<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1999 Commission File Number 0-20348
D & K HEALTHCARE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1465483
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8000 Maryland Avenue, Suite 920, St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 727-3485
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /x/
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: approximately $72,572,584 as of September 15,
1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of September 15,
1999, 4,382,831 shares of Common Stock, par value $.01, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
the Part of this report indicated below:
Part II - Registrant's 1999 Annual Report to Stockholders
Part III - Registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders
<PAGE> 2
PART I
Item 1. Business
OVERVIEW
The Company is the leading publicly held regional wholesale distributor
of pharmaceutical and related healthcare and beauty aid products in the United
States. It serves more than 900 retail and institutional customers in 24 states
primarily in the Midwest and South. The Company also offers a variety of
value-added services to its customers, particularly in the areas of cost
containment and inventory management. The Company had net sales of $815.3
million in fiscal 1999, of which 47% were to independent pharmacies, 26% were to
retail chains, including national pharmacy chains and the pharmacy departments
of supermarkets and mass merchandisers, and 27% were to healthcare institutions,
including hospitals, alternate site care facilities, pharmacy benefit management
companies and managed care organizations. The Company operates from highly
efficient and cost effective distribution facilities in Cape Girardeau,
Missouri; Lexington, Kentucky; Minneapolis, Minnesota; as well as from
facilities in Aberdeen and Sioux Falls, South Dakota, resulting from the Jewett
Drug Co. ("Jewett") acquisition. On June 1, 1999, the Company consummated the
acquisition of 100% of the outstanding stock of Jewett, a pharmaceutical
distribution company based in Aberdeen, South Dakota that provides comprehensive
pharmaceutical distribution services to over 250 customers in the Upper Midwest
and Great Plains region. The aggregate purchase price for this acquisition of
$34.3 million consisted of $21.5 million in cash and $12.8 million (555,556
shares) of the Company's common stock.
Since its formation in 1987, the Company has expanded the scope and
breadth of its business by consistently providing the highest levels of service
to its customers and suppliers. The Company achieves such high levels of service
by (i) providing its customers with a full continuum of products, value-added
services and support, which enable its customers to compete more effectively;
(ii) focusing on flexibility, which allows the Company to respond quickly to
change and to customize systems to meet its customers' and suppliers'
requirements; (iii) strategically locating the Company's distribution centers
and satellite transfer depots throughout the Midwest and the South, which
enables the Company to ship products to and service its customers promptly and
efficiently; and (iv) attracting and motivating experienced and entrepreneurial
management personnel, who continually seek to improve and expand the Company's
business.
In 1996, management of the Company initiated a plan to reposition the
Company and significantly improve operating performance. This plan included: (i)
identifying and focusing the Company's efforts on high-growth niche markets;
(ii) centralizing certain management functions, including purchasing, marketing
and information systems at its corporate offices, while decentralizing
executive, sales and operating functions at each of its independently managed
profit centers, including its three regional distribution centers; (iii)
enhancing the depth and breadth of the Company's management team; (iv) creating
new management and employee incentive plans; (v) upgrading the Company's
facilities; and (vi) enhancing the Company's corporate image. Since implementing
these strategic initiatives, net sales and net income have grown in each of the
last 13 fiscal quarters compared to the same periods in the prior years.
The Company believes that its regional-market focus and high level of
customer service provide it with competitive advantages and position it to
benefit from trends impacting the industry. Management believes that the
increasing size of the wholesale pharmaceutical industry's larger national
participants hampers the ability of these companies to deliver customized
services to most of their customers. The Company has successfully differentiated
itself from its national competitors through its ability to provide flexible and
customized services to its targeted customer segments. The Company has
demonstrated its ability to work with customers to eliminate waste from the
supply chain. In addition, healthcare providers' need for value-added services
which help contain costs and effectively manage inventory has given the Company
the opportunity to capitalize on its cost competitiveness and advanced systems.
The location and quality of the Company's distribution facilities and satellite
transfer depots in the Midwest and South allow the Company to service its
customers' and suppliers' needs promptly and efficiently. The Company has
capitalized on the increased demand for alternate care providers through its
investment in Pharmaceutical Buyers, Inc. ("PBI") in fiscal 1996. PBI is one of
the nation's leading alternate site group purchasing organizations, and the
Company's investment in PBI provides it with access to a higher margin business
segment and insight into alternate site distribution.
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The wholesale pharmaceutical distribution industry has experienced
rapid sales growth over the past 12 years, increasing from approximately $14.0
billion in sales in 1985 to more than $77.4 billion in 1998. The Company
believes that there are several major trends currently affecting the industry,
including: (i) continued consolidation of national and regional wholesale drug
distribution companies; (ii) an increasing emphasis on value-added services that
lower healthcare providers' administrative and other costs associated with
medical supply management; (iii) the growing importance of an efficient
distribution model as customers become more cost conscious; and (iv) a shift in
the delivery of healthcare services from acute care settings to alternate sites,
including physician offices and extended care facilities. In addition, the aging
population, the increase in research and development spending by pharmaceutical
manufacturers and an increase in direct-to-consumer advertising are all
positively impacting pharmaceutical demand.
PRODUCTS, SERVICES AND VALUE ADDED MARKETING SYSTEMS
The Company's product line consists of more than 25,000 SKUs (stock
keeping units), including branded pharmaceuticals, multi-source generics,
private label products, repackaged pharmaceutical products and over-the counter
health and beauty aids. The Company sells branded pharmaceuticals (approximately
90% of net sales in fiscal 1999), generic pharmaceuticals (approximately 5.0% of
net sales in fiscal 1999) and over-the-counter health and beauty aids
(approximately 5.0% of net sales in fiscal 1999). In addition, through its
Tykon, Inc. subsidiary (acquired September 1998), the Company developed and
markets a proprietary PC based order entry/order confirmation system to the drug
distribution industry.
The Company strives to offer services which enhance the operating
efficiencies of its customers and assist them in competing effectively.
Principal elements in the Company's service offerings to its customers include:
(i) RESOURCESM, a proprietary PC based order entry/order confirmation system
that completely automates all order creation, transmission and confirmation
operations; (ii) PARTNERSSM, a fully automated and customizable replenishment
software system which helps pharmacies more efficiently coordinate product
supply and demand; (iii) RESOURCE HQSM, a contract management and reporting
software system designed for group purchasing and managed care organizations,
and retail chains which automates functions relating to corporate and group
contracts; and (iv) SCRIPTMASTER(R), a pharmacy management software system that
provides prescription management functions, drug and allergy checks,
instantaneous connections to hundreds of third party insurance plans, "just in
time" inventory management, automated accounts receivable, quick pay program
monitoring and central office functions.
The Company offers a broad range of merchandising and marketing
services to its independent pharmacy customers under its MedPlus(R) identity
program. Under this program, the Company plans and coordinates cooperative
advertising programs and provides for the availability of various promotional
products, including a single-source supply for generics at highly competitive
prices from leading pharmaceutical manufacturers. The Company also offers new
product introduction programs, point-of-sale materials, calendars, blood
pressure testing units, automatic new product distribution, rack jobbing, store
fixturing and retail employee training programs. Other services offered to
independent pharmacies under Med Plus include: retail merchandising, inventory
management systems, electronic order entry, planogramming, shelf labels and
price stickers, private label products, monthly feature promotions, home
healthcare marketing programs, store layout assistance, business management
reports, pharmacy computer systems and monthly catalogs.
CUSTOMERS AND MARKETS
The Company's diverse customer base consists of over 900 independent
pharmacies, retail chains and healthcare institutions. Independent pharmacies
generally are community-based pharmacies, which the Company believes benefit the
most from the Company's sales and value added services. Retail chains, a fast
growing segment of the market, include national pharmacy chains and the pharmacy
departments of supermarkets and mass merchandisers. Healthcare institutions,
which currently comprise the largest segment of the market, consist of
hospitals, nursing homes, clinics and other alternate site care facilities, home
health agencies, HMOs and pharmacy benefit management companies.
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The independent pharmacy trade class stabilized in 1998 with store
closings dropping to 121 from 1,118 in 1997. In addition, the Company has worked
with entrepreneurs to open new independent community pharmacies. This could
present additional opportunities as the Company is well positioned to respond to
the needs of new pharmacies requiring a flexible, innovative trading partner.
The Company believes that diversifying its sales across the various
market segments enables it to capture greater market share in the geographic
areas it serves and better serve the faster growing segments of the healthcare
markets. The following table sets forth the Company's sales mix by customer
segment:
<TABLE>
<CAPTION>
NET SALES
-------------------------------------------------------------------------------
Fiscal Years Ended
-------------------------------------------------------------------------------
March 28, 1997 June 30, 1998 June 30, 1999
------------------------ ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
----------- --------- ---------- -------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Independent Pharmacies $223,708 46.6% $301,536 49.3% $382,532 46.9%
Retail Chains 131,343 27.4 131,233 21.4 213,779 26.2
Healthcare Institutions 124,473 26.0 179,658 29.3 216,901 26.9
Software -- -- -- -- 2,107 --
-------- ------ -------- ------ -------- ------
$479,524 100.0% $612,427 100.0% $815,319 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
The Company's senior management is actively involved in identifying and
developing opportunities to expand the Company's business with customers in each
of these market segments, including the preparation of proposals which highlight
customer benefits of the Company's cost competitiveness, advanced systems and
value added services. During fiscal 1997, fiscal 1998 and fiscal 1999, the
Company's 10 largest customers accounted for approximately 47.1%, 37.1% and
52.8%, respectively, of the Company's revenues. The Company's largest customer
during fiscal 1997 (with which the Company's relationship was terminated in
September 1997) accounted for approximately 20.0% of the Company's revenues
during that year and Anthem Prescription Management, Inc., its largest customer
during fiscal 1998 and fiscal 1999, accounted for approximately 13% and 12% of
the Company's revenues during those periods, respectively.
In fiscal 1999, the increase in percentage sales to the 10 largest
customers resulted from a focused marketing effort directed towards large
national chains. Jewett's largest customer, Tel Drug (the mail order division
of CIGNA) accounted for 54.0% and 66.0% of Jewett's sales in calendar 1997 and
1998, respectively. Tel Drug is expected to be the Company's largest customer
in fiscal 2000.
In September 1999, the Company renewed its primary supplier contract
with the Tennessee Pharmacy Coalition/Tennessee Pharmacy Purchasing Alliance
("TPPA") extending the agreement through August 2002. TPPA is a group purchasing
alliance which currently has over 180 members of independent pharmacies
operating in Tennessee, Ohio, Georgia, Virginia, Arkansas, Mississippi and
Alabama. Over the next three years, the agreement is expected to represent in
excess of $400 million of pharmaceutical sales; however, TPPA members each
control their own purchasing and, as such, do not comprise one of the Company's
largest customers.
SALES AND MARKETING
The Company recently reinforced its corporate sales effort by promoting
two executives to the position of Vice President - Business Development who will
focus on high potential new customer prospects.
The Company employs sales representatives and customer service
representatives at each of its distribution centers. In addition to base salary,
the Company's sales personnel receive incentive compensation based upon
increases in the Company's market share and market penetration. D&K's corporate
vice presidents of business development work closely with each business unit to
develop sales goals. The Company's sales program includes regular training to
improve customer service and to provide its sales and customer service
representatives with the skills and resources necessary to increase business
with existing customers and establish new customer relationships. The Company
also maintains a telephone service department staffed with trained personnel who
work with customers to answer questions and solve problems.
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The Company's marketing efforts are focused on developing new primary
relationships with its customers. The Company emphasizes frequent personal
interaction of its sales force with customers so that the customer comes to rely
on the Company's dependability, responsiveness, accuracy of order filling and
breadth of product line. Retail customers also rely on the Company's sales force
for consulting services on advertising, merchandising, stocking and inventory
management.
The Company believes that its customer service department is a key
element in its marketing program and differentiates it from its national
competitors. The decentralized customer service staff emphasizes rapid response
to customer inquiries and efficient order placement.
OPERATIONS
The Company is structured as an organization of locally managed drug
wholesale distribution centers. Each distribution center has an executive, sales
and operations staff with management compensation at each center determined by
its operating results. These operations utilize the Company's corporate staff
for procurement, marketing, financial, legal and executive management resources
and corporate coordination of assets and working capital management. The
Company's decentralized sales and distribution network, combined with its
centralized procurement and corporate support staff structure, enable the
Company to provide high levels of specialized, customer service while minimizing
administrative expenses and maximizing volume discounts for product purchases.
The Company's distribution centers maintain computer systems and
sophisticated materials handling equipment for receiving, storing and
distributing large quantities and varieties of products. The Company
continuously seeks to improve its warehouse automation technologies to maximize
operational efficiencies on a cost-effective basis. The Company developed state
of-the-art radio frequency (RF) and receiving procedures and barcoding and
scanning technologies at one of its distribution centers which significantly
improved accuracy, efficiency and productivity at that center. The Company
subsequently exported this technology to its other distribution centers and has
developed RF order verification, vendor returns and customer returns systems.
The Company receives virtually 100% of its orders electronically and,
upon receipt of the customer's order at a distribution center, the Company's
warehouse-management system produces a "picking document" containing product
selection, loading and truck routing information. The system also provides
customized price information (geared to local market as determined by the
customer) or individual package price stickers to accompany each shipment to
facilitate the customer's pricing of the items. Virtually all items ordered from
the Company's distribution centers are available and shipped by the Company
within 24 hours after the orders are placed by customers. Orders are delivered
to customers by the Company's fleet of trucks and vans or by contract carriers.
PURCHASING AND INVENTORY CONTROL
The Company utilizes sophisticated inventory-control and purchasing
software. The software perpetually tracks the Company's inventory, analyzes
demand history and projects future demand. The Company's system is designed to
enhance profit margins by eliminating the manual ordering process, allowing for
automatic inventory replenishment and identifying inventory buying
opportunities. The system also improves the Company's fill rate and enhances
inventory management and control.
The Company purchases products from approximately 1,000 manufacturers
for the wholesale purchase of pharmaceuticals and other products. The Company
initiates purchase orders with manufacturers through its information systems.
During fiscal 1998 and fiscal 1999, the Company's 10 largest suppliers accounted
for approximately 62% and 47%, respectively, of the Company's purchases by
dollar volume. Historically, the Company has not experienced difficulty in
purchasing desired products from suppliers. The majority of contracts with
suppliers are terminable by either party upon short notice and without penalty.
The Company believes that its relationships with its suppliers are good.
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MANAGEMENT INFORMATION SYSTEMS
Each of the Company's distribution centers operates as a distinct
business with full systems functionality: order processing, inventory
management, accounts receivable, accounts payable, general ledger, master file
maintenance, external and internal reporting. Historically, each distribution
center housed an AS/400 system and several PCs, and the St. Louis corporate
office housed an additional AS/400 to support corporate systems. The Company is
in the process of consolidating AS/400 computer processing into two major data
centers: St. Louis and Cape Girardeau. These two data centers will provide
computing services to support all distribution centers as well as corporate
functions. Implementation of high availability business continuity systems to
support continuous operation of the consolidated data centers is planned for the
coming fiscal year. Each distribution center and the corporate offices will
continue to house a local area network (LAN) and multiple PCs. The Company's
computer systems are connected by a high speed data network and information is
transmitted between locations on a regular basis. The Company is standardizing
e-mail systems with implementation of a central e-mail server.
COMPETITION
The wholesale distribution of pharmaceuticals, health and beauty aids,
and other healthcare products is highly competitive, with national and regional
distributors competing primarily on the basis of service and price. Other
competitive factors include delivery service, credit terms, breadth of product
line, customer support, merchandising and marketing programs. The Company
competes with large, national distributors such as McKesson HBOC, Inc., Bergen
Brunswig Corporation, Cardinal Health, Inc., Bindley-Western Industries, Inc.
and AmeriSource Health Corporation, as well as with local and regional
wholesalers, manufacturers and generic pharmaceutical telemarketers and
specialty distributors. The Company also competes with other wholesale
distributors for purchases of products and financial support in the form of
trade credit from manufacturers. Certain of the Company's competitors have
significantly greater financial and marketing resources than the Company.
EMPLOYEES
As of August 31, 1999, the Company employed 324 persons, 290 of whom
were full-time employees. Approximately 23 of the Company's employees at its
Minneapolis, Minnesota distribution center are covered by a collective
bargaining agreement with the Miscellaneous Drivers, Helpers and Warehousemen's
Union, Local 638, which expires in March 2000. Approximately 15 of the Company's
employees at its Jewett Drug Co. subsidiary are covered by a collective
bargaining agreement with the General Drivers and Helpers Union Local 749,
affiliated with the International Brotherhood of Teamsters, which expires
February 29, 2000. The Company believes that its employee relations are good.
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FORWARD-LOOKING STATEMENTS
Certain statements in this document regarding future events, prospects,
projections or financial performance are forward looking statements. Such
forward looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and may also be identified
by words such as "anticipates," "believes," "estimates," "expects," "intends"
and similar expressions. Such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those described in or
suggested by such forward looking statements. These risks and uncertainties
include the Company's ability to compete in a competitive industry, with many
competitors having substantially greater resources than the Company and the
Company's customers generally having the right to terminate their contracts
with the Company or reduce purchasing levels on relatively short notice without
penalty, the Company's ability to maintain or improve its operating margin with
the industry's competitive pricing pressures, the changing business and
regulatory environment, including possible changes in reimbursement for
healthcare products and in manufacturers' pricing or distribution policies, the
continued availability of investment buying opportunities, the loss of one or
more key suppliers for which alternative sources may not be available, the
ability to integrate recently acquired businesses and the ability of the
Company's suppliers and customers to successfully achieve a Year 2000
conversion for computer systems and applications. Readers are cautioned not to
place undue reliance on these forward-looking statements which reflect the
Company's views as of the date hereof. The Company undertakes no obligation to
publicly update or revise any forward-looking statements.
Item 2. Properties
The Company conducts its business from a total of ten office, warehouse
and satellite depot facilities. The Company's primary operating facilities
include:
<TABLE>
<CAPTION>
LOCATION DESCRIPTION SQUARE FOOTAGE
-------------------------------- -------------------------------- ------------------
<S> <C> <C>
Cape Girardeau, Missouri (1) Distribution and administration 66,000
Lexington, Kentucky (2) Distribution and administration 37,500
Minneapolis, Minnesota (2) Distribution and administration 63,000
St. Louis, Missouri (1) Corporate Offices 11,500
Aberdeen, South Dakota (1) Distribution and administration 40,000
Sioux Falls, South Dakota (1) Distribution 22,000
</TABLE>
- ----------------
(1) Leased
(2) Owned
The Company also maintains warehouse and satellite depot facilities in
Missouri, Tennessee, Kentucky and Florida that enable it to efficiently
distribute product on a timely basis.
In May, 1999, the Company entered into a lease for 61,900 square feet
of distribution and administration space in Lexington, Kentucky. The existing
operations in Lexington will be relocated to the new facility in mid fiscal
2000.
The Company believes its facilities are adequate to support its present
business plans.
Item 3. Legal Proceedings
No material legal proceedings are pending against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its security
holders during the quarter ended June 30, 1999.
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Item 4A. Executive Officers of the Registrant
The name, age and position of each of the executive officers of the
Company are set forth below.
J. Hord Armstrong, III, 58, has served as the Chairman of the Board,
Chief Executive Officer and Treasurer and as a director of the Company since
December 1987. Prior to joining the Company, Mr. Armstrong served as Vice
President and Chief Financial Officer of Arch Mineral Corporation, a coal mining
and sales corporation, from 1981 to 1987 and as its Treasurer from 1978 to 1981.
Mr. Armstrong serves as a Trustee of the St. Louis College of Pharmacy and as a
member of the Board of Directors of Jones Pharma, Inc.
Martin D. Wilson, 38, has served as President and Chief Operating
Officer of the Company since January 1996, as Secretary since August 1993 and as
a director since 1997. Mr. Wilson previously served as Executive Vice President,
Finance and Administration of the Company from May 1995 to January 1996, as Vice
President, Finance and Administration of the Company from April 1991 to May 1995
and as Controller of the Company from March 1988 to April 1991. Prior to joining
the Company, Mr. Wilson, a certified public accountant, was associated with KPMG
Peat Marwick, a public accounting firm.
Dennis A. White, 49, has served as Vice President, Chief Information
Officer of the Company since April 1996. From May 1988 to April 1996, Mr. White
served as Director of Customer Information Services and in various other
management positions with Bergen Brunswig Corporation, a national wholesale drug
distributor.
Thomas S. Hilton, 47, has served as Senior Vice President and Chief
Financial Officer of the Company since January 1999. Between May 1980 and June
1998, Mr. Hilton was employed by the Peabody Group serving in a variety of
management positions including Vice President and Treasurer from March 1993 to
May 1995 and as Vice President and Chief Financial Officer from May 1995 to June
1998.
Leonard R. Benjamin, 49, has served as Vice President, General Counsel
and Secretary of the Company since April 1999. Between January 1999 and April
1999, Mr. Benjamin was Assistant General Counsel of Innovex Corporation, a
provider of sales forces to the pharmaceutical industry. Between October 1998
and January 1999, Mr. Benjamin was counsel to KWS&P/SFA Inc., a software
provider to the pharmaceutical industry. Between April 1994 and July 1998, Mr.
Benjamin was employed by Walsh International Inc., a software provider to the
pharmaceutical industry, initially as Associate General Counsel and then as Vice
President, General Counsel and Secretary.
James D. Largent, 61, has served as Vice President - Business
Development of the Company since July 1999. Mr. Largent joined Delta Wholesale
Drug, Inc. in March 1968, which was acquired by the Company in December 1987.
Mr. Largent has served in a variety of management positions with the Company
including Vice President and General Manager of the Cape Girardeau distribution
center from May 1995 to July 1999.
Lewis E. Mead, 49, has served as Vice President - Business Development
of the Company since July 1999. Mr. Mead previously served as Vice President and
General Manager of the Lexington distribution center from February 1996 to July
1999. From May 1992 to February 1996, Mr. Mead served in various sales
management positions with FoxMeyer Drug Company, which was a national wholesale
drug distributor.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information set forth under the caption "Price Range Per Common
Share" on the inside back cover page of the registrant's 1999 Annual Report to
Stockholders is incorporated herein by this reference.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Highlights" on
page 3 of the registrant's 1999 Annual Report to Stockholders is incorporated
herein by this reference.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under the caption "Management's Discussion
and Analysis of Results of Operations and Financial Condition" in the
registrant's 1999 Annual Report to Stockholders is incorporated herein by this
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The following financial statements and supplementary data, included in
the registrant's 1999 Annual Report to Stockholders, are incorporated herein by
this reference.
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCE
-----------------------------
<S> <C>
Report of Independent Public Accountants Page 24
Consolidated Balance Sheets at June 30, 1999 and June 30, 1998 Page 25
Consolidated Statements of Operations for the years ended Page 26
June 30, 1999, June 30, 1998, and March 28, 1997 and for the three months
ended June 30, 1997
Consolidated Statements of Stockholders' Equity for the years Page 27
ended June 30, 1999, June 30, 1998, and March 28, 1997, and for the
three months ended June 30, 1997
Consolidated Statements of Cash Flows for the years ended Page 28
June 30, 1999, June 30, 1998, and March 28, 1997, and for the three
months ended June 30, 1997
Notes to Consolidated Financial Statements Page 29
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the captions "Election of Directors" in
the registrant's Proxy Statement for its 1999 Annual Meeting of Stockholders
(the "1999 Proxy Statement") is incorporated herein by this reference. The
Company will file the 1999 Proxy Statement with the Commission pursuant to
Regulation 14A within 120 days after the close of the fiscal year. Information
regarding executive officers is set forth in Part I of this report.
Item 11. Executive Compensation
The information set forth under the captions "Directors' Fees" and
"Compensation of Executive Officers" in the registrant's 1999 Proxy Statement is
incorporated herein by this reference.
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Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the captions "Voting Securities and
Principal Holders Thereof" and "Security Ownership By Management" in the
registrant's 1999 Proxy Statement is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions" in
the registrant's 1999 Proxy Statement is incorporated herein by this reference.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a)(1) Financial statements: Incorporated herein by reference, are
listed in Item 8 of this report.
(2) The following financial statement schedule and auditors' report
thereon are included in Part IV of this report:
Page
----
Report of Independent Public Accountants on Schedule 12
Schedule II - Valuation and Qualifying Accounts 13
Schedules other than those listed above have been omitted because they
are either not required or not applicable, or because the information is
presented in the consolidated financial statements or the notes thereto.
(3) Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K
None.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
D & K HEALTHCARE RESOURCES, INC.
(Registrant)
By /s/ J. Hord Armstrong, III
----------------------------------------------
J. Hord Armstrong, III, Chairman of the Board,
Chief Executive Officer and Treasurer
Date: September 28, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ J. Hord Armstrong, III Chairman, Chief Executive Officer, September 28, 1999
- ------------------------------- Treasurer and Director
J. Hord Armstrong, III
/s/ Martin D. Wilson President, Chief Operating Officer September 28, 1999
- ------------------------------- and Director
Martin D. Wilson
/s/ Thomas S. Hilton Senior Vice President, Chief Financial September 28, 1999
- ------------------------------- Officer (Principal financial and
Thomas S. Hilton accounting officer)
/s/ Richard F. Ford Director September 28, 1999
- -------------------------------
Richard F. Ford
/s/ Bryan H. Lawrence Director September 28, 1999
- -------------------------------
Bryan H. Lawrence
/s/ Elliot H. Stein Director September 28, 1999
- -------------------------------
Elliot H. Stein
/s/ Robert E. Korenblat Director September 28, 1999
- -------------------------------
Robert E. Korenblat
/s/ Thomas F. Patton Director September 28, 1999
- -------------------------------
Thomas F. Patton
/s/ James M. Usdan Director September 28, 1999
- -------------------------------
James M. Usdan
/s/ Louis B. Susman Director September 28, 1999
- -------------------------------
Louis B. Susman
</TABLE>
11
<PAGE> 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To D & K Healthcare Resources, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in the D & K Healthcare Resources,
Inc. Annual Report to Stockholders which is incorporated by reference in this
Form 10-K, and have issued our report thereon dated August 10, 1999. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. Schedule II included in this Form 10-K is the responsibility of the
Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
St. Louis, Missouri
August 10, 1999
12
<PAGE> 13
D & K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL 1997,
THE THREE MONTHS ENDED JUNE 30, 1997, FISCAL 1998 AND FISCAL 1999
<TABLE>
<CAPTION>
Additions
-------------------------------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Acquisitions Deductions Period
----------- --------- -------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C>
Valuation Allowances for
Doubtful Receivables:
Fiscal Year 1997 $868,000 $ 65,000 $ -- $ (236,000) $ 697,000
======== ======== ======= ========== ==========
Three Months Ended
June 30, 1997 $697,000 $ -- $ -- $ -- $ 697,000
======== ======== ======= ========== ==========
Fiscal Year 1998 $697,000 $ 15,000 $28,000 $ (40,000) $ 700,000
======== ======== ======= ========== ==========
Fiscal Year 1999 $700,000 $365,000 $82,000 $ (5,000) $1,142,000
======== ======== ======= ========== ==========
</TABLE>
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1* Stock Purchase and Redemption Agreement, dated as of November 30, 1995, by and
among Pharmaceutical Buyers, Inc., J. David McCay, The J. David McCay Living Trust,
Robert E. Korenblat and the registrant filed as an exhibit to the registrant's
Annual Report on Form 10-K for the year ended March 28, 1997.
2.2* Stock Purchase Agreement dated June 1, 1999 by and between the registrant and
Harvey C. Jewett, IV, filed as an exhibit to Form 8-K dated June 14, 1999.
3.1* Restated Certificate of Incorporation, filed as an exhibit to registrant's
Registration Statement on Form S-1 (Reg. No. 33-48730).
3.2* Certificate of Amendment to the Restated Certificate of Incorporation of D&K
Wholesale Drug, Inc filed as an exhibit to the registrant's Annual Report on Form
10-K for the year ended June 30, 1998.
3.3* By-laws of the registrant, as currently in effect, filed as an exhibit to
registrant's Registration Statement on Form S-1 (Reg. No. 33-48730).
4.1* Form of certificate for Common Stock, filed as an exhibit to registrant's
Registration Statement on Form S-1 (Reg. No. 33-48730).
4.2* Form of Rights Agreement dated as of November 12, 1998 between registrant and
Harris Trust and Savings Bank as Rights Agent, which includes as Exhibit B the form
of Right Certificate, filed as an exhibit to Form 8-K dated November 17, 1998.
10.1* D & K Wholesale Drug, Inc. Amended and Restated 1992 Long Term Incentive Plan,
filed as Annex A to the registrant's 1995 Proxy Statement.
10.2* Wholesale Distribution Agreement, by and between registrant and GLAXO INC., filed
as an exhibit to the registrant's Registration Statement on Form S-1 (Reg. No.
33-48730).
10.3* Wholesale Distribution Agreement, dated January 1, 1995, by and between registrant
and SmithKline Beecham Pharmaceuticals, filed as an exhibit to registrant's Annual
Report on Form 10-K for the year ended March 29, 1996.
10.4* Wholesale Prime Vendor Agreement, dated September 27, 1993, by and between
registrant and Pfizer Inc., filed as an exhibit to the registrant's Annual Report
on Form 10-K for the year ended April 1, 1994 is incorporated herein by this
reference.
10.5** Warehousing and Distribution Service Agreement, dated September 21, 1999, by and
between registrant and Eli Lilly and Company.
10.6* D & K Wholesale Drug, Inc. 401(k) Profit Sharing Plan and Trust, dated January 1,
1995, filed as an exhibit to the registrant's Annual Report on Form 10-K for the
year ended March 29, 1996.
10.7* Amended and Restated Lease Agreement, dated as of January 16, 1996, by and between
Morhaert Development, L.L.C. and the registrant, filed as an exhibit to the
registrant's Annual Report on Form 10-K for the year ended March 29, 1996.
</TABLE>
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.8* Pharmaceutical Services Agreement between Anthem Prescription Management, Inc. and
registrant dated July 16, 1996, filed as an exhibit to the registrant's Annual
Report on Form 10-K for the year ended June 30, 1998.
10.9* Renewal dated June 26, 1998, to Pharmaceutical Services Agreement between Anthem
Prescription Management, Inc. and registrant. dated July 16, 1996, filed as an
exhibit to the registrant's Annual Report on Form 10-K for the year ended June 30,
1998.
10.10* Purchase and Sale Agreement dated as of August 7, 1998 between registrant, certain
of its subsidiaries and D&K Receivables Corporation, filed as an exhibit to the
registrant's Annual Report on Form 10-K for the year ended June 30, 1998.
10.11* Receivables Purchase Agreement dated as of August 7, 1998 among D&K Receivables
Corporation, registrant, Blue Keel Funding, LLC and Fleet National Bank, filed as
an exhibit to the registrant's Annual Report on Form 10-K for the year ended June
30, 1998.
10.12* Fourth Amended and Restated Loan and Security Agreement dated as of August 7, 1998
among registrant, Jaron Inc., and Fleet Capital Corporation, filed as an exhibit to
the registrant's Annual Report on Form 10-K for the year ended June 30, 1998.
10.13** First Amendment to Fourth Amended and Restated Loan and Security Agreement, dated
as of November 25, 1998, by and among Fleet Capital Corporation, the registrant and
Jaron, Inc.
10.14* Second Amendment to Fourth Amended and Restated Loan and Security Agreement, dated
as of June 1, 1999, by and among Fleet Capital Corporation, the registrant, Jaron,
Inc., and Jewett Drug Co. filed as an exhibit on Form 8-K dated June 14, 1999.
10.15** Third Amendment to Fourth Amended and Restated Loan and Security Agreement, dated
as of June 30, 1999, by and among Fleet Capital Corporation, the registrant, Jaron,
Inc., and Jewett Drug Co.
10.16* Employment agreement for Senior Vice President and Chief Financial Officer dated
December 18, 1998, filed as an exhibit to the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
10.17* Employment Agreement for Vice President, General Counsel and Secretary dated March
17, 1999, filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999.
10.18*** Prime Vendor Agreement dated as of August 25, 1999, between Tennessee Pharmacy
Purchasing Alliance and the registrant.
10.19** Lease Agreement, dated as of May 18, 1999, by and between BSRT Lexington Trust and
the registrant.
10.20** Lease Agreement, dated as of January 1, 1997, by and between Jewett Family
Investments, LLC and Jewett Drug Co.
10.21** First Amendment to Lease, dated as of June 1, 1999, by and between
Jewett Family Investments, LLC and Jewett Drug Co.
</TABLE>
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.22** Lease Agreement dated as of July 1, 1997 by and between Jewett Family Investments,
LLC and the registrant.
10.23** First Amendment to Lease, dated as of June 1, 1999, by and between
Jewett Family Investments, LLC and Jewett Drug Co.
10.24*** Prime Vendor Agreement dated as of March 21, 1994, by and between Tel-Drug, Inc.
and Jewett Drug Co., as amended.
13** Registrant's 1999 Annual Report to Stockholders.
21** Subsidiaries of the registrant.
23** Consent of Arthur Andersen LLP.
27** Financial data schedule.
</TABLE>
* Incorporated by reference.
** Filed herewith.
*** Filed herewith. Confidential portion omitted and filed separately with the
Commission.
16
<PAGE> 1
EXHIBIT 10.5
PHARMACEUTICAL DIVISION
ELI LILLY AND COMPANY
Warehousing and Distribution
Service Agreement
This Agreement, when executed by the Wholesaler's authorized representative
and returned to, and executed by, Eli Lilly and Company (hereinafter called
"Lilly"), at Indianapolis, Indiana, will state the terms and conditions of the
Wholesaler's agreement with Lilly for the period indicated herein governing
sales by Lilly to the Wholesaler of Lilly products sold under the "Lilly"
trademark and under the "Dista" trademark.
1. The Wholesaler Agrees:
A. INVENTORIES.
1. To purchase from Lilly or other authorized Lilly wholesale distributor,
upon reasonable notice to Lilly, its entire requirements for Lilly and
Dista products listed in the Lilly and Dista Price Lists (such products
hereinafter called separately and collectively "Products") and to
maintain at all times a complete inventory of the Products sufficient
to make them available to meet demand for each of the various types of
pharmaceutical products available from Lilly, and to resort to drop
shipment orders only when necessary because of conditions beyond the
Wholesaler's control.
2. To maintain the Products under proper conditions, both in storage and
in transit to its customers, including such refrigeration as may be
specified by Lilly.
3. To supply only Products that are not out-of-date, damaged, or shopworn.
4. To provide to Lilly annually upon Lilly's request during the term of
this Agreement a listing of the Wholesaler's complete and current
inventory of Lilly and Dista Products by item and package size
certified to be accurate by an officer of the Wholesaler.
B. SALES EFFORT. To promote the Products, to give them full selling efforts
and full distribution services, and not to;
1. Refuse or fail to supply promptly the Products when specified, or
2. Fail to include in its system for determining its prices to its
customers all Lilly special net wholesale prices or enter into any
agreement which would preclude the Wholesaler from offering for sale a
Product at any price acceptable to the Wholesaler.
3. Sell any Product to any party who the Wholesaler has reason to believe
plans to use the Product or sell the Product for use outside the
geographic boundaries of the United States, the District of Columbia,
the Commonwealth of Puerto Rico or the territories of the United
States.
C. SALES DATA.
1. To obtain authorization from Lilly before making, or agreeing to make,
available to any third party information concerning Wholesaler's
aggregate sales of Products.
2. To provide information concerning the Wholesaler's sale of Products in
accordance with Section I.C.1. to at least one third party organized
to process sales data and report it to subscribers or, if the
Wholesaler chooses not to provide such data to a third party, to supply
to Lilly, on request by Lilly, detailed information concerning the
Wholesaler's sale of Products within two weeks after the close of each
month in a format and transmission mode specified by Lilly.
Wholesaler's obligations under this section I.C.2. are subject to
receiving satisfactory compensation from such third party therefor.
D. PAYMENT FOR PRODUCTS. To pay in full all invoices in accordance the
provisions of Section III.B.
E. REGISTRATION WITH THE DRUG ENFORCEMENT ADMINISTRATION (DEA) OF THE UNITED
STATES DEPARTMENT OF JUSTICE.
1. To maintain, in full force and effect, registration(s) required under
the Comprehensive Drug Abuse Prevention and Control Act of 1970, as
amended (Control Act), for the distribution by the Wholesaler of the
Products listed in the various Schedules of Controlled Substances.
2. To advise Lilly promptly of any registration number(s) assigned the
Wholesaler by the DEA and of the Schedules of Controlled Substances
that the Wholesaler is registered to distribute. The Wholesaler
certifies that except as otherwise indicated on Schedule A, attached to
and made a part of this Agreement, each subsidiary, affiliate, or
location listed therein is registered to distribute Schedule II, III,
IV and V Controlled Substances, and has been assigned the DEA
registration number set forth for such subsidiary, affiliate, or
location on Schedule A.
3. To advise Lilly promptly of any denial, revocation, or suspension of
registration by the DEA or changes in the Schedules of Controlled
Substances that the Wholesaler is authorized by the DEA to distribute.
F. COMPLIANCE WITH APPLICABLE LAWS.
1. To be in substantial compliance with all federal, state, and local laws
applicable to the purchase, handling, storage, repackaging, sale, and
distribution of the Products.
2. To provide prompt notice to Lilly of any civil, criminal, or
administrative action by federal, state, or local authorities regarding
the Wholesaler, its employees, or its officers with respect to alleged
violations of the Control Act or comparable state laws and to provide
Lilly with full and complete information regarding the disposition of
any such action.
1
<PAGE> 2
3. To furnish Lilly upon request, with respect to any order for Controlled
Substances, assurance satisfactory to Lilly that (a) Wholesaler is
authorized to possess and distribute such Controlled Substances under
federal, state, and local low, (b) the quantity ordered is required by
Wholesaler to fill legitimate orders based on medical, scientific, or
industrial needs, (c) Wholesaler is taking reasonable precautions
against illicit diversion of the Controlled Substances ordered, and (d)
Wholesaler is complying with all federal, state, and local regulations
and guidelines promulgated pursuant to the Control Act with respect to
the purchase, handling, storage, repackaging, sale, or distribution of
the Controlled Substances ordered; and Wholesaler agrees that in the
event Wholesaler fails to furnish assurance satisfactory to Lilly, when
requested, then Lilly, without limiting its right to take such other
action as may be permitted by law or this Agreement, may suspend all
deliveries of all Controlled Substances under this Agreement until
satisfactory assurance is received without incurring liability to the
Wholesaler.
G. CHARGEBACK DATA.
1. To transmit data from Wholesaler invoices eligible for chargeback to
Lilly no more often than weekly in the format recommended by the
National Wholesale Druggists' Association.
2. To include in any transmission, when applicable, data notifying Lilly
of any product returns or other adjustments allowed by the Wholesaler
to the account for which the Wholesaler previously submitted a
chargeback to Lilly. Failure to receive this information on a regular
and timely basis could result in a review of Wholesaler's systems and
records under Section I.K.
3. To submit chargebacks only after all products claimed on the chargeback
have been billed and shipped to the account. Backorders are not
eligible for chargebacks. Lilly shall not accept chargebacks based on
same unit utilization for any Product by more than one entity.
4. To warrant that all chargeback data transmitted to Lilly by or on
behalf of the Wholesaler is to Wholesaler's knowledge accurate and
reflects product actually sold and shipped to the account.
5. To retain the, Wholesaler's original documentation (including invoices
and adjustments) supporting its chargeback claims for at least eighteen
(18) months from the date of shipment of the Products and to permit
Lilly to inspect that documentation, with reasonable prior notice.
6. That if Lilly fails to deny a claim or issue a Lilly Credit Memorandum
within thirty (30) days of original submission, or sixty (60) days of a
resubmission, of a chargeback claim, Wholesaler must notify Lilly of
its desire to deduct the amount of such chargeback claim at least ten
(10) days prior to initiating a deduction from amounts due and owing
Lilly pursuant to Section 111.B. Such notice must be provided in
writing to the Contract Administration Leader and Credit Manager at
Lilly Corporate Center.
H. SALES TAX EXEMPTION CERTIFICATE. To provide to Lilly a copy of the
Wholesaler's Sales Tax Exemption Certificate, whether it be a resale
certificate, blanket exemption, or direct payment exemption, and to
notify Lilly promptly of any change which affects the Wholesaler's
exemption status.
I. CONTROLS. To establish such internal controls and maintain such records
as will assure compliance with its obligations under this Agreement.
J. EVIDENCE OF FINANCIAL CONDITION. To furnish Lilly upon request a copy of
its complete annual financial statement and other such evidence of its
financial condition necessary to establish, in the reasonable opinion
of Lilly, the Wholesaler's ability to perform its obligations
under this Agreement.
K. REVIEW OF WHOLESALER SYSTEMS. Lilly reserves the right to visit the
Wholesaler to inspect the Wholesaler's chargeback system and the records
related to processing chargeback credits. Such records shall include
without limitation, Wholesaler's invoices, inventory reports, accounts
receivable records, and credits/adjustment records. These records must be
retained by the Wholesaler for eighteen (18) months from the shipment
date. In addition, Lilly may send confirmation letters to selected
Wholesaler accounts to verify shipments and credits.
L. OFFSET RIGHTS. Upon cancellation or termination of this Agreement, or
with evidence of a condition of insolvency of the Wholesaler of a
Wholesaler's wholly owned subsidiaries or other entities that are listed
on Schedule A, Lilly reserves the right to offset any amount due and
owing Lilly against amounts otherwise owing to the wholesaler or
wholesaler's subsidiaries or other entities that are listed on Schedule
A.
II. LILLY AGREES:
A. SHIPMENT TO WHOLESALER: To sell and ship Products (other than Products
restricted to sale on a third-party basis) to the Wholesaler at the
subsidiary, affiliate or locations specified on Schedule A at the Net
Wholesale prices shown in the Pricer's Edition of the Lilly and Dista
Price Lists (hereinafter called "Price Lists") in effect on the date of
shipment, such Net Wholesale prices being equal to the Suggested Net
Trade prices specified in the Price Lists less the following discounts:
1. Group I Products-(Marked "I" in the Price Lists): 16 2/3%
2. Group II Products-(marked "II" in the Price Lists)- 200%
B. SPECIAL NET WHOLESALE PRICES. To adjust the Net Wholesale prices on
Products purchased by the Wholesaler from Lilly and sold and shipped from
the Wholesaler's inventory on transactions for which Lilly has provided
to the Wholesaler Special Net Wholesale unit prices. Any adjustments made
by Lilly shall be in accordance with the procedure outlined in the
Lilly and Dista Wholesaler Chargeback Manual.
Chargebacks must be:
1. properly certified and submitted to Lilly at Indianapolis, Indiana,
2. postmarked or transmitted not later than six (6) months after the date
of sale by the Wholesaler, and
3. for those previously rejected in whole or part, resubmitted within six
(6) months after the date of the initial Lilly Credit Memorandum.
Lilly may honor chargebacks if submitted or resubmitted with Lilly's
prior approval after these dates.
C. CHARGEBACK CYCLE REIMBURSEMENT. Lilly agrees to reimburse the Wholesaler
for certain costs associated with the chargeback cycle. The amount of
reimbursement will be dependent upon, among other things, approved
chargeback amounts, processing cycles and cost of funds as reasonably
defined
2
<PAGE> 3
by Lilly. The calculation used to compute the reimbursement may be
changed by Lilly at any time upon thirty (30) days prior written notice
to the Wholesaler. The reimbursement calculation will be in accordance
with procedures outlined in the Lilly Chargeback Manual. Lilly reserves
the right to eliminate reimbursement if it begins processing chargebacks
within two (2) business days after receipt of submissions.
D. SHIPMENT TO THIRD PARTIES. To sell the Products to the Wholesaler upon
third-party orders with shipment direct to the customer (i.e., drop
shipments) when necessary because of conditions beyond the Wholesaler's
control at the applicable Net Wholesale prices, provided that Lilly may,
in its discretion, designate certain Products which will be shipped to
the Wholesaler only and not drop-shipped to third parties.
E. TRANSPORTATION. To ship the Products F.O.B. shipping point,
transportation prepaid, subject to the following:
1. TRANSPORTATION SELECTED BY LILLY. Lilly will prepay that portion of
the transportation charges set forth below when routing is selected by
Lilly.
A. Shipments to the Wholesaler:
(1) Special Shipments. All shipments of (a) Product deferred from
previous orders; (b) Products that are newly released for
Wholesaler stocks (initial shipment and all reorders for first
thirty (30) days after release date); and (c) allocated
shipments; 100%
(2) Regular Shipments. Shipments, other than Special Shipments, as
listed in Section E.I.a.(I), covered by the first two orders
each week by the Wholesaler; 100%
A. Shipments on Third-Party. Orders for Products not released to
Wholesalers; 50%
2. TRANSPORTATION SELECTED BY WHOLESALER. If the Wholesaler requests
special routing of a shipment which results in a higher transportation
Cost than would be incurred as a result of the routing of Lilly's
selection, then the extra cost shall be added to the invoice.
3. TITLE AND RISK OF LOSS. Title and risk of loss shall pass to the
Wholesaler when the Products are duly delivered to the carrier. The
Wholesaler shall give Lilly written notice of any claimed shipping
error within thirty (30) days after the date of shipment from Lilly.
Failure of the Wholesaler to give such notice within such 30-day
period shall be deemed a waiver of the Wholesaler's claim for
shortages or incorrect shipments.
4. CONCEALED DAMAGE. Damage to Products in course of shipment from Lilly
but not discovered on receipt is considered concealed damage and
must be reported to a Lilly Customer Services Representative within
thirty (30) days of receipt for credit to be issued.
