<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1997
REGISTRATION NO. 333-25257
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
HORIZON PHARMACIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
TEXAS 5912 75-2441557
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
Number)
</TABLE>
275 W. PRINCETON DRIVE
PRINCETON, TEXAS 75407
(972) 736-2424
(Address and Telephone Number of Principal Executive Offices)
RICK D. MCCORD, PRESIDENT
HORIZON PHARMACIES, INC.
275 W. PRINCETON DRIVE
PRINCETON, TEXAS 75407
(972) 736-2424
(Name, Address and Telephone Number of Agent for Service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DOUGLAS A. BRANCH, ESQ. MARK A. ROBERTSON, ESQ.
Phillips McFall McCaffrey McVay & Robertson & Williams, Inc.
Murrah, P.C.
211 North Robinson, 12th Floor 3033 N.W. 63rd, Suite 160
Oklahoma City, Oklahoma 73102 Oklahoma City, Oklahoma 73116
(405) 235-4100 (405) 848-1944
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 1, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
1,200,000 SHARES
HORIZON PHARMACIES, INC.
COMMON STOCK
------------------
All of the 1,200,000 shares of common stock, $.01 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by HORIZON
Pharmacies, Inc. (the "Company"). Prior to this Offering, there has been no
public market for the Company's Common Stock. It is currently anticipated that
the initial public offering price will be $5.00 per share. See "Underwriting"
for information relating to the method of determining the initial public
offering price. The Company has been approved for listing of the Common Stock on
the American Stock Exchange under the trading symbol "HZP" subject to notice of
issuance.
The Company has established a website at http://members.aol.com/horizonrx
which contains information regarding the Company.
------------------------
THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO THE PUBLIC AND COMMISSIONS(1) COMPANY(2)(3)
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total(3)........................................ $ $ $
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses in connection with this Offering payable by the
Company, including a nonaccountable expense allowance to be paid to the
Underwriters in the amount of $180,000 ($207,000 if the Underwriters'
over-allotment option is exercised in full). See "Use of Proceeds" and
"Underwriting."
(3) The Company has granted the Underwriters an option, exercisable within 45
business days from the date of this prospectus, to purchase up to 180,000
additional shares of Common Stock upon the same terms and conditions as set
forth above, solely to cover over-allotments, if any. If such over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $6,900,000,
$690,000 and $6,210,000, respectively. See "Underwriting."
------------------------
The Common Stock is being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to the approval of certain legal matters by counsel and to certain other
conditions. It is expected that delivery of certificates representing the shares
of Common Stock will be made against payment therefor at the offices of Capital
West Securities, Inc. ("Capital West"), Oklahoma City, Oklahoma, on or about
, 1997.
------------------------
CAPITAL WEST SECURITIES, INC.
COMVEST PARTNERS, INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
------------------------
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and with quarterly reports for the first three quarters of each
year containing unaudited financial information.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE OR
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE
ACTIVITIES SEE "UNDERWRITING."
------------------------
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND FINANCIAL STATEMENTS, INCLUDING THE
NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS: (I) ASSUMES AN INITIAL
OFFERING PRICE OF $5.00 PER SHARE; (II) REFLECTS A 2-FOR-1 STOCK SPLIT OF THE
COMPANY'S COMMON STOCK; AND (III) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IS NOT EXERCISED. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN,
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS REGARDING THE
COMPANY'S BUSINESS AND PROSPECTS THAT ARE BASED UPON NUMEROUS ASSUMPTIONS ABOUT
FUTURE CONDITIONS WHICH MAY ULTIMATELY PROVE TO BE INACCURATE AND ACTUAL EVENTS
AND RESULTS MAY MATERIALLY DIFFER FROM ANTICIPATED RESULTS DESCRIBED IN SUCH
STATEMENTS. THE COMPANY'S ABILITY TO ACHIEVE SUCH RESULTS IS SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES, SUCH AS THOSE INHERENT GENERALLY IN THE RETAIL PHARMACY
AND HOME HEALTHCARE INDUSTRIES, THE IMPACT OF COMPETITION AND PRICING, CHANGING
MARKET CONDITIONS, THE RISKS DETAILED IN THE SECTIONS ENTITLED "RISK FACTORS"
AND "LEGAL PROCEEDINGS," AND OTHER RISKS DETAILED THROUGHOUT THIS PROSPECTUS.
THESE FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S JUDGMENT AS OF THE DATE
OF THE FILING OF THIS PROSPECTUS. THE COMPANY DISCLAIMS, HOWEVER, ANY INTENT OR
OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
THE COMPANY
The Company owns and operates a chain of 14 retail pharmacies, nine of which
are located in Texas, two in Virginia, and one each in New Mexico, Oklahoma and
Wisconsin. According to the April 28, 1997 issue of CHAIN DRUG REVIEW, the
Company is among the top 100 retail pharmacy chains in the United States based
on store count and dollar volume of sales. The Company plans to acquire between
eight and 12 pharmacies annually in each of 1997, 1998 and 1999. In March 1997,
the Company consummated the purchase of three pharmacies located in Mineola, Mt.
Vernon and McKinney, Texas (the "Vista Stores").
The Company began operating in February 1994 for the purpose of acquiring
and consolidating under the HORIZON Pharmacies, Inc. name, high volume,
free-standing full-service retail pharmacies primarily located in communities
having populations of fewer than 50,000 persons. The Company believes that its
success is primarily due to its philosophy of retaining the individual,
time-proven customer service characteristics of the stores it acquires, while
enabling such stores to offer complete and competitively priced inventories to
their small town customers through enhanced technology and the consolidation and
management of such stores as a chain.
Currently, the Company's primary source of revenue is the sale of
prescription drugs. During 1996, sales of prescription drugs generated 80% of
the Company's net sales. Management expects the Company's prescription drug
business to continue to increase as a result of the demographic trends toward an
aging population and the continued development of new pharmaceutical products.
However, the Company anticipates that prescription sales will continue to
decrease as a percentage of the Company's overall sales and gross margins as the
Company continues to expand its home healthcare and other non-pharmaceutical
sales and services which have historically provided higher margins.
In addition to prescription drugs and services, the Company's retail
pharmacies offer a broad range of over-the-counter medications, supplies and
equipment, health and beauty aids, cosmetics, gifts, greeting cards, convenience
foods, cameras, photo supplies and processing services and other general
merchandise. Some stores incorporate special features such as drive-through
windows and free home delivery for customer convenience, optical departments,
fax, copying and package delivery services and soda fountains. In addition, the
Company's Farmington, New Mexico store sells and leases under the name HORIZON
Home Care durable medical equipment ("DME") and offers home healthcare services
including, but not limited to, intravenous ("IV") infusion services and home
oxygen therapy. The Company intends to expand such products and services to
other stores in which attractive market opportunities exist.
The Company's business strategy is: (i) to expand by continuing to acquire
small chains and independent pharmacies primarily in communities having
populations of fewer than 50,000 persons; (ii) to
3
<PAGE>
improve profitability for each store in its chain; and (iii) to expand home
healthcare and other non-pharmaceutical sales and services to certain of its
other stores. In implementing its business strategy, the Company intends to
maintain competitive pricing and a high level of customer service and
convenience, continue to control costs and take advantage of the available
economies of scale, improve the stores' use of technology and focus on
management procedures and policies and employee training. The Company also plans
to acquire and consolidate the inventory and pharmacy files of certain retail
pharmacies in its existing market areas to increase sales volumes of existing
stores in that market, while managing the overhead expense for those operations
in a cost-effective manner. Stores which are acquired by the Company will not be
remodeled to fit a standardized format, but will, to the extent practicable, be
permitted to retain their individual layouts, locations and management styles.
As part of its marketing strategy, the Company plans to convert between one
and five of its existing stores into "healthcare centers" similar to that
currently operated by its store located in Farmington, New Mexico. Each such
center will offer home healthcare services and may lease to an unaffiliated
third party owner-operator a small clinic staffed by a physician's assistant or
nurse practitioner located adjacent to the store's traditional retail pharmacy
operations. The Company intends for such healthcare centers to offer customers
"one-stop shopping" at competitive prices for basic medical and home healthcare
services. The Company believes that providing such home healthcare and basic
medical services adjacent to its retail pharmacies will result in increased
sales and profits for such stores.
The Company was incorporated under the laws of the State of Texas on August
31, 1992 and began operations under the name HORIZON Pharmacies, Inc. in
February 1994. The Company's principal office is located at 275 W. Princeton
Drive, Princeton, Texas 75407, and its telephone number is (972) 736-2424. The
Company's website is http://members.aol.com/horizonrx.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company......................... 1,200,000 shares
Shares of Common Stock to be
outstanding after the
Offering........................ 2,282,424 shares(1)
Use of Proceeds................... To repay certain existing indebtedness, acquire
additional retail pharmacies and/or the inventory and
pharmacy files of other retail pharmacies, make a
distribution to existing shareholders and for working
capital and general corporate purposes.
American Stock Exchange Symbol.... HZP
</TABLE>
- ------------------------
(1) Excludes 246,242 shares of Common Stock reserved for issuance pursuant to
the Company's 1997 Stock Option Plan (the "Option Plan"). See
"Management--Stock Option Plan" and "Description of Securities."
RISK FACTORS
Investment in the Common Stock offered hereby involves a high degree of risk
and immediate substantial dilution. See "Risk Factors" and "Dilution."
4
<PAGE>
SUMMARY--FINANCIAL AND OPERATING DATA
The following table sets forth historical and pro forma financial
information of the Company. The historical information is derived from the
audited financial statements of the Company for each of the two years in the
period ended December 31, 1996 and from the unaudited financial statements of
the Company for the three months ended March 31, 1996 and 1997, appearing
elsewhere in this prospectus, and from the audited financial statements of the
Company for the period from February 28, 1994 to December 31, 1994, not
presented herein. The following financial information should be read in
conjunction with such Financial Statements including the Notes thereto. See
"Selected Financial Information," "Pro Forma Combined Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
PERIOD FROM --------------------------------- ----------------------------------
FEBRUARY 28,
1994 HISTORICAL HISTORICAL
TO DECEMBER 31, --------------------- PRO FORMA ---------------------- PRO FORMA
1994(1) 1995 1996 1996(2) 1996 1997 1997(2)
---------------- --------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND STORE DATA)
STATEMENT OF INCOME DATA:
Net Sales................... $ 1,671 $ 6,270 $ 13,136 $ 22,133 $ 2,367 $ 5,113 $ 5,892
Gross Profit................ 595 1,898 4,194 6,686 763 1,654 1,841
Income from operations...... 169 279 551 1,024 151 274 322
Interest expense............ 16 110 253 227 43 54 28
Income before pro forma
provision for income
taxes..................... 154 176 302 801 110 221 294
Pro forma provision for
income taxes.............. 54 61 106 278 38 77 104
Pro forma net income........ 100 115 196 523 72 144 190
Pro forma net income per
common share.............. 0.19 0.12 0.18 0.23 0.07 0.13 0.08
Shares used in
computation............... 539,258 957,733 1,074,246 2,274,246 1,058,000 1,142,424 2,342,424
BALANCE SHEET DATA:
Working capital............. $ 600 $ 1,029 $ 1,563 $ 4,518 $ 897 $ 1,057 $ 5,658
Total assets................ 1,268 3,545 6,589 9,518 3,868 8,350 11,411
Long-term obligations....... 346 930 1,467 1,367 716 1,338 1,238
Total liabilities........... 576 2,266 4,839 4,412 2,539 6,454 5,028
Shareholders' equity........ 692 1,279 1,750 5,106 1,329 1,896 6,383
NUMBER OF STORES AT END OF
PERIOD...................... 3 7 11 14 7 14 14
</TABLE>
- ------------------------
(1) The Company was organized August 31, 1992 but had no operations until
February 28, 1994.
(2) See "Pro Forma Combined Financial Data" for information regarding the pro
forma adjustments made to the Company's historical financial data.
5
<PAGE>
RISK FACTORS
An investment in the securities being offered hereby involves substantial
risk. Prospective investors should carefully consider the following factors in
addition to the other information set forth in this prospectus.
DEPENDENCE ON ACQUISITIONS FOR GROWTH. The Company has grown rapidly in
recent periods and intends to continue to pursue an aggressive growth strategy.
The Company's growth strategy depends upon its ability to continue to acquire,
consolidate and operate existing free-standing pharmacies on a profitable basis.
During 1996, the Company acquired four pharmacies and three pharmacies were
acquired during the first quarter of 1997. By the end of 1997, the Company plans
to acquire an additional five to nine stores and have in operation a total of
approximately 20 stores. However, no assurance can be given that the Company
will be able to find attractive acquisition candidates, consummate additional
acquisitions or that it will successfully integrate, convert or operate any
acquired business. In the event that the Company makes acquisitions, there can
be no assurance that any such acquisition expenses will not have a material
adverse effect upon the Company's operating results, particularly during the
period in which such operations are being integrated into the Company.
Furthermore, the Company's ability to make acquisitions may depend upon its
ability to obtain financing. There can be no assurance that the Company will be
able to obtain financing or, if available, that such financing will be on
acceptable terms. The Company continually reviews acquisition proposals and is
currently engaged in discussions with third parties with respect to possible
acquisitions; however, the Company has no agreement or commitments with respect
to any potential acquisition. The Company will compete for acquisition
candidates with buyers who have greater financial and other resources than the
Company and may be able to pay higher acquisition prices than the Company. To
the extent the Company is unable to acquire suitable retail pharmacies, or to
integrate such acquisitions successfully, its ability to expand its business
would be reduced significantly. See "--Possible Need for Additional Capital,"
"--Substantial Indebtedness" and "Business--Expansion Strategy."
SALES TO THIRD-PARTY PAYORS. A growing percentage of the Company's
prescription drug volume has been accounted for by sales to customers who are
covered by third-party payment programs. Third-party reimbursement accounted for
approximately 52% of the Company's prescription sales in 1996, 48% in 1995 and
36% in 1994. It is anticipated that prescription sales to third-party payors, in
terms of both dollar volume and as a percentage of total prescription sales,
will continue to increase in the first quarter of 1997 and the Company expects
this trend to continue. Although contracts with third-party payors may increase
the volume of prescription sales and gross profits, third-party payors typically
negotiate lower prescription prices than those of non third-party payors.
Accordingly, there has been downward pressure on gross profit margins on sales
of prescription drugs which is expected to continue in future periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--The Retail Pharmacy Industry."
RELIANCE ON MEDICARE AND MEDICAID REIMBURSEMENTS. Substantially all of the
Company's home healthcare revenues are attributable to third-party payors,
including Medicare and Medicaid, private insurers, managed care plans and HMOs.
The amounts received from government programs and private third-party payors are
dependent upon the specific benefits included under the program or the patient's
insurance policies. Like other medical service providers, the Company is subject
to lengthy reimbursement delays as a result of third-party payment procedures.
Any substantial delays in reimbursement could adversely affect the Company's
business, financial condition, cash flows and results of operations.
Accordingly, management of accounts receivable through effective billing and
reimbursement procedures is critical to the Company's results of operations.
Because alternate site healthcare is generally less costly to third-party
payors than hospital-based care, alternate site healthcare providers have
generally benefited from cost containment initiatives aimed at reducing the
costs of medical care. However, as the alternate site market becomes a larger
percentage of
6
<PAGE>
the total healthcare market, cost containment initiatives aimed at reducing the
costs of delivering services at non-hospital sites are increasing and may
adversely affect the profitability of alternate site healthcare providers. A
significant reduction in the coverage or payment rates of third-party payors, or
from patients enrolled in the Medicare or Medicaid programs, would have a
material adverse effect on the Company's revenues and profitability. The level
of revenues and profitability of the Company, like those of other healthcare
companies, are affected by the continuing efforts of third-party payors to
contain or reduce the costs of healthcare by lowering reimbursement rates,
increasing case management review of services and negotiating reduced contract
pricing.
Government reimbursement programs are subject to statutory and regulatory
changes, retroactive rate adjustments, administrative rulings and governmental
funding restrictions, all of which may materially increase or decrease the rate
of program payments to the Company for its services. In addition to being
subject to frequent changes in Federal and state laws governing Medicare and
Medicaid coverage and reimbursement policies, the Company is subject to
governmental audit of the reimbursements it receives under the Medicare and
Medicaid programs. Any significant audit adjustment could have a material
adverse effect on the Company's business, financial condition, cash flows or
results of operations. There can be no assurance that payments under
governmental and private third-party payor programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients eligible for reimbursement pursuant to such
programs.
Payment reform for post-acute care services is a top Medicare priority. The
U.S. Department of Health and Human Services ("HHS") is studying, among other
things, the feasibility of changing the Medicare reimbursement system for home
healthcare from cost reimbursement to prospective payment (i.e., a fixed fee for
services rendered per episode of illness). The impact of such a change, if
implemented, on the Company's results of operations cannot be predicted at this
time and will depend, to a large extent, on the reimbursement methodology
ultimately established. The U.S. Congress and President Clinton have each
proposed significant reductions in Medicare and Medicaid spending in connection
with efforts to balance the budget of the United States. Although the Company
cannot predict whether these or other Federal or state cost containment
proposals will be adopted, the adoption of any such proposals could have an
adverse effect on the Company's business, financial condition, cash flows and
results of operations as it expands its home healthcare services. See
"Business--Home Healthcare Services."
EXPANSION. The Company's expansion will require the implementation and
integration of enhanced operational and financial systems and additional
management, operational and financial resources. Failure to implement and
integrate these systems and add these resources could have a material adverse
effect on the Company's results of operations and financial condition. There can
be no assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its growth. While
the Company experienced growth in net sales and net income in 1995 and 1996,
there can be no assurance that the Company will continue to experience growth
in, or maintain the present level of, net sales or net earnings. See
"Business--Expansion Strategy."
GOVERNMENT REGULATION AND HEALTHCARE REFORM. The Company's pharmacists and
pharmacies are required to be licensed by the appropriate state boards of
pharmacy. The Company's pharmacies are also registered with the Federal Drug
Enforcement Administration. Under the Omnibus Budget Reconciliation Act of 1990,
the Company's pharmacists are required to offer counseling to customers covered
by Medicaid about the medication, dosage, delivery system, common side effects
and other information deemed significant by the pharmacists.
The Company relies on prescription drug sales for a significant portion of
its revenues and profits, and prescription drug sales represent a significant
segment of the Company's business. These revenues are affected by changes within
the healthcare industry, including changes in programs providing for
reimbursement of the cost of prescription drugs by third-party payment plans,
such as government and private plans, and regulatory changes relating to the
approval process for prescription drugs. In recent years a number of
7
<PAGE>
healthcare reform proposals have been introduced or proposed by Congress and in
some state legislatures that would effect major changes in the healthcare
system, either nationally or at the state level. The proposals ranged from the
Clinton Administration's comprehensive healthcare reform proposal that would
have restructured the financing and delivery of healthcare services through a
combination of managed competition and mandated employer coverage of employees
to less comprehensive proposals that would have required private health
insurance to be "portable" and eliminated coverage limitations for pre-existing
health conditions. No proposal was adopted by either house of Congress. The
Company anticipates that additional healthcare reform proposals may continue to
be introduced by Congress. It is difficult to predict whether any proposal will
be adopted or the effect on the Company of any proposal that does become law. A
number of states in which the Company has operations have either adopted or are
considering healthcare reform proposals at the state level. These state reform
laws have, in many cases, not been fully implemented. See "Business--Government
Regulation and Healthcare Reform."
In addition, the Company may be affected by any significant healthcare
legislative proposals enacted in the state of Texas. Currently, the Texas
legislature is considering a proposal which would reduce Medicaid reimbursements
to Texas pharmacies by 5% in anticipation of a Federal reduction in Medicaid
pharmacy payments. While any such reductions would affect the Company's Medicaid
reimbursements, management believes that the Company's overall revenues and
profitability will not be materially adversely affected, although there can be
no assurance that revenues or profitability will not be affected by any such
legislation. See "Business--Government Regulation and Healthcare Reform."
REGULATION OF HOME HEALTHCARE SERVICES. The Company's Farmington, New
Mexico store currently offers home healthcare services under the name HORIZON
Home Care, and the Company expects to offer such services from certain of its
other stores. The Company's home healthcare business is subject to extensive
Federal and state regulation. Federal regulation covers, among other things,
Medicare and Medicaid billing and reimbursement, reporting requirements,
certification standards for certain home health agencies and other types of
healthcare providers, limitations on ownership and other financial relationships
between a provider and its referral sources and approval by the Food and Drug
Administration ("FDA") of the safety and efficacy of pharmaceuticals and medical
devices. In addition, the requirements that the Company must satisfy to conduct
its businesses vary from state to state. The Company believes that its
operations comply with applicable Federal and state laws and regulations in all
material respects. However, changes in the law or new interpretations of
existing laws can have a material effect on permissible activities of the
Company, the relative costs associated with doing business and the amount of
reimbursement for the Company's products and services paid by government and
other third-party payors.
Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive healthcare reform legislation, the Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery and payment systems and may in the future
propose and adopt legislation effecting fundamental changes in the healthcare
delivery system. Legislative debate is expected to continue in the future. The
Company cannot predict the ultimate timing, scope or effect of any legislation
concerning healthcare reform. Any proposed Federal legislation, if adopted,
could result in significant changes in the availability, delivery, pricing and
payment for healthcare services and products, including alternate site
healthcare. Various state agencies also have undertaken or are considering
significant healthcare reform initiatives. Although it is not possible to
predict whether any healthcare reform legislation will be adopted or, if
adopted, the exact manner and the extent to which the Company will be affected,
it is likely that the Company will be affected in some fashion, and there can be
no assurance that any healthcare reform legislation, if and when adopted, will
not have a material adverse effect on the Company's business, financial
condition, cash flows or results of operations.
Certain of the Company's facilities are subject to state licensure laws.
Federal laws require certain of the Company's facilities to comply with rules
applicable to controlled substances. These rules include an obligation to
register with the Drug Enforcement Administration of the United States
Department of
8
<PAGE>
Justice and to meet certain requirements concerning security, record keeping,
inventory controls, prescription and order forms and labeling. The Company's
pharmacists, nurses, and certain of its radiology equipment also are subject to
state licensing requirements. The Company believes that it is in compliance with
all applicable licensure requirements.
MALPRACTICE LIABILITY. The provision of home healthcare services entails an
inherent risk of claims of medical and professional malpractice liability. The
Company may be named as a defendant in such malpractice lawsuits, and is subject
to the attendant risk of substantial damage awards. While the Company believes
it has adequate professional and medical malpractice liability insurance
coverage, there can be no assurance that a future claim or claims will not be
successful or if successful will not exceed the limits of available insurance
coverage or that such coverage will continue to be available at acceptable costs
and on favorable terms. See "Business."
COMPETITION. The Company's business is highly competitive. In each of its
markets, the Company competes with one or more national retail pharmacy chains
(including Eckerd's and CVS), regional retail pharmacy chains, local retail
pharmacy chains, independent retail pharmacies, deep discount retail pharmacies
(including Walgreen's), supermarkets (including Kroger's and Brookshire's),
discount department stores (including Wal-Mart and K-Mart), mass merchandisers
and other retail stores and mail order operations. Most of these competitors
have financial resources that are substantially greater than those of the
Company. Competition among retail pharmacies generally takes the form of price
competition, store location, product selection and customer service.
The Company has not yet implemented its plan to expand its home healthcare
services through its stores, but as such plan is implemented, the Company's
stores offering home healthcare services will compete with other larger
providers of home healthcare services including chain operations and independent
single unit stores which are more established in that market. The market for
home healthcare services is highly competitive. Many of the Company's existing
and potential competitors have substantially greater financial, marketing and
personnel resources than the Company and have established generally greater name
recognition in the home healthcare industry. Most of the Company's competitors
also offer more extensive home healthcare services than the Company. There can
be no assurance the Company will be able to successfully compete with its
competitors in the home healthcare industry. See "Business-- Competition."
GEOGRAPHIC CONCENTRATION. Currently, nine of the Company's 14 retail
pharmacies are located in Texas, and other retail pharmacies located in Texas
may be acquired by the Company. Consequently, the Company's results of
operations and financial condition are dependent upon general trends in the
Texas economy. Although the Texas economy was heavily dependent upon
commodity-based industries such as oil and gas and agriculture during the 1980s,
the Texas economy has, during the 1990s, become more closely correlated to the
national economy. While retail sales in the state of Texas have been consistent
with the generally favorable national economy during the past five years, there
can be no assurance that this trend will continue or that retail spending will
not decline in the future.
