<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 333-25257
HORIZON Pharmacies, Inc.
(Exact name of small business issuer as specified in its charter)
TEXAS 75-2441557
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
275 W. Princeton Drive
Princeton, Texas 75407
(Address of principal executive offices)
(972) 736-2424
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Title of Each Class Outstanding at August 22, 1997
Common stock, par value $.01 per share 2,462,424
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION ............................................. 3
Balance Sheets - December 31, 1996 and June 30, 1997 (unaudited) .. 3
Statements of Income - Three months ended June 30, 1996 and
1997 (unaudited) and six months ended June 30, 1996 and June 30,
1997 (unaudited) ................................................ 5
Statement of Stockholders' Equity - Six months ended June 30, 1997. 6
Statements of Cash Flows - Six months ended June 30, 1996
and 1997 (unaudited) ............................................ 7
Notes to Financial Statements (unaudited) ......................... 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 12
PART II. OTHER INFORMATION ................................................. 18
Submission of Matters to a Vote of Security Holders ............... 18
Other Information ................................................. 19
Exhibits and Reports on Form 8-K .................................. 20
SIGNATURES ................................................................. 21
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HORIZON PHARMACIES, INC.
BALANCE SHEETS
<TABLE>
DECEMBER 31, JUNE 30,
1996 1997
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 153,260 $ 229,052
Accounts receivable, net of allowance for uncollectible
accounts of $20,000 in 1996 and $25,000 in 1997:
Third-party providers 1,047,348 1,794,024
Others 412,709 668,993
Inventories, at the lower of specific identification cost or market 3,290,717 3,893,381
Prepaid expenses 31,071 41,096
--------------------------
Total current assets 4,935,105 6,626,546
Deferred offering costs (Note 5) - 344,518
Property, equipment and capital lease assets:
Property and equipment, at cost:
Land 10,000 10,000
Building 193,220 194,389
Equipment 410,162 516,337
--------------------------
613,382 720,726
Less accumulated depreciation 67,253 105,957
--------------------------
Property and equipment, net 546,129 614,769
Equipment under capital leases 158,339 252,953
Less accumulated amortization 33,884 55,060
--------------------------
Equipment under capital leases, net 124,455 197,893
--------------------------
Property, equipment and capital lease assets, net 670,584 812,662
Intangibles, at cost (Note 7):
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 189,417 254,425
--------------------------
Intangibles, net 983,083 1,308,075
--------------------------
$6,588,772 $9,091,801
--------------------------
--------------------------
</TABLE>
(Continued on next page)
3
<PAGE>
HORIZON PHARMACIES, INC.
BALANCE SHEETS
(Continued)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(Unaudited)
<S> <C> <C>
Current liabilities:
Bank overdraft $ 247,759 $ 206,272
Accounts payable 1,491,789 2,916,532
Accrued liabilities 161,365 256,830
Notes payable (Notes 5 and 7):
Supplier 1,215,000 1,156,667
Other - 898,642
Stockholder - 50,000
Current portion of long-term debt (Note 5) 228,759 339,436
Current obligations under capital leases 27,400 57,859
------------------------
Total current liabilities 3,372,072 5,882,238
Long-term debt 1,363,858 1,141,410
Obligations under capital leases 102,769 149,624
Stockholders' equity (Notes 5 and 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) 147,402
------------------------
Total stockholders' equity 1,750,073 1,918,529
------------------------
$6,588,772 $9,091,801
------------------------
------------------------
</TABLE>
See accompanying notes.
4
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Prescription drugs $2,382,505 $4,842,834 $4,370,939 $ 8,903,150
Other 437,548 1,103,978 815,694 2,156,909
---------- ---------- ---------- -----------
Total net sales 2,820,053 5,946,812 5,186,633 11,060,059
Cost of sales:
Prescription drugs 1,550,767 3,408,812 2,871,049 6,218,070
Other 353,174 715,268 636,404 1,364,514
---------- ---------- ---------- -----------
Total cost of sales 1,903,941 4,124,080 3,507,453 7,582,584
---------- ---------- ---------- -----------
Gross margin 916,112 1,822,732 1,679,180 3,477,475
Depreciation and amortization:
Property, equipment and capital lease assets 14,552 31,636 23,914 59,880
Intangibles 23,140 34,556 45,797 65,008
Selling, general and administrative expenses 743,168 1,567,405 1,323,202 2,889,786
---------- ---------- ---------- -----------
Total costs and expenses 780,860 1,633,597 1,392,913 3,014,674
---------- ---------- ---------- -----------
Income from operations 135,252 189,135 286,267 462,801
---------- ---------- ---------- -----------
Other income (expense):
Interest and other income (expense) 1,779 (1,825) 2,939 (1,432)
Interest expense (53,464) (89,382) (96,124) (142,913)
---------- ---------- ---------- -----------
Total other income (expense) (51,685) (91,207) (93,185) (144,345)
---------- ---------- ---------- -----------
Income before pro forma provision for income taxes 83,567 97,928 193,082 318,456
Pro forma provision for income taxes (Note 4) 29,000 34,000 68,000 111,000
---------- ---------- ---------- -----------
Pro forma net income $ 54,567 $ 63,928 $ 125,082 $ 207,456
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Pro forma net income per share (Note 3) $ 0.05 $ 0.06 $ 0.12 $ 0.18
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Weighted average shares outstanding (Note 3) 1,058,000 1,142,424 1,058,000 1,142,424
</TABLE>
See accompanying notes.
5
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
COMMON STOCK
--------------------- ADDITIONAL RETAINED EARNINGS TOTAL
SHARES AMOUNT PAID-IN CAPITAL (ACCUMULATED DEFICIT) STOCKHOLDERS' EQUITY
------ ------ --------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 1,082,424 $ 10,824 $ 1,760,303 $ (21,054) $ 1,750,073
Net income (unaudited) - - - 318,456 318,456
Distributions to stockholders
(unaudited) - - (150,000) (150,000)
--------- --------- ------------ ---------- ------------
Balance at June 30, 1997 (unaudited) 1,082,424 $ 10,824 $ 1,760,303 $ 147,402 $ 1,918,529
--------- --------- ------------ ---------- ------------
--------- --------- ------------ ---------- ------------
</TABLE>
See accompanying notes.
6
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Income before pro forma provision for income taxes $ 193,082 $ 318,456
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 23,914 59,880
Amortization of intangibles 45,797 65,008
Provision for uncollectible accounts receivable 5,940 7,193
Changes in operating assets and liabilities,
net of acquisitions of businesses:
Accounts receivable (170,484) (943,771)
Inventories (350,360) (120,404)
Prepaid expenses 1,477 (10,025)
Bank overdraft 234,065 (41,487)
Accounts payable 267,350 1,423,127
Accrued liabilities 51,320 97,081
---------- ----------
Total adjustments 109,019 536,602
---------- ----------
Net cash provided by operating activities 302,101 855,058
INVESTING ACTIVITIES
Purchases of property and equipment (14,949) (47,344)
Proceeds from sales of property and equipment 5,557 -
---------- ----------
Net cash used in investing activities (9,392) (47,344)
FINANCING ACTIVITIES
Borrowings on notes payable 350,000 -
Principal payments on notes payable - (108,333)
Principal payments on long-term debt (73,530) (111,771)
Principal payments on obligations under capital leases (7,349) (17,300)
Payments for deferred offering costs - (344,518)
</TABLE>
(Continued on next page)
7
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
<TABLE>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Distributions to stockholders $ (120,000) $ (150,000)
---------- ----------
Net cash provided by (used in) financing activities 149,121 (731,922)
---------- ----------
Net increase in cash 441,830 75,792
Cash at beginning of period 135,633 153,260
---------- ----------
Cash at end of period $ 577,463 $ 229,052
---------- ----------
---------- ----------
Supplemental disclosure of interest paid $ 90,124 $ 152,913
NONCASH INVESTING AND FINANCING ACTIVITIES
Additions to property and equipment for long-term debt $ 150,000 $ -
Equipment leased under capital leases 14,308 94,614
Acquisitions of businesses financed by debt:
Accounts receivable and other $ 1,176 $ 66,382
Inventories 460,327 482,260
Property and equipment 75,000 60,000
Intangibles 125,000 390,000
---------- ----------
Assets acquired $ 661,503 $ 998,642
---------- ----------
---------- ----------
Financed by:
Notes payable $ 200,000 $ 898,642
Advance by stockholder - 100,000
Long-term debt 461,503 -
---------- ----------
$ 661,503 $ 998,642
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
8
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1
The unaudited financial statements include all adjustments, consisting of
normal, recurring accruals, which HORIZON Pharmacies, Inc. (the "Company")
considers necessary for a fair presentation of the financial position and the
results of operations for the indicated periods. The notes to the financial
statements should be read in conjunction with the notes to the financial
statements contained in the Company's Registration Statement on Form SB-2, as
amended, for the year ended December 31, 1996 related to the Company's
initial public offering (the "Offering") (Note 5). The results of operations
for the six months ended June 30, 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 and the six months ended June 30, 1997 and 1996.
NOTE 2
In addition to the expansion capital available from the proceeds of the
Offering, the Company has obtained a $2,000,000 credit facility with Bank
One, Texas, N.A. Although the terms have not fully been approved, such terms
will include restrictive covenants such as financial ratio requirements.
Management believes operations will not be adversely impacted by these
restrictive covenants. No funds have been borrowed under this credit facility.
