection with the reorganization, Quality King was required under the
Internal Revenue Code to allocate a portion of its accumulated taxed and
undistributed earnings to us. The allocation is based on a ratio of our fair
value to the fair value of Quality King. The accumulated taxed and
undistributed earnings of Quality King was estimated to be approximately
$132,000 at March 1, 2000. The amount allocated to us for tax purposes will
be approximately $110,000. We declared a dividend in this amount which was
paid in the form of promissory notes to our controlling stockholders. A
portion of the proceeds of this offering will be used to pay $60,000 of
these notes.
(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
YEAR ENDED OCTOBER 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........................... $1,012,818 $1,012,818
---------- ----------
Gross profit......................... 70,760 70,760
Operating expenses(1)................ 15,445 15,445
---------- ----------
Income from operations............... 55,315 55,315
Interest expense..................... 20,737 $(9,072)(2) 15,389
3,724(3)
---------- ------- ----------
Income before income taxes........... 34,578 5,348 39,926
Income taxes......................... 237 37(4) 274
---------- ------- ----------
Net income........................... $ 34,341 $ 5,311 $ 39,652
========== ======= ==========
Pro forma:
Income before income taxes......... $ 34,578 $ 5,348 $ 39,926
Pro forma income taxes............. 13,850 2,136(5) 15,986
---------- ------- ----------
Pro forma net income............... $ 20,728 $ 3,212 $ 23,940
========== ======= ==========
Pro forma basic earnings per
share........................... $ .90 $ .66
========== ==========
Pro forma weighted average shares
outstanding..................... 23,000 36,400(6)
========== ==========
Pro forma diluted earnings per
share........................... $ .64
==========
Pro forma weighted average diluted
shares outstanding.............. 37,250(7)
==========
</TABLE>
- -------------------------
(1) Pro forma operating expenses do not reflect adjustments for the new support
service agreement and the new employment contracts discussed elsewhere in
this prospectus since the on-going charges relating to these agreements
would not be materially different from the amounts allocated.
(2) Reflects the interest savings from the use of $126,000 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.
(3) Reflects the net additional interest expense related to the notes payable to
our controlling stockholders ($50,000 x 8.5%) reduced by the interest
savings related to the reduction of advances from Quality King ($7,300 x
7.2%).
(4) Reflects the additional state income taxes attributed to the change in
interest expense.
(5) Reflects additional income taxes, primarily current, on the net interest
savings noted in (2) and (3) above, 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.
(6) Reflects the sale of 13,400 shares of common stock.
(7) Reflects the dilutive effect (850 shares) of the issuance of stock options
to purchase 2,550 shares granted to key management personnel.
24
<PAGE> 26
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
fiscal 1999, our annual net sales grew from $169.0 million to $1,012.8 million,
representing a compound annual growth rate of 56%. Our income from operations
grew over this period from $3.8 million to $55.3 million, representing a
compound annual growth rate of 95%.
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 $9.0 million, $10.2
million, and $15.7 million in the years ended October 31, 1997, 1998, and 1999,
respectively. 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 $110 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 the fair value of the assets of
Quality King. This $110 million was based on (i) approximately $75.6 million,
representing all of the previously earned and undistributed
25
<PAGE> 27
S corporation earnings allocated to us through October 31, 1998, and (ii) an
amount (estimated to be approximately $34.4 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 $110 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 $60
million upon the closing of this offering. The Notes bear interest at an annual
rate of 8 1/2%. We will use a portion of the proceeds from this offering to pay
$60 million (up to $80 million if the underwriters' option to purchase
additional shares in the offering is exercised) 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
2.55 million shares to members of our 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 $7.65
million in the first quarter following this offering.
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.
26
<PAGE> 28
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
OCTOBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0%
----- ----- -----
Gross profit.......................................... 6.5 5.9 7.0
----- ----- -----
Operating expenses:
Warehouse and delivery.............................. 0.6 0.6 0.5
Selling, general and administrative................. 1.2 0.9 1.0
----- ----- -----
Total operating expenses......................... 1.8 1.5 1.5
----- ----- -----
Income from operations................................ 4.7 4.4 5.5
Interest expense -- related party..................... 2.3 2.3 2.1
----- ----- -----
Income before income taxes............................ 2.4 2.1 3.4
Income taxes.......................................... 0.0 0.0 0.0
----- ----- -----
Net income............................................ 2.4% 2.1% 3.4%
===== ===== =====
Pro forma for change in tax status:
Historical income before income taxes............... 2.4% 2.1% 3.4%
Pro forma income taxes.............................. 1.0% 0.9% 1.4%
----- ----- -----
Pro forma net income................................ 1.4% 1.2% 2.0%
===== ===== =====
</TABLE>
Our industry has experienced significant growth in recent years due to the
aging of the U.S. population, the continuing introduction of new pharmaceutical
products and pharmaceutical price increases by drug manufacturers. We expect
this growth to continue. At the same time, cost containment measures by
third-party payors have created pricing pressures on pharmaceutical retailers
and healthcare institutions. We are unable to determine the effects of these
trends on our future operations, liquidity and capital resources.
YEAR ENDED OCTOBER 31, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998
NET SALES. Net sales increased $240.4 million or 31% from $772.4 million
for the year ended October 31, 1998 to $1,012.8 million for the year ended
October 31, 1999. This increase was primarily attributable to increased sales to
our existing customers. Additional resources were made available to us during
the year ended October 31, 1999 through additional advances from Quality King,
enabling us to purchase more products on favorable terms.
GROSS PROFIT. Gross profit increased $25.4 million or 56% from $45.4
million for the year ended October 31, 1998 to $70.8 million for the year ended
October 31, 1999. Gross profit as a percentage of net sales increased from 5.9%
for the year ended October 31, 1998 to 7.0% for the year ended October 31, 1999.
The increase in gross profit was the result of the increased sales volumes,
lower inventory costs due to an expansion in our
27
<PAGE> 29
supplier base which led to improved pricing opportunities, and a more profitable
product mix.
OPERATING EXPENSES. Operating expenses increased $4.2 million or 37% from
$11.3 million for the year ended October 31, 1998 to $15.5 million for the year
ended October 31, 1999. This increase was due to a 31% increase in warehouse and
delivery expenses and a 41% 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 $21.2 million or 62% from $34.1 million for the year
ended October 31, 1998 to $55.3 million for the year ended October 31, 1999.
Income from operations as a percentage of net sales increased from 4.4% for the
year ended October 31, 1998 to 5.5% for the year ended October 31, 1999.
INTEREST EXPENSE. Interest expense increased $3.3 million or 19% from
$17.4 million for the year ended October 31, 1998 to $20.7 million for the year
ended October 31, 1999. This increase resulted primarily from a $65.2 million
increase in the average advances from Quality King from $221.8 million for the
year ended October 31, 1998 to $287.0 million for the year ended October 31,
1999.
INCOME TAXES. Our pro forma income taxes increased $7.2 million or 108%
from $6.7 million for the year ended October 31, 1998 to $13.9 million for the
year ended October 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
28
<PAGE> 30
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 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.
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
and $75.9 million for the years ended October 31, 1997 and 1998. Due primarily
to an increase in trade credit, we had cash provided by operations of $8.3
million for the year ended October 31, 1999. Since we expect our growth to
continue, we expect our cash flow from operations 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.
29
<PAGE> 31
The following table sets forth selected financial data with respect to our
financial position as of October 31, 1997, 1998 and 1999 and our results of
operations for the years ended October 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------
1997 1998 1999
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Data:
Net sales..................................... $552,488 $772,359 $1,012,818
Net cash provided by (used in) operating
activities................................. (10,339) (75,906) 8,268
Balance Sheet data (at period end):
Accounts receivable........................... 49,159 83,937 107,605
Inventories................................... 120,721 189,703 279,067
Accounts payable.............................. 19,999 31,561 119,719
Advances from Quality King.................... 149,524 241,910 268,349
</TABLE>
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 $126 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 four and
a half 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 1.5%, or the prime rate. We will be required to pay
fees in connection with the bank loan agreement, including a commitment fee of
.25% 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 $60 million (up to $80 million if the underwriters' option to
purchase additional shares in the offering is exercised) of the Notes due
to our controlling stockholders, which bear interest at an annual rate of
8.5% and which were issued
30
<PAGE> 32
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 $126 million of the short-term borrowings we assumed from Quality
King in connection with the Reorganization.
The remaining $50 million ($30 million if the underwriters' option to
purchase additional shares in the offering is exercised in full) of principal on
the Notes will be payable in equal quarterly installments commencing June 30,
2001. Interest on the Notes will accrue for the first 12 months. Such accrued
interest will be payable in equal quarterly installments commencing June 30,
2001. After the first 12 months, interest will be payable quarterly. The Notes
will be subordinated to all of our outstanding indebtedness.
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.
YEAR ENDED OCTOBER 31, 1999. Net cash provided by operations was $8.3
million for the year ended October 31, 1999. This amount was primarily the
result of net income of $34.3 million, an increase in accounts receivable and
inventories of $113.2 million from October 31, 1998, and an increase in accounts
payable of $88.2 million from October 31, 1998. The increase in inventories is
due to our maximizing purchasing opportunities. These inventory increases were
funded primarily through trade credit.
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
$104.1 million from 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.
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
31
<PAGE> 33
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 October 31, 1999 of $268 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
$2.7 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.
32
<PAGE> 34
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 25.6 million in 1980 to 34.4 million in 1998.(2)
This age group, which is projected to grow to 39.8 million individuals by
2010, spends approximately 2.3 times more per capita on pharmaceuticals
and medical supplies than the rest of the population.(3)(,)(4)
- 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
- ---------------
1 Source: U.S. Health Care Financing Administration, National Health
Expenditures Projections: 1998-2008, Tables 1 and 14a.
2 Source: U.S. Bureau of the Census, Statistical Abstracts of the United
States: 1999 (119th Edition), Table 14.
3 Source: U.S. Bureau of the Census, Statistical Abstracts of the United
States: 1999 (119th Edition), Table 24.
4 Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey,
1998, Table 4500.
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<PAGE> 35
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.
- 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%.(5)
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.(6) 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%.(7) 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.(8)
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 --
- ---------------
5 Source: IMS Health 1998 Year-in-Review U.S. Prescription Market, page 8.
6 Source: IMS Health as cited in 1999 National Wholesale Druggists'
Association Industry Profile and Healthcare Fact Book ("IMS"), page 79.
7 Source: Food Marketing Institute's Supermarket Pharmacy Survey Report,
1995-1999.
8 Source: IMS, page 119.
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<PAGE> 36
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.
- 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.(9) 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
- ---------------
9 Source: IMS, pages 18 and 88.
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<PAGE> 37
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 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
36
<PAGE> 38
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.
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.
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<PAGE> 39
CUSTOMER RELATIONSHIPS. We strive to be a valued supplier to our
customers. Our fulfillment rate for the year ended October 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.
The following table shows our net sales and sales mix by customer category
for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1999
---------------- ----------------
NET SALES % NET SALES %
--------- --- --------- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Retail Chains............................... $349.1 45% $ 381.9 38%
Distributors................................ 328.7 43 481.7 47
Other including Pharmacy Benefit Managers... 94.6 12 149.2 15
------ --- -------- ---
Total............................. $772.4 100% $1,012.8 100%
====== === ======== ===
</TABLE>
During the years ended October 31, 1998 and 1999, our 20 largest customers
accounted for approximately 91% and 88%, 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 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>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1999
---------------- ----------------
NET SALES % NET SALES %
--------- --- --------- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Branded..................................... $720.3 93% $ 933.8 92%
Generic..................................... 46.5 6 62.9 6
Medical/surgical and other.................. 5.6 1 16.1 2
------ --- -------- ---
Total............................. $772.4 100% $1,012.8 100%
====== === ======== ===
</TABLE>
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<PAGE> 40
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 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.
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<PAGE> 41
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, 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 December 31, 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.
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<PAGE> 42
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."
41
<PAGE> 43
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 Executive Vice President, Chief
Financial Officer and Treasurer
Salvatore LaDuca.................... 37 Senior Vice President, Purchasing
Michael Ross........................ 45 Senior Vice President, Sales and
Marketing
Dennis Barkey....................... 44 Vice President, Chief Accounting
Officer
Arlene Nussdorf..................... 36 Director
Stephen Nussdorf.................... 49 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
42
<PAGE> 44
licensed pharmacist and member of the American Pharmaceutical Association, the
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 Executive Vice President, 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 Senior 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 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 Reorganiza-
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<PAGE> 45
tion, 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 for out-of-pocket expenses incurred in
connection with attending meetings of the board of directors and its committees.