F. RETURN FOR CREDIT. To receive from the Wholesaler, or through a company
utilized by Wholesaler, for credit the Products purchased from Lilly,
subject to the following:
1. All returns must be sent to: Eli Lilly and Company
MS204
1249 South White River Parkway, East
Drive
Indianapolis, IN 46225
2. Outdated items and deleted items may be returned at any time subject
to the provisions of this Section F. Returns of promoted items with
six (6) months or more of dating must be approved in writing by the
Lilly Sales Representative and Lilly District Sales Manager
responsible for the Wholesaler.
3. Non-promoted items may be returned without approval.
4. Products damaged while in the Wholesaler's possession are
non-returnable.
5. Products damaged while in transit from Lilly to the Wholesaler should
be returned to Lilly in a manner reasonably designed to protect the
quality and security of the product. The damaged product should be
returned at Lilly's expense to the point of shipment. Lilly Customer
Services must be contacted to make appropriate arrangements.
6. Items damaged from such perils as are normally insured under the
standard fire insurance policy, including extended coverage,
vandalism, and malicious mischief, will not be reimbursed by Lilly.
7. Returns of parts of sales packages, returns from customers of the
Wholesaler, and any other returns not authorized by this return goods
policy will be destroyed with no credit issued.
8. All returns must be in original containers. Temperature protected
transportation must be used when in-date or salable products are
returned.
9. Returns of controlled substances in their original cases must be
overpacked.
10. Items received after one (1) full year beyond their expiration date
will be reimbursed at 50% of the current net wholesale price (NWP).
11. Transportation expenses for returned items are the responsibility of
the Wholesaler.
12. Eligible returns will be credited, at Lilly's option, at either net
wholesale price (NWP) in effect on the date of the return or at
Special Net Wholesale Price, if applicable.
III. GENERAL PROVISIONS.
A. ORDERS FOR PRODUCTS.
1. All orders are subject to acceptance and approval by Lilly.
2. If Lilly anticipates a shortage of any of the Products, Lilly
shall have the right, in its sole discretion, to equitably
allocate such Products among its various customers.
3
<PAGE> 4
3. Lilly may, from time to time upon written notice to the Wholesaler,
(a) change the discount applicable to any Group designation, (b) add
or delete Group designations, (c) change the Group designation of any
of the Products, and (d) add Products to or withdraw Products from the
Price Lists.
4. Lilly may, in its discretion, designate certain Products which will be
supplied in shelf-carton or shipping-case quantities only.
B. BILLING, CREDIT, AND PAYMENT.
1. All orders for Products shall be invoiced as of the date shipped.
Lilly may, at its option, grant extended dating on certain invoices.
2. Subject to the provisions of Section III.B.3, unless otherwise
instructed by Lilly, all Lilly invoices shall be payable, without the
application of Credit Memorandum, by means of an electronic funds
transfer ("EFT") system designated or approved by Lilly in its
discretion, as follows:
a. Funds shall be transferred at the direction of the Wholesaler and
shall be available to Lilly on the following dates after the date
of the invoice:
2% 32, NET 45
2% CASH DISCOUNT off gross invoice amount when payment is received
on or before the thirty-second (32nd) day from date of invoice.
100% of gross invoice due on or by the forty-fifth (45th)day from
date of invoice.
b. The Wholesaler warrants to Lilly that each entry transmitted by it
or its agents or employees on its behalf to a depository financial
institution for the purpose of initiating an EFT transaction is
duly authorized by the Wholesaler. Without the Wholesaler's prior
written consent, Lilly shall not have the right to debit
electronically any account of the Wholesaler.
c. The Wholesaler shall not be deemed in default or lose any cash
discount by reason of any delay in receipt or non-receipt by Lilly
of funds transferred by EFT unless the delay or non-receipt is the
result of the negligent or willful act or omission of the
Wholesaler.
d. Credits approved in accordance with this Agreement or with the
Lilly Chargeback Manual, as applicable, shall be paid to the
Wholesaler by Lilly, following Lilly's approval of the credit by
means of an EFT system established by Lilly and in a manner
consistent with the Lilly Chargeback Manual.
e. With respect to any EFT entry originated by Lilly's bank, or any
delay in receipt by the Wholesaler of approved credit funds
transmitted by Lilly by means of EFT, Lilly shall be liable to the
Wholesaler only for Lilly's or Lilly's bank's negligent acts or
omissions or failure to act in good faith and Lilly's liability to
the Wholesaler shall be limited to reasonably foreseeable actual
damages proximately caused thereby.
f. With respect to the use of EFT by the Wholesaler for the payment of
funds, the Wholesaler shall be liable to Lilly only for the
Wholesaler's negligent acts or omissions or failure to act in good
faith and the Wholesaler's liability to Lilly shall be limited to
reasonably foreseeable actual and direct damages caused thereby,
but excluding any consequential, incidental or indirect damages.
g. Except as provided in Sections III.B.2.e and f., neither party
shall be liable to the other for the act or omission of any
financial institution or any automated clearing house in connection
with the use of EFT for payment of funds and neither party shall be
liable for consequential damages to the other arising out of the
use of EFT for payment of funds.
h. Each party agrees promptly to return by EFT any overpayment
received by it.
i. The Wholesaler agrees to execute all authorizations required by
Lilly or Lilly's or Wholesaler's depository financial institutions
for payment and receipt of funds by EFT and to notify Lilly
promptly of any changes in those authorizations.
j. To the extent applicable to the transfer of funds by EFT under this
Agreement, each party agrees to be bound by the Operating Rules and
Guidelines of the National Automated Clearing House Association as
those Operating Rules and Guidelines may be in effect from time to
time.
3. Lilly may require that each order from the Wholesaler be accompanied
by a certified check or other form of payment satisfactory to Lilly in
an amount sufficient to cover the order less the current cash discount
(if any) or require that the Wholesaler provide security in an amount
and form satisfactory to Lilly, and may declare due and owing all
outstanding indebtedness from the Wholesaler, including invoices on
which extended dating has been granted, in the event (a) reasonable
grounds for insecurity arise with respect to the performance by the
Wholesaler under this Agreement or (b) the Wholesaler makes or gives
notice of its intention to make a bulk transfer of inventory or (c)
Lilly has given notice of termination of this Agreement or (d) the
Wholesaler becomes insolvent.
4. Products shipped but not paid for at the time of the cancellation or
termination of this Agreement shall be paid for in accordance with the
terms of this Agreement.
5. Lilly may, from time to time upon ten (10) days prior written notice
to the Wholesaler, change the provisions contained in Section III.B,
except the provisions of Section III.B.2.f.
C. INSPECTION OF INVENTORY AND RECORDS. A Lilly representative will consult
with and advise the Wholesaler concerning the Wholesaler's inventory of
Products and may inspect the same at a mutually agreed upon time. A Lilly
representative may also inspect records of the Wholesaler to determine
compliance with the Wholesaler's obligations under this Agreement
provided that no such inspection shall relate to transactions occurring
more than eighteen (18) months prior to the date of such inspection, and
provided further that the inspection shall be performed by Lilly's
regularly retained independent auditors or employee.
D. INDEMNIFICATION. Lilly shall indemnify and hold harmless Wholesaler and
its affiliates, sublicensors, officers, directors, employees and agents
against all claims, demands, losses, damages, liabilities and expenses,
including court costs and reasonable attorneys fees (collectively
"Claims") arising out of injury or death to person or property alleged to
have resulted from Lilly's manufacturing of the Products except to the
extent caused by the negligent acts or omissions, or willful misconduct
of Wholesaler, its affiliates, sublicensors, officers, directors,
employees and agents or by the Wholesaler's breach of its obligations
under this Agreement. Wholesaler shall indemnify and hold harmless Lilly
and its affiliates, sublicensors,
4
<PAGE> 5
officers, directors, employees and agents harmless against all Claims
arising from the handling, storage, repackaging, sale or distribution of
the Products by Wholesaler, its affiliates, sublicensors, officers,
employees and agents, except to the extent caused by the negligent acts
or omissions of Lilly.
E. NO EXCLUSIVE TERRITORY. This Agreement does not grant the Wholesaler
any exclusive rights in any territory.
F. BUYER-SELLER RELATIONSHIP. The relationship created by this Agreement is
a buyer-seller relationship and not an agency relationship.
G. CHANGE IN OWNERSHIP OF OR CONTROLLING INTEREST IN WHOLESALER OR ANY
SUBSIDIARY, AFFILIATE OR LOCATION. The Wholesaler shall give Lilly at
Indianapolis, Indiana, ten (10) days prior notice of the sale or other
transfer of substantially all of the assets of or a controlling interest
in the Wholesaler, or the sale or other transfer of substantially all of
the assets of or a controlling interest in any of the subsidiaries,
affiliates or locations specified in Schedule A.
H. REPURCHASE OF STOCK. Upon cancellation or termination of this Agreement,
by expiration or otherwise, Lilly shall have the option to repurchase the
Wholesaler's salable stock of Products at the Net Wholesale prices then
in effect.
I. ASSIGNMENT. Neither party shall assign its rights or obligations under
this Agreement without first obtaining the written consent of the other
party, and any attempted assignment without such written consent shall be
void and of no effect.
J. CONTINGENCIES AFFECTING PERFORMANCE. Neither party shall be liable for
delay in performance or nonperformance caused by fire, flood, storm,
earthquake, or other act of God, war, rebellion, riot, failure
of carriers to furnish transportation, strikes, lockouts or other
labor disturbances, act of governmental authority, inability to obtain
material or equipment, or any other cause of like or different nature
beyond the control of such party.
K. NOTICES. All notices under this Agreement shall be in writing and shall
be considered given when delivered or mailed postage prepaid by
registered or certified mail to the address of the party to whom notice
is given as set forth on the next page.
L. TERMINATION OR CANCELLATION.
1. This Agreement shall terminate on June 30, 2002, unless sooner
terminated as herein provided.
2. During its term, this Agreement may be terminated as to all or any one
or more of the subsidiaries, affiliates or locations set forth on
Schedule A, by either party upon thirty (30) days notice.
3. This Agreement shall terminate as to all of the subsidiaries,
affiliates or locations set forth in Schedule A at the time
substantially all the assets of or a controlling interest in the
Wholesaler is sold or otherwise transferred to a new owner, and shall
terminate as to any of the subsidiaries, affiliates or locations
specified in Schedule A at such time as the Wholesaler ceases to own
substantially all of the assets of or a controlling interest in such
subsidiary, affiliate or location unless otherwise provided for by
Lilly in writing.
4. Either party may cancel this Agreement, as to all or any one or more
of the subsidiaries, affiliates or locations set forth on Schedule A,
upon notice for breach by the other party of any covenant contained
herein. Without limiting this right of cancellation by either party,
any failure by the Wholesaler to comply fully with the provisions
of Sections 1.E. (Registration with DEA), 1.F. (Compliance with
Applicable Laws), and 1.G.2, (Chargeback Data) shall constitute a
breach of this Agreement by the Wholesaler.
M. NEW AGREEMENT. Lilly and the Wholesaler may enter into a new Agreement
for the thirty-six (36) months following the expiration of this
agreement, on mutually agreeable terms. Lilly shall mail new Agreement
forms in duplicate 60 days prior to the expiration date of the current
agreement. If the Wholesaler desires to enter into the new Agreement, it
shall deliver or mail to Lilly at Indianapolis, Indiana, on or before the
expiration date of the current agreement, both copies of the new
Agreement executed by the Wholesaler. If Lilly agrees to the new
Agreement, it shall execute the new Agreement and return one copy to the
Wholesaler within 30 days of Lilly's receipt of the executed new
Agreement.
N. ENTIRE AGREEMENT. This Agreement shall (1) supersede all prior contracts,
agreements, and understandings between the Wholesaler and Lilly,
including any agreements between Dista Products Company, Division of Eli
Lilly and Company, and the Wholesaler, relating to the subject matter
hereof, all of which are hereby terminated; (2) constitute the complete
agreement between the Wholesaler and Lilly, relating to the subject
matter hereof; and (3) be controlling to the exclusion of all terms and
conditions of the Wholesaler's purchase orders or other documents in
conflict with the subject manner contained within this Agreement. This
provision shall not be construed in a matter that prevents the execution,
as appropriate, of any specialty wholesaler agreements between Lilly and
any specialty wholesaler that may be an affiliate or subsidiary of the
Wholesaler during the term of this Agreement.
O. WAIVER. The failure of any party to enforce at any time any provision of
this Agreement shall not be a waiver of such provision or effect the
right of such party thereafter to enforce such provision. No waiver shall
be deemed a waiver of any other provision or of a subsequent breach
whether of the same or another provision.
P. APPLICABILITY TO SUBSIDIARIES, AFFILIATES, OR LOCATIONS. Each covenant,
right, and obligation of the Wholesaler contained in this Agreement shall
apply separately and fully to each subsidiary, affiliate or location
specified in Schedule A.
Q. GOVERNING LAW. This Agreement shall be interpreted in accordance with,
and governed by, the laws of the State of Indiana.
R. YEAR 2000. Wholesaler represents and warrants that its operations
including without limitation, the submission of chargeback data will not
be materially delayed, interrupted or otherwise adversely affected due to
either the failure of Wholesaler's business systems and/or computer
systems to be "Year 2000 Compliant" or the failure of the computer or
business systems of any third party on which the Wholesaler is dependent
to be "Year 2000 Compliant". For purposes of this paragraph, a system
shall be considered "Year 2000 Compliant" only if (i) the occurrence in
or use by that system of dates on or after January 1, 2000 ("Millennial
Dates") does not adversely affect that system's performance, including
without limitation performance with respect to date-dependent data,
computations, output, or other functions (including, without limitation,
calculating, comparing, and sequencing), and (ii) that system creates,
stores, processes and outputs information (as applicable) related to or
including Millennial Dates without errors or omissions.
5
<PAGE> 6
IN WITNESS WHEREOF, the Wholesaler has executed this Agreement and the same has
become finally effective on the 21st day of September, 1999, upon execution at
Indianapolis, Indiana, by an authorized representative of Lilly.
WHOLESALER:
D&K HEALTHCARE RESOURCES, INC.
- --------------------------------------------------------------------------------
(Name)
8000 MARYLAND AVE. SUITE 920
- --------------------------------------------------------------------------------
(Street)
ST. LOUIS MO 63105
- --------------------------------------------------------------------------------
(City) (STATE) (Zip Code)
- --------------------------------------------------------------------------------
*DEA REGISTRATION NUMBER)
PLEASE CHECK TO INDICATE THE
SCHEDULES OF CONTROLLED
SUBSTANCES WHICH YOU ARE
REGISTERED TO DISTRIBUTE
SCHEDULE II SCHEDULE III
SCHEDULE IV SCHEDULE V
By:/s/ Martin D. Wilson
-----------------------------------------------------------------------------
(SIGNATURE)
President & COO
- -------------------------------------------------------------------------
(TITLE)
LILLY:
Lilly USA
ELI LILLY AND COMPANY
Lilly Corporate Center
Indianapolis, Indiana 46285
By:/s/ Gino Santini
-----------------------------------------------------------------------------
President, US Operations and Global Marketing
6
<PAGE> 1
EXHIBIT 10.13
FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO THE FOURTH AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (this "Amendment") is made as of November 25,1998, by and among FLEET
CAPITAL CORPORATION, a Rhode Island corporation (the "Lender"), and D&K
HEALTHCARE RESOURCES, INC. ("D & K") and JARON, INC. ("Jaron"), (D & K and Jaron
are sometimes hereinafter referred to individually as "Borrower" and
collectively as "Borrowers").
Preliminary Statements
A. Lender and Borrowers are parties to that certain Fourth Amended and
Restated Loan and Security Agreement dated as of August 7, 1998 (as amended, the
"Loan Agreement"). Capitalized terms used herein and not otherwise defined shall
have the meanings given them in the Loan Agreement.
B. Borrowers and Lender now desire to amend certain provisions of the
Loan Agreement on and subject to the terms hereof.
Terms of Agreement
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1 . Amendment to Loan Agreement. The Loan Agreement is hereby amended by
deleting Section 1.2 [RELATING TO LETTERS OF CREDIT; LC GUARANTIES] in its
entirety and replacing it with the following new Section 1.2:
"1.2 Letters of Credit; LC Guaranties. Lender agrees, for so long as
no Default or Event of Default exists and if requested by D&K on its own
behalf or as agent for any Borrower, to (i) issue its, or cause to be
issued its Affiliate's, Letters of Credit for the account of any Borrower
or (ii) execute LC Guaranties by which Lender or its Affiliate shall
guaranty the payment or performance by any Borrower of its reimbursement
obligations with respect to Letters of Credit and letters of credit issued
for Borrower's account by other Persons in support of such Borrower's
obligations (other than obligations for the repayment of Money Borrowed),
provide that the LC Amount at any time shall not exceed $10,000,000. No
Letter of Creditor or LC Guarantee may have an expiration date that is
after the last day of the Original Term. Any amounts paid by Lender under
any LC Guaranty or in connection with any Letter of Credit shall be treated
as Revolving Credit Loans, shall be secured by all of the Collateral and
shall bear interest and be payable at the same rate and in the same manner
as Revolving Credit Loans."
<PAGE> 2
2. No Claims. Borrowers acknowledge that there are no existing claims,
defenses (personal or otherwise) or rights of set-off or recoupment whatsoever
with respect to any of the Loan Documents. Borrowers agree that this Amendment
in no way acts as a release or relinquishment of any Liens in favor of the
Lender securing payment of the Obligations.
3. Miscellaneous. Except as expressly set forth herein, there are no
agreements or understandings, written or oral, between Borrowers and Lender
relating to the Loan Agreement that are not fully and completely set forth
herein or therein. Except to the extent specifically waived or amended herein or
in any of the documents, instruments, or agreements delivered in connection
herewith, all terms and provisions of the Loan Agreement hereby are ratified and
reaffirmed and shall remain in full force and effect in accordance with the
respective terms thereof. This Agreement may be executed in one or more
counterparts, and by different parties on different counterparts. All such
counterparts shall be deemed to be original documents and together shall
constitute one and the same agreement. A signature of a party delivered by
facsimile or other electronic transmission shall be deemed to be an original
signature of such party.
IN WITNESS WHEREOF, this Amendment has been executed and delivered by the
duly authorized representatives of the parties as of the date first above
written.
FLEET CAPITAL CORPORATION
By:/s/ Edward M. Bartkowski
-------------------------------------
Name: Edward M. Bartkowski
Title: Vice President
D & K HEALTHCARE RESOURCES, INC.
By:/s/ Martin D. Wilson
-------------------------------------
Name: Martin D. Wilson
Title: President
JARON, INC.
By:/s/ Martin D. Wilson
-------------------------------------
Name: Martin D. Wilson
Title: President
- 2 -
<PAGE> 1
EXHIBIT 10.15
THIRD AMENDMENT TO FOURTH AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT AND WAIVER OF DEFAULT
THIS THIRD AMENDMENT TO THE FOURTH AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT AND WAIVER OF DEFAULT (this "Amendment") is made as of June 30, 1999,
by and among FLEET CAPITAL CORPORATION, a Rhode Island corporation (the
"Lender"), and D&K HEALTHCARE RESOURCES, INC. ("D & K"), JARON, INC. ("Jaron")
and JEWETT DRUG CO., a South Dakota corporation ("Jewett") (D & K, Jaron and
Jewett are sometimes hereinafter referred to individually as "Borrower" and
collectively as "Borrowers").
Preliminary Statements
A. Lender, and Borrowers are parties to that certain Fourth Amended and
Restated Loan and Security Agreement dated as of August 7, 1998 (as amended,
restated or renewed from time to time, the "Loan Agreement"). Capitalized terms
used herein and not otherwise defined shall have the meanings given them in the
Loan Agreement.
B. D & K has requested that Lender waive certain provisions of the Loan
Agreement and amend certain provisions of the Loan Agreement to allow for the
Capital Base to be lower than the amount required in the Loan Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Waiver of Default. The Borrowers are in default (the "Default") of the
provisions of Section 8.3(C) of the Loan Agreement [RELATING TO MAINTENANCE OF
CAPITAL BASE] in that the Borrowers maintained a Capital Base for the period of
June 1, 1999 through June 30, 1999 of $1,480,106, and the Loan Agreement
requires the Borrower's Capital Base to be not less than $3,000,000 during such
period. Upon the terms and subject to the conditions set forth in this
Amendment, the Lender hereby waives the Default. This waiver shall be effective
only in this specific instance and for the specific purpose for which it is
given, and this waiver shall not entitle the Borrowers to any other or further
waiver in any similar or other circumstances.
2. Amendment of Capital Base Covenant. Section 8.3(C) of the Loan
Agreement [RELATING TO MAINTENANCE OF CAPITAL BASE] is hereby deleted in its
entirety and replaced with the following new Section 8.3(C):
(C) Maintenance of Capital Base. Maintain at all times
during the periods specified below a Capital Base in an amount not
less than the amount shown below for the period corresponding thereto
(excluding any purchases by D & K of its own stock made between May
20, 1999 and June 1, 2000 pursuant to a consent letter from Lender
dated May 20, 1999):
<PAGE> 2
Period Amount
------ ------
June 1, 1999 through December 30, 1999 $1,480,000
December 31, 1999 through June 29, 2000 $3,000,000
June 30, 2000 through June 29, 2001 $10,000,000
June 30, 2001 and thereafter $20,000,000
3. No Claims. Borrowers acknowledge that there are no existing claims,
defenses (personal or otherwise) or rights of set-off or recoupment whatsoever
with respect to any of the Loan Documents. Borrowers agree that this Amendment
in no way acts as a release or relinquishment of any Liens in favor of the
Lender securing payment of the Obligations.
4. Miscellaneous. Except as expressly set forth herein, there are no
agreements or understandings, written or oral, between any Borrower and Lender
relating to the Loan Agreement and the other Loan Documents that are not fully
and completely set forth herein or therein. Except to the extent specifically
waived or amended herein or in any of the documents, instruments, or agreements
delivered in connection herewith, all terms and provisions of the Loan Agreement
and the other Loan Documents are hereby ratified and reaffirmed and shall remain
in full force and effect in accordance with the respective terms thereof. This
Agreement may be executed in one or more counterparts, and by different parties
on different counterparts. All such counterparts shall be deemed to be original
documents and together shall constitute one and the same agreement. A signature
of a party delivered by facsimile or other electronic transmission shall be
deemed to be an original signature of such party.
IN WITNESS WHEREOF, this Amendment has been executed and delivered by the
duly authorized representatives of the parties as of the date first above
written.
FLEET CAPITAL CORPORATION
By:/s/ Edward M. Bartkowski
------------------------------------
Name: Edward M. Bartkowski
Title: Vice President
D & K HEALTHCARE RESOURCES, INC.
By:/s/ Thomas S Hilton
------------------------------------
Name: Thomas S Hilton
Title: SR. VP. & CFO
<PAGE> 3
JARON, INC.
By:/s/ Martin D. Wilson
-------------------------------------
Name: Martin D. Wilson
Title: Officer - Pres.
JEWETT DRUG CO.
By:/s/ Martin D. Wilson
-------------------------------------
Name: Martin D. Wilson
Title: Vice Chairman
<PAGE> 1
EXHIBIT 10.18
PRIME VENDOR AGREEMENT*
BETWEEN
TENNESSEE PHARMACY PURCHASING
ALLIANCE
AND
D & K HEALTHCARE RESOURCES, INC.
*Confidential portion omitted and filed separately with the Commission.
<PAGE> 2
* indicates deleted material
PRIME VENDOR
AGREEMENT
This Agreement ("Agreement") is made as of the 25th day of August,
1999, is by and between Tennessee Pharmacy Purchasing Alliance, ("TPPA") on its
own behalf and on behalf of its member pharmacies ("Members"), and D & K
Healthcare Resources, Inc., ("D & K").
1. Prime Vendor. Subject to the terms and conditions hereof, TPPA
and each of the Members hereby designate D & K as its Prime
Vendor for pharmaceutical and OTC products for the Members.
TPPA shall update changes to the list of Members at least
quarterly. As used herein, Prime Vendor means the preferred
supplier to fulfill at least ninety percent (90%) of the
branded pharmaceutical (i.e. non-generic) requirements of the
Members. D & K shall endeavor to supply all branded
pharmaceutical products ordered by Members hereunder.
2. Stocking Requests. D & K agrees to stock all routinely ordered
source contract items for the Members. D & K will respond to
all stocking requests on a timely basis. Upon receipt of a
written request from Members that includes NDC number, monthly
usage, and an order to cover the first shipment, D & K will
immediately initiate the stocking and ordering process.
Products are usually in stock and available for shipment
within one (1) to three (3) weeks of the original request
date.
3. Contract Administration. To accelerate the contract loading
and manufacturer confirmation process, Members shall provide D
& K with the following contract information: NDC number,
product description, negotiated price, effective dates, and
vendor contract or reference number.
4. Chargeback Denials by Manufacturers. D & K will make
reasonable efforts to accurately maintain contract pricing
agreements in its system including confirming both pricing and
eligibility. If manufacturers deny chargeback claims to D & K,
Members shall upon receipt of invoice from D & K, pay to D & K
the amount of the denied chargeback. Prior to such invoicing,
D & K will make reasonable efforts to recover the denied
chargeback from the manufacturer.
5. Orders. Telxon and Resource orders may be placed weekdays
until 6:00 P.M. local time for next business day delivery.
Telephone and fax orders may be placed with the Customer
Service Department weekdays until 5:30 P.M. local time for
next business day delivery.
6. Deliveries. Orders will be delivered in a sealed, returnable
plastic tote. A signature may be required by the individual
accepting the shipment to verify the number of cartons
1
<PAGE> 3
received. D & K makes every effort to deliver all customer orders
before 12:00 P.M., but in the event of an unreasonable delay in such
delivery, D & K shall endeavor to provide notice.
7. Freight Terms. Freight will be F.O.B. destination (prepaid and absorbed
by D & K) on all regularly scheduled deliveries to Members. D & K
agrees to waive all daily minimum order requirements to qualify for
prepaid freight. For special requests such as airfreight, express
courier service, or bus shipments, D & K will ship prepaid and bill the
freight charges on a separate invoice.
8. Information Services and Systems. D & K maintains a decentralized
Information Services Department to ensure technical assistance is
readily available to its customers. Experienced personnel are staffed
locally at each Division to provide the day-to-day and developmental
support needed to keep both D & K and its customers on the leading edge
of technological change. A partial list of D & K's technology offerings
follows:
A. RESOURCE: D & K'S Resource order management software has many
advanced features designed to automate the order creation,
transmission, and confirmation process. The system provides
product availability information and reduces acquisition cost
by ensuring contract compliance. For example, prior to
transmission, the system will scan the order to identify items
for which there is either a lower cost, or a contract
alternative. The D & K Resource order management system is
feature rich and considered to be one of the easiest to use
among all ordering systems on the market today. Resource
operated on any IBM compatible 486 or better computer using
MS-DOS with 4M of RAM. Key system features include:
- Order by item number, NDC number or description
- Stock status
- AB ratings
- Generic equivalent search
- Order confirmation within 20 minutes
- Contract compliance and best price scanning
- Purchase history
- Report package
- Import from Telxon or pharmacy system
- Inventory capability
- Daily price updates
B. Customized Management Reports: D & K has a variety of
customized management reports available to its customers. Such
reports include, but are not limited to: DEA reports, history
reports, price changes, contract compliance, etc. D & K will
work with TPPA to develop customized reports as may reasonably
be requested by TPPA.
2
<PAGE> 4
C. Physical Inventory Assistance: D & K will make two physical
inventory options available to Members. Resource and mainframe
programs. Additional Telxons will be provided, as well as
inventory preparation training. System features include:
i. Whole or partial units may be entered
ii. Inventory printed in transmission or department
sequence
iii. Inventory report includes: item number, average
wholesale price (AWP), customer cost, customer retail
price gross margin dollars, and percent by
department.
iv. Multiple transmissions combined into single inventory
report
D. Business Reviews: D & K recommends semi-annual meetings as an
opportunity to formally review the performance of the
Agreement to ensure maximum economic benefit is being realized
by the trading partners, to explore mutually beneficial
programs, and to establish specific action items for the next
period.
9. Prime Vendor Services. D & K shall provide the following services to
Members.
A. Customer Service Department: D & K's customer service
department is professionally staffed from 8:00 A.M. to 6:00
P.M. local time excluding weekends and holidays.
B. Emergency Orders: D & K provides twenty-four (24) hour, seven
(7) day-a-week emergency delivery service in life-threatening
situations. Members will be provided with emergency telephone
and pager numbers.
C. Drop-Ship Service: D & K shall provide drop-ship service to
Members upon request. Manufacturers will typically call for
authorization to bill through D & K and approval will be
promptly given. Manufacturer drop-ship invoices will be
promptly processed by D & K within two business days of
receipt.
D. Price Stickers: D & K offers multiple encoded price sticker
formats for both Rx and OTC products. Information provided on
the sticker is AWP, net landed price, quantity purchased, date
purchased and the D & K item number.
E. Shelf Labels. D & K will provide scannable shelf labels upon
request.
F. Material Safety Data Sheets: D & K will provide Material
Safety Data Sheets (MSDS) upon request.
10. Pricing. The prices for products supplied hereunder are set forth in
the attached Schedule B. All prices quoted in this Agreement and all
other obligations of D & K described herein are based on the agreement
that TPPA has designated, and the Members will utilize, D & K as its
and their Primary Vendor.
3
<PAGE> 5
11. Definitions of Cost. For this Agreement, the following definitions of
costs will apply:
Individual Contracts: TPPA contract items purchased by D & K through
API will be priced at*.
Net-Priced Items: D & K offers a selected group of net-priced products,
including non-contract generic vendor items, special promotional and
drop-ship merchandise. Net priced generic items will not effect
contract generic pricing. A listing of net-priced items is available
separately and is included in the D & K catalog.
Other Items: For the purpose of this Agreement, items not covered under
buying group, individual contracts, or net-priced, cost is defined to
be the manufacturer's scheduled price, including promotions, special
contract pricing, volume discounts and free goods, but excluding cash
discounts. Off invoice allowances and free goods are subject to
manufacturers' promotional calendars and may be subject to minimum
order quantities.
12. Credits. Credit for returned goods will be processed within five days
of receipt of the merchandise. Credit for billing errors or mispicks is
processed immediately. A copy of the credit memo will be sent with the
Member's next order. Returns authorization requests may be transmitted
electronically via Telxon at the Member's convenience.
13. Return Goods Policy. D & K's Return Goods Policy is attached hereto as
Schedule C. D & K reserves the right to change such policy upon thirty
(30) days prior written notice to TPPA.
14. Medicare/Medicaid. TPPA and Members acknowledge that any discounts or
rebates to it hereunder on items reimbursable by Medicare or a state
healthcare program such as Medicaid, may be reportable under applicable
law by TPPA and Members to federal or state healthcare authorities
respectively.
15. No Warranty. D & K makes no representation or warranty of
merchantability, fitness for a particular purpose, or otherwise,
expressed or implied, with respect to any products; and TPPA and the
Members acknowledge and agree that any representations or warranties
that relate to any products are made only by the manufacturer of such
products. TPPA and the Members acknowledge and agree that its sole
recourse for the breach of any such manufacturer's representation and
warranty is against the manufacturer.
16. No Liability. Notwithstanding anything in this Agreement to the
contrary, D & K shall have no liability for any special incidental,
indirect or consequential damages, including, without limitation, loss
of opportunity, revenue or profit, in connection with or arising out of
this Agreement or D & K's performance hereunder, even if such damages
were foreseeable.
*Confidential portion omitted and filed separately with the Commission.
4
<PAGE> 6
17. Extension of Credit. D & K shall extend credit subject to Members
furnishing evidence of financial responsibility, posting of security,
and execution of a security agreement and other documents as D & K may
require from time to time. Notwithstanding the foregoing, if at
anytime, or from time to time, D & K believes that a Member's ability
to make payments hereunder is impaired or a Member's financial
condition has materially deteriorated, D & K may require additional
security and may withhold deliveries until such security is received
and may amend the payment terms hereunder. Members shall abide by D &
K's standard credit terms and conditions.
18. Term. The term of this Agreement will be for a period of
three (3) years, commencing as of the date first set forth above,
and, unless sooner terminated as provided below, shall renew
automatically thereafter for successive one (1) year periods, unless
written cancellation notice is provided by either party at least
thirty (30) days prior to the end of the initial term.* Either
party may terminate this Agreement if the other party is in breach of
any of its obligations hereunder and fails to cure such breach within
ninety (90) days (fifteen (15) days for failure to make payments when
due) after receipt of notice of such breach; and D & K may terminate
this Agreement at any time if TPPA or its assets (whether voluntarily
or involuntarily) become the subject of any bankruptcy or insolvency
proceeding or if TPPA makes an assignment for the benefit of its
creditors.
19. Delays. Notwithstanding any provision of this Agreement to the
contrary, each party's obligations under this Agreement (other then
Member's payment obligations) will be excused if and to the extent that
any delay or failure to perform such obligation is due to acts of
nature, governmental actions, strikes or labor disputes or other causes
or situations beyond the reasonable control of that party.
20. Confidentiality. Each party agrees to maintain in confidence the terms
and conditions herein, and disclose the contents of this Agreement only
to those within its organization who have a reasonable need to know of
such information, except as otherwise agreed by the other party or as
required by law.
21. Taxes. Members will pay, when due, any sales, use, excise, gross
receipts or other federal, state local taxes or other assessments
(other than any tax based solely on the net
*Confidential portion omitted and filed separately with the Commission.
5
<PAGE> 7
income of D & K) and related interest and penalties that D & K is at
any time obligated to pay or collect in connection with or arising out
of the transactions, contemplated by this Agreement. If D & K pays any
such amounts which a Member is obligated to pay under this section,
then such Member will promptly reimburse D & K in an amount equal to
the amount so paid by D & K.
22. Insurance. D & K will at all times during the term of this Agreement
maintain product liability insurance at levels not less than two
million dollars ($2,000,000.00), and will provide TPPA with a
certificate confirming such insurance coverage promptly following
request for same. Such policies will include TPPA as an additional
named insured.
23. Severability. The unenforceability or invalidity of any term or
provision herein, or of any portion thereof, will not affect the
validity of enforceability of any other term or provision, or portion
thereof, herein contained.
24. Assignment. This Agreement may not be assigned by either party without
the express written consent of the other party, except that either
party may assign this Agreement to another party that wholly owns it,
which it wholly owns or which is under common ownership with such
party.
25. Governing Law. This Agreement shall be construed and enforced under the
law of the State of Missouri without regard to its conflict of laws
principles.
26. Notices. All notices under this Agreement shall be in writing and shall
be deemed duly given on the date received, if personally delivered,
sent by facsimile transmission, or by overnight courier, and addresses
to the parties at the following addresses:
If to TPPA to:
Tennessee Pharmacy Purchasing Alliance
107 Music City Circle, Suite 202
Nashville, TN 37214
Attention: Glynn Williams, CEO
Fax: (615) 872-9095
Phone: (615) 872-8880
If to D & K to:
D & K Healthcare Resources, Inc.
8000 Maryland Avenue, Suite 920
St. Louis, MO 63105
Attention: Martin Wilson, President
Fax: (314) 727-5759
Phone: (314) 722-3485
6
<PAGE> 8
28. Headings. The headings of this Agreement are used only as a matter
of convenience, and in no way define limit, construe or describe
the scope or intent of any section of this Agreement.
29. Representation. TPPA represents and warrants that it is authorized
to act on behalf of its members.
30. Incorporation of Request for Proposals (RFP). All terms, covenants
and representations contained in D & K's response to TPPA's
request for proposals (see Schedule A) and information provided to
TPPA during site visits and presentation prior to the award of
this Agreement (collectively the "RFP Information") are expressly
included in this Agreement. In the event that the terms of this
Agreement and the RFP Information conflict, the terms of this
Agreement shall control. Other than the RFP Information, this
Agreement and its Exhibits supersede any and all agreements,
either oral or written, between the parties to this Agreement with
respect to the subject matter contained in the Agreement, and
contains all of the covenants and agreements with respect to the
purchase and sale of Products within the scope of this Agreement.
31. Change of Control. In the event that a third party acquires all or
substantially all of the outstanding voting stock of D & K, then
TPPA shall have the right to terminate this Agreement upon thirty
(30) days advance written notice to D & K or such third party
acquirer as applicable, at any time following the effective date
following the closing of such acquisition.
In Witness Whereof, the parties have caused this Agreement to be executed
by authorized representatives.
D & K HEALTHCARE RESOURCES, INC. TENNESSEE PHARMACY
PURCHASING ALLIANCE
BY: J. Hord Armstrong, III BY: Glenn Williams
------------------------------ -------------------------------
ITS: Chairman and CEO ITS: Board Chairman
------------------------------ -------------------------------
DATE: 8/25/99 DATE: 8/25/99
------------------------------ -------------------------------
7
<PAGE> 9
SCHEDULE A
"TENNESSEE PHARMACIST PURCHASING ALLIANCE"
TENNESSEE PHARMACY COALITION
JUNE 11, 1999
***REQUEST FOR PROPOSAL***
<PAGE> 10
TENNESSEE PHARMACY COALITION
TENNESSEE PHARMACIST PURCHASING ALLIANCE
REQUEST FOR PROPOSAL
GENERAL INFORMATION
I. WHOLESALER INFORMATION
a) Provide the name and address of your corporation.
D&K HEALTHCARE RESOURCES, INC.
CORPORATE OFFICE: 8000 MARYLAND AVENUE
SUITE 920
ST. LOUIS, MISSOURI 63105
CAPE GIRARDEAU DIVISION: 1823 RUST AVENUE
CAPE GIRARDEAU, MISSOURI 63703
LEXINGTON DIVISION: 516 WEST FOURTH STREET
LEXINGTON, KENTUCKY 40508
b) Provide the address and primary contact for all correspondence and
notices.
JIM LARGENT
DIVISION VP & GENERAL MANAGER - CAPE GIRARDEAU DIVISION
1823 RUST AVENUE
CAPE GIRARDEAU, MISSOURI 63703
(800) 851-3814
c) List all key personnel, contacts and addresses. Please include name,
title, telephone number, fax number and e-mail address.
PLEASE REFER TO EXHIBIT 1 FOR A COMPLETE LIST OF KEY CONTACTS FOR BOTH
THE CAPE GIRARDEAU AND LEXINGTON DIVISIONS. PLEASE REFER TO EXHIBIT 2
FOR A LIST OF D&K'S MANAGEMENT TEAM.
D&K Healthcare Resources, Inc. Proposal
July 15, 1999 Page 1 of 3
<PAGE> 11
d) Provide an outline of your customer service program.
EACH D&K DISTRIBUTION CENTER IS STAFFED WITH AN EXPERIENCED CUSTOMER
SERVICE TEAM CONSISTING OF HIGHLY TRAINED REPRESENTATIVES WHO ARE WELL
PREPARED TO PROVIDE TPC/TPPA MEMBER PHARMACIES WITH THE SUPPORT THEY
NEED. OUR TOLL-FREE NUMBERS WILL ACCESS OUR CUSTOMER SERVICE
DEPARTMENTS DIRECTLY FOR ASSISTANCE WITH:
- PRODUCT INFORMATION AND AVAILABILITY
- DROP SHIP SERVICE
- EMERGENCY ORDERS
- MATERIAL SAFETY DATA SHEETS
- PRICE STICKER
- SHELF LABELS
CUSTOMER SERVICE DEPARTMENT - CAPE GIRARDEAU DIVISION
PHONE: (800) 851-3814
HOURS: MONDAY THROUGH THURSDAY: 8:00 AM - 6:00 PM (CT)
FRIDAY: 8:00 AM - 5:00 PM (CT)
CUSTOMER SERVICE DEPARTMENT - LEXINGTON DIVISION
PHONE: (800) 333-9397
HOURS: MONDAY THROUGH FRIDAY 8:00 AM - 5:30 PM (ET)
e) If you are chosen as our Prime Vendor we will need one contact person
for all divisions for resolving any problems that may arise.
CONTACT FOR CAPE GIRARDEAU DIVISION: JIM LARGENT
DIVISION VP & GENERAL MANAGER
CONTACT FOR LEXINGTON DIVISION: GARY EADIE
DIRECTOR OF SALES
D&K Healthcare Resources, Inc. Proposal
July 15, 1999 Page 2 of 3
<PAGE> 12
II. SERVICES AND PROGRAMS
a) MANAGING INVENTORY: Propose an effective program to manage store
inventories. Include in your proposal methods to control inventory
shrink, reduce outdates, improve store turns and to shorten days of
inventory and discuss what tools would be available. Please provide
data on current service levels.
D&K HAS PROPOSED OUR PARTNERS PROGRAM AS THE INVENTORY MANAGEMENT
SOLUTION FOR TPC/TPPA MEMBER PHARMACIES. THIS ADVANCED SOFTWARE PROGRAM
IS THE PROVEN SYSTEM TO CONTROL INVENTORIES, REDUCE OUTDATES, AND IMPROVE
INVENTORY TURNS IN THE FAST PACED COMMUNITY PHARMACY SETTING. IT IS THE
ONLY STATISTICALLY BASED, AUTOMATED INVENTORY REPLENISHMENT PROGRAM
CURRENTLY IN USE TODAY BY INDEPENDENT PHARMACIES. D&K HAS HAD THIS FULLY
FUNCTIONING PROGRAM IN PLACE AND OPERATING IN CUSTOMER PHARMACIES FOR THE
PAST TWO YEARS. PARTNERS IS THE ONLY PROGRAM IN USE IN THE MARKET TODAY
THAT IS FULLY AUTOMATED AND USES HISTORICAL DISPENSING/USAGE DATA TO
PRODUCE ORDERS BASED ON PROJECTED DEMAND. PARTNERS CONTROLS INVENTORY BY
UTILIZING TWENTY-FOUR (24) MONTHS OF PRODUCT MOVEMENT HISTORY FROM THE
STORE'S PHARMACY SYSTEM WHICH IS DOWNLOADED INTO THE D&K AS/400 COMPUTER.
TO GET STARTED, D&K WILL TAKE A PHYSICAL INVENTORY TO DETERMINE INVENTORY
BALANCES IN DISPENSING UNIT OF MEASURE. WITH THESE INVENTORY BALANCES AND
PRIOR 24 MONTHS DEMAND DOWNLOADED TO OUR AS/400, PLUS RECEIVING A DAILY
PRODUCT USAGE TRANSMISSION FROM THE CLIENT PHARMACY SYSTEM, PARTNERS WILL
ACCURATELY FORECAST DEMAND AND CREATE AN ORDER TO PROVIDE JUST-IN-TIME
INVENTORY. PARTNERS IS DESIGNED TO REDUCE INVENTORY BY 25% WHILE
INCREASING SERVICE LEVELS. PARTNERS WILL ALSO CUT LABOR COSTS BY
MINIMIZING THE TIME SPENT BY THE PHARMACY STAFF ORDERING, CHECKING AND
STOCKING PRODUCT. THE HIDDEN COSTS ASSOCIATED WITH RETURNING ORDERING
ERRORS AND CARRYING EXCESS INVENTORY IS ALSO ELIMINATED.
WITH BRANDED RX SERVICE LEVELS APPROACHING 100%, D&K TAKES PRIDE IN ITS
ABILITY TO CONSISTENTLY DELIVER INDUSTRY LEADING FILL-RATE PERFORMANCE.
D&K HAS INVESTED HEAVILY IN SOPHISTICATED INVENTORY CONTROL SYSTEMS TO
PERPETUALLY TRACK ITS INVENTORY, ANALYZE DEMAND HISTORY AND ACCURATELY
PROJECT FUTURE DEMAND TO ENHANCE FILL RATE PERFORMANCE. THE RESULT OF
THIS COMPREHENSIVE INVENTORY MANAGEMENT SYSTEM ALLOWS D&K THE ABILITY TO
CONSISTENTLY OFFER AN OVERALL FILL RATE THAT EXCEEDS 97.5%.
D&K Healthcare Resources, Inc. Proposal
July 15, 1999 Page 3 of 3
<PAGE> 13
b) VENDOR CONTRACTS: Vendor contracts are submitted by the manufacturer
to a wholesaler contracts department. Explain your procedure for loading
vendor contract prices. Include in your explanation how will the contract
be verified, what time frame is involved, appointed contact personnel,
and responsible parties for contract maintenance. What guarantee of
performance do you have on TPC/TPPA's generic contracts?
D&K TAKES GREAT PRIDE IN ITS ABILITY TO EFFECTIVELY PROVIDE CONTRACT
ADMINISTRATION SUPPORT TO TPC/TPPA MEMBER PHARMACIES. UPON RECEIPT OF
VENDOR CONFIRMATIONS, D&K IMMEDIATELY INITIATES THE CONTRACT LOADING OR
UPDATING PROCESS. TO EXPEDITE THE PROCESS, D&K ACCEPTS VENDOR
CONFIRMATIONS BY FAX OR EDI, IN ADDITION TO MAIL. THE CONTRACT ROLL-OVER
PROCESS TAKES TWO WEEKS AND CAN BE REDUCED TO ONE WEEK WHEN RECEIVED VIA
EDI. UPDATES RECEIVED BY 12:00 NOON ARE ROUTINELY LOADED THE SAME DAY AS
RECEIVED AND ARE REFLECTED ON THAT EVENING'S INVOICES. D&K ALSO VERIFIES
PHARMACY ELIGIBILITY TO MINIMIZE DENIED CHARGEBACKS. THE CONTRACT
ADMINISTRATORS ARE KATHY LEE, CAPE GIRARDEAU DIVISION AND LINDA
SCHWEITZER, LEXINGTON DIVISION. TO MONITOR TPC/TPPA'S GENERIC CONTRACT
PERFORMANCE, D&K PROVIDES TPC/TPPA COPIES OF API PURCHASE ORDERS AND
RECEIVERS. IN ADDITION, WE PROVIDE A DETAILED REPORT DOCUMENTING API'S
FILL-RATE PERFORMANCE.
c) DSD POLICY AND PROCEDURE: What is your procedure for stores
deliveries? Include in your explanation, order cut-off time, delivery
days, delivery times, Holiday scheduling, "emergency" orders, your policy
on shelf life of products, storage requirements during transportation,
"special order" items, etc. Attach a copy of your current Policy and
Procedures. Delivery must be by 12:00 noon to all members.