NOTE 3
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 adjusted in all periods presented for the
effect of the number of shares of stock used to pay a non-recurring
distribution of $300,000 to stockholders from the proceeds of the Offering.
The pro forma net income per share calculation has been rounded up to the
next even number.
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 that the impact of SFAS 128 on the
calculation of earnings per share for the three months and six months ended
June 30, 1997 and 1996 would not be material.
NOTE 4
No historical provisions for income taxes have been included in the
accompanying financial statements as income taxes, if any, are payable by the
stockholders under provisions of subchapter S of the Internal Revenue Code.
At June 30, 1997, the net bases of assets and liabilities for financial
reporting purposes exceeds such bases for income tax purposes by
approximately $400,000.
9
<PAGE>
The pro forma provisions 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.
The financial statements for the three months ending September 30, 1997 will
include a provision (non-recurring) for deferred income taxes, resulting from
a change in S corporation status as a result of the Offering in July 1997,
related to the tax effect of cumulative differences in financial and tax
bases of net assets of approximately $149,000.
NOTE 5
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 $1.00 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 stockholders 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.
In July 1997, the Company completed the Offering pursuant to which 1,380,000
shares of common stock were sold at $5.00 per share. The proceeds of the
Offering, after deducting the underwriting discount and offering expenses,
were approximately $6,000,000. A portion of the proceeds (approximately
$1,575,000) was used to repay certain notes payable and long-term debt.
NOTE 6
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 stockholders on May 31, 1997. Under the Plan, options for up
to 246,243 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. Options for 246,243
shares were granted by the Company in July 1997.
NOTE 7
At June 30, 1997, the Company operates 14 conventional, free-standing 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. The
acquisitions generally have been financed by debt to the sellers and/or an
inventory supplier. A summary of acquisitions for the six months ended June
30, 1996 and 1997 follows:
10
<PAGE>
<TABLE>
ASSETS ACQUIRED
SIX MONTHS STORE PURCHASE ------------------------------------ DEBT
ENDED JUNE 30 OPERATIONS PRICE INVENTORIES INTANGIBLES OTHER INCURRED
------------- ---------- --------- ----------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996 1 $661,503 $460,327 $125,000 $ 76,176 $661,503
1997 3 998,642 482,260 390,000 126,382 998,642
</TABLE>
The following unaudited pro forma results of operations data gives effect to
the acquisitions completed during the six months ended June 30, 1996 and 1997
as if the transactions 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 or 1997, 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.
SIX MONTHS ENDED JUNE 30,
----------------------------
1996 1997
---- ----
Unaudited pro forma information:
Net sales $6,433,533 $11,839,059
Net income $ 190,914 $ 228,456
Net income per share $ .18 $ .20
In August 1997, the Company acquired from third parties three retail
pharmacies in purchase transactions. The total purchase price of $1,504,262
has been preliminarily allocated to inventories ($1,047,787), property and
equipment ($60,000), intangibles ($341,500) and other assets ($54,975). The
purchases were financed by the issuance of 8% to 9% notes payable to the
sellers for $966,850, cash of $475,000 and the assumption of certain trade
payables to suppliers of $62,412. The notes to the sellers are secured by the
assets acquired and are due in monthly installments from 60 to 84 months.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The following discussion and analysis reviews the operating results of
the Company for the three months and the six months ended June 30, 1997 and
compares those results to the comparable periods of 1996. Certain statements
contained in this discussion are not based on historical facts, but are
forward-looking statements 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 industry and the impact of competition, pricing and changing
market conditions. The Company disclaims, however, any intent or obligation
to update these forward-looking statements. As a result, the reader is
cautioned not to place reliance on these forward-looking statements.
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 income 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.
During the six months ended June 30, 1996 and 1997, the Company acquired
one and three retail pharmacies, respectively. 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. Since June 30, 1997 the Company has acquired three more
retail pharmacies located in Butte, Montana, Moriarty, New Mexico and
Mesquite, Texas, respectively. The financial information for these three
stores is not included in the financial statements presented in this
Quarterly Report on Form 10-QSB.
Currently, the Company's primary source of revenue is the sale of
prescription drugs. During the six months ended June 30, 1996, sales of
prescription drugs generated 84.3% of the Company's net sales; during the six
months ended June 30, 1997, prescription drugs generated 80.5% of net sales.
Management expects the Company's prescription drug business 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.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
income statement data for the periods indicated:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- --------------
1996 1997 1996 1997
------ ------ ------ ------
INCOME STATEMENT DATA
SALES:
Prescription drugs 84.5% 81.4% 84.3% 80.5%
Other 15.5% 18.6% 15.7% 19.5%
------ ------ ------ ------
Total net sales 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales -- prescription drugs(1) 65.1% 70.4% 65.7% 69.8%
Cost of sales -- other(2) 80.7% 64.8% 78.0% 63.3%
Selling, general and administrative
expenses(3) 26.4% 26.4% 25.5% 26.1%
Depreciation and amortization(3) 1.3% 1.1% 1.3% 1.1%
Interest expense(3) 1.9% 1.5% 1.9% 1.3%
PRO FORMA NET INCOME(3)(4) 1.9% 1.1% 2.4% 1.9%
- -------------------
(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.
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 $5,873,426 or 113.2%, to
$11,060,059 for the six months ended June 30, 1997 compared to $5,186,633 for
the six months ended June 30, 1996, and $3,126,759 or 110.9%, to $5,946,812
for the three months ended June 30, 1997 compared to $2,820,053 for the three
months ended June 30, 1996. The increase was attributable primarily to the
increase in store operating months from 44 in the first six months of 1996 to
78 in the first six months of 1997, and from 23 in the first three months of
1996 to 42 in the first three months of 1997.
The following tables show the Company's prescription drug gross margins
and total sales margins for six months and the three months ended June 30,
1996 and 1997:
13
<PAGE>
GROSS MARGINS ON GROSS MARGINS ON
PRESCRIPTION DRUG SALES TOTAL SALES
----------------------- ------------------------
SIX MONTHS ENDED JUNE 30, AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ------------------------- ---------- ---------- ---------- ----------
1997 $2,685,080 30.2% $3,477,475 31.4%
1996 $1,499,890 34.3% $1,679,180 32.4%
GROSS MARGINS ON GROSS MARGINS ON
PRESCRIPTION DRUG SALES TOTAL SALES
----------------------- ------------------------
THREE MONTHS ENDED JUNE 30, AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- --------------------------- ---------- ---------- ---------- ----------
1997 $1,434,022 29.6% $1,822,732 30.7%
1996 $ 831,738 34.9% $ 916,112 32.5%
The decrease in the gross margin on prescription drug sales from 1996 to
1997 was primarily the result of an increase in third-party sales, which have
lower margins, and the cost of sales during such period.
Sales of prescription drugs decreased from 84.3% of total sales for the
six months ended June 30, 1996 to 80.5% of total sales for six months ended
June 30, 1997 and from 84.5% of total sales for the three months ended June
30, 1996 to 81.4% for the three months ended June 30, 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 for the Company's first seven stores increased from
$4,585,125 in the first six months of 1996 to $5,093,220 in the first six
months of 1997, and from $2,218,545 in the three months ended June 30, 1996
to $2,534,465 in the three months ended June 30, 1997. Management believes
that these respective increases of 11.1% and 14.2% are primarily the result
of increased advertising and promotions as well as an enhanced product mix.
COSTS AND EXPENSES
Cost of sales increased $4,075,131 or 116.2%, to $7,582,584 in the six
months ended June 30, 1997 as compared to $3,507,453 in the six months ended
June 30, 1996. For the three months ended June 30, 1997, the cost of sales
increased $2,220,139, or 116.6%, to $4,124,080 as compared to $1,903,941 in
the three months ended June 30, 1996. These increases are primarily the
result of increased sales volume resulting from the increased number of store
operating months.
Cost of sales as a percentage of total sales increased 1.0% and 1.8%
during the respective periods. These increases are primarily the result of
increased drug prices from the wholesaler, offset by the effects of
management's continual monitoring and adjustment of prices to the consumer.
Selling, general and administrative expenses increased from $1,323,202
in the six months ended June 30, 1996 to $2,889,786 in the six months ended
June 30, 1997 and from $743,168 in the three months ended June 30, 1996 to
$1,567,405 in the three months ended June 30, 1997. Such expenses, expressed
as a percentage of net sales, were 26.1% and 25.5% for the six months ended
June 30, 1997 and 1996, respectively, and 26.4% for the three months ended
June 30 in each of 1997 and 1996. This increase is principally due to
increased store count and resulting increased store operating months, as well
as the
14
<PAGE>
employment of additional executive personnel and an increase in salaries
payable to the Company's executive officers in connection with the execution
of employment agreement with such persons.
Interest expense was $142,913 in the first six months of 1997 compared
to $96,124 during the first six months of 1996, and $89,382 in the three
months ended June 30, 1997 compared to $53,464 in the three months ended June
30, 1996. The increase in interest expense resulted primarily from the
increase in the Company's indebtedness associated with the Company's
acquisition of six stores and its corporate office building.
EARNINGS
Pro forma net income for the first six months of 1997 rose to $207,456
from $125,082 in the comparable period of 1996; an increase of 65.9%. Pro
forma net income for the first three months of 1997 rose to $63,928 from
$54,567 in the comparable period of 1996, an increase of 17.2%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June
30, 1997 and 1996 was $855,058 and $302,101, respectively. 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
designated for working capital in the Offering.