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<PAGE> 46
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 year ended October
31, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2)
--------------------------- ---- --------- --------
<S> <C> <C> <C>
Glenn Nussdorf................................... 1999 $400,027 --
Chief Executive Officer
Michael Sosnowik................................. 1999 $749,996 $585,550
President
Michael Katz..................................... 1999 $ 97,923 --
Executive Vice President, Chief Financial
Officer and Treasurer
Salvatore LaDuca................................. 1999 $528,821 --
Senior Vice President, Purchasing
Michael Ross..................................... 1999 $353,912 --
Vice President, Sales and Marketing
</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 for the year ended October
31, 1999. Prior to the Reorganization, Messrs. Nussdorf, Katz and Ross
performed services for various divisions of Quality King. Salaries were
allocated to the various divisions for these executives. The aggregated
salaries for Messrs. Nussdorf, Katz and Ross for the year ended October 31,
1999 were $500,032, $269,240 and $793,526, respectively. After the
consummation of the 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 4,900,000 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 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
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<PAGE> 47
aggregate exercise price of the option. No stock options may be granted under
the stock option plan after October 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 3,930,000 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 and non-qualified stock options to purchase 230,000 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 425,000 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 2,550,000 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
- Non-qualified stock options to purchase 725,000 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.
Since the exercise price of 2,550,000 of the non-qualified stock options is
below the initial offering price of the stock being sold in this offering, we
will be required to incur a net charge of $7,650,000 against our earnings in the
first quarter following this offering.
The option agreements provide that any shares acquired upon exercise of the
fully vested options may not be resold for 39 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 24th 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
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<PAGE> 48
same percentage of their option shares as the selling stockholders are selling
of their shares of our common stock under the registration statement
- 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 we file a registration statement with respect to shares to be sold by
us within 36 months of the offering, each of the option holders will have
the right to sell up to 25% of their initial shares of our common stock
under the registration statement
- If the option holder voluntarily terminates his or her employment with
us, that option holder's options will terminate 90 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 (i) a
non-qualified stock option to purchase 1,000,000 shares of our common stock at
an exercise price $5.00 less than the initial offering price of the shares sold
in this offering; (ii) a non-qualified stock option to purchase 235,000 shares
of our common stock at an exercise price equal to the initial offering price of
the shares sold in this offering; and (iii) an incentive stock option to
purchase 65,000 shares of our common stock at an exercise price equal to the
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 the fourth anniversary of the effective
date of this offering. 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> 49
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 $110 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 $110 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 $60 million upon consummation of this offering. In
addition, if the underwriters exercise their option to purchase additional
shares in the offering, the Notes require the mandatory prepayment of the first
$20 million from the proceeds of the exercise of the option. The Notes bear
interest at an annual rate of 8 1/2%. A portion of the proceeds from this
offering will be used to pay $60 million of these Notes (up to $80 million if
the underwriters' option to purchase additional shares in the offering is
exercised). The balance of the Notes will be payable in equal quarterly
installments commencing June 30, 2001. 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. This agreement is for five years, subject to
renewal. 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
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<PAGE> 50
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 five years and
after that period may terminate the agreement only upon 365 days notice.
This agreement also provides that Quality King will pay us a commission of
1% 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. In addition, the option holders have the right to sell up to 25%
of their initial shares under any registration statement filed by us with
respect to shares to be sold by us within 36 months of the offering. 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> 51
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 23,000,000 shares of common stock outstanding before the
offering and 36,400,000 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)......... 3,833,333 -- 16.67% 10.53%
Glenn Nussdorf Trust dated
November 2, 1998(1)......... 3,833,333 -- 16.67% 10.53%
Stephen Nussdorf Trust dated
November 1, 1998(1)......... 3,833,333 -- 16.67% 10.53%
Stephen Nussdorf Trust dated
November 2, 1998(1)......... 3,833,333 -- 16.67% 10.53%
Arlene Nussdorf Trust dated
November 1, 1998(1)......... 3,833,333 -- 16.67% 10.53%
Arlene Nussdorf Trust dated
November 2, 1998(1)......... 3,833,333 -- 16.67% 10.53%
</TABLE>
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<PAGE> 52
<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)............. 23,000,000 -- 100% 63.19%
Michael Sosnowik.............. -- 1,300,000 -- 3.45%
Michael Katz.................. -- 300,000 -- *
Salvatore LaDuca.............. -- 600,000 -- 1.62%
Michael Ross.................. -- 600,000 -- 1.62%
Stephen Nussdorf(1)........... 23,000,000 -- 100% 63.19%
Arlene Nussdorf(1)............ 23,000,000 -- 100% 63.19%
Dennis Erani.................. -- -- -- --
Brian Finn.................... -- -- -- --
All directors and executive
officers as a group (8
persons).................... 23,000,000 2,950,000 100% 65.95%
</TABLE>
- -------------------------
* Less than 1%
(1) Stephen and Arlene Nussdorf are co-trustees under each of the Glenn
Nussdorf Trusts dated November 1, 1998 and November 2, 1998; Glenn and
Arlene Nussdorf are co-trustees under each of the Stephen Nussdorf Trusts
dated November 1, 1998 and November 2, 1998; and Glenn and Stephen Nussdorf
are co-trustees under each of 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> 53
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 36.4 million 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> 54
- 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 63% (60% if the
underwriters' option to purchase additional shares in the offering is exercised
in full) 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> 55
- 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 release of our proxy statement to
stockholders for 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 63% of the outstanding
voting power (60% if the underwriters' option to purchase additional shares in
the offering is exercised in full). 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> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding 36,400,000 shares
of common stock (38,410,000 shares if the underwriters' option to purchase
additional shares in the offering is exercised in full). Of these shares, the
13,400,000 shares sold in the offering (15,410,000 shares if the underwriters'
option to purchase additional shares is exercised in full) 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
23,000,000 Restricted Shares, representing approximately 63% (60% 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 3,930,000 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 364,000 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
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<PAGE> 57
availability of shares for sale will have on the market price of the common
stock prevailing 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.
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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................................................. 13,400,000
==========
</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 2,010,000 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.
57
<PAGE> 59
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.
Our common stock has been approved for listing 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
58
<PAGE> 60
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 October 31, 1999 and 1998 and
for the three years ended October 31, 1999 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.
59
<PAGE> 61
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.
60
<PAGE> 62
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2
FINANCIAL STATEMENTS:
Balance sheets -- October 31, 1998 and 1999............... F-3
Statements of operations for the years ended October 31,
1997, 1998 and 1999.................................... F-4
Statements of stockholders' equity for the years ended
October 31, 1997, 1998 and 1999........................ F-5
Statements of cash flows for the years ended October 31,
1997, 1998 and 1999.................................... F-6
Notes to financial statements............................. F-7
</TABLE>
F-1
<PAGE> 63
[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 1999 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended October 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 1999 and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1999 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
New York, New York
January 5, 2000,
except for the reorganization
discussed in Note 1(a), which is
as of , 2000
F-2
<PAGE> 64
QK HEALTHCARE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 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........................... 83,937 107,605
Inventories............................................ 189,703 279,067
Advances to suppliers for future purchases............. 796 1,148
Prepaid expenses and other current assets.............. 454 3,845
-------- --------
TOTAL CURRENT ASSETS................................ 274,890 391,665
Property and equipment, less accumulated depreciation
and amortization.................................... -- 256
-------- --------
$274,890 $391,921
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Advances from Quality King -- related party............ $241,910 $268,349
Accounts payable....................................... 31,561 119,719
Accrued expenses and other............................. 1,396 3,830
-------- --------
TOTAL CURRENT LIABILITIES........................... 274,867 391,898
-------- --------
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 23,000.............. 23 23
Retained earnings...................................... -- --
-------- --------
TOTAL STOCKHOLDERS' EQUITY.......................... 23 23
-------- --------
$274,890 $391,921
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 65
QK HEALTHCARE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Sales, net...................................... $552,488 $772,359 $1,012,818
Cost of sales................................... 516,501 726,967 942,058
-------- -------- ----------
Gross profit.................................... 35,987 45,392 70,760
-------- -------- ----------
Operating Expenses:
Warehouse and delivery........................ 3,039 4,069 5,321
Selling, general and administrative........... 6,762 7,187 10,124
-------- -------- ----------
Total operating expenses................... 9,801 11,256 15,445
-------- -------- ----------
Income from operations.......................... 26,186 34,136 55,315
Interest expense -- related party............... 12,984 17,370 20,737
-------- -------- ----------
Income before income taxes...................... 13,202 16,766 34,578
Income taxes.................................... 224 285 237
-------- -------- ----------
Net income...................................... $ 12,978 $ 16,481 $ 34,341
======== ======== ==========
Pro forma for change in tax status:
Historical income before income taxes......... $ 13,202 $ 16,766 $ 34,578
Pro forma income taxes (Note 6)............... 5,312 6,736 13,850
-------- -------- ----------
Pro forma net income.......................... $ 7,890 $ 10,030 $ 20,728
======== ======== ==========
Pro forma basic earnings per share............ $ .34 $ .44 $ .90
======== ======== ==========
Weighted average number of shares
outstanding................................ 23,000 23,000 23,000
======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 66
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............... 23,000 $ 23 $ -- $ 23
Net income.............................. 12,978 12,978
Distribution to Quality King -- related
party................................. (12,978) (12,978)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1997............... 23,000 23 -- 23
Net income.............................. 16,481 16,481
Distribution to Quality King -- related
party................................. (16,481) (16,481)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1998............... 23,000 23 -- 23
Net income.............................. 34,341 34,341
Distribution to Quality King -- related
party................................. (34,341) (34,341)
-------- -------- -------- --------
BALANCE, OCTOBER 31, 1999............... 23,000 $ 23 $ -- $ 23
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 67
QK HEALTHCARE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 12,978 $ 16,481 $ 34,341
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... -- -- 110
Provision for possible losses......................... 6 169 136
Decrease (increase) in:
Accounts receivable................................. (1,976) (34,948) (23,804)
Inventories......................................... (30,256) (68,982) (89,364)
Advances to suppliers for future purchases.......... 1,258 (21) (352)
Prepaid expenses and other current assets........... 244 (186) (3,391)
Increase (decrease) in:
Accounts payable.................................... 6,394 11,562 88,158
Accrued expenses and other.......................... 1,013 19 2,434
-------- -------- --------
Net cash provided by (used in) operating
activities(1).................................... (10,339) (75,906) 8,268
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in property and equipment....................... -- -- (366)
-------- -------- --------
Net cash used in investing activities(1)............ -- -- (366)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in advances from Quality King -- related
party................................................. 23,317 92,387 26,439
Distribution to Quality King -- related party............ (12,978) (16,481) (34,341)
-------- -------- --------
Net cash provided by financing activities(1)........ 10,339 75,906 (7,902)
-------- -------- --------
Net increase (decrease) in cash............................ -- -- --
Cash and cash equivalents, beginning of year............... -- -- --
-------- -------- --------
Cash and cash equivalents, end of year..................... $ -- $ -- $ --
======== ======== ========
</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> 68
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS
(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. 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 three
years in the period ended October 31, 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.
(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.
F-7
<PAGE> 69
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF ACCOUNTING POLICIES
(a) 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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) 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 October 31, 1999.
F-8
<PAGE> 70
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(g) 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.
(h) 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.
(i) 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.
3. PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, 1999
----------------
<S> <C>
Machinery and equipment................................. $722
Leasehold improvements.................................. 133
----
855
Less accumulated depreciation and amortization.......... 599
----
$256
====
</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)).
F-9
<PAGE> 71
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and
1999 was $212, $223 and $424, 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.