D&K RECOGNIZES AND UNDERSTANDS THE CRITICAL ROLL THAT CONSISTENT, TIMELY
DELIVERING OF MERCHANDISE PLAYS IN A PHARMACY'S DAY-TO-DAY OPERATION. TO
INSURE QUALITY DELIVERY SERVICE, WE CONSTANTLY MONITOR THE PERFORMANCE OF
THE D&K DELIVERY FLEET AND OUR CONTRACT CARRIERS. ALL DELIVERIES ARE MADE
BEFORE 12:00 NOON, THE NEXT BUSINESS DAY, MONDAY THROUGH FRIDAY. ORDER
CUT-OFF TIME IS 6:30 PM. REFRIGERATED ITEMS ARE SENT IN COOLERS PACKED
WITH FROZEN COLD PACKS TO INSURE ITEM TEMPERATURE INTEGRITY. HOLIDAY
SHIPPING SCHEDULES ARE PUBLISHED AND DISTRIBUTED TO THE PHARMACIES WELL
IN ADVANCE OF THE HOLIDAY TO ENSURE MINIMAL DISRUPTION TO THE ORDERING
ROUTINE. PLEASE REFER TO EXHIBIT 1 FOR A LIST OF ALL APPROPRIATE
PERSONNEL, ALONG WITH PAGER AND CELL PHONE NUMBERS. THESE NUMBERS MAY BE
USED FOR LIFE-THREATENING EMERGENCY ORDERS ON WEEKENDS, HOLIDAYS OR AFTER
HOURS. WEEKDAY EMERGENCY ORDERS WILL BE HANDLED WITH TOP PRIORITY AND
SHIPPED EXPRESS OR AIRFREIGHT. D&K ALSO HAS IN PLACE AN EMERGENCY
BACK-ORDER RELAY SYSTEM BETWEEN OUR FOUR DIVISIONS TO ACT AS A BACK UP
MEASURE IN CASE ANY DIVISION IS OUT OF A PARTICULAR PRODUCT. D&K WILL
HONOR ANY REQUEST FROM OUR CUSTOMERS TO STOCK AN ITEM. WE PREFER THAT
CUSTOMERS GIVE US AN APPROXIMATE MONTHLY USAGE ON PRODUCT ADDITION
REQUESTS TO ENSURE PROPER STOCKING LEVELS ARE ESTABLISHED. IT IS D&K'S
POLICY TO SHIP PRODUCT WITH A MINIMUM OF SIX MONTHS SHELF LIFE REMAINING.
THE EXCEPTIONS TO THIS POLICY WOULD BE BIO-TECHNOLOGY AND OTHER PRODUCTS
THAT ARE ONLY AVAILABLE WITH SHORTER SHELF-LIFE.
FOR YOUR CONVENIENCE A COPY OF OUR POLICY AND PROCEDURE MANUAL HAS BEEN
SENT UNDER SEPARATE COVER.
D&K Healthcare Resources, Inc. Proposal
July 15, 1999 Page 4 of 8
<PAGE> 14
d) PRICING: If your bid is based on one price for pharmaceuticals, will
all pharmaceuticals including OTC's be sold at the same pricing? Must be
one price for all members. No tiered pricing will be accepted. List all
payment options for our members (i.e. credit terms). Does Rx trade name
include pass through pricing?
PHARMACEUTICALS AND OTC/HBA MERCHANDISE WILL BE INVOICED AT THE SAME
PRICE, AND IN ADDITION, D&K AGREES TO INVOICE ALL MEMBER PHARMACIES AT
THE SAME PRICE BASED UPON THE PAYMENT TERMS SELECTED. ALL MANUFACTURERS'
PROMOTIONAL DISCOUNTS AND ALLOWANCES WILL BE PASSED THROUGH TO TPC/TPPA
MEMBER PHARMACIES DURING THE MANUFACTURERS' PROMOTIONAL PERIODS. PLEASE
REFER TO EXHIBIT 3 FOR D&K'S PROPOSED PRICING FOR TPC/TPPA.
e) RETURNS: What is your procedure for returning products? Attach a copy
of your company's returns policy. Also, include answers for the
following: (a) Some manufacturers require all returns to be processed
through the wholesaler-even partials. Do you accept returns on these
products? (i.e. Mead Johnson Nutritional) (b) Will there be a deduction
taken on our credits for manufacturer credits processed through your
accounting office? What is the turnaround on credits for manufacturer
credits processed through your accounting office? What is the turnaround
on credits? We prefer no more than one week.
D&K USES RADIO FREQUENCY (RF) TECHNOLOGY TO EXPEDITE RETURN PROCESSING ON
ALL IN HOUSE RETURNS. NORMAL RETURN MERCHANDISE WILL BE PROCESSED IN ONE
WEEK AND WILL BE INCLUDED ON THE TPC/TPPA MEMBER PHARMACY'S CURRENT
STATEMENT. WE FOLLOW ALL MANUFACTURERS' RETURNED GOODS POLICIES. IF A
MANUFACTURER ONLY ACCEPTS PARTIAL RETURNS THROUGH A WHOLESALER, WE WILL
ACCEPT THOSE RETURNS FOR CREDIT. WE ALSO OFFER THE SERVICES OF CAPITAL
RETURNS TO HANDLE MERCHANDISE NOT RETURNABLE TO WHOLESALERS. CAPITAL
RETURNS WILL ACCEPT MERCHANDISE OVER ONE YEAR OUT-OF-DATE, OUTDATED
SCHEDULE II'S, PARTIAL BOTTLES, AND HAZARDOUS MATERIALS. D&K WILL CREDIT
ALL RETURNS PROCESSED THROUGH CAPITAL RETURNS ON TPC/TPPA MEMBER
PHARMACIES' STATEMENTS. D&K CHARGES 10% ON ALL OUTDATED OR NON-SALEABLE
MERCHANDISE RETURNED FOR CREDIT. CREDITS FROM THE MANUFACTURER FOR DIRECT
RETURNS ARE PASSED THROUGH TO THE CUSTOMER, WITHOUT ANY DEDUCTIONS,
WITHIN ONE WEEK OF RECEIPT. PLEASE REFER TO EXHIBIT 4 FOR OUR COMPLETE
RETURNED GOODS POLICY.
f) List all fees for any services and programs you may offer.
PLEASE REFER TO EXHIBIT 5 FOR A SUMMARY OF SERVICE AND PROGRAM FEES.
D&K Healthcare Resources, Inc. Proposal
July 15, 1999 Page 5 of 8
<PAGE> 15
III. INVOICING
Is your company capable of providing custom invoicing? If yes, are you
capable of placing data such as customer-requested vendor numbers on
invoices? Are you able to identify contract pricing on invoices? Are you
capable of categorizing and separating invoices according to "control"
products, "noncontrol" products and "supply" products? Do you offer
customer price tags? What is the procedure for stocking new items for our
members?
D&K'S INVOICES ARE SEPARATED BY PRESCRIPTION, OTC/HBA, CONTROL PRODUCTS,
SCHEDULE II'S, AND SUPPLIES. ALL DROP-SHIPPED ORDERS ARE BILLED ON D&K'S
INVOICES, WITH A REFERENCE TO THE MANUFACTURER PO NUMBER FOR EASY
REFERENCE. CONTRACT ITEMS ARE CODED ON THE INVOICE AS WELL AS ANY PRICE
INCREASE OR DECREASE. D&K OFFERS MULTIPLE ENCODED PRICE STICKER FORMATS
FOR BOTH RX AND OTC PRODUCTS. INFORMATION PROVIDED ON THE STICKER IS AWP,
NET LANDED PRICE, QUANTITY PURCHASED, DATE PURCHASED, AND D&K'S ITEM
NUMBER. PRICE STICKERS MAY BE CUSTOMIZED AND ENHANCED TO BETTER MEET THE
NEEDS OF TPC/TPPA MEMBER PHARMACIES. D&K WILL HONOR REQUESTS FROM
TPC/TPPA MEMBER PHARMACIES TO STOCK AN ITEM. WE PREFER THAT THE STORE
PROVIDE US AN APPROXIMATE MONTHLY USAGE ON PRODUCT ADDITION REQUESTS TO
ENSURE THAT PROPER STOCKING LEVELS ARE ESTABLISHED.
IV. REPORT DATA
Explain what measures for reporting data (80/20, purchase histories,
monthly dollars, etc.) are available. Include in your answer, forms used
(i.e. electronic, on-line viewing, hard copy, etc.) and tools provided by
the wholesaler (for example, hardware and software). What is the time
frame for getting reports? How are "special request" reports handled? Any
changes incurred for `special request" reports? Please provide a copy of
your annual report.
ONE OF D&K'S STRENGTHS IS ITS ABILITY TO PROVIDE CUSTOMIZED MANAGEMENT
REPORTS TO MEET THE UNIQUE NEEDS OF OUR CUSTOMERS. WE RECOGNIZE THE VALUE
OF INFORMATION AND HOW IMPORTANT IT IS TO ACCESS CRITICAL DATA IN A
TIMELY AND ACCURATE MANNER. CUSTOMIZED REPORT REQUESTS ARE TYPICALLY
PROCESSED AND AVAILABLE WITHIN TWO BUSINESS DAYS. D&K IS PRESENTLY
SUPPLYING A NUMBER OF REPORTS DESIGNED TO TPC/TPPA'S SPECIFICATIONS. IN
ADDITION, TPC/TPPA IS ALSO UTILIZING D&K'S RESOURCE HQ, A POWERFUL
PC-BASED ONLINE REPORTING SYSTEM. THE INFORMATION IS UPDATED DAILY AS
TPC/TPPA DIALS IN TO RECEIVE PURCHASE HISTORY REPORTS IDENTIFYING
CONTRACT, NON-CONTRACT AND API GENERIC PURCHASES. D&K ALSO PROVIDES
COPIES OF ALL REPORTS AT THE END OF EACH MONTH. PRINTED REPORTS ARE SENT
DIRECTLY TO TPC/TPPA HEADQUARTERS WITH A COPY TO GLYNN WILLIAMS. ALL
HARDWARE, SOFTWARE AND REPORTS ARE PROVIDED AT NO CHARGE. D&K IS ANXIOUS
TO PROVIDE ADDITIONAL REPORTS IN THE DESIRED FORMAT, AS REQUESTED BY
TPC/TPPA AND ITS MEMBER PHARMACIES. PLEASE REFER TO EXHIBIT 6 FOR D&K'S
ANNUAL REPORT.
D&K Healthcare Resources, Inc. Proposal
July 15, 1999 Page 6 of 8
<PAGE> 16
V. SUPPORTIVE MEASURES
What supportive measures are available through your company? Include in
your answer, measures regarding managers, meetings, store grand openings,
promotional programs, merchandising support, personnel, amount of time it
would take to convert stores to your company, etc. Provide number of
location of houses available to service this contract.
D&K BELIEVES IT IS IMPERATIVE THAT SEMI-ANNUAL BUSINESS REVIEW MEETINGS
ARE HELD WITH THE MANAGEMENT OF BOTH TPC/TPPA AND D&K. THESE
PARTNERSHIP-BUILDING SESSIONS OFFER BOTH PARTIES THE OPPORTUNITY TO
MAXIMIZE THE ECONOMIC BENEFIT OF THE AGREEMENT AND TO ENSURE THE MUTUALLY
AGREED UPON OBJECTIVES RECEIVE THE PROPER FOCUS IN BOTH ORGANIZATIONS. IN
ADDITION TO THE SEMI-ANNUAL MEETING, D&K PROPOSES QUARTERLY MEETINGS
BETWEEN TPC/TPPA'S REPRESENTATIVE, STEVE HATFIELD, AND D&K'S MANAGEMENT
TEAM.
D&K SERVICING DIVISION PERSONNEL WILL ATTEND STORE GRAND OPENINGS. D&K
WILL ALSO PROVIDE A GRAND OPENING GIVE-AWAY PRIZE AS WELL AS SECURE
AVAILABILITY OF NO-CHARGE PROMOTIONAL MERCHANDISE FROM OTC MANUFACTURERS.
OPENING ORDERS WILL BE GIVEN ADDITIONAL DATING WITH NO PAYMENT DUE FOR
THE FIRST 90 DAYS, THEN PAYMENTS OF 1/3 OF OPENING ORDER FOR THE NEXT
THREE MONTHS. D&K ESTIMATES IT WILL TAKE 1-2 DAYS TO TAG A NEW MEMBER
PHARMACY. RESETS AND REMODELS WOULD DEPEND UPON THE SIZE AND SCOPE OF THE
PROJECT.
PLEASE REFER TO EXHIBIT 7 FOR A COMPLETE LIST OF D&K'S PROMOTIONAL
PROGRAMS.
D&K REALIZES HOW CRUCIAL IT IS TO PROPERLY MERCHANDISE, ACCURATELY TAG
AND EXPEDITIOUSLY COMPLETE THE STORE CONVERSION PROCESS. TO ACCOMMODATE
THESE PROCEDURES, D&K HAS RECENTLY MORE THAN DOUBLED ITS MERCHANDISING
STAFF AND HAS UPGRADED THE LAPTOP/PC-BASED SHELF LABELING SYSTEM, USED TO
CONVERT NEW TPA/TPPC MEMBER PHARMACIES TO D&K. MED PLUS MERCHANDISER IS
D&K'S CUSTOMIZED VERSION OF THE D.P. HAMACHER TEMPS PLAN-O-GRAM PROGRAM.
IT IS DESIGNED TO D&K'S SPECIFICATIONS ENSURING THE REGIONAL NEEDS OF OUR
CUSTOMERS ARE MET. D&K'S MERCHANDISERS ARE AVAILABLE FOR IN-STORE
DEPARTMENT RESET ASSISTANCE, ALLOWING TPC/TPPA MEMBER PHARMACIES TO
PLAN-O-GRAM THEIR FRONT-END DEPARTMENTS TO MAXIMIZE THIS HIGH MARGIN
OPPORTUNITY. IN ADDITION, D&K PROVIDES A CHOICE OF THREE ZONE RETAIL
PRICING OPTIONS. THERE IS NO CHARGE FOR STORE TAGGING OR STORE
PLAN-O-GRAMS.
D&K DIVISIONS ARE LOCATED IN MINNEAPOLIS, MINNESOTA, LEXINGTON, KENTUCKY,
CAPE GIRARDEAU, MISSOURI, AND ABERDEEN, SOUTH DAKOTA.
D&K Healthcare Resources, Inc. Proposal
July 15, 1999 Page 7 of 8
<PAGE> 17
VI. REPACKS
Explain the type of repack program available through your company.
Include in your explanation buying re-packs, lead-times, pricing issues,
credits, returns and morgue products. Please provide your generic program
including rebates.
D&K IS PLEASED TO OFFER SAVPAK, ONE OF THE MOST EXTENSIVE REPACK PROGRAMS
IN THE INDUSTRY. DISCOUNTS OF UP TO 5% ARE ROUTINELY AVAILABLE ON OVER
140 BRANDED PRODUCTS. REPACK ITEMS MAY BE AUTOMATICALLY SUBSTITUTED FOR
BRANDED ITEMS.
VII. INTERNET CAPABILITIES
What capabilities do you offer utilizing the Internet? List all available
options of ordering systems.
D&K, THROUGH OUR TYCON SUBSIDIARY, IS IN THE PROCESS OF CREATING AN
INTERNET PHARMACY CAPABILITY FOR OUR CUSTOMERS. THIS WILL PERMIT TPC/TPPA
MEMBER PHARMACIES TO PROTECT THEIR BUSINESSES FROM OTHER INTERNET
PHARMACIES AND ALLOW THEM TO PARTICIPATE IN THIS EMERGING HEALTHCARE
TREND. D&K WOULD WELCOME THE OPPORTUNITY TO HAVE TPC/TPPA AND ITS MEMBER
PHARMACIES INVOLVED IN THE FINAL DEVELOPMENT OF THIS PROGRAM.
VIII. GENERICS
What is your markup above dead net cost on generics inclusive of all
manufacturer rebates and special prices?
D&K WILL INVOICE NON-CONTRACT GENERIC PHARMACEUTICAL PRODUCTS BASED ON
THE MANUFACTURER'S PUBLISHED WHOLESALER PRICE (WAC) IN EFFECT AT THE TIME
OF DELIVERY. THE PRODUCTS WILL BE DISCOUNTED FROM WAC BY THE AMOUNT OF
THE TPC/TPPA BUY-PLAN IN AFFECT AT THE TIME OF ORDERING. ALL DISCOUNTS
AND ALLOWANCES WILL BE PASSED THROUGH TO TPC/TPPA MEMBER PHARMACIES
DURING THE MANUFACTURERS' PROMOTIONAL PERIOD.
D&K Healthcare Resources, Inc. Proposal
July 15, 1999 Page 8 of 8
<PAGE> 18
SCHEDULE B*
*Confidential portion omitted and filed separately with the Commission.
<PAGE> 1
EXHIBIT 10.19
STANDARD INDUSTRIAL
LEASE AGREEMENT
By and Between
BSRT LEXINGTON TRUST
as Landlord
and
D&K HEALTHCARE RESOURCES, INC.
as Tenant
DATE
May 18, 1999
<PAGE> 2
INDEX
1. TERMS AND DEFINITIONS ............................... 2
2. CONDITION OF PREMISES ............................... 3
3. TERM ................................................ 3
4. RENT ................................................ 4
5. COMMON AREAS ........................................ 7
6. USE OF PREMISES ..................................... 7
7. RULES AND REGULATIONS ............................... 8
8. COMPLIANCE WITH LAWS ................................ 8
9. HAZARDOUS MATERIALS ................................. 9
10. ALTERATIONS ........................................ 11
11. MAINTENANCE AND REPAIRS ............................ 12
12. RIGHT OF ENTRY ..................................... 13
13. UTILITIES .......................................... 13
14. ASSIGNMENT AND SUBLETTING .......................... 13
15. TENANT'S INSURANCE ................................. 13
16. INDEMNIFICATION .................................... 14
17. WAIVER OF SUBROGATION .............................. 14
18. DAMAGE OR DESTRUCTION .............................. 15
19. CONDEMNATION ....................................... 15
20. DEFAULT AND REMEDIES: BANKRUPTCY ................... 16
21. INTEREST ON PAST DUE AMOUNTS ....................... 20
22. SECURITY DEPOSIT ................................... 20
23. DEFAULT BY LANDLORD ................................ 20
24. LEGAL PROCEEDINGS .................................. 20
25. NOTICES ............................................ 20
26. QUIET POSSESSION ................................... 21
27. SUBORDINATION AND ATTORNMENT ....................... 21
28. ESTOPPEL CERTIFICATES .............................. 22
<PAGE> 3
29. LANDLORD'S LIABILITY ............................... 22
30. BROKERAGE .......................................... 23
31. SURRENDER OF PREMISES .............................. 23
32. HOLDOVER ........................................... 23
33. SEVERABILITY ....................................... 23
34. INTERPRETATION ..................................... 23
35. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS ... 24
36. WAIVERS ............................................ 24
37. NO RECORDATION ..................................... 24
38. BINDING EFFECT; CHOICE OF LAW ...................... 24
39. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY ......... 24
40. JOINT AND SEVERAL LIABILITY ........................ 24
41. FORCE MAJEURE ...................................... 24
42. EXECUTION OF LEASE ................................. 25
43. COVENANTS AND CONDITIONS ........................... 25
44. SUBMISSION OF LEASE ................................ 25
45. FINANCIAL STATEMENTS ............................... 25
46. RIGHT OF FIRST REFUSAL ............................. 25
47. OPTION TO RENEW .................................... 25
EXHIBITS AND ADDENDA
Exhibit A - Drawing of Project Showing Location of Premises
Exhibit Al - Parking
Exhibit B - Work Letter
Exhibit C - Rules and Regulations
Exhibit D - Signage Requirements
Representations and Warranty
(Intentionally Deleted)
<PAGE> 4
LEASE AGREEMENT
THIS LEASE AGREEMENT is made and entered into this 25th day of May,
1999, by and between BSRT LEXINGTON TRUST ("Landlord") and D&K HEALTHCARE
RESOURCES, INC. ("Tenant").
WITNESSETH:
In consideration of the terms and conditions set forth herein,
Landlord and Tenant agree as follows:
1. TERMS AND DEFINITIONS. As used in this Lease, the following terms
shall have the following meanings:
A. LANDLORD. BSRT Lexington Trust
150 S. Wacker Drive
Suite 2900
Chicago, IL 60606
B. TENANT. D&K Healthcare Resources, Inc.
2040 Creative Drive
Suite 300
Lexington, KY 40505
C. TENANT'S DESIGN COMPLETION DATE. August 31, 1999
D. COMMENCEMENT DATE. September 1, 1999
E. BUILDING. Lexington Business Center, Lexington, KY. A five (5)
building complex containing approximately 307,953 RENTABLE square feet of
building area.
F. BUILDING ADDRESS. 2040 Creative Drive, Suite 300
Lexington, KY 40505
G. PREMISES. 49,105 Rentable Square Feet
H. SUITE NUMBER. 300
FLOOR NUMBER. First
<PAGE> 5
I. PERMITTED USE. Tenant shall be permitted to use the Premises for
the operation of a drug wholesale business and related uses and any other lawful
purpose.
J. ANNUAL BASIC RENT. 09/01/99 - 10/31/99 $ 0.00
11/01/99 - 10/31/04 $191,509.50
11/01/04 - 10/31/07 $196,420.00
11/01/07 - 10/31/09 $203,785.75
K. MONTHLY BASIC RENT 09/01/99 - 10/31/99 $ 0.00
INSTALLMENT. 11/01/99 - 10/31/04 $ 15,959.13
11/01/04 - 10/31/07 $ 16,368.33
11/01/07 - 10/31/09 $ 16,982.15
L. SECURITY DEPOSIT. N/A
M. COMPREHENSIVE GENERAL LIABILITY INSURANCE REQUIRED. $1,000,000.00
per occurrence.
N. TENANT'S PROPORTIONATE SHARE. (49,105/157,400 s.f.) 31.20%
Building (49,105/307,953 s.f.)
15.95% Project
0. LEASEHOLD IMPROVEMENTS. Exhibit A-1
P. PARKING CHARGES. N/A
Q. RENTABLE AREA. The gross area within the inside surface of the
outer glass of the exterior walls of the Premises, to the mid-point of any walls
separating portions of the Premises from those of adjacent tenants and to the
Common Areas or Service Areas side of walls separating the Premises from Common
Areas and Service Areas, subject to the following.
[1] Rentable Area shall not include any Service Areas.
[21 Rentable Area shall include any columns and/or projections(s)
which protrude into the Premises and/or the Common Areas.
R. TERM. The term shall commence on September 1, 1999 and terminate
at 11:59 p.m. October 31, 2009.
S. BROKERS. Coleman Group Property Services
Haymaker Company
T. COMMON AREAS. Common Areas shall mean all areas within LEXINGTON
BUSINESS CENTER IN LEXINGTON, KENTUCKY (the ("project") which are available for
the common use of tenants of the project and which are not part of the Premises
of other tenants.
<PAGE> 6
1.5 DEMISE OF PREMISES. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord for the term, at the rent, and upon all of the
conditions contained herein, certain Premises (the "Premises") located in the
LEXINGTON BUSINESS CENTER in Lexington, Kentucky (the "Project"). The Premises,
containing approximately 49,105 square feet, is known as Building F, (the
"Building"), Space 300, (Detailed on Exhibit A) and its location within the
Project is as shown on the drawing attached hereto as Exhibit A.
2. CONDITION OF PREMISES. Tenant accepts the Premises in its "as is"
condition, with the exception of the scope of work as provided in Exhibit B
contained herein as part hereof, as of the execution of this Lease, subject to
all recorded matters, laws, ordinances, and governmental regulations and orders.
Tenant acknowledges that neither Landlord nor any agent of Landlord has made any
representation as to the condition of the Premises or the suitability of the
Premises for Tenant's intended use.
3. TERM.
3.1 TERM. The term (the "Term") of this Lease shall be for a
period of Ten (10) years and two (2) months commencing September 1, 1999 (the
"Commencement Date") and expiring October 31, 2009 (the "Expiration Date"),
unless sooner terminated pursuant to any provision hereof.
3.2 DELAY IN OCCUPANCY. If Landlord cannot deliver possession of
the Premises to Tenant on the Commencement Date THROUGH NO FAULT OR DELAY BY
LANDLORD, Landlord shall not be subject to any liability therefor, nor shall
such failure affect the validity of this Lease or the obligations of Tenant
hereunder, except that the Commencement Date shall be delayed until possession
of the Premises is delivered to Tenant and the Term shall be extended for a
period equal to the delay in the delivery of the Premises, plus the number of
days necessary to end the term on the last day of a month. If Landlord fails to
deliver possession of the Premises to Tenant within thirty (30) days of the
Commencement Date specified in Section 3.1 above, through no fault or delay on
the part of Tenant, Tenant may cancel this Lease by written notice to Landlord
within twenty (20) days of the expiration of such thirty (30) day period, in
which event this Lease and the obligations of the parties hereunder shall be
terminated. If Tenant fails to give such notice within such twenty (20) day
period, Tenant's right to cancel this Lease shall expire and the Term shall
commence upon delivery of possession of the Premises to Tenant. In the event of
any delay hereunder, Landlord and Tenant shall execute and deliver an amendment
hereto setting forth the revised Commencement and Expiration Dates.
3.3 EARLY OCCUPANCY. If Tenant occupies the Premises prior to
the Commencement Date, such occupancy shall be upon all of the terms and
conditions contained herein but shall not advance the Expiration Date.
<PAGE> 7
4. RENT.
4.1 BASE RENT. Tenant shall pay to Landlord as base rent (the
"Base Rent") see Section 1 J/K in equal monthly installments throughout the term
of the Lease as provided in Section 1 K.
4.2 ADDITIONAL RENT. All charges due and payable by Tenant other
than Base Rent are herein called "Additional Rent." The term "Rent" shall mean
Base Rent and Additional Rent.
4.3 TIME AND MANNER OF PAYMENT. Payments of Rent are to be made
to BSRT LEXINGTON TRUST, care of Coleman Group Property Services, Dept. 77-6544.
Chicago, IL 60678-6544 or as Landlord shall hereafter designate. Rent shall be
due and payable in advance on the first (1st) day of each month, without
offset, deduction or demand, except That Any Partial Month Rent shall be
prorated. The burden of proof of full payment shall be upon Tenant. Upon any
termination of this Lease not resulting from Tenant's default, and after Tenant
has vacated the Premises as required herein, an equitable adjustment shall be
made as to all payments made by or due from Tenant.
4.4 LATE CHARGES. Tenant's failure to pay Rent promptly may
cause Landlord to incur unanticipated costs. The amount of such costs are
difficult to ascertain, and therefore on any Rent payment not made within ten
(10) days after NOTICE TO TENANT THAT it is due, THEN Tenant shall pay Landlord
a late charge equal to fifteen percent (15%) of the overdue amount. The parties
agree that such late charge represents a fair and reasonable estimate of the
costs Landlord will incur by reason of such late payment.
4.5 PROPORTIONATE SHARE. Tenant's "Proportionate Share" as used
in this Lease shall be obtained by multiplying the expense in question by a
fraction, the numerator of which shall be the square footage area of the
Premises and the denominator of which shall be the rentable square footage area
of the Building. If a particular expense is incurred or charged to more than one
building in the Project rather than solely to the Building, then, for the
purposes of calculating Tenant's Proportionate Share with respect the Building,
such multi-building expense shall be allocated to Building by multiplying the
expense in question by a fraction, the numerator of which shall be the rentable
square footage of the Building and the denominator of which shall be the
rentable square footage area of the buildings for which the expense was incurred
or otherwise allocated to, with the resulting number being used to calculate
Tenant's Proportionate Share as to the Premises. NOTWITHSTANDING ANYTHING IN
THIS LEASE TO THE CONTRARY, TENANT'S PROPORTIONATE SHARE OF COMMON EXPENSES AND
REAL PROPERTY TAXES AND INSURANCE RELATING TO TAXES, INSURANCE AND COMMON AREA
MAINTENANCE SHALL NOT EXCEED THE FOLLOWING AMOUNTS PER SQUARE FOOT DURING THE
TERM OF THIS LEASE: YR. 1: $.50 P.S.F.
YR. 2: $.51 P.S.F.
YR. 3: $.52 P.S.F.
YR. 4: $.53 P.S.F.
YR. 5: $.54 P.S.F.
<PAGE> 8
YR. 6: $.55 P.S.F.
YR. 7: $.56 P.S.F.
YR. 8: $.57 P.S.F.
YR. 9: $.58 P.S.F.
YR. 10: $.59 P.S.F.
1st. OPTION TERM: YR. 11: $.60 P.S.F.
YR. 12: $.61 P.S.F.
YR. 13: $.62 P.S.F.
YR. 14: $.63 P.S.F.
YR. 15: $.64 P.S.F.
2nd OPTION TERM: YR. 16: $.65 P.S.F.
YR. 17: $.66 P.S.F.
YR. 18: $.67 P.S.F.
YR. 19: $.68 P.S.F.
YR. 20: $.69 P.S.F.
4.6 REAL PROPERTY TAXES. Tenant shall pay annually its Proportionate
Share of annual Real Property Taxes (see Section 4.5) ACCRUING DURING HE TERM
OF THIS LEASE. Such payment shall be based on the most current notices of
assessment concerning the Building. If Tenant has overpaid or underpaid the
actual amount due, the excess shall be credited against or added to Tenant's
next payment due. A tax bill submitted by Landlord to Tenant shall be conclusive
evidence of the amount of Real Property Taxes, as well as the items taxed. "Real
Property Taxes" shall mean: (i) any fee, license fee, license tax, business
license fee, commercial rental tax, levy, charge, assessment, government charge
or tax imposed by any taxing authority against the Building or land upon which
the Building is located; (ii) any tax on the Landlord's right to receive, or the
receipt of, rent or income from the Building or against Landlord's business of
leasing the Building; (iii) any tax, or charge, or assessment, or any assessment
for repayment of bonds for fire protection, streets, sidewalks, road
maintenance, refuse or other services provided to the Building by any
governmental agency; (iv) any charge or fee replacing any tax previously
included within the definition of real property tax; and (v) any costs incurred
by Landlord in contesting such Real Property Taxes, whether successful or not.
Real Property Taxes does not, however, include Landlord's federal or state
income, franchise, inheritance or estate taxes. Tenant shall pay when due all
taxes charged against trade fixtures, furnishings, equipment or any other
personal property belonging to Tenant.
4.7 COMMON EXPENSES. Tenant shall pay monthly its Proportionate Share
of annual Common Expenses ACCRUING DURING THE TERM OF THIS LEASE (as hereinafter
defined) in such amount as Landlord may reasonably estimate (see Section 4.5).
DURING THE FIRST YEAR AND after each calendar year, Landlord shall deliver to
Tenant a statement setting forth, in reasonable detail, the actual Common
Expenses paid or incurred by Landlord during the preceding calendar year and
Tenant's Proportionate Share thereof. If the amount paid by Tenant for Common
Expenses exceeds or is less than Tenant's Proportionate Share as shown by the
statement, the excess shall be credited against or the amount underpaid shall be
added to
<PAGE> 9
Tenant's next payment due under this Section. In this Lease, "Common Expenses"
shall mean all costs incurred by Landlord in repairing, maintaining and
operating the Building and the Common Areas (other than (i) expenses recoverable
under Sections 4.6 above and (ii) expenses incurred by Landlord in satisfying
its obligations under Section 11.1 below). Common Expenses shall include, but
are not limited to, the following: gardening and landscaping; electrical, gas,
water and sewer service, maintenance, and repair of the facilities providing the
same, to the extent not separately metered to tenants of the Building;
maintenance, repair and replacement of signs; maintenance and repairs of the
exterior heating and air conditioning, (including service contracts, and
preventative maintenance contracts providing for the regular inspection and
maintenance of the heating and air conditioning systems by a licensed HVAC
contractor), premiums for liability, property damage, fire and other types of
casualty insurance on the Common Areas and worker's compensation insurance; cost
of repairs that extend the life of the building and costs of capital
improvements to the extend necessary to comply with applicable governmental
rules and regulations; all real property taxes and assessments levied on or
attributable to the Common Areas and all improvements thereon; all personal
property taxes and assessments levied on or attributable to the Common Areas and
all improvements thereon; all personal property taxes levied on or attributable
to personal property used in connection with the Common Areas, the Building or
the Project; capital expenses which reduce any component cost of expenses (such
cost to be reasonably amortized by Landlord and expenses to include only the
cost as so amortized by Landlord during the calendar year for which such
computation is made); rental or lease payments paid by Landlord for rented or
leased personal property used in the operation or maintenance of the Common
Areas or the Building; fees for required licenses and permits; repairing,
replacing, resurfacing, repaving, maintaining, painting, lighting, cleaning,
refuse removal, security and similar items; reserves for roof replacement and
exterior painting and other appropriate reserves; and a reasonable management
fee. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, THE FOLLOWING ITEMS SHALL
BE EXCLUDED FROM CAM.
A. ALL ITEMS OF CAPITAL NATURE, EXCEPT COST-SAVING
CAPITAL EXPENDITURES TO THE EXTENT COSTS ARE
ACTUALLY SAVED, SUCH AS: PARKING LOT RESURFACING
AND ROOF REPLACEMENT; PROVIDED, WITH REGARD TO SUCH
ALLOWED CAPITAL EXPENDITURES, SUCH EXPENDITURES
SHALL BE AMORTIZED OVER THE USEFUL LIFE OF THE
IMPROVEMENT, AND LANDLORD MAY ONLY INCLUDE AS A
COMMON AREA EXPENSE THAT ANNUAL AMORTIZING AMOUNT;
B. COSTS ASSOCIATED WITH OTHER TENANTS IN THE BUILDING
AND COSTS OF NEGOTIATING LEASES;
C. COSTS OF LANDLORD'S EMPLOYEES, EXCEPT TO THE EXTENT
WORK PERFORMED BY SUCH EMPLOYEES IS DIRECTLY
RELATED TO THE BUILDING.
D. ANY ITEM CHARGED TO TENANT ELSEWHERE IN THE LEASE
OR TO OTHER TENANTS IN THE BUILDING;
E. THE COSTS OF ACQUIRING ADDITIONAL LAND,
CONSTRUCTION OF ADDITIONAL STRUCTURES OR
IMPROVEMENTS OR OTHER EXPANSION OR UPGRADES TO THE
BUILDING;
F. THE COST OF EARTHQUAKE INSURANCE; OR
<PAGE> 10
G. CHARGES FOR ANY ITEM FOR WHICH LANDLORD HAS
ESTABLISHED A RESERVE UNTIL SUCH RESERVE HAS BEEN
DEPLETED.
5. COMMON AREAS.
5.1 COMMON AREAS. In this Lease, "Common Areas" shall mean
all areas within the Project which are available for the common use of tenants
of the Project and which are not part of the Premises or the Premises of other
tenants. Landlord may from time to time change the size, location, nature and
use of any of the Common Areas. Tenant acknowledges that such activities may
result in occasional inconvenience and such activities and changes shall be
expressly permitted if they do not materially affect Tenant's use of the
Property. LANDLORD SHALL USE GOOD FAITH EFFORTS NOT TO DISTURB OR OTHERWISE
INTERFERE WITH TENANT'S USE OF THE PREMISES.
5.2 USE OF COMMON AREAS. Tenant shall have the nonexclusive
right (in common with all others to whom Landlord has granted or may grant such
rights) to use the Common Areas for the purposes intended, subject to such
reasonable rules and regulations as Landlord may establish from time to time.
Tenant shall abide by such rules and regulations and shall use its best effort
to cause others who use the Common Areas with Tenant's expressed or implied
permission to abide by Landlord's rules and regulations. Tenant shall not, at
any time, interfere with the rights of Landlord, other tenants, or any other
person entitled to use the Common Areas.
5.3 VEHICLE PARKING. Tenant shall be entitled to use the
vehicle parking spaces in the Project ON A NONEXCLUSIVE BASIS WITH OTHER TENANTS
OF THE PROJECT without paying any additional Rent. Temporary parking of large
delivery vehicles in the Project may be permitted by the rules and regulations
established by Landlord. Vehicles shall be parked only in striped parking spaces
and not in driveways, loading areas or other locations not specifically
designated for parking.
5.4 COMMON AREA MAINTENANCE. Landlord shall maintain the
Common Areas in good order, condition and repair. Landlord's cost of such
maintenance, repair and replacement shall be included as a Common Expense which
is subject to proportionate reimbursement as provided in Section 4.7 above.
6. USE OF PREMISES. Tenant shall use and occupy the Premises
throughout the full Term for the purpose of operation of a drug wholesale
business and related uses and any other lawful purpose. Tenant shall use and
occupy the Premises only for the permitted use, and for no other business or
purpose without the prior written consent of the Landlord. Tenant shall not
KNOWINGLY use or occupy the Premises in violation of the law or of the
certificate of use and occupancy issued for the Building, and shall immediately
discontinue any use of the Premises which is declared by any governmental
authority having jurisdiction to be a violation of law, code or regulation or
of said certificate of
<PAGE> 11
use and occupancy UNLESS TENANT IN GOOD FAITH CONTESTING SUCH DECLARATION AND
PURSUANT TO APPLICABLE LAW MAY CONTINUE SUCH USE WHILE THE MATTER IS BEING
CONTESTED. Tenant shall comply with any direction of any governmental authority
having jurisdiction which shall, by reason of the nature of Tenant's use or
occupancy of the Premises, impose any duty upon Tenant or Landlord with respect
with the Premises or with respect to the use or occupation thereof Tenant shall
not do or permit to be done anything which will invalidate or increase the cost
of any fire, extended coverage or any other insurance policy covering the
Building and/or property located therein and shall comply with all rules,
orders, regulations and requirements of the Fire Department or Fire Marshall or
any other person or organization performing a similar function. Tenant shall
promptly upon demand reimburse Landlord as additional Rent for any additional
premium charged for any such policy by reason of Tenant's failure to comply with
of this paragraph 6. Tenant shall not do or permit anything to be done in or
about the Premises which will in any way MATERIALLY obstruct or MATERIALLY
interfere with rights of other Tenants or occupants of the Building, or injure
or annoy them, or use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or
permit any nuisance in, on or about the Premises. Tenant shall not commit or
suffer to be committed any waste in or upon the Premises and shall keep the
Premises in first class repair and appearance PROVIDED TENANT IS RESPONSIBLE FOR
ANY NEEDED REPAIRS PURSUANT TO THE TERMS OF THIS LEASE.
7. RULES AND REGULATIONS. Tenant shall faithfully observe and
comply with the rules and regulations attached to this Lease as Exhibit C as
well as all modifications thereof and additions thereto as are from time to time
MAY BE REASONABLY promulgated by Landlord (the "Rules and Regulations") PROVIDED
TENANT IS GIVEN ADEQUATE NOTICE OF ANY SUCH MODIFICATION OR ADDITION.
8. COMPLIANCE WITH LAWS. Tenant covenants and agrees that it
will observe and comply with all laws, orders, rules and regulations of any
governmental authority relating to Tenant's use and occupancy of the Premises,
and will not permit the Premises to be used for illegal purposes nor permit any
nuisance to be created or maintained thereon.
9. HAZARDOUS MATERIALS.
(1) Tenant agrees that Tenant, its agents contractors, licensees
or invitees shall not handle, manufacture, store or dispose of any flammables,
explosives, radioactive materials, hazardous wastes or materials, toxic wastes
or materials, or other similar substances, petroleum products or derivatives
(collectively "Hazardous Materials") on, under, or about the Premises, without
Landlord's prior written consent (which consent shall not be unreasonably
withheld as long as Tenant demonstrates and documents to Landlord's reasonable
satisfaction (i) that such Hazardous Materials (A) are necessary or useful to
Tenant's business; and (B) will be used AND, kept in or about the Premises; and
(ii) that Tenant will give all required notices concerning the presence in or on
the Premises or the release of such Hazardous Materials from the Premises)
provided that Tenant may handle, store, use of dispose of products containing
small quantities of Hazardous Materials, which products are of a type
customarily found in offices and households (such as aerosol cans containing
insecticides, toner for copies, paints, paint remover, and the like and provided
further that Tenant shall handle, store, use and dispose of any such Hazardous
<PAGE> 12
Materials in a safe and lawful manner and shall not allow such Hazardous
Materials to contaminate the Premises or the environment. NOTWITHSTANDING
ANYTHING HEREIN TO THE CONTRARY, TENANT IN CONNECTION WITH ITS BUSINESS
OPERATIONS, MAY HANDLE, STORE OR USE PRODUCTS WHICH MAY BE CONSIDERED HAZARDOUS
MATERIAL SUCH AS RUBBING ALCOHOL OR OTHER PRODUCTS RELATED TO DRUG WHOLESALE
DISTRIBUTION ON THE PREMISES.
(2) Tenant further agrees that Tenant will not permit any
substance KNOWN TO TENANT WHICH IS suspected of causing cancer or reproductive
toxicity to come into contact with groundwater under the Premises. Any such
substance coming into contact with groundwater shall be considered a Hazardous
Material for purposes of this Paragraph 9.
(3)(i) Notwithstanding the provisions hereinabove Tenant covenants
to comply with the use restrictions shown on the attached Hazardous Materials
Exhibit. Tenant's business and operations, and more especially its handling,
storage, use and disposal of Hazardous Materials shall at all times comply with
all applicable laws pertaining to Hazardous Materials. Tenant shall secure and
abide by all permits necessary for Tenant's operations on the Premises. Tenant
shall give or post all notices required by all applicable laws pertaining to
Hazardous Materials. If Tenant shall at any time fail to comply with this
Paragraph 9, Tenant shall immediately notify Landlord in writing of such
noncompliance.
(ii) Tenant shall provide Landlord with copies of any Material
Safety Data Sheets (as required by the Occupational Safety and Health Act)
relating to any Hazardous Materials to be used, kept, or stored at or on the
Premises, at least thirty (30) days prior to the first use, placement, or
storage of such Hazardous material on the Premises. Landlord shall have ten (10)
days following delivery of such Material Safety Data Sheets to approve or
forbid, in its sole discretion subject to the limitation contained in Paragraph
(9) above, such use, placement, or storage of a Hazardous Material on the
Premises.
(iii) SUBJECT TO PARAGRAPH 9(1) ABOVE Tenant shall not store any
hazardous waste on the Premises for more than 90 days; "hazardous waste" having
the meaning given it by the Resource Conservation and Recovery Act of 1976, as
amended. Tenant shall not install any underground or above ground storage tanks
on the Premises. Tenant shall not dispose of any Hazardous Material in the
Premises without the prior written consent of Landlord.
(iv) Any increase in the premiums for necessary insurance on the
Building which arises from Tenant's use or storage of Hazardous Materials shall
be solely at Tenant's expense. Tenant shall procure and maintain at its sole
expense such additional insurance as may be necessary to Comply with any
requirement of any Federal, State or local governmental agency relating to
Tenant's use, storage or disposal of Hazardous Material in or from the
Premises.
(4) If Landlord, in its sole discretion, believes that the
Premises or the environment have become contaminated with Hazardous Materials
that must be removed under the laws of the state where the Premises is located,
in breach of the provisions of this Lease, Landlord, in addition to its other
rights under this Lease, may AFTER NOTICE TO TENANT (EXCEPT IN
<PAGE> 13
EMERGENCIES) enter upon the Premises and obtain samples from the Premises,
including without limitation the soil and groundwater under the Premises, for
the purposes of analyzing the same to determine whether and to what extent the
Premises or the environment have become so contaminated. Tenant shall reimburse
Landlord for the costs of any inspection, sampling and analysis that discloses
contamination for which Tenant is liable under the terms of this Lease. Tenant
may not perform any sampling, testing, or drilling to locate any Hazardous
Materials on the Premises without Landlord's prior written consent.
(5) Without limiting the above, Tenant shall, reimburse, defend,
indemnify and hold Landlord harmless from and against any and all claims,
losses, liabilities, damages, costs and expenses, including without limitation,
loss of rental income, loss due to business interruption, and attorneys fees and
costs, arising out of or in any way connected with the use, manufacture,
storage, or disposal of Hazardous Materials by Tenant, its agents or contractors
on, under or about the Premises including, without limitation, the costs of any
required or necessary investigation, repair, cleanup, or detoxification and the
preparation of any closure or other required plans in connection therewith,
whether voluntary or compelled by governmental authority. The indemnity
obligations of Tenant herein contained shall survive any termination of this
Lease. At Landlord's option, Tenant shall perform any required or necessary
investigation, repair, cleanup or detoxification of the Premises CAUSED BY
TENANT'S USE, STORAGE, RELEASE OR DISPOSAL OF HAZARDOUS MATERIALS. In such case,
Landlord shall have the right, in its sole discretion, to approve all plans,
consultants, and cleanup standards. Tenant shall provide Landlord on a timely
basis with (i) copies of all documents, reports, and communications with
governmental authorities; and (ii) notice and an opportunity to attend all
meetings with regulatory authorities. Tenant shall comply with all notice
requirements and Landlord and Tenant agree to cooperate with governmental
authorities seeking access to the Premises for purposes of sampling or
inspection. No disturbance of Tenant's use of the Premises resulting from
activities conducted pursuant to this paragraph shall constitute an actual or
constructive eviction of Tenant from the Premises.