SUBSTANTIAL INDEBTEDNESS. In connection with the Company's acquisition of
retail pharmacies, the Company has incurred substantial debt. At March 31, 1997,
the Company had long-term obligations (including current maturities) of
$1,716,649, notes payable of $2,128,642 (including $948,642 debt incurred in
connection with the acquisition of the Vista Stores) and accounts payable of
$1,664,186, a substantial portion of which is payable under a 30-day credit
arrangement with its primary supplier. While the Company intends to use a
portion of the proceeds from this Offering to satisfy $1,475,000 of its notes
payable and $100,000 of its long-term obligations, the Company may incur
additional indebtedness in the future in connection with its planned acquisition
of additional stores. In addition, the Company's ability to make cash payments
to satisfy its substantial indebtedness will depend upon its future operating
performance, which is subject to a number of factors including prevailing
economic conditions and financial, business and other factors beyond the
Company's control. Based on the Company's ability to generate cash
9
<PAGE>
flow from operating activities, management believes that the Company will have
the funds necessary to meet the principal and interest payments on its debt as
they become due and to operate and expand its business. However, there can be no
assurance that the Company will be able to do so. If the Company is unable to
generate sufficient earnings and cash flow to meet its obligations with respect
to its outstanding indebtedness, refinancing of certain of these debt
obligations or disposition of certain assets may be required. In the event debt
refinancing is required, there can be no assurance that the Company can effect
such refinancing on satisfactory terms. Although the Company is current in its
payments to its lenders, it is in breach of several covenants under a loan
agreement covering certain demand notes, including a covenant prohibiting
payment of dividends or distributions to shareholders. The referenced loan
agreement covers certain notes payable totaling $1,180,000 at March 31, 1997 and
such outstanding amounts will be repaid with the proceeds of this Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Use of Proceeds."
POSSIBLE NEED FOR ADDITIONAL CAPITAL. Although the Company believes that
the proceeds from this Offering combined with operating revenues will be
adequate to satisfy its capital requirements for at least 12 months following
the termination of the Offering, circumstances, including the acquisition of
additional stores, may require the Company to obtain long or short-term
financing to realize certain business opportunities. No assurance can be made
that such financing will be obtained. See "--Substantial Indebtedness," "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
RELIANCE ON SINGLE SUPPLIER. The Company currently purchases approximately
83.6% of its inventory from Bergen Brunswig Drug Co. ("Bergen Brunswig"). Bergen
Brunswig also provides the Company with order entry machines, shelf labels and
other supplies used in connection with the Company's purchase and sale of such
inventory. The Company believes that the wholesale pharmaceutical and
non-pharmaceutical distribution industry is highly competitive because of the
consolidation of the retail pharmacy industry and the practice of certain large
retail pharmacy chains to purchase directly from product manufacturers.
Accordingly, the Company believes that it could obtain its inventory through
another similar distributor at competitive prices and upon competitive payment
terms in the event its relationship with Bergen Brunswig was terminated. See
"Business--Purchasing and Distribution."
DEPENDENCE ON KEY PERSONNEL. The Company's future success will be highly
dependent on the continued efforts of Rick D. McCord, R.Ph., President and Chief
Operating Officer; Sy S. Shahid, Executive Vice President and Secretary; and
David W. Frauhiger, Chief Financial Officer and Treasurer. The Company has
employment agreements with Messrs. McCord, Shahid and Frauhiger, and owns key
man life insurance policies on each such individual. Notwithstanding the
foregoing, the loss of the services of one or more of such key personnel could
have a material adverse effect upon the Company's results of operations.
The Company's success is also dependent upon its ability to attract and
retain experienced retail managers, pharmacists, and employees skilled in home
healthcare services, and the ability of the Company's personnel to manage the
Company's growth and integrate its operations. There can be no assurance that
the Company will be successful in attracting and retaining such personnel. See
"Management."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company
expects to experience fluctuations in future quarterly operating results that
may be caused by many factors, including the number and timing of store
acquisitions, additional and existing competition, marketing programs, weather,
special or unusual events and national, regional and local economic conditions
that may affect retailers in general. Any concentration of acquisitions near the
end of a quarter could have an adverse effect on the financial results for that
quarter and could, in certain circumstances, lead to fluctuations in quarterly
financial results. Furthermore, the retail pharmacy business is somewhat
seasonal, with the highest net sales and net income levels historically
occurring during the fourth and following first quarters of each year (which
include the holiday selling season). The Company's results of operations depend
significantly upon the net
10
<PAGE>
sales generated during the first and fourth quarters, and any decrease in net
sales for such periods could have a material adverse effect upon the Company's
profitability. As a result, the Company believes that period-to-period
comparisons of its results of operations are not and will not necessarily be
meaningful, and should not be relied upon as an indication of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
CONTROL BY MANAGEMENT. The Company's executive officers and directors and
their respective affiliates will beneficially own an aggregate of approximately
32% of the Company's outstanding shares of Common Stock after the Offering
(approximately 30% if the Underwriters' over-allotment option is exercised in
full). Such shareholders, if voting together, may, as a practical matter, have
sufficient voting power to elect the board of directors of the Company (the
"Board of Directors"), exercise significant control over the business, policies
and affairs of the Company and, in general, determine the outcome of any
corporate transaction or other matters submitted to the shareholders for
approval, such as any amendment to the Company's articles of incorporation (the
"Articles of Incorporation"), any merger, consolidation, sale of all or
substantially all of the Company's assets or "going private" transactions and
prevent or cause a change in control of the Company, all of which may adversely
affect the market price of the Common Stock. See "Principal Shareholders."
POSSIBLE ISSUANCES OF PREFERRED STOCK. The Company's Articles of
Incorporation authorize the Board of Directors, without shareholder approval, to
issue up to 1,000,000 shares of preferred stock, $.01 per share par value (the
"Preferred Stock"). The number of shares of each series and the designations,
powers, preferences, qualifications, limitations or restrictions of each series
shall be determined by the Board of Directors. The possible effects of such
issuances include the grant of voting rights to holders of Preferred Stock
superior to that of the holders of Common Stock, the grant of preferences in the
payment of dividends and upon liquidation of the Company in favor of the holders
of Preferred Stock, and the conferral of conversion rights which entitle the
holders of Preferred Stock to convert their shares into Common Stock, thereby
resulting in possible future dilution to the holders of Common Stock. The
issuance of the Preferred Stock could have the effect of delaying or preventing
a change in control of the Company. See "Description of Securities--Preferred
Stock."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Texas Business
Corporation Act (the "Texas Act") may delay, discourage or prevent a change in
control of the Company. Such provisions may discourage bids for the Common Stock
at a premium over the market price of the Common Stock and may adversely affect
the market price and the voting and other rights of the holders of Common Stock.
In addition, the Board of Directors has the authority without action by the
Company's shareholders to fix the rights, privileges and preferences of and to
issue shares of the Company's Preferred Stock which may have the effect of
delaying, deterring or preventing a change in control of the Company. See
"Description of Securities--Preferred Stock."
In addition to the authorization of Preferred Stock, the Company's Articles
of Incorporation and Bylaws include several other provisions which may have the
effect of inhibiting a change of control of the Company. These include the
division of the Board of Directors into three classes serving staggered three
year terms (which could delay or prevent shareholders from effecting a change of
control of the Company), no shareholder action by written consent and advance
notice requirements for shareholder proposals and director nominations. The
provisions may discourage a party from making a tender offer for or otherwise
attempting to obtain control of the Company. The Board of Directors does not
currently have any plans, arrangements, commitments or understandings to issue
any Preferred Stock.
SUBSTANTIAL DILUTION. On the basis of an assumed offering price of $5.00
per share, this Offering involves an immediate dilution of approximately $2.79
per share of Common Stock (approximately 56% of the offering price per share)
between the offering price per share and the pro forma net tangible book value
per share of the Common Stock immediately after the completion of this Offering.
See "Dilution."
11
<PAGE>
BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS. The Company's current
shareholders will benefit from the Offering, principally through the creation of
a public market for the Common Stock and the potential unrealized gains in the
value of the Common Stock held by them. Based upon the difference between the
initial public offering price of $5.00 per share and the average price per share
of $1.64 paid by such current shareholders, the current shareholders will have
potential unrealized gains of $3.36 per share, or an aggregate of $3,636,945.
See "Dilution." In addition, current shareholders will receive a cumulative
distribution of $300,000 out of the proceeds of this Offering. See "Dividend
Policy" and "Use of Proceeds."
LIMITED UNDERWRITING EXPERIENCE. Capital West, one of the Underwriters, was
first registered as a broker-dealer in May 1995 and has participated in six
public equity offerings as an underwriter, acting as a manager or co-manager in
three of those offerings. Prospective purchasers of the securities offered
hereby should consider this limited experience in evaluating this Offering. See
"Underwriting."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to the Offering, there has been no public market for the Common Stock. Although
the Company's Common Stock has been approved for listing on the American Stock
Exchange under the trading symbol "HZP," there can be no assurance that an
active public market will develop for the Common Stock. The initial public
offering price was determined solely through negotiations among the Company and
representatives of the Underwriters based on several factors, and may not be
indicative of the market price for the Common Stock after the completion of the
Offering. Among the factors considered in such negotiations were prevailing
market conditions, the results of operations of the Company in recent periods,
the market capitalizations and stages of development of other companies which
the Company and the Underwriters believe to be comparable to the Company,
estimates of the business potential of the Company and the present state of the
Company's development. See "Underwriting."
Moreover, the trading price of the Company's Common Stock could be subject
to fluctuations in response to quarterly variations in results of operations,
announcements of new services or products by the Company or its competitors,
changes in financial estimates by securities analysts and other events or
factors. See "Business." Recent history relating to the market prices of other
newly public companies indicates that the market price of the Company's Common
Stock following the Offering may be highly volatile. At various times, the stock
market has experienced volatility that has particularly affected the market
prices for stock of particular industry groups, such as retail-oriented
companies, often without regard to a particular company's operating results.
POSSIBLE DELISTING FROM THE AMERICAN STOCK EXCHANGE; DISCLOSURE RELATED TO
LOW PRICED STOCKS. Although the Company's application for listing of the Common
Stock on the American Stock Exchange has been approved subject to notice of
issuance, there can be no assurance that a trading market will develop or, if
developed, that it will be maintained. In addition, there can be no assurance
that the Company will in the future meet the maintenance criteria for continued
quotation of the securities on the American Stock Exchange. The maintenance
criteria for the American Stock Exchange include, among other things,
stockholders' equity of at least $2,000,000, a public float of at least 200,000
shares (exclusive of shares held by officers, directors, controlling
shareholders and other restricted shares) together with a minimum of 300 public
holders, and an aggregate market value of shares publicly held of $1,000,000.
The American Stock Exchange may also delist the Company's Common Stock in the
event the Common Stock sells for a substantial period of time for a low price
per share. If the Company was removed from the American Stock Exchange, trading,
if any, in the Common Stock would thereafter have to be conducted on the Nasdaq
SmallCap Market, in the over-the-counter market in the so-called "pink sheets"
or, if then available, the NASD's OTC Electronic Bulletin Board. As a result, an
investor would find it more difficult to dispose of, and to obtain accurate
quotations as to the value of, such securities.
In addition, if the Common Stock is delisted from trading on the American
Stock Exchange and the trading price of the Common Stock is less than $5.00 per
share at a time when the net tangible assets of the
12
<PAGE>
Company are less than $5,000,000, trading in the Common Stock would also be
subject to the requirements of Rule 15g-9 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Under such rule,
broker-dealers who recommend such low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction. The Securities Enforcement Remedies
and Penny Stock Reform Act of 1990 also requires additional disclosure in
connection with any trades involving a stock defined as a penny stock
(generally, according to recent regulations adopted by the Commission, any
equity security not traded on an exchange or quoted on the Nasdaq SmallCap
Market that has a market price of less than $5.00 per share, subject to certain
exceptions), including (i) the delivery, prior to any penny stock transaction,
of a disclosure schedule explaining the penny stock market and the risks
associated therewith; (ii) the delivery, orally or in writing prior to effecting
the transaction, and in writing at or prior to the time that any written
confirmation of the transaction is given or sent to the customer, of (a) current
bid and offer quotations for the penny stock; and (b) disclosure of the
aggregate amount of any compensation received by the broker or dealer and its
sales persons in connection with such transaction; and (iii) the delivery of
monthly account statements showing the market value of each penny stock held in
the customer's account. Such requirements could severely limit the market
liquidity of the Common Stock and the ability of purchasers in this Offering to
sell their securities in the secondary market. There can be no assurance that
the Common Stock will not be delisted or treated as a penny stock.
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of shares of Common Stock by
the Company or its existing shareholders, or the perception that such sales may
occur, could adversely affect the market price of the Common Stock. Upon
completion of the Offering, 2,282,424 shares of Common Stock will be outstanding
(2,462,424 shares outstanding assuming exercise of the Underwriters'
over-allotment option in full). Additionally, the Company may in the future
issue significant amounts of Common and/or Preferred Stock to finance
acquisition and development activities. Of the outstanding shares, the 1,200,000
shares (1,380,000 shares assuming the Underwriters' over-allotment option is
exercised in full) sold in the Offering, and 753,994 shares held by existing
shareholders, will be tradeable without restriction by persons other than
"affiliates" of the Company. The remaining 328,430 shares of Common Stock to be
outstanding after the Offering are "restricted securities" within the meaning of
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act") and
may not be publicly resold, except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, including that provided by Rule 144 promulgated under the
Securities Act.
The directors and executive officers of the Company collectively will hold
741,352 shares (the "Affiliate Shares"), or approximately 32%, of the
outstanding shares of Common Stock after the Offering. Such individuals have
agreed not to, directly or indirectly, offer, sell, assign, transfer, encumber,
pledge, contract to sell, grant an option to purchase or otherwise dispose of
any Common Stock for a period of 24 months after the date of this prospectus
without the prior written consent of the Underwriters. Upon expiration of the
24-month lockup period, the Affiliate Shares will be eligible for immediate
resale without restriction under the Securities Act, subject, in certain cases,
to certain volume, timing and other requirements of Rule 144 promulgated under
the Securities Act. Sales of substantial amounts of Common Stock, or the
perception that such sales could occur, could adversely affect the prevailing
market price of the Common Stock. See "Shares Eligible for Future Sale" and
"Underwriting."
DIVIDEND POLICY. The Company has previously made cash distributions to its
shareholders and intends to distribute $300,000 to its existing shareholders out
of the proceeds of this Offering. The Company does not anticipate paying any
cash dividends on the Common Stock in the foreseeable future. See "Dividend
Policy." Approximately 45% of the intended distribution of $300,000 of the
proceeds of this Offering is being paid to mitigate such shareholders' expected
state and Federal income taxes payable in connection with the Company's S
corporation status from January 1, 1997 to the date of the termination of such
status.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,200,000 shares of
Common Stock being offered hereby are estimated to be approximately $5,000,000
(approximately $5,783,000 if the Underwriters' over-allotment option is
exercised in full), assuming an initial offering price of $5.00 per share and
after deducting the estimated underwriting discounts and commissions and
offering expenses. The Company expects to use the net proceeds (assuming no
exercise of the Underwriters' over-allotment option) approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
USE DOLLAR AMOUNT NET PROCEEDS
- ------------------------------------------------------ -------------- ---------------
<S> <C> <C>
Repayment of certain existing indebtedness............ $1,575,000 31.5%
Acquisitions.......................................... 2,375,000 47.5%
Working capital and general corporate purposes........ 750,000 15.0%
Distribution to existing shareholders................. 300,000 6.0%
-------------- -----
Total................................................. $5,000,000 100.0%
-------------- -----
-------------- -----
</TABLE>
The Company plans to use approximately $1.15 million of the net proceeds to
repay the principal amount expected to be outstanding at the close of this
Offering under the Company's credit agreement with Bergen Brunswig (the "Bergen
Brunswig Loan"). The proceeds of the Bergen Brunswig Loan were used primarily
for the Company's acquisitions of six retail pharmacies located in Farmington,
New Mexico; McLoud, Oklahoma; Cleburne, Texas; Covington and Marion, Virginia;
and Tomah, Wisconsin. The Bergen Brunswig Loan bears interest at 2% above the
prime rate announced from time to time by two banks. As of March 31, 1997, the
effective interest rate on the Bergen Brunswig Loan was 10.5%. In addition,
$325,000 will be paid to retire a portion of the debt incurred in connection
with the Company's acquisition of the Vista Stores in March 1997, which bears
interest at the rate of 8.5% and matures December 25, 1997, and $100,000 will be
paid to retire certain debt incurred in connection with the redemption of the
Common Stock held by a former shareholder.
The Company will use approximately $2.4 million of the net proceeds of the
Offering and may, in the future, incur additional debt, in connection with the
acquisition of additional stores. The Company continually reviews acquisition
proposals and is currently engaged in discussions with third parties with
respect to possible acquisitions; however, the Company has no current agreements
or commitments with respect to any potential acquisition.
The Company will distribute $300,000 of the net proceeds to its existing
shareholders. Approximately 45% of such distribution is intended to mitigate
such shareholders' 1997 state and Federal tax liabilities accruing as a result
of the Company's S corporation status from January 1, 1997 to the date such
status will be terminated.
Any remaining net proceeds are to be used for working capital and other
general corporate purposes. Pending application of the proceeds described above,
the net proceeds of the Offering will be invested in short-term, investment
grade, interest-bearing securities.
DIVIDEND POLICY
The Company does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company intends to retain earnings in order to provide
funds for use in the operation and expansion of its business. Notwithstanding
the Company's future intentions respecting the payment of dividends, a
distribution of $300,000 will be made from the proceeds of this Offering to the
Company's shareholders. Approximately 45% of such distribution is being paid for
the purpose of mitigating the state and Federal
14
<PAGE>
income tax liability expected to be incurred by such shareholders in connection
with the Company's S corporation status from January 1, 1997 until the date of
the termination of such status. See "Use of Proceeds."
The payment of dividends, if any, in the future is within the discretion of
the Board of Directors and will depend on the Company's earnings, its capital
requirements, restrictions imposed by lenders and financial condition, and other
relevant factors.
DILUTION
At March 31, 1997, net tangible book value of the Company's Common Stock was
approximately $489,000, or $.45 per share. Net tangible book value per share of
Common Stock is defined as total tangible assets of the Company less total
liabilities, divided by the total number of shares of Common Stock outstanding.
The consummation of this Offering will result in a pro forma net tangible book
value of $2.21 per share which will represent an immediate dilution of $2.79 per
share to new investors purchasing shares of Common Stock in this Offering,
assuming an initial public offering price of $5.00 per share.
The following table summarizes the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price paid per share by existing shareholders and new investors
purchasing shares in this Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders (cash)...................... 1,082,424 47.4% $ 1,771,127 22.8% $ 1.64
New investors..................................... 1,200,000 52.6% 6,000,000 77.2% 5.00
---------- --------- ------------ ---------
Total............................................. 2,282,424 100.0% $ 7,771,127 100.0% $ 3.40
---------- --------- ------------ ---------
---------- --------- ------------ ---------
</TABLE>
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997 and as adjusted to give effect to the sale of the 1,200,000 shares of
Common Stock offered hereby at an assumed per-share price of $5.00 and the
application of the estimated net proceeds as described under "Use of Proceeds."
This table should be read in conjunction with "Use of Proceeds," "Pro Forma
Combined Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------
ACTUAL AS ADJUSTED(3)
------------ --------------
<S> <C> <C>
Notes Payable....................................................................... $ 2,128,642 $ 653,642
Long-term obligations, including current portion.................................... 1,716,649 1,616,649
Shareholders' Equity:
Common Stock; $.01 par value, 14,000,000 shares authorized; 1,082,424 shares
issued and outstanding; 2,282,424 shares as adjusted(1)(2)...................... 10,824 22,824
Preferred Stock; $.01 par value, 1,000,000 shares authorized, no shares issued and
outstanding, actual or adjusted................................................. -- --
Additional paid-in capital........................................................ 1,760,303 6,360,303
Retained Earnings................................................................. 124,474 --
------------ --------------
Total shareholders' equity........................................................ 1,895,601 6,383,127
------------ --------------
Total Capitalization................................................................ $ 5,740,892 $ 8,653,418
------------ --------------
------------ --------------
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock reserved for issuance pursuant to the
Company's 1997 Stock Option Plan, estimated at 246,242. See
"Management--1997 Stock Option Plan" and "Description of Securities."
(2) Reflects a 2-for-1 stock split for shares of Common Stock.
(3) The as adjusted amounts consider the effect of the Offering and the expected
application of its net proceeds.
16
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth the historical operating results and selected
balance sheet data of the Company since beginning operations in February 1994 as
an S corporation. The historical information has been adjusted to provide pro
forma charges for income taxes as explained below. The information should be
read in conjunction with the historical financial statements and the Pro Forma
Combined Financial Data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER THREE MONTHS ENDED
FEBRUARY 28, 31, MARCH 31,
1994 TO DECEMBER --------------------- ----------------------
31, 1994(1) 1995 1996 1996 1997
---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
INCOME STATEMENT DATA:
NET SALES:
Prescription drugs................................. $ 1,387 $ 5,235 $ 10,515 $ 1,989 $ 4,060
Other.............................................. 284 1,035 2,621 378 1,053
------- --------- ---------- ---------- ----------
Total net sales...................................... 1,671 6,270 13,136 2,367 5,113
COST OF SALES:
Prescription drugs................................. 902 3,595 7,310 1,321 2,810
Other.............................................. 174 777 1,632 283 649
------- --------- ---------- ---------- ----------
Total cost of sales.................................. 1,076 4,372 8,942 1,604 3,459
------- --------- ---------- ---------- ----------
Gross profit......................................... 595 1,898 4,194 763 1,654
Selling, general and administrative expenses......... 396 1,519 3,471 580 1,322
Depreciation and amortization........................ 30 100 172 32 58
------- --------- ---------- ---------- ----------
Income from operations............................... 169 279 551 151 274
Interest expense and other, net...................... 15 103 249 41 53
------- --------- ---------- ---------- ----------
Income before income taxes(2)........................ 154 176 302 110 221
Pro forma provision for income taxes(2).............. 54 61 106 38 77
------- --------- ---------- ---------- ----------
Pro forma net income(2).............................. $ 100 $ 115 $ 196 $ 72 $ 144
------- --------- ---------- ---------- ----------
------- --------- ---------- ---------- ----------
Pro forma net income per share(2).................... $ 0.19 $ 0.12 $ 0.18 $ 0.07 $ 0.13
Shares used in computation........................... 539,258 957,733 1,074,246 1,058,000 1,142,424
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996 MARCH 31, 1997
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Working capital................................................. $ 600 $ 1,029 $ 1,563 $ 1,057
Total assets.................................................... 1,268 3,545 6,589 8,350
Long-term obligations........................................... 346 930 1,467 1,338
Total liabilities............................................... 576 2,266 4,839 6,454
Shareholders' equity............................................ 692 1,279 1,750 1,896
</TABLE>
- ------------------------
(1) The Company was organized August 31, 1992 but had no operations until
February 28, 1994.
(2) The Company is organized as an S corporation and has not historically
included charges for income taxes. The pro forma provisions for income taxes
are based on a rate of 35% applied to income before income taxes in each of
the periods presented.
17
<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
The following unaudited Pro Forma Combined Condensed Statements of Income
for the year ended December 31, 1996 and the three months ended March 31, 1997
reflect the historical results of operations of the Company, adjusted to give
effect to the acquisition of the Farmington, New Mexico store (the "Farmington
Store") in April 1996 and the Vista Stores in March 1997 as though such stores
were acquired January 1, 1996 and to give pro forma effect to the Offering as
though it occurred January 1, 1996.
The Pro Forma Combined Condensed Balance Sheet as of March 31, 1997 reflects
the historical financial position of the Company as of that date adjusted to
give pro forma effect to the Offering as if it had occurred as of March 31,
1997.
The pro forma adjustments are based upon available information and
assumptions that management of the Company believes are reasonable and fairly
reflect all expenses associated with the acquired businesses. The Pro Forma
Combined Financial Data do not purport to represent the financial position or
results of operations which would have occurred had such transactions been
consummated on the dates indicated or the Company's financial position or
results of operations for any future date or period. These Pro Forma Combined
Condensed Financial Statements and notes thereto should be read in conjunction
with the historical financial statements and notes included elsewhere herein.
18
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------
FARMINGTON OTHER
VISTA STORE STORES PRO FORMA
COMPANY STORES (NOTE A) (NOTE A) ADJUSTMENTS
----------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net sales................................................. $ 13,136 $ 4,229 $ 1,247 $ 3,521
Costs and expenses:
Cost of sales........................................... 8,942 3,021 826 2,658
Depreciation and amortization........................... 172 10 8 -- $ (18)(1)
48(1)
Selling, general and administrative..................... 3,471 785 299 790 97(3)
----------- --------- ----------- ----------- -----
Total costs and expenses.................................. 12,585 3,816 1,133 3,448 127
----------- --------- ----------- ----------- -----
Income from operations.................................... 551 413 114 73 (127)
Interest expense and other, net........................... 249 -- -- -- 142(2)
----------- --------- ----------- ----------- -----
Income before income taxes................................ 302 413 114 73 (269)
Pro forma provision for income taxes (Note B)............. 106 145 40 26 (95)(4)
----------- --------- ----------- ----------- -----
Pro forma net income (Note B)............................. $ 196 $ 268 $ 74 $ 47 $ (174)
----------- --------- ----------- ----------- -----
----------- --------- ----------- ----------- -----
Pro forma net income per share (Note B)...................
Shares used in computation................................