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
OCTOBER 31,
---------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Federal............................................ $4,115 $5,218 $10,729
State.............................................. 1,197 1,518 3,121
------ ------ -------
Pro forma income taxes............................. $5,312 $6,736 $13,850
====== ====== =======
</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. 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
F-10
<PAGE> 72
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 processed, estimated delivery miles, warehouse square
footage and other methods as indicated below. The following table summarizes the
expenses which were allocated to the Company:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
WAREHOUSE AND DELIVERY
Delivery expenses................................. $1,695 $ 854 $ 600
Rent............................................ 106 213 417
Payroll and related expenses.................... 99 271 310
Repairs and maintenance......................... 53 77 121
Union expenses.................................. 48 78 109
Utilities....................................... -- 47 105
Supplies........................................ 29 59 103
Depreciation.................................... 18 34 81
Other........................................... 19 50 65
------ ------ ------
$2,067 $1,683 $1,911
====== ====== ======
SELLING, GENERAL AND ADMINISTRATIVE:
Payroll and related expenses.................... $1,282 $1,479 $2,368
Insurance....................................... 465 572 797
Office expenses................................. 206 279 509
Telephone....................................... 176 244 274
Computer services............................... 102 155 259
Professional fees............................... 172 275 180
Sales expenses.................................. -- 174 147
Other........................................... 83 93 52
------ ------ ------
2,486 3,271 4,586
------ ------ ------
Total............................................. $4,553 $4,954 $6,497
====== ====== ======
</TABLE>
The above expenses were allocated as follows:
WAREHOUSE AND DELIVERY
Warehouse expenses, including rent, payroll, repairs and maintenance, union
expenses, supplies, utilities, and depreciation were primarily allocated based
on warehouse square footage. Payroll taxes were allocated primarily based on
payroll dollars. Other warehouse and delivery expenses, which includes office
expenses and security, were allocated based on
F-11
<PAGE> 73
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
The following table summarizes the methods used to allocate expenses:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Ratio of the number of transactions processed..... $1,480 $2,279 $3,191
Warehouse square footage.......................... 287 751 1,216
Estimated delivery miles.......................... 1,695 853 600
Payroll dollars................................... 344 253 572
Estimate of time-officers......................... 359 400 400
Sales ratios...................................... 140 145 178
Purchases ratios.................................. 73 73 165
Inventory ratios.................................. 157 194 155
Other............................................. 18 6 20
------ ------ ------
Total............................................. $4,553 $4,954 $6,497
====== ====== ======
</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 4), 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, 1998 and 1999 were approximately 7.7%, 7.8% and 7.2%, respectively.
10. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
(a) COMMON STOCK
In connection with the Reorganization, the Company issued 23,000 shares of
common stock, $.001 par value per share, to the stockholders of Quality King.
The shares issued in the Reorganization are reflected in the historical
financial statements as issued in the earliest period presented. The
Reorganization, including the issuance of common stock, has
F-12
<PAGE> 74
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
been retroactively reflected in these financial statements since the
stockholders of Quality King are also the same stockholders of the Company.
(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 4,900
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 3,930 shares of common stock. These options will be granted on the
following terms: incentive and non-qualified stock options to purchase 230
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 and non-qualified stock options to purchase 1,150 shares at an
exercise price 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 2,550 shares at an exercise price $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 $7,650 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 three years ended October 31, 1997, 1998 and 1999, two customers
accounted for approximately 36%, 34% and 33% of net sales, respectively. These
customers accounted for approximately the same percentage of accounts receivable
at October 31, 1997, 1998 and 1999, respectively, as their sales for these
years.
12. SUBSEQUENT EVENTS
(a) CORPORATE REORGANIZATION
In connection with the Reorganization, Quality King was required under the
Internal Revenue Code to allocate a portion of its accumulated taxed and
undistributed earnings to the Company. The allocation is based on a ratio of the
Company's fair value to the fair value of Quality King. The accumulated taxed
and undistributed earnings of Quality King was estimated at approximately
$132,000 as of March 1, 2000. The amount allocated for tax purposes to the
Company will be approximately $110,000. In connection with the proposed public
offering, the Company declared a dividend of $110,000, which was paid in the
form of promissory notes (the "Notes").
The historical advances from Quality King of $268,349 was based on the
difference between our assets and our liabilities to third parties. In
connection with the Reorganization and to comply with a ruling from the Internal
Revenue Service, Quality
F-13
<PAGE> 75
QK HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
King allocated $261,049 of the historical advances to us, which is a portion of
its bank obligations based in part on its borrowing base formula. Quality King
then forgave the remaining advances of $7,300, which was treated as a capital
contribution by Quality King.
(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
$186,000 upon the sale of its common stock.
The net proceeds will be used to pay $60,000 of the Notes (see Note 12(a))
and reduce short-term borrowings assumed from Quality King by $126,000.
(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 loan agreement is for
$350,000 and has a term of four and a half years. The loan agreement provides
for borrowings based on 85% of receivables and 65% of inventory, as defined.
Interest accrues at the prime rate or at LIBOR plus a margin of 1.5%. The loan
agreement provides for certain financial ratios, warranties and other covenants.
F-14
<PAGE> 76
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> 77
[MAP GRAPHIC]
13,400,000 Shares
QK HEALTHCARE, INC.
COMMON STOCK
----------------------------
PROSPECTUS
, 2000
----------------------------
LEHMAN BROTHERS
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
<PAGE> 78
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................................................... 26,697
Printing and engraving expenses............................ 170,000
Accounting fees and expenses............................... 1,530,000
Legal fees and expenses.................................... 250,000
Blue Sky fees and expenses................................. 4,000
NYSE listing application fee............................... 84,600
Transfer agent fees and expenses........................... 5,000
Miscellaneous.............................................. 797,770
----------
TOTAL................................................. $2,940,000
==========
</TABLE>
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 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
II-1
<PAGE> 79
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
23,000,000 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, $110 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 $110 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 3,930,000 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 and non-qualified stock options to purchase 230,000 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 and non-qualified stock options to purchase 1,150,000 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
- Non-qualified stock options to purchase 2,550,000 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
II-2
<PAGE> 80
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
*** Re-filed with revisions
II-3
<PAGE> 81
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> 82
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 January 31, 2000.
QK Healthcare, Inc.
By: /s/ MICHAEL W. KATZ
-----------------------------------
Name: Michael W. Katz
Title: Executive Vice President
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 January 31, 2000.
<TABLE>
<C> <S>
* Chairman, Chief Executive Officer and
- --------------------------------------------------- Director (Principal Executive
Glenn Nussdorf Officer)
/s/ MICHAEL W. KATZ Executive Vice President, 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> 83
[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 January 5, 2000, 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 three years
ended October 31, 1999, 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
January 5, 2000
S-1
<PAGE> 84
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
Year ended October 31, 1999...... $863,000 $136,000 $ 72,000(b) $-- $1,071,000
</TABLE>
- -------------------------
(a) provision for possible losses.
(b) write off net of $102,000 recovery.
S-2
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
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
*** Re-filed with revisions
<PAGE> 1
Exhibit 1.1
13,400,000 SHARES
QK HEALTHCARE, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
February __, 2000
LEHMAN BROTHERS INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
SALOMON SMITH BARNEY INC.
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Ladies and Gentlemen:
QK Healthcare, Inc., a Delaware corporation (the "Company"), proposes to
sell 13,400,000 shares (the "Firm Stock") of the Company's Common Stock, par
value $.001 per share (the "Common Stock"). In addition, the Company proposes to
grant to the Underwriters named on Schedule 1 hereto (the "Underwriters") an
option to purchase up to an additional 2,010,000 shares of the Common Stock on
the terms and for the purposes set forth in Section 3 (the "Option Stock"). The
Firm Stock and the Option Stock, if purchased, are hereinafter collectively
called the "Stock." As used in this agreement, the term "Principal Stockholders"
shall mean collectively the persons named on Schedule 2 hereto. This is to
confirm the agreement concerning the purchase of the Stock from the Company by
the Underwriters.
1. Representations, Warranties and Agreements of the Company. The Company
represents, warrants and agrees that:
(a) A registration statement on Form S-1 with respect to the Stock has
(i) been prepared by the Company in conformity with the requirements of the
United States Securities Act of 1933 (the "Securities Act") and the rules and
regulations (the "Rule and Regulations") of the United States Securities and
Exchange Commission (the "Commission") thereunder, (ii) been filed with the
Commission under the
<PAGE> 2
2
Securities Act and (iii) become effective under the Securities Act. Copies of
such registration statement and the amendments thereto have been delivered by
the Company to you as the representatives (the "Representatives") of the
Underwriters. As used in this Agreement, "Effective Time" means the date and the
time as of which such registration statement, or the most recent post-effective
amendment thereto, if any, was declared effective by the Commission; "Effective
Date" means the date of the Effective Time; "Preliminary Prospectus" means each
prospectus included in such registration statement, or amendments thereof,
before it became effective under the Securities Act and any prospectus filed
with the Commission by the Company with the consent of the Representatives
pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement"
means such registration statement, as amended at the Effective Time, including
all information contained in the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section
6 hereof and deemed to be a part of the registration statement as of the
Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and
Regulations; and "Prospectus" means such final prospectus, as first filed with
the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules and
Regulations. The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the Commission, as
the case may be, conform in all respects to the requirements of the Securities
Act and the Rules and Regulations and do not and will not, as of the applicable
effective date (as to the Registration Statement and any amendment thereto) and
as of the applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain 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; provided that no representation or warranty
is made as to information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation, is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which its ownership or lease of
property or the conduct of its business requires such qualification, except
where the failure to register or qualify does not have a material adverse effect
on the condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company and
<PAGE> 3
3
has all power and authority necessary to own or hold its properties and to
conduct the business in which it is engaged; and the Company does not directly
or indirectly own and has not made any investment in any of the capital stock
of, or any other proprietary interest in, any individual, firm, corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, limited liability company, governmental authority or other
entity of any kind.
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description thereof contained in the Prospectus.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein, will be
duly and validly issued, fully paid and non-assessable; and the Stock will
conform to the description thereof contained in the Prospectus.
(f) The Company has full corporate power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and delivered
by the Company.
(g) The execution, delivery and performance of this Agreement by the
Company, the consummation of the transactions contemplated hereby, and the
application of the net proceeds from the offering and sale of the Stock in the
manner set forth in the Prospectus under the caption "Use of Proceeds," will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any material indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which the
Company is a party or by which the Company is bound or to which any of the
property or assets of the Company are subject, nor will such actions result in
any violation of the provisions of the charter or by-laws of the Company or any
material statute or any material order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or the
Company's properties or assets; and except for the registration of the Stock
under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Securities Exchange
Act of 1934 (the "Exchange Act") and applicable state securities laws in
connection with the purchase and distribution of the Stock by the Underwriters,
no consent, approval, authorization or order of, or filing or registration with,
any such court or governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company and the consummation
of the transactions contemplated
<PAGE> 4
4
hereby.
(h) The Company has full corporate power and authority to enter into
the Credit Agreement, dated [February] __, 2000 (the "Credit Agreement"), among
the Company, [ ] and [ ]. The Credit Agreement has been duly authorized,
executed and delivered by the Company, and constitutes a valid and binding
agreement of and is enforceable against the Company in accordance with its
terms, except as the enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization and other laws affecting creditors'
rights generally and moratorium laws in effect from time to time and by
equitable principles restricting the availability of equitable remedies.
(i) The execution, delivery and performance of the Credit Agreement by
the Company, the consummation of the transactions contemplated thereby, and the
application of the net proceeds from the credit facility under the Credit
Agreement in the manner set forth in the Prospectus will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any material indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company is a party
or by which the Company is bound or to which any of the property or assets of
the Company are subject, nor will such actions result in any violation of the
provisions of the charter or by-laws of or any material statute or any material
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of the Company's properties or assets; and
no consent, approval, authorization or order of, or filing or registration with,
any such court or governmental agency or body is required for the execution,
delivery and performance of the Credit Agreement by the Company and the
consummation of the transactions contemplated thereby.
(j) Each of the Company and the other parties to the following
agreements (collectively including the Company, the "Reorganization Parties,"
and each individually, a "Reorganization Party") has full corporate or other
applicable power and authority (to the extent that it is party to such
agreements) to enter into: (i) the Agreement and Plan of Corporate Separation
and Reorganization for QK Healthcare, Inc., dated [February] ___, 2000 (the
"Company Reorganization Agreement"), among Quality King Distributors, Inc.
("QKD"), and each of the Principal Stockholders, (ii) the Agreement and Plan of
Corporate Separation for Pro's Choice Beauty Care, Inc., dated [February] ___,
2000 (the "Pro Choice Reorganization Agreement"), among QKD, Ruth Nussdorf and
the Estate of Bernard Nussdorf, as represented by [ ], (iii) the
Indemnification, Noncompetition and Tax Cooperation Agreement, dated [February]
___, 2000 (the "Indemnity Agreement"),
<PAGE> 5
5
among the Company, QKD and Pro's Choice Beauty Care, Inc., (iv) the Support
Services Agreement, dated [February] ___, 2000 (the "Support Services
Agreement"), between the Company and QKD, (v) the Registration Rights Agreement,
dated [February] [ ], 2000 (the "Registration Rights Agreement"), among the
Company and the Principal Stockholders, and (vi) the Sublease Agreement, dated
[February] ___, 2000 (the "Sublease Agreement"), between the Company and QKD.