(6) Notwithstanding anything set forth in this Lease, Tenant shall
only be responsible for contamination of Hazardous Materials or any cleanup
resulting directly therefrom, resulting directly from matters occurring or
Hazardous Materials deposited BY TENANT (other than by contractors, agents or
representatives controlled by Landlord) during the Term,
<PAGE> 14
and any other period of time during which Tenant is in actual or constructive
occupancy of the Premises. Tenant AND LANDLORD shall take reasonable precautions
to prevent the contamination of the Premises with Hazardous Materials by third
parties.
(7) It shall not be unreasonable for Landlord to withhold its
consent to any proposed assignment or sublease if (i) the proposed assignee's or
sublessee's anticipated use of the Premises involves the generation, storage
use, treatment or disposal of Hazardous Materials; (ii) the proposed assignee or
sublessee has been required by any prior landlord, lender, or governmental
authority to take remedial action in connection with Hazardous Materials
contaminating a property if the contamination resulted from such assignee's or
sublessee's actions or use of the property in question; or (iii) the proposed
assignee or sublessee is subject to an enforcement order issued by any
governmental authority in connection with the use, disposal or storage of a
Hazardous Material.
(8) Any of Tenant's insurance insuring against claims of the type
dealt with herein shall be considered primary coverage for claims against the
Building arising out of or under this Paragraph 9.
(9) In the event of (i) any transfer of Tenant's interest under
this Lease, or (ii) the termination of this Lease, by lapse of time or
otherwise, Tenant shall be solely responsible for compliance with any and all
then effective federal, state or local laws concerning (i) the physical
condition of the Premises, or (if) the presence of Hazardous or toxic Materials
in or on the Premises (for example, the New Jersey Environmental Cleanup
Responsibility Act, the Illinois Responsible Property Transfer Act or similar
applicable state laws), including but not limited to any reporting or filing
requirements imposed by such laws.
10. ALTERATIONS. Tenant shall make no alterations, additions,
replacements or improvements to the Premises without the express written consent
of Landlord, WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED.
Landlord may require Tenant to provide demolition and/or lien and completion
bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove
any alterations, additions, or improvements constructed in violation of this
Paragraph 10 upon Landlord's written request. All alterations, additions, and
improvements will be accomplished in a good and workmanlike manner, in
conformity with all applicable laws and regulations, by a contractor approved by
Landlord WHICH APPROVAL SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED. Tenant
agrees that should it make any alterations, additions, replacements or
improvements to the Premises, it will not be acting as agent or servant of
Landlord in making any alterations and shall pay when due all claims for labor
and material furnished to the Premises. Tenant shall give Landlord at least ten
(10) days' prior written notice of the commencement of any work on the Premises.
Landlord may elect to record and post notices of non-responsibility on the
Premises.
<PAGE> 15
11. MAINTENANCE AND REPAIRS.
11.1 LANDLORD'S OBLIGATIONS. Except for any repairs
occasioned by the act or omission of Tenant, Tenant's agents, employees,
contractors, licensees or invitees, which repairs shall be the responsibility of
Tenant, Landlord shall maintain in good repair the roof, foundations and
structural walls of the Premises, not including doors and windows AND THE
PARKING LOT AND COMMON AREAS OF THE BUILDING AND PROJECT. Landlord shall not be
obligated to make any repairs until notified in writing by Tenant, and Landlord
shall then have a reasonable period of time to make such repairs. Landlord shall
not be liable for any damage or loss occasioned by Landlord's failure to repair
the Premises unless it shall have failed to make such repair within a reasonable
time following written notice from Tenant of the need for such repair. TENANT,
UPON SIMULTANEOUS WRITTEN NOTICE TO LANDLORD, MAY MAKE EMERGENCY REPAIRS, BUT
ONLY TO THE EXTENT NECESSARY TO ALLEVIATE THE EMERGENCY, AND MAY OFFSET THE COST
OF SUCH REPAIRS AGAINST RENT PAYMENTS.
11.2 TENANT'S OBLIGATIONS. Tenant shall at its own expense
keep and maintain in good order, condition and repair the entire Premises, other
than those portions for which Landlord shall be responsible as set out above,
including, without limitation, interior walls, floors, ceiling, electrical.
Maintenance and repairs of all improvements made by Tenant shall be the sole
responsibility of Tenant. Tenant shall keep the Premises and alongside of and in
the vicinity of same in a good, clean, and sanitary condition and appearance.
TENANT, AT ITS SOLE COST AND EXPENSE SHALL ENTER INTO A MAINTENANCE CONTRACT
RELATING TO THE REPAIR AND MAINTENANCE OF EXISTING HVAC EQUIPMENT THROUGHOUT THE
TERM AND EXTENSION OF LEASE AGREEMENT. THE FOLLOWING OUTLINES LANDLORD AND
TENANT UNDERSTANDING OF HVAC EXPENSES DURING THE INITIAL TERM OF THE LEASE.
1. DURING THE FIRST YEAR OF THE LEASE, LANDLORD, AT ITS
COST, SHALL BE RESPONSIBLE FOR ANY REPAIRS OR
REPLACEMENT TO HVAC EQUIPMENT NOT COVERED BY THE
MAINTENANCE CONTRACT.
2. DURING YEARS 2-10 OF INITIAL LEASE TERM TENANT SHALL BE
RESPONSIBLE FOR FIRST $2,000.00 OF REPAIRS NOT COVERED
BY MAINTENANCE AGREEMENT AND LANDLORD SHALL BE
RESPONSIBLE FOR ALL EXPENSES ABOVE $2,000.00 THAT ARE
NOT COVERED BY THE MAINTENANCE AGREEMENT.
If Tenant fails to maintain and repair the Premises AS
PROVIDED IN THIS PARAGRAPH 11, Landlord may, on ten (10) days' prior notice
(except that no notice shall be required in case of emergency) enter the
Premises and perform such repair and maintenance on behalf of Tenant. In such
case, Tenant shall reimburse Landlord for all costs so incurred immediately upon
demand.
<PAGE> 16
12. RIGHT OF ENTRY. Landlord, and its agents or other
representatives, shall have the right to enter into and upon the Premises or any
part thereof at all reasonable times for the purpose of examining the same, AND
AFTER REASONABLE NOTICE TO TENANT (EXCEPT IN EMERGENCIES) to make repairs or
alterations, or showing the Premises to prospective purchasers of the Building.
LANDLORD SHALL USE ITS BEST EFFORTS NOT TO DISTURB OR INTERFERE WITH TENANT'S
USE OF THE PREMISES WHILE LANDLORD PERFORMS ANY SUCH REPAIRS OR ALTERATIONS.
Tenant agrees at any time within six (6) calendar months before the expiration
of this Lease to allow Landlord to enter upon the Premises TO EXHIBIT IT TO
PROSPECTIVE TENANTS and will permit all persons authorized by Landlord to view
said Premises at reasonable times.
13. UTILITIES. All heat, electric current, gas, garbage, or
utility charges of any nature used on the Premises shall be paid for by Tenant.
Landlord shall not be liable to Tenant for interruption in or curtailment of any
utility service, nor shall any such interruption or curtailment constitute a
constructive eviction or grounds for rental abatement in whole or in part.
14. ASSIGNMENT AND SUBLETTING. No portion of the Premises or of
Tenant's interest in this Lease may be acquired by any other person or entity,
whether by assignment, mortgage, sublease, transfer, operation of law, or act of
Tenant or any change in controlling interest of Tenant, without Landlord's prior
written consent, WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED.
Any attempted transfer without consent shall be void and shall constitute a
breach of this Lease. No transfer permitted hereunder shall release Tenant or
change Tenant's primary liability to pay the Rent. Landlord's acceptance of Rent
from any other person is not a waiver of any provision of this Lease. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's transferee
defaults under this Lease, Landlord may proceed directly against Tenant without
pursuing remedies against the transferee. EXCEPT AS SET FORTH BELOW, IN THE
EVENT OF ANY SUBLET OR ASSIGNMENT, ANY PROFIT SHALL BE SPLIT EQUALLY BETWEEN
LANDLORD AND TENANT. TENANT SHALL HAVE THE RIGHT, WITHOUT LANDLORD'S CONSENT, TO
ENTER INTO AN ASSIGNMENT OR SUBLEASE WITH: (I) TENANT'S PARENT CORPORATION; (II)
ANY SUBSIDIARY CORPORATION OF TENANT OR TENANT'S PARENT CORPORATION; OR (III)
ANY AFFILIATED ENTITY IN WHICH TENANT, TENANT'S PARENT CORPORATION OR ANY
SUBSIDIARY OF EITHER HOLDS A MAJORITY OF THE OUTSTANDING SHARES OF OWNERSHIP
INTERESTS. NONE OF THESE EXEMPT TRANSFERS SHALL OBLIGATE TENANT TO SHARE WITH
LANDLORD ANY CONSIDERATION PAID IN CONNECTION THEREWITH. REGARDLESS OF ANY
TRANSFER, TENANT SHALL IN ALL INSTANCES REMAIN LIABLE UNDER THE LEASE.
15. TENANT'S INSURANCE. Tenant agrees to provide comprehensive
public liability insurance with an insurance company REASONABLY satisfactory to
Landlord, naming Landlord as an additional insured, in amounts not less than
$500,000 per person and $1,000,000 per accident, and $500,000 for damage to
property. Tenant shall deliver to Landlord a copy of such policy of insurance
prior to the Commencement Date and a copy of any renewal policy at least ten
(10) days prior to the expiration date of any existing policy. Such policies
shall specifically provide that they shall not be cancelable or subject to
reduction of coverage except after thirty (30) days' prior written notice to
Lessor.
<PAGE> 17
16. INDEMNIFICATION. Landlord shall indemnify Tenant against and
hold Tenant harmless from any and all cost, claims or liability arising from any
breach or default in the performance of Landlord obligations under the Lease OR
ANY MATERIAL MISREPRESENTATION OR MATERIAL BREACH OF WARRANTY BY LANDLORD UNDER
THIS LEASE; Tenant shall indemnify Landlord against and hold Landlord harmless
from any and all costs, claims or liability arising from: (a) Tenant's use of
the Premises; (b) the conduct of Tenant's business or anything else done or
permitted by Tenant to be done in or about the Premises; (c) any breach or
default in the performance of Tenant's obligations under this Lease; or (d) any
misrepresentation or breach of warranty by Tenant under this Lease. Tenant shall
defend Landlord against any such costs, claims or liabilities at Tenant's
expense with counsel reasonably acceptable to Landlord or, at Landlord's
election, Tenant shall reimburse Landlord for any legal fees or costs incurred
by Landlord in connection with any such claim. As a material part of the
consideration to Landlord, EXCEPT AS PROVIDED FOR IN THIS PARAGRAPH 16 Tenant
hereby assumes all risk of damage to property or injury to persons in or about
the Premises arising from any cause, and Tenant hereby waives all claims in
respect thereof against Landlord, except for any claim arising out of Landlord's
gross negligence or willful misconduct.
17. WAIVER OF SUBROGATION. Landlord and Tenant agree, provided
that such agreement does not invalidate or prejudice any policy of insurance,
that, in the event the Premises or the fixtures, leasehold improvements,
furniture, equipment's, or merchandise therein, are damaged or destroyed by fire
or other casualty which is covered by insurance of either the Landlord or the
Tenant, the rights of either party, if any, against the other, or against the
employees, agents, or licensees of any party with respect to such damage or
destruction and with respect to any loss resulting therefrom, including the
interruption of the business of any party, are hereby waived to the extent of
the coverage of said insurance. Landlord and Tenant agree further that all
policies of fire, extended coverage, business interruption, all risk or other
insurance covering the Premises, or the contents, fixtures, equipment and
improvements thereon, shall, if obtainable, contain a clause or endorsement
providing in substance that the insurance shall not be prejudiced by virtue of
this waiver. Any additional premiums on account thereof shall be paid by the
party benefited.
17.1 LIENS. Tenant shall not permit any lien or claims for
lien including without limitation, any mechanic, laborer or supplier lien to be
filed against the Building or any part thereof arising out of work performed or
alleged to have been performed by, at the direction of or on behalf of Tenant.
If any such lien or claim for lien is filed, Tenant shall within thirty (30)
days after such filing either have such lien or claim for lien released of
record or MAY CONTEST SUCH LIEN AND IN SUCH CASES shall deliver to Landlord a
bond or other security in form, content, amount, and issued by a company
satisfactory to Landlord, indemnifying Landlord, and others designated by
Landlord against all costs and liabilities resulting from such lien or claim for
lien released or to deliver such bond to Landlord. If Tenant fails to delete
contest any lien, Landlord, without investigating the validity of such lien, may
pay or discharge the same and Tenant shall reimburse Landlord upon demand for
the amount so paid by Landlord including Landlord's expense and attorney's fees.
<PAGE> 18
18. DAMAGE OR DESTRUCTION.
18.1 Partial Damage to Premises. Tenant shall notify
Landlord in writing immediately upon the occurrence of any damage to the
Premises. If the damage can be completely repaired within ninety (90) days from
the date of such damage and the cost of such repairs do not exceed fifty percent
of the value of the Premises, Landlord shall repair the damage as soon as
reasonably possible. If the damage cannot be repaired within 90 days of the date
of such damages or the cost of such repairs exceeds 50% of the value of the
premises this Lease SHALL TERMINATE as of the date the damage occurred. Landlord
shall notify Tenant within thirty (30) days after receipt of notice of the
occurrence of the damage, whether Landlord elects to repair the damage or
terminate the Lease. If the damage to the Premises occurs during the last six
(6) months of the Lease Term, and if such damage or destruction is not the
result of the act or omission of Tenant, Landlord or Tenant may elect to
terminate this Lease.
18.2 TOTAL OR SUBSTANTIAL DESTRUCTION. If the Premises is
totally or substantially destroyed by any cause whatsoever, or if the Premises
is in a building which is substantially destroyed (even though the Premises is
not totally or substantially destroyed), this Lease shall terminate as of the
date the destruction occurred. However, if the Premises can be rebuilt within
one hundred and twenty (120) days after the date of destruction, Landlord may
elect to rebuild the Premises at Landlord's own expense, in which case, this
Lease shall remain in full force and effect. Landlord shall notify Tenant of
such election within thirty (30) days after the occurrence of total or
substantial destruction.
18.3 TEMPORARY REDUCTION OF RENT. If the Premises is totally
or substantially destroyed, or if the Premises is damaged through no fault of
Tenant, and the Premises is repaired pursuant to the provisions of this
PARAGRAPH 18, Rent payable during the period of such damage, repair and/or
restoration shall be reduced according to the degree, if any, to which Tenant's
use of the Premises is impaired. Tenant shall not be entitled to any other
compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair, or restoration of or to the Premises.
19. Condemnation. If all or any portion of the Premises is taken
through eminent domain or sold under threat of such taking (all of which are
called "Condemnation"), this Lease shall terminate as to the part taken or sold
on the date the condemning authority takes title or possession, whichever occurs
first. Any Condemnation award or payment shall be distributed in the following
order: (a) first, to any ground lessor, mortgagee or beneficiary under a deed of
trust encumbering the Premises for the amount of its interest in the Premises;
(b) second, to Landlord for reduction in the value of the leasehold, the taking
of the fee, or otherwise; (c) third, to tenant for
<PAGE> 19
reimbursement of unamortized tenant improvements, trade fixtures and moving
expense caused by such condemnation.
20. DEFAULT AND REMEDIES AND BANKRUPTCY.
A. If Tenant shall default in the payment of any installment of
Rent or in the payment of any other sum required to be paid by Tenant under this
Lease and such default shall continue for ten (10) days after payment thereof is
due, or if Tenant shall default in the observance or performance of any of the
other covenants or conditions in this Lease to be performed by Tenant and such
default shall continue for thirty (30) days after written notice to Tenant
(provided, however, that if Tenant shall default with respect to such payments
or observances or performances more than twice in any six (6) month period
within the Term, then no notice of any further default with respect to such
matters within such period shall be required hereunder), or if a default
involves a hazardous condition or an event which in Landlord's judgment is
materially detrimental to the Building and within the control of Tenant, and is
not cured by Tenant immediately upon written notice to Tenant, or if the
interest of Tenant in this Lease shall be levied upon under execution or other
legal process, or if any voluntary petition in bankruptcy or for corporate
reorganization or any similar relief shall be filed by Tenant, or if any
involuntary petition in bankruptcy shall be filed against Tenant under any
federal or state bankruptcy or insolvency act and shall not have been dismissed
within sixty (60) days following the filing thereof, or if a receiver shall be
appointed for Tenant or any of the property of Tenant by any court and such
receiver shall not be dismissed within sixty (60) days from the date of
appointment, or if Tenant shall make an assignment for the benefit of creditors,
or if Tenant shall admit in writing its inability to meet its debts as they
mature, or if Tenant shall abandon the Premises, then Landlord may treat the
occurrence of any one or more of the foregoing events as a breach of this Lease
and thereupon at its option may, without notice or demand of any kind to Tenant
or any other person, exercise one or more of the following described remedies,
in addition to all other rights and remedies provided at law or in equity:
(i) Landlord may terminate this Lease, in which event Landlord may
immediately repossess the Premises and be entitled to recover, in addition
to any other sums or damages for which Tenant may be liable to Landlord, as
damages, an amount, if any, equal to the Rent which would have been payable
during any period of rent-free occupancy provided to Tenant by this Lease,
the cost of all leasing commissions paid by Landlord in connection with this
Lease, the cost of all leasing commissions paid by Landlord in connection
with this Lease, the cost to Landlord of the initial leasehold improvements
to the Premises, and all other amounts paid to or on behalf of Tenant in
connection with Tenant's entry into this Lease and occupancy of the Premises
(including without limitation any moving cost allowance, payments on
lease(s) assumed by Landlord, payment for preparation of floor plans and the
like), including Landlord's interest expense thereon, together with a sum of
money equal to the excess of the Rent provided to be paid by Tenant for the
balance of the Term over the fair market rental value of the Premises, after
deduction of all anticipated expenses of reletting for said period. Should
the fair market rental value of the Premises after deduction of all
anticipated expenses of reletting for the balance of the
<PAGE> 20
then existing Term exceed the Rent to be paid by Tenant for the balance of the
Term, Landlord shall have no obligation to pay to Tenant the excess or any part
thereof or to credit such excess or any part thereof against any other sums or
damages for which Tenant may be liable to Landlord.
(ii) Landlord may terminate Tenant's right of possession and may repossess
the Premises by forcible entry or unlawful detainer suit by taking peaceful
possession or otherwise without terminating this Lease, in which event Landlord
may, but shall be under no obligation to, relet the same for the account of
Tenant; for such rent and upon such terms as shall be satisfactory to Landlord.
For the purpose of such reletting, Landlord is authorized to decorate, repair,
remodel or alter the Premises. If Landlord shall fail to relet the Premises,
Tenant shall pay to Landlord a sum equal to the amount of the Rent for the
balance of the Term. If the Premises are relet and a sufficient sum shall not be
realized from such reletting after payment of the costs and expenses of all
decoration, repairs, remodeling, alterations and additions and the expenses of
such reletting (including broker's fees) to satisfy the Rent provided for in
this Lease and the amounts recoverable by Landlord from Tenant pursuant to
subparagraph (i) of this paragraph, Tenant shall satisfy and pay the same upon
demand therefor from time to time. Landlord may file suit to recover any sums
falling due from time to time and no suit or recovery of any portion due
Landlord hereunder shall be any defense to any subsequent action brought for any
amount not previously reduced to judgment in favor of Landlord. No waiver of any
default by Tenant shall be implied from any omission by Landlord to take any
action on account of said default if such default persists or shall be repeated,
and no express waiver shall affect any default other than the default specified
in the express waiver and then only for the time and to the extent therein
stated. No failure of Landlord to exercise any power given Landlord hereunder or
to insist upon strict compliance with any obligation hereunder and no custom or
practice of the parties at variance with the terms hereof shall constitute a
waiver of Landlord's right to demand exact compliance with the terms hereof. The
provisions of this Paragraph 20 shall survive any termination of this Lease.
B. The following shall be events of bankruptcy ("Events of Bankruptcy") under
this Lease:
[1] Tenant's becoming insolvent, as that term is defined under the
Bankruptcy Code, or under the insolvency laws of any state, district,
commonwealth or territory of the United States (the "Insolvency Laws");
[2] The appointment of a receiver or custodian for any material part of
Tenant's property or assets, or the institution of a foreclosure action upon any
material part of Tenant's real or personal property;
[3] The filing of a voluntary petition under the provisions of the
Bankruptcy Code or Insolvency Laws;
[4] The filing of an involuntary petition against Tenant as the subject
debtor under the Bankruptcy Code or Insolvency Laws, which either [a] is not
dismissed within
<PAGE> 21
sixty (60) thirty (30) days of filing, or [b] results in the issuance of an
order for relief against the debtor; or
[51 Tenant's making or consenting to an assignment for the benefit
of creditors or a common law composition of creditors.
C. Upon the occurrence of an Event of Bankruptcy, Landlord shall have
all rights and remedies available to Landlord pursuant to Subparagraph 20.A
hereof; provided that, while a case under the Bankruptcy Code is pending in
which Tenant is the subject debtor and only for so long as Tenant or its Trustee
in Bankruptcy hereinafter referred to as "Trustee") is in compliance with the
provisions of Subparagraphs D, E and F below, Landlord shall not exercise its
rights and remedies pursuant to Subparagraph 20.A hereof.
D. If Tenant becomes the subject debtor in a case pending under the
Bankruptcy Code, Landlord's right to terminate this Lease pursuant to
Subparagraph 20.C above shall be subject to the rights of Trustee to assume or
assign this Lease. Trustee shall not have the right to assume or assign this
Lease unless Trustee promptly [i] cures all defaults under this Lease, [ii]
compensates Landlord for monetary damages incurred as a result of such defaults,
and [iii] provides "adequate assurance of future performance" on the part of the
Tenant as debtor in possession or on the part of the assignee tenant.
E. Landlord and Tenant hereby agree in advance that "adequate assurance
of future performance," as used in Subparagraph D above, shall mean that all of
the following minimum criteria must be met:
[1] Trustee must agree that Tenant's business shall be conducted
in a appropriate manner, and that no liquidating sales, auctions, or other
inappropriate business operations shall be conducted on the Premises;
(2] Trustee must agree that the use of the Premises as stated in
this Lease will remain unchanged and that no prohibited use shall be
permitted;
[3] Trustee must agree that the assumption or assignment of this
Lease will not violate or affect the rights of any sublessees of space in
the Premises;
[4] Trustee must pay to Landlord at the time the next monthly
installment of Rent is due under this Lease, in addition to such Monthly
Basic Rent Installment of Rent, an amount equal to the Monthly Basic Rent
Installments due under this Lease for the next three (3) months, said amount
to be held by Landlord in escrow until either Trustee or Tenant defaults in
its payment of Rent or other obligations under this Lease (whereupon
Landlord shall have the right to draw on such escrowed funds to pay all or
any portion of unpaid sums due under this Lease) or until the expiration of
this Lease (whereupon the funds shall be returned to Trustee or Tenant); and
<PAGE> 22
[5] Tenant or Trustee must agree to pay to Landlord promptly at
any time Landlord is authorized to and does' draw on the escrow account the
amount necessary to restore such escrow account to the original level
required by Subparagraph [4] of this Subparagraph E.
F. In the event Tenant is unable to [i] cure its defaults, [ii]
promptly reimburse the Landlord for its monetary damages, [iii] pay the Rent and
all other payments required of Tenant under this Lease on time (or within ten
(10) days of the due date, or [iv] meet the criteria and obligations imposed by
Subparagraph 20.E above, Tenant agrees in advance that it has not met its burden
to provide "adequate assurance of future performance," and this Lease may be
terminated by Landlord in accordance with Subparagraphs 20.A and 20.C above.
G. Any property, furniture or fixtures belonging to Tenant which
Landlord may store shall be stored at Tenant's expense and at Tenant's sole risk
and Landlord shall not be held responsible for any breakage or damage occasioned
by such storing. If this Lease is terminated at the election of Landlord, as
aforesaid, or in any other way, Tenant shall, without demand, surrender and
deliver up said Premises and property peaceably to Landlord immediately upon
such termination, and if Tenant shall remain in possession of the Premises, or
any part thereof, one day after the termination of this Lease in any of the ways
above named, Tenant shall be deemed guilty of forcible detainer of the Premises
under the statutes of the State of Kentucky and shall be subject to all the
conditions and provisions above named and to eviction and removal forcibly or
otherwise with or without process of law as above stated. Any property,
furniture or fixtures belonging to Tenant which Landlord may store shall be
stored at Tenant's expense and at Tenant's sole risk and Landlord shall not be
held responsible for any breakage or damage occasioned by such storing after the
commencement of a suit, or after final judgment, for possession of said
Premises, Landlord may receive and collect any Rent due from Tenant, and the
payment of said Rent shall not waive or affect said suit or said judgment. All
rights of Landlord in the event of default herein enumerated shall be in
addition to and without prejudice to any remedy or remedies which Landlord may
have at law or in equity for nonpayment of rent or for breaches of the covenants
and agreements hereof.
<PAGE> 23
H. All rights, options and remedies of Landlord contained in this
Lease shall be construed and held to be cumulative, and not one of them shall be
exclusive of the other, and Landlord shall have the right to pursue any one or
all of such remedies or any other remedy or relief which may be provided by law,
whether or not stated in this Lease. No waiver of any default of Tenant
hereunder shall be implied from any acceptance by Landlord of any Rent or other
payments due hereunder or any omission by Landlord to take any action on account
of default if such default persists or is repeated, and no express waiver shall
affect defaults other than as specified in said waiver. The consent or approval
of Landlord to or of any act by Tenant requiring Landlord's consent or approval
shall not be deemed to waive or render unnecessary Landlord's consent or
approval to or of any subsequent similar acts by Tenant.
I. Landlord shall in no event be in default in the performance of any
of its obligations in this Lease Agreement unless and until Landlord shall have
failed to perform such obligation within thirty (30) days (or such additional
time as is reasonably required to correct any such default provided Landlord
continuously is acting in good faith to cure such default and such default is
capable of being cured) after notice by Tenant to Landlord in writing and
pursuant to the terms of this Lease concerning notice specifying wherein
Landlord has failed to perform any such obligation.
21. INTEREST ON PAST DUE AMOUNTS. Any amount owed by Tenant to Landlord
which is not paid when due shall bear interest at the rate of ten percent (10%)
per annum from the due date of such amount, in addition to any late charges due
under this Lease. If the interest rate specified in this Lease is higher than
the rate permitted by law, the interest rate is hereby decreased to the maximum
legal interest rate permitted by law.
22. SECURITY DEPOSIT. Upon the execution of this Lease, Tenant shall
deposit with Landlord a Security Deposit in the amount of $ 0.00.
23. DEFAULT BY LANDLORD. Tenant shall give written notice of any
failure by Landlord to perform any of its obligations under this Lease to
Landlord. Landlord shall not be in default under this Lease unless Landlord
fails to cure such non-performance within thirty (30) days after receipt of
Tenant's notice. However, if such non-performance reasonably requires more than
thirty (30) days to cure, Landlord shall not be in default if such cure is
commenced within such thirty (30) day period and thereafter diligently pursued
to completion.
24. LEGAL PROCEEDINGS. Should this Lease or the parties' obligations
hereunder be the subject of litigation between Landlord and Tenant, it is
expressly agreed that the prevailing party will have its reasonable legal fees,
costs and expenses reimbursed by the other party.
25. NOTICES. All notices required or permitted under this Lease shall
be in writing and shall be personally delivered or sent by certified or
registered mail, return receipt requested, or sent by Federal Express or other
recognized delivery service. Notices shall be
20
<PAGE> 24
effective upon delivery or attempted delivery in accordance with this Section.
Notices to Landlord and Tenant shall be addressed as follows:
Tenant
To the Premises and to:
D&K Healthcare Resources, Inc.
8000 Maryland Avenue, Suite 920
St. Louis, MO 63105
Attn: Leonard R. Benjamin, Esq.
Landlord
BSRT LEXINGTON TRUST.
c/o Banyan Strategic Realty Trust
Attention. General Counsel
150 South Wacker Drive
Suite 2900
Chicago, Illinois 60606
with a copy to:
Coleman Group Property Services
300 West Vine Street
Lexington, KY 40507
Attn: Robert L. Cole
Either party may change its notice address upon written notice to the other
party.
26. QUIET POSSESSION. Upon paying the Rent and observing and
performing all of the covenants, conditions and provisions on Tenant's part to
be observed and performed hereunder, Tenant shall have quiet possession of the
Premises for the entire Term, subject to all of the provisions of this Lease.
27. SUBORDINATION AND ATTORNMENT.
27.1 SUBORDINATION. Landlord shall have the right to subordinate
this Lease to any ground lease, deed of trust or mortgage encumbering the
Premises, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. However, Tenant's right to quiet possession of the Premises during
the Term shall not be disturbed if Tenant pays the Rent and performs all of
Tenant's obligations under this Lease and is not otherwise in default. If any
ground lessor, beneficiary or mortgagee elects to have this Lease prior to the
lien of its ground lease, deed of
21
<PAGE> 25
trust or mortgage and gives written notice thereof to Tenant, this Lease shall
be deemed prior to such ground lease, deed of trust or mortgage whether this
Lease is dated prior or subsequent to the date of said ground lease, deed of
trust or mortgage or date of recording thereof.
27.2 ATTORNMENT. If Landlord's interest in the Premises is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Premises and recognize such transferee
or successor as Landlord under this Lease provided such party obtaining
Landlord's interest in the Premises recognizes Tenant's interest under this
Lease and agrees not to disturb the same. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Premises upon the transfer
of Landlord's interest.
27.3 SIGNING OF DOCUMENTS. Provided the provisions of
Subparagraphs 27.1 and/or 27.2 are met, Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. Such subordination and attornment
documents may contain such provisions as are customarily required by any ground
lessor, beneficiary under a deed of trust or mortgagee. If Tenant fails to do so
within ten (10) days after written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
27.4 MORTGAGEE PROTECTION. Tenant agrees to give any mortgagees
and/or trust deed holders, by registered mail, a copy of any notice of default
served upon Landlord, provided that prior to such notice Tenant has been
notified, in writing (by way of Notice of Assignment of Rents and Leases, or
otherwise), of the address of such mortgagees and/or trust deed holders. Tenant
further agrees that if Landlord shall have failed to cure such default within
the term provided for in this Lease, then the mortgagees and/or trust deed
holders shall have an additional thirty (30) days within which to cure such
default or, if such default cannot be cured within that time, then such
additional time as may be necessary, if within such thirty (30) days any
mortgagee and/or trust deed holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including, but not limited to,
commencement of foreclosure proceedings, if necessary to effect such cure), in
which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
27.5 ASSIGNMENT OR SALE BY LANDLORD. In the event Landlord shall
assign this Lease or sell or convey the Building, the same shall operate to
release Landlord from any future liability for any of the covenants or
conditions, express or implied, herein contained in favor of Tenant, and in such
event Tenant agrees to look solely to the successor in interest of Landlord in
and to this Lease.
28. ESTOPPEL CERTIFICATES. Within ten (10) business days after
Landlord's written request, Tenant shall deliver, executed in recordable form a
declaration to any person designated by Landlord: [a] ratifying this Lease; [b]
stating the commencement and termination dates; and [c] certifying [i] that this
Lease is in full force and effect and has not been assigned,
22
<PAGE> 26
modified, supplemented or amended (except by such writings as shall be stated),
[ii] that all conditions under this Lease to be performed by Landlord have
been satisfied (stating exceptions, if any), [iii] that no defenses, credits or
offsets against the enforcement of this Lease by Landlord exist (or stating
those claimed): [iv] as to advance Rent, if any, paid by Tenant, [v] the date
to which Rent has been paid, [vi] as to amount of security deposited with
Landlord, and such other information as Landlord reasonably requires. Persons
receiving such statements shall be entitled to rely upon them.
29. LANDLORD'S LIABILITY. The obligations of the Landlord under this
Lease do not constitute personal obligations of Landlord or the individual
partners, joint ventures, directors, officers, shareholders or beneficial owners
of the Landlord, and Tenant shall look solely to the Building and to no other
assets of the Landlord for satisfaction of any liability in respect to this
Lease. Tenant will not seek recourse against Landlord or such individuals or
entities or such other assets for such satisfaction. As used in this Lease, the
term "Landlord" means only the current owner or owners of the fee title to the
Premises or the leasehold estate under a ground lease of the Premises at the
time in question. Any Landlord who transfers its title or interest is relieved
of all liability with respect to the obligations of Landlord under this Lease to
be performed on or after the date of transfer. However, each Landlord shall
deliver to its transferee, by actual transfer or appropriate credits, all funds
previously paid by Tenant if such funds have not yet been applied under the
terms of this Lease.
30. BROKERAGE. This Lease has been negotiated through the agency of
Coleman Group Property Services and Haymaker Company ("Broker"), and Tenant and
Landlord warrant and represents to the other that no other broker was involved
with the leasing of the Premises or the negotiation of this Lease or is entitled
to any commission in connection herewith. Landlord shall be solely responsible
for any commission or fee or other compensation payable to Broker arising from
this Lease. Tenant and Landlord agrees to indemnify and hold the other harmless
against any other claims (including court costs and attorneys fees) for
commissions by any other broker.
31. SURRENDER OF PREMISES. Upon termination of the Lease, by expiration
of term, or otherwise, Tenant shall redeliver to Landlord the Premises broom
clean and in good order and condition, ordinary wear and tear excepted. In
addition, Landlord may require Tenant to remove any alterations, additions or
improvements (whether or not made with Landlord's consent) prior to the
termination of the Lease and to restore the Premises to its prior condition, all
at Tenant's expense. If Landlord shall require such removal, Landlord shall
provide notice to Tenant no later than ninety (90) days prior to the end of the
Lease term. All alterations, additions and improvements which Landlord has not
required Tenant to remove and which Tenant has not removed shall become
Landlord's property and shall be surrendered to Landlord upon the termination of
the Lease. Tenant shall remain liable for holdover rent until the Premises shall
be returned in such order to Landlord.
32. HOLDOVER. Tenant shall vacate the Premises upon the expiration or
earlier termination of this Lease. Tenant shall reimburse Landlord for and
indemnify Landlord against all damages incurred by Landlord from any delay by
Tenant in vacating the Premises. If Tenant
23
<PAGE> 27
does not vacate the Premises upon the expiration or earlier termination of the
Lease and Landlord thereafter accepts rent from Tenant, Tenant's occupancy of
the Premises shall be a "month-to-month tenancy, subject to all of the terms of
this Lease applicable to a month-to-month tenancy, except that the Base Rent for
such tenancy shall be two hundred percent (200%) of the Base Rent in effect at
the expiration of the Lease.
33. SEVERABILITY. A determination by a court of competent jurisdiction
that any provision of this Lease or any part thereof is illegal or unenforceable
shall not cancel or invalidate the remainder of such provision or this Lease,
which shall remain in full force and effect.
34. INTERPRETATION. The captions of the Sections of this Lease are to
assist the parties in reading this Lease and are not a part of the terms or
provisions of this Lease. Whenever required by the contest of this Lease, the
singular shall include the plural and the plural shall include the singular. The
masculine, feminine and neuter genders shall each include the other. In any
provision relating to the conduct, acts or omissions of Tenant, the term
"Tenant" shall include Tenant's agents, employees, contractors, invitees,
successors or others using the Premises with Tenant's expressed or implied
permission.
35. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Lease is the
only agreement between the parties pertaining to the lease of the Premises and
no other agreements are effective. All amendments to this Lease shall be in
writing and signed by all parties. Any other attempted amendment shall be void.
36. WAIVERS. All waivers must be in writing and signed by the waiving
party. Landlord's failure to enforce any provision of this Lease or its
acceptance of Rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
37. NO RECORDATION. Tenant shall not record this Lease without prior
written consent from Landlord. However, either Landlord or Tenant may require
that a "Short Form" memorandum of this Lease executed by both parties be
recorded.
38. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon any
party who legally acquires any rights or interest in this Lease from Tenant.
However, Landlord shall have no obligation to Tenant's successor unless the
rights or interests of Tenant's successor are acquired in accordance with the
terms of this Lease. The laws of the State of Kentucky shall govern the
validity, performance and enforcement of this Lease.
39. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. If Tenant is a partnership, each person signing this Lease for
Tenant represents and warrants that he is a general partner of
24
<PAGE> 28
the partnership, that he has full authority to sign for the partnership and that
this Lease binds the partnership and all general partners of the partnership.
The withdrawal of a General Partner from the Partnership shall not relieve the
General Partner from liability under this Lease and all general partners added
to the Partnership shall be fully liable for the Partnership's obligations
hereunder. Tenant shall give written notice to Landlord of any general partner's
withdrawal or addition.
40. JOINT AND SEVERAL LIABILITY. All parties signing this Lease as
Tenant shall be jointly and severally liable for all obligations of Tenant.
41. FORCE MAJEURE. If EITHER PARTY cannot perform any of its
obligations HEREUNDER (EXCEPT TENANT OBLIGATION TO PAY RENT) due to events
beyond their control, the time provided for performing such obligations shall be
extended by a period of time equal to the duration of such events. Events beyond
a PARTY'S control include, but are not limited to, acts of God, war, civil
commotion, labor disputes, strikes, fire, flood or other casualty, shortages of
labor or material, government regulation or restriction and weather conditions.
42. EXECUTION OF LEASE. This Lease may be executed in counterparts,
and, when all counterpart documents are executed, the counterparts shall
constitute a single binding instrument.
43. COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's
obligations under this Lease is a condition as well as a covenant. Tenant's
right to continue in possession of the Premises is conditioned upon such
performance. Time is of the essence in the performance of all covenants and
conditions.
44. SUBMISSION OF LEASE. The submission of this Lease to Tenant for
examination does not constitute an offer to lease or a reservation of space. No
agreement between Landlord and Tenant relating to the leasing of the Premises
shall become effective or binding until executed by both parties and received by
Tenant.
45.
46. RIGHT OF FIRST REFUSAL. During the initial five (5) year term of
this Lease, and provided that Tenant is not then in default under the terms,
covenants, and of this Lease, Tenant shall have the right of first refusal TO
LEASE any adjoining space occupied by Tenant. Landlord shall notify Tenant in
writing that it is under firm negotiations with a prospective tenant to lease
the demised Premises, or any part thereof, and should Tenant decide to lease
said space, Tenant may do so under the same terms and conditions as prospective
tenant. Tenant must notify Landlord in
25
<PAGE> 29
writing of its desire to lease said additional space within five (5) days after
receiving said notification from Landlord.
47. OPTION TO RENEW. Provided Tenant is not then in default with
respect to this Lease, and has kept and performed all of its obligations under
this Lease, Tenant shall have the right and option, by giving Landlord written
notice of its intention at least six (6) months before the expiration date of
the initial term and/or 1st option period hereof to extend the time of this
Lease for two (2) additional five (5) year periods from the date of expiration
of this Lease, which notice of exercise of this option shall be given separately
and shall only be effective if in writing and sent to Landlord as provided
herein for the mailing of notices. Such Lease extension shall be upon identical
terms and conditions as set forth in this Lease, except that the rental to be
paid by the Tenant shall be $4.50 per square foot during the first renewal term
and $4.75 per square foot during the second renewal term.
IN WITNESS WHEREOF, the parties have hereunder executed the lease the
day and year above written.
LANDLORD:
BSRT LEXINGTON TRUST
BY BSRT PORTFOLIO CORP. TRUSTEE
By: /s/ Niel S. Hanson
---------------------------------------------
Its: Vice President
--------------------------------------------
Date: 5/25/99
--------------------------------------------
TENANT:
D&K HEALTHCARE RESOURCES, INC.
By: /s/ Thomas S. Hilton
---------------------------------------------
Its: Sr. V.P. and CFO
--------------------------------------------
Date: 5/21/99
-------------------------------------------
26
<PAGE> 30
EXHIBIT A
SITE PLAN
LEXINGTON BUSINESS CENTER
Lexington, Kentucky
<PAGE> 31
EXHIBIT A-1
LEXINGTON BUSINESS CENTER
SITE PLAN
<PAGE> 32
EXHIBIT B
Landlord's Work
Landlord shall contribute up to $300,000.00 towards tenant improvements, said
contribution will be provided to tenant upon completion of said work which is
accompanied by invoice and lien waiver's executed by both contractor and Tenant.
Tenant shall be responsible for any and all expenses over Landlord's
contribution towards tenant improvements.
Landlord shall at Landlord's sole cost and expense construct a demising wall to
the east of Tenant's warehouse space, such wall shall be constructed as follows:
1. Eight (8") feet up from floor level to be constructed of plywood
material throughout entire wall.
2. Starting at eight (8") feet above from floor level up to ceiling or
beam, such wall shall be constructed of dry wall.
Landlord shall at Landlord's sole cost and expense construct a demising wall in
the openings of the west wall. Such wall shall be of block construction.
B-1
<PAGE> 33
EXHIBIT C
Rules and Regulations
THE FOLLOWING RULES AND REGULATIONS ARE PRESCRIBED BY LANDLORD FOR THE GENERAL
SAFETY, SECURITY, AND BENEFIT OF ALL OCCUPANTS OF THE BUILDING. LANDLORD SHALL
AT ALL TIMES HAVE THE RIGHT TO CONTROL AND OPERATE THE PUBLIC PORTIONS OF THE
BUILDING, AS WELL AS FACILITIES FOR COMMON USE OF OCCUPANTS, IN SUCH MANNER AS
LANDLORD DEEMS BEST.
1. The sidewalks, entrances, passages or stairways, shall not be
obstructed by Tenant or used for any purpose other than ingress and
egress to and from the Premises. Equipment, furniture or supplies to be
delivered to the Premises shall be delivered using passageways
designated for such purpose by Landlord and only during hours and in a
manner approved by Landlord.
2. No awnings, antenna or other projections shall be permitted on the
outside of the Building and no curtains, blinds, shades, screens or
lights shall be attached to or hung in, or used in connection with any
window or door of the Premises, without the prior written approval of
the Landlord.
3. No sign, advertisement, notice or other lettering or object shall be
affixed or exhibited on any part of the outside of the Premises, or on
the inside thereof so as to be visible from the outside of the
Building. Signage shall be of a material, size and color and style
acceptable to Landlord and shall be affixed by Tenant at Tenant's
expense.
4. Landlord shall have the right to control and operate the public
portions of the Building and the public facilities, as well as
facilities furnished for the common use of the tenants, in such manner
as it deems best for the benefit of the tenants generally. No tenant
shall invite to the Premises, or permit the visit of persons in such
numbers or under such conditions as to interfere with the use and
enjoyment of the entrances an facilities of the Building by other
tenants. Tenants shall in no way obstruct the sidewalks, entry
passages, pedestrian passageways, driveways, entrances and exists; they
shall use them only as ingress to and egress from their work areas.
5. No showcases or other articles shall be put in front of or affixed to
any part of the exterior of the Building, nor placed in the windows or
vestibules without the prior written consent of Landlord.
6. Canvassing, soliciting or peddling in the Building is prohibited and
each tenant shall cooperate to prevent the same.
C-1
<PAGE> 34
7. Tenant shall not advertise the business, profession or activities of
Tenant in any manner which violates the letter or spirit of any code of
ethics adopted by any recognized association or organization pertaining
thereto or use the name of the building for any purpose other than that
of the business address of Tenant.
9. Tenant shall not mark, paint, drill into or in any way deface any part
of the Premises or the Building including, but not limited to, any
walls, partitions, doors or window. No boring, cutting or stringing of
wires shall be permitted, excepts with the prior written consent of the
Landlord, which consent shall not be unreasonably withheld, and as the
Landlord may direct.
10. Tenant shall not permit any unusual or objectionable odors or gases to
be produced upon or permeate from the Premises.
11. Tenant shall not make, nor permit its employees, agents or invitees to
make any unseemly or disturbing noises or vibrations, nor disturb nor
interfere with occupants of this or neighboring buildings or Premises
or those having business with them, whether by the use of any musical
instruments, recording device, radio equipment or in any other way.
12. Tenant agrees that it shall not willfully do or omit to do any act or
thing which shall discriminate or segregate upon the basis of race,
color, sex, creed or national origin in the use and occupancy or in any
subleasing or subletting in the Premises.
14. Landlord shall have the right to prohibit any advertising by any tenant
which, in Landlord's opinion, tends to impair the reputation of the
Building or its desirability as a building for office and warehouse
space, and upon written notice from Landlord, Tenant shall refrain from
or discontinue such advertising. Tenant shall not, in its advertising
or
C-2
<PAGE> 35
other publicity, without prior written consent of Landlord, use the
name of the Building or use pictures or illustrations of the Building.
15. Tenant shall not carry on or permit to be carried upon said Premises or
any part thereof any immoral or illegal business, gambling, the selling
of pools, lotteries or any business that is prohibited by law.
16. Tenant and its authorized representatives or invitees shall not throw
cigar or cigarette butts or other substances of litter of any kind in
or about the Building, except in receptacles placed in it for that
purpose.