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS
FOR FOR THE
ACQUISITIONS OFFERING PRO FORMA
----------- -------------- ------------
<S> <C> <C> <C>
Net sales................................................. $ 22,133 $ 22,133
Costs and expenses:
Cost of sales........................................... 15,447 15,447
Depreciation and amortization........................... 220 220
Selling, general and administrative..................... 5,442 5,442
----------- ----- ------------
Total costs and expenses.................................. 21,109 21,109
----------- ----- ------------
Income from operations.................................... 1,024 1,024
Interest expense and other, net........................... 391 $ (168)(6) 223
----------- ----- ------------
Income before income taxes................................ 633 168 801
Pro forma provision for income taxes (Note B)............. 222 56(7) 278
----------- ----- ------------
Pro forma net income (Note B)............................. $ 411 $ 112 $ 523
----------- ----- ------------
----------- ----- ------------
Pro forma net income per share (Note B)................... $ 0.23
------------
------------
Shares used in computation................................ 2,274,246
------------
------------
</TABLE>
- ------------------------
Note A: The Farmington Store was acquired by the Company April 27, 1996. The
amounts shown for the Farmington Store are for the period January 1,
1996 to April 26, 1996. Additionally, the Company acquired three other
stores in 1996 (one in July 1996 and two in November 1996). The
historical results of these stores are included for the months in 1996
prior to their respective acquisition.
Note B: The adjustments do not include a provision (non-recurring) for deferred
income taxes, resulting from a change in S corporation status, related
to the tax effect of cumulative differences in financial and tax bases
of net assets of approximately $131,000 ($.06 per share) at January 1,
1996.
19
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ ADJUSTMENTS
VISTA PRO FORMA PRO FORMA FOR FOR THE
COMPANY STORES(A) ADJUSTMENTS ACQUISITIONS OFFERING PRO FORMA
----------- ----------- -------------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................... $ 5,113 $ 779 $ 5,892 $ 5,892
Costs and expenses:
Cost of sales......................... 3,459 592 4,051 4,051
Depreciation and amortization......... 58 3 $ (3)(1) 64 64
6(1)
Selling, general and administrative... 1,322 133 -- 1,455 1,455
----------- ----- --- ------ --- ----------
Total costs and expenses................ 4,839 728 3 5,570 5,570
----------- ----- --- ------ --- ----------
Income from operations.................. 274 51 (3) 322 322
Interest expense and other, net......... 53 -- 14(2) 67 $ (39)(6) 28
----------- ----- --- ------ --- ----------
Income before income taxes.............. 221 51 (17) 255 39 294
Pro forma provision for income taxes
(Note B).............................. 77 19 (6)(4) 90 14(7) 104
----------- ----- --- ------ --- ----------
Pro forma net income (Note B)........... $ 144 $ 32 $ (11) $ 165 $ 25 $ 190
----------- ----- --- ------ --- ----------
----------- ----- --- ------ --- ----------
Pro forma net income per share (Note
B).................................... $ .08
----------
----------
Shares used in computation.............. 2,342,424
</TABLE>
- ------------------------
Note A: The Vista Stores were acquired by the Company March 6 and 7, 1997. The
amounts shown for the Vista Stores are for the period January 1, 1997
to February 28, 1997.
Note B: The adjustments do not include a provision (non-recurring) for deferred
income taxes, resulting from a change in S corporation status, related
to the tax effect of cumulative differences in financial and tax bases
of net assets of approximately $149,000 ($.06 per share) at January 1,
1997.
20
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE
HISTORICAL OFFERING PRO FORMA
----------- ------------ -----------
<S> <C> <C> <C>
Current assets:
Cash...................................................................... $ 110 $ 3,125(5) $ 3,235
Accounts receivable....................................................... 2,051 2,051
Inventories............................................................... 3,986 3,986
Prepaid expenses.......................................................... 27 27
----------- ------------ -----------
Total current assets........................................................ 6,174 3,125 9,299
Deferred offering costs..................................................... 64 (64)(5)
Property and equipment, net................................................. 770 770
Intangibles, net............................................................ 1,342 1,342
----------- ------------ -----------
Total assets................................................................ $ 8,350 $ 3,061 $ 11,411
----------- ------------ -----------
----------- ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................................ $ 730 $ 730
Accounts payable.......................................................... 1,664 1,664
Accrued liabilities....................................................... 214 214
Notes payable............................................................. 2,129 $ (1,475)(5) 654
Current portion of long-term obligations.................................. 379 379
----------- ------------ -----------
Total current liabilities................................................... 5,116 (1,475) 3,641
Deferred income taxes....................................................... -- 149(8) 149
Long-term obligations....................................................... 1,338 (100)(5) 1,238
Shareholders' equity:
Common stock.............................................................. 11 12(5) 23
Additional paid-in capital................................................ 1,760 4,924(5)
(324)(9) 6,360
Retained earnings......................................................... 125 (149)(8)
(300)(5)
324(9) --
----------- ------------ -----------
Total shareholders' equity.................................................. 1,896 4,487 6,383
----------- ------------ -----------
Total liabilities and shareholders' equity.................................. $ 8,350 $ 3,061 $ 11,411
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
21
<PAGE>
ADJUSTMENTS TO PRO FORMA FINANCIAL STATEMENTS
ACQUISITIONS OF STORES:
(1) Adjust depreciation and amortization of acquired equipment and intangibles
to reflect new basis in acquired stores:
<TABLE>
<S> <C>
Eliminate historical depreciation of Vista and Farmington stores:
Year ended December 31, 1996.................................... $ 18,000
---------
---------
Three months ended March 31, 1997............................... $ 3,000
---------
---------
Provide depreciation and amortization on acquired bases in
equipment and intangibles:
Equipment--7 year life--purchase price allocated:
Vista stores.................................................. $ 60,000
Farmington store.............................................. $ 75,000
Other stores.................................................. $ 10,000
Intangibles--5 to 20 year life--purchase price allocated:
Vista stores.................................................. $ 390,000
Farmington store.............................................. $ 125,000
Other stores.................................................. $ 40,000
Year ended December 31, 1996:
Depreciation of equipment--
Vista stores.................................................. $ 9,000
Farmington store.............................................. 2,000
Other stores.................................................. 1,000
Amortization of intangibles--
Vista stores.................................................. 30,000
Farmington store.............................................. 2,000
Other stores.................................................. 4,000
---------
Total....................................................... $ 48,000
---------
---------
Three months ended March 31, 1997:
Vista stores
Depreciation of equipment..................................... $ 1,000
Amortization of intangibles................................... 5,000
---------
Total....................................................... $ 6,000
---------
---------
</TABLE>
(2) Provide for interest expense on debt issued in acquisitions:
<TABLE>
<CAPTION>
INTEREST
------------------------
ACQUISITIONS DEBT RATE ADJUSTMENTS
- ----------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Vista stores............................................... $ 999,000 8.6% $ 86,000
Farmington store........................................... $ 662,000 9% 17,000
Other stores............................................... $ 601,000 10.3% 39,000
-----------
Year ended December 31, 1996............................... $ 142,000
-----------
-----------
Three months ended March 31, 1997:
(Vista stores)........................................... $ 14,000
-----------
-----------
</TABLE>
22
<PAGE>
(3) Record additional compensation expense related to management personnel (two
persons) converted from part-time to full-time positions to supervise stores
acquired in 1996 and 1997:
<TABLE>
<S> <C>
Annualized salary and bonus for 1996............................ $ 180,000
Actual compensation for 1996 (part-time employment basis)....... (83,000)
---------
$ 97,000
---------
---------
</TABLE>
(4) Adjust pro forma income taxes (at a rate of 35%) for acquisition
adjustments:
<TABLE>
<S> <C>
Year ended December 31, 1996.................................... $ 95,000
---------
---------
Three months ended March 31, 1997............................... $ 6,000
---------
---------
</TABLE>
THE OFFERING:
(5) Record the issuance of 1,200,000 shares of Common Stock of the Company in
connection with this Offering and the payment of debt and distributions to
existing shareholders from the proceeds:
<TABLE>
<S> <C>
Estimated Offering proceeds..................................... $6,000,000
Estimated expenses of Offering.................................. 1,000,000
Estimated net proceeds of Offering.............................. 5,000,000
Repayment of existing indebtedness.............................. 1,575,000
Distributions to existing shareholders.......................... 300,000
---------
Estimated net cash proceeds..................................... $3,125,000
---------
---------
</TABLE>
(6) Reduce interest expense including pro forma amounts related to acquisitions
related to repayment of debt of $1,575,000 including $1,150,000 notes
payable, at prime + 2%; $325,000 note payable, at 8.5% and $100,000 note
payable, at prime + 4%:
<TABLE>
<S> <C>
Year ended December 31, 1996.................................... $ 168,000
---------
---------
Three months ended March 31, 1997............................... $ 39,000
---------
---------
</TABLE>
(7) Record income tax effects (at a rate of 35%) of adjustments:
<TABLE>
<S> <C>
Year ended December 31, 1996.................................... $ 56,000
---------
---------
Three months ended March 31, 1997............................... $ 14,000
---------
---------
</TABLE>
(8) Record deferred income taxes on cumulative differences in financial and tax
bases of net assets at date of change from S corporation status as a result
of the Offering assuming change of tax status at March 31, 1997:
<TABLE>
<S> <C>
$ 149,000
---------
---------
</TABLE>
(9) Reclassify net accumulated deficit, after the Offering, as paid in capital
as a result of termination of Subchapter S election:
<TABLE>
<S> <C>
$ 324,000
---------
---------
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's principal business strategy since commencing operations in
1994 has been to establish a chain of retail pharmacies through the acquisition
of free-standing full-line retail pharmacies. In evaluating a retail pharmacy
for potential acquisition, the Company (i) evaluates the target store's profits
and losses for preceding years; (ii) reviews the store's tax returns for
preceding years; (iii) reviews computer-generated prescription reports showing
historical information including prescriptions sold, average price of each
prescription, gross margins and trends in prescription sales; (iv) analyzes the
store's location and competition in the immediate area; (v) reviews the store's
lease agreement, if any; and (vi) assesses targeted areas for growth patterns
and trends. Based on the Company's analysis of the foregoing items, the Company
prepares an offer to purchase the particular store. To assess the reasonableness
of the purchase price offered by a seller, the Company considers the anticipated
rate of return, payback period, and the availability and terms of seller
financing, it being generally desired that 50% of the purchase price be
seller-financed with the balance split between cash and other consideration such
as Company stock.
In each of 1994, 1995 and 1996 the Company acquired three, four and four
retail pharmacies, respectively. These acquisitions are the principal influence
on the Company's results of operations and financial condition. The primary
measurement of the effect of acquisitions on the Company's operating performance
is the number of store operating months, which is the number of months all
stores were owned by the Company during the relevant measuring period.
Acquisitions are expected to continue as the most significant factor in the
Company's growth strategy.
Currently, the Company's primary source of revenue is the sale of
prescription drugs. During 1996, sales of prescription drugs generated 80.0% of
the Company's net sales; in the first quarter of 1997, prescription drugs
generated 79.4% of sales. Management expects the Company's prescription drug
business to continue to increase on an annual basis as a result of the
demographic trends towards an aging population and the continued development of
new pharmaceutical products. However, the Company anticipates that such sales
will decrease as a percentage of the Company's overall sales and gross margins
as the Company expands its home healthcare and other non-pharmaceutical sales
and services which have historically generated higher margins.
The Company's sales and profits are higher during peak holiday periods and
from Christmas through Easter. Sales of health-related products peak during
seasonal outbreaks of cough and cold/flu viruses, which typically occur during
the winter and spring. Accordingly, sales and profits are typically highest in
the fourth quarter and the first quarter of the ensuing year.
24
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain income
statement data:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Prescription drugs................................................ 83.5% 80.0% 84.0% 79.4%
Other............................................................. 16.5% 20.0% 16.0% 20.6%
--------- --------- --------- ---------
Total net sales................................................. 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales--prescription drugs(1).............................. 68.7% 69.5% 66.4% 69.2%
Cost of sales--other(2)........................................... 75.1% 62.3% 74.9% 61.7%
Selling, general and administrative expenses(3)................... 24.2% 26.4% 24.5% 25.9%
Depreciation and amortization(3).................................. 1.6% 1.3% 1.4% 1.1%
Interest expense(3)............................................... 1.8% 1.9% 1.8% 1.0%
PRO FORMA NET INCOME(3)(4).......................................... 1.8% 1.5% 3.0% 2.8%
</TABLE>
- ------------------------
(1) As a percentage of prescription drug sales.
(2) As a percentage of other sales.
(3) As a percentage of total net sales.
(4) After pro forma provisions for income taxes.
The Company's historical operating results include the operating results of
the Vista Stores after these acquisitions in March 1997. In connection with the
acquisition of the Vista Stores, the Company acquired certain accounts
receivable, supplies, furniture, fixtures and equipment, as well as intangible
assets including pharmacy files and goodwill. In consideration for the purchase
of such assets the Company paid $100,000 (proceeds from a note payable to a
shareholder) and executed a promissory note in the amount of $898,642 payable in
varying installments until December 25, 1997 and bearing interest at 8.5% per
year. Historically, the Vista Stores have had positive operating results,
recognizing net sales of $4,229,000 in 1996 and pro forma net income in 1996 of
$268,000. The Company expects that the Vista Stores will increase the Company's
income from operations, however, the extent to which the Vista Stores may
contribute is uncertain and there can be no assurance that such stores will
actually operate at a profit.
Intangible assets, including but not limited to goodwill, pharmacy files and
non-compete covenants, have historically represented a substantial portion of
the Company's acquisition costs. Such assets are generally amortized over a
period of not more than 20 years. Accordingly, the amortization of intangible
assets is not expected to have a significant effect on the Company's future
results of operations.
NET SALES
The Company's total net sales increased $2,746,667 or 116%, to $5,113,247 in
the first quarter of 1997 compared to $2,366,580 in the first quarter of 1996.
The increase was attributable primarily to the increase in store operating
months from 21 in the first quarter of 1996 to 36 in the first quarter of 1997.
Total net sales increased by $6,866,738 or 110%, to $13,136,319 in 1996, from
$6,269,581 in 1995. The increase was attributable primarily to the increase in
store operating months from 58 in 1995 to 101 in 1996.
Net sales of prescription drugs increased by $5,280,107, or 101% to
$10,515,353 for 1996 compared to $5,235,246 for 1995 and by $2,071,832, or 104%
to $4,060,266 for the first quarter of 1997 compared to $1,988,434 in the first
quarter of 1996. Third-party reimbursed sales accounted for approximately 52% of
25
<PAGE>
the Company's total prescription sales in 1996, as compared to 48% in 1995.
Higher reimbursement sales have typically resulted in a decrease in gross
margins due to the lower prices negotiated by third party payors. This decrease
has been more than offset, however, by the Company's efforts to manage inventory
levels and by purchasing efforts, resulting in a slight margin percentage
increase in 1996 as well as in the first quarter of 1997.
The following tables show the Company's prescription drug gross margins and
total sales margins for 1995, 1996 and the first quarters of 1996 and 1997:
<TABLE>
<CAPTION>
GROSS MARGINS ON GROSS MARGINS ON
PRESCRIPTION DRUG SALES TOTAL SALES
--------------------------- ---------------------------
YEAR AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- -------------------------------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
1996.................................. $ 3,205,973 30.5% $ 4,194,614 31.9%
1995.................................. 1,639,956 31.3% 1,897,774 30.3%
<CAPTION>
GROSS MARGINS ON GROSS MARGINS ON
PRESCRIPTION DRUG SALES TOTAL SALES
--------------------------- ---------------------------
FIRST QUARTER AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- -------------------------------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
1997.................................. $ 1,251,008 30.8% $ 1,654,743 32.4%
1996.................................. 668,152 33.6% 763,068 32.2%
</TABLE>
Sales of prescription drugs decreased from 83.5% of total sales for 1995 to
80.0% of total sales for 1996 and from 84.0% of total sales for the first
quarter of 1996 to 79.4% for the first quarter of 1997. The Company expects that
prescription drug sales will continue to decrease as a percentage of total sales
as the Company expands its home healthcare and other non-pharmaceutical sales
and services, whose gross margins exceed those of pharmaceutical sales.
Same store sales, which includes only the first three stores acquired by the
Company, decreased from $3,342,552 in 1995 to $3,265,627 in 1996. Management
believes the decrease is not representative of Company-wide sales because of the
small size of the comparison sample and the three stores subject to the
comparison are among the smallest stores in the Company's chain. Same store
sales for the Company's first seven stores increased from $2,366,580 in the
first quarter of 1996 to $2,558,755 in the first quarter of 1997. Management
believes that this 8.12% increase is primarily the result of increased
advertising and promotions as well as an enhanced product mix.
COSTS AND EXPENSES
Cost of sales increased $4,569,898 or 105%, to $8,941,705 in 1996 as
compared to $4,371,807 in 1995. For the first quarter of 1997, the cost of sales
increased $1,854,992, or 116%, to $3,458,504 as compared to $1,603,512 in the
first quarter of 1996. These increases are primarily the result of increased
sales volume due to the increased number of store operating months for the
respective periods. Cost of total sales as a percentage of total sales decreased
1.6% from 1995 to 1996 and .2% for the first quarter of 1997 from the first
quarter of 1996. These decreases are primarily the result of more favorable
pricing terms from the Company's primary wholesaler, as well as management's
continual monitoring and adjusting of pricing.
The increase of selling, general and administrative expenses from $1,519,439
in 1995 to $3,471,370 in 1996 and from $580,035 in the first quarter of 1996 to
$1,322,381 in the first quarter of 1997 are principally due to increased store
count and resulting increased store operating months. Such expenses, expressed
as a percentage of net sales, were 26.4% and 24.2% for 1996 and 1995, and 25.9%
and 24.5% for the first quarters of 1997 and 1996, respectively. These
percentage increases in expense were primarily due to increases in payroll
associated with the recruiting and hiring of personnel and costs associated with
the acquisition of the Company's corporate office building in 1996. Salary and
bonus expenses will increase by $83,737 in 1997 and $167,474 in 1998 as a result
of the execution of the Employment Agreements between
26
<PAGE>
the Company and Messrs. Frauhiger, Herr, McCord, Mueller and Shahid, and Ms.
Papaneri, respectively. The Company expects that such increases in salary and
bonus costs will be offset by the expected increase in revenues associated with
the Company's planned acquisition of additional retail pharmacy stores.
Interest expense was $252,767 in 1996 compared to $109,828 in 1995 and
$53,531 in the first quarter of 1997 compared to $42,660 in the first quarter of
1996. The increase in interest expense resulted primarily from the increase in
the Company's indebtedness associated with the Company's acquisition of four
stores and its corporate office building in 1996 and higher interest rates.
Because the Company has historically operated as an S Corporation, it has
not heretofore incurred any income taxes. As a result of the termination of its
S Corporation election in connection with this Offering, the Company will be a
taxpaying entity, and will be subject to the payment of taxes on all non-exempt
income at applicable Federal and state income tax rates.
EARNINGS
Pro forma net income for 1996 rose to $196,353 from $114,629 in 1995, and
continued to increase from $71,515 in the first quarter of 1996 to $143,528 in
the first quarter of 1997. Because the Company has maintained S corporation
status since 1994, no income taxes have been included in the determination of
historical net income.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities was $49,456 in 1996 and $287,519
in 1995. Although earnings have increased, less cash was provided by operations
largely due to increases in accounts receivable resulting from store
acquisitions. Typically, cash provided by operations is adequate to supply
working capital, and contribute to investing activities. External sources of
cash are used mainly to help finance store acquisitions. The Company believes
that the operating needs to be incurred in connection with its capital expansion
program, including growth in accounts receivable and inventory, will be funded
by cash flow from operations supplemented by the approximately $750,000 of the
proceeds from the Offering designated for working capital.
The Company will have available approximately $2,375,000 from the proceeds
of the Offering which will be used to support an aggressive store acquisition
program. The Company believes that based on prior acquisitions, the average
acquisition cost per store will be approximately $500,000 to $700,000 based on
such variables as store sales and profits. Management believes it will be able
to obtain seller financing for approximately 50% of the cost of each such
acquisition.
In addition to the expansion capital expected to be available from the
proceeds of the Offering, the Company has had discussions with Bank One, Texas,
N.A. with regard to a $2,000,000 credit facility which would be provided to the
Company upon completion of the Offering. Although the terms of the proposed
credit facility have not yet been approved by Bank One, Texas, N.A., such terms
may include restrictive covenants such as financial ratio requirements with
which the Company would have to comply to maintain the credit facility. No funds
have been borrowed under this credit facility. In the event the Company does not
obtain the credit facility, the Company will modify or reduce its acquisition
schedule. While management does not expect that the failure to obtain the credit
facility would adversely affect the Company's cash flow, there can be no
assurance that cash flow would not be affected.
Based on the foregoing and with the expected $2,375,000 of Offering proceeds
available for acquisitions, the Company expects to be able to meet its current
expansion schedule without additional borrowings assuming the contemplated
seller financing is available.
Management expects that the proceeds generated from the Offering will be
sufficient to support the ongoing acquisition activities of the business for
approximately 12 to 18 months, although there can be no assurance that such
proceeds will be adequate to support the Company's acquisitions during such
period.
27
<PAGE>
The Company expects to fund ongoing acquisitions after 1997 with proceeds from
this Offering, income from current operations, seller financing of acquisitions
and possible future equity offerings.
In addition, management expects to convert, during the next 12 to 18 months,
between two and three of its existing stores to "healthcare centers." Management
expects to incur a minimum of $20,000 to $40,000 in conversion costs per store.
The costs of such conversion are expected to be funded from operations.
IMPACT OF INFLATION AND CHANGING PRICES
Though not significant, inflation continues to cause increases in product,
occupancy and operating expenses, as well as the cost of acquiring capital
assets. The effect of higher costs is minimized by achieving operating
efficiencies and passing vendor price increases along to the consumers.
28
<PAGE>
BUSINESS
GENERAL
The Company owns and operates a chain of 14 retail pharmacies (including the
three Vista Stores acquired in March 1997), nine of which are located in Texas,
two in Virginia, and one each in New Mexico, Oklahoma and Wisconsin. According
to the April 28, 1997 issue of CHAIN DRUG REVIEW, the Company is among the top
100 retail pharmacy chains in the United States based on store count and dollar
volume of sales. The Company plans to acquire between eight and 12 pharmacies
annually in each of 1997, 1998 and 1999.
The Company was formed by Messrs. Frauhiger, Herr, McCord and Shahid who
each were employed by True Quality Pharmacies, Inc. ("True Quality") at the time
of the Company's formation. Mr. McCord also served on the Board of Directors of
True Quality prior to the Company's formation. Although for a period of time
following their departure from True Quality Messrs. Frauhiger, Herr, McCord and
Shahid continued as part-time employees of True Quality as a means of easing the
transition for their successors, and the Company has acquired three pharmacies
from True Quality, there is no continuing business relationship between True
Quality and the Company or its management.
The Company began operating in February 1994 for the purpose of acquiring
and consolidating under the HORIZON Pharmacies, Inc. name, high volume,
free-standing full-service retail pharmacies primarily located in communities
having populations of fewer than 50,000 persons. The primary sources of the
Company's acquisitions are retiring pharmacists, small chains and the Federal
Trade Commission ("FTC"). The Company believes that its success is primarily due
to its philosophy of retaining the individual, time-proven customer service
characteristics of the stores it acquires, while enabling such stores to offer
complete and competitively priced inventories to their small town customers
through enhanced technology and the consolidation and management of such stores
as a chain. Furthermore, the Company believes that communities of this size
offer more competitive rent and labor costs.
In addition to prescription drugs and services, the Company's retail
pharmacies offer a broad range of over-the-counter medications, supplies and
equipment, health and beauty aids, cosmetics, gifts, greeting cards, convenience
foods, cameras, photo supplies and processing services and other general
merchandise. Some stores incorporate special features such as drive-through
windows and free home delivery for customer convenience, optical departments,
fax, copying and package delivery services and soda fountains. In addition, the
Company's Farmington, New Mexico store sells and leases DME, IV infusion and
home oxygen therapy, and offers home healthcare services under the name HORIZON
Home Care. The Company intends to expand such services to certain of its other
stores and in April 1997 formed a wholly-owned subsidiary named HORIZON Home
Care, Inc.
The Company also plans to acquire and consolidate the inventory and pharmacy
files of certain retail pharmacies in its existing market areas to increase
sales volume in existing stores in a cost-effective manner. Stores which are
acquired by the Company will not be remodeled to fit a standardized format, but
will, to the extent practicable, be permitted to retain their individual
layouts, locations and management styles.
As part of its marketing strategy, the Company plans to convert between one
and five of its existing stores into "healthcare centers" similar to that
currently operated by its store located in Farmington, New Mexico. Each such
center will offer home healthcare services and may lease to an unaffiliated
third party owner-operator a small clinic staffed by a physician's assistant or
nurse practitioner located adjacent to the store's traditional retail pharmacy
operations. The Company intends for such healthcare centers to offer customers
"one-stop shopping" at competitive prices for basic medical and home healthcare
services. The Company believes that providing such home healthcare and basic
medical services adjacent to its retail pharmacies will result in increased
sales and profits for such stores.