The Company Reorganization Agreement, the Pro Choice Reorganization Agreement,
the Indemnity Agreement, the Support Services Agreement, the Registration Rights
Agreement and the Sublease Agreement are collectively referred to as the
"Reorganization Agreements," and each individually as a "Reorganization
Agreement." The transactions contemplated by the Reorganization Agreements and
as described in "Related Party Transactions" in the Prospectus are referred to
as the "Reorganization." Each of the Reorganization Agreements has been duly
authorized, executed and delivered by each of the Reorganization Parties party
thereto and constitutes a valid and binding agreement of and is enforceable
against each Reorganization Party party thereto in accordance with its terms,
except as the enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization and other laws affecting creditors' rights generally
and moratorium laws in effect from time to time and by equitable principles
restricting the availability of equitable remedies.
(k) (i) The execution, delivery and performance of each Reorganization
Agreement by each Reorganization Party party thereto and the consummation of the
transactions contemplated thereby and by the Reorganization do not and will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any material indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which any
Reorganization Party is a party or by which any Reorganization Party is bound or
to which any of the property or assets of any Reorganization Party are subject,
nor do such actions nor will they result in any violation of the provisions of
the charter, by-laws or other organizational documents of any Reorganization
Party or any material statute or any material order, rule or regulation of any
court or governmental agency or body having jurisdiction over any Reorganization
Party or any Reorganization Party's properties or assets; (ii) no consent,
approval, authorization or order of, or filing or registration with, any such
court or governmental agency or body was or is required for the execution,
delivery and performance of each Reorganization Agreement by each Reorganization
Party party thereto and the consummation of the transactions contemplated
thereby and by the Reorganization; (iii) QKD has received a ruling by the
Internal Revenue Service (the "IRS Ruling") to the effect that the transactions
contemplated by the Reorganization Agreements will qualify as (A) tax-free
reorganizations under Sections 361(a) and 368(a)(1)(D) of the Internal Revenue
Code of
<PAGE> 6
6
1986, as amended, including the regulations and published interpretations
thereunder (the "Code"), and (B) tax-free exchanges under Section 355 of the
Code, and has received no notification from the Internal Revenue Service that
such IRS Ruling has been or is anticipated to be amended, revoked or withdrawn;
(iv) the Reorganization has been consummated in conformity with the description
thereof contained in the Prospectus and as contemplated by the IRS Ruling; and
(v) each of QKD and Pro's Choice Beauty Care, Inc. is, after the consummation of
the Reorganization, Solvent. As used herein, the term "Solvent" means, with
respect to an entity on a particular date, that on such date (P) the fair value
of the assets of the entity at a fair valuation will exceed the debts and
liabilities, subordinated, contingent or otherwise, of the entity, (Q) the
present fair salable value of the entity's business taken as a whole is greater
than the amount that will be required to pay the probable liabilities of the
entity on its debts as they become absolute and matured, (R) the entity is able
to realize upon its assets and pay its debts and other liabilities, including
contingent obligations, as they mature, and (S) the entity does not have
unreasonably small capital. For all purposes of clauses (P) through (S) in the
preceding sentence, the amount of the contingent liabilities at any time shall
be computed as the amount that, in the light of all the facts and circumstances
existing at such time, represents the amount that can reasonably be expected to
become an actual or matured liability.
(l) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Securities Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Securities Act.
(m) Except as described in the Prospectus, the Company has not sold or
issued any shares of Common Stock during the six-month period preceding the date
of the Prospectus, including any sales pursuant to Rule 144A under, or
Regulation D or S of, the Securities Act.
(n) The Company has not sustained, since the date of the latest audited
financial statements included in the Prospectus, any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since such date, there has not been any
change in the capital stock or long-term debt of
<PAGE> 7
7
the Company or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity, results of operations,
business or prospects of the Company, otherwise than as set forth or
contemplated in the Prospectus.
(o) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or included in
the Prospectus present fairly the financial condition and results of operations
of the entities purported to be shown thereby, at the dates and for the periods
indicated, and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved; the pro forma financial statements included in the Prospectus have
been prepared on a basis consistent with the historical financial statements
included therein and in accordance with the Commission's rules and guidelines
with respect to pro forma financial statements, the assumptions used in
preparing the pro forma financial statements included in the Prospectus provide
a reasonable basis for presenting the significant effects directly attributable
to the transactions or events described therein, the related pro forma
adjustments give appropriate effect to those assumptions and the pro forma
columns therein reflect the proper application of those adjustments to the
corresponding historical financial statement amounts; and the other financial
and statistical information and data included in the Prospectus derived from the
historical and pro forma financial statements are accurately presented in all
material respects and prepared on a basis consistent with the financial
statements, historical and pro forma, included in the Prospectus and the books
and records of the Company.
(p) BDO Siedman, LLP, who have certified certain financial statements
of the Company, whose report appears in the Prospectus and who have delivered
the initial letter referred to in Section 9(h) hereof, are independent public
accountants as required by the Securities Act and the Rules and Regulations.
(q) The Company owns no real property but has good and marketable title
in fee simple to all personal property owned by it, free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by the
Company; and all real property and buildings held under lease by the Company are
held by it under valid, subsisting and enforceable leases, with such exceptions
as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company.
<PAGE> 8
8
(r) The Company carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of its business and the
value of its properties and as is customary for companies engaged in similar
businesses in similar industries.
(s) The Company owns or possesses adequate rights to use all material
patents, patent applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights and licenses necessary for
the conduct of its business and has no reason to believe that the conduct of its
business will conflict with, and has not received any notice of any claim of
conflict with, any such rights of others.
(t) There are no legal or governmental proceedings pending to which the
Company is a party or of which any property or assets of the Company is the
subject which, if determined adversely to the Company, might have a material
adverse effect on the general affairs, management, financial position,
stockholders' equity, results of operations, business or prospects of the
Company; and to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others.
(u) There are no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the Registration Statement
by the Securities Act or by the Rules and Regulations which have not been
described in the Prospectus or filed as exhibits to the Registration Statement
or incorporated therein by reference as permitted by the Rules and Regulations.
(v) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders, customers or
suppliers of the Company on the other hand, which is required to be described in
the Prospectus which is not so described.
(w) No labor disturbance by the employees of the Company exists or, to
the knowledge of the Company, is imminent which might be expected to have a
material adverse effect on the consolidated financial position, stockholders'
equity, results of operations, business or prospects of the Company.
(x) The Company has no "employee benefit plan" (as defined under the
Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA")). The
Reorganization will not give rise to any material liability with respect to any
"employee
<PAGE> 9
9
benefit plan" (as defined in ERISA) under which the Company has, or reasonably
could have, any liability or obligation.
(y) The Company has filed all federal, state and local income and
franchise tax returns and elections required to be filed through the date hereof
and has paid all taxes due thereon, and no tax deficiency has been determined
adversely to the Company which has had (nor does the Company have any knowledge
of any tax deficiency which, if determined adversely to the Company, might have)
a material adverse effect on the general affairs, management, financial
position, stockholders' equity, results of operations, business or prospects of
the Company.
(z) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed in the
Prospectus, the Company has not (i) issued or granted any securities, (ii)
incurred any liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary course of
business or (iv) declared or paid any dividend on its capital stock.
(aa) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with management's
authorization, (B) transactions are recorded as necessary to permit preparation
of its financial statements and to maintain accountability for its assets, (C)
access to its assets is permitted only in accordance with management's
authorization and (D) the recorded accountability for its assets is compared
with existing assets at reasonable intervals.
(bb) The Company is not (i) in violation of its charter or by-laws,
(ii) in default in any material respect, and no event has occurred which, with
notice or lapse of time or both, would constitute such a default, in the due
performance or observance of any term, covenant or condition contained in any
material indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which it is a party or by which it is bound or to which any of
its properties or assets is subject or (iii) in violation in any material
respect of any law, ordinance, governmental rule, regulation or court decree to
which it or its property or assets may be subject, including, but not limited
to, the Prescription Drug Marketing Act, the Controlled Substances Act, the
Federal Food, Drug and Cosmetic Act, the Occupational Safety and Health Act, and
any comparable or related state or local statutes or regulations and applicable
state laws regulating pharmacy or wholesaling practices and worker safety (all
such laws, statutes, orders, rules, regulations, policies, guidelines,
judgments,
<PAGE> 10
10
decisions and orders, collectively, "Applicable Laws"). Except as described in
the Prospectus, the Company holds all licenses, certificates, approvals and
permits from all state, United States, and other regulatory authorities
(together, "Permits"), that are required for the conduct of the business of the
Company, all of which are valid and in full force and effect; and there is no
proceeding pending or, to the knowledge of the Company, threatened which may
cause any such Permit to be withdrawn, canceled, suspended or not renewed. The
Company has implemented procedures and controls reasonable for the conduct of
its business to ensure compliance with Applicable Laws, the requirements of any
Permits and any requirements of product manufacturers regarding the purchase,
sale, storage or shipping of such products.
(cc) Neither the Company, nor any director, officer, agent, employee or
other person associated with or acting on behalf of the Company, has used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expense relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment.
(dd) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company (or, to the
knowledge of the Company, any of its predecessors in interest) at, upon or from
any of the property now or previously owned or leased by the Company in
violation of any applicable law, ordinance, rule, regulation, order, judgment,
decree or permit or which would require remedial action under any applicable
law, ordinance, rule, regulation, order, judgment, decree or permit, except for
any violation or remedial action which would not have, or could not be
reasonably likely to have, singularly or in the aggregate with all such
violations and remedial actions, a material adverse effect on the general
affairs, management, financial position, stockholders' equity, results of
operations, business or prospects of the Company; there has been no material
spill, discharge, leak, emission, injection, escape, dumping or release of any
kind onto such property or into the environment surrounding such property of any
toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company or with respect to which the Company
has knowledge, except for any such spill, discharge, leak, emission, injection,
escape, dumping or release which would not have or would not be reasonably
likely to have, singularly or in the aggregate with all such spills, discharges,
leaks, emissions, injections, escapes, dumpings and releases, a material adverse
effect on the general affairs, management,
<PAGE> 11
11
financial position, stockholders' equity, results of operations, business or
prospects of the Company; and the terms "hazardous wastes," "toxic wastes,"
"hazardous substances" and "medical wastes" shall have the meanings specified in
any applicable local, state, federal and foreign laws or regulations with
respect to environmental protection.
(ee) The Company is not, and upon application of the proceeds of the
offering of the Stock as described in the Prospectus will not be, an "investment
company" within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
(ff) The Company has not taken and will not take, directly or
indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the shares of the Stock.
2. Representations, Warranties and Agreements of the Principal
Stockholders. Each Principal Stockholder severally represents, warrants and
agrees that:
(a) The Principal Stockholder has full right, power and authority to
enter into this Agreement and each Reorganization Agreement to which such
Principal Stockholder is a party; each of this Agreement and the Reorganization
Agreements to which the Principal Stockholder is a party has been duly
authorized, executed and delivered by the Principal Stockholder and constitutes
a valid and binding agreement of and is enforceable against the Principal
Stockholder in accordance with its terms, except as the enforceability hereof
and thereof may be limited by applicable bankruptcy, insolvency, reorganization
and other laws affecting creditors' rights generally and moratorium laws in
effect from time to time and by equitable principles restricting the
availability of equitable remedies; the execution, delivery and performance of
this Agreement and such Reorganization Agreements by the Principal Stockholder
and the consummation by the Principal Stockholder of the transactions
contemplated hereby, thereby and by the Reorganization will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any material indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Principal
Stockholder is a party or by which the Principal Stockholder is bound or to
which any of the property or assets of the Principal Stockholder is subject, nor
will such actions result in any violation of the provisions of the formation
documents of the Principal Stockholder or any material statute or any material
order, rule
<PAGE> 12
12
or regulation of any court or governmental agency or body having jurisdiction
over the Principal Stockholder or the property or assets of the Principal
Stockholder; and, except for the registration of the Stock under the Securities
Act and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and applicable state
securities laws in connection with the purchase and distribution of the Stock by
the Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is required for
the execution, delivery and performance of this Agreement and such
Reorganization Agreements by the Principal Stockholder and the consummation by
the Principal Stockholder of the transactions contemplated hereby, thereby and
by the Reorganization.
(b) Each of the trust indentures listed on Schedule 2 creates a trust
that is valid under New York law, and each trust indenture remains valid, in
force, existing and has not been amended or revoked since it was originally
signed. The Principal Stockholder is duly qualified and duly acting as trustee
under each of the trust indentures listed on Schedule 2, and has not resigned or
been removed or replaced as trustee under any of such trust indentures. Each of
the trusts created by the trust indentures listed on Schedule 2 owns no real
property but has good and marketable title in fee simple to all personal
property owned by it, free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property.