17. The toilet rooms, toilets, urinals, washbowls, and other apparatus
available to Tenant shall not be used for any purpose other than that
for which they were constructed. No foreign substance of any kind
(including sanitary napkins, etc.), shall be thrown into them, and the
expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be paid by the Tenant (or its authorized
representative or invitee) that has caused it.
18. Landlord agrees that these rules and regulations shall be enforced
against all tenants in a nondiscriminatory manner. Tenant shall be
deemed to have read these rules and to have agreed to abide by them as
a condition to its occupancy of the Premises.
19. Landlord reserves the right by written notice to Tenant, to rescind,
alter or waive any rule or regulation at any time prescribed for the
Building when, in Landlord's judgment, it is necessary, desirable or
proper for the best interest of the Building and its tenants.
20. Tenant shall not use or keep in Premises any kerosene, gasoline or
inflammable or combustible fluid or material other than those limited
quantities necessary for the operation or maintenance of office
equipment. Tenant shall not use or permit to be used in the Premises
any foul or noxious gas or substance, or permit or allow the Premises
to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Building by reason of noise, odors
or vibrations, nor shall Tenant bring into or keep on or about the
Premises any birds or animals.
21. Tenant shall not use any method of heating or air-conditioning other
than that supplied by the building.
22. Landlord reserves the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the
Building.
23. Tenant shall not park its vehicles in any parking areas designated by
Landlord as areas for parking by visitors or handicap to the Building.
C-3
<PAGE> 36
EXHIBIT D
Signage Requirements
I. SCOPE
A. The provisions of this exhibit shall apply to the display,
construction, erection alteration, use, location and maintenance of all
signs within the Lexington Business Center.
B. All sections, provisions and definitions as defined by the 1983
Lexington-Fayette Urban County Government sign ordinance, Article 17,
shall apply to this sign regulatory standard with provisions for the
Landlord as contained herein.
II. PERMITS AND FEES
A. Tenant or Tenant's contractor shall be responsible for all permits and
fees required for Tenant signage.
B. No sign shall be displayed, erected, relocated or altered unless and
until a permit has been issued by the Division of Building and
Inspection. Application materials shall be as required by the division
of building Inspection, and shall include, but shall not be limited to
the following:
1. A completed application form.
2. Building elevation showing the location of the proposed sign.
3. Detailed sign information including type of construction, method
of mounting and/or erection and other similar information.
4. The written approval of the Landlord which shall not be
unreasonably withheld or delayed. Signage proposal shall be
submitted to Landlord prior to the division of Building Inspection
review for concept and compatibility with overall shopping center
aesthetics.
5. A permit fee in the amount determined by the Lexington-Fayette
Urban County Council.
6. The Landlord's judgments and decisions relative to the aesthetic
compatibility of all proposed signage shall be final.
C. The Division of Building and Inspection shall have on file, records of
all issued or formally denied permits and conditions attached to
approval of such permit request. signs may be erected or constructed
only in compliance with the approved permit.
D-1
<PAGE> 37
D. The Division of building Inspection shall enforce sign and permit
compliance and shall maintain written records of any enforcement
actions taken.
III. SIGNAGE CRITERIA
A. All primary tenant identification shall be located on the Landlord's
"designated signband" as illustrated on the attached Exhibit C-1.
B. All signage shall be individual letters with internal illumination or
back lighting to produce a silhouette.
C. Tenant signage on the designated sign panel shall not exceed 2/3 of
the length of the Tenant storefront.
D. Maximum letter height shall be 24", minimum letter height shall be
10".
E. Tenant signage shall be connected to the electric service for the
Tenant's demised Premises.
F. All individual letters shall be constructed of black anodized aluminum.
G. Landlord must review and approve the signage shop drawings prior to
fabrication and installation. The shop drawings shall indicate letter
style, letter height, letter color, overall sign length, and location
relative to the Tenant's demised Premises. Any deviation from the
approved signage drawing shall be corrected by the tenant or Tenant's
contractor.
IV. SIGNAGE LIMITATIONS
A. No logos, emblems or trademarks shall be permitted.
B. Temporary (2 weeks or less) window signs shall be permitted. Limited to
no more than 25% of the total window area.
C. No light, sign or other advertising device shall be designated or
erected in such a manner or location as to imitate or resemble any
official traffic sign, signal or device or use any words, phrases,
symbols or characters implying the existence of danger, or the need to
stop or maneuver the vehicle.
D. Mobile signs, projecting signs, flashing or blinking signs, rotating or
moving signs, streamers, pennants or similar sings or devices, noise
emitting signs, odor or visible matter emitting signs for the purpose
of attracting attention to the sign shall not be permitted.
E. No roof mounted or roof attached signs will be permitted.
F. No free standing or under canopy attached signs shall be permitted.
D-2
<PAGE> 38
G. No "painted copy on plywood" signs shall be permitted.
H. No remote located or projected illumination of sign shall be permitted.
1. No electronic message display system signs shall be permitted.
J. No signs will be permitted at or on the rear of the Premises except
that a small identification sign showing only the name of the tenant
may be lettered on the exterior of the delivery door at the rear of
Tenant's store unit with a maximum two (2) inch letter.
K. No sign shall be painted on the exterior of the masonry, doors (except
as permitted in J.), windows, nor any other surface of the Premises.
V. MAINTENANCE STANDARDS
A. Every sign shall be maintained in good condition at all times.
B. All signs which contain painted parts shall be kept neatly painted
including metal parts which are not galvanized or of rust resistant
materials.
C. The Division of Building Inspection shall have the authority to order
the repair, repainting, alteration, or removal of any sign which
constitutes a hazard to the health, safety or public welfare or which
is an eyesore to the community be reason or inadequate maintenance,
dilapidation or obsolescence.
D. The Landlord shall have the authority to order the repair, repainting
and maintenance of signs which are, in the opinion of the Landlord,
deemed as an eyesore by reason of inadequate maintenance.
E. Repair of damaged sign panel shall be at the expense of the Tenant.
VI. LANDLORD RESERVED RIGHTS
A. The Landlord reserves the right to request verification and
substantiation of structural compatibility of the signage and or
attachment devices.
D-3
<PAGE> 39
Representations By Landlord. Landlord represents and warrants to Tenant that:
(a) Landlord does not have any knowledge of any structural or other
defects in the Improvements on the Promises;
(b) Landlord has not received from any governmental agency any notice
of, any violations of any environmental laws or regulations, (including, but not
limited to, notifications of violations or deficiencies from the Environmental
Protection Agency or any similar state or local agency) or the Americans with
Disabilities Act, as amended from time to time ("ADA") applicable to the
Premises;
(c) The Premises is not listed or to the best of Landlord's knowledge
is not proposed for listing on the National Priorities List by the Environmental
Protection Agency or on any such similar list in the State of Kentucky relating
to abandoned or uncontrolled hazardous waste sites, and there have been no
discussions between Landlord or its agents or state or federal officials
concerning the possibility of such listings;
(d) There has been no unlawful contamination (including any disposal,
discharge, deposit, injection, dumping, leaking, spilling, placing or escaping)
of any hazardous materials, pollutant or contaminant on, in, under or from the
Premises and there is no facility in or on the Premises which is used for the
treatment, storage or disposal of hazardous materials;
(e) There is no current or threatened action, suit or proceeding
pending against the Landlord or the Premises, arising out of the condition, use
or operation of the Premises in any court or before any federal, state, county
or municipal department, commission, board, bureau or agency or other
governmental instrumentality which effects the Premises or Tenant's intended use
thereof;
(f) There is currently no action, suit or proceeding pending or, to the
bast of Landlord's knowledge, threatened which would result in a condemnation of
the Premises or any portion thereof or which would affect the access to the
Premises by vehicles or to the utilities presently serving the Premises;
(g) There are no claims pending or threatened which would result in the
creation of any lien against the Premises or any portion thereof;
(h) Landlord has no knowledge of any pending changes in zoning of the
Premises or any zoning action affecting access to the Premises from dedicated
roadways or of any citation for violation of any building, fire, health, zoning,
or other governmental requirement which has not been corrected by Landlord;
(i) No commitments have been made to any governmental authority which
would impose any obligation on Tenant or its successors or assigns to make any
contribution or dedication of money or land to construct or maintain any roads
or other improvements of a public or private nature on or off the Premises;
(j) Landlord is the sole owner in fee simple of the Premises free and
clear of any liens, security agreements or other encumbrances and Landlord is
fully empowered and authorized to enter into this Lease and consummate the Lease
contemplated hereby. There are no purchase options, contracts for dead,
contracts, or other agreements of any kind affecting any part of the Premises;
and
(k) No fact or condition exists which would result in the termination
of access to, or impair access to the Premises from adjoining public or private
streets which would result in discontinuation of presently available or
otherwise necessary access to sewer, water, electric, gas, telephone or other
utilities or services. The Premises is adjacent to and has full and free access
to and from public roads and ways such that no private easements or agreements
are necessary to afford access to or from the Premises for public street access
or otherwise.
<PAGE> 1
EXHIBIT 10.20
LEASE
THIS LEASE, dated this 1st day of January, 1997, is made and
entered into by and between JEWETT FAMILY INVESTMENTS, L.L.C., a South Dakota
limited liability company, hereinafter referred to as "Landlord", and JEWETT
DRUG CO., A/K/A JEWETT WHOLESALE DRUG COMPANY, a South Dakota corporation,
hereinafter referred to as "Tenant".
1. Premises
Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, for the term and subject to the agreements, conditions and provisions
hereinafter set forth, to each and all of which Landlord and Tenant hereby
mutually agree, all that certain real property, together with all improvements
thereon, without limitation, as follows:
Parcel #1: Lots 1 to 12, inclusive, Block 63, Hagerty & Lloyd's
Addition to the City of Aberdeen, Brown County, South Dakota.
Parcel #2: Lots 7 - 12, inclusive, Block 62, Hagerty & Lloyd's
Addition to the City of Aberdeen, Brown County, South Dakota.
Parcel #3: The vacated Jay Street between Blocks 62 and 63,
Hagerty & Lloyd's Addition to the City of Aberdeen, Brown County,
South Dakota.
For the sake of convenience, except when the context provides otherwise, the
foregoing real property and improvements are herein collectively called "the
premises", "the demised premises" or "the leased premises".
2. Term
(a) The term of this Lease shall commence on the 1st day of
January, 1997, and shall end December 31, 2006.
(b) Tenant shall have the option to extend the term of this Lease
for not less than the entire premises leased at the end of the initial term on
all the provisions contained herein (except the renewal provisions) for two (2)
separate ten-year (10-year) renewal periods by giving to Landlord notice of the
exercise of such option at least ninety (90) days prior to the expiration of the
initial term or the initial extended term; provided, however, that if Tenant is
in default on the date of the giving of such option notice or this Lease is not
otherwise in full force and effect, the option notice shall be totally in
effective or, if Tenant is in default on the date as of which the
DUPLICATE ORIGINAL
<PAGE> 2
extended term is to commence, such extended term shall not commence and this
Lease shall expire at the end of the initial term or the initial extended term
then in effect. The Base Rent payable during the extended term(s) hereof shall
be subject to Landlord's and Tenant's agreement and in no event less than the
then prevailing rental paid by Tenant at the expiration of the initial term of
this Lease or the initial extended term, as the case may be, adjusted as of the
commencement of the extended term for which the option is exercised, both
otherwise such extended term(s) shall be upon the same terms and conditions as
set forth herein.
Upon adjustment of the Base Rent and any other provisions of this
lease in accordance with this Paragraph 2, the parties shall immediately execute
an amendment to this Lease stating such adjustment.
3. Rental
(a) Commencing on the Rental commencement Date as defined in
Paragraph 2(a) above, Tenant shall pay to Landlord, throughout the term of this
Lease, the following amounts as base rental for the premises (the "Base Rent")
subject to adjustment as provided in this Paragraph 3, on or before the l0th day
of the first full calendar month of the term hereof and on or before the tenth
day of each and every successive calendar month thereafter during the term
hereof.
The monthly Base Rent for the premises is Eight Thousand Three
Hundred Thirty-three Dollars ($8,333.00).
(b) The monthly Base Rent set forth in Paragraph 3(a) above shall
be subject to adjustment annually on each anniversary of the Rental Commencement
Date (the "Adjustment Date") as follows:
The base for computing the adjustment shall be the final Consumer
Price Index for all Urban Consumers in the United States published by the United
States Department of Labor, Bureau of Labor Statistics (the "Index"), which is
published for the month most recently preceding the Rental Commencement Date
("Beginning Index"). If the Index published most recently preceding an
Adjustment Date ("Adjustment Index") has increased or decreased with respect to
the Beginning Index, the monthly Base Rent for the period until the next annual
Adjustment Date shall be set by multiplying the monthly Base Rental by a
fraction, the numerator of which is the Adjustment Index and the denominator of
which is the Beginning Index. In no case shall the monthly Base Rent be less
than the full monthly Base Rent set forth in Paragraph 3(a). On adjustment of
the monthly Base Rent as provided in this Lease, the parties shall immediately
execute an amendment to the Lease stating the new monthly Base Rent.
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If the Index is changed so that the base year differs from that
used as of the month most recently preceding the month in which the term
commences, the Index shall be converted in accordance with the conversion factor
published by the United States Department of Labor, Bureau of Labor Statistics.
If the Index is discontinued or revised during the term, such other government
index or computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the Index has not be
discontinued or revised.
4. Absolutely Net Lease
The parties understand and agree that this Lease is deemed an
absolutely net lease wherein Tenant shall pay and be responsible for all
premises expenses and operating costs including, without limitation, all present
and future costs of any kind paid or incurred in operating, cleaning, equipping,
protecting, lighting, repairing, heating, air-conditioning and maintaining the
premises.
5. Taxes, Assessments and Public Utilities
Tenant shall pay for all water, light, power, gas, heat, rubbish
removal, telephone service and all other services and utilities supplied now or
in the future to the demised premises and Landlord shall have no responsibility
therefor.
In addition to the monthly rental and other charges to be paid by
Tenant hereunder, Tenant shall reimburse Landlord, upon demand, for any and all
taxes payable by Landlord (other than net income taxes) whether or not now
customary or within the contemplation of the parties hereto: (a) upon, measured
by or reasonably attributable to the cost or value of Tenant's equipment,
furniture, fixtures and other personal property located in the premises or by
the cost or value of any leasehold improvements made in or to the premises by or
for Tenant, regardless of whether title to such improvements shall be in Tenant
or Landlord; (b) upon or measured by the monthly rental payable hereunder
including, without limitation, any gross receipts tax or excise tax levied by
the City of Aberdeen, the County of Brown, the State of South Dakota, the
Federal Government or any other governmental body with respect to the receipt of
such rental; (c) upon or with respect to the possession, leasing, operation,
management, maintenance, alteration, repair, use or occupancy by Tenant of the
premises or any portion thereof. If it shall not be lawful for Tenant so to
reimburse Landlord, the monthly rental payable to Landlord under this Lease
shall be revised to net Landlord the same net rental after imposition of any
such tax upon Landlord as would have been payable to Landlord before the
imposition of any such tax. All taxes and assessments payable for a period
partly within and
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partly without the term of this Lease shall be prorated between Landlord and
Tenant.
Tenant shall pay, before delinquency, all taxes on all personal
property belonging to or used by Tenant on the premises.
6. Use of Premises
Tenant agrees that the demised premises shall be used and occupied
only as a wholesale warehouse and office facility and for no other purpose or
purposes without Landlord's prior written consent. Tenant shall not do or permit
to be done in or about the premises, nor bring or keep or permit to be brought
or kept therein, anything which is prohibited by or will in any way conflict
with any law, statute, ordinance or governmental rule or regulation now in force
or which may hereafter be enacted or promulgated, or which is prohibited by any
fire insurance policy covering the premises, or will in any way increase the
rate of or affect any fire or other insurance upon the premises or any of its
contents beyond those normally in effect for use as a wholesale warehouse and
office facility, or cause a cancellation of any insurance policy covering the
premises or any part thereof or any of its contents. Tenant shall not do or
permit anything to be done in or about the premises for any unlawful purpose,
nor shall Tenant cause, maintain or permit any nuisance in, on or about the
premises or commit or suffer to be committed any waste in, on or about the
premises.
7. Fixtures and Equipment
Tenant may install in the demised premises, at its own cost and
expense, any fixtures, equipment and signs it deems necessary in addition to
furniture, fixtures and equipment leased herein, for the conduct of said
business, which fixtures, equipment and signs may either be leased by Tenant or
purchased by Tenant from a conditional seller or otherwise. Landlord shall not
be responsible for the safekeeping of any such fixtures, equipment or other
goods. All furniture, fixtures, equipment and signs installed by Tenant in or
about the demised premises shall, at all times, be and remain personal property,
regardless of the method in which the same is affixed to the demised premises,
and shall remain the personal property of the Tenant.
8. Maintenance and Repairs
By entry hereunder, Tenant accepts the premises as being in the
condition in which Landlord is obligated to deliver the premises. Landlord has
no obligation and has made no promise to alter, remodel, improve, repair,
decorate or paint the premises or any part thereof. No representations
respecting the condition of the premises have been made by Landlord to Tenant,
except as specifically set forth in this Lease. Except as otherwise
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<PAGE> 5
provided in the hereinafter entitled paragraph "Destruction of Premises",
Tenant, at all times during the term hereof and at its condition and repair
including, without limitation, the roof and all exterior walls, all landscaped
areas and parking lots. Tenant agrees, at the expiration of this Lease or upon
the earlier termination thereof, to quit and surrender the leased premises in
good condition and repair, ordinary wear and damage by act of God or war or
other causes beyond the control of Tenant excepted.
Tenant, at its sole cost and expense, shall promptly comply with
all present and future governmental requirements pertaining to the use or
occupancy of the premises. Tenant hereby waives all rights to make repairs at
the expense of the Landlord or in lieu thereof to vacate the premises.
9. Insurance
Tenant shall obtain and maintain in full force during the term
hereof, at its own expense, public liability insurance in minimum amounts of
$ for injury or death of one person, $
for injury or death arising out of any one occurrence, and $
for damage to property, such coverage to protect the Tenant and Landlord and any
such other persons, firms or corporations as are designated by Landlord.
Tenant shall also obtain and maintain in full force during the
term hereof at its own expense, fire, extended coverage and special form
insurance on the improvements on the leased premises in an amount equal to not
less than one hundred percent (100%) of the actual replacement cost (exclusive
of foundation and excavation costs) of such improvements, which insurance shall
name Landlord and Tenant as co-insureds and shall contain a loss-payable
endorsement in favor of the beneficiary of any mortgage covering the subject
real property and provide that such policies cannot be cancelled without thirty
(30) days prior notice to such parties.
Tenant, at its expense, shall maintain for the benefit of Landlord
so-called rental value insurance, protecting the Landlord from loss of rent or
income occasioned by damages to the premises as covered by such policies of
insurance, such loss of income to be guaranteed for a period of six (6) months
from the date of occurrence of the damage, in the full amount of all rentals due
and payable under Paragraph 3 above.
Each party hereby waives its entire right of recovery against the
other party for losses which are insured against under-insured policies carried
by each of such parties to the extent expressly permitted by the issuers of such
insurance policies.
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<PAGE> 6
All policies of insurance which Tenant is required to carry
hereunder shall be issued by good and responsible companies authorized to write
such insurance in South Dakota and shall provide that no cancellation or
material change in the coverage shall be made except after thirty (30) days
prior notice to Landlord. Tenant may, at its option, satisfy its obligations
under this paragraph by bringing said risks within the coverage of any so-called
blanket policy or policies of insurance which it may now or hereafter carry by
an appropriate amendment, rider, endorsement or otherwise so long as Landlord is
provided a certificate establishing that the coverage allocated to the premises
is in compliance with the terms of this Lease. Copies of all insurance policies
required under the provisions of this Lease shall be delivered to Landlord
punctually.
10. Indemnification
Tenant hereby waives all claims against Landlord for damage to any
property or injury to or death of any person in, upon or about the premises
arising at any time and from any cause except to the extent that such is caused
by the sole and exclusive negligence or willful misconduct of Landlord. Tenant
shall hold Landlord harmless from any damage to any property or injury to or
death of any person arising from the use of the premises by Tenant, except to
the extent that such is caused by the sole and exclusive negligence or willful
misconduct of Landlord and, to such extent, Landlord agrees to hold Tenant
harmless from any such damage, injury or death. The foregoing indemnity
obligations shall include actual attorneys' fees paid or incurred in good faith,
investigation costs and all other reasonable costs and expenses incurred by the
party indemnified from the first notice that any claim or demand is to be made
or may be made. The provisions of this Paragraph 10 shall survive the
termination of this Lease with respect to any damage, injury or death occurring
before such termination.
11. Damage and Destruction of Premises
In the event of a total or partial destruction of the improvements
constructed on the leased premises during the term of the Lease, from any cause
covered by the insurance described in Paragraph 9 of the Lease, Tenant shall
promptly repair the same, but such destruction shall not annul or void the
Lease; provided that the holder of any encumbrance makes the insurance proceeds
available to Tenant or in lieu thereof, the lender may hold said proceeds in
trust to be distributed to Tenant, or Tenant's subcontractors as the work
progresses and Tenant delivers certification of the same. The proceeds received
from the rental value insurance described in said Paragraph 9 shall be paid to
Landlord during the six (6) month period covered by said insurance but,
subsequent to said date, the rent reserved to be
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<PAGE> 7
paid hereunder shall be equitably adjusted according to the amount and value of
the undamaged space. Notwithstanding the provisions of this Paragraph 11, in the
event there is total destruction, or partial destruction to the extent of fifty
percent cent (50%) or more of the improvements constructed on the leased
premises during the last one hundred twenty (120) days of the initial term, or
during the last one hundred twenty (120) days of the extended term under any
option to extend this Lease, Tenant can elect to terminate this Lease by written
notice delivered to Landlord not more than thirty (30) days after the
destruction or damage, provided that in the event Tenant elects to so terminate,
the insurance proceeds payable under the insurance described in Paragraph 9
shall be the property of the Landlord.
In the event of damage or destruction by any casualty other than a
casualty insured under the insurance referred to hereinabove, Landlord may
restore the premises or, at Landlord's option, may elect to terminate the Lease
and thereupon be released from further obligation under the Lease by giving
written notice thereof to Tenant within twenty (20) days after the occurrence of
such casualty, unless Tenant elects to restore the premises, by written notice
of such election to Landlord, delivered to Landlord within twenty (20) days
after the receipt of Landlord's written election to terminate the Lease, in
which event Tenant shall, as soon as reasonably possible, commence and proceed
diligently to restore the premises substantially to the condition thereof
immediately prior to such damage or destruction. If neither party elects to
restore the improvements, the Lease shall be terminated and thereupon the
Landlord and Tenant shall be released from further obligation thereunder, except
that Landlord shall be obligated to repay Tenant any unused prepaid rent paid to
Landlord.
12. Alterations
Tenant shall not make, or suffer to be made, any alterations,
additions or improvements to or of the premises or any part thereof, without the
prior written consent of the Landlord. Any alterations, additions or
improvements to the premises shall be for Tenant's account on the basis of plans
and specifications approved by Landlord and shall become at once a part of the
realty and shall belong to the Landlord without compensation. If written consent
of the Landlord to any such proposed repairs or alterations by Tenant shall have
been obtained, Tenant agrees to advise Landlord in writing of the date upon
which such repairs or alterations will commence in order to permit Landlord to
post a notice of non-responsibility. Tenant agrees to save and hold Landlord
free and harmless against any liability, loss or damage (and to defend Landlord
by attorneys of Tenant's selection, at Tenant's sole expense) on account of any
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<PAGE> 8
mechanic's lien claim for work performed or materials furnished in
connection with such alterations.
13. Assignment and Subletting
Tenant shall not either voluntarily, or by operation of law,
assign, transfer, mortgage, pledge, hypothecate or encumber this Lease or any
interest therein or in the shares of Tenant, and shall not sublet the premises
or any part thereof, or any right or privilege appurtenant thereto, or allow any
other person (the employees, agents, servants and invitees of Tenant excepted)
to occupy or use the premises, or any portion thereof, without first obtaining
the written consent of Landlord, which consent shall not be unreasonably
withheld. A consent to one assignment, subletting, occupation or use shall not
be deemed to be a consent to any subsequent assignment, subletting, occupation
or use. Consent to any such assignment or subletting shall in no way relieve
Tenant of any liability under this Lease. Any such assignment or subletting
without such consent, whether direct or indirect, shall be void and shall, at
the option of the Landlord, constitute a default under the terms of this Lease.
In the event that Landlord shall consent to a sublease or
assignment hereunder, Tenant shall pay Landlord all reasonable fees, not to
exceed Five Thousand Dollars ($5,000.00), incurred in connection with the
processing of documents necessary to the giving of such consent.
14. Quiet Enjoyment
The Tenant, upon paying the rent herein provided and performing
all and singular the covenants and conditions of the Lease on its part to be
performed, shall and may peaceably and quietly have, hold and enjoy legal
possession to the demised premises during the term hereof.
15. Events of Default
The occurrence of any one or more of the following events ("Events
of Default") shall constitute a breach of this Lease by Tenant: (a) if Tenant
shall fail to pay any rental when and as the same becomes due and payable and
such failure shall continue for more than three (3) days after Tenant receives
notice of nonpayment from Landlord; or (b) if Tenant shall fail to pay any other
sum when and as the same becomes due and payable and such failure shall continue
for more than ten (10) days after Tenant receives notice of nonpayment from
Landlord; or (c) if Tenant shall fail to perform or observe any other term
hereof to be performed or observed by Tenant, such failure shall continue for
more than thirty (30) days after Tenant receives notice thereof from Landlord,
and Tenant shall not, within such period, commence with due diligence and
dispatch the curing of such default or,
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<PAGE> 9
having so commenced, shall thereafter fail or neglect to prosecute or complete
with due diligence and dispatch the curing of such default; or (d) if Tenant
shall make a general assignment for the benefit of creditors, or shall admit in
writing its inability to pay its debts as they become due, or shall file a
petition in bankruptcy, or shall be adjudicated as bankrupt or insolvent, or
shall file a petition in any proceeding seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, or shall file an answer admitting
or fail timely to contest the material allegations of a petition filed against
it in any such proceeding, or shall seek or consent to or acquiesce in the
appointment of any trustee, receiver or liquidator of Tenant or any material
part of its properties; or (e) if within sixty (60) days after the commencement
of any proceeding against Tenant seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, such proceeding shall not have
been dismissed, or if, within sixty (60) days after the appointment without the
consent or acquiescence of Tenant, of any trustee, receiver or liquidator of
Tenant or of any material part of its properties, such appointment shall not
have been vacated; or (f) if this Lease or any estate of Tenant hereunder shall
be levied upon under any attachment or execution and such attachment or
execution is not vacated within ten (10) days.
16. Termination Upon Default
If an Event of Default shall occur, Landlord at any time
thereafter may give a written termination notice to Tenant, and on the date
specified in such notice (which shall be not less than three (3) days after the
giving of such notice) Tenant's right to possession shall terminate and this
Lease shall terminate, unless on or before such date all arrears of rental and
all other sums payable by Tenant under this Lease (together with interest
thereon at the then maximum legal rate) and all costs and expenses incurred by
or on behalf of Landlord hereunder shall have been paid by Tenant and all other
breaches of this Lease by Tenant at the time existing shall have been fully
remedied to the satisfaction of Landlord. Upon such termination, Landlord may
accumulatively recover from Tenant: (a) the worth at the time of award of the
unpaid rental which had been earned at the time of termination; and (b) the
worth at the time of award of the amount by which the unpaid rental which would
have been earned after termination until the time of award exceeds the amount of
such rental loss that Tenant proves could have been reasonably avoided; and (c)
the worth at the time of award of the amount by which the unpaid rental for the
balance of the term of this Lease after the time of award exceeds the amount of
such rental loss that Tenant proves could be reasonably avoided; and (d) any
other amount necessary to compensate Landlord for all the
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<PAGE> 10
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which, in the ordinary course of events, would be likely to
result therefrom. The "worth at the time of award" of the amounts referred to in
clauses (a) and (b) above shall be computed by allowing interest at the then
maximum legal rate. The worth at the time of award of the amount referred to in
clause (c) above shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of Minneapolis, Minnesota at the time of award
plus one percent (1%). For the purpose of determining unpaid rental under
clauses (a), (b) and (c) above, the monthly rent reserved in this Lease shall be
deemed to be the sum of the amounts last payable by Tenant pursuant to Paragraph
3 above.
17. Continuation After Default
Even though Tenant has breached this Lease and abandoned the premises,
this Lease shall continue in effect for so long as Landlord does not expressly
terminate, in writing, Tenant's right to possession, and Landlord may enforce
all its rights and remedies under this Lease; including the right to recover the
rental as it becomes due under this Lease. Acts of maintenance, preservation,
efforts to relet the premises or the appointment of a receiver upon the
initiative of Landlord to protect Landlord's interest under this Lease shall not
constitute a termination of Landlord's right to possession.
18. Other Relief
The remedies provided for in this Lease are in addition to any other
remedies available to Landlord at law or in equity by statute or otherwise.
19. Landlord's Right to Cure Defaults
All agreements and provisions to be performed by Tenant under any of
the terms of this Lease shall be at its sole cost and expense and without any
abatement of rental. If Tenant shall fail to pay any sum of money and such
failure is unexcused under the terms hereof, other than rental required to be
paid by it hereunder, or shall fail to perform any other act on its part to be
performed hereunder and such failure shall continue for thirty (30) days after
notice thereof by Landlord, Landlord may, but shall not be obligated so to do
and without waiving or releasing Tenant from any obligations of Tenant, make any
such payment or perform any such other act on Tenant's part to be made or
performed as in this Lease provided. All sums so paid by Landlord and all
necessary incidental costs shall be deemed additional rent hereunder and shall
be payable to Landlord on demand, and Landlord shall have (in addition to any
other right or remedy of Landlord) the same rights and remedies in the event
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<PAGE> 11
of the nonpayment thereof by Tenant as in the case of default by Tenant in the
payment of rental.
20. Attorney's Fees
In the event of any action or proceeding brought by either party
against the other under this Lease, the prevailing party in any final judgment
or the nondismissing party in the event of a dismissal without prejudice shall
be entitled to the full amount of all reasonable expenses including all costs
and actual attorney's fees paid or incurred in good faith in connection
therewith.
21. Eminent Domain
If all or any part of the premises shall be taken as a result of the
exercise of the power of eminent domain, this Lease shall terminate as to the
part so taken as of the date of taking and in the case of a partial taking,
either Landlord or Tenant shall have the right to terminate this Lease as to the
balance of the premises by written notice to the other within thirty (30) days
after such date; provided, however, that a condition to the exercise by Tenant
of such right to terminate shall be that the portion of the premises taken shall
be of such extent and nature as substantially to handicap, impede or impair
Tenant's use of the balance of the premises and that a condition to exercise by
Landlord of such right to terminate shall be that the portion of the premises
taken shall be of such extent and nature as substantially to handicap, impede or
impair Landlord's leasing or use of the balance of the premises. In the event of
any taking, Landlord shall be entitled to any and all compensation, damages,
income, rent, awards or any interest therein whatsoever which may be paid or
made in connection therewith, and Tenant shall have no claim against Landlord
except, in the event of a taking which terminates this Lease, for the value of
the then unexpired term of this Lease as if this Lease had not terminated, which
shall be valued in accordance with the same principles and assumptions used to
determine, for condemnation purposes, the value of the premises and Landlord's
interest therein. In the event of a partial taking of the premises which does
not result in a termination of this Lease, the monthly rental thereafter to be
paid shall be equitably reduced. In the event of a dispute as to the value of
Tenant's interest in the then unexpired term of this Lease, the parties shall
resolve such dispute by arbitration.
22. Subordination
This Lease shall be subject and subordinated at all times to (a) all
ground or underlying leases now in effect or which may hereafter be executed
affecting the premises, and (b) the lien of all mortgages and deeds of trust in
any amount or amounts whatsoever, now or hereafter placed on or against the
premises or
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<PAGE> 12
on or against Landlord's interest or estate therein or on or against all such
ground or underlying leases, all at the option of the holder(s) thereof and
without the necessity of having further instruments executed on the part of
Tenant to effectuate such subordination. Notwithstanding the foregoing; (x) in
the event of termination for any reason whatsoever of any such ground or
underlying lease, this Lease shall not be barred, terminated, cut off or
foreclosed, nor shall the rights and possession of Tenant hereunder be disturbed
if Tenant shall not then be in default in the payment of rental or other sums or
be otherwise in default under the terms of this Lease, and Tenant shall attorn
to the Landlord of any such ground or underlying lease or, if requested, enter
into a new lease for the balance of the original or extended term hereof then
remaining, upon the same terms and provisions as are in this Lease contained;
(y) in the event of a foreclosure of any such mortgage or deed of trust or of
any other action or proceeding for the enforcement thereof, or of any sale
thereunder, this Lease will not be barred, terminated, cut off or foreclosed nor
will the rights and possession of Tenant thereunder be disturbed if Tenant shall
not then be in default in the payment of rental or other sums or be otherwise in
default under the terms of this Lease, and Tenant shall attorn to the purchaser
at such foreclosure, sale or other action or proceeding; and (z) Tenant agrees
to execute and deliver, upon demand, such further instruments evidencing such
subordination of this Lease to said deed, to such ground or underlying leases,
and to the lien of any such mortgages or deeds of trust as may be reasonably
required by Landlord. Tenant's covenant to subordinate this Lease to ground or
underlying leases and mortgages or deeds of trust hereafter executed is
conditioned upon each such senior instrument containing the commitments
specified in the preceding clauses (x) and (y), and, at Tenant's request,
Landlord shall provide Tenant with written confirmation of such commitments from
the holders of instruments which, as a matter of law, are senior to this Lease
and Tenant's interest hereunder.
23. No Merger
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies, or may, at
the option of Landlord, operate as an assignment to it of any or all such
subleases or subtenancies.
24. Sale
In the event the Landlord hereunder, or any successor owner of the
premises, shall sell or convey the premises, or portions thereof, other than a
transfer for security purposes, all liabilities and obligations on the part of
the Landlord, or
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<PAGE> 13
such successor owner, under this Lease accruing thereafter, shall terminate, and
thereupon all such liabilities and obligations shall be binding upon the new
owner. Tenant agrees to attorn to such new owner.
25. Estoppel Certificate
At any time and from time to time but on not less than ten (10) days
prior written request by Landlord, Tenant shall execute, acknowledge and deliver
to Landlord, promptly upon request, an estoppel certificate in form satisfactory
to Landlord. Any such certificate may be relied upon by any prospective
purchaser, mortgagee or beneficiary under any mortgage or deed of trust of the
premises or any part thereof.
26. Holding Over
If, without objection by Landlord, Tenant holds possession of the
premises after expiration of the term of this Lease, Tenant shall become a
tenant from month to month upon the terms herein specified but at a monthly
rental equivalent to the then prevailing rental paid by Tenant at the expiration
of the term of this Lease pursuant to all the provisions of this Lease, payable
in advance on or before the first day of each month. Each party shall give the
other written notice at least one month prior to the date of termination of such
monthly tenancy of its intention to terminate such tenancy. If Tenant holds
possession of the premises after expiration of the term of this Lease,
notwithstanding Landlord's objection, Tenant shall pay monthly rental at twice
the amounts otherwise then payable under the terms hereof.
27. Abandonment
Subject to applicable provisions of State and local law, if Tenant
shall abandon or surrender the premises, or be dispossessed by process of law or
otherwise, any Personal property belonging to Tenant and left on the premises
shall be deemed to be abandoned, at the option of Landlord.
28. Waiver
The waiver by Landlord or Tenant of any agreement, condition or
provision herein contained shall not be deemed to be a waiver of any subsequent
breach of the same or any other agreement, condition or provision herein
contained, nor shall any custom or practice which may evolve between the parties
in the administration of the terms hereof be construed to waive or to lessen the
right of Landlord or Tenant to insist upon the performance by the other party in
strict accordance with said terms. The subsequent acceptance of rental hereunder
by Landlord shall not be deemed to be a waiver of any preceding breach by
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<PAGE> 14
Tenant of any agreement, condition or provision of this Lease, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rental.
29. Notices
All notices and demands which may or are required to be given by either
party to the other hereunder shall be in writing and shall be deemed to have
been fully given when deposited in the United States mail, certified or
registered, postage prepaid, and addressed as follows: To Tenant at P. O. Box
1240, Aberdeen, South Dakota 57402-1240, or to such other place as Tenant may,
from time to time, designate in a notice to Landlord; to Landlord at P. O. Box
1036, Aberdeen, South Dakota 57402-1036, or to such other place as Landlord may,
from time to time, designate in a notice to Tenant. Tenant hereby appoints as
its agent to receive the service of all dispossessory or distraint proceedings
and notices thereunder the person in charge of or occupying the premises at the
time, and if no person shall be in charge of or occupying the same, then such
service may be made by attaching the same on the main entrance of the premises.
Tenant shall pay, before delinquency, all taxes on all real and/or
personal property belonging to, leased by, or used by Tenant on the premises,
including real estate taxes on the demised premises.
30. Complete Agreement
There are no oral agreements between Landlord and Tenant affecting this
Lease, and this Lease supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between Landlord
and Tenant with respect to the subject matter of this Lease or the premises.
There are no representations between Landlord and Tenant other than those
contained in this Lease.
31. Corporate Authority
Each of the persons executing this Lease on behalf of Tenant does
hereby covenant and warrant that Tenant is a duly authorized and existing
corporation, that Tenant has and is qualified to do business in the State of
South Dakota, that the corporation has full right and authority to enter into
this Lease, and that each and every person signing on behalf of the corporation
was authorized to do so.
32. Mechanic's Liens.
Tenant covenants to keep the demised premises and the improvements
thereon, at all times during the term hereof, free
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<PAGE> 15
of mechanic's liens and other liens of like nature and at all times fully to
protect and indemnify Landlord against all such liens or claims which may ripen
into such liens and against all attorney's fees and other costs and expenses
growing out of or incurred by reason of or on account of any such claim or lien,
and Landlord agrees to do likewise with respect to work done by or for Landlord.
Should Tenant or Landlord fail to fully discharge any such lien or claim, the
other, at its option, may pay the same or any part thereof, and shall be the
sole judge of the legality of such lien or claim. All amounts so paid by
Landlord or Tenant, together with interest thereon at the then maximum legal
rate from time of payment until repayment, shall be repaid by the other. If the
Tenant shall desire to contest any mechanic's lien claim, it shall furnish the
Landlord adequate security in the amount of the claim or a bond of a responsible
corporate surety in such amount. If a final judgment establishing the validity
or existence of a lien for any amount is entered, the Tenant shall pay and
satisfy the same at once.
33. Memorandum of Lease
A Memorandum of Lease, suitable for recording in the office of the
Register of Deeds of Brown County, State of South Dakota, and satisfactory in
form to both Landlord and Tenant, shall be executed and recorded. Said document
shall be entitled "Memorandum of Lease" and shall incorporate the legal
description of the demised premises.
34. Amendment and Modification
This Lease may be modified or amended only by a writing duly authorized
and executed by both Landlord and Tenant. It may not be amended or modified by
oral agreements or understandings between the parties or by any acts or conduct
of the parties with reference thereto unless reduced to writing. The marginal
headings used herein are for convenience only and shall not be resorted to for
purposes of interpretation or construction hereof.
35. Successors
All of the terms, covenants and conditions hereof shall be binding upon
and inure to the benefit of the successors and assigns of the parties hereto,
provided that nothing in this paragraph shall be deemed to permit any assignment
contrary to the provisions of Paragraph 13 above.
36. Miscellaneous
The words "Landlord" and "Tenant" as used herein shall include the
plural as well as the singular. Time is of the essence of this Lease and each
and all of its provisions.
15 DUPLICATE ORIGINAL
<PAGE> 16
Reference to time periods in days, unless otherwise specified, shall be to
calendar days. The exhibit(s) attached to this Lease are by this reference made
a part hereof. All amounts of money payable by Tenant to Landlord, if not paid
when due, shall bear interest from the due date until paid at the then maximum
legal rate. If any provision of this Lease shall be determined to be illegal or
unenforceable, such determination shall not affect any other provision of this
Lease and all such other provisions shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Lease dated the day
and year first above written.
LANDLORD: TENANT:
JEWETT FAMILY INVESTMENTS, JEWETT DRUG CO.
L.L.C.
By /s/ Harvey C. Jewett By /s/ James Erickson
---------------------------- ----------------------------
Its President Its President
--------------------------- ----------------------------
16 DUPLICATE ORIGINAL
<PAGE> 17
MEMORANDUM OF LEASE
THIS MEMORANDUM OF LEASE is entered into as of the 1st day of June,
1999, in order to make a public record of that certain Lease by and between
JEWETT FAMILY INVESTMENTS, L,L.C., a South Dakota limited liability company
("Lessor") and JEWETT DRUG CO., a South Dakota corporation ("Lessee"), dated
January 1, 1997, as amended by that certain First Amendment to Lease by and
between Lessor and Lessee, dated as of June 1, 1999 (collectively, the "Lease").
1. Premises. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, for the term and subject to the terms, agreements, conditions and
provisions set forth in the lease, the following described real property located
in Aberdeen, South Dakota, together with any and all improvements affixed
thereto, without limitation (the "Leased Property"):
Parcel 1: Lots 1 to 12, inclusive, Block 63, Hagerty & Lloyd's Addition
to the City of Aberdeen, Brown County, South Dakota.
Parcel 2: Lots 7-12, inclusive, Block 62, Hagerty & Lloyd's Addition to
the City of Aberdeen, Brown County, South Dakota.
Parcel 3: The vacated Jay Street between Blocks 62 and 63, Hagerty &
Lloyd's Addition to the City of Aberdeen, Brown County, South Dakota.
2. Term and Extension of Term. The term of the Lease shall commence
on January 1, 1997, on which date possession of the Leased Property shall be
delivered to Lessee by Lessor, and, unless sooner terminated as provided in the
Lease, shall end on December 31, 2006. In addition, Lessee shall have the option
to extend the term of the Lease, for not less than the entire Leased Property at
the end of the initial term, on all the provisions contained herein for one (1)
five-year renewal period by giving Lessor notice of the exercise of such option
at least ninety (90) days prior to the expiration of the initial term.
3. Further Information. Anyone seeking further information with
respect to the Lease should direct all inquiries to:
Jewett Family Investments, L.L.C.
P.O. BOX 1036
Aberdeen, SD 57402-1036
Phone: (605) 229-8680.
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have executed this Memorandum
of Lease as of the date first written above.
LESSOR: LESSEE:
JEWETT FAMILY INVESTMENTS, L.L.C. JEWETT DRUG CO.
L.L.C.
By: /s/ Harvey C. Jewett By: /s/ Martin D. Wilson
---------------------- ----------------------
Name: Harvey C. Jewett Name: Martin D. Wilson
---------------------- ----------------------
Title: President Title: Vice Chairman
---------------------- ----------------------
STATE OF South Dakota)
)ss:
COUNTY OF Brown )
On this 8th day of July, 1999, before me appeared Harvey C. Jewett, to
me known to be the person described in and who executed the foregoing
instrument, as the President of Jewett Family Investments, L.L.C., a limited
liability company organized under the laws of the State of South Dakota, and
acknowledged that he/she executed the same as the free act and deed of said
limited liability company and is acting for and on behalf of and as President of
said limited liability company.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my
official seal in the County and State aforesaid on the day and year first above
written.
/s/ Lorelei Inman
---------------------
Notary Public
My Commission Expires: 9/7/03
2
<PAGE> 1
EXHIBIT 10.21
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("Amendment") is entered into by and
among JEWETT FAMILY INVESTMENTS, L.L.C., a South Dakota limited liability
company ("Lessor") and JEWETT DRUG CO., a South Dakota corporation ("Lessee")
for the purpose of amending that certain lease, dated January 1, 1997 (the
"Lease"), by and between Lessor and Lessee respecting 217 Railroad Avenue SE,
Aberdeen, South Dakota 57402 (the "Premises"), more particularly described on
Exhibit A, attached hereto and incorporated herein.
WHEREAS, Harvey C. Jewett, IV, sole stockholder of Lessee and managing
member of Lessor, plans to sell all of the issued and outstanding stock in
Lessee to D&K Healthcare Resources, Inc., a Delaware corporation; and
WHEREAS, Lessee and Lessor desire to amend the Lease as per their
mutual agreement respecting the same,
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged by each party hereto, the parties agree to
amend the Lease as follows:
1. Section 2(b) is hereby modified by deleting the following language
from the first sentence thereof, "two (2) separate ten-year (10-year) renewal
periods", and replacing it in its entirety by the following: "one (1) five-year
(5-year) renewal period".
2. The second paragraph of Section 3 is hereby deleted in its
entirety and replaced by the following: "The monthly Base Rent for the
premises is Six Thousand Six Hundred Sixty Six and 67/100 Dollars ($6,666.67)."
3. The fourth sentence of the first paragraph of Section 8 is hereby
deleted in its entirety and replaced by the following: "Except as otherwise
provided in the hereinafter entitled paragraph 'Destruction of Premises', Tenant
shall, at all times during the term hereof and at its sole cost and expense,
repair any and all damage to the premises; notwithstanding the foregoing, Tenant
shall have no obligation to make repairs to any structural member or major
system of the premises, including without limitation the exterior walls and
roofs thereof and the HVAC, plumbing or electrical systems thereof
(collectively, the "Excluded Repair Items"). The obligation to repair any and
all damage to Excluded Repair Items shall be the obligation of Landlord, who
shall, once such obligation arises, promptly begin the repairs thereto and
pursue such repairs diligently until completion."