29
<PAGE>
The Company was incorporated under the laws of the State of Texas on August
31, 1992 and began operations under the name HORIZON Pharmacies, Inc. in
February 1994. The Company's principal office is located at 275 W. Princeton
Drive, Princeton, Texas 75407, and its telephone number is (972) 736-2424.
THE RETAIL PHARMACY INDUSTRY
Prescription and over-the-counter medications have traditionally been sold
by independent retail pharmacies as well as conventional retail pharmacy chains,
and purchased by consumers with cash or credit cards. The retail pharmacy
industry has recently undergone significant changes as a result of the following
important trends: (i) the increase in third-party reimbursement for prescription
drugs; (ii) the consolidation within the retail pharmacy industry; (iii) the
aging of the United States population; and (iv) the increase in competition from
non-traditional retailers of prescription and over-the-counter drugs.
During the last several years, a growing percentage of prescription drug
volume throughout the industry has been accounted for by sales to customers who
are covered by third-party reimbursement plans. According to the 1995
NARD--Lilly Digest, in 1994, third-party reimbursement represented approximately
56% of total prescription drug sales in the United States, an increase of 4%
over the previous year. In a typical third-party reimbursement plan, the retail
pharmacy has a contract with a third-party payor, such as an insurance company,
HMO, PPO, other managed care provider, government agency or private employer,
which agrees to pay for part or all of a customer's eligible prescription
purchases. Although these third-party payors often account for a high volume of
prescription sales, such sales typically generate lower gross margins than non
third-party payor sales due principally to the highly competitive nature of this
business and recent efforts by third-party payors to contain costs.
As a result of the economies of scale from which larger retail chains
benefit as well as the trend toward third-party reimbursement, the number of
independent retail pharmacies and smaller retail pharmacy chains has decreased
as many of such retailers have been acquired by larger retail pharmacy chains or
gone out of business. This trend is expected to continue because larger chains
are better positioned to handle the increased third-party payor sales, purchase
inventory on more advantageous terms and achieve other economies of scale with
respect to their marketing, advertising, distribution and other expenditures.
The Company believes that the number of independent retail pharmacies and
smaller retail pharmacy chains remaining in operation may provide significant
acquisition opportunities for larger retail pharmacy chains, such as the
Company.
In 1996, retail pharmacy chains and independent retail pharmacies
represented approximately 39% and 27%, respectively, of all retail prescription
sales in the United States. In response to a number of factors, including the
aging population of the United States, mass merchants (including discounters and
deep discounters), supermarkets, combination food and retail pharmacies, mail
order distributors, hospitals, HMOs and other managed care providers have
entered the prescription industry. Supermarkets, including combination food and
retail pharmacies, and mass merchants each represented approximately 11% of all
prescription sales in the United States in 1995. Although the Company currently
faces increased competition from these retailers, industry studies show that
consumers in the over-65 age group tend to make purchases at traditional retail
pharmacies, such as HORIZON Pharmacy stores, and maintain strong store loyalty.
30
<PAGE>
HORIZON PHARMACIES
As of May 29, 1997, the Company operated 14 stores. The following table
summarizes the number of stores operated by the Company and the year in which
each respective store was acquired by the Company.
<TABLE>
<CAPTION>
STORE LOCATIONS YEAR ACQUIRED
- ----------------------------------------------------------- ---------------
<S> <C>
Winnsboro, Texas 1994
Princeton, Texas** 1994
Cuero, Texas 1994
Bonham, Texas 1995
Uvalde, Texas 1995
Cleburne, Texas 1995
McLoud, Oklahoma 1995
Farmington, New Mexico* 1996
Tomah, Wisconsin 1996
Marion, Virginia 1996
Covington, Virginia 1996
Mineola, Texas 1997
Mt. Vernon, Texas 1997
McKinney, Texas 1997
</TABLE>
- ------------------------
* Indicates home healthcare services offered.
** Indicates the Company has submitted an application for home healthcare
license.
BUSINESS STRATEGY
The Company's business strategy is to continue to expand through
acquisitions and to increase individual store profitability. In implementing its
business strategy, the Company intends to continue cost-control programs,
continue and improve employee training, negotiate increases in vendor rebates,
maintain a high level of customer service and convenience, increase sales in
each department in each store and maintain competitive pricing. To mitigate the
effect of third-party reimbursement on pharmaceutical sales, the Company also
plans to expand its home healthcare and non-pharmaceutical sales and services.
CUSTOMER SERVICE AND CONVENIENCE. The Company believes that customer
service and convenience are critical in positioning itself as an alternative to
mass merchandisers, supermarkets and other large format retailing channels. The
Company will continue to emphasize service and convenience through pharmacy
support services, home healthcare services, store location and design, drive
through pick-up and home delivery, merchandising programs and operating hours
geared to the needs of the particular market.
The Company offers a high level of professional pharmacy services, which the
Company believes provides added value to its customers. The Company operates a
computer software program which enables each of the Company's stores to provide
to each prescription drug customer a printout which advises the customer of the
specific dosages, drug interactions and side effects of his or her prescription
medicine. See "--Merchandising and Marketing."
The Company will continue to arrange and merchandise its stores to provide
modern, well-identified stores, which are easily accessible to customers. The
Company's stores range in size from approximately 3,600 to 12,000 square feet
and are located primarily in neighborhood strip shopping centers or free
standing locations in communities having populations of fewer than 50,000
persons. The Company's stores are typically open Monday through Saturday from
8:00 a.m. until 6:00 p.m. and certain stores are open from 11:00 a.m. to 5:00
p.m. on Sunday.
31
<PAGE>
COMPETITIVE PRICING. While the Company believes that it competes primarily
on the basis of customer service and convenience, price is also an important
factor. The Company's policy is to price its prescription drug products
competitively. The Company believes that this policy has enhanced its
competitive position with retail pharmacies and other shopping formats.
COST CONTROLS. The Company's continued commitment to control costs and
maintain its competitive position in the marketplace focuses on decreasing
expenses without decreasing the level of services provided in its stores. The
Company continues to actively evaluate and pursue additional cost savings, such
as inventory control and computerized point of sale information, which can be
obtained without affecting the Company's customer service, quality or sales
growth potential. There can be no assurance, however, that any additional cost
reductions will be realized. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
EXPANSION STRATEGY
The Company intends to continue to expand its business by acquiring smaller
retail pharmacy chains and independent retail pharmacies primarily located in
communities having populations of fewer than 50,000 persons. In identifying
retail pharmacies for potential acquisition, the Company evaluates a number of
demographic considerations, including the size, growth pattern and per capita
income of the population, as well as the competitive environment and the
accessibility of a proposed site to the customer. The Company also evaluates the
respective store's historical financial performance, focusing on stores having
annual sales volumes between $1,500,000 and $5,000,000. The Company has also
acquired two retail pharmacy stores from the FTC and will continue to evaluate
the purchase of other stores which may be offered for sale by the FTC. As part
of its regulatory function, the FTC occasionally mandates the divestiture of
certain retail pharmacies, generally in connection with its approval of a merger
or acquisition of two companies which each own a group of pharmacies.
The Company's goal for the next three years is to acquire between eight and
12 new retail pharmacies in each of 1997, 1998 and 1999. The Company intends to
use a portion of the proceeds of this Offering and cash flow from operations to
finance the cash costs of this growth, although borrowings may also be available
to finance such growth. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
PRODUCTS AND SERVICES
PHARMACY. The primary focus of the Company is the sale of prescription and
over-the-counter drugs. During 1996, the Company filled approximately 500,000
prescriptions, and sales of prescription drugs generated approximately 80% of
the Company's net sales.
The Company believes that it is well positioned to take advantage of certain
demographic trends, including the aging of the United States population. Nine of
the Company's retail pharmacies are located in Texas, one of the top three
states experiencing the greatest migrations of persons over age 65. The Company
also believes that it is capable of meeting the needs of the increasing volume
of third-party prescription sales and is aggressively marketing itself to
third-party payors. See "Government Regulation and Healthcare Reform" and
"Third-Party Reimbursement."
The Company believes that new prescription drugs and drug therapies provide
an opportunity for increased demand for prescription drugs. In addition, the FDA
is approving an increasing number of prescription products for sale over the
counter. Prescription drugs which are approved for over-the-counter distribution
have historically shown significantly increased sales.
NONPHARMACEUTICAL MERCHANDISE. HORIZON Pharmacy stores sell a wide variety
of nonpharmaceutical merchandise, including gifts, over-the-counter drugs,
health and beauty aids, greeting cards and numerous other convenience products.
The Company's stores offer a broad assortment of popular national
32
<PAGE>
brand over-the-counter drugs and other products related to dental care, foot
care, vitamins and nutritional supplements, feminine hygiene, family planning
and baby care. The Company's stores provide a helpful environment in which
consumers can obtain product information from professional pharmacists,
knowledgeable sales employees and store managers or from literature available
throughout the store.
Each of the Company's stores also offers an assortment of popular brand name
cosmetics, fragrances and other beauty products. A wide selection of gifts,
greeting cards, gift wrap, bows and novelties are also offered. Assorted
convenience products including candy, food, tobacco products, books and
magazines, household products, seasonal merchandise and toys are also offered.
Certain of the Company's stores also offer camera and photo accessories,
photo processing, small electronics, batteries and audio and video tapes.
HOME HEALTHCARE SERVICES
The Company's Farmington, New Mexico store is currently licensed and offers
under the name HORIZON Home Care certain home healthcare services. In April
1997, the Company formed HORIZON Home Care, Inc. as its wholly-owned subsidiary.
The Company has applied for a home healthcare services license for its
Princeton, Texas store and anticipates receiving such license within the next 90
to 180 days. The home healthcare services offered by the Company's Farmington
store currently include: (i) respiratory therapy; (ii) DME; (iii) patient
services, including nursing and para-professional services; and (iv) infusion
therapy. The Company provides patients with a variety of services and related
products, many of which are essential to the proper implementation of a
physician's treatment plan.
RESPIRATORY THERAPY. The Company provides home respiratory services to
patients with a variety of conditions, including chronic obstructive pulmonary
disease (e.g., emphysema, chronic bronchitis and asthma), cystic fibrosis and
neurologically-related respiratory conditions. The Company contracts with
respiratory care professionals to provide support to its home respiratory
therapy patients. These professionals manage the needs of the Company's patients
according to physician-directed plans of care.
DURABLE MEDICAL EQUIPMENT. The Company also offers for sale and lease,
certain DME which primarily consists of patient room equipment (such as hospital
beds, patient lifts and commodes), ambulatory aids (such as walkers and canes)
and bathroom safety items. The Company's broad range of product offerings
provides patients requiring either infusion, nursing or respiratory services
access to needed DME through a single source.
NURSING AND PARA-PROFESSIONAL SERVICES. The Company offers a broad range of
professional nursing and para-professional services to meet a patient's medical
and personal needs, principally in the home. These services include pediatric
and adult care, such as ventilator care; administration of infusion therapies,
including chemotherapy, antibiotics, enteral and parenteral feeding; standard
skilled nursing services such as changing dressings, injections, catheterization
and administration of medication; physical, respiratory, occupational and speech
therapy; home health aide services, such as assistance with personal hygiene,
dressing and feeding; and homemaker services, such as the preparation of meals
and light house cleaning.
INFUSION THERAPY. Infusion therapy involves the intravenous administration
of nutrients, antibiotics or other medications to patients in their homes
usually as a continuation of treatment initiated in the hospital. The infusion
therapies provided by the Company include antibiotic and related therapies
(therapies used to treat various infections and diseases); parenteral nutrition
therapy (the intravenous feeding of life sustaining nutrients to patients with
impaired or altered digestive tracts due to gastrointestinal illness, such as an
intestinal obstruction or inflammatory bowel disease); enteral nutrition therapy
(the administration of nutrients through a feeding tube to patients who cannot
eat as a result of an obstruction to the digestive tract or because they are
otherwise unable to feed themselves orally); chemotherapy (the intravenous
administration of cancer inhibiting drugs through either rapid or continuous
infusion); pain management
33
<PAGE>
(the administration of pain controlling drugs such as morphine and Demerol to
terminally or chronically ill patients); and other therapies.
STORE OPERATIONS
The Company's current stores are generally located in free-standing stores
or in strip shopping centers located near the communities' main thoroughfare.
Although the Company does not remodel stores upon acquisition to conform to a
particular format, it arranges its stores to facilitate customer movement and to
maximize product visibility. The Company's pharmacy departments are generally
located near the back of its stores to maximize customer exposure to the store.
Most of the stores are equipped with modern fixtures and equipment and range in
size from approximately 3,600 to 12,000 square feet.
The Company utilizes centrally prepared formats for the display and stocking
of its stores, while allowing individual store managers some flexibility with
regard to choice and display of the merchandise assortment based upon the
Company's strategy of tailoring its stores to the markets in which the
respective stores operate.
PURCHASING AND DISTRIBUTION
The Company centrally purchases most of its merchandise from Bergen Brunswig
and other vendors, enabling it to benefit from promotional programs and volume
discounts offered by such companies. All merchandise is shipped directly to the
Company's stores at prices generally negotiated at the corporate level. The
Company's primary vendor is Bergen Brunswig which supplied approximately 83.6%
of the Company's inventory in 1996. Bergen Brunswig is also the Company's
primary creditor. See "Risk Factors--Reliance on Single Supplier" and "Use of
Proceeds."
MERCHANDISING AND MARKETING
The Company's merchandising strategy is to offer a broad selection of
traditional retail pharmacy items, including both nationally advertised and
private label products. Substantially all products are offered at competitive
prices. The Company emphasizes value and customer service in attractive,
conveniently located drugstores. It uses color, signs, packaging and other
merchandising aids to reinforce its name and low prices, and to showcase its
products.
The pharmacy department in each of the Company's stores carries a complete
line of both brand name and generic drugs. The Company has been expanding its
prescription drug business by promoting the use of less costly generic drugs
whenever possible, and by entering into arrangements with insurance companies,
HMOs and other healthcare groups for the sale of prescription drugs under
third-party reimbursement programs.
Each of the Company's pharmacy departments utilizes a computer system which
includes software which enables the Company's pharmacists to recall a customer's
pharmacy history for the purpose of identifying possible allergies, drug
interactions or therapeutic duplication, and to provide customers with a
complete record of medication dispensed. The Company's computer software system
also enables the Company to identify generic equivalents of brand name drugs,
centrally control prescription prices, increase the speed of processing
prescriptions and reduce the paperwork normally involved in, and thus expedite
the collection of amounts due the Company under, third-party reimbursement
programs.
The Company sells certain private label products which enables the Company
to sell products, comparable in quality to name brand products, at lower prices
to its customers, but at higher gross margins for the Company.
Most photo processing services offered at Company stores are provided by an
independent contractor who provides the stores with a "drop box" into which the
customer places its film for processing. The independent contractor collects the
film, processes it and returns the printed photos to the respective
34
<PAGE>
stores for pick-up and payment by the customer. One of the Company's stores
operates its own photo lab and processes customers' film itself.
The Company advertises principally through the use of radio, newspaper,
direct mail and advertising circulars.
GOVERNMENTAL REGULATION AND HEALTHCARE REFORM
GENERAL. All of the Company's pharmacists and pharmacies are required to be
licensed by the appropriate state boards of pharmacy. The Company's retail
pharmacies are also registered with the Federal Drug Enforcement Administration.
By virtue of these license and registration requirements, the Company is
obligated to observe certain rules and regulations, and a violation of such
rules and regulations could result in a suspension or revocation of the licenses
or registrations.
The Company relies on prescription drug sales for a significant portion of
its revenues and profits, and prescription drug sales represent a significant
segment of the Company's business. These revenues are affected by changes within
the healthcare industry, including changes in programs providing for
reimbursement of the cost of prescription drugs by third-party payment plans,
such as government and private plans, and regulatory changes relating to the
approval process for prescription drugs.
The Company has a number of third-party payor contracts pursuant to which
the Company is a provider of prescription drugs. "Freedom of Choice" state
statutes, pursuant to which all pharmacies would be entitled to be a provider
under such a contract, have been enacted in certain states, including Alabama,
Georgia, New Jersey, North Carolina, Louisiana, South Carolina, Tennessee and
Texas, and may be enacted in others. Although such statutes may adversely affect
certain of the Company's third-party contracts, they may also provide the
Company with opportunities regarding additional third-party contracts.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the healthcare system, either nationally or at the state
level. The Company cannot predict whether any Federal or state healthcare reform
legislation will eventually be passed, and if so, the impact thereof on the
Company's financial position or results of operations. Healthcare reform, if
implemented, could adversely affect the pricing of prescription drugs or the
amount of reimbursement from governmental agencies and third-party payors, and
consequently could be adverse to the Company. However, to the extent healthcare
reform expands the number of persons receiving healthcare benefits covering the
purchase of prescription drugs, it may also result in increased purchases of
such drugs and could thereby have a favorable impact on both the Company and the
retail drug industry in general. Nevertheless, there can be no assurance that
any future Federal or state healthcare reform legislation will not adversely
affect the Company or the retail pharmacy industry generally.
In 1990, Congress enacted the Omnibus Budget Reconciliation Act of 1990
("OBRA 1990"), which includes a requirement that states implement pharmaceutical
drug use review programs for Medicaid beneficiaries receiving covered
out-patient prescription drugs. The OBRA 1990 legislation states that
pharmacists must offer to discuss with each Medicaid patient "common, severe
side or adverse effects or interactions and therapeutic contraindications that
may be encountered, including their avoidance and the action required if they
occur." In order to ensure reimbursement of out-patient prescription drugs under
Medicaid, states were required, pursuant to the OBRA 1990 legislation, to
implement drug use review programs by January 1, 1993. In all states where the
Company operates, the State Pharmacy Practices Acts have expanded the OBRA
requirements to include all patients receiving prescriptions in a retail
setting. Pharmacists now have a duty to warn the purchaser of a prescription
drug if the warning could reduce or negate the adverse effects of the use of
such drug.
35
<PAGE>
The Company's operations are also subject to Federal and state laws
governing such matters as wages, working conditions and overtime.
TEXAS LEGISLATION. Currently, nine of the Company's 14 retail pharmacies
are located in Texas, and other retail pharmacies located in Texas may be
acquired by the Company. Consequently, the Company may be affected by any
significant healthcare legislative proposals enacted in the state of Texas. The
Texas legislature is considering a proposal which would reduce Medicaid
reimbursements to Texas pharmacies by 5% in anticipation of a Federal reduction
in Medicaid pharmacy payments. While any such reductions would affect the
Company's Medicaid reimbursements, management believes that the Company's
overall revenues and profitability will not be materially adversely affected,
although there can be no assurance that revenues or profitability will not be
affected by any such legislation.
THIRD-PARTY REIMBURSEMENT
A growing percentage of the Company's prescription drug volume has been
accounted for by sales to customers who are covered by third-party payment
programs. Third-party reimbursement accounted for approximately 52% of the
Company's prescription sales in 1996, 48% in 1995 and 36% in 1994, and the
Company expects this trend to continue. Although contracts with third-party
payors may increase the volume of prescription sales and gross profits,
third-party payors typically negotiate lower prescription prices than those of
non third-party payors. Accordingly, there has been downward pressure on gross
profit margins on sales of prescription drugs which is expected to continue in
future periods. Further, sales to customers covered by Medicare or Medicaid
represented 30% of all the Company's prescription drug sales in 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The Company's retail pharmacies operate in a highly competitive industry,
and compete primarily on the basis of customer service, convenience of location
and store design, price and product mix and selection. In addition to
traditional competition from independent retail pharmacies and other retail
pharmacy chains, the Company faces competition from mass merchants (including
discounters and deep discounters), supermarkets, combination food and retail
pharmacies, mail order distributors, hospitals and HMOs. These other formats
have experienced significant growth in their market share of the prescription
and over-the-counter drug business. The Company's home healthcare services
compete with certain chain operations and independent single unit stores. Many
of the Company's competitors have greater financial resources than the Company.
TRADEMARKS AND SERVICE MARKS
No patent, trademark, license, franchise or concession is considered to be
of material importance to the business of the Company other than the trade names
under which the Company operates its retail businesses, including the HORIZON
Pharmacies and HORIZON Home Care names. The Company recently filed applications
for Federal trademark protection of such trade names.
PROPERTIES
The Company's principal offices are currently located at 275 W. Princeton
Drive, Princeton, Texas, 75407, where it owns a 5,500 square foot building. The
Company also owns the furniture and fixtures in each of its stores. However, the
Company conducts substantially all of its retail businesses under noncancelable
leases, many of which expire within the next eight years. In the normal course
of business, however, it is expected that leases will be renewed or replaced by
leases on other properties. No single lease is material to the Company's
operations.
36
<PAGE>
EMPLOYEES
At March 31, 1997, the Company employed approximately 180 employees,
approximately 110 on a full-time basis. None of the Company's employees are
represented by a labor union and the Company believes that its relations with
its employees are good.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its normal business operation. The Company is not now
engaged in any legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- --------------------------------------------------------------------------
<S> <C> <C>
Rick D. McCord, R.Ph.(1) 42 Chairman of the Board of Directors, President, Chief Operating Officer
Sy S. Shahid(2) 46 Director, Executive Vice President, Secretary
David W. Frauhiger(2) 35 Director, Chief Financial Officer, Treasurer
Charlie K. Herr, R.Ph.(1) 57 Director, Southern Regional Manager
Carson A. McDonald(3) 37 Director
Robert D. Mueller, R.Ph.(2) 39 Director, Western Regional Manager
Philip H. Yielding(3) 37 Director
</TABLE>
- ------------------------
(1) Class III Director whose term expires in 2000.
(2) Class II Director whose term expires in 1999.
(3) Class I Director whose term expires in 1998.
RICK D. MCCORD, R.PH., has served as Director, President and Chief Operating
Officer since the Company's inception. Mr. McCord, who has been a licensed
pharmacist in the State of Texas since 1977, was employed by True Quality
Pharmacies, Inc., a multi-location, multi-state retail pharmacy, from 1977
through 1993. During such time, Mr. McCord served as pharmacist and store
manager from 1977 to 1981, as district manager from 1982 to 1992, and as a
director from 1980 through 1990.
SY S. SHAHID has served as Director, Executive Vice President and Secretary
since the Company's inception. From February 1989 to February 1994, Mr. Shahid
served full-time as the Director of Management Information Systems of True
Quality Pharmacies, Inc., and thereafter, until October 1996, he served
part-time in the same capacity. Mr. Shahid served as Financial Systems Manager
for 1st Texas Savings during 1988, and as Financial Systems Manager for Lomas
and Nettleton during 1987.
DAVID W. FRAUHIGER has served as Director, Controller and Treasurer since
the Company's inception, acting part time from February 1994 through June 1996
and full-time thereafter, and as Chief Financial Officer since March 1997. Mr.
Frauhiger served as the full-time controller for True Quality Pharmacies, Inc.
from June 1991 to March 1996, and as the part-time controller from March 1996
until April 1997. Prior to such time Mr. Frauhiger worked as an assistant
controller for SunWest Companies, a commercial real estate company, from
September 1988 to June 1991, and as an accountant for Jeffrey L. Harbin, CPA
from January 1982 to September 1988.
37
<PAGE>
CHARLIE K. HERR, R.PH., has served as Director and Southern Regional Manager
since the Company's inception. Mr. Herr has been a practicing pharmacist since
1963, serving as Pharmacist in Charge for True Quality Pharmacies, Inc. from
July 1969 to December 1995. Mr. Herr is licensed to practice in Colorado,
Kansas, Missouri, New Mexico, Oklahoma, Texas and Virginia.
CARSON A. MCDONALD has served as Director of the Company since May 1997.
From 1980 to the present, Mr. McDonald has been employed by Bergen Brunswig in
various capacities, acting as Division Sales Manager since 1993. Bergen Brunswig
is currently the Company's primary supplier and a creditor of the Company. See
"Certain Transactions."
ROBERT D. MUELLER, R.PH., has served as Director and Western Regional
Manager of the Company from August 1995 to the present. Mr. Mueller has been a
practicing pharmacist since 1980, and is licensed in New Mexico, Oklahoma and
Texas. Mr. Mueller served as Pharmacy Manager of True Quality Pharmacies, Inc.
from August 1983 through August 1996, and as Staff Pharmacist from Eastland
Memorial Hospital from September 1994 to August 1996.
PHILIP H. YIELDING has served as Director of the Company since May 1997. Mr.
Yielding has served as a physician's assistant and a director of the Wilson and
Jones Health Center since January 1995. From August 1991 through December 1994,
Mr. Yielding was employed by the Farmersville Medical Center; from October 1989
to August 1991 he was employed by the Mitchell Family Care Center; and from
August 1988 to October 1989 he was employed by the McKellar Clinic, serving as a
physician's assistant for each center and as director of the Farmersville
Medical Center.
KEY EMPLOYEE
NANCY J. PAPANERI, R.PH., 47, has served as Northern Regional Manager since
the Company's inception. Ms. Papaneri is currently a licensed pharmacist in New
Mexico, Oklahoma, Texas, Virginia and Wisconsin. From August 1990 to March 1995,
Ms. Papaneri served as Pharmacist for True Quality Pharmacies, Inc. From
February 1976 to July 1990 Ms. Papaneri served in a variety of positions for
Revco Drug Stores, Inc., including clerk, intern, pharmacist and manager.