(c) The Principal Stockholder has no reason to believe that the
representations and warranties of the Company contained in Section 1 hereof are
not true and correct, is familiar with the Registration Statement and the
Prospectus (as amended or supplemented) and has no knowledge of any material
fact, condition or information not disclosed in the Registration Statement, as
of the effective date, or the Prospectus (or any amendment or supplement
thereto), as of the applicable filing date, which has adversely affected or may
reasonably be expected to adversely affect the business of the Company and is
not prompted to enter into the Reorganization Agreements and cause the Company
to offer the shares of Common Stock by any information concerning the Company
which is not set forth in the Registration Statement and the Prospectus.
(d) The Principal Stockholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the shares of the Stock.
<PAGE> 13
13
3. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 13,400,000 shares of
the Firm Stock to the several Underwriters and each of the Underwriters,
severally and not jointly, agrees to purchase the number of shares of the Firm
Stock set opposite that Underwriter's name in Schedule 1 hereto. The respective
purchase obligations of the Underwriters with respect to the Firm Stock shall be
rounded among the Underwriters to avoid fractional shares, as the
Representatives may determine.
In addition, the Company grants to the Underwriters an option to purchase
up to 2,010,000 shares of Option Stock. Such option is granted solely for the
purpose of covering over-allotments in the sale of Firm Stock and is exercisable
as provided in Section 5 hereof. Shares of Option Stock shall be purchased
severally for the account of the Underwriters in proportion to the number of
shares of Firm Stock set opposite the name of such Underwriters in Schedule 1
hereto. The respective purchase obligations of each Underwriter with respect to
the Option Stock shall be adjusted by the Representatives so that no Underwriter
shall be obligated to purchase Option Stock other than in 100 share amounts.
The price of both the Firm Stock and any Option Stock shall be $_____ per
share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on any Delivery Date (as hereinafter defined), as the case may be,
except upon payment for all the Stock to be purchased on such Delivery Date as
provided herein.
4. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm Stock,
the several Underwriters propose to offer the Firm Stock for sale upon the terms
and conditions set forth in the Prospectus.
5. Delivery of and Payment for the Stock. Delivery of and payment for the
Firm Stock shall be made at the office of Paul, Weiss, Rifkind, Wharton &
Garrison, 1285 Avenue of the Americas, New York, New York, at 10:00 A.M., New
York City time, on the [fourth] full business day following the date of this
Agreement or at such other date or place as shall be determined by agreement
between the Representatives and the Company. This date and time are sometimes
referred to as the
<PAGE> 14
14
"First Delivery Date." On the First Delivery Date, the Company shall deliver or
cause to be delivered certificates representing the Firm Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall be
registered in such names and in such denominations as the Representatives shall
request in writing not less than two full business days prior to the First
Delivery Date. For the purpose of expediting the checking and packaging of the
certificates for the Firm Stock, the Company shall make the certificates
representing the Firm Stock available for inspection by the Representatives in
New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the First Delivery Date.
The option granted in Section 3 will expire 30 days after the date of this
Agreement and may be exercised in whole or in part from time to time by written
notice being given to the Company by the Representatives. Such notice shall set
forth the aggregate number of shares of Option Stock as to which the option is
being exercised, the names in which the shares of Option Stock are to be
registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as the "Second Delivery Date" and the First Delivery
Date and any Second Delivery Date are sometimes each referred to as a "Delivery
Date").
Delivery of and payment for the Option Stock shall be made at the place
specified in the first sentence of the first paragraph of this Section 5 (or at
such other place as shall be determined by agreement between the Representatives
and the Company) at 10:00 A.M., New York City time, on such Second Delivery
Date. On such Second Delivery Date, the Company shall deliver or cause to be
delivered the certificates representing the Option Stock to the Representatives
for the account of each Underwriter against payment to or upon the order of the
Company of the purchase price by wire transfer in immediately available funds.
Time shall be of the essence, and delivery at the time and place specified
pursuant to this Agreement is a further condition of the obligation of each
Underwriter hereunder. Upon delivery, the Option Stock shall be registered in
such names and in such denominations as the
<PAGE> 15
15
Representatives shall request in the aforesaid written notice. For the purpose
of expediting the checking and packaging of the certificates for the Option
Stock, the Company shall make the certificates representing the Option Stock
available for inspection by the Representatives in New York, New York, not later
than 2:00 P.M., New York City time, on the business day prior to such Second
Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the Representatives
and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not
later than Commission's close of business on the second business day following
the execution and delivery of this Agreement or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Securities Act; to make no
further amendment or any supplement to the Registration Statement or to the
Prospectus except as permitted herein; to advise the Representatives, promptly
after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to furnish the
Representatives with copies thereof; to advise the Representatives, promptly
after it receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, of the suspension of the qualification of the
Stock for offering or sale in any jurisdiction, of the initiation or threatening
of any proceeding for any such purpose, or of any request by the Commission for
the amending or supplementing of the Registration Statement or the Prospectus or
for additional information; and, in the event of the issuance of any stop order
or of any order preventing or suspending the use of any Preliminary Prospectus
or the Prospectus or suspending any such qualification, to use promptly its best
efforts to obtain its withdrawal;
(b) To furnish promptly to the Representatives and to counsel for the
Underwriters a signed copy of the Registration Statement as originally filed
with the Commission, and each amendment thereto filed with the Commission,
including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits other
than this Agreement) and (ii) each Preliminary Prospectus, the Prospectus and
any amended or supplemented Prospectus and, if the delivery of a prospectus is
required at any time after the Effective
<PAGE> 16
16
Time in connection with the offering or sale of the Stock or any other
securities relating thereto and if at such time any events shall have occurred
as a result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Securities Act, to notify
the Representatives and, upon their request, to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of an amended or
supplemented Prospectus which will correct such statement or omission or effect
such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Stock at any time nine
months or more after the time of issue of the Prospectus, upon your request but
at the expense of such Underwriter, to prepare and deliver to such Underwriter
as many copies as you may request of an amended or supplemented Prospectus
complying with Section 10(a)(3) of the Securities Act;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the Prospectus
that may, in the judgment of the Company or the Representatives, be required by
the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to
the Representatives and counsel for the Underwriters and obtain the consent of
the Representatives to the filing, which consent will not be unreasonably
withheld;
(f) As soon as practicable after the Effective Date (it being
understood that the Company shall have until at least [410] days after the end
of the Company's current fiscal quarter), to make generally available to the
Company's security holders and to deliver to the Representatives an earnings
statement of the Company and its subsidiaries (which need not be audited)
complying with Section 11(a) of the Securities Act and the Rules and Regulations
(including, at the option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to furnish
to the Representatives copies of all materials furnished by the Company to its
shareholders and all reports and financial statements furnished by the Company
to the principal national securities exchange upon which the Common Stock may be
listed pursuant to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of the
Commission thereunder;
(h) Promptly from time to time to take such action as the
<PAGE> 17
17
Representatives may reasonably request to qualify the Stock for offering and
sale under the securities laws of such jurisdictions as the Representatives may
request and to comply with such laws so as to permit the continuance of sales
and dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Stock; provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction;
(i) For a period of 360 days from the date of the Prospectus, not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose of
(or enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any shares of Common Stock or securities convertible into or exchangeable
for Common Stock (other than the Stock and shares issued pursuant to employee
benefit plans, qualified stock option plans or other employee compensation plans
existing on the date hereof or pursuant to currently outstanding options,
warrants or rights), or sell or grant options, rights or warrants with respect
to any shares of Common Stock or securities convertible into or exchangeable for
Common Stock (other than the grant of options pursuant to option plans existing
on the date hereof), or (2) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic benefits or
risks of ownership of such shares of Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, in each case without the prior
written consent of Lehman Brothers Inc.; and to cause each officer and director
of the Company to furnish to the Representatives, prior to the First Delivery
Date, a letter or letters, in form and substance satisfactory to counsel for the
Underwriters, pursuant to which each such person shall agree not to, directly or
indirectly, (1) offer for sale, sell, pledge or otherwise dispose of (or enter
into any transaction or device which is designed to, or could be expected to,
result in the disposition by any person at any time in the future of) any shares
of Common Stock or securities convertible into or exchangeable for Common Stock
or (2) enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of ownership
of such shares of Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, in each case for a period of 360 days from the
date of the Prospectus, without the prior written consent of the Lehman Brothers
Inc.;
(j) Prior to the Effective Date, to apply for the listing of the Stock
on the New York Stock Exchange, Inc. and to use its best efforts to complete
that listing, subject only to official notice of issuance and evidence of
satisfactory
<PAGE> 18
18
distribution, prior to the First Delivery Date;
(k) Prior to filing with the Commission any periodic report filed
pursuant to Section 13(a) or 15(d) of the Exchange Act that contains information
regarding the use of proceeds from the sale of the Stock being sold by the
Company pursuant to Rule 463 of the Rules and Regulations, to furnish a copy
thereof to the counsel for the Underwriters and receive and consider its
comments thereon, and to deliver promptly to the Representatives a signed copy
of each such periodic report filed by it with the Commission that contains the
information described above;
(l) To apply the net proceeds from the sale of the Stock being sold by
the Company as set forth in the Prospectus; and
(m) To take such steps as shall be necessary to ensure that neither the
Company nor any subsidiary shall become an "investment company" within the
meaning of such term under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
7. Further Agreements of the Principal Stockholders. Each Principal
Stockholder agrees:
(a) For a period of 360 days from the date of the Prospectus, not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose of
(or enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any shares of Common Stock or securities convertible into or exchangeable
for Common Stock (other than the Stock) or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in part, any of
the economic benefits or risks of ownership of such shares of Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or other securities, in cash or otherwise,
in each case without the prior written consent of the Representative.
8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of
<PAGE> 19
19
producing and distributing this Agreement and any other related documents in
connection with the offering, purchase, sale and delivery of the Stock; (e) the
filing fees incident to securing any required review by the National Association
of Securities Dealers, Inc. of the terms of sale of the Stock (including related
reasonable fees and expenses of counsel to the Underwriters); (f) any applicable
listing or other fees; (g) the fees and expenses of qualifying the Stock under
the securities laws of the several jurisdictions as provided in Section 6(h) and
of preparing, printing and distributing a Blue Sky Memorandum (including related
reasonable fees and expenses of counsel to the Underwriters); and (h) all other
costs and expenses incident to the performance of the obligations of the Company
under this Agreement; provided that, except as provided in this Section 8 and in
Section 14, the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Stock which
they may sell and the expenses of advertising any offering of the Stock made by
the Underwriters.
9. Conditions of Underwriters' Obligations. The respective obligations of
the Underwriters hereunder are subject to the accuracy, when made and on each
Delivery Date, of the representations and warranties of the Company and the
Principal Stockholders contained herein, to the performance by the Company and
the Principal Stockholders of their respective obligations hereunder, and to
each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission in
accordance with Section 6(a); no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement or the Prospectus or otherwise shall
have been complied with.
(b) No Underwriter shall have discovered and disclosed to the Company
on or prior to such Delivery Date that the Registration Statement or the
Prospectus or any amendment or supplement thereto contains an untrue statement
of a fact which, in the opinion of counsel for the Underwriters, is material or
omits to state a fact which, in the opinion of such counsel, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Reorganization
Agreements, the Credit Agreement, the Stock, the Registration Statement and the
Prospectus, and all other legal matters relating to this Agreement and the
transactions
<PAGE> 20
20
contemplated hereby shall be reasonably satisfactory in all material respects to
counsel for the Underwriters, and the Company shall have furnished to such
counsel all documents and information that they may reasonably request to enable
them to pass upon such matters.
(d) The Credit Agreement and the Reorganization Agreements, in
substantially the form reviewed by counsel for the Underwriters and filed as
exhibits to the Registration Statement, shall have been executed and delivered
by all of the parties thereto, all obligations of QKD with respect to its prior
credit facility assumed by the Company shall have been discharged in full, and
the new credit facility of the Company, the Reorganization Agreements and the
other transactions contemplated by such agreements and the Reorganization shall
have closed with no conditions to closing under any such agreements waived
without the prior written consent of the Representatives, and in conformity with
the descriptions thereof contained in the Prospectus, and, in the case of the
Reorganization, as contemplated by the IRS Ruling.