Net cash used in financing activities was $731,922 for the six months
ended June 30, 1997 compared to net cash provided by financing activities of
$149,121 in the six months ended June 30, 1996. The principal cause of this
difference was deferred offering costs of $344,518 and an increase in
distributions to stockholders for the six months ended June 30, 1997. Net
cash used in financing activities was the principal factor in the $75,792 net
increase in cash for the six months ended June 30, 1997.
The Company has available approximately $2,375,000 from the proceeds of
the Offering which will be used to support an aggressive store acquisition
program. Historically, the average acquisition price paid by the Company per
store has been approximately $500,000 to $700,000; however, because the
acquisition price is based on variables such as store sales and profits,
there can be no assurance that future acquisition prices will fall within the
referenced range. 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 provided by the proceeds of the
Offering, the Company has available a $2,000,000 credit facility provided by
Bank One, Texas, N.A. Although all of the terms of such credit facility have
not received final approval, the Company believes that such terms will
include restrictive covenants such as financial ratio requirements with which
the Company will have to comply to maintain the facility. Management
believes the Company's operations will not be adversely impacted by these
restrictive covenants. No funds have been borrowed under this credit
facility.
Management expects that the proceeds generated from the Offering
combined with the above-described credit facility will be sufficient to
support the Company's current expansion schedule and ongoing
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acquisition activities for the next 12 months, although there can be no
assurance that such proceeds will be adequate to support the Company's
acquisitions during such period. The Company expects to fund ongoing
acquisitions after 1997 with proceeds from the 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," although there can be no assurance that all or any part of such
conversions will be effected. In the event such conversions are undertaken,
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.
FACTORS AFFECTING OPERATIONS
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. The Company continually reviews acquisition proposals and
is currently engaged in discussions with third parties with respect to
possible acquisitions. 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.
SALES TO THIRD-PARTY PAYORS. A growing percentage of the Company's
prescription drug sales has been accounted for by sales to customers who are
covered by third-party payment programs. 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.
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. Any substantial delays in
reimbursement or significant reductions 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.
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
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be no assurance that the Company will continue to experience growth in, or
maintain the present level of, net sales or net earnings.
GOVERNMENT REGULATION AND HEALTHCARE REFORM. The Company's pharmacists
and pharmacies are subject to a variety of state and Federal regulations, and
may be adversely affected by certain changes in such regulations. In
addition, 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
regulatory 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.
REGULATION OF HOME HEALTHCARE SERVICES. The Company's home healthcare
business is subject to extensive Federal and state regulation. In addition,
the requirements that the Company must satisfy to conduct its businesses vary
from state to state. Changes in the law or new interpretations of existing
laws could 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.
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.
COMPETITION. The retail pharmacy and home healthcare businesses are
highly competitive. In each of its markets, the Company competes with one or
more national, regional and local retail pharmacy chains, independent retail
pharmacies, deep discount retail pharmacies, supermarkets, discount
department stores, mass merchandisers and other retail stores and mail order
operations. Similarly, 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 and which offer more extensive home healthcare
services than the Company. Most of the Company's competitors in the retail
pharmacy and home healthcare markets have financial resources that are
substantially greater than those of the Company. There can be no assurance
the Company will be able to successfully compete with its competitors in the
retail pharmacy and/or home healthcare industry.
GEOGRAPHIC CONCENTRATION. Currently, 10 of the Company's 17 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 and any significant healthcare legislative proposals enacted in
the state of Texas.
SUBSTANTIAL INDEBTEDNESS. In connection with the Company's acquisition
of retail pharmacies, the Company has incurred substantial debt and may
incur additional indebtedness in the future in connection with its planned
acquisition of additional stores. 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. 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
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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.
POSSIBLE NEED FOR ADDITIONAL CAPITAL. Although the Company believes
that the proceeds from the Offering combined with operating revenues will be
adequate to satisfy its capital requirements for the next 12 months,
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.
RELIANCE ON SINGLE SUPPLIER. The Company currently purchases
approximately 84% 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. Although 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, there can be no assurance that the
termination of such relationship would not adversely affect the Company's
business.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company's
results of operations depend significantly upon the net 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.
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of stockholders on May 31, 1997.
The following matters were voted upon at the annual meeting:
1. The stockholders approved the Company's Amended and Restated Articles
of Incorporation with 467,903 votes in favor, no votes against and
no abstentions.
2. The stockholders approved the Company's Amended and Restated Bylaws
with 467,903 votes in favor, no votes against and no abstentions.
3. The stockholders ratified the appointment of Ernst & Young LLP as the
independent auditors of the Company with 467,903 votes in favor, no
votes against and no abstentions.
4. The stockholders approved the HORIZON Pharmacies, Inc. 1997 Stock
Option Plan with 467,903 votes in favor, no votes against and no
abstentions.
5. The stockholders ratified all prior acts of the Company's officers
and directors with 467,903 votes in favor, no votes against and no
abstentions.
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6. Following are the directors elected at the annual meeting and the
tabulation of votes related to each nominee:
Affirmative Votes Withheld
----------- --------------
Carson A. McDonald (Class I) 467,903 -0-
Philip H. Yeilding (Class I) 467,903 -0-
David W. Frauhiger (Class II) 467,903 -0-
Robert D. Mueller, R.Ph. (Class II) 467,903 -0-
Sy S. Shahid (Class II) 467,903 -0-
Rick D. McCord, R.Ph. (Class III) 467,903 -0-
Charlie K. Herr, R.Ph. (Class III) 467,903 -0-
ITEM 5. OTHER INFORMATION
ACQUISITION OF MORIARTY, NEW MEXICO STORE. On August 2, 1997, the
Company acquired substantially all of the assets of Sun Country Drug, Inc.
("Sun Country Drug") comprising primarily pharmacy files, equipment,
inventory and supplies. The Company acquired the assets through arm's-length
negotiations with Sun Country and Sun Country's sole shareholder, Dale Kemper.
Prior to this transaction, no material relationships existed between Sun
Country and the Company or any of its affiliates, any director or officer of
the Company, or any associate of such director or officer, except to the
extent that Carson A. McDonald, a director of the Company, is employed by
Bergen Brunswig Drug Co. ("Bergen Brunswig"), a creditor of Sun Country.
The consideration for the acquisition consisted of $175,000 cash,
assumption of an aggregate $62,412.48 of trade accounts owing to Bergen
Brunswig and one other creditor, and a promissory note in the amount of
$197,406.28 payable over 60 months in equal monthly installments bearing
interest at 9% per annum. The cash portion of the purchase price was derived
from proceeds of the Company's initial public offering which closed July 11,
1997 (the "Offering").
The Company intends to continue Sun Country's retail pharmacy operations
under the HORIZON Pharmacies, Inc. name. In connection therewith, the
Company has secured a real estate lease covering Sun Country's current retail
location and has secured a valid New Mexico license to do business at that
location under the HORIZON Pharmacies, Inc. name.
ACQUISITION OF MESQUITE, TEXAS STORE. On August 12, 1997, the Company
acquired substantially all of the assets utilized in connection with and as
a part of certain retail drug store operations of Revco, Inc. d/b/a
Northridge Pharmacy ("Northridge") located in Mesquite, Texas, comprising
primarily pharmacy files, equipment, inventory and supplies. The Company
acquired the assets through arm's-length negotiations with Northridge.
Prior to this transaction, no material relationships existed between
Northridge and the Company or any of its affiliates, any director or officer
of the Company, or any associate of such director or officer.
The consideration for the acquisition consisted of $150,000 cash and a
promissory note in the amount of $154,931.65 payable over 72 months in equal
monthly installments bearing interest at 8.5% per annum. The cash portion of
the purchase price was derived from proceeds of the Offering.
The Company intends to continue the retail pharmacy operations of
Northridge Pharmacy under the HORIZON Pharmacies, Inc. name. In connection
therewith, the Company secured a real estate lease
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covering the current retail location of Northridge Pharmacy and secured a
valid Texas license to conduct business as a retail pharmacy at that location
under the HORIZON Pharmacies, Inc. name.
ACQUISITION OF BUTTE, MONTANA STORE. On August 16, 1997, the Company
acquired substantially all of the assets of Downey Drug, Inc. ("Downey
Drug") comprising primarily pharmacy files, equipment, inventory and
supplies. The Company acquired the assets through arm's-length negotiations
with Downey Drug and its sole shareholders, James and Tim Downey.
Prior to this transaction, no material relationships existed between
Downey Drug and the Company or any of its affiliates, any director or officer
of the Company, or any associate of such director or officer.
The consideration for the acquisition consisted of $150,000 cash and
three promissory notes in the aggregate amount of $614,511.79. The first
note executed in favor of Downey Drug in the amount of $344,511.79 is
payable over 84 months in equal monthly installments bearing interest at 8%
per annum. The other two notes, each in the amount of $135,000, are executed
in favor of James Downey and Tim Downey, respectively and are payable over 60
months in equal monthly installments bearing interest at 8% per annum. The
cash portion of the purchase price was derived from proceeds of the Offering.
The Company intends to continue Downey Drug's retail pharmacy operations
under the HORIZON Pharmacies, Inc. name. In connection therewith, the
Company secured a real estate lease covering Downey Drug's current retail
location and secured a valid Montana license to conduct business as a retail
pharmacy at that location under the HORIZON Pharmacies, Inc. name.
FINANCIAL STATEMENTS. It is impracticable at this time to provide the
required financial statements of the acquired businesses described in Item 5
and the required pro forma financial information. This information will be
provided within 60 days by an amendment to this report.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Name of Exhibit
2.1 Purchase Agreement dated August 2, 1997 by and between Sun
Country Drug, Inc. and the Company (incorporated by reference
to the Company's Current Report on Form 8-K filed electronically
on August 18, 1997).