THE BOARD OF DIRECTORS
The Company's Articles of Incorporation and Bylaws provide for the division
of the Board of Directors into three classes, each class consisting (as nearly
as possible) of one-third of the whole. The term of office of one class of
directors expires each year, with each class of directors being elected for a
term of three years and until the shareholders elect their qualified successors.
The Company's Bylaws provide that the Board of Directors by resolution from time
to time may fix the number of directors that shall constitute the whole Board of
Directors. The Board of Directors has set the number of directors at seven.
EXECUTIVE COMPENSATION
During 1996, no executive officer was paid compensation in excess of
$100,000.
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of the compensation of the
Company's President and Chief Operating Officer for services rendered in all
capacities to the Company during the year ended December 31, 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------
NAME YEAR SALARY BONUS
- ---------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Rick D. McCord.................................................. 1996 $ 64,172 $ 25,334
</TABLE>
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
The following table sets forth information with respect to the exercise of
stock options during the year ended December 31, 1996, by the Company's
President and Chief Operating Officer.
<TABLE>
<CAPTION>
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED
- ----------------------------------------------------------------- --------------- ----------
<S> <C> <C>
Rick D. McCord................................................... 50,000 $ 225,000
</TABLE>
DIRECTORS' COMPENSATION
Directors who are not employees of the Company are to be paid $1,000 for
each regularly scheduled Board of Directors meeting attended and $250 for each
special Board of Directors meeting attended.
STOCK OPTION PLAN
The Company's Board of Directors and shareholders have approved the 1997
Stock Option Plan. The description in this prospectus of the principal terms of
the 1997 Stock Option Plan is a summary, does not purport to be complete, and is
qualified in its entirety by the full text of the 1997 Stock Option Plan, a copy
of which has been filed as an exhibit to the Registration Statement of which
this prospectus is a part.
Pursuant to the 1997 Stock Option Plan, employees and directors of the
Company are eligible to receive awards of stock options. The 1997 Stock Option
Plan provides for grants of "incentive stock options" ("ISO's") meeting the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and "non-qualified stock options" ("NQSO's").
Under the 1997 Stock Option Plan, the Company has reserved 10% of its Common
Stock outstanding at the date of the closing of the Offering (246,242 shares of
Common Stock in the event the Underwriters' overallotment option is exercised in
full) for issuance of awards under the 1997 Stock Option Plan (subject to
antidilution and similar adjustments).
The 1997 Stock Option Plan will be administered by a Compensation Committee
(the "Committee") composed of two or more directors of the Company who are
"Non-Employee Directors" as such term is used in Rule 16b-3 promulgated under
the Exchange Act. Subject to the provisions of the 1997 Stock Option Plan, the
Committee will determine the type of award, when and to whom awards will be
granted, the number of shares covered by each award and the terms, provisions
and kind of consideration payable with respect to awards. The Committee may
interpret the 1997 Stock Option Plan and may at any time adopt such rules and
regulations therefor as it deems advisable. The Committee may, additionally,
cancel or amend awards.
In determining the persons to whom awards shall be granted and the number of
shares covered by each award the Committee shall take into account the duties of
the respective persons, their present and potential contribution to the success
of the Company and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the 1997 Stock Option Plan.
Management intends to recommend to the Committee that upon completion of the
Offering all of the shares subject to the 1997 Stock Option Plan be granted to
the Company's current officers, directors and key employee identified in this
prospectus, with exercise prices equal to the greater of $5.00 per share or 85%
of the fair market value of the Company's Common Stock at the date such options
are granted.
An option may be granted on such terms and conditions as the Committee may
approve, and generally may be exercised for a period of up to 10 years from the
date of grant. Generally, NQSO's and ISO's will be granted with an exercise
price of not less than 85% of the "Fair Market Value" (as defined in the 1997
Stock Option Plan) on the date of grant and ISO's will be granted with an
exercise price of not less than the Fair Market Value on the date of grant. In
the case of ISO's, the aggregate value of option shares which can become
exercisable for the first time during any one calendar year is limited to
$100,000, and ISO's
39
<PAGE>
granted to an employee who possesses more than 10% of the total combined voting
power of all classes of stock of the Company may not be exercised unless the
exercise price is at least 110% of the fair market value of the Common Stock on
the date the options were granted. The Committee may provide for the payment of
the option price in cash, by delivery of other Common Stock having a Fair Market
Value equal to such option price, by a combination thereof or by such other
manner as the Committee shall determine. Options granted under the 1997 Stock
Option Plan will become exercisable at such times and under such conditions as
the Committee shall determine. Options generally may not be exercised more than
three months after an employee terminates employment with the Company.
The Board may at any time and from time to time suspend, amend, modify or
terminate the 1997 Stock Option Plan; provided, however, that, to the extent
required by Rule 16b-3 promulgated under the Exchange Act or any other law,
regulation or stock exchange rule, no such change shall be effective without the
requisite approval of the Company's shareholders. In addition, no such change
may adversely affect any award previously granted, except with the written
consent of the grantee.
No awards may be granted under the 1997 Stock Option Plan after the tenth
anniversary of the approval of the 1997 Stock Option Plan.
EMPLOYMENT AGREEMENTS
The Company has Employment Agreements with Rick D. McCord, R.Ph., Sy S.
Shahid, David W. Frauhiger, Charlie K. Herr, R.Ph., Robert D. Mueller, R.Ph. and
Nancy J. Papaneri, R.Ph. (each an "Employee" and collectively, the "Employees").
Each of these agreements runs for a term of three years and automatically renews
for additional three year terms unless terminated by either the Company or the
Employee. Each of the Employment Agreements may be terminated without cause by
the Company upon 90 days written notice. Under the respective agreements Mr.
McCord will receive an annual salary of $120,000 and an annual bonus of $24,000;
Mr. Shahid will receive an annual salary of $112,568 and an annual bonus of
$22,514; Mr. Frauhiger will receive an annual salary of $107,667 and an annual
bonus of $21,533; Messrs. Herr and Mueller will each receive an annual salary of
$97,518 and an annual bonus of $19,503; and Ms. Papaneri will receive an annual
salary of $80,136 and an annual bonus of $8,014. For a period of two years
following the termination of an Employee, the Employee is prohibited from
engaging in or assisting in any business which is identical, competitive with or
comparable to, the Company's business within any area in which the employee
rendered services to the Company. Each agreement contains a provision
prohibiting the Employee subsequent to termination of employment from disclosing
to third parties proprietary information relating to the Company. A state court
charged with enforcing any of the referenced Employment Agreements may determine
that such non-competition provisions are not enforceable in whole or in part.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Texas Act, the Company's Articles of
Incorporation eliminate, in certain circumstances, the monetary liability of
directors of the Company for a breach of their fiduciary duty as directors.
These provisions do not eliminate the liability of a director: (i) for a breach
of a director's duty of loyalty to the Company or its shareholders; (ii) for
acts or omissions by a director not in good faith or which involve intentional
misconduct or a knowing violation of law; or (iii) for any transaction from
which the director derived an improper personal benefit. In addition, these
provisions do not eliminate the liability of a director for violations of
Federal securities laws or limit the rights of the Company or its shareholders,
in appropriate circumstances, to seek equitable remedies such as injunctive or
other forms of non-monetary relief. Such remedies may not be effective in all
cases.
The Company's Articles of Incorporation provide that the Company shall
indemnify all directors and officers of the Company to the full extent permitted
by the Texas Act. Under such provisions, any director or officer, who in his
capacity as such, is made or threatened to be made, a party to any suit or
proceeding,
40
<PAGE>
may be indemnified if the Board of Directors determines such director or officer
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the Company. The Articles and the Texas Act
further provide that such indemnification is not exclusive of any other rights
to which such individuals may be entitled under the Articles of Incorporation,
the Bylaws, any agreement, vote of shareholders or disinterested directors or
otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
Carson A. McDonald, a director of the Company, is an employee of Bergen
Brunswig, the Company's primary supplier and a lender to the Company.
Approximately $1.15 million of the proceeds of this Offering are expected to be
used to repay the principal owing under loans made to the Company by Bergen
Brunswig.
All future transactions between the Company and its directors, officers,
principal shareholders or affiliates will be on terms no less favorable to the
Company than may be obtained from unaffiliated third parties, and any such
transactions will be approved by a majority of disinterested directors of the
Company.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of May 29, 1997 after giving
effect to the 2-for-1 stock split, and as adjusted to reflect the sale of the
1,200,000 shares of Common Stock offered hereby, concerning the beneficial
ownership of Common Stock by each of the Company's directors, each executive
officer named in the table under the heading "Management--Directors, Executive
Officers and Key Employees," and all directors and executive officers of the
Company as a group, and by each person who is known by the Company to own more
than 5% of the outstanding shares of Common Stock. Unless otherwise indicated,
the beneficial owner has sole voting and investment power with respect to such
stock.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED(1)
-----------------------------
NAME AND ADDRESS BEFORE AFTER
OF BENEFICIAL HOLDER NUMBER OF SHARES OFFERING OFFERING
- -------------------------------------------- ----------------- -------------- -------------
<S> <C> <C> <C>
Rick D. McCord, R.Ph.(2).................... 221,740 20.48% 9.71%
Charlie K. Herr, R.Ph.(2)................... 211,426 19.53% 9.26%
Sy S. Shahid(2)............................. 209,748 19.38% 9.19%
David W. Frauhiger(2)....................... 70,000 6.47% 3.07%
Robert D. Mueller, R.Ph.(2)................. 28,438 2.63% 1.25%
Carson A. McDonald(3)....................... -0- -- --
Philip H. Yielding(4)....................... -0- -- --
Directors and executive officers as a group
(seven persons)........................... 741,352 68.49% 32.48%
</TABLE>
- ------------------------
(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares
beneficially owned by such person.
(2) Address is c/o HORIZON Pharmacies, Inc., 275 W. Princeton Drive, Princeton,
Texas 75407.
(3) Address is c/o Bergen Brunswig Drug Co., 1841 Monetary Lane, Carrollton,
Texas 75006.
(4) Address is c/o Wilson and Jones Health Center, 1000 S FM 1417, Sherman,
Texas 75092.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company as approved by the Board of
Directors and pending approval by the Company's shareholders shall consist of:
(i) 14,000,000 shares of Common Stock, having a par value of $.01 per share; and
(ii) 1,000,000 shares of Preferred Stock, having a par value of $.01 per share.
Immediately prior to this Offering, 1,082,424 shares of Common Stock were issued
and outstanding and were held of record by 29 shareholders, and no shares of
Preferred Stock were issued and outstanding. A total of 246,242 shares of Common
Stock has been reserved for grants of options under the 1997 Stock Option Plan.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of shareholders. There is no cumulative voting with
respect to the election of directors. Accordingly, holders of a majority of the
shares entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any then outstanding class of Preferred Stock, the holders of Common Stock
are entitled to receive such dividends, if any, as may be declared by the Board
of Directors from time to time out of legally available funds. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets of the Company that are legally
available for distribution, after payment of all debts and other liabilities and
subject to the prior rights of holders of any class of Preferred Stock then
outstanding. The holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights,
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<PAGE>
preferences and privileges of holders of Common Stock are subject to the rights
of the holders of shares of any series of Preferred Stock that the Company may
issue in the future.
PREFERRED STOCK
The Company's Articles of Incorporation provide that the Company may issue
from time to time up to 1,000,000 shares of Preferred Stock in one or more
series with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations and restrictions thereof, as are determined by resolution of the
Board of Directors of the Company. The issuance of Preferred Stock, while
providing flexibility in connection with possible financing, acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of holders of Common Stock and, under certain circumstances, be used as a
means of discouraging, delaying or preventing a change in control of the
Company. Currently, the Company has no shares of Preferred Stock outstanding.
The Board of Directors does not currently have any plans, arrangements,
commitments or understandings to issue any Preferred Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws may
be deemed to have anti-takeover effects and may delay, defer or prevent a tender
offer or takeover attempt that a shareholder might consider to be in such
shareholder's best interest, including those attempts that might result in a
premium over the market price for the shares held by shareholders.
CLASSIFIED BOARD. The Company's Bylaws provide that: (i) the Board of
Directors is divided into three classes of as equal size as possible, with such
classes serving staggered three-year terms; (ii) the number of directors is to
be fixed from time to time by the Board of Directors; and (iii) the term of
office of each class expires in consecutive years so that each year only one
class is elected. These provisions may render more difficult a change in control
of the Company or the removal of incumbent management.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The Company's
Articles of Incorporation provide that no action shall be taken by shareholders
except at an annual or special meeting of shareholders, and prohibits action by
written consent in of lieu of a meeting. The Company's Bylaws provide that,
unless otherwise proscribed by law, special meetings of shareholders can only be
held pursuant to a resolution of the Board of Directors.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors as well as for other
shareholder proposals to be considered at shareholders' meetings.
Notice of shareholder proposals and director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or Directors are to be elected. In all cases,
to be timely, notice must be received at the principal offices of the Company
not less than 40 days before the meeting, or, if on the day notice of the
meeting is given to the shareholders less than 45 days remain until the meeting,
(i) five days after notice is given but not less than five days prior to the
meeting in the case of shareholder proposals, and (ii) 10 days after notice is
given in the case of director nominations.
Notice to the Company from a shareholder who proposes to nominate a person
at a meeting for election as a director must contain all information about that
person as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee (including such person's
written consent to serve as a Director if so elected) and certain information
about the shareholder proposing to nominate that person. Shareholder proposals
must also include certain specified information.
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<PAGE>
These limitations on shareholder proposals do not restrict a shareholder's
right to include proposals in the Company's annual proxy materials pursuant to
rules promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
TRANSFER AGENT
The transfer agent for the Common Stock is American Securities Transfer &
Trust, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Company's
Common Stock. Sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.
Upon completion of the Offering, the Company will have outstanding 2,282,424
shares of Common Stock. Of these shares all of the 1,200,000 shares sold in the
Offering (assuming no exercise of the Underwriters' over-allotment option) will
be transferable without restriction or further registration under the Securities
Act, unless they are held by "affiliates" of the Company within the meaning of
Rule 144 promulgated under the Securities Act. Of the remaining shares held by
existing shareholders, 328,430 shares are "restricted shares" ("Restricted
Shares") within the meaning of amendments to Rule 144 which became effective
April 29, 1997, and, as such, may not be sold in the absence of registration
under the Securities Act or an exemption therefrom under Rules 144 and 701, and
753,994 shares are eligible for sale without restriction or further registration
under Rule 144(k), unless they are held by "affiliates" of the Company or
subject to a "lock-up" agreement summarized below.
Of the Restricted Shares held by existing shareholders, 100,006 shares will
be eligible for sale without restriction or further registration on September 8,
1997, unless they are held by "affiliates" of the Company or subject to a
"lock-up" agreement summarized below in "Underwriting". The remaining 228,424
Restricted Shares will be eligible for sale without restriction or further
registration on various dates in the fourth quarter of 1997, subject to the
volume limitations of Rule 144.
In general, under amendments to Rule 144 which became effective April 29,
1997, any person (or persons whose shares are aggregated for purposes of Rule
144) who beneficially owns Restricted Shares with respect to which at least one
year has elapsed since the later of the date the shares were acquired from the
Company or from an affiliate of the Company, is entitled to sell, within any
three month period, a number of shares that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock of the Company, or (ii) the
average weekly trading volume in Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
manner-of-sale provisions and notice requirements, and to the availability of
current public information about the Company. A person who is not an affiliate,
has not been an affiliate within 90 days prior to sale and who beneficially owns
Restricted Shares with respect to which at least two years have elapsed since
the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell such shares under Rule 144(k)
without regard to any of the volume limitations or other requirements described
above.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of Common Stock,
as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities. Prior to this Offering, there has been
no trading market for the Common Stock. The Company anticipates that the trading
market in the Common Stock, if any, will be limited based upon the number of
shares currently outstanding and anticipated to be sold in this Offering.
44
<PAGE>
As of the date of this prospectus, the Company had reserved an aggregate of
246,242 shares of Common Stock for issuance pursuant to the Option Plan, and no
options to purchase shares were outstanding under the 1997 Stock Option Plan. As
soon as practicable following the Offering, the Company intends to file a
registration statement under the Securities Act to register shares of Common
Stock reserved for issuance under the Option Plan. Such registration statement
will automatically become effective immediately upon filing.
UNDERWRITING
Each of the underwriters named below (the "Underwriters") have severally
agreed, subject to the terms and conditions of the Underwriting Agreement, to
purchase from the Company the number of shares of Common Stock set forth
opposite their respective names below. The nature of the obligations of the
Underwriters is such that if any of such shares are purchased, all must be
purchased.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Capital West...............................................................
ComVest Partners, Inc. ....................................................
-----------------
Total.................................................................... 1,200,000
-----------------
-----------------
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock offered hereby to the public at the price to
public set forth on the cover page of this prospectus. The Underwriters may
allow a concession to selected dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") not in excess of $.25 per
share. After the public offering, the price to public, the concession and the
reallowance may be changed by the Underwriters.
Capital West, one of the Underwriters, was first registered as a
broker-dealer in May 1995. Capital West has participated in six public equity
offerings as an underwriter, acting as a manager or co-manager in three such
offerings, although certain of its employees have had experience in underwriting
public offerings while employed by other broker-dealers. Prospective purchasers
of the securities offered hereby should consider Capital West's limited
underwriting experience in evaluating this Offering.
The Company has granted an option to the Underwriters, exercisable within 45
business days after the date of this prospectus, to purchase up to an aggregate
of 180,000 additional shares of Common Stock, at the initial price to public,
less the underwriting discount, set forth on the cover page of this prospectus.
The Underwriters may exercise the option only for the purpose of covering
over-allotments. To the extent that the Underwriters exercise such option, each
Underwriter will be committed, subject to certain conditions, to purchase from
the Company on a pro rata basis that number of additional shares of Common Stock
which is proportionate to such Underwriters' initial commitment.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed to pay to the Underwriters a nonaccountable expense
allowance of 3% of the gross proceeds derived from the sale of the shares of
Common Stock underwritten (including the sale of any shares of Common Stock
subject to the Underwriters' over-allotment option), $45,000 of which has been
paid as of the date of this prospectus. The Company also has agreed to pay all
expenses in connection
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<PAGE>
with qualifying the Common Stock offered hereby for sale under the laws of such
states as the Underwriters may designate, including filing fees and fees and
expenses of counsel retained for such purposes by the Underwriters and
registering the Offering with the NASD.
In connection with this Offering, the Company has agreed to sell to the
Underwriters, for a price of $.001 per warrant, warrants (the "Underwriters'
Warrants") to purchase shares of Common Stock equal to 10% of the total number
of shares sold pursuant to this Offering, excluding shares subject to the over-
allotment option. The Underwriters' Warrants are exercisable at a price equal to
120% of the initial public offering price ($6.00 assuming an initial public
offering price of $5.00 per share) for a period of four years commencing one
year from the date of this prospectus (the "Exercise Period"). The Underwriters'
Warrants grant to the holders thereof, with respect to the registration under
the Securities Act of the securities directly and indirectly issuable upon
exercise of the Underwriters' Warrants, one demand registration right during the
Exercise Period, as well as piggyback registration rights at any time during the
Exercise Period. The Company and its executive officers and directors have
agreed that for a period of 24 months after the date of this prospectus, they
will not offer, sell or otherwise dispose of any shares of Common Stock
beneficially owned or controlled by them (including subsequently acquired
shares) without the prior written consent of Capital West which consent shall
not be unreasonably withheld.
At the Company's request, the Underwriters have reserved up to 45,000 shares
of Common Stock (the "Directed Shares") for sale at the public offering price to
approximately 20 persons who are directors, officers or employees of, or
otherwise associated with, the Company and who have advised the Company of their
desire to participate in its future growth. Each director and executive officer
who is a purchaser of Directed Shares will be required to agree to restrictions
on resale similar to those described in the immediately preceding paragraph.
However the Underwriters are not obligated to sell any shares to any such
persons. The number of shares of Common Stock available for sale to the general
public will be reduced to the extent of sales of Directed Shares to any of the
persons for whom they have been reserved. Any shares not so purchased will be
offered by the Underwriters on the same basis as all other shares offered
hereby.
Prior to this Offering, there has been no market for the Common Stock and
there can be no assurance that a regular trading market will develop upon the
completion of this Offering. The initial public offering price was determined by
negotiations between the Company and the Underwriters. The primary factors
considered in determining such offering price included the history of and
prospects for the Company's business and the industry in which the Company
competes, market valuation of comparable companies, market conditions for public
offerings, the prospects for future earnings of the Company, an assessment of
the Company's management, the general condition of the securities markets, the
demand for similar securities of comparable companies and other relevant
factors.
In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock during and after the Offering. Specifically, the
Underwriters may over-allot or otherwise create a short position in the Common
Stock for their own account by selling more shares of Common Stock than have
been sold to them by the Company. The Underwriters may elect to cover any such
short position by purchasing shares of Common Stock in the open market or by
exercising the over-allotment option granted to the Underwriters. In addition,
such persons may stabilize or maintain the price of the Common Stock by bidding
for or purchasing shares of Common Stock in the open market and may impose
penalty bids, under which selling concessions allowed to syndicate members or
other broker-dealers participating in the Offering are reclaimed if shares of
Common Stock previously distributed in the Offering are repurchased in
connection with stabilizing transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The imposition of a penalty bid may also affect the price of the Common Stock to
the extent that it discourages resales thereof. No representation is made as to
the magnitude or effect of any such stabilization or other transactions. Such
transactions, if commenced, may be discontinued at any time.
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<PAGE>
The Underwriters have advised the Company that the Underwriters do not
expect any sales by the Underwriters to accounts over which they exercise
discretionary authority.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
has been passed upon for the Company by Phillips McFall McCaffrey McVay &
Murrah, P.C., Oklahoma City, Oklahoma. Robertson & Williams, Inc. of Oklahoma
City, Oklahoma, has served as counsel to the Underwriters in connection with
this Offering.
EXPERTS
The financial statements of HORIZON Pharmacies, Inc. at December 31, 1996,
and for the year then ended, appearing in this prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, and for
the year ended December 31, 1995, by Herold, Howard & Madsen P.C., independent
auditors, as set forth in their respective reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firms as experts in accounting and auditing.
The statements of operating revenues and direct operating expenses of the
Farmington Store Acquisition for the year ended December 31, 1995 and the period
from January 1, 1996 to April 26, 1996 and of the Vista Store Acquisition for
each of the two years in the period ended December 31, 1996, appearing in this
prospectus and Registration Statement have been audited by Herold, Howard &
Madsen P.C., independent auditors as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
On March 17, 1997, Ernst & Young LLP replaced Herold, Howard & Madsen P.C.
as the Company's independent auditors. In the Company's view, this change was
not the result of any disagreement relating to any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures. The reports issued by Herold, Howard & Madsen P.C. did not contain
an adverse opinion or a disclaimer of opinion, nor were such reports qualified
or modified as to uncertainty, audit scope, or accounting principles. At no time
during the engagement of Herold, Howard & Madsen P.C. were there any
disagreements on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Herold, Howard & Madsen P.C., would have caused
it to make a reference to the subject matter of the disagreement in connection
with its report. Notwithstanding the engagement of Ernst & Young LLP as the
Company's independent auditors, Herold, Howard & Madsen P.C. continues to
perform individual audits of certain acquired stores and to perform tax and
other financial planning for the Company.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. The Company has filed a
Registration Statement on Form SB-2 (the "Registration Statement") with the
Commission under the Securities Act with respect to the Common Stock offered
hereby. As permitted by the rules and regulations of the Commission, this
prospectus does not contain all of the information set forth in the Registration
Statement and in the exhibits and schedules thereto. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement and the exhibits thereto. Statements
contained in this prospectus concerning the provisions of documents filed with
the Registration Statement as exhibits and schedules are necessarily summaries
of such documents, and each such statement is qualified in its entirety by
reference to the copy of the applicable document filed with the Commission. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge and copied upon
47
<PAGE>
payment of the charges prescribed by the Commission at the Public Reference Room
of the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission at http://www.sec.gov.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF HORIZON PHARMACIES, INC...................................... F-2
Report of Independent Auditors..................................................... F-3
Independent Auditor's Report....................................................... F-4
Balance Sheets at December 31, 1996 and March 31, 1997............................. F-5
Statements of Income for the years ended December 31, 1995 and 1996 and the three
months ended March 31, 1996 and 1997............................................. F-6
Statements of Shareholders' Equity for the years ended December 31, 1995 and 1996
and the three months ended March 31, 1997........................................ F-7
Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the
three months ended March 31, 1996 and 1997....................................... F-8
Notes to Financial Statements...................................................... F-10
FINANCIAL STATEMENTS OF MESA DRUG, INC.--FARMINGTON STORE............................ F-17
Report of Independent Auditors..................................................... F-18
Statements of Operating Revenues and Direct Operating Expenses for the year ended
December 31, 1995 and the period from January 1, 1996 to April 26, 1996.......... F-19
Notes to Financial Statements...................................................... F-20
FINANCIAL STATEMENTS OF TRUE QUALITY PHARMACIES, INC.--VISTAS........................ F-21
Report of Independent Auditors..................................................... F-22
Combined Statements of Operating Revenues and Direct Operating Expenses for the
years ended December 31, 1995 and 1996........................................... F-23
Combined Statement of Net Assets as of March 6, 1997............................... F-24
Notes to Financial Statements...................................................... F-25
</TABLE>
F-1
<PAGE>
FINANCIAL STATEMENTS
HORIZON PHARMACIES, INC.