(e) Edwards & Angell, LLP shall have furnished to the Representatives
its written opinion, as counsel to the Company and the Principal Stockholders,
addressed to the Underwriters and dated such Delivery Date, in form and
substance reasonably satisfactory to the Representatives, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in
which its ownership or lease of property or the conduct of its
business requires such qualification except where the failure to
register or qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company, and has all power and
authority necessary to own or hold its properties and to conduct the
business in which it is engaged; and the Company has no subsidiaries;
<PAGE> 21
21
(ii) The Company has an authorized
capitalization as set forth in the Prospectus, and all of the issued
shares of capital stock of the Company (including the shares of Stock
being delivered on such Delivery Date) have been duly and validly
authorized and issued, are fully paid and non-assessable and conform to
the description thereof contained in the Prospectus;
(iii) There are no preemptive or other
rights to subscribe for or to purchase, nor any restriction upon the
voting or transfer of, any shares of the Stock pursuant to the
Company's charter or by-laws or any agreement or other instrument known
to such counsel;
(iv) All real property and buildings held
under lease by the Company is held by it under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property
and buildings by the Company;
(v) To the best of such counsel's knowledge
and other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a party or of
which any property or assets of the Company are the subject which, if
determined adversely to the Company, might have a material adverse
effect on the financial position, stockholders' equity, results of
operations, business or prospects of the Company; and, to the best of
such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(vi) The Registration Statement was declared
effective under the Securities Act as of the date and time specified in
such opinion, the Prospectus was filed with the Commission pursuant to
the subparagraph of Rule 424(b) of the Rules and Regulations specified
in such opinion on the date specified therein and no stop order
suspending the effectiveness of the Registration Statement has been
issued and, to the knowledge of such counsel, no proceeding for that
purpose is pending or threatened by the Commission;
(vii) The Registration Statement and the
Prospectus and any further amendments or supplements thereto made by
the Company prior to such Delivery Date (other than the financial
statements and related schedules therein, as to which such counsel need
express no opinion) comply as to form in
<PAGE> 22
22
all material respects with the requirements of the Securities Act and
the Rules and Regulations;
(viii) The statements contained in the
Prospectus under the captions "Business - Government Regulation,"
"Related Party Transactions," "Management - Employment Agreement" and
"Description of the Credit Agreement" insofar as they describe
statutes, rules and regulations or summaries or descriptions of legal
agreements, constitute a fair summary thereof;
(ix) To the best of such counsel's
knowledge, there are no contracts or other documents that are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as exhibits to the
Registration Statement or incorporated therein by reference as
permitted by the Rules and Regulations;
(x) This Agreement has been duly
authorized, executed and delivered by the Company and, assuming the
accuracy of the Principal Stockholders' representation in Section 2(b)
above, each of the Principal Stockholders;
(xi) The issue and sale of the shares of
Stock being delivered on such Delivery Date by the Company and the
compliance by each of the Company and the Principal Stockholders with
all of the provisions of this Agreement and the consummation of the
transactions contemplated hereby will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument known to such counsel to which the
Company or any Principal Stockholder is a party or by which the Company
or any Principal Stockholder is bound or to which any of the property
or assets of the Company or any Principal Stockholder are subject, nor
will such actions result in any violation of the provisions of the
charter, by-laws or other formation documents of the Company or any
Principal Stockholder or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any Principal Stockholder or
any of their respective properties or assets; and, except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court
<PAGE> 23
23
or governmental agency or body is required for the execution, delivery
and performance of this Agreement by the Company and each of the
Principal Stockholders and the consummation of the transactions
contemplated hereby;
(xii) Each of the Credit Agreement and each
of the Reorganization Agreements has been duly authorized, executed and
delivered by each Reorganization Party party thereto, and constitutes a
valid and binding agreement of such Reorganization Party enforceable
against the Reorganization Party in accordance with its terms, subject
to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other laws relating to or affecting
creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law);
(xiii) The compliance by the Company with
all of the provisions of the Credit Agreement and by each
Reorganization Party with all of the provisions of the Reorganization
Agreements to which it is party and the consummation of the
transactions contemplated thereby and by the Reorganization do not and
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which any Reorganization Party is a
party or by which any Reorganization Party is bound or to which any of
the property or assets of any Reorganization Party are subject, nor do
or will such actions result in any violation of the provisions of the
charter, by-laws or other formation documents of any Reorganization
Party or any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having jurisdiction
over any Reorganization Party or any of its properties or assets; and
no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body was or
is required for the execution, delivery and performance of the Credit
Agreement and the Reorganization Agreements to which it is party by
each Reorganization Party and the consummation of the transactions
contemplated thereby and by the Reorganization;
(xiv) The Reorganization has been
consummated in conformity with the description thereof contained in the
Prospectus and as contemplated by the IRS Ruling; and
(xv) To the best of such counsel's
knowledge, there are no contracts, agreements or understandings between
the Company and any
<PAGE> 24
24
person granting such person the right (other than as set forth in the
Prospectus) to require the Company to file a registration statement
under the Securities Act with respect to any securities of the Company
owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant
to any other registration statement filed by the Company under the
Securities Act.
In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the Federal laws of the United States
of America, the laws of the State of New York and General Corporation Law of the
State of Delaware and that such counsel is not admitted in the State of
Delaware. Such counsel shall also have furnished to the Representatives a
written statement, addressed to the Underwriters and dated such Delivery Date,
in form and substance satisfactory to the Representatives, to the effect that
(x) such counsel has acted as counsel to the Company on a regular basis and has
acted as counsel to the Company in connection with the preparation of the
Registration Statement, and (y) based on the foregoing, no facts have come to
the attention of such counsel which lead it to believe that the Registration
Statement, as of the Effective Date, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, or that the
Prospectus contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The foregoing opinion and statement may be qualified by a
statement to the effect that such counsel does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus except for the statements identified in
paragraphs (iii) and (ix) above, insofar as such statements relate to the Stock
and concern legal matters.
(f) The Representatives shall have received from Paul, Weiss,
Rifkind, Wharton & Garrison, counsel for the Underwriters, such opinion or
opinions, dated such Delivery Date, with respect to the issuance and sale of the
Stock, the Registration Statement, the Prospectus and other related matters as
the Representatives may reasonably require, and the Company shall have furnished
to such counsel such documents as it reasonably requests for the purpose of
enabling it to pass upon such matters.
(g) At the time of execution of this Agreement, the
Representatives shall have received from BDO Siedman, LLP a letter, in form and
<PAGE> 25
25
substance satisfactory to the Representatives, addressed to the Underwriters and
dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance with
the applicable requirements relating to the qualification of accountants under
Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date hereof), the
conclusions and findings of such firm with respect to the financial information
and other matters ordinarily covered by accountants' "comfort letters" to
underwriters in connection with registered public offerings.
(h) With respect to the letter of BDO Siedman, LLP referred to
in the preceding paragraph and delivered to the Representatives concurrently
with the execution of this Agreement (the "initial letter"), the Company shall
have furnished to the Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such Delivery Date (i)
confirming that they are independent public accountants within the meaning of
the Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission, (ii) stating, as of the date of the bring-down letter (or,
with respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the Prospectus, as
of a date not more than three days prior to the date of the bring-down letter),
the conclusions and findings of such firm with respect to the financial
information and other matters covered by the initial letter and (iii) confirming
in all material respects the conclusions and findings set forth in the initial
letter.
(i) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating that:
(i) The representations, warranties and
agreements of the Company in Section 1 are true and correct as of such
Delivery Date; the Company has complied with all its agreements
contained herein; and the conditions set forth in Sections 9(a) and
9(k) have been fulfilled; and
(ii) They have carefully examined the
Registration Statement and the Prospectus and, in their opinion (A) as
of the Effective Date, the Registration Statement and Prospectus did
not include any untrue statement of a material fact and did not omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and
<PAGE> 26
26
(B) since the Effective Date no event has occurred which should have
been set forth in a supplement or amendment to the Registration
Statement or the Prospectus.
(j) Each Principal Stockholder shall have furnished to the
Representatives on each Delivery Date a certificate, dated such Delivery Date,
signed by, or on behalf of, each Principal Stockholder stating that the
representations, warranties and agreements of such Principal Stockholder
contained herein are true and correct as of such Delivery Date and that such
Principal Stockholder has complied with all agreements contained herein to be
performed by such Principal Stockholder at or prior to such Delivery Date.
(k) (i) The Company shall not have sustained since the date of
the latest audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus or (ii) since such date there shall not have been
any change in the capital stock or long-term debt of the Company or any change,
or any development which could reasonably be expected to involve a prospective
change, in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company, otherwise than as
set forth or contemplated in the Prospectus, the effect of which, in any such
case described in clause (i) or (ii), is, in the judgment of the
Representatives, so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Stock
being delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(l) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or in the over-the-counter market, or
trading in any securities of the Company on any exchange or in the
over-the-counter market, shall have been suspended or minimum prices shall have
been established on any such exchange or such market by the Commission, by such
exchange or by any other regulatory body or governmental authority having
jurisdiction, (ii) a banking moratorium shall have been declared by Federal or
state authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities involving the
United States or there shall have been a declaration of a national emergency or
war by the United States or (iv) there shall have occurred such a material
adverse change in general economic, political or financial conditions (or the
effect of international conditions on the financial markets in the United States
shall be
<PAGE> 27
27
such) as to make it, in the judgment of a majority in interest of the several
Underwriters, impracticable or inadvisable to proceed with the public offering
or delivery of the Stock being delivered on such Delivery Date on the terms and
in the manner contemplated in the Prospectus.
(m) The New York Stock Exchange, Inc. shall have approved the
Stock for listing, subject only to official notice of issuance and evidence of
satisfactory distribution.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
10. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each
Underwriter, its officers and employees and each person, if any, who controls
any Underwriter within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of Stock), to which that Underwriter,
officer, employee or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (B) in any materials or information provided to investors by, or
with the approval of, the Company in connection with the marketing of the
offering of the Stock ("Marketing Materials"), including any roadshow or
investor presentations made to investors by the Company (whether in person or
electronically), (ii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, or in any Marketing Materials, or in any Blue
Sky Application any material fact required to be stated therein or necessary to
make the statements therein not misleading or (iii) any act or failure to act or
any alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Stock or the offering contemplated hereby, and
which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon matters covered by clause (i)
or (ii) above (provided that the Company shall not be liable under this clause
(iii) to the extent that it is determined in a final judgment by a court of
competent jurisdiction that such loss, claim, damage, liability or action
resulted directly
<PAGE> 28
28
from any such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its gross negligence or willful misconduct), and shall
reimburse each Underwriter and each such officer, employee or controlling person
promptly upon demand for any legal or other expenses reasonably incurred by that
Underwriter, officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of, or is based upon,
any untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any such amendment or supplement, in reliance upon and in
conformity with written information concerning such Underwriter furnished to the
Company through the Representatives by or on behalf of any Underwriter
specifically for inclusion therein which information consists solely of the
information specified in Section 9(g); and provided further that the foregoing
indemnity agreement with respect to any Preliminary Prospectus, the Prospectus
or in any amendment or supplement thereto shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased Stock, or any person controlling such Underwriter, if a
copy of the Prospectus (as then amended or supplemented, if the Company shall
have made any amendments or supplements) was not sent or given by or on behalf
of such Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of Stock to such
person, and if the Prospectus (as so amended or supplemented) would have cured
the defect giving rise to such loss, claim, damage or liability, unless such
failure to send or give was the result of noncompliance by the Company with
Section 6(c) hereof. The foregoing indemnity agreement is in addition to any
liability which the Company may otherwise have to any Underwriter or to any
officer, employee or controlling person of that Underwriter.
(b) The Principal Stockholders, jointly and severally, shall
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof (including, but not limited to, any
loss, claim, damage, liability or action relating to purchases and sales of
Stock), to which that Underwriter, officer, employee or controlling person may
become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto, (ii) the omission or alleged omission to
<PAGE> 29
29
state in any Preliminary Prospectus, Registration Statement or the Prospectus,
or in any amendment or supplement thereto, any material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Stock or the
offering contemplated hereby, and which is included as part of or referred to in
any loss, claim, damage, liability or action arising out of or based upon
matters covered by clause (i) or (ii) above (provided that the Principal
Stockholders shall not be liable under this clause (iii) to the extent that it
is determined in a final judgment by a court of competent jurisdiction that such
loss, claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its gross negligence or willful misconduct), and shall reimburse each
Underwriter, its officers and employees and each such controlling person for any
legal or other expenses reasonably incurred by that Underwriter, its officers
and employees or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that the Principal
Stockholders shall not be liable in any such case to the extent that any such
loss, claim, damage, liability or action arises out of, or is based upon, any
untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the Prospectus
or in any such amendment or supplement in reliance upon and in conformity with
written information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of any Underwriter specifically for
inclusion therein which information consists solely of the information specified
in Section 9(g). The foregoing indemnity agreement is in addition to any
liability which the Principal Stockholders may otherwise have to any Underwriter
or any officer, employee or controlling person of that Underwriter.