2.2 Purchase Agreement dated August 12, 1997 by and between Revco
Inc. d/b/a Northridge Pharmacy and the Company (filed
electronically herewith).
2.3 Purchase Agreement dated August 16, 1997 by and between Downey
Drug, Inc. and the Company (filed electronically herewith).
27.1 Financial Data Schedule (filed electronically herewith).
(b) Reports on Form 8-K
The Company was not required to file and did not file any report on Form
8-K during the three months ended June 30, 1997.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused
the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HORIZON PHARMACIES, INC.,
a Texas corporation
Date: August 21, 1997 /s/ Ricky D. McCord
-------------------------------------
Ricky D. McCord
Chief Executive Officer
Date: August 21, 1997 /s/ David W. Frauhiger
-------------------------------------
David W. Frauhiger
Chief Financial Officer
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PURCHASE AGREEMENT
AGREEMENT made the 12th day of August, 1997 between Revco, Inc. d/b/a
Northridge Pharmacy having an office at 1819 N. Galloway, Mesquite,
Texas (hereinafter referred to as the "seller"), and HORIZON PHARMACIES,
INC., a Texas Corporation, having offices located at 275 W. Princeton Drive,
Princeton Texas, 75407 (hereinafter referred to as the "Buyer").
W I T N E S S E T H
WHEREAS, the Seller and the Buyer have reached an agreement, in accordance
with the terms and conditions hereinbelow set forth, with respect to the sale by
the Seller and the purchase by the Buyer of certain of the assets of the Seller
utilized in connection with and as part of the retail drug store operations of
the Seller known as Revco, Inc. d/b/a Northridge Pharmacy (hereinafter referred
to as the "DRUG STORE") and desire to reduce said agreement in writing;
NOW, THEREFORE, THE PARTIES AGREE:
1. SALE OF ASSETS.
1.1 For the purpose of this Agreement, Seller agrees to sell to Buyer AS
IS certain assets of the Drug Store (hereinafter referred to as the
"Drug Store Assets"), which the Buyer hereby agrees to purchase. Such
assets include and are hereby limited to:
A. INVENTORY. All of the marketable inventory (as defined in
Exhibit A attached hereto) held for retail sale by the Seller
and located at the Drug Store; and
B. PRESCRIPTION FILES INCLUDING ALL CUSTOMER AND PATIENT LISTS AND
PATIENT PROFILES. All prescription files and patient profiles of
Seller located at and pertaining to prescription customers of
the Drug Store.
C. ALL FIXTURES AND EQUIPMENT. All Rx, OTC, and DME fixtures and
equipment owned by Seller (computer/peripherals, registers,
refrigerator, typewriter, Microfiche, etc.) located at the Drug
Store,; and all telephone equipment, and all miscellaneous
shelving, counters and supplies belonging to Seller as listed on
Exhibit B attached hereto and made a part hereof.
D. STORE TELEPHONE NUMBER(S). All telephone numbers of the Drug
Store location shall be transferred to Buyer.
E. SUPPLIES. All bottles, vials, ointment jars, and other usable
supplies of Seller located at the Drug Store location and at
Seller cost.
F. ASSETS NOT PURCHASED. Buyer shall not purchase any consigned
merchandise or layaway items.
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2. PURCHASE PRICE.
2.1 The total purchase price to be paid by the Buyer for the Drug Stores
Assets shall be computed, but not allocated, as follows:
Furniture, Fixtures and Equipment, Prescription Files, Patient
Profiles, Customer List, Telephone System/Numbers, $120,000.00
1988 S-10 Blazer, NDC Computer hardware/software, and Non-compete
Covenant, Store's name "Northridge Pharmacy"
2.2 An amount equal to the aggregate value of the marketable inventory (as
defined in Exhibit A attached hereto) as determined in the physical
inventory described in paragraph 5 below and as valued in accordance
with Exhibit A attached hereto and made a part hereof.
2.3 Buyer will purchase active accounts receivable for the individual
Charge Accounts (as determined on 7/25/97) based on the following
evaluation:
0-30 days balances at 100%
31-60 days balances at 80%
61-90 days balances at 60%
> 90 days balances at 0%
ALLOCATION OF PURCHASE PRICE.
The Purchase Price shall be allocated and reflected on the Closing
Statement
PAYMENT OF PURCHASE PRICE.
4.1 Subject to the following provisions, the purchase price hereafter
shall be paid as follows:
4.1 (a) Cash at the closing equal to $150,000.00 less $1,000 escrow
deposit.
4.1 (b) A note at the closing equal to the purchase price less cash
in Sections 4.1(a) bearing interest at the rate of eight and
half (8 1/2) percent. The note is due and payable in seventy
two (72) equal consecutive monthly installments, the first
installment will be 1st of the following month. The Note
will be executed by Buyer and payable to the order of
Seller. It will be secured by the inventory of the said
DRUG STORE.
INVENTORY.
A physical inventory shall be taken at the Drug Store by RGIS INVENTORY
SPECIALISTS on the closing date. Each party shall pay one-half of the
inventory expense. Seller portion will be deducted from Closing
Statement.
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REPRESENTATIONS AND WARRANTIES BY SELLER.
6.1 The Seller does hereby represent and warrant as follows:
A. AUTHORITY. The execution, delivery and performance of this
Agreement by Seller has been duly authorized by all necessary
entity action and constitutes a legal, valid, and binding
obligation on Seller enforceable in accordance with its terms.
B. TITLE TO PROPERTIES. The Seller has good and marketable title
to all of the Drug Store assets to be transferred hereunder, free
and clear of all mortgages, liens, encumbrances, pledges, or
security interests of any nature whatsoever, except for secured
debts, if any, listed on Exhibit C attached hereto which shall be
satisfied and released at or prior to closing. The Seller
has received no notice of violation of any applicable law,
regulation or requirement relating to the retail Drug Store
business operation or Drug Store assets to be transferred
hereunder; and as far as known to the Seller, no such violation
exists.
C. CONTRACTS. Seller is not party to any contract, understanding
or commitment whether in the ordinary course of business or not,
relating to the conduct of business by Seller from the Drug
Store which contract, understanding or commitment shall
extend beyond the Closing Date for the Pharmacy Location except
the contracts identified in Exhibit "C." Seller is not party to
any contractual agreement or commitment to individual employees
which may not be terminated at the will of Seller.
D. LITIGATION. To the best of Seller's current actual knowledge
there is no suit, action, proceeding, investigation, claim,
complaint or accusation pending or, threatened against or
affecting Seller or the Assets or to which Seller is a party, in
any court or before any arbitration panel of any kind or before
or by any federal, state, local, foreign, or other governmental
agency, department, commission, board, bureau, instrumentality or
body which would have a materially adverse affect on the financial
condition of Seller, and to the best knowledge and belief of
Seller, there is no basis for any such suit, action, litigation,
proceeding, investigation, claim, complaint or accusation. There
is no outstanding order, writ, injunction, decree, judgment or
award by any court, arbitration panel or governmental body against
or affecting Seller with which Seller is not currently in
compliance.
E. EMPLOYEES.
(a) To the best of Seller's actual knowledge, the Seller is in full
compliance with all wage and hour laws, and is not engaged in any
unfair labor practice or discriminatory employment practice and no
complaint of any such practice against Seller is filed or
threatened to be filed with or by the National Labor Relations
Board, the Equal Employment Opportunity Commission or any other
administrative agency, federal or state, that regulates labor or
employment practices, nor is any grievance filed or threatened to
be filed against Seller by any employee pursuant to any collective
bargaining or other employment agreement to which Seller is a
party. To the best of Seller's current actual knowledge and
belief it is in compliance with all applicable federal and state
laws and regulations regarding occupational safety and health
standards and has received no material complaints from any
federal or state agency or regulatory body alleging violations
of any such laws and regulations.
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(b) The employment of all persons and officers employed by Seller is
terminable at will without any penalty or severance obligation of
any kind on the part of the employer. All sums due for employee
compensation and benefits and all vacation time owing to any
employees of Seller have been duly and adequately accrued and
reflected in the accounting records of Seller. All benefits such
as vacation accrued and earned by employees up to the Closing
Date is responsibility of the Seller. All benefits accrued and
earned after the Closing Date will become the financial
responsibilities of the Buyer. To the Seller's best actual
knowledge, all employees of Seller are either United States
citizens or resident aliens specifically authorized to engage in
employment in the United States in accordance with all applicable
laws.
F. TAXES.
(a) Seller has duly filed all required federal, state, local, foreign
and other tax returns, notices, and reports (including, but
not limited to, income, property, sales, use, franchise,
capital, stock, excise, added value, employees' income
withholding, social security and unemployment tax returns)
heretofore due; and to Seller's best actual knowledge all such
returns, notices, and reports are correct, accurate, and
complete.
(b) All deposits required to be made by Seller with respect to any
tax (including but not limited to, estimated income, franchise,
sales, use, and employee withholding taxes) have been duly made.
(c) All taxes, assessments, fees, penalties, interest and other
governmental charges which have become due and payable have been
paid in full by Seller or adequately reserved against on its
books of account and the amounts reflected on such books are
to the best belief and knowledge of Seller sufficient for the
payment of all unpaid federal, state, local, foreign, and other
taxes, fees, and assessments, and all interest and penalties
thereon with respect to the periods then ended and or all periods
prior thereto. Seller hereby agrees to indemnify and hold
harmless Buyer from and against any and all liability, claims, or
causes of action for any unpaid taxes, or other assessments due
and owing to any federal, state, or local governmental entity
arising out of the business of Seller prior to the Closing Date.