4. The following shall be added to the end of the second paragraph of
Section 8: "Notwithstanding the foregoing, Tenant shall have no obligation to
make repairs and/or alterations to the premises required because of violation of
any governmental laws, regulations or requirements which existed on or before
June 1, 1999 (the "Excluded Alteration Items"). The obligation to make
alterations or repair any and all Excluded Alteration Items shall be the
obligation of Landlord, who shall, once such obligation arises, promptly begin
the repairs thereto and pursue such repairs
<PAGE> 2
diligently until completion."
5. As modified by this instrument, the Lease remains in full force
and effect.
6. For purposes of executing this Amendment, a document (or signature
page thereto) signed and transmitted by facsimile machine or telecopier is to be
treated as an original document. The signature of any party thereon, for
purposes hereof, is to be considered as an original signature, and the document
transmitted is to be considered to have the same binding effect as an original
signature on an original document. At the request of any party, any facsimile or
telecopy document is to be reexecuted in original form by the parties who
executed the facsimile or telecopy document. No party may raise the use of a
facsimile machine or telecopier or the fact that any signature was transmitted
through the use of a facsimile or telecopier machine as a defense to the
enforcement of this Amendment when executed in compliance with this paragraph.
7. This Amendment hereof may be executed in several counterparts and
by each party on a separate counterpart, each of which when so executed and
delivered shall be an original, and all of which together shall constitute one
instrument. In proving this Amendment it shall not be necessary to produce or
account for more than one such counterpart signed by the party against whom
enforcement is sought.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the 1st day of June, 1999.
JEWETT FAMILY INVESTMENTS L.L.C.
By: /s/ Harvey C. Jewett, IV
----------------------------------------
Harvey C. Jewett, IV, Managing Member
JEWETT DRUG CO.
By: /s/ James Erickson
----------------------------------------
Name: James Erickson
--------------------------------------
Title: President
-------------------------------------
2
<PAGE> 3
Exhibit A
Parcel 1: Lots 1 to 12, inclusive, Block 63, Hagerty & Lloyd's Addition to the
City of Aberdeen, Brown County, South Dakota.
Parcel 2: Lots 7-12, inclusive, Block 62, Hagerty & Lloyd's Addition of the City
of Aberdeen, Brown County, South Dakota.
Parcel 3: The vacated Jay Street between Blocks 62 and 63, Hagerty & Lloyd's
Addition to the City of Aberdeen, Brown County, South Dakota.
3
<PAGE> 1
EXHIBIT 10.22
LEASE
THIS LEASE, dated this 1st day of July, 1997, is made and entered into
by and between JEWETT FAMILY INVESTMENTS, L.L.C., a South Dakota limited
liability company, hereinafter referred to as "Landlord", and JEWETT DRUG CO.,
A/K/A JEWETT WHOLESALE DRUG COMPANY, a South Dakota corporation, hereinafter
referred to as "Tenant".
1. Premises
Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, for the term and subject to the agreements, conditions and provisions
hereinafter set forth, to each and all of which Landlord and Tenant hereby
mutually agree, all that certain real property, together with all improvements
thereon, without limitation, as follows:
Lot A of Tract 2 of Sioux Empire Development Park Two Addition to the
City of Sioux Falls, Minnehaha County, South Dakota, according to the
recorded plat thereof.
For the sake of convenience, except when the context provides otherwise, the
foregoing real property and improvements are herein collectively called "the
premises", "the demised premises" or "the leased premises".
2. Term
(a) The term of this Lease shall commence on the 1st day of July,
1997, and shall end June 30, 2006.
(b) Tenant shall have the option to extend the term of this Lease for
not less than the entire premises leased at the end of the initial term on all
the provisions contained herein (except the renewal provisions) for two (2)
separate ten year (10-year) renewal periods by giving to Landlord notice of the
exercise of such option at least ninety (90) days prior to the expiration of The
Initial term or the initial extended term; provided, however, that if Tenant is
in default on the date of the giving of such option notice or this Lease is not
otherwise in full force and effect, the option notice shall be totally in
effective or, if Tenant is in default on the date as of which the extended term
is to commence, such extended term shall not commence and this Lease shall
expire at the end of the initial term or the initial extended term then in
effect. The Base Rent payable during the extended term(s) hereof shall be
subject to Landlord's and Tenant's agreement and in no event less than the then
prevailing rental paid by Tenant at the expiration of the initial term of this
Lease or the initial extended term, as the case may be, adjusted as of the
commencement of the extended term for which the option is exercised, both
otherwise such extended term(s) shall be upon the same terms and conditions as
set forth herein.
DUPLICATE ORIGINALS
1
<PAGE> 2
Upon adjustment of the Base Rent and any other provisions of this lease
in accordance with this Paragraph 2, the parties shall immediately execute an
amendment to this Lease stating such adjustment.
3. Rental
(a) Commencing on the Rental Commencement Date as defined in Paragraph
2(a) above, Tenant shall pay to Landlord, throughout the term of this Lease, the
following amounts as base rental for the premises (the "Base Rent") subject to
adjustment as provided in this Paragraph 3, on or before the 10th day of the
first full calendar month of the term hereof and on or before the tenth day of
each and every successive calendar month thereafter during the term hereof.
The monthly Base Rent for the premises is Ten Thousand Dollars
($10,000.00).
(b) The monthly Base Rent set forth in Paragraph 3(a) above shall be
subject to adjustment annually on each anniversary of the Rental Commencement
Date (the "Adjustment Date") as follows:
The base for computing the adjustment shall be the final Consumer Price
Index for all Urban Consumers in the United States published by the United
States Department of Labor, Bureau of Labor Statistics (the "Index"), which is
published for the month most recently preceding the Rental Commencement Date
("Beginning Index"). If the Index published most recently preceding an
Adjustment Date ("Adjustment Index") has increased or decreased with respect to
the Beginning Index, the monthly Base Rent for the period until the next annual
Adjustment Date shall be set by multiplying the monthly Base Rental by a
fraction, the numerator of which is the Adjustment Index and the denominator of
which is the Beginning Index. In no case shall the monthly Base Rent be less
than the full monthly Base Rent set forth in Paragraph 3(a). On adjustment of
the monthly Base Rent as provided in this Lease, the parties shall immediately
execute an amendment to the Lease stating the new monthly Base Rent.
If the Index is changed so that the base year differs from that used as
of the month most recently preceding the month in which the term commences, the
Index shall be converted in accordance with the conversion factor published by
the United States Department of Labor, Bureau of Labor Statistics. If the Index
is discontinued or revised during the term, such other government index or
computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the Index has not be
discontinued or revised.
4. Absolutely Net Lease
The parties understand and agree that this Lease is deemed an
absolutely net lease wherein Tenant shall pay and be responsible for all
premises expenses and operating costs including, without limitation, all present
and future costs of any kind paid or incurred in operating, cleaning, equipping,
protecting, lighting, repairing, heating, air-conditioning and maintaining the
premises.
2 DUPLICATE ORIGINALS
<PAGE> 3
5. Taxes, Assessments and Public Utilities
Tenant shall pay for all water, light, power, gas, heat, rubbish
removal, telephone service and all other services and utilities supplied now and
in the future to the demised premises and Landlord shall have no responsibility
therefor.
In addition to the monthly rental and other charges to be paid by
Tenant hereunder, Tenant shall reimburse Landlord, upon demand, for any and all
taxes payable by Landlord (other than net income taxes) whether or not now
customary or within the contemplation of the parties hereto: (a) upon, measured
by or reasonably attributable to the cost or value of Tenant's equipment,
furniture, fixtures and other personal property located in the premises or by
the cost or value of any leasehold improvements made in or to the premises by or
for Tenant, regardless of whether title to such improvements shall be in Tenant
or Landlord; (b) upon or measured by the monthly rental payable hereunder
including, without limitation, any gross receipts tax or excise tax levied by
the City of Aberdeen, the County of Brown, the State of South Dakota, the
Federal Government or any other governmental body with respect to the receipt of
such rental; (c) upon or with respect to the possession, leasing, operation,
management, maintenance, alteration, repair, use or occupancy by Tenant of the
premises or any portion thereof. If it shall not be lawful for Tenant so to
reimburse Landlord, the monthly rental payable to Landlord under this Lease
shall be revised to net Landlord the same net rental after imposition of any
such tax upon Landlord as would have been payable to Landlord before the
imposition of any such tax. All taxes and assessments payable for a period
partly within and partly without the term of this Lease shall be prorated
between Landlord and Tenant.
Tenant shall pay, before delinquency, all taxes on all personal
property belonging to or used by Tenant on the premises.
6. Use of Premises
Tenant agrees that the demised premises shall be used and occupied only
as a wholesale warehouse and office facility and for no other purpose or
purposes without Landlord's prior written consent. Tenant shall not do or permit
to be done in or about the premises, nor bring or keep or permit to be brought
or kept therein, anything which is prohibited by or will in any way conflict
with any law, statute, ordinance or governmental rule or regulation now in force
or which may hereafter be enacted or promulgated, or which is prohibited by any
fire insurance policy covering the premises, or will in any way increase the
rate of or affect any fire or other insurance upon the premises or any of its
contents beyond those normally 'in effect for use as a wholesale warehouse and
office facility, or cause a cancellation of any insurance policy covering the
premises or any part thereof or any of its contents. Tenant shall not do or
permit anything to be done in or about the premises for any unlawful purpose,
nor shall Tenant cause, maintain or permit any nuisance in, on or about the
premises or commit or suffer to be committed any waste in, on or about the
premises.
3 DUPLICATE ORIGINALS
<PAGE> 4
7. Fixtures and Equipment
Tenant may install in the demised premises, at its own cost and
expense, any fixtures, equipment and signs it deems necessary in addition to
furniture, fixtures and equipment leased herein, for the conduct of said
business, which fixtures, equipment and signs may either be leased by Tenant or
purchased by Tenant from a conditional seller or otherwise. Landlord shall not
be responsible for the safekeeping of any such fixtures, equipment or other
goods. All furniture, fixtures, equipment and signs installed by Tenant in or
about the demised premises shall, at all times, be and remain personal property,
regardless of the method in which the same is affixed to the demised premises,
and shall remain the personal property of the Tenant.
8. Maintenance and repairs
By entry hereunder, Tenant accepts the premises as being in the
condition in which Landlord is obligated to deliver the premises. Landlord has
no obligation and has made no promise to alter, remodel, improve, repair,
decorate or paint the premises or any part thereof. No representations
respecting the condition of the premises have been made by Landlord to Tenant,
except as specifically set forth in this Lease. Except as otherwise provided in
the hereinafter entitled paragraph "Destruction of Premises", Tenant, at all
times during the term hereof and at its condition and repair including, without
limitation, the roof and all exterior walls, all landscaped areas and parking
lots. Tenant agrees, at the expiration of this Lease or upon the earlier
termination thereof, to quit and surrender the leased premises in good condition
and repair, ordinary wear and damage by act of God or war or other causes beyond
the control of Tenant excepted.
Tenant, at its sole cost and expense, shall promptly comply with all
present and future governmental requirements pertaining to the use or occupancy
of the premises. Tenant hereby waives all rights to make repairs at the expense
of the Landlord or in lieu thereof to vacate the premises.
9. Insurance
Tenant shall obtain and maintain in full force during the term hereof,
at its own expense, public liability insurance in minimum amounts of $1,000,000
for injury or death of one person, $1,000,000 for injury or death arising out of
any one occurrence, and $350,000 for damage to property, such coverage to
protect the Tenant and Landlord and any such other persons, firms or
corporations as are designated by Landlord.
Tenant shall also obtain and maintain in full force during the term
hereof at its own expense, fire, extended coverage and special form insurance on
the improvements on the leased premises in an amount equal to not less than one
hundred percent (100%) of the actual replacement cost (exclusive of foundation
and excavation costs) of such improvements, which insurance shall name Landlord
and Tenant as co-insureds and shall contain a loss-payable endorsement in favor
of the beneficiary of any mortgage covering the subject real property and
provide that such policies cannot be cancelled without thirty (30) days prior
notice to such parties.
4 DUPLICATE ORIGINALS
<PAGE> 5
Tenant, at its expense, shall maintain for the benefit of landlord
so-called rental value insurance, protecting the Landlord from loss of rent or
income occasioned by damages to the premises as covered by such policies of
insurance, such loss of income to be guaranteed for a period of six (6) months
from the date of occurrence of the damage, in the full amount of all rentals due
and payable under Paragraph 3 above.
Each party hereby waives its entire right of recovery against the other
party for losses which are insured against under-insured policies carried by
each of such parties to the extent expressly permitted by the issuers of such
insurance policies.
All policies of insurance which Tenant is required to carry hereunder
shall be issued by good and responsible companies authorized to write such
insurance in South Dakota and shall provide that no cancellation or material
change in the coverage shall be made except after thirty (30) days prior notice
to Landlord. Tenant may, at its option, satisfy its obligations under this
paragraph by bringing said risks within the coverage of any so-called blanket
policy or policies of insurance which it may now or hereafter carry by an
appropriate amendment, rider, endorsement or otherwise so long as Landlord is
provided a certificate establishing that the coverage allocated to the premises
is in compliance with the terms of this Lease. Copies of all insurance policies
required under the provisions of this Lease shall be delivered to Landlord
punctually.
10. Indemnification
Tenant hereby waives all claims against Landlord for damage to any
property or injury to or death of any person in, upon or about the premises
arising at any time and from any cause except to the extent that such is caused
by the sole and exclusive negligence or willful misconduct of Landlord. Tenant
shall hold Landlord harmless from any damage to any property or injury to or
death of any person arising from the use of the premises by Tenant, except to
the extent that such is caused by the sole and exclusive negligence or willful
misconduct of Landlord and, to such extent, Landlord agrees to hold Tenant
harmless from any such damage, injury or death. The foregoing indemnity
obligations shall include actual attorneys' fees paid or incurred in good faith,
investigation costs and all other reasonable costs and expenses incurred by the
party indemnified from the first notice that any claim or demand is to be made
or may be made. The provisions of this Paragraph 10 shall survive the
termination of this Lease with respect to any damage, injury or death occurring
before such termination.
11. Damage and Destruction of Premises
In the event of a total or partial destruction of the improvements
constructed on the leased premises during the term of the Lease, from any cause
covered by the insurance described in Paragraph 9 of the Lease, Tenant shall
promptly repair the same, but such destruction shall not annul or void the
Lease; provided that the holder of any encumbrance makes the insurance proceeds
available to Tenant or in lieu thereof, the lender may hold said proceeds in
trust to be distributed to Tenant, or Tenant's subcontractors as the work
progresses and Tenant delivers certification of the same. The proceeds received
from the rental value insurance described in said Paragraph 9 shall be paid to
Landlord during the six (6) month period covered by said insurance but,
subsequent to said
5 DUPLICATE ORIGINALS
<PAGE> 6
date, the rent reserved to be paid hereunder shall be equitably adjusted
according to the amount and value of the undamaged space. Notwithstanding the
provisions of this Paragraph 11, in the event there is total destruction, or
partial destruction of the extent of fifty percent cent (50%) or more of the
improvements constructed on the leased premises during the last one hundred
twenty (120) days of the initial term, or during the last one hundred twenty
(120) days of the extended term under any option to extend this Lease, Tenant
can elect to terminate this Lease by written notice delivered to Landlord not
more than thirty (30) days after the destruction or damage, provided that in the
event Tenant elects to so terminate, the insurance proceeds payable under the
insurance described in Paragraph 9 shall be the property of the Landlord.
In the event of damage or destruction by any casualty other than a
casualty insured under the insurance referred to hereinabove, Landlord may
restore the premises or, at Landlord's option, may elect to terminate the Lease
and thereupon be released from further obligation under the Lease by giving
written notice thereof to Tenant within twenty (20) days after the occurrence of
such casualty, unless Tenant elects to restore the premises, by written notice
of such election to Landlord, delivered to Landlord within twenty (20) days
after the receipt of Landlord's written election to terminate the Lease, in
which event Tenant shall, as soon as reasonably possible, commence and proceed
diligently to restore the premises substantially to the condition thereof
immediately prior to such damage or destruction. If neither party elects to
restore the improvements, the Lease shall be terminated and thereupon the
Landlord and Tenant shall be released from further obligation thereunder, except
that Landlord shall be obligated to repay Tenant any unused prepaid rent paid to
Landlord.
12. Alterations
Tenant shall not make, or suffer to be made, any alterations, additions
or improvements to or of the premises or any part thereof, without the prior
written consent of the Landlord. Any alterations, additions or improvements to
the premises shall be for Tenant's account on the basis of plans and
specifications approved by Landlord and shall become at once a part of the
realty and shall belong to the Landlord without compensation. If written consent
of the Landlord to any such proposed repairs or alterations by Tenant shall have
been obtained, Tenant agrees to advise Landlord in writing of the date upon
which such repairs or alterations will commence in order to permit Landlord to
post a notice of non-responsibility. Tenant agrees to save and hold Landlord
free and harmless against any liability, loss or damage (and to defend Landlord
by attorneys of Tenant's selection, at Tenant's sole expense) on account of any
mechanic's lien claim for work performed or materials furnished in connection
with such alterations.
13. Assignment and Subletting
Tenant shall not either voluntarily, or by operation of law, assign,
transfer, mortgage, pledge, hypothecate or encumber this Lease or any interest
therein or in the shares of Tenant, and shall not sublet the premises or any
part thereof, or any right or privilege appurtenant thereto, or allow any other
person (the employees, agents, servants and invitees of Tenant excepted) to
occupy or use the premises, or any portion thereof, without first obtaining the
written consent of Landlord, which consent shall not be unreasonably withheld. A
consent to one assignment,
6 DUPLICATE ORIGINALS
<PAGE> 7
subletting, occupation or use shall not be deemed to be a consent to any
subsequent assignment, subletting, occupation or use. Consent to any such
assignment or subletting shall in no way relieve Tenant of any liability under
this Lease. Any such assignment or subletting without such consent, whether
direct or indirect, shall be void and shall, at the option of the Landlord,
constitute a default under the terms of this Lease.
In the event that Landlord shall consent to a sublease or assignment
hereunder, Tenant shall pay Landlord all reasonable fees, not to exceed Five
Thousand Dollars ($5,000.00), incurred in connection with the processing of
documents necessary to the giving of such consent.
14. Quiet Enjoyment
The Tenant, upon paying the rent herein provided and performing all and
singular the covenants and conditions of the Lease on its part to be performed,
shall and may peaceably and quietly have, hold and enjoy legal possession to the
demised premises during the term hereof.
15. Events of Default
The occurrence of any one or more of the following events ("Events of
Default") shall constitute a breach of this Lease by Tenant: (a) if Tenant shall
fail to pay any rental when and as the same becomes due and payable and such
failure shall continue for more than three (3) days after Tenant receives notice
of nonpayment from Landlord; or (b) if Tenant shall fail to pay any other sum
when and as the same becomes due and payable and such failure shall continue for
more than ten (10) days after Tenant receives notice of nonpayment from
Landlord; or (c) if Tenant shall fail to perform or observe any other term
hereof to be performed or observed by Tenant, such failure shall continue for
more than thirty (30) days after Tenant receives notice thereof from Landlord,
and Tenant shall not, within such period, commence with due diligence and
dispatch the curing of such default or, having so commenced, shall thereafter
fail or neglect to prosecute or complete with due diligence and dispatch the
curing of such default; or (d) if Tenant shall make a general assignment for the
benefit of creditors, or shall admit in writing its inability to pay its debts
as they become due, or shall file a petition in bankruptcy, or shall be
adjudicated as bankrupt or insolvent, or shall file a petition in any proceeding
seeking any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, or shall file an answer admitting or fail timely to contest the
material allegations of a petition filed against it in any such proceeding, or
shall seek or consent to or acquiesce in the appointment of any trustee,
receiver or liquidator of Tenant or any material part of its properties; or (e)
if within sixty (60) days after the commencement of any proceeding against
Tenant seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, such proceeding shall not have been dismissed, or if, within
sixty (60) days after the appointment without the consent or acquiescence of
Tenant, of any trustee, receiver or liquidator of Tenant or of any material part
of its properties, such appointment shall not have been vacated; or (f) if this
Lease or any estate of Tenant hereunder shall be levied upon under any
attachment or execution and such attachment or execution is not vacated within
ten (10) days.
7 DUPLICATE ORIGINALS
<PAGE> 8
16. Termination Upon Default
If an Event of Default shall occur, Landlord at any time thereafter may
give a written termination notice to Tenant, and on the date specified in such
notice (which shall be not less than three (3) days after the giving of such
notice) Tenant's right to possession shall terminate and this Lease shall
terminate, unless on or before such date all arrears of rental and all other
sums payable by Tenant under this Lease (together with interest thereon at the
then maximum legal rate) and all costs and expenses incurred by or on behalf of
Landlord hereunder shall have been paid by Tenant and all other breaches of this
Lease by Tenant at the time existing shall have been fully remedied to the
satisfaction of Landlord. Upon such termination, Landlord may accumulatively
recover from Tenant: (a) the worth at the time of award of the unpaid rental
which had been earned at the time of termination; and (b) the worth at the time
of award of the amount by which the unpaid rental which would have been earned
after termination until the time of award exceeds the amount of such rental loss
that Tenant proves could have been reasonably avoided; and (c) the worth at the
time of award of the amount by which the unpaid rental for the balance of the
term of this Lease after the time of award exceeds the amount of such rental
loss that Tenant proves could be reasonably avoided; and (d) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or which, in the
ordinary course of events, would be likely to result therefrom. The "worth at
the time of award" of the amounts referred to in clauses (a) and (b) above shall
be computed by allowing interest at the then maximum legal rate. The worth at
the time of award of the amount referred to in clause (c) above shall be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of Minneapolis, Minnesota at the time of award plus one percent (1%). For
the purpose of determining unpaid rental under clauses (a), (b) and (c) above,
the monthly rent reserved in this Lease shall be deemed to be the sum of the
amounts last payable by Tenant pursuant to Paragraph 3 above.
17. Continuation After Default
Even though Tenant has breached this Lease and abandoned the premises,
this Lease shall continue in effect for so long as Landlord does not expressly
terminate, in writing, Tenant's right to possession, and Landlord may enforce
all its rights and remedies under this Lease, including the right to recover the
rental as it becomes due under this Lease. Acts of maintenance, preservation,
efforts to relet the premises or the appointment of a receiver upon the
initiative of Landlord to protect Landlord's interest under this Lease shall not
constitute a termination of Landlord's right to possession.
18. Other Relief
The remedies provided for in this Lease are in addition to any other
remedies available to Landlord at law or in equity by statute or otherwise.
8 DUPLICATE ORIGINALS
<PAGE> 9
19. Landlord's Right to Cure Defaults
All agreements and provisions to be performed by Tenant under any of
the terms of this Lease shall be at its sole cost and expense and without any
abatement of rental. If Tenant shall fail to pay any sum of money and such
failure is unexcused under the terms hereof, other than rental required to be
paid by it hereunder, or shall fail to perform any other act on its part to be
performed hereunder and such failure shall continue for thirty (30) days after
notice thereof by Landlord, Landlord may, but shall not be obligated so to do
and without waiving or releasing Tenant from any obligations of Tenant, make any
such payment or perform any such other act on Tenant's part to be made or
performed as in this Lease provided. All sums so paid by Landlord and all
necessary incidental costs shall be deemed additional rent hereunder and shall
be payable to Landlord on demand, and Landlord shall have (in addition to any
other right or remedy of Landlord) the same rights and remedies in the event of
the nonpayment thereof by Tenant as in the case of default by Tenant in the
payment of rental.
20. Attorney's Fees
In the event of any action or proceeding brought by either party
against the other under this Lease, the prevailing party in any final judgment
or the nondismissing party in the event of a dismissal without prejudice shall
be entitled to the full amount of all reasonable expenses including all costs
and actual attorney's fees paid or incurred in good faith in connection
therewith.
21. Eminent Domain
If all or any part of the premises shall be taken as a result of the
exercise of the power of eminent domain, this Lease shall terminate as to the
part so taken as of the date of taking and in the case of a partial taking,
either Landlord or Tenant shall have the right to terminate this Lease as to the
balance of the premises by written notice to the other within thirty (30) days
after such date; provided, however, that a condition to the exercise by Tenant
of such right to terminate shall be that the portion of the premises taken shall
be of such extent and nature as substantially to handicap, impede or impair
Tenant's use of the balance of the premises and that a condition to exercise by
Landlord of such right to terminate shall be that the portion of the premises
taken shall be of such extent and nature as substantially to handicap, impede or
impair Landlord's leasing or use of the balance of the premises. In the event of
any taking, Landlord shall be entitled to any and all compensation, damages,
income, rent, awards or any interest therein whatsoever which may be paid or
made in connection therewith, and Tenant shall have no claim against Landlord
except, in the event of a taking which terminates this Lease, for the value of
the then unexpired term of this Lease as if this Lease had not terminated, which
shall be valued in accordance with the same principles and assumptions used to
determine, for condemnation purposes, the value of the premises and Landlord's
interest therein. In the event of a partial taking of the premises which does
not result in a termination of this Lease, the monthly rental thereafter to be
paid shall be equitably reduced. In the event of a dispute as to the value of
Tenant's interest in the then unexpired term of this Lease, the parties shall
resolve such dispute by arbitration.
9 DUPLICATE ORIGINALS
<PAGE> 10
22. Subordination
This Lease shall be subject and subordinated all times to (a) all
ground or underlying leases now in effect or which may hereafter be executed
affecting the premises, and (b) the lien of all mortgages and deeds of trust in
any amount or amounts whatsoever, now or hereafter placed on or against the
premises or on or against Landlord's interest or estate therein or on or against
all such ground or underlying leases, all at the option of the holder(s) thereof
and without the necessity of having further instruments executed on the part of
Tenant to effectuate such subordination. Nothwithstanding the foregoing; (x) in
the event of termination for any reason whatsoever of any such ground or
underlying lease, this Lease shall not be barred, terminated, cut off or
foreclosed, nor shall the rights and possession of Tenant hereunder be disturbed
if Tenant shall not then be in default in the payment of rental or other sums or
be otherwise in default under the terms of this Lease, and Tenant shall attorn
to the Landlord of any such ground or underlying lease or, if requested, enter
into a new lease for the balance of the original or extended term hereof then
remaining, upon the same terms and provisions as are in this Lease contained;
(y) in the event of a foreclosure of any such mortgage or deed of trust or of
any other action or proceeding for the enforcement thereof, or of any sale
thereunder, this Lease will not be barred, terminated, cut off or foreclosed nor
will the rights and possession of Tenant thereunder be disturbed if Tenant shall
not then be in default in the payment of rental or other sums or be otherwise in
default under the terms of this Lease, and Tenant shall attorn to the purchaser
at such foreclosure, sale or other action or proceeding; and (z) Tenant agrees
to execute and deliver, upon demand, such further instruments evidencing such
subordination of this Lease to said deed, to such ground or underlying leases,
and to the lien of any such mortgages or deeds of trust as may be reasonably
required by Landlord. Tenant's covenant to subordinate this Lease to ground or
underlying leases and mortgages or deeds of trust hereafter executed is
conditioned upon each such senior instrument containing the commitments
specified in the preceding clauses (x) and (y), and, at Tenants request,
Landlord shall provide Tenant with written confirmation of such commitments from
the holders of instruments which, as a matter of law, are senior to this Lease
and Tenant's interest hereunder.
23. No Merger
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies, or may, at
the option of Landlord, operate as an assignment to it of any or all such
subleases or subtenancies.
24. Sale
In the event the Landlord hereunder, or any successor owner of the
premises shall sell or convey the premises, or portions thereof, other than a
transfer for security purposes, all liabilities and obligations on the part of
the Landlord, or such successor owner, under this Lease accruing thereafter,
shall terminate, and thereupon all such liabilities and obligations shall be
binding upon the new owner. Tenant agrees to attorn to such new owner.
10 DUPLICATE ORIGINALS
<PAGE> 11
25. Estoppel Certificate
At any time and from time to time but on not less than ten (10) days
prior written request by Landlord, Tenant shall execute, acknowledge and deliver
to Landlord, promptly upon request, an estoppel certificate in form satisfactory
to Landlord. Any such certificate may be relied upon by any prospective
purchaser, mortgagee or beneficiary under any mortgage or deed of trust of the
premise or any part thereof.
26. Holding Over
If, without objection by Landlord, Tenant holds possession of the
premises after expiration of the term of this Lease, Tenant shall become a
tenant from month to month upon the terms herein specified but at a monthly
rental equivalent to the then prevailing rental paid by Tenant at the expiration
of the term of this Lease pursuant to all the provisions of this Lease, payable
in advance on or before the first day of each month. Each party shall give the
other written notice at least one month prior to the date of termination of such
monthly tenancy of its intention to terminate such tenancy. If Tenant holds
possession of the premises after expiration of the term of this Lease,
notwithstanding Landlord's objection, Tenant shall pay monthly rental at twice
the amounts otherwise then payable under the terms hereof.
27. Abandonment
Subject to applicable provisions of State and local law, if Tenant
shall abandon or surrender the premises, or be dispossessed by process of law or
otherwise, any personal property belonging to Tenant and left on the premises
shall be deemed to be abandoned, at the option of Landlord.
28. Waiver
The waiver by Landlord or Tenant of any agreement, condition or
provision herein contained shall not be deemed to be a waiver of any subsequent
breach of the same or any other agreement, condition or provision herein
contained, nor shall any custom or practice which may evolve between the parties
in the administration of the terms hereof be construed to waive or to lessen the
right of Landlord or Tenant to insist upon the performance by the other party in
strict accordance with said terms. The subsequent acceptance of rental hereunder
by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant
of any agreement, condition or provision of this Lease, other than the failure
of Tenant to pay the particular rental so accepted, regardless of Landlord's
knowledge of such preceding breach at the time of acceptance of such rental.
29. Notices
All notices and demands which may or are required to be given by either
party to the other hereunder shall be in writing and shall be deemed to have
been fully given when deposited in the United States mail, certified or
registered, postage prepaid, and addressed as
11 DUPLICATE ORIGINALS
<PAGE> 12
follows: To Tenant at P.O. Box 1240, Aberdeen, South Dakota 57402-1240, or to
such other place as Tenant may, from time to time, designate in a notice to
Landlord; to Landlord at P.O. Box 1036, Aberdeen, South Dakota 57402-1036, or to
such other place as Landlord may, from time to time, designate in a notice to
Tenant. Tenant hereby appoints as its agent to receive the service of all
dispossessory or distraint proceedings and notices thereunder the person in
charge of or occupying the premises at the time, and if no person shall be in
charge of or occupying the same, then such service may be made by attaching the
same on the main entrance of the premises.
Tenant shall pay, before delinquency, all taxes on all real and/or
personal property belonging to, leased by, or used by Tenant on the premises,
including real estate taxes on the demised premises.
30. Complete Agreement
There are no oral agreements between Landlord and Tenant affecting this
Lease, and this Lease supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between Landlord
and Tenant with respect to the subject matter of this Lease or the premises.
There are no representations between Landlord and Tenant other than those
contained in this Lease.
31. Corporate Authority
Each of the persons executing this Lease on behalf of Tenant does
hereby covenant and warrant that Tenant is a duly authorized and existing
corporation, that Tenant has and is qualified to do business in the State of
South Dakota, that the corporation has full right and authority to enter into
this Lease, and that each and every person signing on behalf of the corporation
was authorized to do so.
32. Mechanic's Liens
Tenant covenants to keep the demised premises and the improvements
thereon, at all times during the term hereof, free of mechanic's liens and other
liens of like nature and at all times fully to protect and indemnify Landlord
against all such liens or claims which may ripen into such liens and against all
attorney's fees and other costs and expenses growing out of or incurred by
reason of or on account of any such claim or lien, and Landlord agrees to do
likewise with respect to work done by or for Landlord. Should Tenant or Landlord
fail to fully discharge any such lien or claim, the other, at its option, may
pay the same or any part thereof, and shall be the sole judge of the legality of
such lien or claim. All amounts so paid by Landlord or Tenant, together with
interest thereon at the then maximum legal rate from time of payment until
repayment, shall be repaid by the other. If the Tenant shall desire to contest
any mechanic's lien claim, it shall furnish the Landlord adequate security in
the amount of the claim or a bond of a responsible corporate surety in such
amount. If a final judgment establishing the validity or existence of a lien for
any amount is entered, the Tenant shall pay and satisfy the same at once.
12 DUPLICATE ORIGINALS
<PAGE> 13
33. Memorandum of Lease
A Memorandum of Lease, suitable for recording in the office of the
Register of Deeds of Brown County, State of South Dakota, and satisfactory in
form to both Landlord and Tenant, shall be executed and recorded. Said document
shall be entitled "Memorandum of Lease" and shall incorporate the legal
description of the demised premises.
34. Amendment and Modification
This Lease may be modified or amended only by a writing duly authorized
executed executed by both Landlord and Tenant. It may not be amended or modified
by oral agreements or understandings between the parties or by any acts or
conduct of the parties with reference thereto unless reduced to writing.
The marginal headings used herein are for convenience only and shall not be
resorted to for purposes of interpretation or construction hereof.
35. Successors
All of the terms, covenants and conditions hereof shall be binding upon
and inure to the benefit of the successors and assigns of the parties hereto,
provided that nothing in this paragraph shall be deemed to permit any assignment
contrary to the provisions of Paragraph 13 above.
36. Miscellaneous
The words "Landlord" and "Tenant" as used herein shall include the
plural as well as the singular. Time is of the essence of this Lease and each
and all of its provisions. Reference to time periods in days, unless otherwise
specified, shall be to calendar days. The exhibit(s) attached to this Lease are
by this reference made a part hereof. All amounts of money payable by Tenant to
Landlord, if not paid when due, shall bear interest from the due date until paid
at the then maximum legal rate. If any provision of this Lease shall be
determined to be illegal or unenforceable, such determination shall not affect
any other provision of this Lease and all such other provisions shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties have executed this Lease dated the day
and year first above written.
LANDLORD: TENANT:
JEWETT FAMILY INVESTMENTS, L.L.C. JEWETT DRUG CO.
By: /s/ Harvey C. Jewett By: /s/ James Erickson
----------------------------- --------------------------------
Its: President Its: President
---------------------------- --------------------------------
13 DUPLICATE ORIGINALS
<PAGE> 14
MEMORANDUM OF LEASE
THIS MEMORANDUM OF LEASE is entered into as of the 1st day of June,
1999, in order to make a public record of that certain Lease by and between
JEWETT FAMILY INVESTMENTS, L.L.C., a South Dakota limited liability company
("Lessor") and JEWETT DRUG CO., a South Dakota corporation ("Lessee"), dated
July 1, 1997, as amended by that certain First Amendment to Lease by and
between Lessor and Lessee, dated as of June 1, 1999 (collectively, the "Lease").
1. Premises. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, for the term and subject to the terms, agreements, conditions and
provisions set forth in the lease, the following described real property located
in Sioux Falls, South Dakota, together with any and all improvements affixed
thereto, without limitation (the "Leased Property"):
Lot A of Tract 2 of Sioux Empire Development Park Two Addition to the
City of Sioux Falls, Minnehaha County, South Dakota, according to the
recorded plat thereof.
2. Term and Extension of Term. The term of the Lease shall commence
on July 1, 1997, on which date possession of the Leased Property shall be
delivered to Lessee by Lessor, and, unless sooner terminated as provided in the
Lease, shall end on June 30, 2006. In addition, Lessee shall have the option to
extend the term of the Lease, for not less than the entire Leased Property at
the end of the initial term, on all the provisions contained herein for one (1)
five-year renewal period by giving Lessor notice of the exercise of such option
at least ninety (90) days prior to the expiration of the initial term.
3. Further Information. Anyone seeking further information with
respect to the Lease should direct all inquiries to:
Jewett Family Investments, L.L.C.
P.O. BOX 1036
Aberdeen, SD 57402-1036
Phone: (605) 229-8680.
[the remainder of this page intentionally blank]
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have executed this Memorandum
of Lease as of the date first written above.
LESSOR: LESSEE:
JEWETT FAMILY INVESTMENTS, JEWETT DRUG CO.
L.L.C.
By: /s/ Harvey C. Jewett By: /s/ Martin D. Wilson
-------------------------- -------------------------------
Name: Harvey C. Jewett Name: Martin D. Wilson
-------------------------- -------------------------------
Title: President Title: Vice Chairman
-------------------------- -------------------------------
STATE OF South Dakota)
)ss:
COUNTY OF Brown )
On this 8th day of July, 1999, before me appeared Harvey C. Jewett, to
me known to be the person described in and who executed the foregoing
instrument, as the President of Jewett Family Investments, L.L.C., a limited
liability company organized under the laws of the State of South Dakota, and
acknowledged that he/she executed the same as the free act and deed of said
limited liability company and is acting for and on behalf of and as President of
said limited liability company.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my
official seal in the County and State aforesaid on the day and year first above
written.
/s/ Lorelei Inman
--------------------------------------
Notary Public
My Commission Expires: 9/7/03
------------
2
<PAGE> 1
EXHIBIT 10.23
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("Amendment") is entered into by and
among JEWETT FAMILY INVESTMENTS, L.L.C., a South Dakota limited liability
company ("Lessor") and JEWETT DRUG CO., a South Dakota corporation ("Lessee")
for the purpose of amending that certain lease, dated July 1, 1997 (the
"Lease"), by and between Lessor and Lessee respecting 807 Benson Road, Sioux
Falls, South Dakota 57105 (the "Premises"), more particularly described on
Exhibit A, attached hereto and incorporated herein.
WHEREAS, Harvey C. Jewett, IV, sole stockholder of Lessee and managing
member of Lessor, plans to sell all of the issued and outstanding stock in
Lessee to D&K Healthcare Resources, Inc., a Delaware corporation; and
WHEREAS, Lessee and Lessor desire to amend the Lease as per their
mutual agreement respecting the same.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged by each party hereto, the parties agree to
amend the Lease as follows:
1. Section 2(b) is hereby modified by deleting the following language
from the first sentence thereof, "two (2) separate ten-year (10-year) renewal
periods", and replacing it in its entirety by the following: "one (1) five-year
(5-year) renewal period".
2. The fourth sentence of the first paragraph of Section 8 is hereby
deleted in its entirety and replaced by the following: "Except as otherwise
provided in the hereinafter entitled paragraph 'Destruction of Premises', Tenant
shall, at all times during the term hereof and at its sole cost and expense,
repair any and all damage to the premises; notwithstanding the foregoing, Tenant
shall have no obligation to make repairs to any structural member or major
system of the premises, including without limitation the exterior walls and
roofs thereof and the HVAC, plumbing or electrical systems thereof
(collectively, the "Excluded Repair Items"). The obligation to repair any and
all damage to Excluded Repair Items shall be the obligation of Landlord, who
shall, once such obligation arises, promptly begin the repairs thereto and
pursue such repairs diligently until completion."
3. The following shall be added to the end of the second paragraph of
Section 8: "Notwithstanding the foregoing, Tenant shall have no obligation to
make repairs and/or alterations to the premises required because of violation of
any governmental laws, regulations or requirements which existed on or before
June 1, 1999 (the "Excluded Alteration Items"). The obligation to alter or
repair any and all Excluded Alteration Items shall be the obligation of
Landlord, who shall, once
<PAGE> 2
such obligation arises, promptly begin the repairs thereto and pursue such
repairs diligently until completion."
4. The following shall be added as Section 37 of the Lease: "Landlord
hereby covenants and agrees that it will, on or before , ,
begin construction of an addition to the premises (the "Addition"). The Addition
shall (i) at a minimum, result in a total facility square footage, including the
existing premises, of 20,000 square feet, (ii) be constructed in accordance with
plans and specifications to be mutually agreed upon by the parties and (iii) be
constructed with materials and workmanship equal to the existing premises. All
costs and expenses associated with the construction of the Addition shall be
borne by Landlord. The Landlord shall procure or caused to be procured insurance
in commercially reasonable amounts to cover the risks normally associated with
the construction of a like building or addition, and shall indemnify, defend and
hold harmless the Tenant for any and all lost, cost and damage associated with
the construction of the Addition (but not special or consequential damages),
including and notwithstanding anything to contrary herein contained, mechanic's
liens."
5. For purposes of executing this Amendment, a document (or signature
page thereto) signed and transmitted by facsimile machine or telecopier is to be
treated as an original document. The signature of any party thereon, for
purposes hereof, is to be considered as an original signature, and the document
transmitted is to be considered to have the same binding effect as an original
signature on an original document. At the request of any party, any facsimile or
telecopy document is to be reexecuted in original form by the parties who
executed the facsimile or telecopy document. No party may raise the use of a
facsimile machine or telecopier or the fact that any signature was transmitted
through the use of a facsimile or telecopier machine as a defense to the
enforcement of this Amendment when executed in compliance with this paragraph.
6. This Amendment hereof may be executed in several counterparts and
by each party on a separate counterpart, each of which when so executed and
delivered shall be an original, and all of which together shall constitute one
instrument. In proving this Amendment it shall not be necessary to produce or
account for more than one such counterpart signed by the party against whom
enforcement is sought.
As modified by this instrument, the Lease remains in full force and effect.
THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the 1st day of June, 1999.
JEWETT FAMILY INVESTMENTS, L.L.C.
By: /s/ Harvey C. Jewett
-------------------------------------
Harvey C. Jewett, IV, Managing Member
JEWETT DRUG CO.
By: /s/ James Erickson
-------------------------------------
Name: James Erickson
-------------------------------------
Title: President
-------------------------------------
3
<PAGE> 4
EXHIBIT A
Lot A of Tract 2 of Sioux Empire Development Park Two Addition to the City of
Sioux Falls, Minnehaha County, South Dakota, according to the recorded plat
thereof.
<PAGE> 1
EXHIBIT 10.24
PRIME VENDOR AGREEMENT*
TEL-DRUG, INC,
AND
JEWETT DRUG CO., INC.
1
*Confidential portion omitted and filed separately with the Commission.
<PAGE> 2
PRIME VENDOR AGREEMENT
This agreement is made as of the 21st day of March 1994, between TEL-DRUG, INC.
also known as CIGNA and JEWETT DRUG CO., INC. of Aberdeen, South Dakota,
hereinafter known as JDC.
1. PRIME VENDOR
The following describe the terms and conditions under which JDC, as a prime
vendor, will provide pharmaceutical products and services to Tel-Drug.
2. TERMS AND CONDITIONS
A. PRICE STRUCTURE
JDC will supply all products under this agreement to Tel-Drug on the
basis of the "cost" (as that term is defined an following page)
plus [*}
For purchases of non-contract product, "Cost" will be defined as the
manufacturer's published wholesale acquisition cost on the date of
JDC's invoice to Tel-Drug, adjusted to reflect normal and customary
quantity discounts and special promotional allowances, excluding
manufacturer's cash discounts. For purchases of contract product,
"Cost" will be defined as the cost negotiated between the manufacturer
and Tel-Drug; provided that JDC shall have an arrangement with the
manufacturer regarding such contract cost satisfactory to JDC. The
JDC system pricing logic is defined as best price. If a special
promotional price is more favorable than the contract price, product
will be priced at the lower amount.
All orders to be transmitted to qualify for above pricing.
Non-transmitted orders subject to cost plus [*] (excluding schedule
II's, back orders and emergency orders).
B. TAXES
Purchaser will pay any fees and taxes (other than taxes based upon
JDC's net income or imposed upon it's inventory held in it's
warehouses at the rate in effect on the date hereof) imposed or
assessed upon sales by JDC to Purchaser (including any interest or
penalties not arising from the negligence of JDC). For example:
1. Gross Receipts - Prices to Purchaser will include any taxes and
fees
2
*Confidential portion omitted and filed separately with the Commission.
<PAGE> 3
payable by JDC based upon its gross receipts from Purchaser
(except as provided above). Prices will be adjusted from
time-to-time as necessary to include such amounts.
2. Sales Taxes - Purchaser will pay sales taxes imposed upon sales
from JDC to Purchaser as invoiced by JDC, unless Purchaser has
previously delivered to appropriate certificate of exemption.
C. COST VERIFICATION
Upon request, JDC will make available on-site inspection of
manufacturer's invoices to an authorized representative provided that
such invoices are limited to the most recent 12 months.
D. PAYMENT
Any extension of credit and/or the continued extension of credit shall
be at the discretion of JDC. Extension of credit shall be based upon
the receipt of a completed credit application and the review of any
requested financial information.
Weekly Deposit
Tel-Drug will provide JDC a deposit equal to one week's average
purchases. JDC will produce a statement for Tel-Drug on a weekly
basis. Purchases made Friday through Thursday are due the following
Tuesday. Deposit will be adjusted monthly based on most current
purchasing levels.
LATE PAYMENT
A late fee of 12% per year or the highest rate allowed by law,
whichever is less, will be charged on past due balances on subsequent
invoices. JDC will immediately contact Tel-Drug management regarding
late payment issues. A late payment penalty (as described above) will
be assessed in the event of:
1. Payment still not being made within five (5) business days from
the time Tel-Drug management was made aware of the situation.
2. Should Tel-Drug be consistently late with payments, JDC will
immediately assess late penalties. JDC will continue to contact
Tel-Drug management in such instances.
3
<PAGE> 4
3. SERVICES AND FEES
A. COMPREHENSIVE SERVICE PACKAGE
REFER TO ATTACHED ADDENDUM
B. PROGRAM OPTIONS
C. DEPOT PROGRAM AND GROUP SUPPORT
JDC understands that commitment to group contracts by the members and
their distributor, is essential to the long term success of a contract
program.