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THREE MONTHS ENDED MARCH 31, 1996 AND 1997
WITH REPORTS OF INDEPENDENT AUDITORS
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
HORIZON Pharmacies, Inc.
We have audited the accompanying balance sheet of HORIZON Pharmacies, Inc. (an S
corporation) as of December 31, 1996, and the related statements of income,
shareholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 HORIZON Pharmacies, Inc. at
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
April 4, 1997,
except for the third and fourth paragraphs of Note 6, as to which the date is
May 31, 1997
F-3
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
HORIZON Pharmacies, Inc.
We have audited the accompanying statements of income, shareholders' equity
and cash flows of HORIZON Pharmacies, Inc. for the year ended December 31, 1995.
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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of HORIZON
Pharmacies, Inc. for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
HEROLD, HOWARD & MADSEN P.C.
Dallas, Texas
April 24, 1996
except for the fourth paragraph of Note 6,
as to which the date is May 31, 1997
F-4
<PAGE>
HORIZON PHARMACIES, INC.
BALANCE SHEETS
ASSETS (NOTES 3 AND 4)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash................................................................................ $ 153,260 $ 109,699
Accounts receivable, net of allowance for uncollectible accounts of $20,000 in 1996
and $25,000 in 1997:
Third-party providers........................................................... 1,047,348 1,439,493
Others.......................................................................... 412,709 611,229
Inventories, at the lower of specific identification cost or market................. 3,290,717 3,985,876
Prepaid expenses.................................................................... 31,071 27,082
------------ -----------
Total current assets.................................................................. 4,935,105 6,173,379
Deferred offering costs............................................................... -- 63,850
Property, equipment and capital lease assets:
Property and equipment, at cost:
Land.............................................................................. 10,000 10,000
Building.......................................................................... 193,220 193,220
Equipment......................................................................... 410,162 477,980
------------ -----------
613,382 681,200
Less accumulated depreciation....................................................... 67,253 85,222
------------ -----------
Property and equipment, net......................................................... 546,129 595,978
Equipment under capital leases...................................................... 158,339 218,033
Less accumulated amortization....................................................... 33,884 44,158
------------ -----------
Equipment under capital leases, net................................................. 124,455 173,875
------------ -----------
Property, equipment and capital lease assets, net..................................... 670,584 769,853
Intangibles, at cost (NOTE 2):
Noncompete covenants................................................................ 146,788 146,788
Customer lists...................................................................... 211,605 279,996
Goodwill............................................................................ 814,107 1,135,716
------------ -----------
1,172,500 1,562,500
Less accumulated amortization....................................................... 189,417 219,869
------------ -----------
Intangibles, net...................................................................... 983,083 1,342,631
------------ -----------
$6,588,772 $8,349,713
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft...................................................................... $ 247,759 $ 730,239
Accounts payable.................................................................... 1,491,789 1,664,186
Accrued liabilities................................................................. 161,365 214,396
Notes payable:
Supplier (NOTE 3)................................................................. 1,215,000 1,180,000
Other (NOTE 2).................................................................... -- 898,642
Shareholder (NOTE 2).............................................................. -- 50,000
Current portion of long-term debt (NOTE 4).......................................... 228,759 332,268
Current obligations under capital leases (NOTE 5)................................... 27,400 46,680
------------ -----------
Total current liabilities............................................................. 3,372,072 5,116,411
Long-term debt (NOTE 4)............................................................... 1,363,858 1,205,101
Obligations under capital leases (NOTE 5)............................................. 102,769 132,600
Commitments (NOTE 5)
Shareholders' equity (NOTE 6):
Preferred stock, $.01 par value, authorized 1,000,000 shares; none issued
Common stock, $.01 par value, authorized 14,000,000 shares; issued 1,082,424
shares............................................................................ 10,824 10,824
Additional paid-in capital.......................................................... 1,760,303 1,760,303
Retained earnings (accumulated deficit)............................................. (21,054) 124,474
------------ -----------
Total shareholders' equity............................................................ 1,750,073 1,895,601
------------ -----------
$6,588,772 $8,349,713
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- --------------------------
1995 1996 1996 1997
------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales:
Prescription drugs.................................... $ 5,235,246 $ 10,515,353 $ 1,988,434 $ 4,060,266
Other................................................. 1,034,335 2,620,966 378,146 1,052,981
------------ ------------- ------------ ------------
Total net sales......................................... 6,269,581 13,136,319 2,366,580 5,113,247
Costs and expenses:
Cost of sales:
Prescription drugs.................................. 3,595,290 7,309,380 1,320,282 2,809,258
Other............................................... 776,517 1,632,325 283,230 649,246
Depreciation and amortization:
Property, equipment and capital lease assets........ 32,305 64,058 9,361 28,244
Intangibles......................................... 67,412 107,749 22,657 30,452
Selling, general and administrative expenses.......... 1,519,439 3,471,370 580,035 1,322,381
------------ ------------- ------------ ------------
Total costs and expenses................................ 5,990,963 12,584,882 2,215,565 4,839,581
------------ ------------- ------------ ------------
Income from operations.................................. 278,618 551,437 151,015 273,666
Other income (expense):
Interest and other income............................. 6,839 3,683 1,160 393
Interest expense...................................... (109,828) (252,767) (42,660) (53,531)
------------ ------------- ------------ ------------
Total other income (expense)............................ (102,989) (249,084) (41,500) (53,138)
------------ ------------- ------------ ------------
Income before pro forma provision for income taxes...... 175,629 302,353 109,515 220,528
Pro forma provision for income taxes.................... 61,000 106,000 38,000 77,000
------------ ------------- ------------ ------------
Pro forma net income.................................... $ 114,629 $ 196,353 $ 71,515 $ 143,528
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Pro forma net income per share (Note 6)................. $ .12 $ .18 $ .07 $ .13
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Weighted average shares outstanding (Note 6)............ 957,733 1,074,246 1,058,000 1,142,424
</TABLE>
See accompanying notes.
F-6
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (NOTE 6)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
--------------------- PAID-IN (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
---------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.................. 554,482 $ 5,545 $ 672,178 $ 14,464 $ 692,187
Sale of common stock.......................... 355,518 3,555 743,609 -- 747,164
Redemption of common stock for debt........... (56,000) (560) (75,320) -- (75,880)
Net income.................................... -- -- -- 175,629 175,629
Distributions to shareholders................. -- -- -- (260,000) (260,000)
---------- --------- ------------ ------------ -------------
Balance at December 31, 1995.................. 854,000 8,540 1,340,467 (69,907) 1,279,100
Sale of common stock.......................... 64,424 644 321,476 -- 322,120
Exercise of common stock options.............. 160,000 1,600 78,400 -- 80,000
Issuance of common stock to reduce long-term
debt........................................ 4,000 40 19,960 -- 20,000
Net income.................................... -- -- -- 302,353 302,353
Distributions to shareholders................. -- -- -- (253,500) (253,500)
---------- --------- ------------ ------------ -------------
Balance at December 31, 1996.................. 1,082,424 10,824 1,760,303 (21,054) 1,750,073
Net income (unaudited)........................ -- -- -- 220,528 220,528
Distributions to shareholders
(unaudited)................................. -- -- -- (75,000) (75,000)
---------- --------- ------------ ------------ -------------
Balance at March 31, 1997 (unaudited)......... 1,082,424 $ 10,824 $ 1,760,303 $ 124,474 $ 1,895,601
---------- --------- ------------ ------------ -------------
---------- --------- ------------ ------------ -------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -----------------------
1995 1996 1996 1997
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Income before pro forma provision for income taxes.......... $ 175,629 $ 302,353 $ 109,515 $ 220,528
Adjustments to reconcile income before pro forma provision
for income taxes to net cash provided by operating
activities:
Depreciation and amortization of property, equipment and
capital lease assets.................................... 32,305 64,058 9,361 28,244
Amortization of intangibles............................... 67,412 107,749 22,657 30,452
Provision for uncollectible accounts receivable........... 19,876 21,241 2,084 5,598
Changes in operating assets and liabilities, net of
acquisitions of businesses:
Accounts receivable................................... (415,094) (847,494) 63,357 (529,881)
Inventories........................................... (199,330) (716,553) (106,976) (212,899)
Prepaid expenses...................................... (27,495) 4,302 17,143 3,989
Bank overdraft........................................ 130,830 116,929 (6,737) 482,480
Accounts payable...................................... 477,990 888,348 200 172,397
Accrued liabilities................................... 25,396 108,523 15,895 53,031
------------ ------------ ---------- -----------
Total adjustments........................................... 111,890 (252,897) 16,984 33,411
------------ ------------ ---------- -----------
Net cash provided by operating activities................... 287,519 49,456 126,499 253,939
INVESTING ACTIVITIES
Purchases of property and equipment......................... (33,129) (156,625) (5,161) (7,819)
Proceeds from sales of property and equipment............... -- -- 5,557 --
Assets acquired for cash in acquisitions of businesses...... (545,000) -- -- --
------------ ------------ ---------- -----------
Net cash provided by (used in) investing activities......... (578,129) (156,625) 396 (7,819)
FINANCING ACTIVITIES
Borrowings on notes payable................................. -- 210,535 300,000 --
Borrowings on long-term debt................................ 24,120 -- -- --
Principal payments on notes payable......................... -- (35,000) -- (85,000)
Principal payments on long-term debt........................ (128,869) (180,643) (33,224) (55,248)
Principal payments on obligations under capital
leases.................................................... (5,562) (18,716) (2,680) (10,583)
Proceeds from sale of stock................................. 747,164 402,120 -- --
Payments for deferred offering costs........................ -- -- -- (63,850)
Distributions to shareholders............................... (260,000) (253,500) (60,000) (75,000)
------------ ------------ ---------- -----------
Net cash provided by (used in) financing activities......... 376,853 124,796 204,096 (289,681)
------------ ------------ ---------- -----------
Net increase (decrease) in cash............................. 86,243 17,627 330,991 (43,561)
Cash at beginning of period................................. 49,390 135,633 135,633 153,260
------------ ------------ ---------- -----------
Cash at end of period....................................... $ 135,633 $ 153,260 $ 466,624 $ 109,699
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
(CONTINUED ON FOLLOWING PAGE)
</TABLE>
F-8
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -----------------------
1995 1996 1996 1997
------------ ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID.................... $ 106,828 $ 240,767 $ 39,660 $ 53,531
NONCASH INVESTING AND FINANCING ACTIVITIES
Additions to property and equipment for long-term debt...... $ -- $ 150,000 $ -- $ --
Equipment leased under capital leases....................... 32,692 88,208 -- 59,694
Issuance of common stock to reduce long-term debt........... -- 20,000 -- --
Redemption of common stock for long-term debt, excluding
cash proceeds of $24,120.................................. 75,880 -- -- --
Acquisitions of businesses financed by debt:
Accounts receivable and other............................. 24,967 (1,793) -- 66,382
Inventories............................................... 801,000 1,014,247 -- 482,260
Property and equipment.................................... 140,000 85,000 -- 60,000
Intangibles............................................... 638,000 165,000 -- 390,000
------------ ------------ ---------- -----------
1,603,967 1,262,454 -- 998,642
Less cash paid............................................ (545,000) -- -- --
------------ ------------ ---------- -----------
Assets acquired........................................... $ 1,058,967 $ 1,262,454 $ -- $ 998,642
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
Financed by:
Notes payable............................................. $ 400,000 $ 639,465 $ -- $ 898,642
Advance by shareholder.................................... -- -- -- 100,000
Long-term debt............................................ 658,967 622,989 -- --
------------ ------------ ---------- -----------
$ 1,058,967 $ 1,262,454 $ -- $ 998,642
------------ ------------ ---------- -----------
------------ ------------ ---------- -----------
</TABLE>
See accompanying notes.
F-9
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
HORIZON Pharmacies, Inc., a Texas corporation (the "Company"), was organized
on August 31, 1992. During the period from inception (August 31, 1992) to
February 27, 1994, the Company had no operations (NOTE 2).
NATURE OF OPERATIONS
At March 31, 1997, the Company owns and operates fourteen retail pharmacies
located in five states (NOTE 2), including nine pharmacies located in Texas.
Purchases from the Company's largest supplier amounted to $3,356,215 in 1995 and
$8,077,406 in 1996. Accounts payable to this supplier totaled $1,001,023 at
December 31, 1996. Notes payable to this supplier were $1,215,000 at December
31, 1996 and $1,180,000 at March 31, 1997 (NOTE 3).
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Accounts receivable are unsecured and consist principally of receivables from
third-party providers (insurance companies and government agencies) under
third-party payment plans and receivables from individuals. Receivables from
third-party providers are recorded net of any allowances provided under the
respective payment plans. Since payments due from third-party payers are
sensitive to payment criteria changes and legislative actions, the allowances
are reviewed continually and adjusted for accounts deemed uncollectible by
management.
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 amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
ADVERTISING
Advertising costs are charged to expense as incurred and amounted to $35,962
in 1995 and $84,057 in 1996.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided on a straight-line basis
over the estimated useful lives of the assets. Amortization of equipment under
capital leases is provided on a straight-line basis over the estimated useful
lives of the equipment or over the terms of the leases, whichever is shorter.
Amortization of intangibles, including noncompete covenants, customer lists and
goodwill are being amortized using the straight-line method over 2 to 7 years, 5
years and 20 years, respectively.
The Company reviews each store for impairment whenever events or changes in
circumstances indicate that the carrying amounts of intangibles may not be
recoverable, based upon expectations of undiscounted future cash flows.
F-10
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
NOTES PAYABLE: The carrying amount reported in the balance sheet for
variable-rate notes payable approximates its fair value.
LONG-TERM DEBT: The carrying amount reported in the balance sheet for
variable-rate long-term debt approximates its fair value. The fair values of
the Company's fixed-rate long-term debt are estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements. At December 31, 1996, the fair
value of the Company's long-term debt was approximately $1,614,000.
INCOME TAXES
No historical provisions for income taxes have been included in the
accompanying financial statements as income taxes, if any, are payable by the
shareholders under provisions of subchapter S of the Internal Revenue Code. At
December 31, 1996, the net bases of assets and liabilities for financial
reporting purposes exceeds such bases for tax purposes by $427,000.
The pro forma provision for income taxes included in the accompanying
statements of income are based on an estimated effective tax rate of 35% and are
presented as though the Company was required to pay income taxes in the periods
presented.
DEFERRED OFFERING COSTS
Specific incremental costs directly attributable to a proposed initial
public offering of common stock (the "Offering") have been deferred and will be
charged against the gross proceeds of the Offering or charged to expense if the
Offering is aborted.
UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited financial statements include all adjustments,
consisting of normal, recurring accruals, which the Company considers necessary
for a fair presentation of the financial position and the results of operations
for the indicated periods. The results of operations for the three months ended
March 31, 1997, are not necessarily indicative of the results to be expected for
the full year ending December 31, 1997. The Company's sales and earnings are
higher during peak holiday periods and from Christmas through Easter (the first
and fourth quarters of the calendar year). Estimated gross profit rates were
used to determine cost of sales for the three months ended March 31, 1996 and
1997.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is based upon the weighted average number of
shares of common stock and dilutive common stock equivalent shares outstanding
during each period (NOTE 6) adjusted in all periods presented for the effect of
the exercise of stock options in 1996 at less than the expected price of shares
in the proposed Offering and the number of shares of stock required to pay
proposed distributions of $300,000 to shareholders from the proceeds of the
Offering.
F-11
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share," which is required to be adopted by the Company in the
reporting period ending December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded. The
Company has determined the impact of SFAS 128 on the calculation of net income
per share would not be material.
2. ACQUISITIONS
At December 31, 1996, the Company operates eleven conventional, freestanding
retail pharmacies, all of which were acquired from third parties in purchase
transactions beginning February 27, 1994. Such acquisitions have each been
structured as asset purchases and generally have included inventories, store
fixtures and the assumption of store operating lease arrangements (NOTE 5). The
acquisitions generally have been financed by debt to the sellers and/or an
inventory supplier (NOTES 3 AND 4). A summary of acquisitions follows:
<TABLE>
<CAPTION>
ASSETS ACQUIRED
STORE PURCHASE ------------------------------------- DEBT
YEAR OPERATIONS PRICE INVENTORIES INTANGIBLES OTHER INCURRED
- -------------- ------------- ------------ ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
1994.......... 3 $ 944,201 $ 506,680 $ 369,500 $ 68,021 $ 368,080
1995.......... 4 1,603,967 801,000 638,000 164,967 1,058,967
1996.......... 4 1,262,454 1,014,247 165,000 83,207 1,262,454
</TABLE>
The following unaudited pro forma results of operations data gives effect to
the acquisitions completed in 1995 and 1996 as if the transactions had been
consummated as of January 1, 1995 and 1996. The unaudited pro forma results of
operations data is presented for illustrative purposes and is not necessarily
indicative of the actual results that would have occurred had the acquisitions
been consummated as of January 1, 1995 or 1996, respectively, or of future
results of operations. The data reflects adjustments for amortization of
intangibles resulting from the purchases, incremental interest expense resulting
from borrowings to fund the acquisitions and income taxes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Unaudited pro forma information:
Net sales.................................................... $ 16,177,000 $ 17,904,000
------------- -------------
------------- -------------
Net income................................................... $ 121,000 $ 281,000
------------- -------------
------------- -------------
Net income per share......................................... $ .13 $ .26
</TABLE>
In March 1997, the Company acquired from a third party three retail
pharmacies in a purchase transaction. The total purchase price of $998,642 was
allocated to inventories ($482,260), property and equipment ($60,000),
intangibles ($390,000) and other assets ($66,382). The purchase was financed by
an unsecured 13% demand note to a shareholder of $100,000 ($50,000 repaid by
March 31, 1997) and the issuance of a 8.5% note payable to the seller for
$898,642. The note to the seller is secured by the assets acquired and
guarantees by certain shareholders and is due in varying installments until
December 25, 1997.
F-12
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The following unaudited pro forma results of operations data gives effect to
the acquisition completed in March 1997 as if the transaction had been
consummated as of January 1, 1996 and 1997. The unaudited pro forma results of
operations data is presented for illustrative purposes and is not necessarily
indicative of the actual results that would have occurred had the acquisitions
been consummated as of January 1, 1996 and 1997, respectively, or of future
results of operations. The data reflects adjustments for amortization of
intangibles resulting from the purchase, incremental interest expense resulting
from borrowing to fund the acquisition and income taxes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Unaudited pro forma information:
Net sales....................................................... $ 3,463,000 $ 5,892,000
------------ ------------
------------ ------------
Net income...................................................... $ 94,000 $ 165,000
------------ ------------
------------ ------------
Net income per share............................................ $ .09 $ .14
</TABLE>
3. NOTES PAYABLE TO SUPPLIER
In October 1996, the Company entered into a Loan Agreement under the terms
of which a supplier committed until May 17, 1997 to loan to the Company a
maximum of $1,500,000 ($800,000 under Note A and $700,000 under Note B) to be
used principally to acquire specified operating assets of retail pharmacies.
Borrowings under the facility are secured by certain accounts receivable,
inventories, property and equipment, and guarantees by certain shareholders. The
Loan Agreement contains various covenants which limit, among other things, the
Company's ability to incur additional debt, redeem common stock, enter into
certain transactions with affiliates, pay dividends and sell assets. The Company
is also required to meet a specified debt to equity ratio.
Notes payable to supplier consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Note A due on demand, plus interest at a specified bank's prime
rate plus 2% (10.25% at December 31, 1996)..................... $ 550,000 $ 550,000
Note B due on demand or in monthly installments of $11,667 until
September 10, 2001, plus interest at a specified bank's prime
rate plus 2% (10.25% at December 31, 1996)..................... 665,000 630,000
------------ ------------
$1,215,000 $ 1,180,000
------------ ------------
------------ ------------
</TABLE>
F-13
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Note payable to former shareholder, due on March 1, 1998,
interest at New York prime plus 4% (12.25% at December 31,
1996).......................................................... $ 100,000 $ 100,000
Installment notes due in varying installments (totaling $29,524
per month, as of December 31, 1996) including interest at rates
ranging from 8% to 10.25% and maturing on various dates from
November 1999 to June 2011..................................... 1,492,617 1,437,369
------------ ------------
1,592,617 1,537,369
Less current portion of long-term debt........................... 228,759 332,268
------------ ------------
Long-term debt................................................... $1,363,858 $ 1,205,101
------------ ------------
------------ ------------
</TABLE>
Long-term debt is secured by certain accounts receivable, inventories and
property and equipment. Certain long-term debt is secured by guarantees of
certain shareholders.
Long-term debt maturing during the five years subsequent to 1996 is as
follows: 1997--$228,759; 1998--$350,622; 1999--$271,305; 2000--$227,585 and
2001--$207,657.
5. LEASES
The Company leases all of its retail store facilities under noncancelable
operating leases, many of which expire within eight years. These leases require
the Company to pay for taxes, maintenance and insurance and contain renewal
options, certain of which involve rent increases. Rent expense was $100,725 in
1995 and $195,609 in 1996.
The Company leases most of its retail store pharmacy computer equipment
under capital lease agreements which expire from 1999 to 2001.
F-14
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LEASES (CONTINUED)
At December 31, 1996, the future minimum lease payments under operating and
capital leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
1997.................................................................. $ 203,951 $ 41,847
1998.................................................................. 164,309 41,847
1999.................................................................. 97,697 37,535
2000.................................................................. 77,596 27,605
2001.................................................................. 38,985 18,201
---------- ----------
Total................................................................. $ 582,538 167,035
----------
----------
Less amount representing interest..................................... 36,866
----------
Net present values.................................................... 130,169
Current obligations under capital leases.............................. 27,400
----------
Obligations under capital leases...................................... $ 102,769
----------
----------
</TABLE>
6. SHAREHOLDERS' EQUITY
During 1995, the Company sold 255,512 and 100,006 shares of common stock at
$1.75 and $3.00 per share, respectively. In addition, the Company redeemed
56,000 shares of common stock at $1.36 per share and received cash of $24,120 in
exchange for a note payable (Note 4).
During 1996, the Company issued 160,000 shares of common stock at $.50 per
share relating to the exercise of all stock options granted to the officers and
founders of the Company in 1994. Additionally, the Company sold 64,424 shares of
common stock at $5.00 per share. The Company also issued 4,000 shares of common
stock at $5 per share in exchange for a $20,000 reduction in long-term debt.
In March 1997, the Board of Directors approved the 1997 Stock Option Plan
(the "Plan"). The Plan was amended by the Board of Directors and was approved by
the shareholders on May 31, 1997. Options for up to 10% of the Company's
outstanding shares of common stock may be granted until March 2007 to key
employees and directors at prices as specified in the Plan on the dates the
options are granted. Except as provided in the option agreements, options are
exercisable at any time during a ten-year term. No options have been granted to
date.
In April 1997, the Board of Directors of the Company approved a two-for-one
split of the Company's common stock. The split and an amendment to the Company's
articles of incorporation to change the authorized capitalization from 1,000,000
shares of $1 par common stock to 14,000,000 shares of $.01 par common stock and
1,000,000 shares of $.01 par preferred stock were approved by the shareholders
on May 31, 1997. The Board of Directors has the authority to issue preferred
stock in one or more classes or series and to fix from time to time the number
of shares to be included in each such class or series and the designations,
preferences, qualifications, limitations, restrictions and rights of the shares
of each such class or series. The effects of the stock split and
recapitalization have been reflected retroactively in the accompanying financial
statements.
F-15
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLAN
Effective January 1, 1996, the Company adopted a profit sharing plan for
certain full-time employees. Each participant in the plan may contribute by
payroll deduction up to 15% of their earnings. The Company may make matching
contributions of a portion of each participant's contribution up to 6% of their
earnings. The Company may also make a profit sharing contribution. No matching
or profit sharing contributions were made in 1996.
F-16
<PAGE>
FINANCIAL STATEMENTS
MESA DRUG, INC.--FARMINGTON STORE
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM JANUARY 1, 1996 TO APRIL 26, 1996
WITH REPORT OF INDEPENDENT AUDITORS
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
HORIZON Pharmacies, Inc.
We have audited the accompanying statements of operating revenues and direct
operating expenses for Mesa Drug, Inc.--Farmington Store for the year ended
December 31, 1995 and the period from January 1, 1996 to April 26, 1996. These
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 accompanying statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the accompanying statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, the accompanying statements were prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission and are not intended to be a complete presentation of the
revenues and expenses of Mesa Drug, Inc.--Farmington Store.
In our opinion, the statements referred to above present fairly, in all
material respects, the operating revenues and direct operating expenses of Mesa
Drug, Inc.--Farmington Store for the year ended December 31, 1995 and the period
from January 1, 1996 to April 26, 1996.