(d) Buyer shall pay any and all Sales, Use, and Transfer Taxes, if
any, arising out of the sale and transfer of assets which are
the subject of this transaction.
(e) Seller shall pay any and all personal property taxes for prior
years attributable to the property being transferred hereby
prior to Closing Date.
(f) The parties shall pro rate at Closing anticipated personal
property taxes as of the date of Closing based upon last year's
tax renditions, and personal property tax bills and rent and
will be deducted from Seller at closing.
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CONDITIONS PRECEDENT.
7.1 All obligations of Seller under this Agreement are subject to the
fulfillment, prior to or at the closing, of each of the following
conditions (unless waived in writing by Buyer).
A. REPRESENTATIONS. The representations and warranties of Seller
contained in this Agreement shall not only have been true and
complete as of date of this Agreement, but shall also be true and
complete as though again made as of the Closing Date.
B. COMPLIANCE. The Seller shall have performed and complied with all
terms and conditions required by this Agreement to be performed or
complied with by it prior to or on the Closing Date.
C. CONSENTS. All necessary consents to the transfer of the Drug Store
assets have been obtained from vendors and partners if any.
LIABILITIES NOT ASSUMED BY BUYER.
8.1 It is expressly understood and agreed that Buyer shall not, by virtue
of this Agreement, the consummation of the transactions
contemplated herein or otherwise, assume any liabilities or
obligations of the Seller or any liabilities or obligations
constituting a charge, lien, encumbrance or security interest upon
the Drug Store assets to be transferred hereunder, regardless of
whether such liabilities or obligations are absolute or
contingent, liquidated or unliquidated or otherwise except the
Security interest securing Buyer's Note to Seller.
8.2 Seller hereby indemnifies the Buyer, its officers, directors, and
controlling persons against any liability for any fee or
commission payable to any broker, agent or finder retained by
Seller with respect to any transaction contemplated by this
Agreement.
9. CLOSING.
9.1 The closing shall take place on or before August 12, 1997 at Buyer's
discretion, but in no event later than August 31, 1997, at the Drug
Store location.
A. TO BE DELIVERED TO BUYER. The Seller shall deliver to Buyer a Bill
of Sale, which shall be effective to vest in Buyer good and
marketable title to the Drug Store Assets, free and clear of
all mortgages, security interest, liens, encumbrances, pledges
and hypothecation of every nature and description, except the
Security interest securing Buyer's Note to the Seller.
B. TO BE DELIVERED TO SELLER. The Buyer shall deliver to the Seller a
Cashier's check for the cash portion of the purchase price less
$1,000 Escrow amount, and Buyer's promissory note described in
Paragraph 4.1 hereof, and the Security instruments required by
section 4.1(b).
INDEMNITY BY SELLER.
10.1 The Seller hereby agrees to indemnify and hold harmless Buyer against
and in respect of:
A. LIABILITY OF THE SELLER. With the exception of liabilities
expressly assumed, all liabilities and obligations of the Seller,
of every kind and description, regardless of whether such
liabilities or obligations are absolute or contingent, liquidated
or unliquidated, accrued or otherwise, and regardless of now and
when the same may have arisen, which are asserted against Buyer as
a result of this Agreement or the
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consummation of the transaction contemplated herein.
B. CLAIMS UPON ASSETS. All claims against, or claims of any interest
in, or of a lien or encumbrance or the like upon any or all of the
Drug Store assets to be transferred hereunder by the Seller to
Buyer which are caused or created by indemnifying party, with the
exception of Seller's interest, lien, or encumbrance resulting
from Seller's security interest.
11. INDEMNITY BY BUYER.
The buyer will indemnify the Seller for all claims against the Assets
for any period after the Closing Date. The Buyer further indemnifies the
Seller for break or leases and dissatisfied customer claims caused by HORIZON
for any period after the Closing Date.
12. SURVIVAL OF REPRESENTATIONS, WARRANTIES & INDEMNIFICATIONS.
12.1 All of the covenants, representations, warranties and indemnification
of the parties set forth in this Agreement shall survive the Closing
Date hereof.
All outstanding business transactions prior to the closing date
are credited to the Seller. All business acquired on or after the
Closing Date belong to the HORIZON Pharmacies, Inc. Including any
insurance payments made to the existing NABP, State Welfare
number(s), and/or contract(s) as long as the date of service is on
or after the Closing Date.
Sellers gives Buyer & Buyer's accountants access to financial
records to conduct an audit for 1996 & through August 12, 1997 at
Buyer's expense.
13. RISK OF LOSS.
13.1 The risk of loss of damage of Drug Store assets to be conveyed
hereunder shall be upon Seller until the closing hereof.
14. NON-COMPETE COVENANT OF SELLER.
14.1 In consideration of the Purchase Price hereinabove stated in
paragraph 2 of which $50,000.00 (for each individual) is allocated
to this covenant not to compete BOB NORDEEN hereby agrees that for a
period of six (6) years after the Closing Date hereunder will not,
directly or indirectly, through a subsidiary, joint venture
arrangement or otherwise, conduct or assist another party other than
the Buyer in conducting or managing any operation which has as its
purpose what is generally known as a retail pharmacy, or Nursing Home
or IV operation or DME operation within the city limits of Mesquite,
Texas, or have any equity investment in such operation. This
non-compete entitles BOB NORDEEN to perform work as an employee of
HORIZON Pharmacies, Inc. Furthermore, this non-compete clause does
not prohibit BOB NORDEEN from performing duties such as relief
pharmacist at other pharmacies within or without Mesquite. The
parties hereby recognize and acknowledge that the territorial and
time limitations contained in this paragraph are reasonable and
properly required for the adequate protection of the business to be
conducted by Buyer with the assets and properties to be transferred
hereunder and cannot be changed except by written permission of
Buyer.
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14.2 The parties recognize that, in the event of a breach by Seller of any
of the provisions of this paragraph, the remedy of law alone would
be inadequate and, accordingly, Buyer, (in addition to damages),
shall be entitled to an injunction restraining Seller from
violating the covenants herein contained.
14.3 It is the intention of the Seller and the Buyer that the execution of
these covenants not to compete be considered as materially
significant and essential to the closing of this Agreement, and
that such covenants are a material portion of the purchase price
set forth herein above.
15. GOVERNING LAW.
15.1 This agreement shall be governed and construed in accordance with the
laws of the State of Texas.
16. ENTIRE AGREEMENT.
16.1 This Agreement contains the entire agreement between the parties, and
no representations, warranties or promises, unless contained
herein, shall be binding upon the parties hereto. This document is
null and void if the Purchase Agreement is not signed by both
parties within 10 days from date the Buyer has received the
Purchase Agreement document and the deposit of the $1,000.00
escrow.
16.2 It is stipulated that this agreement is null and void if HORIZON
Pharmacies, Inc:
(a) can not secure a valid Texas License under its own merit for the
said DRUG STORE location to conduct business as a retail pharmacy
operation. HORIZON Pharmacies, Inc. commits that it will exercise due
diligent effort to secure the Texas License.
(b) can not secure a lease for:
$2,650.00 per month for 1st year
17. EARNEST MONEY.
17.1 To bind this Agreement, Buyer herewith deposits with RICHARD DOBBYN
as Escrow Agent, the sum of $1,000 (One Thousand Dollars), which
sum shall be applied to the cash portion of the Purchase Price
upon the closing of the transaction contemplated herein. However,
in the event Seller fails to perform each and every covenant and
condition required hereunder, Buyer may cancel this Agreement and
have the Earnest Money returned to it. If the Buyer fails to
perform each and every obligation hereunder, Seller shall retain
the Earnest Money as liquidated damages. each party's remedy
provided in this Section is that party's exclusive remedy.
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IN WITNESS WHEREOF, the parties hereto have set their hands the day and
year first above written.
BUYER:
HORIZON PHARMACIES, INC.
---------------------------------------
Rick McCord, President
THE STATE OF )
COUNTY OF )
THIS INSTRUMENT was acknowledged before me on this the __________ day of
__________ , 19_____, by RICK MCCORD, who holds the office of President of
HORIZON PHARMACIES, INC., a Texas Corporation on behalf of such corporation.
---------------------------------------
SEAL
Notary Public, State of Texas
My commission Expires:
-----------------
SELLER:
Revco, Inc. d/b/a Northridge Pharmacy
---------------------------------------
Bob Nordeen, President
THE STATE OF )
COUNTY OF )
THIS INSTRUMENT was acknowledged before me on this the _________day of
__________, 19___ by _________________, who holds the office of President of
Revco, Inc.
---------------------------------------
SEAL
Notary Public, State of Texas
My commission Expires:
-----------------
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EXHIBIT A
1. DEFINITION OF MARKETABLE INVENTORY. For purposes of this Agreement,
marketable inventory is all of Seller's inventory except the following:
(a) DAMAGED MERCHANDISE. Damaged merchandise, including but not
limited to, items which are shopworn, faded (including faded labels)
or subject to visible deterioration; and
(b) UNSALABLE MERCHANDISE. Unsalable merchandise, that is items which
are obsolete, or which have an expired expiration date or which have
been discontinued by the manufacturer; and
(c) PRESCRIPTION MERCHANDISE AND OVER-THE COUNTER DRUGS. The following
exclusions, in addition to the exclusions set forth above, shall be
applicable to prescription merchandise and over-the-counter drugs:
(i) Any partial container with expired dating within thirty
(30) days;
(ii) Any full, sealed containers (aa) with expired dating,
(iii) Filled prescriptions over one month old;
(d) The buyer has the right of refusal to exclude seasonal merchandise
from the evaluation of inventory other than Halloween, Thanksgiving,
and Christmas.