JDC commits to support the contract efforts of Tel-Drug by:
1. Developing contracts file from award information submitted
by CIGNA.
2. Assigning only the CIGNA group contract file to each member.
3. Processing ancillary contracts only at the request of the
facility.
4. Providing the entire group contract file of whether contract
products are stocked locally.
4
<PAGE> 5
5. Performing electronic bid check function comparing each
order to the entire CIGNA contract file for maximum contract
utilization.
6. Prioritizing CIGNA contract products in all system
applications.
7. Implementing systems designed to locate, confirm, and ship
first choice contract products ordered by Tel-Drug.
D. CONTRACT LOAD INFORMATION
JDC loads bid files in the following manner in order to ensure initial
and ongoing accuracy. Six weeks lead time is requested in order to
complete this process before the membership begins purchasing.
- JDC loads the file electronically or manually depending on how
the data is provided by CIGNA. JDC loads the file based on data
provided by CIGNA.
- After the file is loaded, JDC will validate the accuracy of the
entire file by comparing the file to hard copy contracts provided
to JDC by the manufacturer.
Approximately 80% of the vendors provide the data in hard copy.
- JDC will identify those manufacturers that do not provide hard
copy verification. JDC will interact with the manufacturers and
CIGNA in an aggressive effort to secure hard copy verification.
- Price discrepancies identified in the above process will be
brought to the attention of the manufacturer and CIGNA in order
to determine the correct price.
- JDC will load contract updates on the same day that the
contract(s) are received from CIGNA.
E. PERFORMANCE AND SERVICE LEVEL
Delivery
1. Daily Delivery: JDC will provide a minimum of one delivery per
day Monday through Friday. A second daily delivery and or
Saturday delivery may be available. Delivery schedules to be
provided by JDC.
5
<PAGE> 6
2. Emergency Delivery: JDC provides 24-hour emergency service 7 days
per week. Extraordinary delivery costs, i.e., air freight
shipments and after hours delivery services, may be passed on to
the facility.
3. To maintain the integrity of such products and to reduce any
risks associated with such products to those receiving them, JDC
will ship within a separate package all chemotherapeutic agents
and related hazardous materials and so identify the outside of
the package. JDC will adhere to all applicable OSHA standards of
most recent date relating to this issue.
Service Level
JDC will guarantee a 96% line service level for each facility. Should
the service level for my facility fall below 96% for two consecutive
months, JDC will rebate such facility an amount equal to 0.1% of such
facility's purchases during each subsequent month in which the line
service level remains below 96%.
The following provisions will apply:
1. Purchases must not exceed 120% of the prior month.
2. One month start up for new items. Excluding bid year transition.
3. CIGNA must submit bid awards a minimum of six weeks prior to bid
transaction. If less than six weeks, a one month start up period
will be allowed.
4. Service level calculation as per the computerized recap report
generated by JDC.
5. The service level promise will not apply to new items; provided,
however, that JDC will use commercially reasonable efforts to
have items in stock as soon as possible after orders are placed
by the facility.
6. Manufacturers' back orders, and re-orders of a product that occur
within three (3) days of the initial order of the product
hereunder, will not be counted in the service level calculation.
7. Partial line fills of orders will be counted as a percentage of
the total line item filled. For example, if ten (10) pieces of
one (1) item are ordered and one piece is delivered, the item
will be counted as ten percent (10%) filled.
6
<PAGE> 7
8. Subject to the foregoing, line service level is defined as
follows:
IO-INS
LSL = ------ x 100
IO-CS
where LSL = line service level
IO = total number of items ordered
INS = items not shipped (counting partially filled
lines)
CS = out of stocks or shorts due to manufacturer;
ineligible reorders; new items
F. SALES REPRESENTATION
A JDC Sales-Representative will call on each facility at least once
every two weeks or as requested by Tel-Drug with following objectives:
1. Optimization of service.
2. Implementation of true prime vendor service and participation of
the facility within the context of the prime vendor concept.
3. Inventory management training. Inventory control and contract
portfolio management.
4. MANAGEMENT INFORMATION SERVICES - PHARMACY
A. CAPABILITIES
REFER TO ATTACHED ADDENDUM
7
<PAGE> 8
B. COMPUTER GENERATED MIN/MAX LABELS QUARTERLY
Based upon a weighted forecasting method and desired product turn
rates, these labels will show order points and order quantity to
enhance inventory performance.
C. PRODUCT STICKERS
Tel-Drug will receive product stickers with each item ordered,
denoting: day, year purchased: invoice cost; third party information
or NDC#; number of units purchased; average wholesale price; order
entry number; retail price.
D. MICROFICHE (INVENTORY LISTING)
Microfiche will be mailed at the beginning of each month denoting; JDC
product listing; O/E number; third party information; average
wholesale price; wholesale cost; NDC#. In addition, facilities will
receive a contract price microfiche to coincide with the manufacturer
bid year.
E. MANAGEMENT REPORTS
JDC will provide monthly to Tel-Drug an Inventory Management Report.
Report denotes: Products purchased; six months actual unit purchase
history; 12 months total dollars purchase history; weighted forecasts;
suggested order quantities; economic order quantities; ABC Product
classification; price change information; overstock information;
dollars purchased by Product and manufacturer.
Options Include:
1. Alphabetically by vendor:
a. brand name
b. generic name
2. Therapeutic classification
a. brand name
b. generic name
3. An "A" Item Ranking Report denoting those products constituting
"A" item purchases utilizing a weighted forecast method based on
previous four (4) months history. The report can be generated in
two formats:
8
<PAGE> 9
a. brand name
b. generic name
4. Shelf Labels
JDC will supply to each facility upon request, one set of Mylar
shelf labels (listed by either generic or brand name). A unique
set of color coded contractual labels supplied annually.
5. Controlled Substance Report
JDC provides a monthly report listing all DEA scheduled
pharmaceuticals purchased and delivered during the reporting
month.
6. Electronic Order Confirmation
Verification of all orders transmitted within minutes of order
placement.
F. BID ITEM MICROFICHE
A microfiche listing all Depot bid items to be supplied to each
facility. Items sorted alphabetically by: vendor; product
description; generic description.
G. INVOICES
The invoice format may be customized for Tel-Drug. JDC has the ability
to produce invoices alphabetical, by trade name or generic name.
Invoices denote bid products by printing a "B" in the right hand
margin. Generic manufacturer must be noted if invoiced by generic
name.
JDC provides electronic invoicing on a daily basis utilizing industry
standard formats (ANSIX12). JDC also has the capability of providing a
computerized invoice review to Tel-Drug.
H. PHYSICAL INVENTORY SERVICE
Through special data terminal - provides detailed listing of all
inventory within the pharmacy. Includes capability to enter items not
purchased from JDC.
I. INVENTORY MANAGEMENT WORKSHOP
JDC will provide in inventory control workshop at the request of the
facility. The workshop provides training in the concept of inventory
management and cost containment, detailed explanation of the inventory
management tools
9
<PAGE> 10
available, and ideas on the application of an inventory management
program.
5. MANAGEMENT INFORMATION SERVICES
A. REPORTS
JDC has the capability to provide Tel-Drug with facility transaction
data as requested by Tel-Drug. See the following:
1. Facility/Customer identification number
2. Invoice number
3. Invoice date
4. Order date
5. Facility/Customer purchase order number
6. Manufacturer name
7. Manufacturer product code number
8. Distributor product code number
9. Item description
10. Unit of sale
11. Unit price
12. Quantity shipped/billed
6. CUSTOMER SERVICE
JDC will provide customer service support staff to accept phone calls from
facilities and to resolve problems related to a normal business
relationship between JDC and Tel-Drug. JDC will also provide technical
service support to facilitate communications, problem-solving, and the
like.
7. CONFIDENTIALITY
The terms of this Agreement between CIGNA and JDC are confidential and
neither CIGNA nor JDC will disclose the terms of the Agreement to any party
without the written consent of the other.
8. TERMINATION
JDC or CIGNA may cancel this agreement at any time with sixty (60) days
prior written notice. Subject to the foregoing, the term of this Agreement
shall be from 3-21-94 through 3~21-97 with an option for a two year
contract extension based upon mutual agreement of CIGNA and JDC.
10
<PAGE> 11
Tel-Drug, Inc. Jewett Drug Co., Inc.
3101 So. Carolyn Avenue 217 S.E. Railroad Avenue
Sioux Falls, South Dakota 57117 Aberdeen, South Dakota 57402-1240
By: Agnes G. Harris, Pharm.D. By: James Brickson
Assistant Vice President, President
National Pharmacy
Signature: /s/ Agnes G. Harris Signature: /s/ James Brickson
------------------------ ---------------------------
Date: 4/26/94 Date: 3/21/94
----------------------------- ---------------------------------
11
<PAGE> 12
[JEWETT DRUG CO., INC. LETTERHEAD]
JEWETT DRUG COMPANY
ADDENDUM TO CONTRACT
3) Services and Fees
A) Comprehensive Service Package - no fees
Jewett Drug Co. will provide immediately and free of charge the
following services:
1) Hand-held electronic ordering device
2) Toll free number to place orders
3) Invoices, shelf labels and pricing stickers with merchandise
4) Order confirmation by fax
5) Microfiche machine and semi-monthly microfiche catalog
listings
6) Weekly product pricing information on diskette
7) Volume purchases reports listing products purchased, total
units purchased, total dollar amount bought and min/max order
quantities
8) Hard copy multi-source generic and repack catalogs - monthly
9) Product purchased at contract bid prices are indicated with
a "T" on the invoices.
10) Detailed pharmacy inventory listing transmitted by hand-held
terminal on product purchased from Jewett Drug Co.
11) Monthly price increase bulletins
B) Comprehensive Service Packages - Services for a fee
Jewett Drug is prepared to provide additional services which will
become available on approximate implementation dates:
Please note: As each service becomes available, Jewett Drug will
contact Cigna to negotiate a mutually agreeable monthly fee. The
services and their pending implementation dates are as follows:
1) August 1, 1994 - electronic ordering and confirmation
2) January 1, 1995 - electronic receipt of contract bid awards
and pricing
3) March 1, 1995 - daily electronic invoicing
4) After March 1, 1995 - any special reports required by Cigna
will be discussed and agreed upon at that time.
OVER 100 YEARS OF SERVICE
<PAGE> 13
August 22, 1995
ADDENDUM II to contract dated March 21, 1994 between Tel-Drug, Inc.
also known as CIGNA and Jewett Drug Co., Inc. of Aberdeen, South
Dakota.
Page 4
3. SERVICES AND FEES
A. COMPREHENSIVE SERVICE PACKAGE
12. Jewett Drug Company shall construct a warehouse and
office facilities in Sioux Falls, S.D., within a close
proximity of Tel-Drug, of sufficient size, with
sufficient inventories and man power to act as a back-
up to or eliminate the need for, Tel-Drug's back-room
inventory.
13. Jewett Drug Co. will provide multiple, meaning four or
more, scheduled deliveries to the Tel-Drug facilities
each day and will provide for additional emergency
order deliveries.
14. Jewett Drug Co. will assist Tel-Drug in the
development of a new electronic ordering and receiving
system which will provide for a more rapid product
integration into Tel-Drug's working inventory.
***Note: Completion and implementation of 12, 13, and 14 can be within
five (5) months or a short time thereafter, subsequent to the
completion of this contract extension agreement.
Page 10
8. TERMINATION
Jewett Drug Co. or CIGNA may cancel this agreement at any time
with sixty(60) days prior written notice. Subject to the
foregoing, the term of this agreement shall be from 9-01-1995
thru 9-01-2000 with an option for a two-year contract extension
based upon mutual agreement of CIGNA and Jewett Drug Co.
Tel-Drug, Inc. Jewett Drug Co., Inc.
4901 No. 4th Avenue 217 S.E. Railroad Avenue
Sioux Falls, South Dakota 57104 Aberdeen, South Dakota 57402-1240
By: /s/ Judy Kelley By: James Erickson
------------------------------- President
-------------------------------
-------------------------------
Signature: /s/ Judy Kelley Signature: /s/ James Erickson
--------------------- -----------------------
Date: 8/31/95 Date: 8/24/95
-------------------------- ----------------------------
<PAGE> 14
ADDENDUM III to Prime Vendor Agreement (the "Agreement") dated March
21, 1994, between Tel-Drug, Inc. ("Tel-Drug") and Jewett Drug Company,
Inc. ("JDC") of Aberdeen, South Dakota.
Tel-Drug and JDC agree to amend the Agreement as follows:
1. The effective date of this Amendment shall be 6-1-97
--------------------
2. Section 2. of the Agreement is deleted in its entirety and
replaced with the following:
2. TERMS AND CONDITIONS
A. PRICE STRUCTURE
JDC will supply all products under this agreement to
Tel-Drug on the basis of the "cost", which is defined
as follows:
For Non Contracted Products
"Cost" is defined as the manufacturer's published
wholesale acquisition cost on the date of JDC's invoice
to Tel-Drug, plus additional adjustments to reflect
normal and customary quantity discounts and special
promotional allowances, excluding manufacturer's cash
discounts.
For Contract Products
"Cost" is defined as the cost negotiated between the
manufacturer and Tel-Drug; provided that JDC shall have
an arrangement with the manufacturer regarding such
contract cost satisfactory to JDC. The FDC system
pricing logic is defined as best price. If a special
promotional price is more Favorable than the contract
price, the product will be priced at the lower amount.
All orders must be electronically transmitted to
qualify for above pricing. Non-transmitted orders
subject to cost plus* (excluding schedule II's, back
orders and emergency orders).
Additional Volume Discounts
JDC will allow additional credits in the form of volume
discount percentages to Tel-Drug monthly based on
Tel-Drug's monthly net purchase volume with JDC. Such
credit for additional volume shall be in the form of a
check, payable to Tel-Drug (the "Payment") which shall
be delivered to Tel-Drug by the tenth (10th) working
day of each month. The amount of the Payment to Tel-
Drug will be based on the schedule below:
*Confidential portion omitted and filed separately with the Commission.
<PAGE> 15
[*]
3. The Agreement is amended by adding the following new sections:
9. Warranty
JDC will indemnify and hold harmless Tel-Drug and its
subsidiaries and affiliates from and against those claims,
damages or liabilities (exclusive of any incidental or
consequential claims, damages or liabilities) directly
attributable to the failure of JDC to properly store, handle,
or distribute Products in accordance with the Agreement, it
being understood, however, that JDC is not the Manufacturer
of the Products, that JDC makes no warranty as to the
quality, condition, or performance of the Products, and that
no warranty or indemnification of any type is being provided
other than as specifically stated in this paragraph.
10. General Responsibilities and Status of JDC
a. Insurance
JDC shall at all times during the terms of this Agreement
carry and maintain in full force and effect motor vehicle,
public liability and workers' compensation insurance
protecting Tel-Drug and JDC from claims which may arise
out of or result from JDC's performance under this
Agreement, whether such performance be by JDC or by any
subcontractor or agent or by anyone directly or indirectly
employed by any of them or by anyone for whose acts any of
them may be liable. The minimum amounts of insurance
coverage to be provided by JDC hereunder shall be the
greater of the amounts required by law and the following
minimum amounts:
Comprehensive General Minimum Coverage
Liability Insurance
To include:
Bodily Injury, Property Damage $1,000,000 each person
Products Liability, Completed Combined single limit
Operations and Contractual
Liability
Workers' Compensation Full statutory limit
each accident;
Employers Liability
coverage of $100,000
*Confidential portion omitted and filed separately with the Commission.
<PAGE> 16
Motor Vehicle $1,000,000 Combined single
limit
Certificates of insurance acceptable to Tel-Drug shall
be delivered to Tel-Drug prior to commencement of the
services. Such certificates shall contain a provision
that the coverages provided under JDC's insurance will
not be canceled until at least thirty (30) days prior
written notice has been given to Tel-Drug.
b. Indemnity
JDC will indemnify, defend with counsel reasonably
acceptable to Tel-Drug, and hold harmless Tel-Drug, its
subsidiaries and affiliates from and against all
liability, demands, claims, suits, losses, damages,
infringement of proprietary rights, causes of action,
fines, or judgments (including costs, attorneys' and
witnesses' fees and expenses incident thereto) for
violations of laws or regulations, injury or death to
persons, including its employees, servants, and agents,
or for damage, destruction, or loss of property arising
out of or in connection with its performance of, or
failure to perform, the duties provided for herein,
unless caused by the gross negligence or willful
misconduct of Tel-Drug.
c. Licenses and Permits
JDC shall secure any licenses and/or permits required
for the proper performance of its duties hereunder,
paying the fees therefor, and shall take all reasonable
precautions to assure the safety of its employees and
agents who are engaged in the performance of the duties
provided for herein.
d. Compliance with Laws
Both parties shall comply in all material respects with
all applicable federal, state, county and municipal
laws, ordinances, rules, regulations and orders.
e. Affirmative Action
JDC shall comply with the requirements set forth in
U.S. Department of Labor regulations dealing with: (1)
equal employment opportunity obligations of government
contractors and subcontractors; (2) employment by
government contractors and subcontractors of
Vietnam-era and disabled veterans; and (3) employment
of the physically handicapped by government contractors
and subcontractors. All of the above referenced
regulations are hereby incorporated herein and
expressly made a part hereof, to the extent required by
law.
<PAGE> 17
f. Non-use of Company's Name
JDC in the course of performance pursuant to this
Agreement of thereafter, shall not use or permit the
use of Tel-Drug's name, or the name of any of Tel-
Drug's subsidiaries or affiliates, in any advertising
or promotional materials prepared by it or on its
behalf without the prior written consent of Tel-Drug.
g. Company Security Regulations
JDC, JDC's employees and any of JDC's subcontractors
who will be performing services on Tel-Drug's premises,
will abide by Tel-Drug's security regulations, which
have been established for the protection of all
concerned.
h. Sale of Information
Except for data provided to Manufacturers in connection
with chargebacks or other Tel-Drug specific issues as
required by law or court order, JDC will not disclose
sales data specific to Tel-Drug without the approval
of Tel-Drug. "Blinded" sales data compiled by JDC which
includes (but is not specific to) any particular CIGNA
Company will not be subject to the disclosure
restrictions contained in the Agreement.
Except as required by law or court order, JDC will not
publish or otherwise disclose individual patient names,
addresses or telephone numbers.
11. Arbitration
Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by
arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, and judgment
upon the award rendered by the Arbitrator(s) may be entered
in any court having jurisdiction thereof.
12. Year 2000
JDC represents and warrants that the products and services
are designed to be provided prior to, during, and after the
calendar year 2000 A.D., and that the products and services
will be provided during each time period without error
relating to date data which represents or references
different centuries or more than one century. JDC covenants
to maintain the products and services in such a manner as to
assure continued compliance with the foregoing representation
and warranty, and JDC agrees to make such modifications as
may be necessary or desirable to satisfy any new or modified
requirement, including, but not limited to, a new and
modified interpretation of any prior requirement. JDC agrees
to pay, hold harmless and indemnify Tel-Drug from and against
any and all losses, damages, claims, suits, actions,
judgments and costs (including reasonable attorney's and
witnesses' fees) which may arise from any failure of JDC to
comply with the terms of this section. Any and all costs
(capital
<PAGE> 18
or otherwise) incurred by JDC in satisfying the terms of this
section shall be solely paid by JDC and not passed on to
Tel-Drug as additional fees or otherwise.
Tel-Drug, Inc. Jewett Drug Company, Inc.
490l No. 4th Avenue 217 S.E. Railroad Avenue
Sioux Falls, South Dakota 57104 Aberdeen, South Dakota 57402
By: By: James Erickson
----------------------------- -----------------------------
Its: Its: President
Signature: Signature: /s/ James Erickson
---------------------- -------------------------
Date: Date: 5-22-97
--------------------------- ------------------------------
<PAGE> 19
Addendum IV to Prime Vendor Agreement (the "Agreement") dated March 21,
1994, between Tel-Drug, Inc. ("Tel-Drug") and Jewett Drug Company, Inc.
("JDC") of Aberdeen, South Dakota.
Tel-Drug and JDC agree to amend the Agreement as follows:
1. The effective date of this Amendment shall be JUNE 1ST, 1997 .
---------------------
2. The Agreement is amended by changing the following section:
9. Warranty
JDC will indemnify and hold harmless Tel-Drug and its
subsidiaries and affiliates from and against those claims,
damages or liabilities exclusive of any incidental or
consequential claims, damages or liabilities) directly
attributable to the failure of JDC to properly store, handle, or
distribute Contract Products or Non Contracted Products
(Collectively the "Products") in accordance with the Agreement,
it being understood, however, that JDC is not the Manufacturer of
the Products, that JDC makes no warranty as to the quality,
condition, or performance of the Products, and that no warranty
or indemnification of any type is being provided other than as
specifically stated in this paragraph.
Tel-Drug, Inc. Jewett Drug Company, Inc.
4901 No. 4th Avenue 217 S.E. Railroad Avenue
Sioux Falls, South Dakota 57104 Aberdeen, South Dakota 57402
By: Ron Bertsch By: James Erickson
---------------------------- ------------------------------
Its: VP/GM Its: Pres.
Signature: /s/ Ron Bertsch Signature: /s/ James Erickson
-------------------- ----------------------
Date: 5-28-97 Date: 5-27-97
-------------------------- ----------------------------
<PAGE> 20
Addendum V to Prime Vendor Agreement (the "Agreement") dated March
21, 1994, between Tel-Drug, Inc. ("Tel-Drug") and Jewett Drug Company,
Inc. ("JDC") of Aberdeen, South Dakota.
Tel-Drug and JDC agree to amend the Agreement as follows:
1. The effective date of this Amendment shall be 12-1-98.
2. Section 2. of the Agreement is deleted in its entirety and
replaced with the following.
2. TERMS AND CONDITIONS
A. PRICE STRUCTURE
JDC will supply all products under this agreement to Tel-Drug
on the basis of the "cost", which is defined as follows:
For Non Contracted Products
"Cost" is defined as the manufacturer's published wholesale
acquisition cost on the date of JDC's invoice to Tel-Drug,
plus additional adjustments to reflect normal and customary
quantity discounts and special promotional allowances,
excluding manufacturer's cash discounts.
For Contract Products
"Cost" is defined as the cost negotiated between the
manufacturer and Tel-Drug; provided that JDC shall have an
arrangement with the manufacturer regarding such contract
cost satisfactory to JDC. The JDC system pricing logic is
defined as best price. If a special promotional price is more
favorable than the contract price, the product will be priced
at the lower amount.
All orders must be electronically transmitted to qualify for
above pricing. Non-transmitted orders subject to cost plus.
[*] (excluding schedule II's, back orders and
emergency orders).
Additional Volume Discounts
JDC will allow additional credits in the form of volume
discount percentages to Tel-Drug monthly based on Tel-Drug's
monthly net purchase volume with JDC. Such credit for
additional volume shall be in the form of a check, payable to
Tel-Drug (the "Payment") which shall be delivered to Tel-Drug
by the tenth (10th) working day of each month. The amount of
the payment to Tel-Drug will be based on the schedule below:
*Confidential portion omitted and filed separately with the Commission.
<PAGE> 21
[*]
Tel-Drug, Inc. Jewett Drug Company, Inc.
4901 No. 4th Avenue 217 S.E. Railroad Avenue
Sioux Falls, South Dakota 57104 Aberdeen, South Dakota 57402
By: Ron Bertsch By: James Erickson
----------------------------- ------------------------------
Its: Its: Pres
Signature: /s/ Ron Bertsch Signature: /s/ James Erickson
--------------------- ------------------------
Date: 11/20/98 Date: 11-16-98
--------------------------- ----------------------------
*Confidential portion omitted and filed separately with the Commission.
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30, June 30, March 28, March 29, March 31,
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------
Income Statement Data (in thousands, except shares and per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 815,319 $ 612,427 $ 479,524 $ 425,333 $ 319,958
Gross profit 41,100 29,662 21,640 20,272 16,095
Income from operations 14,406 8,778 4,447 2,147 4,557
Net income (loss) 6,355 3,327 739 (1,109) 1,409
Basic earnings (loss) per share $ 1.65 $ 0.99 $ 0.24 $ (0.37) $ 0.55
Diluted earnings (loss) per share $ 1.52 $ 0.90 $ 0.24 $ (0.37) $ 0.49
Basic common shares outstanding 3,846,837 3,345,261 3,033,536 2,971,117 2,547,334
Diluted common shares outstanding 4,219,876 3,766,352 3,588,943 2,971,117 3,114,129
<CAPTION>
June 30, June 30, March 28, March 29, March 31,
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------
Balance Sheet Data (in thousands)
<S> <C> <C> <C> <C> <C>
Current assets $ 173,367 $ 145,492 $ 74,932 $ 68,938 $ 73,338
Working capital 20,068 52,528 24,270 25,224 27,395
Total assets 230,080 170,350 101,065 94,937 95,787
Long-term debt 40,449 61,156 41,530 43,190 39,991
Stockholders' equity 35,850 15,952 8,873 8,033 8,784
</TABLE>
(1) Fiscal year end changed to June 30.
[BAR GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C>
NET SALES $ 319,958 425,333 479,524 612,427 815,319
</TABLE>
[BAR GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY $ 8,784 8,033 8,873 15,952 35,850
</TABLE>
[BAR GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C>
INCOME FROM OPERATIONS $ 4,557 2,174 4,447 8,778 14,406
</TABLE>
[BAR GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C>
GROSS PROFIT $ 16,095 20,272 21,640 29,662 41,100
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The table below sets forth certain statement of operations data for the last
three fiscal years expressed as a percentage of net sales and in comparison with
the prior fiscal year. Unless otherwise indicated, for purposes of this
discussion, all references to "1999," "1998," and "1997" shall mean the
Company's fiscal years ended June 30, 1999, June 30, 1998, and March 28, 1997,
respectively. See Note 1 of "Notes to Consolidated Financial Statements."
<TABLE>
<CAPTION>
------------------------------------------ ---------------------------
Percentage Change from
Percentage of Net Sales Prior Year
------------------------------------------ ---------------------------
1999 1998 1997 1998-99 1997-98
------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 33.1% 27.7%
Gross profit 5.04% 4.84% 4.51% 38.6% 37.1%
Total operating expenses (3.27%) (3.42%) (3.58%) 27.8% 21.5%
------------------------------------------
Income from operations 1.77% 1.42% 0.93% 64.1% 97.4%
Interest expense, net (0.57%) (0.61%) (0.76%) 21.8% 5.1%
Other income, net 0.05% 0.08% 0.09% (18.7%) 16.5%
Income tax provision 0.47% 0.35% 0.11% 76.9% 302.6%
------------------------------------------
Net income 0.78% 0.54% 0.15% 91.0% 350.2%
------------------------------------------
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1999, COMPARED WITH THE FISCAL YEAR ENDED JUNE 30,
1998
NET SALES. Net sales increased $202.9 million, or 33.1%, for the fiscal year
ended June 30, 1999, compared with the fiscal year ended June 30, 1998.
Institutional sales increased by $37.3 million, or 20.7% compared with fiscal
1998, due to increased sales to one prescription benefit management company
(PBM) and sales to another PBM that became a customer as a result of the
Company's acquisition of a drug wholesaler in June 1999. Chain store sales
increased by $82.5 million, or 62.9%, from higher sales to existing and new
chain store customers resulting from a focused marketing effort on this trade
class. Independent pharmacy sales increased by $81.9 million, or 27.3% from
higher sales to existing customers and new customers, including those obtained
in the June 1999 acquisition. The remaining $1.2 million sales increase was
primarily from software sales by Tykon, Inc. acquired in September 1998. In
addition, during fiscal 1999, the Company made $189.0 million in "dock-to-dock"
sales, which are not included in net sales due to the Company's accounting
policy of recording only the commission on such transactions as a reduction of
cost of goods sold. There were $62.1 million of dock-to-dock sales in fiscal
1998. Dock-to-dock sales represent bulk sales of pharmaceuticals to
self-warehousing retail chains for which the Company acts only as an
intermediary in the order and subsequent delivery of products to the customers'
warehouses. The commission on dock-to-dock sales is typically lower than the
gross profit realized on sales of products from inventory.
GROSS PROFIT. Gross profit increased 38.6%, to $41.1 million in fiscal 1999
compared with fiscal 1998 driven primarily by higher sales and partially by
improved margins. As a percentage of net sales, gross margin increased from
4.84% to 5.04% in fiscal 1999 compared with fiscal 1998. The increase in gross
margin percentage was mainly due to a shift in customer mix to higher margin
business, higher sales of more profitable generic pharmaceutical products and
sales of inventory acquired through advantageous purchasing. These benefits were
partially offset by higher sales to large customers which typically generate
lower margins.
1
<PAGE> 3
OPERATING EXPENSES. Total operating expenses increased $5.8 million, or 27.8%,
to $26.7 million in fiscal 1999, compared with fiscal 1998. As a percentage of
net sales, total operating expenses decreased from 3.42% to 3.27% in fiscal 1999
compared with fiscal 1998. The increase in operating expenses in fiscal 1999
resulted primarily from incremental warehouse and distribution costs associated
with increased sales activity and higher personnel costs related to additional
managerial positions in several major functional areas of the Company. The
decrease in operating expense percentage for the year is due mainly to the
increase in chain store sales which typically generate a lower expense to sales
ratio than other trade classes.
NET INTEREST EXPENSE. Net interest expense increased $0.8 million, or 21.8%, in
fiscal 1999, compared with fiscal 1998. As a percentage of net sales, net
interest expense decreased from 0.61% to 0.57% in fiscal 1999 compared with
fiscal 1998. The increase in net interest expense was primarily the result of
higher average outstanding borrowings in support of the Company's growth,
partially offset by lower weighted average interest rates. Weighted average
interest rates decreased 91 basis points to 6.26% for the year primarily due to
the accounts receivable securitization facility finalized in August 1998.
OTHER INCOME, NET. Other income, net decreased from $530,000 to $431,000 in
fiscal 1999 compared with fiscal 1998. The decrease was primarily due to lower
recorded earnings from the Company's equity interest in the net income of PBI
during fiscal 1999, which totaled $332,000, compared with $389,000 in fiscal
1998.
The Company's effective income tax rates of 37.7% in fiscal 1999 and
39.5% in fiscal 1998 differed from the statutory blended federal and state
effective rates primarily due to the impact of the amortization of intangible
assets that were not deductible for income tax purposes, partially offset by the
Company's equity in the net income of PBI, a portion of which was excludable
from taxable income.
The effect of price inflation, as measured by the excess of LIFO costs
over FIFO costs, was $0.4 million in fiscal 1999 and $1.0 million in fiscal
1998. The decrease in the LIFO provision was due to changes in the Company's
inventory mix to include higher levels of generic pharmaceuticals and
modifications made in investment buying practices.
FISCAL YEAR ENDED JUNE 30, 1998, COMPARED WITH THE FISCAL YEAR ENDED MARCH 28,
1997
NET SALES. Net sales increased $132.9 million, or 27.7%, for the fiscal year
ended June 30, 1998, compared with the fiscal year ended March 28, 1997. Sales
to healthcare institutions increased by $55.2 million, or 44.3%, compared with
fiscal 1997, due to increased sales to a PBM added as a customer in August 1996
coupled with higher sales to new and existing hospital, clinic and nursing home
accounts. Independent pharmacy sales increased by $77.8 million, or 34.8%,
compared with fiscal 1997, from higher sales to existing and new retail
accounts, including $53.6 million to an association of retail pharmacies added
as a customer in May 1997 and $6.2 million to independent pharmacies that became
customers as a result of the Company's acquisition of a drug wholesaler in
October 1997. The Company experienced a net decrease in retail chain sales of
$0.1 million, compared to fiscal 1997, primarily due to the termination of the
Company's relationship with a large regional retail chain customer on September
30, 1997, (a decrease of approximately $68.5 million) partially offset by
increased sales to other existing and new retail chain customers of
approximately $68.4 million. In addition, during 1998, the Company made $62.1
million in dock-to-dock sales. There were no dock-to-dock sales in fiscal 1997.
GROSS PROFIT. Gross profit increased 37.1%, to $29.7 million in fiscal 1998
compared with fiscal 1997. As a percentage of net sales, gross margin increased
from 4.51% to 4.84% in fiscal 1998 compared with fiscal 1997. The increase in
gross margin percentage was due mainly to a shift in customer mix to higher
margin business, higher sales of more profitable generic pharmaceutical products
and sales of inventory acquired through advantageous purchasing.
OPERATING EXPENSES. Total operating expenses increased $3.7 million, or 21.5%,
to $20.9 million in fiscal 1998, compared with fiscal 1997. As a percentage of
net sales, total operating expenses decreased from 3.58% to 3.42% in fiscal 1998
compared with fiscal 1997. The increase in operating expenses in fiscal 1998
resulted primarily from incremental warehouse and distribution costs associated
with increased sales activity, higher personnel and occupancy costs related to
additional managerial positions in several major functional areas of the
Company, and legal fees associated with the conclusion of the Company's
relationship with its previously largest customer.
2
<PAGE> 4
NET INTEREST EXPENSE. Net interest expense increased $184,000, or 5.1%, in
fiscal 1998, compared with fiscal 1997. As a percentage of net sales, net
interest expense decreased from 0.76% to 0.61% in fiscal 1998 compared with
fiscal 1997. The increase in net interest expense was primarily the result of
higher average outstanding borrowings offset by lower interest rates on the
Company's line of credit. In addition, the collection of approximately $9.5
million of accounts receivable on September 30, 1997, from the Company's then
largest customer, a relationship that was terminated in September 1997, reduced
the Company's working capital requirements and its borrowings.
OTHER INCOME, NET. Other income, net increased from $455,000 to $530,000 in
fiscal 1998 compared with fiscal 1997. The increase was primarily due to gains
on sales of investments partially offset by lower recorded earnings from the
Company's equity interest in the net income of PBI during fiscal 1998, which
totaled $389,000, compared with $410,000 in fiscal 1997.
The Company's effective income tax rates of 39.5% in fiscal 1998 and
42.2% in fiscal 1997 differed from the statutory blended federal and state
effective rates primarily due to the impact of the amortization of intangible
assets that were not deductible for income tax purposes, partially offset by the
Company's equity in the net income of PBI, a portion of which was excludable
from taxable income.
The effect of price inflation, as measured by the excess of LIFO costs
over FIFO costs, was $1.0 million in fiscal 1998 and $1.2 million in fiscal
1997. The decrease in the LIFO provision was due to changes in the Company's
inventory mix to include higher levels of generic pharmaceuticals and
modifications made in investment buying practices.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements are generally met through a
combination of internally generated funds, borrowings under the revolving line
of credit, the accounts receivable securitization facility, and trade credit
from its suppliers. The following ratios are used by the Company as key
indicators of its liquidity and working capital management:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
----------------- -----------------
<S> <C> <C>
Working capital (000s) $20,068 $52,528
Current ratio 1.13 to 1 1.56 to 1
</TABLE>
The $32.5 million decrease in working capital at June 30, 1999 was due primarily
to the sale of accounts receivable under the securitization facility discussed
below. Adjusted for the securitization, working capital and the current ratio
would have been $57.1 million and 1.37, respectively.
The Company invested $879,000 in capital assets in fiscal 1999 and
$863,000 in fiscal 1998. The Company believes that continued investment in
capital assets is necessary to achieve its goal of improving operating
efficiency and information services capabilities, thereby improving its
productivity and ratio of operating expenses to net sales.
In December 1996, the Company obtained a $1.5 million equipment loan
from a bank through the Missouri First Link program ("Missouri First") to
finance certain capital expenditures at its leased Cape Girardeau, Missouri,
facility. During the first year of the four-year agreement, the Missouri First
loan required monthly interest payments. In December 1997, the Company made a
$182,500 principal payment to Missouri First, in December 1998 a $437,500
principal payment was made and on March 31, 1999, the remaining $875,000 in
principal was paid.
In November 1997, the Company's revolving line of credit was amended
to increase the maximum borrowings from $60 million to $75 million, including a
$5 million supplemental facility that expired August 3, 1998. Interest on
borrowings under the line of credit was reduced in April 1998 to daily LIBOR
plus 1.25%. In August 1998, the revolving line of credit was amended to be
secured solely by eligible inventories, to increase the facility to $75 million
and to extend its maturity through August 2001. Borrowings under the line of
credit were limited to 60% of eligible inventories. On June 1, 1999, in
conjunction with the acquisition of the wholesale drug distribution company
discussed below, the facility was increased to $95 million, the interest rate
was increased to LIBOR plus 1.75% and borrowing limits were increased to 65% of
eligible inventories. At June 30, 1999 and June 30, 1998, the unused portions of
the line of credit were $55.5 million and $14.8 million, respectively.
3
<PAGE> 5
In August 1998, the Company finalized a $45 million accounts receivable
purchase facility under an asset securitization structure with its primary
lender. The securitization carries an initial term of three years, with annual
renewal options, and bears interest at the 30-day LIBOR rate plus program and
liquidity fees of 0.71% payable monthly. Under the securitization, the Company's
accounts receivable are being sold on a non-recourse basis to a
bankruptcy-remote subsidiary of the Company as security for commercial paper
issued by an affiliate of the lender. Based on the structure of the arrangement,
the subsidiary's assets and liabilities, consisting of accounts receivable and
long-term debt, are no longer consolidated with those of the Company. In
December 1998, the facility was increased to $60 million. At June 30, 1999, $35
million of the facility was utilized. The Company believes that funds available
under the line of credit and the securitization facility, together with
internally generated funds, will be sufficient to meet its capital requirements
for the foreseeable future.
On June 1, 1999, the Company consummated the acquisition of 100% of the
outstanding stock of Jewett Drug Co. ("Jewett"). Jewett is a pharmaceutical
distribution company based in Aberdeen, South Dakota, which provides
comprehensive pharmaceutical distribution services to over 250 customers in the
Upper Midwest and Great Plains region. The aggregate purchase price for this
acquisition of $34.3 million consisted of $21.5 million in cash and $12.8
million (555,556 shares) of the Company's common stock. Funds for the cash
portion of the purchase price were provided by the Company's revolving loan
facility. The acquisition was accounted for as a purchase. As such, Jewett
results are included in consolidated operating results from the acquisition
date. The acquisition resulted in goodwill of $30.5 million, which is being
amortized over 25 years.
In September 1998, the Company acquired 100% of the stock of Tykon,
Inc., a wholesale distribution software developer, for cash consideration of
$2.0 million. During fiscal 1998, the Company made two acquisitions of
pharmaceutical distribution companies for aggregate consideration of $2.6
million, including cash payments and the issuance of notes payable.
The increase in Stockholders' Equity from $16.0 million at June 30,
1998 to $35.9 million at June 30, 1999 is related primarily to the shares issued
in the Jewett acquisition and earnings for the year.
YEAR 2000
Certain aspects of the Company's business (including that of its
subsidiaries) could be affected by what has commonly become known as the Year
2000 or Y2K problem. Specifically, the problem derives from computer software,
hardware and embedded chips that recognize, receive, process and store date data
using only two-digit years, and therefore, may malfunction when they encounter
dates which are from the 21st century, rather than the 1900's. Computerized
systems are fundamental to several key functions of the Company and its
subsidiaries. The following discussion includes the Company and its
subsidiaries. The Company operates its business using a network of distributed
AS/400, local area network (LAN) and PC Systems. The Company's financial,
distribution and operational systems reside on the AS/400. LANs are used
primarily for file sharing. PCs are used primarily as terminals to the AS/400
systems, with the exception of financial reporting and banking functions.
Several of the Company's warehouse operations are automated using radio
frequency (RF) equipment. The Company receives customer orders electronically,
either from PCs, data files or hand held devices. The Company also provides
software to pharmacies and drug distributors to help them automate functions
within their businesses.
The Company began its Year 2000 efforts in the summer of 1997 and has
worked since then to identify and remediate potential Y2K issues. The Company's
Y2K project is being executed in phases, beginning with assessment, followed by
prioritization, remediation, testing, implementation and contingency planning.
Assessment, prioritization and remediation work on all known Y2K issues is
complete. Testing is complete for LAN, PC and AS/400 systems, which includes
financial, operational, banking and financial reporting systems. Testing has
indicated that LAN and PC systems are Year 2000 compliant and the Company is not
aware, at this point, of any further work required with these systems. The
remaining AS/400, RF and hand held ordering systems, which support distribution
and internal operations functions, have undergone rigorous testing procedures
before being implemented in production in all of the Company's locations. The
Company's software products have been remediated and tested and the results have
been positive, leading the Company to believe that these products are, in all
material respects, Y2K compliant. The Company is in the process of completing
its Y2K software implementation in customer sites, which it expects to complete
in October 1999. Software upgrades to enable the Company's software products to
handle Year 2000 date processing are being provided to customers free of charge
through electronic transmissions of the upgrade to customer computers. Customers
who use the Company's Resource software product to place electronic orders and
the Company's Scriptmaster software product to fill prescriptions are being
notified regarding potential hardware issues and given alternatives to resolve
the issue. The Company expects this effort to be completed in October 1999.
4
<PAGE> 6
The Company does not sell non-IT embedded systems, but does use non-IT
embedded systems in the normal course of its business in areas such as alarm
systems, time clocks, etc. As does virtually every other company, the Company
does rely on third parties in the conduct of its business. The Company has
surveyed suppliers, customers, transportation companies, alarm system providers,
utilities, banks and other third parties it does business with, or who provide
products or services the Company uses containing non-IT embedded systems, on a
regular basis in an effort to determine their Y2K state of readiness. At the
present time, it appears that the majority of third parties with whom the
Company does business are reasonably certain they will be able to conduct
business without significant interruption at the century date change.
The Company has essentially completed its Y2K contingency plan. The
Company's contingency planning efforts are focused on identifying the entities
that are critical to the Company's business functions, determining which
entities have the largest potential for impact if there are Y2K issues,
determining the likelihood of the potential problem, ranking the entities by
criticality and likelihood of potential problems, and developing work-around
plans to handle any potential emergency situation. The Company expects to
monitor critical situations from this point forward, revising contingency plans
as necessary.
The costs of the Company's Y2K project have been incurred in the areas
of IT systems and contingency planning. The Company had spent approximately
$575,000 as of June 30, 1999 on its Year 2000 project and expects to spend an
additional $125,000 by October 1999, all from internally generated funds.
The Company believes the greatest potential risks in connection with
the Year 2000 issue would be the inability of its suppliers to provide product
in a timely manner, the inability to obtain payments from its customers and the
inability of transportation companies to deliver product to its customers, any
of which could have a material adverse impact on the Company's operations,
liquidity and financial condition. Also, the issue of customer stockpiling in
anticipation of the Year 2000 poses a dilemma which potentially could have an
impact on the Company and other distributors of pharmaceuticals. Many industry
commentators have noted the likelihood that some patients, fearing Y2K
disasters, will attempt to stockpile prescriptions, thus causing supply chain
problems for manufacturers, distributors and retailers. This eventuality could,
of course, directly affect the Company's operations, liquidity or financial
condition. The Company's contingency plans are designed with the goal of
minimizing the potential impact caused by any Year 2000 problems of its
suppliers and other third parties. Therefore, the Company does not now believe
that any external Y2K problems will have a material adverse impact on its
operations, liquidity or financial condition.
While the Company believes it has taken a comprehensive and reasonable
approach towards anticipating and addressing the potential impact of the century
date change on its business, there can be no assurance that the Company
internally, or any third party upon which the Company depends, will successfully
avoid all Y2K malfunctions.
As part of the foregoing Y2K discussion, the Company has used a
significant number of forward looking statements (e.g., "expects," "believes,"
and similar phrases). These are based on the Company's present knowledge and
informed expectations that may change in the future based on new developments,
facts and circumstances.
EFFECT OF NEW ACCOUNTING STANDARDS
The provisions of SFAS No. 130, "Reporting Comprehensive Income,"
became effective in fiscal 1999. The statement requires that an enterprise
report, by major component and as a single total, the change in its net assets
during the period from nonowner sources. The Company had no such items during
the periods covered by this analysis. The Company adopted the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
during the fourth quarter of fiscal 1999. After application of the aggregation
criteria in SFAS No. 131, the Company operates in three segments. Only one,
Wholesale drug distribution, met the standards for separate disclosure. See Note
16 of Notes to Consolidated Financial Statements for the required disclosures.
The adoption by the Company during fiscal 1999 of SFAS No. 132, "Employers'
Disclosures and Pensions and Other Postretirement Benefits," did not impact the
Company's consolidated financial position, results of operations, cash flows or
disclosures. In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999 (subsequently
changed to June 15, 2000 by SFAS No. 137). The effect of this statement is not
expected to have a significant impact on the consolidated financial position or
results of operations of the Company.