HEROLD, HOWARD & MADSEN P.C.
Dallas, Texas
March 28, 1997
F-18
<PAGE>
MESA DRUG, INC.--FARMINGTON STORE
STATEMENTS OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM JANUARY 1,
DECEMBER 31, 1995 1996 TO APRIL 26, 1996
----------------- --------------------------
<S> <C> <C>
Sales--RX.......................................................... $ 2,342,399 $ 914,834
Sales--Other....................................................... 1,265,463 332,156
----------------- -----------
Total Sales........................................................ 3,607,862 1,246,990
Cost of Goods Sold................................................. 2,357,352 826,053
----------------- -----------
Gross Profit....................................................... 1,250,510 420,937
Operating expenses:
Professional fees................................................ 64,122 16,940
Advertising...................................................... 25,614 6,148
Bad debts........................................................ 4,215 --
Depreciation..................................................... 51,293 8,324
Rent............................................................. 60,696 22,843
Security......................................................... 1,163 639
Dues & Subscriptions............................................. 10,227 3,232
Repairs/Maintenance.............................................. 8,724 4,760
Meals & Entertainment............................................ 4,185 3,614
Insurance........................................................ 51,624 5,715
Janitorial....................................................... 2,041 718
Miscellaneous.................................................... 4,279 367
Office supplies.................................................. 35,855 10,502
Supplies......................................................... 64,263 24,781
Taxes............................................................ 54,329 18,190
Telephone........................................................ 32,260 7,924
Travel........................................................... 3,622 80
Utilities........................................................ 21,969 7,473
Wages............................................................ 518,458 160,606
Auto expenses.................................................... 23,172 4,273
Uniforms......................................................... 385 --
Royalties........................................................ 7,393 --
----------------- -----------
Total operating expenses........................................... 1,049,889 307,129
----------------- -----------
Operating profit................................................... $ 200,621 $ 113,808
----------------- -----------
----------------- -----------
</TABLE>
See accompanying notes.
F-19
<PAGE>
MESA DRUG, INC.--FARMINGTON STORE
NOTES TO THE FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995 AND
PERIOD FROM JANUARY 1, 1996 TO APRIL 26, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Mesa Drug, Inc. owns and operates two retail pharmacies located in New
Mexico. The financial statements presented include only the operations of the
retail pharmacy located in Farmington, New Mexico for the year ended December
31, 1995 and the period from January 1, 1996 to April 26, 1996. The financial
statements represent the operations of the retail pharmacy prior to the sale to
HORIZON Pharmacies, Inc. ("HORIZON"). HORIZON purchased the business, including
various assets, on April 27, 1996. Expenses relating to income taxes, interest
and executive compensation are not included because they are not directly
related to the sale.
DEPRECIATION
Depreciation is provided on a straight-line basis over the estimated life of
the assets. In these financial statements, depreciation is included only for
those assets to be sold to HORIZON.
BASIS OF ACCOUNTING
The financial statements are prepared on the accrual basis of accounting and
accordingly reflect revenues at the time products are sold or services are
rendered. Expenses are recognized when the products are received or the services
are performed.
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 amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
F-20
<PAGE>
FINANCIAL STATEMENTS
TRUE QUALITY PHARMACIES, INC.--VISTAS
AS OF MARCH 6 AND 7, 1997
YEARS ENDED DECEMBER 31, 1995 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
HORIZON Pharmacies, Inc.
We have audited the accompanying combined statements of operating revenues
and direct operating expenses for True Quality Pharmacies, Inc.--Vistas for the
years ended December 31, 1995 and 1996 and the Combined Statement of Net Assets
Sold as of March 6 and 7, 1997. These statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 accompanying statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the accompanying statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, the accompanying statements were prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission and are not intended to be a complete presentation of the
revenues and expenses nor the financial position of True Quality Pharmacies,
Inc.--Vistas.
In our opinion, the statements referred to above present fairly, in all
material respects, the combined operating revenues and direct operating expenses
of True Quality Pharmacies, Inc.--Vistas for the years ended December 31, 1995
and 1996 and the net assets sold as of March 6 and 7, 1997.
HEROLD, HOWARD & MADSEN P.C.
Dallas, Texas
March 28, 1997
F-22
<PAGE>
TRUE QUALITY PHARMACIES, INC.--VISTAS
COMBINED STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Sales--RX........................................................................... $ 3,628,467 $ 3,726,405
Sales--Other........................................................................ 522,814 502,766
------------ ------------
Total Sales......................................................................... 4,151,281 4,229,171
Cost of Goods Sold.................................................................. 2,900,035 3,021,070
------------ ------------
Gross Profit........................................................................ 1,251,246 1,208,101
Operating expenses:
Inventory services................................................................ 2,615 5,685
Commissions....................................................................... -- 600
Delivery.......................................................................... 6,113 6,105
Advertising....................................................................... 40,118 29,167
Bank charges...................................................................... 3,201 3,269
Bad debt expense.................................................................. 14,878 5,274
Data processing................................................................... 24,519 25,250
Depreciation...................................................................... 10,440 9,628
Rent.............................................................................. 53,975 52,743
Credit card charges............................................................... 2,062 2,211
Dues & Subscriptions.............................................................. 3,279 2,868
Repairs/Maintenance............................................................... 9,669 12,953
Meals & Entertainment............................................................. 459 531
Insurance......................................................................... 44,382 39,804
Professional fees................................................................. 25,895 26,876
Miscellaneous..................................................................... 1,465 1,875
Office supplies................................................................... 3,658 4,002
Postage........................................................................... 2,630 17,924
Supplies.......................................................................... 4,069 2,411
Taxes/Licenses.................................................................... 35,383 50,130
Telephone......................................................................... 14,012 15,227
Travel............................................................................ 2,181 2,728
Utilities......................................................................... 17,198 17,523
Wages............................................................................. 431,504 434,817
Accounts receivable fee........................................................... 10,322 12,180
Vials and labels.................................................................. 12,602 12,146
------------ ------------
Total Operating expenses............................................................ 776,629 793,927
------------ ------------
Operating profit.................................................................... $ 474,617 $ 414,174
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-23
<PAGE>
TRUE QUALITY PHARMACIES, INC.--VISTAS
COMBINED STATEMENT OF NET ASSETS SOLD
<TABLE>
<CAPTION>
MARCH 6
AND 7,
1997
----------
<S> <C>
ASSETS SOLD
Current assets:
Accounts receivable, net............................................................................ $ 66,494
Inventories, at cost................................................................................ 482,260
----------
Total current assets.................................................................................. 548,754
Equipment, at cost.................................................................................... 112,952
Less accumulated depreciation......................................................................... 94,893
----------
Equipment, net........................................................................................ 18,059
----------
Total assets sold..................................................................................... 566,813
Liabilities assumed................................................................................... --
----------
Net assets sold....................................................................................... $ 566,813
----------
----------
</TABLE>
See accompanying notes.
F-24
<PAGE>
TRUE QUALITY PHARMACIES, INC.--VISTAS
NOTES TO THE FINANCIAL STATEMENTS
AS OF MARCH 6 AND 7, 1997 AND THE YEARS ENDED
DECEMBER 31, 1995 AND DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
True Quality Pharmacies, Inc. owns and operates fourteen retail pharmacies
located in Texas, Oklahoma and Kansas. The financial statements presented
include only the operations of the retail pharmacies operating as Vistas and
located in Mineola, Mt. Vernon and McKinney, Texas for the years ended December
31, 1995 and 1996 on a combined basis and their combined net assets sold as of
March 6, 1997, prior to the sale of such assets to HORIZON Pharmacies, Inc.
("HORIZON"). The financial statements represent the operations of the retail
pharmacies prior to the sale. HORIZON purchased the business, including various
assets on March 6 and 7, 1997. Expenses relating to income taxes, interest and
executive compensation are not included because they are not directly related to
the sale.
DEPRECIATION
Depreciation is provided on a straight-line basis over the estimated useful
life of the assets. In these financial statements, depreciation is only included
for those assets to be sold to HORIZON.
BASIS OF ACCOUNTING
The financial statements are prepared on the accrual basis of accounting and
accordingly reflect revenues at the time products are sold or services are
rendered. Expenses are recognized when the products are received or the services
are performed.
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 amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER,
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 14
Dividend Policy................................ 14
Dilution....................................... 15
Capitalization................................. 16
Selected Financial Information................. 17
Pro Forma Combined Financial Data.............. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 24
Business....................................... 29
Management..................................... 37
Certain Transactions........................... 41
Principal Shareholders......................... 42
Description of Securities...................... 42
Shares Eligible for Future Sale................ 44
Underwriting................................... 45
Legal Matters.................................. 47
Experts........................................ 47
Additional Information......................... 47
Financial Statements........................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,200,000 SHARES
HORIZON
PHARMACIES, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
CAPITAL WEST SECURITIES, INC.
COMVEST PARTNERS, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HORIZON PHARMACIES, INC.
REGISTRATION STATEMENT ON FORM SB-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02 of the Texas Business Corporation Act provides broadly for
indemnification of directors and officers against claims and liabilities against
them in their capacities as such. The Company's Bylaws also provide for the
indemnification of directors and officers by the Company. In addition, the
Company has purchased Directors' and Officers' Liability and Company
Reimbursement Liability Insurance which, in certain circumstances, provide for
payments to the directors and officers of the Company, in the event of such
liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All expenses of registration will be
borne by the Company. All of the amounts shown are estimates, except the
registration fee, and assume exercise of the underwriters' over-allotment
option.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 2,272.73
NASD fees...................................................... 1,300.00
Underwriters' non-accountable expense allowance................ 207,000.00
Blue Sky Fees.................................................. 15,000.00
Legal fees and expenses........................................ 80,000.00
Accounting fees and expenses................................... 65,000.00
Printing and engraving expenses................................ 35,000.00
Exchange listing fees.......................................... 21,000.00
----------
TOTAL EXPENSES............................................... $426,572.73
----------
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information regarding sales of securities
of the Company issued within the past three years, which were not registered
pursuant to the Securities Act of 1933, as amended (the "Securities Act"). The
following information has been adjusted to reflect the 2-for-1 split for all
Common Stock approved by the Company's Board of Directors on April 14, 1997:
On June 6, 1994, the Company sold 120,000 shares of Common Stock to five
officers, directors and an employee for an aggregate price of $150,000. The
Company sold an additional 136,000 shares to five officers and directors, one
person with whom the Company's officers and/or directors had a prior business
relationship ("Business Associate"), and one employee on August 9, 1994 for an
aggregate price of $170,000. The Company sold an additional 118,482 shares of
Common Stock on November 18, 1994 to its officers and directors, one employee,
one Business Associate, and one additional investor for an aggregate of
$177,723.
On February 27, 1995, the Company sold 255,512 shares of Common Stock to
five officers and directors, seven employees (one of whom was an existing
shareholder), two existing shareholders, three Business Associates and three
other investors for an aggregate of $447,146; on September 8, 1995 the Company
sold 100,006 shares of Common Stock for an aggregate of $300,018 to five
officers and directors, and 12 existing shareholders.
II-1
<PAGE>
On September 25, 1996, the Company sold 19,424 shares of Common Stock for an
aggregate $97,120 to 19 officers, directors and existing shareholders. On
September 26, 1996, the Company issued 160,000 shares of Common Stock for an
aggregate $80,000 in connection with the exercise of certain stock options held
by the Company's officers and directors. On September 30, 1996, the Company sold
31,000 shares of Common Stock to certain relatives of its officers and directors
for an aggregate $155,000. On October 18, 1996, the Company sold 14,000 shares
of Common Stock to a relative of one of the Company's directors for an aggregate
price of $70,000, and on November 30, 1996 the Company issued 4,000 shares of
Common Stock for an aggregate $20,000 to one of its lenders to reduce long-term
debt.
No sales commissions were paid in connection with any of the sales of
securities described above. The Company believes that the securities were issued
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act as set forth below.
In determining the availability of an exemption under Section 4(2), all
offerees of the Company's Common Stock had a prior business or personal
relationship with the Company, its officers or directors, and the amount of
securities offered in each offering was less than $500,000. Each of the offerees
was a sophisticated investor by virtue of their experience in the retail
pharmacy industry or their close personal relationship with the Company's
officers or directors. No general solicitation or advertising was employed in
connection with any of the offerings, and with the exception of the Company's
offering in September 1996, which was extended to each of the Company's existing
27 shareholders in connection with such shareholders' preemptive rights under
Texas law, no offer was made to more than 25 persons. Each of the offerings was
separately conducted in connection with the acquisition of one or more stores,
and in no offering did the amount of Common Stock sold to non-officers or
- -directors exceed $337,000 in the aggregate, nor $812,000 for all such offerings
combined. Although no formal offering documents were prepared and distributed to
potential investors, each investor was given an opportunity to receive financial
and other information regarding the Company's operations by means of the close
business and/or personal relationship of each investor to the Company or its
officers or directors. Similarly, while no investment intent letters were
obtained by the Company and the stock certificates issued by the Company did not
bear any restrictive legends, the Company's stock transfer records were marked
with stop transfer instructions in connection with the stock split approved by
the Board of Directors on April 14, 1997, and stock certificates replacing the
original certificates will bear appropriate restrictive legends.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Underwriting Agreement between the Company and Capital West Securities, Inc.
*3.1 Restated Articles of Incorporation.
*3.2 Amended and Restated Articles of Incorporation.
*3.3 Amended and Restated Bylaws.
*4.1 Specimen Certificate of the Common Stock.
*4.3 Form of Warrant Agreement between the Company and the Underwriters.
4.4 Stock Option Plan (filed electronically herewith).
*5.1 Opinion of Phillips McFall McCaffrey McVay & Murrah, P.C. as to the legality of the securities being
registered.
*10.1 Loan Agreement dated October 16, 1996, by and between the Company and Bergen Brunswig Drug Company.
*10.2 Purchase Agreement dated March 8, 1997 by and between Mesa Drug, Inc. and Horizon Pharmacies, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
*10.3 Asset Purchase Agreement dated March 4, 1997 by and between True Quality Pharmacies, Inc. (d/b/a Vista
Pharmacies) and Horizon Pharmacies, Inc.
10.4 Form of Employment Agreement by and between the Company and each of Rick D. McCord, R.Ph., Sy S. Shahid,
David W. Frauhiger, Charlie K. Herr, R.Ph., Robert D. Mueller, R.Ph., and Nancy Papaneri, R.Ph. (filed
electronically herewith).
*10.5 Form of Lockup Agreement.
*10.6 Supply Agreement dated effective January 1, 1995 by and between the Company and
Bergen Brunswig, Inc.
16.1 Letter of Herold, Howard & Madsen P.C., Independent Auditors, relating to change in auditors (filed
electronically herewith).
23.1 Consent of Herold, Howard & Madsen P.C., Independent Auditors (filed electronically herewith).
23.2 Consent of Ernst & Young LLP, Independent Auditors (filed electronically herewith).
*23.3 Consent of Phillips McFall McCaffrey McVay & Murrah, P.C.
*24.1 Powers of Attorney of Messrs. Frauhiger, Herr, McCord, Mueller and Shahid.
*24.2 Powers of Attorney of Carson A. McDonald and Philip H. Yielding.
*27 Financial data schedule.
</TABLE>
- ------------------------
* Previously filed
ITEM 28. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes:
(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
(b) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it
effective.
(c) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(d) That, for the purpose of determining liability under the Securities
Act, each post-effective amendment shall be deemed to be a new
registration statement of the securities offered, and the offering of
the securities at that time shall be deemed to be the initial bona
fide offering thereof.
(e) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination or end of the
offering.
II-3
<PAGE>
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and has duly caused this Amendment No. 2
to Registration Statement on Form SB-2, to be signed on its behalf by the
undersigned, thereon duly authorized in the City of Princeton, State of Texas,
on July 1, 1997.
HORIZON PHARMACIES, INC.
a Texas corporation
By: /s/ RICK D. MCCORD, R.PH.
-----------------------------------------
Rick D. McCord, R.Ph.
PRESIDENT AND CHIEF OPERATING OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ RICK D. MCCORD, R.PH.
- ------------------------------ Chairman of the Board of
Rick D. McCord, R.Ph. Directors, President and July 1, 1997
PRINCIPAL EXECUTIVE OFFICER Chief Operating Officer
/s/ SY S. SHAHID*
- ------------------------------ Executive Vice President, July 1, 1997
Sy S. Shahid Secretary, Director
/s/ DAVID W. FRAUHIGER*
- ------------------------------
David W. Frauhiger Chief Financial Officer, July 1, 1997
PRINCIPAL FINANCIAL AND Treasurer, Director
ACCOUNTING OFFICER
/s/ CHARLIE K. HERR*
- ------------------------------ Director July 1, 1997
Charlie K. Herr
/s/ ROBERT D. MUELLER*
- ------------------------------ Director July 1, 1997
Robert D. Mueller, R.Ph.
/s/ CARSON A. MCDONALD*
- ------------------------------ Director July 1, 1997
Carson A. McDonald
/s/ PHILIP H. YIELDING*
- ------------------------------ Director July 1, 1997
Philip H. Yielding
*By: /s/ RICK D. MCCORD
-------------------------
Rick D. McCord
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
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<C> <S>
*1.1 Underwriting Agreement between the Company and Capital West Securities, Inc.
*3.1 Restated Articles of Incorporation.
*3.2 Amended and Restated Articles of Incorporation.
*3.3 Amended and Restated Bylaws.
*4.1 Specimen Certificate of the Common Stock.
*4.3 Form of Warrant Agreement between the Company and the Underwriters.
4.4 Stock Option Plan (filed electronically herewith).
*5.1 Opinion of Phillips McFall McCaffrey McVay & Murrah, P.C. as to the legality of the securities
being registered.
*10.1 Loan Agreement dated October 21, 1996 by and between Bergen-Brunswig Drug Co. and Horizon
Pharmacies, Inc.
*10.2 Purchase Agreement dated March 8, 1997 by and between Mesa Drug, Inc. and Horizon Pharmacies, Inc.
*10.3 Asset Purchase Agreement dated March 4, 1997 by and between True Quality Pharmacies, Inc. (d/b/a
Vista Pharmacies) and Horizon Pharmacies, Inc.
10.4 Form of Employment Agreement by and between the Company and each of Rick D. McCord, R.Ph., Sy S.
Shahid, David W. Frauhiger, Charlie K. Herr, R.Ph., Robert D. Mueller, R.Ph. and Nancy Papaneri,
R.Ph. (filed electronically herewith).
*10.5 Form of Lockup Agreement.
*10.6 Supply Agreement dated effective January 1, 1995 by and between the Company and Bergen Brunswig,
Inc.
16.1 Letter of Herold, Howard & Madsen P.C., Independent Auditors, relating to change in auditors (filed
electronically herewith).
23.1 Consent of Herold, Howard & Madsen P.C., Independent Auditors (filed electronically herewith).
23.2 Consent of Ernst & Young LLP, Independent Auditors (filed electronically herewith).
*23.3 Consent of Phillips McFall McCaffrey McVay & Murrah, P.C.
*24.1 Powers of Attorney of Messrs. Frauhiger, Herr, McCord, Mueller and Shahid.
*24.2 Powers of Attorney of Carson A. McDonald and Philip H. Yielding.
*27 Financial data schedule.
</TABLE>
- ------------------------
* Previously filed
<PAGE>
HORIZON PHARMACIES, INC. 1997 STOCK OPTION PLAN
1. PURPOSE. The purposes of the HORIZON Pharmacies, Inc. 1997 Stock
Option Plan are to enable the Company to attract and retain the services of
employees and directors and to provide them with increased motivation and
incentive to exert their best efforts on behalf of the Company by enlarging
their personal stake in the Company's success.
2. DEFINITIONS. As used in the Plan, the following definitions apply to
the terms indicated below:
"BOARD" means the Board of Directors of the Company.
"CHANGE IN CONTROL" means (i) the execution by the Company of an
agreement to merge or consolidate with another corporation (other than a
corporation 50% or more of which is controlled by, or is under common control
with, the Company), or (ii) the execution of an agreement by shareholders of the
Company to sell or transfer an amount of Shares equal to or greater than 50% of
the outstanding Shares of the Company.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COMMITTEE" means the entire Board or any committee thereof
consisting of two or more directors of the Company who are "Non-Employee
Directors" as such term is used in Rule 16b-3 promulgated under the Exchange
Act, or such number of directors or Non-Employee Directors as is required by
Rule 16b-3 or any successor rule.
"COMPANY" means HORIZON Pharmacies, Inc., a Texas corporation.
"FAIR MARKET VALUE" of a Share on a given day means, if Shares are
listed on an established stock exchange or exchanges, the highest closing sales
price of a Share as reported on such stock exchange or exchanges; or if not so
reported, the average of the bid and asked prices, as quoted on the Nasdaq Stock
Market, Nasdaq Small-Cap Market, the Nasdaq National Association Bulletin Board,
or by the National Quotations Bureau. If the Shares shall not be so quoted, the
Fair Market Value shall be determined by the Board taking into account all
relevant facts and circumstances.
"INCENTIVE STOCK OPTION" means an Option that qualifies as an
incentive stock option within the meaning of Section 422 of the Code and which
is identified as an Incentive Stock Option in the agreement by which it is
evidenced.
"OPTION" means a right to purchase Shares under the terms and
conditions of the Plan as evidenced by an option agreement in such form not
inconsistent with the Plan, as the Board may adopt for general use or for
specific cases from time to time.
"NONQUALIFIED STOCK OPTION" means an Option that is not an Incentive
Stock Option and which is identified as a Nonqualified Stock Option in the
agreement by which it is evidenced.
"PARTICIPANT" means an employee or director, eligible to participate
in the Plan under Section 5 hereof, to whom an Option is granted under the Plan.
<PAGE>
"PLAN" means the HORIZON Pharmacies, Inc. 1997 Stock Option Plan,
including any amendments thereto.
"SHARES" means shares of the Company's Common Stock, $.01 par value,
now or hereafter owned by the Company as treasury stock or authorized but
unissued shares of the Company's Common Stock, subject to adjustment as provided
in the Plan.
"SUBSIDIARY" means any corporation, now or hereafter existent, in
which the Company owns, directly or indirectly, stock comprising fifty percent
(50%) or more of the total combined voting power of all classes of stock of such
corporation.
"TEN PERCENT SHAREHOLDER" means any person who, before or after the
grant or exercise of any Option, owns or would own, directly or indirectly, more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, or its parent or any Subsidiary, or who is not an employee
of the Company.
3. PLAN ADOPTION AND TERM.
A. The Plan shall become effective upon its adoption by the Board,
and Options may be issued upon such adoption and from time to time thereafter;
provided, however, that the Plan shall be submitted to the Company's
shareholders for their approval at the next annual meeting of shareholders, or
prior thereto at a special meeting of shareholders expressly called for such
purpose, or by written consent of the holders of a majority of the issued and
outstanding shares of Common Stock; and provided further, that the approval of
the Company's shareholders shall be obtained within twelve (12) months of the
date of adoption of the Plan. If the Plan is not approved at the annual meeting
or special meeting by the affirmative vote of a majority of all shares voting at
such meeting, or by or by written consent of the holders of a majority of the
issued and outstanding shares of Common Stock, then the Plan and all Options
then outstanding hereunder shall forthwith automatically terminate and be of no
force and effect.
B. Subject to the provisions hereinafter contained relating to
amendment or discontinuance, the Plan shall continue in effect for ten (10)
years from the date of its adoption by the Board. No option may be granted
hereunder after such ten-year period.
4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Committee. Except as otherwise expressly provided in the Plan, the Committee
shall have sole and final authority to interpret the provisions of the Plan and
the terms of any Option issued under it and to promulgate and interpret such
rules and regulations relating to the Plan and Options as it may deem necessary
or desirable for the administration of the Plan. Without limiting the
foregoing, the Committee shall, subject to Section 5 and to the extent and in
the manner contemplated herein, determine who shall receive Options under the
Plan and how many Shares shall be subject to each such Option. The Committee
may correct any defect in the Plan or any Option in the manner and to the extent
it shall deem expedient to carry the Plan into effect and shall be the sole and
final judge of such expediency.
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<PAGE>
No member of the Committee shall be liable for any action taken or
omitted or any determination made by him in good faith relating to the Plan, and
the Company shall indemnify and hold harmless each member of the Committee and
each other director or employee of the Company to whom any duty or power
relating to the administration or interpretation of the Plan has been delegated
against any cost or expense (including counsel fees) or liability (including any
sum paid in settlement of a claim with the approval of the Board) arising out of
any act or omission in connection with the Plan, unless arising out of such
person's own fraud or bad faith.
5. ELIGIBILITY. The employees of the Company and its Subsidiaries, who,
in the opinion of the Committee, have a capacity for contributing in a
substantial measure to the success of the Company and its Subsidiaries, shall be
eligible to participate in the Plan. Directors of the Company, who need not be
employees, shall also be eligible to participate in the Plan.
6. STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in
Section 13 hereof, Options may be granted pursuant to the Plan with respect to a
number of Shares that, in the aggregate, does not exceed 10% of the Common Stock
issued and outstanding at the date of the closing of the Company's initial
public offering (246,242 shares of Common Stock in the event the Underwriters'
over-allotment option is exercised). If, prior to the termination of the Plan,
an Option shall expire or terminate for any reason without having been exercised
in full, the unpurchased Shares subject thereto shall again be available for
the purposes of the Plan.
7. OPTIONS.
A. All Options granted under the Plan shall be clearly identified
either as Incentive Stock Options or as Nonqualified Stock Options. All Options
granted under the Plan shall be evidenced by agreements in such form, not
inconsistent with the Plan, as the Committee may adopt for general use or for
specific use from time to time. An Option shall be deemed "granted" under the
Plan on the date on which the Committee, by appropriate action, awards the
Option to a Participant, or on such subsequent date as the Committee may
designate.
B. (i) The aggregate Fair Market Value of Shares with respect to
which Incentive Stock Options granted under the Plan are exercisable for the
first time by a Participant during any calendar year under the Plan and any
other stock option plan of the Company (and its parent and subsidiary
corporations as those terms are used in Section 422 of the Code) shall not
exceed $100,000. Such Fair Market Value shall be determined as of the date on
which each such Incentive Stock Option is granted. To the extent that the
aggregate Fair Market Value of Shares with respect to such Incentive Stock
Options exceeds $100,000, such Incentive Stock Options shall be treated as
Nonqualified Options, but all other terms and provisions of such Incentive Stock
Options shall remain unchanged.
(ii) Subparagraph (i) of this Paragraph B shall be applied by
taking Options into account in the order in which they were granted.
8. OPTION PRICE. The price per share at which Shares may be purchased
pursuant to any Incentive Stock Option granted under the Plan shall be not less
than 100% of the Fair Market Value of a
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<PAGE>
Share on the date the Option is granted. The price per share at which Shares
may be purchased pursuant to any Nonqualified Stock Option granted under the
Plan shall be not less than 85% of the Fair Market Value of a Share on the
date the Option is granted. No options intended to qualify as Incentive
Stock Options shall be granted under the Plan to any Ten Percent Shareholder
unless the exercise price of said Option is at least 110% of the Fair Market
Value of a Share on the date the Option is granted.
9. DURATION OF OPTIONS. No Option granted hereunder shall be exercisable
after the expiration of ten (10) years from the date such Option was granted.
All Options shall be subject to earlier termination as provided elsewhere in the
Plan.
10. CONDITIONS RELATING TO EXERCISE OF OPTIONS.
A. The Committee may, at its discretion, provide that an Option may
not be exercised in whole or in part for any period or periods of time specified
in the Option agreement. Except as provided in the Option agreement, an Option
may be exercised in whole or in part at any time during its term. No Option may
be exercised for a fractional share of stock.
B. No Option shall be transferable by a Participant otherwise than
by will or the laws of descent and distribution and Options shall be exercisable
during the lifetime of a Participant only by such Participant.
C. An Option shall be exercised by the delivery to the Company of a
written notice signed by the Participant, which specifies the number of Shares
with respect to which the Option is being exercised and the date of the proposed
exercise. Such notice shall be delivered to the Company's principal office, to
the attention of its Secretary, no less than three (3) business days in advance
of the date of the proposed exercise and shall be accompanied by the applicable
option certificate evidencing the Option. A Participant may withdraw such
notice at any time prior to the close of business on the proposed date of
exercise, in which case the option certificate evidencing the Option shall be
returned to the Participant.
D. Payment for Shares purchased upon exercise of an Option shall be
made at the time of exercise either in cash, by certified check or bank
cashier's check or in Shares owned by the Participant and valued at their Fair
Market Value on the date of exercise, or partly in Shares with the balance in
cash or by certified check or bank cashier's check. Any payment in Shares shall
be effected by their delivery to the Secretary of the Company, endorsed in blank
or accompanied by stock powers executed in blank.
E. Certificates for Shares purchased upon exercise of Options shall
be issued and delivered as soon as practicable following the date the Option is
exercised. Certificates for Shares purchased upon exercise of Options shall be
issued in the name of the Participant.
F. Notwithstanding any other provision in the Plan, no Option may be
exercised unless and until the Shares to be issued upon the exercise thereof
have been registered under the Securities Act of 1933 and applicable state
securities laws, or are, in the opinion of counsel to the Company, exempt from
such registration. The Company shall not be under any obligation to register
under applicable Federal or state
-4-
<PAGE>
securities laws any Shares to be issued upon the exercise of an Option
granted hereunder, or to comply with an appropriate exemption from
registration under such laws in order to permit the exercise of an Option and
the issuance and sale of the Shares subject to such Option. If the Company
chooses to comply with such an exemption from registration, the Shares issued
under the Plan may, at the discretion of the Committee, bear an appropriate
restrictive legend restricting the transfer or pledge of the Shares
represented thereby, and the Committee may also give appropriate
stop-transfer instructions to the transfer agent to the Company.
G. Any person exercising an Option or transferring or receiving
Shares shall comply with all regulations and requirements of any governmental
authority having jurisdiction over the issuance, transfer, or sale of capital
stock of the Company, and as a condition to receiving any Shares, shall execute
all such instruments as the Company in its sole discretion may deem necessary or
advisable.
H. Notwithstanding Paragraph A of this Section 10, the Committee
may, in its sole discretion, accelerate the date on which any Option granted
under the Plan, and outstanding at such time, shall become exercisable.
I. In the event of termination of a Participant's employment by
reason of such Participant's retirement in accordance with an applicable
retirement plan, any outstanding Option held by such Participant shall be or
immediately become fully exercisable as to the total number of Shares subject
thereto (whether or not exercisable to that extent prior to termination of
employment) and shall remain so exercisable but only for a period of three
months after commencement of such retirement, at the end of which time it shall
terminate (unless such Option expires earlier by its terms).
J. In the event of termination of a Participant's employment by
reason of such Participant's disability within the meaning of Section 22(e)(3)
of the Code, any outstanding Option held by such Participant shall be or
immediately become fully exercisable as to the total number of Shares subject
thereto (whether or not exercisable to that extent prior to termination of
employment) and shall remain so exercisable but only for a period of one year
after termination of employment for such disability, at the end of which time it
shall terminate (unless such Option expires earlier by its terms).
K. In the event of the death of any Participant (including death
during an approved leave of absence or following a Participant's retirement or
disability), any Option then held by him which shall not have lapsed or
terminated prior to his death shall be or immediately become fully exercisable
by the executors, administrators, legatees, or distributees of his estate, as
may be appropriate, as to the total number of Shares subject thereto (whether or
not exercisable to that extent at the time of death) and shall remain so
exercisable but only for a period of one year after death, at the end of which
time it shall terminate (unless such Option expires earlier by its terms).
L. In the event of the termination of the Participant's employment
otherwise than as described in paragraphs I, J, and K, any outstanding Option
held by such Participant shall be exercisable to the extent exercisable at the
time of such termination and shall be so exercisable for a period of thirty (30)
-5-
<PAGE>
days following such termination. Whether an authorized leave of absence, or
absence in military or government service, shall constitute termination of
employment shall be determined by the Committee.
M. Notwithstanding Paragraph A of this Section 10, upon the
occurrence of a Change in Control, any Option granted under the Plan and
outstanding at such time shall become fully and immediately exercisable and
shall remain exercisable until its expiration or termination as provided in the
Plan.
11. NO EMPLOYMENT RIGHTS. Nothing contained in the Plan or any Option
shall confer upon any Participant any right with respect to the continuation of
his employment by the Company or interfere in any way with the right of the
Company, subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such employment or to increase or decrease
the compensation of the Participant from the rate in existence at the time of
the grant of an Option.
12. RIGHTS OF A SHAREHOLDER. No person shall have any rights with respect
to any Shares covered by or relating to any grant hereunder of an Option until
the date of issuance of a certificate to him evidencing such Shares. Except as
otherwise expressly provided in the Plan, no adjustment to any Option shall be
made for dividends or other rights for which the record date occurs prior to the
date such certificate is issued.
13. ADJUSTMENT UPON CHANGES IN CAPITAL STOCK.
A. If the capital stock of the Company shall be subdivided or
combined, whether by reclassification, stock dividend, stock split, reverse
stock split or other similar transaction, then the number of Shares authorized
under the Plan, the number of Shares then subject to or relating to unexercised
Options granted hereunder and the exercise price per Share will be adjusted
proportionately. A stock dividend shall be treated as a subdivision of the
whole number of Shares equal to such whole number of Shares so outstanding plus
the number of Shares issued as a stock dividend.
B. In the case of any capital reorganization or any reclassification
of the capital stock of the Company (except pursuant to a transaction described
in Paragraph A of this Section 13) (a "Reorganization"), appropriate adjustment
may be made by the Board in the number and class of shares authorized to be
issued under the Plan and the number and class of shares subject to or relating
to Options awarded under the Plan and outstanding at the time of such
Reorganization.
C. Each Participant will be notified of any adjustment made pursuant
to this Section 13 and any such adjustment, or the failure to make such
adjustment, shall be binding on the Participant.
D. Except as expressly set forth herein, the number and kind of
Shares subject to Options, shall not be affected by any transaction (including,
without limitation, any merger, recapitalization, stock split, stock dividend,
issuance of stock or similar transaction) affecting the capital stock of the
Company and no Participant shall be entitled to any additional Options on
account thereof.
14. WITHHOLDING TAXES.
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<PAGE>
A. Whenever Shares are to be issued upon the exercise of an Option,
the Company shall have the right to require the Participant to remit to the
Company in cash an amount sufficient to satisfy federal, state and local
withholding tax requirements, if any, prior to the delivery of any certificate
or certificates for such Shares.
B. Notwithstanding Paragraph A of this Section 14, at the election
of a Participant, subject to the approval of the Committee, when Shares are to
be issued upon the exercise of an Option, the Participant may tender to the
Company a number of Shares, or the Company shall withhold a number of such
shares, the Fair Market Value of which is sufficient to satisfy the federal,
state and local tax requirements, if any, attributable to such exercise or
occurrence. The Committee hereby grants its approval to any election made
pursuant to this Paragraph B, but reserves the right, in its absolute
discretion, to withdraw such approval in case of any such election effective
upon its delivery of notice thereof to the Participant.
C. Notwithstanding Paragraph E of Section 10 hereof, if a
Participant subject to the provisions of Section 16(b) of the Exchange Act
who has not made an election pursuant to Section 83(b) of the Code, makes an
election described in Paragraph B of this Section 14 to have Shares withheld
with respect to an Option, then the Company shall hold as custodian for the
Participant certificates evidencing the total number of Shares required to be
issued pursuant to the exercise of the Option until the expiration of six (6)
months following the date of such exercise. Upon the expiration of such
six-month period, the Company shall deliver to such Participant certificates
evidencing such Shares minus a number of such Shares, the Fair Market Value
of which on the date on which such period expires is sufficient to satisfy
the federal, state and local tax requirements attributable to such exercise.
D. Notwithstanding any other provisions of the Plan, a individual
who is subject to Section 16(b) of the Exchange Act, may not make either of the
elections described in Paragraph B of this Section 14 prior to the expiration of
six (6) months after the date on which the applicable Option was granted. Such
elections must be made either (i) during the 10-day window period described in
Section (e)(3)(iii) of Rule 16b-3 promulgated under such Section 16(b) of the
Exchange Act, or (ii) at least six months prior to the date as of which the
income attributable to the exercise of the related Option is recognized under
the Code. Such elections shall be irrevocable and shall be made by the delivery
to the Company's principal office, to the attention of its Secretary, of a
written notice signed by Participant.
15. AMENDMENT OF THE PLAN.
A. The Board may at any time and from time to time suspend,
discontinue, modify or amend the Plan in any respect whatsoever except that the
Board may not suspend, discontinue, modify or amend the Plan so as to adversely
affect the rights of a Participant with respect to any grants that have
theretofore been made to such Participant without such Participant's approval.
B. No amendment to or modification of the Plan which: (i) materially
increases the benefits accruing to Participants; (ii) except as provided in
Sections 6 and 13 hereof, increases the number
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<PAGE>
of Shares that may be issued under the Plan; or (iii) modifies the
requirements as to eligibility for participation under the Plan shall be
effective without shareholder approval.
16. RESOLUTION OF DISPUTES. The following provisions shall apply to any
controversy between the Company and its Subsidiaries and the Participant
(including any director, officer, employee, agent or affiliate of the Company
and its Subsidiaries) relating to this Plan or any Option granted pursuant to
this Plan.
A. The parties first shall use their reasonable efforts to discuss
and negotiate a resolution of the controversy.
B. If the efforts to negotiate a resolution do not succeed, the
parties shall resolve the controversy by final and binding arbitration in
accordance with the Rules for Commercial Arbitration (the "Rules") of the
American Arbitration Association in effect at the time of the adoption of this
Plan and pursuant to the following additional provisions:
(i) The Federal Arbitration Act (the "Federal Act"), as
supplemented by the Texas Arbitration Act (to the extent not inconsistent
with the Federal Act), shall apply to the arbitration and all procedural
matters relating to the arbitration.
(ii) The parties shall select one arbitrator within ten days
after filing of a demand and submission in accordance with the Rules. If
the parties fail to agree on an arbitrator within that ten day period or
fail to agree to an extension of that period, the arbitration shall take
place before an arbitrator selected in accordance with the Rules.
(iii) The arbitration shall take place in McKinney, Texas,
and the arbitrator shall issue any award at the place of arbitration. The
arbitrator may conduct hearings and meetings at any place agreeable to the
parties or, upon the motion of a party, determined by the arbitrator as
necessary to obtain significant testimony or evidence.
(iv) The arbitrator shall have the power to authorize all forms
of discovery (including depositions, interrogatories and document
production) upon the showing of (a) a specific need for the discovery, (b)
that the discovery likely will lead to material evidence needed to resolve
the controversy, and (c) that the scope, timing and cost of the discovery
is not excessive.
(v) Authority of Arbitrator. The arbitrator shall not have the
power (a) to alter, modify, amend, add to, or subtract from any term or
provision of this Plan or any Option; (b) to rule upon or grant any
extension, renewal or continuance of this Plan or any Option; or (c) to
grant interim injunctive relief prior to the award.
(vi) Enforcement of Award. The prevailing party shall have the
right to enter the award of the arbitrator in any court having jurisdiction
over one or more of the parties or their assets. The parties specifically
waive any right they may have to apply to any court for relief from the
provisions of this Agreement or from any decision of the arbitrator made
prior to the award.
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<PAGE>
B. Attorneys' Fees and Costs. The prevailing party to the
arbitration shall have the right to an award of its reasonable attorneys' fees
and costs (including the cost of the arbitrator) incurred after the filing of
the demand and submission. If the Company prevails, the award shall include an
amount for that portion of the administrative overhead reasonably allocable to
the time devoted by the in-house legal staff of the Company.
C. Other Rights. The provisions of this Section 16 shall not
prevent the Company, its Subsidiaries, or the Participant from exercising any of
their rights under this Plan, any Option, or under the common law, including
(without limitation) the right to terminate any agreement between the parties or
to end or change the party's legal relationship.
17. MISCELLANEOUS.
A. It is expressly understood that the Plan grants powers to the
Board but does not require their exercise; nor shall any person, by reason of
the adoption of the Plan, be deemed to be entitled to the grant of any Option;
nor shall any rights be deemed to accrue under the Plan except as Options may be
granted hereunder.
B. All rights hereunder shall be governed by and construed in
accordance with the laws of Texas.
C. All expenses of the Plan, including the cost of maintaining
records, shall be borne by the Company.
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<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of __________________, 1997,
by and between HORIZON Pharmacies, Inc., a Texas corporation (the "Company"),
and _________________________ ("Employee").
W I T N E S S E T H:
WHEREAS, Employee has been serving as an officer of the Company; and
WHEREAS, the Company desires to obtain the services of Employee on a
full time basis in order to preserve the continuation of the businesses of
the Company and Employee is desirous of rendering such services to same; and
WHEREAS, Employee has agreed to enter into this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained, and other good and valuable consideration, the adequacy of
which is hereby acknowledged, the parties hereby agree as follows:
1. EMPLOYMENT; DUTIES AND ACCEPTANCE.
1.1. EMPLOYMENT BY THE COMPANY. During the Term of this Agreement,
as hereinafter defined, the Company hereby agrees to employ Employee as
_____________________ - of the Company or such other executive position as
the Company's Board of Directors may designate. During said period, Employee
shall render services to the Company on a full-time basis (serving approximately
the same total number of hours per week as Employee has previously worked for
the Company).
1.2. DUTIES. As the __________________ of the Company, Employee
shall be involved in all executive activities of the Company, and perform the
function of his office and other duties as directed by the Board of Directors.
1.3. ACCEPTANCE OF EMPLOYMENT BY EMPLOYEE. Employee hereby accepts
such employment and shall render the services described above. Employee agrees
to devote his full attention, skill and best efforts to the performance of said
duties for the Company.
1.4. TERMINATION OF EXISTING CONTRACTS. Employee agrees that all
agreements and contracts, whether written or oral, relating to the current
employment of Employee by the Company will be terminated as of the commencement
of the Term of this Agreement, as defined below.
2. TERM OF EMPLOYMENT. The term of Employee's employment under this
Agreement (the "Term") shall commence as of June 1, 1997 (the "Commencement
Date"), and shall continue through and expire on the third anniversary of the
Commencement Date, unless earlier terminated as herein provided. The date at
which Employee's employment is terminated under this Agreement shall be
referred to herein as the "Termination Date." The agreement shall be renewed
for consecutive three year period(s) unless either party no later than thirty
(30) days prior to the termination date elects in writing to not renew.
3. PARTICIPATION IN EMPLOYEE BENEFIT PLANS. During the Term, Employee
shall be permitted to participate in any group life, hospitalization or
disability insurance plan, health program, pension plan, similar benefit plan
or other so-called "fringe benefits" of the Company, which may be
EMPLOYMENT AGREEMENT/HORIZON- 1
<PAGE>
available to other employees of the Company generally on the same terms as
such other employees.
4. COMPENSATION. In consideration of the observance by Employee of the
terms of this Agreement and the performance of his duties as set forth
herein, the Company shall pay to Employee the sum of ______________ Thousand
Dollars ($___________) per year during the Term, which payments shall be
payable in accordance with the payroll policies of the Company as such are
from time to time in effect. At the end of each fiscal year of the Company,
the Board of Directors of the Company shall review the Company's performance
for such year and consider other compensation for Employee, such as a bonus
payment, stock options, stock grants or an increase in the annual salary
payable during the Term, which, in the sole judgment of the Board, may be
appropriate compensatory recognition for Employee's performance of his duties
hereunder.
5. TERMINATION. The Company has the right, at any time during the
Term, subject to all of the provisions hereof, exercisable by serving notice,
effective no earlier than ninety (90) days from the date of notification, to
terminate the Employee's employment under this Agreement and to discharge the
Employee without cause and with no advance notice with cause. If such right is
exercised, the Company's obligation to the Employee shall be limited to the
payment of unpaid Annual Salary accrued up to the effective date specified
in the Company's notice of termination. If, however such termination is
without cause the Company shall be liable to the employee for a lump sum
severance payment of one (1) year anticipated compensation in accordance with
the employee's current annualized salary, benefit package, and anticipated
bonus. Notwithstanding termination of this Agreement, whether by expiration of
the Term or otherwise, the obligations of Section 7 hereof shall survive such
termination.
6. SOLE EMPLOYMENT; NON COMPETITION.
6.1. SOLE EMPLOYMENT. During the Term of this Agreement, Employee
shall not, except as set forth herein, be engaged in any other business
activity whether or not such business activity is pursued for gain, profit,
or other pecuniary advantage. Employee may, however, invest his assets in
such form or manner as will not require his services in the operation of the
affairs of the companies in which such investments are made.
6.2. NON-COMPETITION. During the period expiring two (2) years from
the Commencement Date (the "Noncompetition Period"), Employee will not (a)
within any area in the continental United States where the Employee provided
any services to the Company, directly or indirectly, acquire, own, manage,
operate, join, control, by employed with, or participate in the acquisition,
ownership, management, operation, or control of, or be connected in any
manner with, any business engaged in the retail pharmacy industry without the
prior written consent of the Company, (b) contact or attempt to contact,
directly or indirectly, any of the Company's employees as of the Termination
Date, in connection with the formation or operation of any other entity whose
purpose is to acquire, manage or operate retail pharmacies for the profit of
anyone other than the Company or provide services of a type similar to those
provided by the Company as of the Termination Date, nor will Employee
dissuade or attempt to dissuade any customer of the Company as of the
Termination Date from purchasing products from the Company or using services
provided by the Company at the Termination Date.
7. CONFIDENTIALITY. It is contemplated that Employee will learn of the
Company's confidential information or confidential information entrusted to
the Company by other persons corporations or firms (collectively, Third
Parties). The Company's confidential information includes matters not
generally known outside the Company, such as developments relating to
existing and future products and services marketed or used by the Company and
also data relating to the general business operations of the Company (e.g.,
concerning sales, costs, profits, organizations, customer lists, pricing
methods, etc.). During the Term and continuing thereafter, Employee agrees
not to disclose any confidential information of the Company or of such other
persons, corporations or firms to others or to
EMPLOYMENT AGREEMENT/HORIZON- 2
<PAGE>
make use of its, except on the Company's behalf, whether or not such
information is produced by Employee's own efforts. Also, Employee may learn
of developments, ways of business, etc., which in themselves are generally
known but whose use by the Company is not generally known, and during the
Term and continuing thereafter, Employee agrees not to disclose to others
such use, whether or not such use is due to Employee's own efforts. All
records of the Company, including the names and addresses of its customers,
are and shall remain the property of the Company at all times during the Term
and after termination of Employee's employment for any reason with the
Company. None of such records, nor any part of them, is to be removed by
Employee from the premises of the Company either in original form or in
computerized, duplicated, or copied form, and the names, addresses, and other
facts in such records are not to be transmitted verbally, in writing, or in
computerized form by Employee except in the ordinary course of conducting
business for the Company.
8. OTHER PROVISIONS.
8.1. NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally or
sent by certified, registered or express mail, postage prepaid. Any such
notice shall be deemed given when so delivered personally or, if mailed, five
days after the date of deposit in the United States mail, as follows:
(i) IF TO THE COMPANY, TO:
HORIZON Pharmacies, Inc.
275 W. Princeton Drive
Princeton, TX 75407
(ii) IF TO EMPLOYEE, TO:
Any party may change its address for notice hereunder by notice to the
other parties hereto.
8.2 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof, and supersedes
all prior agreements, written or oral, with respect thereto.
8.3. WAIVERS AND AMENDMENTS. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance. No
delay on the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any waiver on the part
of any party of any right, power or privilege hereunder, nor any single or
partial exercise of any right, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, power
or privilege hereunder.
8.4. GOVERNING LAW. This Agreement shall be governed and construed
in accordance with the laws of the State of Texas applicable to agreements
made and to be performed entirely within such state.
8.5. ASSIGNMENT. Employee may not delegate the performance of any
of his duties hereunder. Neither party hereto may assign any rights hereunder
without the written consent of the other party hereto.
8.6. COUNTERPARTS. This Agreement may be executed in two or more
counterparts,
EMPLOYMENT AGREEMENT/HORIZON- 3
<PAGE>
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
8.7. HEADINGS. The headings in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation
of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY: HORIZON Pharmacies, Inc.
By:
---------------------------------
EMPLOYEE:
------------------------------------
EMPLOYMENT AGREEMENT/HORIZON- 4
<PAGE>
[LETTERHEAD]
We have been the Company's independent accounting firm since April 16, 1996.
In March 1997, the Company retained Ernst & Young LLP to perform the audit
for the year ended December 31, 1996. We will still perform various store
audits, tax and financial planning for the Company. The change was not the
result of any disagreement relating to any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures. No
reports issued by us contain an adverse opinion or a disclaimer of opinion,
nor were such reports qualified or modified as to uncertainty, audit scope,
or accounting principle. At no time during our engagement were there any
disagreements on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure. We have read the
disclosures provided by the Company and agree with such disclosures.
HEROLD, HOWARD & MADSEN, PC
- --------------------------------
Herold, Howard & Madsen, PC
Dallas, Texas
May 29, 1997
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts," to the
use of our report on the financial statements for the year ended December 31,
1995 of HORIZON Pharmacies, Inc. dated April 24, 1996 and to the use of our
reports on the financial statements of the Farmington Store Acquisition and the
Vista Store Acquisition dated March 28, 1997, in the Amendment No. 2 to
Registration Statement (Form SB-2 No. 333-25257) and related Prospectus of
HORIZON Pharmacies, Inc. for the registration of 1,200,000 shares of its common
stock.
HEROLD, HOWARD & MADSEN P.C.
Dallas, Texas
June 30, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 4, 1997, except for the third and fourth
paragraphs of Note 6, as to which the date is May 31, 1997, in Amendment No. 2
to the Registration Statement (Form SB-2 No. 333-25257) and related Prospectus
of HORIZON Pharmacies, Inc. for the registration of 1,200,000 shares of its
common stock.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
June 30, 1997