VALUATION OF INVENTORY. The marketable inventory shall be valued, for
purposes of this Agreement, as follows
(a) The marketable prescription inventory will be taken at acquisition
cost OR AWP less 16%. Special deal prescription items and/or
generic items will be at acquisition cost.
(b) Non-prescription merchandise will be taken at acquisition cost. If no
acquisition cost exists, then the following formula will apply to
the merchandise.
CATEGORY COST (% OF RETAIL)
HBA Retail price less 25%
OTC( Health aids) Retail price less 25%
Gifts Retail price less 50%
Cards Retail price less 50%
Cosmetics Retail price less 40%
Watches/Cameras Retail price less 50%
Fragrances Retail price less 25%
Candy (box) Retail price less 40%
Candy (loose) Retail price less 30%
Jewelry Retail price less 50%
Miscellaneous Retail price less 50%
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Seasonal Merchandise Retail price less 50%
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EXHIBIT B
1. LIST OF ASSETS (FURNITURE, FIXTURES, AND EQUIPMENT, ETC.).
<TABLE>
<S> <C>
Radionic Security System and equipment Proscar/Teleco 6 station telephone system
Diebold safe 2 NDC scanning register TEC
IBM pentium 330 Rx computer/4 work stations 2 Okidata 320 printers
1 IBM printer 3 Backup batteries
Rx balance and weights Assorted compounding utensils
2 Rheen 5ton A/C & Heating units 1 A/C window unit
(new compressor as of 10/96) 1 S-10 Chevy Blazer 1988
20 ft Pharmacy counter unit 16ft Rx counter, cupboard/sink
Rx bays & wall unit 5 metal Rx file cabinets
1 Sears coldspot 12.66 cu ft refrigerator Remington elec. typewriter
24ft check-in counter & base cupboards 1 impulse sign machine
1 coke machine 28ft stock room shelving
1 orbiter floor scrub machine 108ft gondolas with shelves 5ft high
40ft wall shelving 5ft high 52ft wall fixtures with shelves 7ft high
8 end stand units 3ft wide 1 glass showcase 8ft
2 glass shelf gift fixture 5ft 2 glass shelf gift fixture 7ft
2 check-out counters 1 neon "open" sign
1 power-mate answering machine 4 ceiling security mirrors
1 blood pressure machine floor model assorted wood display fixtures
1 wood desk and chair 1 TV/VCR combo for training
1 Toshiba microwave 1 Kirby lester pill counter
1 fax machine 1 unit dose heat seal w/ blister cards
1 metal dolly 2 wheel 2 metal drawer file cabinets
1 metal file cabinet with shelves/Rx dept c-2
</TABLE>
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EXHIBIT C
1. LIST OF SECURED DEBTS.
1. Advertising. Southwestern Bell Yellow Pages from September 1, 1997
to December 31, 1997. $94.00 per month x 4 months = $376.00
2. Real Estate lease. Real property lease for the store located at 1819
N. Galloway Mesquite, TX 75149 from 91/97 to 12/31/97. $2,650.00 per
month x 4 months = $10,600.00
3. Equipment Leases
Lessor Monthly Pmt Remaining Months Total Due
NDC $297.47 11 $ 3,569.64
NDC-POS $305.57 12 $ 3,972.41
AT & T computer $162.37 45 $ 7,306.65
Total $14,848.70
Buyer and Seller will pay for and be obligated to pay for one-half of each
month's rental payment until the equipment leases are paid in full or otherwise
terminated. If and when Seller and Robert Nordeen are released from any
obligations which they may have on the leases, Seller will convey fifty percent
(50%) of the remaining balance on the equipment leases to Buyer. Until such
leases are obtained, each party obligates itself to pay 50% of each month's
payment.
EXHIBIT D
1. ALL COLLECTIBLES & ANTIQUES ARE EXCLUDED:
Which include the following:
1 Alchemy clock
1 antique wood wheelchair
1 show globe / ceiling hanging
1 wood desk in office
2 wood show cases filled with pharmacy memorabilia
all items on top of Rx department shelves and cupboards
all tile plaques hanging in Rx department
Pharmacist Bear (hand carved) redwood
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PURCHASE AGREEMENT
AGREEMENT made the 16 day of August, 1997 between Downey Drug, Inc.
having an office at 1839 Harrison Avenue, Butte, MT 59701 (hereinafter
referred to as the "seller"), and HORIZON PHARMACIES, INC., a Texas
Corporation, having offices located at 275 W. Princeton Drive, Princeton
Texas, 75407 (hereinafter referred to as the "Buyer").
W I T N E S S E T H
WHEREAS, the Seller and the Buyer have reached an agreement, in
accordance with the terms and conditions hereinbelow set forth, with respect
to the sale by the Seller and the purchase by the Buyer of certain of the
assets of the Seller utilized in connection with and as part of the retail
drug store operations of the Seller known as Downey Drug (hereinafter
referred to as the "DRUG STORE") and desire to reduce said agreement in
writing;
NOW, THEREFORE, THE PARTIES AGREE:
1. SALE OF ASSETS.
1.1 For the purpose of this Agreement, Seller agrees to sell to Buyer
certain assets of the Drug Store (hereinafter referred to as the "Drug
Store Assets"), which the Buyer hereby agrees to purchase. Such assets
include and are hereby limited to:
A. INVENTORY. All of the marketable inventory (as defined in
Exhibit A attached hereto) held for retail sale by the Seller
and located at the Drug Store; and
B. PRESCRIPTION FILES INCLUDING ALL CUSTOMER AND PATIENT LISTS AND
PATIENT PROFILES. All prescription files and patient profiles
of Seller located at and pertaining to prescription customers
of the Drug Store.
C. ALL FIXTURES AND EQUIPMENT. All Rx, OTC, and DME fixtures and
equipment owned and leased by Seller (computer/peripherals,
registers, refrigerator, typewriter, Microfiche, fax, copier,
Pitney Bowes, sound of music and alarm system, etc.) located at
the Drug Store,; and all telephone equipment, and all
miscellaneous shelving, counters and supplies belonging to
Seller as listed on Exhibit B attached hereto and made a
part hereof.
D. STORE TELEPHONE NUMBER(S). All telephone numbers of the Drug
Store location shall be transferred to Buyer.
E. SUPPLIES. All bottles, vials, ointment jars, and other usable
supplies of Seller located at the Drug Store location and at
Seller cost.
F. ASSETS NOT PURCHASED. Buyer shall not purchase any consigned
merchandise or layaway items.
G. All outstanding business transactions prior to the closing date
are credited to the Buyer. All the business acquired after
the closing date belong to the HORIZON
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Pharmacies, Inc. including any insurance payments made to the
existing NABP, State Welfare number(s), and/or contract(s) as
long as the date of service is on or after the closing date.
2. PURCHASE PRICE.
2.1 The total purchase price to be paid by the Buyer for the Drug
Stores Assets shall be computed, but not allocated, as follows:
Furniture, Fixtures and Equipment, Prescription Files, Patient
Profiles, Customer List, Telephone System/Numbers, $130,000.00
2.2 An amount equal to the aggregate value of the marketable inventory
(as defined in Exhibit A attached hereto) as determined in the
physical inventory described in paragraph 5 below and as valued in
accordance with Exhibit A attached hereto and made a part hereof.
For the purpose of the purchase Buyer will pay 100% of the inventory
evaluation on the first $550,000 and 80% thereafter.
2.3 Buyer will purchase accounts receivable based on the following
evaluation:
(a) Third Party Insurance Receivable All at 100%
(b) Individual Charge Accounts
0-30 days balances at 100%
31-60 days balances at 80%
61-90 days balances at 60%
>90 days balances at 0%
ALLOCATION OF PURCHASE PRICE.
The Purchase Price shall be allocated based on the attached closing
statement, signed by both buyer and seller.
PAYMENT OF PURCHASE PRICE.
4.1 Subject to the following provisions, the purchase price hereafter
shall be paid as follows:
4.1 (a) Cash at the closing equal to $150,000.00 less $5,000 escrow
deposit.
4.1 (b) A note payable at closing to James Downey at 1355 West
Porphyry, Butte, MT 59701, for $135,000 which will bear
interest at the rate of eight (8) percent per annum for 60
months starting September 1, 1997.
(c) A note payable at closing to Tim Downey at 111 View, Butte,
MT 59701, for $135,000 which will bear interest at the rate
of eight (8) percent per annum for 60 months starting
September 1, 1997.
(d) A note at closing equal to the purchase price less section
4.1 (a, b, & c) above. The note will bear interest at the
rate of eight (8) percent per annum for 84 months starting
September 1, 1997. The note will be executed by buyer and
payable to the order of Downey Drug, Inc. It will be secured
by the inventory, furniture, fixtures, and equipment of said
Drug Store.
4.2 Security Instruments including Security Agreement and Financing
Statements covering the property being purchased by this
Agreement.
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<PAGE>
INVENTORY.