5
<PAGE> 7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To D&K Healthcare Resources, Inc.:
We have audited the accompanying consolidated balance sheets of D&K Healthcare
Resources, Inc., (a Delaware corporation) and subsidiaries as of June 30, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the fiscal years ended June 30, 1999 and 1998, for the
three months ended June 30, 1997, and for the fiscal year ended March 28, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of D&K Healthcare Resources, Inc.,
and subsidiaries as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for the fiscal years ended June 30, 1999 and
1998, for the three months ended June 30, 1997, and for the fiscal year ended
March 28, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
St. Louis, Missouri
August 10, 1999
1
<PAGE> 8
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share and per share data)
- -------------------------------------------------------------------------------------------------
June 30, 1999 June 30, 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash (including restricted cash) $ 708 $ 4,051
Receivables, net of allowance for doubtful accounts of
$1,142 and $700, respectively 14,889 50,496
Inventories 157,171 90,413
Prepaid expenses and other current assets 599 532
-----------------------------------
Total current assets 173,367 145,492
Property and Equipment, net of accumulated depreciation
and amortization of $6,640 and $5,990, respectively 6,205 5,924
Investment in PBI 4,111 4,129
Deferred Income Taxes 1,547 2,842
Other Assets 1,041 228
Intangible Assets, net of accumulated amortization 43,809 11,735
-----------------------------------
Total assets $ 230,080 $ 170,350
LIABILITIES AND STOCKHOLDER' EQUITY
Current Liabilities
Current maturities of long-term debt $ 403 $ 6,448
Accounts payable 142,360 80,659
Accrued expenses, including $5,000 customer deposit
at June 30, 1999 8,251 2,883
Deferred income taxes 2,285 2,974
-----------------------------------
Total current liabilities 153,299 92,964
Long-term Liabilities 482 278
Long-term Debt 40,449 61,156
-----------------------------------
Total liabilities 194,230 154,398
Stockholders' Equity
Preferred stock; no par value, 1,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock; $.01 par value, 10,000,000 shares
authorized, 4,413,781 and 3,746,275 shares issued
and outstanding, respectively 44 37
Paid-in capital 29,555 15,075
Retained earnings 7,195 840
Less treasury stock, at cost, 39,900 shares (944) --
-----------------------------------
Total stockholders' equity 35,850 15,952
-----------------------------------
Total liabilities and stockholders' equity $ 230,080 $ 170,350
===================================
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 9
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three
(in thousands, except per share data) For the Years Ended Months Ended
- -------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998 MARCH 28, 1997 JUNE 30, 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $815,319 $612,427 $479,524 $144,473
Cost of Sales 774,219 582,765 457,884 138,457
----------------------------------------------------------------------
Gross profit 41,100 29,662 21,640 6,016
Depreciation and Amortization 1,647 1,468 1,523 384
Operating Expenses 25,047 19,416 15,670 4,329
----------------------------------------------------------------------
Income from operations 14,406 8,778 4,447 1,303
----------------------------------------------------------------------
Other Income (Expense):
Interest expense (5,266) (4,080) (3,961) (959)
Interest income 630 273 338 83
Equity in net income of PBI 332 389 410 51
Other, net 99 141 45 165
----------------------------------------------------------------------
(4,205) (3,277) (3,168) (660)
----------------------------------------------------------------------
Income before income
tax provision 10,201 5,501 1,279 643
----------------------------------------------------------------------
Income Tax Provision 3,846 2,174 540 280
----------------------------------------------------------------------
Net income $ 6,355 $ 3,327 $ 739 $ 363
----------------------------------------------------------------------
Basic Earnings Per Share $ 1.65 $ 0.99 $ 0.24 $ 0.12
----------------------------------------------------------------------
Diluted Earnings Per Share $ 1.52 $ 0.90 $ 0.24 $ 0.11
----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 10
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
RETAINED
EARNINGS
COMMON PAID-IN (ACCUMULATED TREASURY
STOCK CAPITAL DEFICIT) STOCK Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 29, 1996 $30 $11,592 $(3,589) $ -- $ 8,033
Common stock issued -- 4 -- -- 4
Stock option and warrant expense -- 3 -- -- 3
Stock options exercised -- 94 -- -- 94
Net income -- -- 739 -- 739
----------------------------------------------------------------
BALANCE AT MARCH 28, 1997 30 11,693 (2,850) -- 8,873
Common stock issued -- 49 -- -- 49
Warrant expense -- 77 -- -- 77
Stock options exercised -- 16 -- -- 16
Net income -- -- 363 -- 363
----------------------------------------------------------------
BALANCE AT JUNE 30, 1997 30 11,835 (2,487) -- 9,378
Common stock issued upon debt conversions 6 2,744 -- -- 2,750
Stock options and warrants exercised, including tax benefit 1 496 -- -- 497
Net income -- -- 3,327 -- 3,327
----------------------------------------------------------------
BALANCE AT JUNE 30, 1998 37 15,075 840 -- 15,952
Common stock issued 6 12,843 -- -- 12,849
Stock options exercised, including tax benefit 1 1,637 -- -- 1,638
Treasury stock acquired -- -- -- (944) (944)
Net income -- -- 6,355 -- 6,355
----------------------------------------------------------------
BALANCE AT JUNE 30, 1999 $44 $29,555 $ 7,195 $(944) $35,850
================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 11
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three
(in thousands) For the Years Ended Months Ended
- --------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998 MARCH 28, 1997 June 30, 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,355 $ 3,327 $ 739 $ 363
Adjustments to reconcile net income to net cash
flows from operating activities -
Depreciation and amortization 1,647 1,468 1,523 384
Amortization of debt issuance costs 188 59 73 20
Stock option and warrant expense -- -- 3 77
Gain from sale of assets (9) (32) (6) (217)
Equity in net income of PBI (332) (389) (410) (51)
Deferred income taxes 492 1,241 363 105
(Increase) decrease in receivables, net 41,182 (16,500) 3,214 (7,069)
(Increase) decrease in inventories (42,001) (47,799) (10,491) 8,600
(Increase) decrease in prepaid expenses and other
current assets 242 633 1,884 (160)
Increase in accounts payable 39,297 31,491 4,318 6,529
Increase (decrease) in accrued expenses (7,895) (65) 754 (69)
Other, net (157) 432 22 (7)
----------------------------------------------------------------------
Net cash flows from operating activities 39,009 (26,134) 1,986 8,505
----------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for acquisitions, net of cash acquired (13,961) (1,256) -- --
Cash dividend from PBI 350 350 300 --
Purchases of property and equipment (879) (863) (2,198) (180)
Proceeds from sale of assets 752 32 6 956
----------------------------------------------------------------------
Net cash flows from investing activities (13,738) (1,737) (1,892) 776
----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving line of credit 487,844 429,431 306,471 82,138
Repayments under revolving line of credit (513,714) (397,997) (306,471) (91,990)
Proceeds from equipment loan -- -- 1,495 --
Payments of long-term debt (1,973) (1,571) (1,287) (2)
Payments of capital lease obligations (9) -- (94) (10)
Proceeds from exercise of stock options and warrants 822 413 94 16
Purchase of treasury stock (944) -- -- --
Payments of deferred debt costs (640) -- (36) --
----------------------------------------------------------------------
Net cash flows from financing activities (28,614) 30,276 172 (9,848)
----------------------------------------------------------------------
Increase (decrease) in cash (3,343) 2,405 266 (567)
Cash, beginning of period 4,051 1,646 1,947 2,213
----------------------------------------------------------------------
Cash, end of period $ 708 $ 4,051 $ 2,213 $ 1,646
======================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (refunded) during the period for -
Interest $ 4,927 $ 3,601 $ 3,689 $ 1,029
Income taxes, net $ 2,755 $ 1,151 $ (1,089) $ 31
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 12
D&K HEALTHCARE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of all divisions and
wholly owned subsidiaries of D&K Healthcare Resources, Inc. (the "Company"). All
significant intercompany accounts and transactions are eliminated.
Change in Fiscal Year
On June 30, 1997, the Company changed from a fiscal year ending the Friday
closest to March 31 in each year to a fiscal year ended June 30 of each year.
Therefore, fiscal 1999 and 1998 ended on June 30. Fiscal 1997 ended on March 28,
1997 and included 52 weeks. The three-month period began March 29, 1997 and
ended June 30, 1997. References to years relate to fiscal years rather than
calendar years unless otherwise stated.
Name Change to D&K Healthcare Resources, Inc.
In 1998, through an amendment to its Certificate of Incorporation and with the
approval of its stockholders, the Company changed its corporate name from D&K
Wholesale Drug, Inc., to D&K Healthcare Resources, Inc.
Concentration of Credit Risk
The Company is a full-service, regional wholesale drug distributor. From
facilities in Missouri, Kentucky, Minnesota, and South Dakota, the Company
distributes a broad range of pharmaceutical products, health and beauty aids and
related products to its customers in more than 24 states. The Company focuses
primarily on a target market sector that includes independent retail,
institutional, franchise, chain store, and alternate site pharmacies in the
Midwest and South.
The Company had a single customer that accounted for approximately 18% and 20%,
respectively, of net sales for the three months ended June 30, 1997 and in 1997.
The supply agreement with this customer was terminated on September 30, 1997,
upon the acquisition of the customer by a third party. Upon termination of the
supply agreement, the Company collected the entire amount of its accounts
receivable due from this customer. In 1999 and 1998, sales to a single customer
represented approximately 12% and 13% of total net sales, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Restricted Cash
Restricted cash of $0.7 million and $4.0 million at June 30, 1999, and June 30,
1998, respectively, represents cash receipts from customers that must be used to
reduce borrowings under the revolving line of credit and are included in cash.
Revenue Recognition
Revenue is recognized when products are shipped or services are provided to
customers. During 1999 and 1998, the Company had $189.0 million and $62.1
million, respectively, of "dock-to-dock" sales, which are excluded from net
sales due to the Company's policy of recording only the commission on such
transactions as a reduction against cost of goods sold in the consolidated
statements of operations. Dock-to-dock sales represent large volume sales of
pharmaceuticals to major self-warehousing retail chain pharmacies whereby the
Company acts as an intermediary in the order and subsequent delivery of products
to the customers' warehouses. The Company had no dock-to-dock sales during the
three-month period ended June 30, 1997 or in 1997.
Inventories
Inventories consist of pharmaceutical drugs and related over-the-counter items
that are stated at the lower of cost or market. Cost is primarily determined
using the last-in, first-out (LIFO) method.
6
<PAGE> 13
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization are
charged to operations primarily using the straight-line method over the shorter
of the estimated useful lives of the various classes of assets, which vary from
two to 30 years, or the lease term for leasehold improvements. For income tax
purposes, accelerated depreciation methods are used.
Intangible Assets
Intangible assets are stated at cost less accumulated amortization. Amortization
is determined using the straight-line method over the estimated useful lives of
the related assets.
Long-Lived Assets
If facts and circumstances suggest that a long-lived asset may be impaired, the
carrying value is reviewed. If this review indicates that the carrying value of
the asset will not be recovered, as determined by a review of projected
undiscounted cash flows related to the asset over its remaining life, the
carrying value of the asset is reduced to its estimated fair value.
Income Taxes
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective bases
for income tax purposes. Deferred tax assets and liabilities are measured and
recorded at tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
Book Overdrafts
Accounts payable includes book overdrafts (outstanding checks) of $5.2 million
and $14.1 million at June 30, 1999, and June 30, 1998, respectively.
Treasury Stock
In May 1999, the board of directors authorized the repurchase of up to 300,000
shares of the Company's outstanding common stock. The shares may be acquired in
the open market or in private transactions over a twelve month period from the
date of authorization.
Earnings per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128) requires a dual presentation of basic and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing net
income (loss) by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted into common stock. All share and per share amounts have
been stated in accordance with the provisions of SFAS No. 128 (see Note 14).
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
NOTE 2. ACQUISITIONS
On June 1, 1999, the Company consummated the acquisition of 100% of the
outstanding stock of Jewett Drug Co. ("Jewett"). Jewett is a pharmaceutical
distribution company based in Aberdeen, South Dakota, that provides
comprehensive pharmaceutical distribution services to over 250 customers in the
Upper Midwest and Great Plains region. The aggregate purchase price for this
acquisition of $34.3 million consisted of $21.5 million in cash and $12.8
million (555,556 shares) of the Company's common stock. Funds for the cash
portion of the purchase price were provided by the Company's revolving loan
facility. In connection with the transaction, the Company paid investment
banking fees of $0.8 million to a firm that employs a member of the Company's
Board of Directors.
7
<PAGE> 14
Also, on June 1, 1999, the Company entered into an amendment to the Amended and
Restated Loan and Security Agreement with Fleet Capital Corporation pursuant to
which the Company's revolving loan facility was increased from $75 million to
$95 million and Jewett became a party to, and permitted borrower under, that
facility (See Note 8).
The acquisition was accounted for as a purchase. As such, Jewett results are
included in consolidated operating results from the acquisition date. The
acquisition resulted in goodwill of $30.5 million which is being amortized over
25 years.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Jewett for 1999 and 1998 as if the
acquisition had occurred at July 1, 1998, and July 1, 1997, respectively, with
pro forma adjustments to give effect to amortization of goodwill, interest
expense on acquisition debt and certain other adjustments, together with related
income tax effects. The unaudited pro forma information has been prepared for
comparative purposes only and does not purport to be indicative of the results
of operations had these transactions been completed as of the assumed dates or
which may be obtained in the future (in thousands, except per share amounts).
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Sales $1,074,047 $807,314
Net Income 7,310 3,717
Diluted earnings per share $ 1.55 $ 0.88
</TABLE>
In September 1998, the Company acquired 100% of the stock of Tykon, Inc., a
wholesale distribution software developer, for cash consideration of $2.0
million. During fiscal 1998, the Company made two acquisitions of pharmaceutical
distribution companies for aggregate consideration of $2.6 million, including
cash payments and the issuance of notes payable.
NOTE 3. INVENTORIES
Substantially all inventories are stated at the lower of LIFO cost or market. If
the Company had used the first-in, first-out (FIFO) method of inventory
valuation, which approximates current replacement cost, inventories would have
been $8.5 million and $8.0 million higher than reported at June 30, 1999, and
June 30, 1998, respectively.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Land $ 383 $ 407
Building and improvements 3,758 3,436
Fixtures and equipment 7,139 6,478
Leasehold improvements 828 749
Vehicles 737 844
-----------------------------------------
12,845 11,914
Less-accumulated depreciation and
amortization (6,640) (5,990)
-----------------------------------------
$ 6,205 $ 5,924
=========================================
</TABLE>
During 1999, the Company sold an idle distribution facility, with a carrying
value of $0.7 million, for cash proceeds of $0.7 million.
During the three-month period ended June 30, 1997, the Company sold an idle
distribution facility, with a carrying value of $0.7 million, for cash proceeds
of $0.9 million. The gain on the sale is included in Other, net in the
consolidated statements of operations for the three months ended June 30, 1997.
The Company leases certain properties under capital leases from a trust
controlled by a significant shareholder. Capital lease asset balances consist of
buildings of $0.9 million as of June 30, 1999.
8
<PAGE> 15
NOTE 5. INVESTMENT IN PBI
The Company owns approximately 50% of the capital stock of Pharmaceutical
Buyers, Inc. ("PBI"), a Colorado-based group purchasing organization. The
Company acquired approximately 50% of the voting and non-voting common stock of
PBI for $3.75 million in cash. The Company's investment in PBI is accounted for
under the equity method.
The Company's equity in the net income of PBI totaled $332,000, $389,000,
$410,000 and $51,000, respectively, for 1999, 1998, 1997 and for the three
months ended June 30, 1997, which is net of amortization of goodwill associated
with its investment in PBI of $276,000, $276,000, $276,000 and $69,000 for these
respective fiscal periods. The PBI goodwill is being amortized using the
straight line method over a period of 25 years. During 1999, 1998, and 1997, the
Company received cash dividends of $350,000, $350,000, and $300,000,
respectively, from PBI, which were recorded as a reduction in the carrying
amount of the investment.
Summarized balance sheet information for PBI for its fiscal year ended December
31, 1998, and unaudited information for the periods ended June 30, 1999 and 1998
included current assets of $2.9 million, $3.0 million and $2.3 million,
noncurrent assets of $0.6 million, $0.5 million and $0.8 million, current
liabilities of $1.7 million, $1.9 million and $1.0 million and noncurrent
liabilities of $5.2 million, $5.1 million, and $6.3 million, respectively.
Summarized income statement information for PBI for its fiscal year ended
December 31, 1998, and unaudited information for the six months ended June 30,
1999 and June 30, 1998, and for the three months ended June 30, 1997, included
net revenues of $5.6 million, $2.7 million, $2.8 million and $1.3 million and
income from continuing operations and net income of $1.4 million, $0.6 million,
$0.6 million and $0.3 million, respectively.
Certain other shareholders of PBI have the option to exchange their combined 20%
ownership interests in PBI for shares of the Company's common stock under the
terms of the original purchase agreement. Those options have been determined to
be dilutive in 1999 and are included in the reconciliation of the basic and the
diluted earnings per share computation (See Note 14).
NOTE 6. OTHER ASSETS
Other assets include deferred debt issuance costs of $0.9 million and $0.3
million at June 30, 1999 and 1998, respectively, that are being amortized over
the periods the related debt is outstanding. Accumulated amortization amounted
to $0.4 million and $0.2 million at June 30, 1999 and 1998, respectively.
Amortization of deferred debt issuance costs totaled $188,000 in 1999, $59,000
in 1998, $73,000 in 1997 and $20,000 for the three-month period ended June 30,
1997, and is included in interest expense in the consolidated statements of
operations.
NOTE 7. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Excess of purchase price over fair value of net assets acquired $46,776 $14,065
Less-accumulated amortization (2,967) (2,330)
------------------------------------------
$43,809 $11,735
==========================================
</TABLE>
The excess of purchase price over the fair value of net assets acquired is being
amortized using the straight-line method over periods of 10 to 40 years.
Amortization of intangible assets totaled $0.6 million in 1999, $0.4 million in
1998, $0.4 million in 1997 and $0.1 million for the three-month period ended
June 30, 1997.
During 1998, the excess of purchase price over the fair value of net assets
acquired was reduced by $4.1 million to reflect the reversal of the deferred tax
asset valuation allowance related to acquired net operating loss, alternative
minimum tax and charitable contribution carryforwards (see Note 12).
9
<PAGE> 16
NOTE 8. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Revolving line of credit with banks $39,453 $60,185
Revolving accounts receivable credit facility -- 5,139
Missouri First Link loan -- 1,312
Other, including capital lease obligations 1,399 968
----------------------------------------
$40,852 $67,604
Less-current maturities (403) (6,448)
----------------------------------------
$40,449 $61,156
========================================
</TABLE>
As of June 30, 1999, the revolving line of credit had a maximum borrowing
capacity of $95 million, expiring August 7, 2001. Prior to June 1, 1999, the
revolving line of credit had maximum borrowing capacity of $75 million. Under
the loan agreement, the total amount of loans and letters of credit outstanding
at any time may not exceed the lesser of an amount based on percentages of
eligible inventories (the borrowing base formula), or $95 million. Generally,
advances bear interest at the London Interbank Offered Rate (LIBOR) plus 1.75%
or at the prime rate (7.75% at June 30, 1999) plus 0.25% per annum payable
monthly. At June 30, 1999 and June 30, 1998, the Company's borrowings under the
revolving line of credit bore interest at a weighted average LIBOR-based rate of
6.96% and 6.94%, respectively. The Company was required to pay annual facility
fees of $201,000 and $289,000, respectively, in 1999 and 1998. At June 30, 1999
and June 30, 1998, the borrowing base formula amounted to $106.8 million and
$92.6 million, respectively. At June 30, 1999 and June 30, 1998, the unused
portion of the line of credit amounted to $55.5 million and $14.8 million,
respectively. The agreement expires August 7, 2001, and, therefore, the related
debt has been classified as long-term. The revolving line of credit is secured
by eligible inventories.
The Company also has an interest rate collar agreement, whereby the LIBOR on
$10.0 million of the outstanding revolving line of credit balance shall not
exceed 6.75%. If the LIBOR is less than 5.25%, then the LIBOR rate on $7.5
million of the outstanding revolving line of credit balance shall not be less
than 5.25%. On March 31, 1999, the Company executed an additional interest rate
collar agreement on $40.0 million of the outstanding revolving line of credit,
whereby the LIBOR shall not exceed 6.85% nor be less than 4.93%.
In the first quarter of fiscal 1999, the Company entered into a $45 million
accounts receivable purchase facility under an asset securitization structure
("the Securitization") with its primary lender. In the second quarter of fiscal
1999, the Securitization was increased to a $60.0 million facility. The
Securitization has an initial term of three years, with annual renewal options,
and bears interest at the LIBOR rate (5.21% at June 30, 1999) plus program and
liquidity fees of 0.71% paid monthly. The Company was required to pay a
structuring fee of $225,000, which is being amortized over the initial term of
the arrangement. Under the Securitization, accounts receivable are sold on a
non-recourse basis to a bankruptcy-remote subsidiary of the Company as security
for commercial paper issued by an affiliate of the lender. Based upon the
structure of the arrangement, the subsidiary's assets and liabilities,
consisting of accounts receivable and long-term debt, are not consolidated with
those of the Company. Accordingly, the Company's trade accounts receivable and
long-term debt at June 30, 1999 are net of $35 million, which represent accounts
receivable that were sold under the Securitization.
The revolving accounts receivable credit facility had a maximum borrowing
capacity of $10 million at June 30, 1998. Under the facility, the total amount
of loans outstanding could not exceed the lesser of eligible accounts receivable
or $10 million. Advances bore interest at the prime rate (8.5% at June 30, 1998)
plus 2.0%. At June 30, 1998, the unused portion of the facility amounted to $4.9
million. The facility expired August 31, 1998, and the entire remaining
principal was paid in full on August 31, 1998.
The Missouri First Link loan ("Missouri First") was used to finance and was
secured by certain capital expenditures at a leased distribution facility. The
Missouri First loan bore interest at a fixed rate of 70% of the bank's prime
rate (8.5% at June 30, 1998) plus 0.50%, or 6.45%. A $437,500 principal
reduction was required in December 1998; after such time, the loan required
monthly payments of $36,458 plus interest until maturity in December 2000. In
March 1999, the remaining principal of the Missouri First loan was paid in full.
10
<PAGE> 17
Subordinated notes payable to an insurance company bore interest at 11% payable
semiannually, and consisted of nonconvertible notes of $1.1 million and
convertible notes of $1.75 million. Principal on the nonconvertible notes was
paid in full in December 1997, and the convertible notes payable were converted
into 530,978 shares of the Company's common stock. In June 1998, a $1.0 million
convertible note payable was converted into 59,880 shares of the Company's
common stock. The debt conversions were recorded as a component of stockholders'
equity in the June 30, 1998, consolidated balance sheets.
The Company is required under the terms of its debt agreements to comply with
certain financial covenants, including those related to the maintenance of
current ratio, tangible net worth and debt service and interest coverage ratios.
The Company is also limited in its ability to make loans and investments, to
enter into leases, to make capital expenditures and/or to incur additional debt,
among other things, without the consent of its lenders.
At June 30, 1999, maturities of long-term debt, including capital lease
obligations, were as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ending June 30,
---------------------------
<S> <C>
2000 $ 403
2001 140
2002 39,597
2003 148
2004 161
Thereafter 403
-------
$40,852
=======
</TABLE>
At June 30, 1999 and 1998, the fair value of long-term debt approximated its
current carrying value.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases office and warehouse space and other equipment through
noncancelable operating leases. Rental expense under operating leases was $0.9
million, $0.9 million, $0.7 million and $0.2 million in 1999, 1998, 1997 and for
the three-month period ended June 30, 1997, respectively. Minimum rental
payments under these leases with initial or remaining terms of one year or more
at June 30, 1999, are $10.2 million and payments during the succeeding five
years are: 2000, $1.9 million; 2001, $1.6 million; 2002, $1.5 million; 2003,
$1.4 million; 2004, $1.1 million; and thereafter, $2.7 million.
There are various pending claims and lawsuits arising out of the normal course
of the Company's business. In the opinion of management, the ultimate outcome of
these claims and lawsuits will not have a material adverse effect on the
financial position or results of operations of the Company.
NOTE 10. STOCK OPTIONS
In 1992, the Company adopted a Long-Term Incentive Plan that authorized the
Compensation Committee of the Board of Directors ("the Committee") to grant key
employees and officers of the Company incentive or non-qualified stock options,
stock appreciation rights, performance shares, restricted shares and performance
units. Options to purchase up to 200,000 shares of common stock were authorized
under the Long-Term Incentive Plan. The Committee determines the price
(generally no less than fair market value on the date of grant) and terms at
which awards may be granted, along with the duration of the restriction periods
and performance targets. In 1998, the Company's shareholders approved an
amendment to the Plan to increase the number of shares available for grant to
500,000 shares. Stock options granted under the Long-Term Incentive Plan are not
exercisable earlier than six months from the date of grant (except in the case
of death or disability of the employee holding the same), nor later than 10
years from the date of grant. In January 1997, 67,999 non-qualified and
incentive stock options outstanding under the Company's Long-Term Incentive
Plan, with exercise prices ranging from $3.875 to $7.00 per share, were canceled
and replaced with an equivalent number of non-qualified and incentive options
with an exercise price equal to the then fair market price of the stock, $3.75
per share.
In 1993, the Board of Directors of the Company adopted the D&K Wholesale Drug,
Inc. 1993 Stock Option Plan ("the 1993 Plan") to grant key employees of the
Company non-qualified stock options to purchase up to 350,000 shares of the
Company's common stock. The 1993 Plan is administered by the Company's Board of
Directors, which determines the price and terms by which awards may be granted.
Stock options granted under the 1993 Plan are immediately exercisable from the
date of grant and expire not later than 10 years from the date of grant. The
exercise price of all options granted pursuant to the 1993 Plan was equal to the
fair market value of stock on the respective dates of grant. In January 1997,
60,000 non-qualified stock options outstanding under the 1993 Plan, with
exercise prices ranging from $3.875 to $7.00 per share, were canceled and
replaced with an equivalent number of non-qualified stock options with an
exercise price equal to the then fair market price of the stock, $3.75 per
share.
11
<PAGE> 18
Changes in options outstanding under the Company's Long-Term Incentive Plan and
the 1993 Plan were as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Price
---------------- --------------
<S> <C> <C>
Outstanding at March 29, 1996 191,697 $ 5.35
Granted 1997 252,332 4.74
Canceled 1997 (209,164) 6.31
Exercised 1997 (25,666) 3.65
-----------------------------------------
Outstanding at March 28, 1997 209,199 3.84
Granted three months ended June 30, 1997 86,000 5.63
-----------------------------------------
Outstanding at June 30, 1997 295,199 4.36
Granted 1998 175,999 11.30
Exercised 1998 (29,200) 4.26
-----------------------------------------
Outstanding at June 30, 1998 441,998 7.13
Granted 1999 169,200 19.64
Exercised 1999 (112,000) 7.33
Canceled 1999 (3,000) 11.25
-----------------------------------------
Outstanding at June 30, 1999 496,198 $11.32
=========================================
</TABLE>
Stock options exercisable at June 30, 1999, June 30, 1998 and March 28, 1997
were 451,198, 409,998 and 179,699, respectively, with a weighted average
exercise price of $10.12, $6.43 and $3.78, respectively. The weighted average
remaining contractual terms for all outstanding options was 7.89 years at June
30, 1999.
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company
has elected to account for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense has been recognized in the consolidated
financial statements for the stock option plans. If the Company had elected to
recognize compensation expense based upon the fair value of the options granted
at the grant date as prescribed by SFAS No. 123, pro forma net income (loss) and
earnings (loss) per share would have been as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
1999 1998 1997 JUNE 30, 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Net income - as reported $6,355 $3,327 $ 739 $ 363
Net income - pro forma $4,776 $2,392 $ 464 $ 208
Earnings per share:
Basic - as reported $ 1.65 $ 0.99 $0.24 $0.12
Basic - pro forma $ 1.24 $ 0.72 $0.15 $0.07
Diluted - as reported $ 1.52 $ 0.90 $0.24 $0.11
Diluted - pro forma $ 1.14 $ 0.65 $0.15 $0.07
</TABLE>
The fair value of each option grant on the date of the grant was estimated using
the Black-Scholes option-pricing model and the following weighted average
assumptions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
1999 1998 1997 JUNE 30, 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Risk free interest rates 4.89% 5.50% 5.78% 5.49%
Expected life of options (years) 5.0 5.0 6.2 6.8
Volatility of stock price 116% 138% 83% 60%
Expected divided yield 0% 0% 0% 0%
Fair value of options $16.25 $10.13 $3.43 $3.59
</TABLE>
NOTE 11. WARRANTS
The Company has outstanding warrants to purchase 22,072 shares of common stock
at a price of $0.005 per share. These warrants are exercisable only at such time
as a principal investor receives, following a merger or sale of all or
substantially all of the assets of the Company, in excess of a 30% compounded
annual rate of return on its investment in common stock of the Company. The
warrants were not exercisable at June 30, 1999, and will expire in December
1999. The Company does not believe the conditions for the exercise of the
warrants will be satisfied.
12
<PAGE> 19
In June 1994, the Company entered into a letter agreement with an independent
research firm to produce reports with respect to the Company's publicly traded
equity securities. The term of the agreement was 13 months and in consideration
for the research reports, the Company granted the firm warrants to purchase up
to 70,000 shares of the Company's common stock at an exercise price equal to the
closing price of the stock on the date of the agreement, which was $4.125 per
share. The warrants were exercisable for a period of three years from the date
of the agreement. The research firm earned the warrants on a vesting schedule
over the 13-month term of its services. Fifty percent of the warrants vested on
the date of the agreement, an additional 25% vested upon issuance of a second
research report in November 1994, and the final 25% vested upon issuance of a
third research report in June 1995. The Company recorded total expense of
$70,000 related to these warrants. During the three-month period ended June 30,
1997, the Company agreed to extend the expiration of the warrants through June
1998 in exchange for additional research reports. The Company recorded expense
of $77,000 based upon the estimated fair value of the warrants, as amended,
during the three-month period ended June 30, 1997. In 1998, the research firm
exercised the warrants, resulting in the issuance of 70,000 shares of common
stock of the Company, recorded as additional equity of $288,750.
NOTE 12. INCOME TAXES
The components of the income tax provision were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
1999 1998 1997 JUNE 30, 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Current tax provision $ 3,354 $ 933 $177 $175
Deferred tax provision 492 1,241 363 105
----------------------------------------------------------------------------
Income tax provision $ 3,846 $2,174 $540 $280
============================================================================
</TABLE>
The actual income tax provision differed from the expected income tax provision,
computed by applying the respective U.S. statutory federal tax rates of 34% to
income before income tax provision, as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
1999 1998 1997 JUNE 30, 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Current expected income tax provision $3,468 $1,870 $ 435 $219
Amortization of intangible assets not deductible for
income tax purposes 202 222 234 58
Equity in net income of PBI not taxable for
income tax purposes (166) (181) (186) (33)
State income taxes, net of federal benefit 439 293 61 29
Other, net (97) (30) (4) 7
------------------------------------------------------------------
$3,846 $2,174 $ 540 $280
==================================================================
</TABLE>
At June 30, 1999 and June 30, 1998, the tax effects of temporary differences
that give rise to significant portions of the Company's deferred tax assets and
liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 457 $ 280
Accrued liabilities 577 277
Capital lease obligations 104 41
Inventories 948 832
Net operating loss carryforwards 2,383 2,854
Alternative minimum tax and contribution carryforwards 32 331
Other 136 150
------------------------------
Total deferred tax assets $ 4,637 $ 4,765
------------------------------
Deferred tax liabilities:
Property and equipment $ (454) $ (302)
Inventories (4,167) (4,167)
Intangibles (407) --
Accounts receivable (233) (346)
Other (114) (82)
------------------------------
Total deferred tax liabilities $ (5,375) $(4,897)
------------------------------
Net deferred tax liabilities $ (738) $ (132)
==============================
</TABLE>
13
<PAGE> 20
In connection with the acquisitions of two companies in fiscal 1995, net
deferred tax liabilities of $4.1 million were established for the differences in
the income tax basis of assets and liabilities acquired and their carrying
amounts for financial reporting purposes. In addition, deferred tax assets of
$4.0 million were recorded with respect to net operating loss carryforwards,
contribution carryforwards, and alternative minimum tax carryforwards that were
generated by the companies prior to their acquisitions. The use of
pre-acquisition operating losses is subject to limitations imposed by the
Internal Revenue Code and if not utilized by the Company, the net operating loss
carryforwards will expire beginning in 2007. At March 28, 1997, the Company
recorded a valuation allowance of $4.2 million primarily due to the uncertainty
of utilizing the pre-acquisition operating losses and other carryforwards.
During the three-month period ended June 30, 1997, the Company utilized $306,000
of the net operating loss carryforwards as a deduction against taxable income
for that period. Accordingly, the recorded valuation allowance and the excess of
purchase price over the fair value of net assets acquired were adjusted by
$122,000 to reflect the utilization at June 30, 1997.
In 1998, based upon its current and forecasted taxable earnings levels for
future years, the Company determined that it was more likely than not that the
remaining acquired net operating loss, contribution and alternative minimum tax
credit carryforwards would be utilized against consolidated taxable income in
the current and future years. Therefore, the remaining valuation allowance of
$4.1 million was released. This resulted in a corresponding increase to deferred
tax assets and a reduction in the excess of purchase price over the fair value
of net assets acquired. The Company utilized $3.2 million of the net operating
loss carryforwards in 1998. The annual net operating loss limitation for 1999
and future years is $1.0 million and begins to expire in 2007.
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan covering substantially all of
its employees. Plan participants may contribute up to 20% of their annual
compensation, subject to certain limitations. The Company contribution is
discretionary and is currently equivalent to 25% of employees' contributions up
to a maximum contribution based on 6% of eligible compensation. Expenses related
to the plan were $66,000 in 1999, $45,000 in 1998, $49,000 in 1997, and $20,000
for the three-month period ended June 30, 1997. Jewett has a defined
contribution 401(k) plan covering substantially all of its employees, which was
still in existence at June 30, 1999. Jewett also participates in the Central
States Pension, a multiemployer pension plan, on behalf of its union employees
in accordance with the union agreement.
The Company also has an executive retirement benefit plan, implemented in 1998,
that provides supplemental pre-retirement life insurance plus supplemental
retirement income to key executives. The life insurance benefit is calculated at
three times annual salary as of the date of participant enrollment. The
retirement income benefit is provided through discretionary contributions to
each participant's account, which vest 20% annually and are fully vested upon
attaining age 65. Upon retirement, the accumulated account balance is paid to
the participant over 15 years in quarterly benefit payments. The Company's
expense related to the plan was $245,000 in 1999 and $176,000 in 1998.
NOTE 14. EARNINGS PER SHARE
All earnings and share amounts have been restated in accordance with SFAS No.
128. The reconciliation of the numerator and denominator of the basic and
diluted earnings per common share computations are as follows (in thousands,
except for shares and per share amounts):
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $6,355 3,846,837 $1.65
EFFECT OF DILUTED SECURITIES:
Options and warrants 173,039
Convertible PBI stock 41 200,000
------------------------------------------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders plus
assumed conversions $6,396 4,219,876 $1.52
------------------------------------------
</TABLE>
14
<PAGE> 21
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $3,327 3,345,261 $0.99
EFFECT OF DILUTED SECURITIES:
Options and warrants 138,940
Convertible subordinated notes 70 282,151
------------------------------------------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders plus
assumed conversions $3,397 3,766,352 $0.90
------------------------------------------
<CAPTION>
1997
-----------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $739 3,033,536 $0.24
EFFECT OF DILUTED SECURITIES:
Options and warrants 24,429
Convertible subordinated notes 116 530,978
------------------------------------------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders
plus assumed conversions $855 3,588,943 $0.24
------------------------------------------
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income available to common shareholders $363 3,054,994 $0.12
EFFECT OF DILUTED SECURITIES:
Options and warrants 40,859
Convertible subordinated notes 29 530,978
------------------------------------------
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders plus
assumed conversions $392 3,626,831 $0.11
------------------------------------------
</TABLE>
The impact of the PBI stock conversion has been determined to be anti-dilutive
for 1998, 1997 and the three months ended June 30, 1997.
15
<PAGE> 22
NOTE 15. EFFECT OF NEW ACCOUNTING STANDARDS
The provisions of SFAS No. 130, "Reporting Comprehensive Income," became
effective in fiscal 1999. The statement requires that an enterprise report, by
major component and as a single total, the change in its net assets during the
period from nonowner sources. The Company had no such items during the periods
presented.
The Company adopted the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," during the fourth quarter of fiscal
year 1999. See Note 16 for the required disclosures.
The adoption by the Company during fiscal year 1999 of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," did not impact
the Company's consolidated financial position, results of operations, cash
flows, or disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999 (subsequently
changed to June 15, 2000 by SFAS No. 137). The effect of this statement is not
expected to have a significant impact on the consolidated financial position or
results of operations of the Company.
NOTE 16. BUSINESS SEGMENTS
During the fourth quarter of fiscal 1999, the Company adopted SFAS No. 131. This
statement establishes standards for the way public companies report information
about operating segments that is consistent with that made available to the
management of the Company in allocating resources and assessing performance.
After application of the aggregation criteria, the Company has three
identifiable business segments, only one of which, Wholesale drug distribution,
meets the quantitative thresholds for separate disclosure prescribed in SFAS No.
131. This segment is described in Note 1. The Company's equity investment in PBI
(see Note 5) is a second segment. Two wholly owned software subsidiaries, Viking
Computer Services, Inc. and Tykon, Inc. constitute the third segment. Viking
markets a pharmacy management software system and Tykon developed and markets a
proprietary PC-based order entry/order confirmation system to the drug
distribution industry. These two segments are combined as Other in the table
below.
Though the Wholesale drug distribution segment operates from several different
facilities, the nature of its products and services, the types of customers and
the methods used to distribute its products are similar and thus they have been
aggregated for presentation purposes. The Company operates principally in the
United States. Intersegment sales have been recorded at amounts approximating
market. Interest and corporate expenses are allocated to wholly owned
subsidiaries only. Assets have been identified with the segment to which they
relate.
16
<PAGE> 23
<TABLE>
<CAPTION>
For the Three
(in thousands) For the Year Ended Months Ended
---------------------------------------------------------------
June 30, 1999 June 30, 1998 March 28, 1997 June 30, 1997
-------------------- -------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers -
Wholesale drug distribution $813,287 $611,498 $478,794 $144,267
Other 2,032 929 730 206
-------------------- -------------------- ------------------- -----------------
Total $815,319 $612,427 $479,524 $144,473
Intersegment sales -
Wholesale drug distribution $-- $-- $-- $--
Other 75 -- -- --
Intersegment eliminations (75) -- -- --
-------------------- -------------------- ------------------- -----------------
Total $-- $-- $-- $--
Net sales -
Wholesale drug distribution $813,287 $611,498 $478,794 $144,267
Other 2,107 929 730 206
Intersegment eliminations (75) -- -- --
-------------------- -------------------- ------------------- -----------------
Total $815,319 $612,427 $479,524 $144,473
Gross profit -
Wholesale drug distribution $39,113 $28,890 $21,016 $5,882
Other 1,987 772 624 134
-------------------- -------------------- ------------------- -----------------
Total $41,100 $29,662 $21,640 $6,016
Depreciation and amortization -
Wholesale drug distribution $1,457 $1,429 $1,499 $378
Other 466 315 300 75
Less: PBI amortization (1) (276) (276) (276) (69)
-------------------- -------------------- ------------------- -----------------
Total $1,647 $1,468 $1,523 $384
Interest expense -
Wholesale drug distribution $5,260 $4,075 $3,961 $956
Other 6 5 -- 3
-------------------- -------------------- ------------------- -----------------
Total $5,266 $4,080 $3,961 $959
Pre-tax income (loss) -
Wholesale drug distribution $9,637 $5,800 $1,333 $780
Other 564 (299) (54) (137)
-------------------- -------------------- ------------------- -----------------
Total $10,201 $5,501 $1,279 $643
Purchase of property and equipment -
Wholesale drug distribution $292 $337 $1,979 $95
Other 10 9 18 3
Other unallocated Corporate
amounts (2) 577 517 201 82
-------------------- -------------------- ------------------- -----------------
Total $879 $863 $2,198 $180
Identifiable assets -
Wholesale drug distribution $232,729 $164,069
Other 6,740 4,232
Other unallocated Corporate
amounts (2) 3,737 4,887
Elimination of receivables from
Corporate (13,126) (2,838)
-------------------- --------------------
Total $230,080 $170,350
</TABLE>
(1) Amortization of PBI goodwill is netted against Equity in net income of PBI
in the accompanying Consolidated Statements of Operations.
(2) Amounts represent assets at Corporate Headquarters consisting primarily of
deferred tax assets, property and equipment and deferred debt costs.
17
<PAGE> 24
Note 17. Quarterly Results (Unaudited)
Quarterly results are determined in accordance with annual accounting policies.
They include certain items based upon estimates for the entire year. Summarized
quarterly results for the last two years were as follows:
<TABLE>
<CAPTION>
(in thousands, except per share data) 1999 Quarter 1999
------------------------------------------------- ----------
First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
Net Sales $179,374 $198,345 $213,984 $223,616 $815,319
Gross profit 8,404 9,776 12,205 10,715 41,100
Income before income tax provision 1,882 2,203 3.400 2,716 10,201
Net income 1,129 1,363 2,074 1,789 6,355
Basic earnings per share $0.30 $0.36 $0.54 $0.45 $1.65
Diluted earnings per share 0.29 0.33 0.49 0.41 1.52
<CAPTION>
(in thousands, except per share data) 1998 Quarter 1998
------------------------------------------------- -----------
First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
Net Sales $149,024 $138,570 $155,314 $169,519 $612,427
Gross profit 6,379 6,816 8,074 8,393 29,662
Income before income tax provision 878 1,228 1,770 1,625 5,501
Net income 509 712 1,062 1,044 3,327
Basic earnings per share $0.17 $0.23 $0.29 $0.30 $0.99
Diluted earnings per share 0.15 0.20 0.27 0.28 0.90
</TABLE>
18
<PAGE> 25
PRICE RANGE PER
COMMON SHARE
The Company's common stock (symbol: "DKWD") is traded on the NASDAQ national
market. The number of beneficial holders of the Company's common stock is
approximately 1,700. Set forth below are the high and low transaction prices as
reported by the NASDAQ stock market for the periods indicated. Such prices
reflect interdealer prices, without retail markup, markdown, or commission:
1999
---------------------------------------------------
LOW HIGH
First Quarter 12 1/2 25 1/4
Second Quarter 15 7/8 27 1/4
Third Quarter 22 27 1/8
Fourth Quarter 19 11/16 25
1998
---------------------------------------------------
LOW HIGH
First Quarter 5 1/8 8 1/8
Second Quarter 7 11/16 9 1/4
Third Quarter 8 1/8 14 1/4
Fourth Quarter 13 1/4 23 1/2
CORPORATE OFFICES:
D&K Healthcare Resources, Inc.
8000 Maryland Ave. Suite 920
St. Louis, Missouri 63105
(888) 727-3485
(314) 727-3485
Fax: (314) 727-5759
web: www.dkwd.com
TRANSFER AGENT REGISTRAR:
Harris Trust & Savings Bank
111 West Monroe Street
Chicago, Illinois 60690
(312) 461-2121
AUDITORS:
Arthur Andersen LLP
St. Louis, Missouri
COUNSEL:
Armstrong, Teasdale, Sclafly & Davis
St. Louis, Missouri
FORM 10-K:
Copies of form 10-K filed by D&K Healthcare Resources, Inc. for the year ended
June 30, 1999, are available without charge upon request. Requests should be
directed to the Company's corporate office address, marked attention: Investor
Relations.
FORWARD-LOOKING STATEMENTS:
The forward-looking statements contained in this document are inherently subject
to risks and uncertainties. D&K's actual results could differ materially from
those currently anticipated due to a number of factors, including without
limitation, the competitive nature of the wholesale pharmaceutical drug
distribution industry, the evolving business and regulatory environment of the
healthcare industry in which D&K operates and other factors set forth in reports
and other documents filed by D&K with the Securities and Exchange Commission
from time to time.
ANNUAL MEETING:
The annual meeting of stockholders will be held at 10:00 a.m. Thursday, November
11, 1999, in The Ritz Carlton Hotel, 100 Carondelet Plaza, St. Louis, MO.
<PAGE> 1
EXHIBIT 21
<TABLE>
<CAPTION>
SUBSIDIARY NAME STATE OF INCORPORATION % OWNED
<S> <C> <C>
Associated Pharmacies, Inc. Arkansas 100%
VC Services, Inc. Minnesota 100%
Pharmaceutical Buyers, Inc. Arkansas 50%
Jaron, Inc. Florida 100%
D & K Receivables Corporation Delaware 100%
Jewett Drug Co. South Dakota 100%
Tykon, Inc. Wisconsin 100%
Southwest Computer Systems, Inc. Arkansas 100%
(inactive)
U.P.C., Inc. (inactive) Minnesota 100%
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated August 10, 1999, included in and incorporated by reference in this
Form 10-K for the year ended June 30, 1999, into the Company's previously filed
Registration Statements on Form S-3 (Nos. 333-56929, 33-99210, and 333-3262) and
Form S-8 (Nos. 33-88714 and 333-24263).
ARTHUR ANDERSEN LLP
St. Louis, Missouri
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 708
<SECURITIES> 0
<RECEIVABLES> 16,031
<ALLOWANCES> 1,142
<INVENTORY> 157,171
<CURRENT-ASSETS> 173,367
<PP&E> 12,845
<DEPRECIATION> 6,640
<TOTAL-ASSETS> 230,080
<CURRENT-LIABILITIES> 153,299
<BONDS> 0
44
0
<COMMON> 0
<OTHER-SE> 35,806
<TOTAL-LIABILITY-AND-EQUITY> 230,080
<SALES> 815,319
<TOTAL-REVENUES> 815,750
<CGS> 774,219
<TOTAL-COSTS> 800,913
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 365
<INTEREST-EXPENSE> 4,636
<INCOME-PRETAX> 10,201
<INCOME-TAX> 3,846
<INCOME-CONTINUING> 6,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,355
<EPS-BASIC> 1.65
<EPS-DILUTED> 1.52
</TABLE>