(c) Each Underwriter, severally and not jointly, shall
indemnify and hold harmless the Company, its officers and employees, each of its
directors (including any person who, with his or her consent, is named in the
Registration Statement as about to become a director of the Company), each
Principal Stockholder, and each person, if any, who controls the Company within
the meaning of the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the
Company or any such director, officer, Principal Stockholder or controlling
person may become subject, under the Securities Act or otherwise, insofar as
such loss, claim, damage, liability or action arises out of, or is based upon,
(i) any untrue statement or alleged untrue statement of a material fact
contained (A) in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (B) in any Blue Sky
Application or (ii) the omission or alleged omission to state in any Preliminary
<PAGE> 30
30
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information concerning such Underwriter furnished to the
Company through the Representatives by or on behalf of that Underwriter
specifically for inclusion therein, and shall reimburse the Company and any such
director, officer, Principal Stockholder or controlling person for any legal or
other expenses reasonably incurred by the Company or any such director, officer,
Principal Stockholder or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred. The foregoing indemnity agreement is in
addition to any liability which any Underwriter may otherwise have to the
Company or any such director, officer, employee, Principal Stockholder or
controlling person.
(d) Promptly after receipt by an indemnified party under this
Section 10 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 10.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Company or any Principal Stockholder under this Section 10 if, in
the reasonable judgment of the Representatives, it is advisable for the
<PAGE> 31
31
Representatives and those Underwriters, officers, employees and controlling
persons to be jointly represented by separate counsel, and in that event the
fees and expenses of such separate counsel shall be paid by the Company. No
indemnifying party shall (i) without the prior written consent of the
indemnified parties (which consent shall not be unreasonably withheld), settle
or compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding, or (ii) be liable for any settlement of any such action
effected without its written consent (which consent shall not be unreasonably
withheld), but if settled with the consent of the indemnifying party or if there
be a final judgment of the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment.
(e) If the indemnification provided for in this Section 10
shall for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 10(a), 10(b) or 10(c) in respect of any loss,
claim, damage or liability, or any action in respect thereof, referred to
therein, then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in respect
thereof, (i) in such proportion as shall be appropriate to reflect the relative
benefits received by the Company and the Principal Stockholders on the one hand
and the Underwriters on the other from the offering of the Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Principal Stockholders on the one hand and the Underwriters on the other
with respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Principal Stockholders on the one hand and the Underwriters on the other with
respect to such offering shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Stock purchased under this Agreement
(before deducting expenses) received by the Company and the Principal
Stockholders on the one hand and the total underwriting discounts and
commissions received by the Underwriters with respect to the shares of the Stock
purchased under this Agreement on the other hand bear to the total gross
proceeds from the offering of the shares of the Stock under this Agreement, in
each case as set forth in the table on the cover page of
<PAGE> 32
32
the Prospectus. The relative fault shall be determined by reference to whether
the untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Principal Stockholders or the Underwriters, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Principal
Stockholders and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section shall be deemed to
include, for purposes of this Section 10(e), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 10(e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Stock underwritten by
it and distributed to the public was offered to the public exceeds the amount of
any damages which such Underwriter has otherwise paid or become liable to pay by
reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 9(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 10(e) are
several in proportion to their respective underwriting obligations and not
joint.
(f) Without limiting the Company's agreements under this
Section 10 in any manner, no Principal Stockholder shall be liable in any such
case in respect of any such losses, claims, damages, liabilities or expenses
unless the Underwriter who has the right to indemnification or contribution
hereunder and is seeking indemnification or contribution from such Principal
Stockholder shall have previously sought indemnification or contribution from
the Company in respect thereof and the Company shall have failed to honor and
pay such Underwriter's claim for indemnification or contribution within 30
calendar days of the date such indemnification or contribution is first sought
against the Company (except that the foregoing condition precedent requiring an
Underwriter to so seek indemnification or contribution from the Company (i)
shall not be applicable if an Underwriter has previously sought indemnification
or contribution from the Company with respect to such matters or if such
Underwriter is prohibited from being indemnified by or receiving contribution
from the Company (or from seeking such indemnification or contribution) by the
effect of any order, decree, stay, injunction, statute, legal process or other
matter of law and
<PAGE> 33
33
(ii) shall not limit the right of an Underwriter at any time to notify a
Principal Stockholder of a claim for indemnification or contribution or
otherwise initiate a claim or proceeding against a Principal Stockholder for
indemnification or contribution prior to the expiration of such 30 calendar
days, but only and solely to the extent necessary to prevent any applicable
statute of limitations from expiring).
(g) The Underwriters severally confirm and the Company
acknowledges that the statements with respect to the public offering of the
Stock by the Underwriters set forth on the cover page of, and the concession and
reallowance figures appearing under the caption "Underwriting" in, the
Prospectus are correct and constitute the only information concerning such
Underwriters furnished in writing to the Company by or on behalf of the
Underwriters specifically for inclusion in the Registration Statement and the
Prospectus.
11. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining
non-defaulting Underwriter shall not be obligated to purchase more than 110% of
the number of shares of the Stock which it agreed to purchase on such Delivery
Date pursuant to the terms of Section 3. If the foregoing maximums are exceeded,
the remaining non-defaulting Underwriters, or those other underwriters
satisfactory to the Representatives who so agree, shall have the right, but
shall not be obligated, to purchase, in such proportion as may be agreed upon
among them, all the Stock to be purchased on such Delivery Date. If the
remaining Underwriters or other underwriters satisfactory to the Representatives
do not elect to purchase the shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such Delivery Date, this Agreement
(or, with respect to the Second Delivery Date, the obligation of the
Underwriters to purchase, and of the Company to sell, the Option Stock), shall
terminate without liability on the part of any non-defaulting Underwriter,
<PAGE> 34
34
the Company or the Principal Stockholders, except that the Company will continue
to be liable for the payment of expenses to the extent set forth in Sections 8
and 13. As used in this Agreement, the term "Underwriter" includes, for all
purposes of this Agreement unless the context requires otherwise, any party not
listed in Schedule 1 hereto who, pursuant to this Section 11, purchases Firm
Stock which a defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company and the Principal Stockholders for damages
caused by its default. If other underwriters are obligated or agree to purchase
the Stock of a defaulting or withdrawing Underwriter, either the Representatives
or the Company may postpone the Delivery Date for up to seven full business days
in order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
12. Termination. The obligations of the Underwriters hereunder may be
terminated by the Representatives by notice given to and received by the Company
and the Principal Stockholders prior to delivery of and payment for the Firm
Stock if, prior to that time, any of the events described in Sections 9(k) or
9(l) shall have occurred or if the Underwriters shall decline to purchase the
Stock for any reason permitted under this Agreement.
13. Reimbursement of Underwriters' Expenses. If (a) the Company shall
fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company or any of the Principal
Stockholders to perform any agreement on its part to be performed, or because
any other condition of the Underwriters' obligations hereunder required to be
fulfilled by the Company or any of the Principal Stockholders is not fulfilled,
the Company and the Principal Stockholders will reimburse the Underwriters for
all reasonable out-of-pocket expenses (including fees and disbursements of
counsel) incurred by the Underwriters in connection with this Agreement and the
proposed purchase of the Stock, and upon demand the Company and the Principal
Stockholders shall pay the full amount thereof to the Representatives. If this
Agreement is terminated pursuant to Section 12 by reason of the default of one
or more Underwriters, neither the Company nor any Principal Stockholder shall be
obligated to reimburse any defaulting Underwriter on account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
<PAGE> 35
35
(a) if to the Underwriters, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate Department
(Fax: 212-526-6588), with a copy, in the case of any notice pursuant to Section
10(d), to the Director of Litigation, Office of the General Counsel, Lehman
Brothers Inc., Three World Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company shall be delivered or sent by mail,
telex or facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Michael W. Katz, Executive Vice President and
Chief Financial Officer.
(c) if to any Principal Stockholders, shall be delivered or
sent by mail, telex or facsimile transmission to such Principal Stockholder at
the address set forth on Schedule 2 hereto;
provided, however, that any notice to an Underwriter pursuant to Section 10(d)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and the
Principal Stockholders shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Underwriters by
Lehman Brothers Inc. and the Company and the Underwriters shall be entitled to
act and rely upon any request, consent, notice or agreement given or made on
behalf of the Principal Stockholders by Glenn Nussdorf.
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, the
Principal Stockholders and their respective personal Representatives and
successors. This Agreement and the terms and provisions hereof are for the sole
benefit of only those persons, except that (A) the representations, warranties,
indemnities and agreements of the Company and the Principal Stockholders
contained in this Agreement shall also be deemed to be for the benefit of the
person or persons, if any, who control any Underwriter within the meaning of
Section 15 of the Securities Act and (B) the indemnity agreement of the
Underwriters contained in Section 10(c) of this Agreement shall be deemed to be
for the benefit of directors of the Company, officers of the Company who have
signed the Registration Statement and any person controlling the Company within
the meaning of Section 15 of the Securities Act. Nothing in this Agreement is
intended or shall be construed to give any person, other than the persons
<PAGE> 36
36
referred to in this Section 15, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
16. Survival. The respective indemnities, representations, warranties
and agreements of the Company, the Principal Stockholders and the Underwriters
contained in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall survive the delivery of and payment for the
Stock and shall remain in full force and effect, regardless of any investigation
made by or on behalf of any of them or any person controlling any of them.
17. Definition of the Terms "Business Day" and "Subsidiary." For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF NEW YORK.
Each party irrevocably agrees that any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City of New York or the courts of the
State of New York in each case located in the Borough of Manhattan in the City
of New York (collectively, the "Specified Courts"), and irrevocably submits to
the exclusive jurisdiction (except for proceedings instituted in regard to the
enforcement of a judgment of any such court (a "Related Judgment"), as to which
such jurisdiction is non-exclusive) of such courts in any such suit, action or
proceeding. The parties further agree that service of any process, summons,
notice or document by mail to such party's address set forth above shall be
effective service of process for any lawsuit, action or other proceeding brought
in any such court. The parties hereby irrevocably and unconditionally waive any
objection to the laying of venue of any lawsuit, action or other proceeding in
the Specified Courts, and hereby further irrevocably and unconditionally waive
and agree not to plead or claim in any such court that any such lawsuit, action
or other proceeding brought in any such court has been brought in an
inconvenient forum.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
<PAGE> 37
37
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
<PAGE> 38
If the foregoing correctly sets forth the agreement, the Principal
Stockholders and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
QK HEALTHCARE, INC.
By
Name:
Title:
The Principal Stockholders:
Glenn Nussdorf, as Trustee under (i) the
Indenture dated November 1, 1998 creating the
Stephen Nussdorf November 1, 1998 trust (the
"Stephen Nussdorf November 1, 1998 Trust
Indenture"), (ii) the Indenture dated
November 2, 1998 creating the Stephen
Nussdorf November 2, 1998 trust (the "Stephen
Nussdorf November 2, 1998 Trust Indenture"),
(iii) the Indenture dated November 1, 1998
creating the Arlene Nussdorf November 1, 1998
trust (the "Arlene Nussdorf November 1, 1998
Trust Indenture"), and (iv) the Indenture
dated November 2, 1998 creating the Arlene
Nussdorf November 2, 1998 trust (the "Arlene
Nussdorf November 2, 1998 Trust Indenture")
<PAGE> 39
Stephen Nussdorf, as Trustee under (i) the
Indenture dated November 1, 1998 creating the
Glenn Nussdorf November 1, 1998 trust (the
"Glenn Nussdorf November 1, 1998 Trust
Indenture"), (ii) the Indenture dated
November 2, 1998 creating the Glenn Nussdorf
November 2, 1998 trust (the "Glenn Nussdorf
November 2, 1998 Trust Indenture"), (iii) the
Arlene Nussdorf November 1, 1998 Trust
Indenture, and (iv) the Arlene Nussdorf
November 2, 1998 Trust Indenture
Arlene Nussdorf, as Trustee under (i) the
Glenn Nussdorf November 1, 1998 Trust
Indenture, (ii) the Glenn Nussdorf November
2, 1998 Trust Indenture, (iii) the Stephen
Nussdorf November 1, 1998 Trust Indenture,
and (iv) the Stephen Nussdorf November 2,
1998 Trust Indenture
<PAGE> 40
Accepted:
Lehman Brothers Inc.
Credit Suisse First Boston Corporation
Salomon Smith Barney Inc.
By: Lehman Brothers Inc.
By
-------------------------
Authorized Representative
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
<PAGE> 41
SCHEDULE 1
<TABLE>
<S> <C>
Number of Underwriters Shares:
Lehman Brothers Inc.