A physical inventory shall be taken at the Drug Store by RGIS INVENTORY
SPECIALISTS on the closing date. Each party shall pay one-half of the
inventory expense. Seller portion will be deducted from Closing
Statement.
REPRESENTATIONS AND WARRANTIES BY SELLER.
6.1 The Seller does hereby represent and warrant as follows:
A. AUTHORITY. The execution, delivery and performance of this
Agreement by Sellerhas been duly authorized by all necessary entity
action and constitutes a legal, valid, and binding obligation on
Seller enforceable in accordance with its terms.
B. TITLE TO PROPERTIES. The Seller has good and marketable title
to all of the Drug Store assets to be transferred hereunder, free
and clear of all mortgages, liens,encumbrances, pledges, or security
interests of any nature whatsoever, except for secured debts, if any,
listed on Exhibit C attached hereto which shall be satisfied and
released at or prior to closing. The Seller has received no notice of
violation of any applicable law, regulation or requirement relating
to the retail Drug Store business operation or Drug Store assets to
be transferred hereunder; and as far as known to the Seller, no such
violation exists.
C. CONTRACTS. Seller is not party to any contract, understanding or
commitment whether in the ordinary course of business or not,
relating to the conduct ofbusiness by Seller from the Drug Store
which contract, understanding or commitment shall extend beyond the
Closing Date for the Pharmacy Location except the contracts the
real estate lease Seller is not party to any contractual agreement
or commitment to individual employees which may not be terminated at
the will of Seller.
D. LITIGATION. To the best of Seller's current actual knowledge
there is no suit, action, proceeding, investigation, claim, complaint
or accusation pending or, threatened against or affecting Seller or
the Assets or to which Seller is a party, in any court or before any
arbitration panel of any kind or before or by any federal, state,
local, foreign, or other governmental agency, department, commission,
board, bureau, instrumentality or body which would have a materially
adverse affect on the financial condition of Seller, and to the best
knowledge and belief of Seller, there is no basis for any such suit,
action, litigation, proceeding, investigation, claim, complaint or
accusation.
There is no outstanding order, writ, injunction, decree, judgment or
award by any court, arbitration panel or governmental body against or
affecting Seller with which Seller is not currently in compliance.
E. EMPLOYEES.
(a) To the best of Seller's actual knowledge, the Seller is in full
compliance with all wage and hour laws, and is not engaged in any
unfair labor practice or discriminatory employment practice and no
complaint of any such practice against Seller is filed or threatened
to be filed with or by the National Labor Relations Board, the Equal
Employment Opportunity Commission or any other administrative agency,
federal or state, that regulates labor or employment practices, nor
is any grievance filed or
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<PAGE>
threatened to be filed against Seller by any employee pursuant to
any collect bargaining or other employment agreement to which Seller
is a party. To the Seller's best knowledge and belief it is in
compliance with all applicable federal and state laws and
regulations regarding occupational safety and health standards and
has received no material complaints from any federal or state
agency or regulatory body alleging violations of any such laws and
regulations.
(b) The employment of all persons and officers employed by Seller
is terminable at will without any penalty or severance obligation of
any kind on the part of the employer. All sums due for employee
compensation and benefits and all vacation time owing to any
employees of Seller have been duly and adequately accrued and
reflected in the accounting records of Seller. All benefits such as
vacation accrued and earned by employees up to the Closing Date is
responsibility of the Seller. All benefits accrued and earned after
the Closing Date will become the financial responsibilities of the
Buyer. To the Seller's best knowledge, all employees of Seller are
either United States citizens or resident aliens specifically
authorized to engage in employment in the United States in accordance
with all applicable laws.
F. TAXES.
(a) Seller has duly filed all required federal, state, local, foreign
and other tax returns, notices, and reports (including, but not
limited to, income, property, sales, use, franchise, capital, stock,
excise, added value, employees' income withholding, social security
and unemployment tax returns) heretofore due; and to Seller's best
knowledge all such returns, notices, and reports are correct,
accurate, and complete.
(b) All deposits required to be made by Seller with respect to any
tax (including but not limited to, estimated income, franchise,
sales, use, and employee withholding taxes) have been duly made.
(c) All taxes, assessments, fees, penalties, interest and other
governmental charges which have become due and payable have been
paid in full by Seller or adequately reserved against on its books of
account and the amounts reflected on such books are to the best
belief and knowledge of Seller sufficient for the payment of all
unpaid federal, state, local, foreign, and other taxes, fees, and
assessments, and all interest and penalties thereon with respect to
the periods then ended and or all periods prior thereto. Seller
hereby agrees to indemnify and hold harmless Buyer from and against
any and all liability, claims, or causes of action for any unpaid
taxes, or other assessments due and owing to any federal, state, or
local governmental entity arising out of the business of Seller prior
to the Closing Date.
(d) Buyer shall pay any and all Sales, Use, and Transfer Taxes, if
any, arising out of the assets which are the subject of this sale.
(e) Seller shall pay any and all personal property taxes for prior
years attributable to the property being transferred hereby prior to
Closing Date.
(f) The parties shall pro rate at Closing anticipated personal
property taxes as of the date of Closing based upon last year's tax
renditions, and personal property tax bills and rent.
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CONDITIONS PRECEDENT.
7.1 All obligations of Seller under this Agreement are subject to the
fulfillment, prior to or at the closing, of each of the following
conditions (unless waived in writing by Buyer).
A. REPRESENTATIONS. The representations and warranties of Seller
contained in this Agreement shall not only have been true and
complete as of date of this Agreement, but shall also be true
and complete as though again made as of the Closing Date.
B. COMPLIANCE. The Seller shall have performed and complied with all
terms and conditions required by this Agreement to be performed
or complied with by it prior to or on the Closing Date.
C. CONSENTS. All necessary consents to the transfer of the Drug Store
assets have been obtained from vendors and partners if any.
D. UNION CONTRACT. Buyer acknowledges Seller has a union contract
covering a portion of its employees. As a condition to
closing, Buyer needs to evaluate said contract and Seller's
status as a union employer. It is Buyer's intent to separately
hire all its own employees for operations starting August
18, 1997, and not be bound by Sellers prior employment practices
or union obligations. As a result, on or before May 30, 1997,
Buyer will notify Seller of its intent to close on or before
August 30, 1997. Seller will then terminate all its employees
with two (2) weeks notice on July 30, 1997. Buyer shall hire
its own work force for its start of business on August 18,
1997. Seller will fully cooperate with Buyer in this
transition. Failure by Buyer to notify Seller by August 30,
1997 of its intent to close, shall terminate all obligations of
Seller to sell as provided hereunder. Once Buyer notifies
Seller of its intent to close on August 30,1997, it will be
obligated to close in conformity with this agreement.
LIABILITIES NOT ASSUMED BY BUYER.
8.1 It is expressly understood and agreed that Buyer shall not, by
virtue of this Agreement, the consummation of the transactions
contemplated herein or otherwise, assume any liabilities or
obligations of the Seller or any liabilities or obligations
constituting a charge, lien, encumbrance or security interest upon
the Drug Store assets to be transferred hereunder, regardless of
whether such liabilities or obligations are absolute or contingent,
liquidated or unliquidated or otherwise except the Security
interest securing Buyer's Note to Seller.
8.2 Seller hereby indemnifies the Buyer, its officers, directors, and
controlling persons against any liability for any fee or commission
payable to any broker, agent or finder retained by Seller with
respect to any transaction contemplated by this Agreement.
9. CLOSING.
9.1 The closing shall take place on or before August 30, 1997 at Buyer's
discretion, but in no event later than August 30, 1997, at the Drug
Store location.
A. TO BE DELIVERED TO BUYER. The Seller shall deliver to Buyer a Bill
of Sale, which shall be effective to vest in Buyer good and
marketable title to the Drug Store Assets, free and clear of all
mortgages, security interest, liens, encumbrances, pledges and
hypothecation of every nature and description, except the Security
interest securing Buyer's Note to the Seller.
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B. TO BE DELIVERED TO SELLER. The Buyer shall deliver to the Seller a
Cashier's check for the cash portion of the purchase price less
$1,000 Escrow amount, and Buyer's promissory note described in
Paragraph 4.1 hereof, and the Security instruments required by
section 4.1 (b).
INDEMNITY BY SELLER.
10.1 The Seller hereby agrees to indemnify and hold harmless Buyer against
and in respect of:
A. LIABILITY OF THE SELLER. With the exception of liabilities
expressly assumed, all liabilities and obligations of the Seller,
of every kind and description, regardless of whether such
liabilities or obligations are absolute or contingent, liquidated
or unliquidated, accrued or otherwise, and regardless of now and
when the same may have arisen, which are asserted against Buyer as
a result of this Agreement or the consummation of the transaction
contemplated herein.
B. CLAIMS UPON ASSETS. All claims against, or claims of any interest
in, or of a lien or encumbrance or the like upon any or all of the
Drug Store assets to be transferred hereunder by the Seller to Buyer
which are caused or created by indemnifying party, with the exception
of Seller's interest, lien, or encumbrance resulting from Seller's
security interest.
C. The Buyer will indemnify the Seller for all claims against the
Assets for any period after the closing date. The Buyer further
indemnifies the Seller for break of leases and dissatisfied
customer claims caused by HORIZON for any period after the closing
date.
11. SURVIVAL OF REPRESENTATIONS, WARRANTIES & INDEMNIFICATIONS.
11.1 All of the covenants, representations, warranties and indemnification
of the parties set forth in this Agreement shall survive the Closing
Date hereof.