Credit Suisse First Boston Corporation
Salomon Smith Barney Inc.
Total
</TABLE>
<PAGE> 42
SCHEDULE 2
Names and addresses of Principal Stockholders:
1. Stephen Nussdorf and Arlene Nussdorf, as Trustees under the Indenture
dated November 1, 1998 creating the Glenn Nussdorf November 1, 1998
trust (the "Glenn Nussdorf November 1, 1998 Trust Indenture").
2. Stephen Nussdorf and Arlene Nussdorf, as Trustees under the Indenture
dated November 2, 1998 creating the Glenn Nussdorf November 2, 1998
trust (the "Glenn Nussdorf November 2, 1998 Trust Indenture").
3. Glenn Nussdorf and Arlene Nussdorf, as Trustees under the Indenture
dated November 1, 1998 creating the Stephen Nussdorf November 1, 1998
trust (the "Stephen Nussdorf November 1, 1998 Trust Indenture").
4. Glenn Nussdorf and Arlene Nussdorf, as Trustees under the Indenture
dated November 2, 1998 creating the Stephen Nussdorf November 2, 1998
trust (the "Stephen Nussdorf November 2, 1998 Trust Indenture").
5. Glenn Nussdorf and Stephen Nussdorf, as Trustees under the Indenture
dated November 1, 1998 creating the Arlene Nussdorf November 1, 1998
trust (the "Arlene Nussdorf November 1, 1998 Trust Indenture").
6. Glenn Nussdorf and Stephen Nussdorf, as Trustees under the Indenture
dated November 2, 1998 creating the Arlene Nussdorf November 2, 1998
trust (the "Arlene Nussdorf November 2, 1998 Trust Indenture").
Address of all the Principal Stockholders:
2060 Ninth Avenue
Ronkonkoma, NY 11779
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
QKRX 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 QKRX Inc.
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 6th day of December, 1999.
/s/ Michael Katz
__________________________
Michael Katz
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<PAGE> 1
Exhibit 5.1
[LETTERHEAD OF E&A]
January 31, 2000
QK Healthcare, Inc.
2060 Ninth Avenue
Ronkonkoma, New York 11779
Ladies and Gentlemen:
We have acted as counsel to QK Healthcare, Inc., a Delaware corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), of a Registration Statement (the "Registration Statement") on Form
S-1 (Reg. No. 333-88769) relating to the public offering by the Company of an
aggregate of 15,410,000 shares (including 2,010,000 shares subject to an
over-allotment option) of the Company's common stock, $.001 par value per share
(the "Common Stock").
In the above capacity and for the purposes of rendering the opinions set
forth below, we have examined and relied upon executed copies of the
Registration Statement and upon copies of the related prospectus, dated the date
hereof (the "Prospectus"). We have also examined and relied upon: (a) the
Amended and Restated Certificate of Incorporation of the Company; (b) the
By-laws of the Company; (c) originals or copies of all such corporate records,
certificates of officers and/or other representatives of the Company and/or
public officials and other documents and instruments as we have deemed necessary
or appropriate for purposes of rendering the opinions set forth below.
In our examination, we have assumed, without investigation or independent
verification, the legal capacity of all natural persons, the genuineness of all
signatures, the authority of all signatories (other than those signing on behalf
of the Company), the authenticity of all documents submitted to us as originals,
the conformity with original documents of all documents submitted to us as
copies and the authenticity of such original documents. As to any other facts
material to the opinions expressed herein that were not independently
established or verified by
<PAGE> 2
us, we have relied upon statements or representations of officers and/or other
representatives of the Company.
We are qualified to practice law in the State of New York. We express no
opinion as to, and, for the purposes of the opinions set forth herein, we have
conducted no investigation of, and do not purport to be experts on, any laws
other than the laws of the State of New York and, to the extent expressly set
forth herein, the federal laws of the United States of America and the State of
Delaware. While we are not admitted to the Bar in Delaware, based upon our
practice or representation of corporations incorporated under the laws of the
State of Delaware, we believe that we have the requisite familiarity to render
the opinions set forth herein insofar as they relate to matters governed by
Delaware General Corporation Law (the "DGCL"), the applicable provisions of the
Delaware Constitution and the reported decisions interpreting of the DGCL and
the applicable provisions of the Delaware Constitution.
Based upon the foregoing examination, and subject to the assumptions,
limitations, qualifications and exceptions set forth herein, we are of the
opinion that, as of the date hereof:
1. The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware.
2. The shares of Common Stock have been duly authorized by the
Company and, when issued and paid for as contemplated by the Registration
Statement, will be duly and validly issued and fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement. In giving this consent, we do not admit that we are
acting within the category of persons whose consent is required under Section 7
of the Act.
Very truly yours,
EDWARDS & ANGELL, LLP
By /s/ Christine M. Marx
----------------------------------
Christine M. Marx
Partner
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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 [ ], 2000 (the
"Effective Date") and shall expire on [ ], 2005 (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 10.04, 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 10.04, 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 10.01, 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 10.06, the
indemnification rights of each Indemnified Party pursuant to Section 10.01,
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 11.14
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 1.0% 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 10.4
QK HEALTHCARE, INC.
2000 STOCK OPTION PLAN
1. NAME AND PURPOSE. This Plan shall be known as the QK Healthcare,
Inc. 2000 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 4,900,000 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, a declaration of an extraordinary dividend
payment in a form other than shares in an amount that has a material effect on
the fair market value of the Common Shares or other increase or reduction in the
number of Common Shares outstanding, without receiving compensation therefor in
money, services or property, the Board shall make appropriate adjustments in one
or more of (i) the number of Common Shares available for future grant under
Section 5 hereof, (ii) the number of Common Shares covered by each outstanding
option or the exercise price under each outstanding option.
(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_____________, 2000 , 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. 2000 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 3 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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date with the consent of the Corporation) from or termination of employment, for
reason other than Cause (except as provided in subsection 4(a)(ii) and 4(a)(iii)
below), 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 36 months after the Employee dies: (A) while he is employed
by the Corporation, (B) within 3 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 17),
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) Ninety days after the Employee voluntarily terminates his or her
employment with the Corporation;
(d) Thirty-six months after the Employee dies: (i) while an employee,
(ii) within three months after termination of employment on account of
retirement or (iii) within twelve months after termination of employment on
account of his disability (within the meaning of Section 22(e)(3) of the
Internal Revenue Code) 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; or
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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. 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.
11. 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.
12. 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 12(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
12(a) shall be of no effect.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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 six months
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
- 10 -
<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 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 Employee acknowledges that the covenants in this Section 17:
(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 17
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 six months
following termination of the Employee's employment stated at the beginning of
this Section 17, during which the agreements and covenants of the Employee made
in this Section 17 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 17.
18. 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. 2000 Stock Option Plan (the "Plan"), and
pursuant to an Incentive Stock Option Agreement dated ___________, 2000, 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_____________, 2000, 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. 2000 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 3 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 (except as provided in subsection 4(a)(ii) and 4(a)(iii)
below), 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 36 months after the Employee dies: (A) while he is employed
by the Corporation, (B) within 3 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 39 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 24th 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) Notwithstanding Section 6(d) above, 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. The Corporation shall pay all registration expenses incurred in
filing a Registration Statement on Form S-3 except underwriting discounts and
commissions and the expenses of Employee's legal counsel.
(g) Notwithstanding Section 6(d) above, if the Corporation files a
Registration Statement on Form S-3 or any other similar short-form registration
statement with respect to shares of Common Stock to be sold by the Corporation
within 36 months of the Corporation's initial public offering, the Optionee
shall have the right to sell up to 25% of the Optionee's aggregate initial
Option Shares pursuant to the registration statement. This right shall be
limited to the extent that the managing underwriter determines that the
inclusion of such additional shares will interfere with the orderly sale of the
underwritten Common Stock at a price range acceptable to the Corporation. The
Corporation shall pay all registration expenses incurred in filing a
Registration Statement on Form S-3 except underwriting discounts and commissions
and the expenses on Optionee's legal counsel.
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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 17
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) Ninety days after the Employee voluntarily terminates his or
her employment with the Corporation;
(d) Thirty-six months after the Employee dies: (i) while an employee,
(ii) within three months after termination of employment on account of
retirement or (iii) within twelve months after termination of employment on
account of his disability (within the meaning of Section 22(e)(3) of the
Internal Revenue Code) 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. 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.
11. 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.
12. 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 12(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 12(a) shall be of no effect.
13. 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
14. 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.
15. 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.
16. 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.
17. 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 six months
immediately following the termination of the Employee's employment for any
reason whatsoever other than termination by the Corporation
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<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.
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<PAGE> 12
(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 Employee acknowledges that the covenants in this Section 17: (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 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 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 six
months following termination of the Employee's employment stated at the
beginning of this Section 17, during which the agreements and covenants of the
Employee made in this Section 17 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 17.
18. 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.
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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
Form of Exercise
The undersigned employee of QK Healthcare, Inc. (the "Corporation"),
pursuant to the QK Healthcare, Inc. 2000 Stock Option Plan (the "Plan"), and
pursuant to an Incentive Stock Option Agreement dated , 2000, 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. 2000 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
hereby granted shall expire 30 days after delivery of this Agreement to the
Employee unless the employee signs and returns this Agreement to the Corporation
within such 30 days. 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 in accordance with
the provisions of Section 8 below.
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 39 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 24th 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) Notwithstanding Section 6(a) above, 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. The Corporation shall pay all registration expenses incurred in a
filing a Registration Statement on Form S-3 except underwriting discounts and
commissions and expenses of Optionee's legal counsel.
(d) Notwithstanding Section 6(a) above, if the Corporation files a
Registration Statement on Form S-3 or any other similar short-form registration
statement with respect to shares of Common Stock to be sold by the Corporation
within 36 months of the Corporation's initial public offering, the Optionee
shall have the right to sell up to 25% of the Optionee's aggregate initial
Option Shares pursuant to the registration statement. This right shall be
limited to the extent that the managing underwriter determines that the
inclusion of such additional shares will interfere with the orderly sale of the
underwritten Common Stock at a price range acceptable to the Corporation. The
Corporation shall pay all registration expenses incurred in filing a
Registration Statement on Form S-3 except underwriting discounts and commissions
and the expenses of Optionee's legal counsel.
7. Assumption of Options. Subject to the provisions of Section 8, upon
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 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 5, 6(a) and 17), 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) Thirty-six 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) Thirty six months 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) Thirty-six months after: (i) the retirement of the Optionee; (ii) the
termination of employment with the Corporation on account of
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<PAGE> 6
disability (within the meaning of Section 22(e)(3) of the Internal Revenue
Code), 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 (iii) the death of the Optionee while an
employee of the Corporation; or
(e) Ten years after 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 six months 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 six
months 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._______________________________
-12-
<PAGE> 13
QK HEALTHCARE, INC.
EXHIBIT A
Form of Exercise
The undersigned, pursuant to the QK Healthcare, Inc. 2000 Stock Option
Plan (the "Plan") and pursuant to a Non-Qualified Stock Option Agreement
dated_______________, 2000, 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: (i)
<PAGE> 2
a non-qualified stock option to purchase 1,000,000 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; (ii) a
non-qualified stock option to purchase 235,000 shares of Common Stock at an
exercise price equal to the IPO Price and (iii) a qualified stock option to
purchase 65,000 shares of Common Stock at an exercise price equal to the IPO
Price. The options shall have a term of 10 years except as otherwise provided in
the stock option agreements 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 agreements between the Company and the
Executive in the forms 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
- 2 -
<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
- 3 -
<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 until the fourth anniversary of the effective date of the
Company's initial public offering.
(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,
- 4 -
<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.
- 5 -
<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
- 6 -
<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 January 5,
2000, except for the reorganization discussed in Note 1 which is as of
, 2000, relating to the financial statements of QK Healthcare,
Inc., which is contained in that Prospectus, and of our report dated January 5,
2000, 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
January 31, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET OF QK HEALTHCARE, INC. AS OF OCTOBER 31, 1999 AND THE AUDITED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 108,676
<ALLOWANCES> 1,071
<INVENTORY> 279,067
<CURRENT-ASSETS> 391,665
<PP&E> 855
<DEPRECIATION> 599
<TOTAL-ASSETS> 391,921
<CURRENT-LIABILITIES> 391,898
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 391,921
<SALES> 1,012,818
<TOTAL-REVENUES> 1,012,818
<CGS> 942,058
<TOTAL-COSTS> 942,058
<OTHER-EXPENSES> 15,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,737
<INCOME-PRETAX> 34,578
<INCOME-TAX> 237
<INCOME-CONTINUING> 34,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,341
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