12. RISK OF LOSS.
12.1 The risk of loss of damage of Drug Store assets to be conveyed
hereunder shall be upon Seller until the closing hereof.
13. NON-COMPETE COVENANT OF SELLER.
13.1 In partial consideration of the Purchase Price hereinabove stated in
paragraph 2 and other consideration $270,000 ($135,000 for each
individual, includes 8% interest) will be paid to this covenant
not to compete. Jim Downey and Tim Downey hereby agree that for a
period of five (5) years after the date of closing hereunder will
not directly or indirectly, through a subsidiary, joint venture
arrangement or otherwise, conduct or assist another party other
than the Buyer in conducting or managing any operation which has
its own purpose what is generally known as a retail pharmacy, or
Nursing Home or IV operation or DME operation within Butte-Silver
Bow County, Montana, or have any equity investment in such
operation. This non-compete entitles Jim Downey and Tim Downey to
perform work at 40 hours a week as employees of HORIZON
Pharmacies, Inc. Furthermore, this non-compete clause does not
prohibit Jim Downey and Tim Downey from performing duties such as
relief pharmacist at other pharmacies. Any additional relief work
days in a month will require written approval of the Buyer. The
parties hereby
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<PAGE>
recognize and acknowledge that the territorial and time
limitations contained in this paragraph are reasonable and
properly required for the adequate protection of the business to
be conducted by Buyer with the assets and properties to be
transferred hereunder and cannot be changed except by written
permission of Buyer. Said $135,000 to each Jim and Tim Downey
shall be paid monthly at $2,250.00 each over a period of five (5)
years starting one month after closing. Seller will allow Buyer
and Buyers accountant access to financial information to prepare
and audit for 1996, and up to closing date in 1997 to be paid at
Buyers expense.
13.2 The parties recognize that, in the event of a breach by Seller of any
of the provisions of this paragraph, the remedy of law alone would
be inadequate and, accordingly, Buyer,(in addition to damages),
shall be entitled to an injunction restraining Seller from
violating the covenants herein contained.
13.3 It is the intention of the Seller and the Buyer that the execution of
these covenants not to compete be considered as materially
significant and essential to the closing of this Agreement, and
that such covenants are a material portion of the purchase price
set forth herein above.
14. GOVERNING LAW.
14.1 This agreement shall be governed and construed in accordance with the
laws of the State of Montana.
15. ENTIRE AGREEMENT.
15.1 This Agreement contains the entire agreement between the parties, and
no representations, warranties or promises, unless contained herein,
shall be binding upon the parties hereto, their successors and
assigns.
15.2 It is stipulated that this agreement is null and void if HORIZON
Pharmacies, Inc:
(a) can not secure a valid Montana License under its own merit for
the said DRUG STORE location to conduct business as a retail
pharmacy operation. HORIZON Pharmacies, Inc. commits that it will
exercise due diligent effort to secure the Montana License.
(b) can not secure a lease for $4,000.00 per month for three (3)
years with one (1) three (3) year option @ $4,300.00 per month and
one (1) four (4) year option @ $4,500.00 per month.
16. EARNEST MONEY.
16.1 To bind this Agreement, Buyer herewith deposits with James F. Duffy
as Escrow Agent, the sum of $5,000 (Five Thousand Dollars), which
sum shall be applied to the cash portion of the Purchase Price
upon the closing of the transaction contemplated herein. However,
in the event Seller fails to perform each and every covenant and
condition required hereunder, Buyer may cancel this Agreement and
have the Earnest Money returned to it. If the Buyer fails to
perform each and every obligation hereunder, Seller shall retain
the Earnest Money as liquidated damages each party's remedy
provided in
7
<PAGE>
this Section is that party's exclusive remedy.
17. ASSIGNMENT
17.1 This agreement may not be assigned by Buyer without written consent
of Seller. Consent will not be unreasonably withheld.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands the day and
year first above written.
BUYER:
HORIZON PHARMACIES, INC.
-----------------------------------------
Rick McCord, President
THE STATE OF )
COUNTY OF )
THIS INSTRUMENT was acknowledged before me on this the __________ day
of __________ , 19_____, by RICK MCCORD, who holds the office of President of
HORIZON PHARMACIES, INC., a Texas Corporation on behalf of such corporation.
-----------------------------------------
SEAL
Notary Public, State of Texas
My commission Expires:
-------------------
SELLER:
Downey Drug, Inc.
-----------------------------------------
Tim Downey, President
-----------------------------------------
Jim Downey, Vice-President
THE STATE OF )
COUNTY OF )
THIS INSTRUMENT was acknowledged before me on this the _________day of
__________, 19___ by Tim Downey, who holds the office of President of Downey
Drug, Inc. and by Jim Downey who holds the office of Vice-President of Downey
Drug, Inc. on behalf of such corporation.
-----------------------------------------
SEAL
Notary Public, State of Texas
My commission Expires:
-------------------
9
<PAGE>
EXHIBIT A
1. DEFINITION OF MARKETABLE INVENTORY. For purposes of this Agreement,
marketable inventory is all of Seller's inventory except the following:
(a) DAMAGED MERCHANDISE. Damaged merchandise, including but not limited
to, items which are shopworn, faded (including faded labels) or
subject to visible deterioration; and
(b) UNSALABLE MERCHANDISE. Unsalable merchandise, that is items which are
obsolete, or which have an expired expiration date or which have been
discontinued by the manufacturer; and
(c) PRESCRIPTION MERCHANDISE AND OVER-THE COUNTER DRUGS. The following
exclusions, in addition to the exclusions set forth above, shall be
applicable to prescription merchandise and over-the-counter drugs:
(i) Any partial container with expired dating within thirty (30)
days;
(ii) Any full, sealed containers (aa) with expired dating,
(iii) Filled prescriptions over one month old;
(d) The buyer has the right of refusal to exclude seasonal merchandise
from the evaluation of inventory other than Halloween, Thanksgiving,
and Christmas.
VALUATION OF INVENTORY. The marketable inventory shall be valued, for purposes
of this Agreement, as follows
(a) The marketable prescription inventory will be taken at acquisition
cost OR AWP less 16%. Special deal prescription items and/or generic
items will be at acquisition cost.
(b) Non-prescription merchandise will be taken at acquisition cost. If no
acquisition cost exists, then the following formula will apply to the
merchandise.
CATEGORY COST (% OF RETAIL)
HBA Retail price less 25%
OTC( Health aids) Retail price less 25%
Gifts Retail price less 50%
Cards Retail price less 50%
Cosmetics Retail price less 40%
Watches/Cameras Retail price less 50%
Fragrances Retail price less 25%
Candy (box) Retail price less 40%
Candy (loose) Retail price less 30%
Jewelry Retail price less 50%
Miscellaneous Retail price less 50%
Seasonal Merchandise Retail price less 50%
10
<PAGE>
EXHIBIT B
1. LIST OF ASSETS (FURNITURE, FIXTURES, AND EQUIPMENT, ETC.).
STORE:
1-7 ft. GONDOLA/SHELVES
1-15 ft GONDOLA/SHELVES
1-21 ft GONDOLA/SHELVES
1-30 ft GONDOLA/SHELVES
2-36 ft GONDOLA/SHELVES
10-40 ft GONDOLA/SHELVES
9-4 ft GLASS CASES
9-6 ft GLASS CASES
9-8 ft GLASS CASES
19-ENDCAPS
75-OTC WALL SHELVES
5-GIFT DISPLAYS
5-COSMETIC DISPLAYS
2-GLASS DISPLAYS
1-GIFT WRAP DISPLAY-HOLDER
5-GLASS OAK WALL DISPLAY (32 FT)
20-RX WALL SHELVES (3 ft SECTIONS)
1-RX COUNTER 36 ft W/DRAWS ETC.
1-AUTOMATIC PILL COUNTER
1-RX REFRIGERATOR
1-CIGAR CASE
1-REF. CANDY CASE
3-CHECK OUT COUNTERS
1-COOLER VET. SECTIONS
5-REGISTERS
4-DESKS
5-LOCKERS
4-FILE CABINETS
3-VACUUMS
1-COPIER
1-FAX MACHINE
13-SHELVES (8 ft) STORE ROOM/UPSTAIRS
WOOD SHELVES (STORE ROOMS)
2-SAFES-NOT FOR SALE, BUT MAY BE USED WITH LEASE ON BLDG.
1-RX BALANCE-NOT FOR SALE, MAY BE USED UNTIL REPLACED.
EXHIBIT C
1. LIST OF SECURED DEBTS.
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 229,052
<SECURITIES> 0
<RECEIVABLES> 2,463,017
<ALLOWANCES> 0
<INVENTORY> 3,893,381
<CURRENT-ASSETS> 6,626,546
<PP&E> 720,726
<DEPRECIATION> 105,957
<TOTAL-ASSETS> 9,091,801
<CURRENT-LIABILITIES> 5,882,238
<BONDS> 1,291,034
0
0
<COMMON> 10,824
<OTHER-SE> 1,907,705
<TOTAL-LIABILITY-AND-EQUITY> 9,091,801
<SALES> 11,060,059
<TOTAL-REVENUES> 11,060,059
<CGS> 7,582,584
<TOTAL-COSTS> 7,582,584
<OTHER-EXPENSES> 3,013,242
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,913
<INCOME-PRETAX> 318,456
<INCOME-TAX> 111,000
<INCOME-CONTINUING> 207,456
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207,456
<EPS-PRIMARY> .18
<EPS-DILUTED> 0
</TABLE>
