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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-KSB
(MARK
ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / 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 0-22403
--------------------------
HORIZON PHARMACIES, INC.
(Name of small business issuer in its charter)
TEXAS 75-2441557
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 WEST PRINCETON DRIVE 75407
PRINCETON, TEXAS (Zip Code)
(Address of principal executive offices)
(972) 736-2424
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01
PAR VALUE
--------------------------
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 at least the past 90 days.
YES _X_ NO ___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
YES ___ NO _X_
Issuer's revenues for its most recent fiscal year $28,429,604.
As of March 24, 1998 the aggregate market value of voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock was $32,827,886.50. As of
March 24, 1998 there were 4,492,595 shares of Common Stock, $.01 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Following is a list of documents incorporated by reference and the Part of
the Form 10-KSB into which the document is incorporated:
The Company's Proxy Statement in connection with its Annual Meeting of
Shareholders to be held on June 4, 1998 is incorporated by reference in Part
III, Items 9, 10, 11, 12, and 13.
Transitional Small Business Disclosure Format (check one): YES ___ NO _X_
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HORIZON PHARMACIES, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PAGE
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PART I...................................................................................................... 1
Item 1. Business........................................................................................ 1
Item 2. Properties...................................................................................... 7
Item 3. Legal Proceedings............................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders............................................. 8
PART II..................................................................................................... 8
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters........................... 8
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 9
Item 7. Financial Statements............................................................................ 15
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 15
PART III.................................................................................................... 15
PART IV..................................................................................................... 15
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 15
Index to Financial Statements and Financial Statement Schedules............................................. F-l
Signatures.................................................................................................. 18
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PART I
ITEM 1. BUSINESS.
GENERAL
HORIZON Pharmacies, Inc. (the "Company") owns and operates one of the top
100 retail pharmacy chains according to the October 20, 1997 issue of Chain Drug
Review. As of December 31, 1997, the Company had 24 stores located principally
in the south central United States.
Currently, the Company's primary source of revenue is the sale of
prescription drugs. During fiscal 1997, sales of prescription drugs generated
approximately 76% of the Company's net revenues. Management expects the
Company's prescription drug business to continue to increase as a result of the
demographic trends towards an aging population and the continued development of
new pharmaceutical products. However, the Company anticipates that prescription
sales will continue to decrease as a percentage of the Company's overall
revenues and gross margins as the Company continues to expand its home
healthcare and other non-pharmaceutical sales and services which have
historically provided higher margins.
In addition to prescription drugs and services, the Company's retail
pharmacies offer a broad range of over-the-counter medications, supplies and
equipment, health and beauty care, cosmetics, gifts, greeting cards, convenience
foods, cameras, photo supplies and processing services and other general
merchandise. Some stores incorporate special features such as drive-through
windows and free home delivery for customer convenience, optical departments,
faxing, copying and package delivery services, fresh floral arrangements and
soda fountains. The Company also sells and leases home medical equipment ("HME")
and offers home healthcare services including, but not limited to, intravenous
services and home oxygen therapy under the name HORIZON Home Care. As of
December 31, 1997, the Company had one freestanding HME store and three
pharmacies offering intravenous infusion services and home oxygen therapy.
Additionally, the Company operates two closed-door institutional pharmacies.
The Company's business strategy is to continue to expand through
acquisitions and to increase individual store profitability. In implementing its
business strategy, the Company intends to continue cost-control programs,
continue and improve employee training, negotiate increases in vendor rebates,
maintain a high level of customer service and convenience, increase sales in
each department in each store and maintain competitive pricing. To mitigate the
effect of third-party reimbursement on pharmaceutical sales, the Company also
plans to expand its home healthcare, non-pharmaceutical sales and services and
wholesale pharmaceutical and non-pharmaceutical sales.
The Company expects to acquire at least 15 new pharmacies and three HME
stores in fiscal 1998 and 20 new pharmacies and five HME stores in fiscal 1999,
and to have at least 59 pharmacies and offer HME from at least nine locations by
the year 2000. Since the end of fiscal 1997, the Company has acquired six
additional pharmacies, one additional HME operation and one wholesale company
which sells injectable pharmaceuticals direct to physicians and pharmacies in
Colorado.
While the Company also plans to convert certain of its existing stores into
"healthcare centers" similar to that currently operated by its store in
Farmington, New Mexico, a Federal moratorium on the enrollment of new home
healthcare providers in the Medicare program which was enacted in September 1997
and continued until January 1998 has delayed the Company's ability to effect
such conversions. The Company believes that providing such home healthcare and
basic medical services adjacent to its retail pharmacies will result in
increased sales and profits for such stores, and is continuing to evaluate all
available alternatives for effecting the conversion of certain of its stores
into full-service healthcare centers.
The Company was incorporated under the laws of the State of Texas on August
31, 1992 and began operations under the name HORIZON Pharmacies, Inc. in
February 1994. The Company's principal office is located at 275 W. Princeton
Drive, Princeton, Texas 75407, and its telephone number is (972) 736-2424.
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STORE LOCATIONS
The following table summarizes the number, location and year of acquisition
for each of the Company's pharmacies, HME operations and wholesale company as of
April 10, 1998.
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PHARMACY NO. STORE LOCATIONS YEAR ACQUIRED
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1 Winnsboro, Texas(1) 1994
2 Princeton, Texas(1) 1994
3 Cuero, Texas(1) 1994
4 Bonham, Texas(1) 1995
5 Uvalde, Texas(1) 1995
6 Cleburne, Texas(1)(3) 1995
7 McLoud, Oklahoma(1) 1995
8 Farmington, New Mexico(1)(2)(3) 1996
9 Tomah, Wisconsin(1) 1996
10 Marion, Virginia(1) 1996
11 Covington, Virginia(1) 1996
12 Mineola, Texas(1) 1997
13 Mt. Vernon, Texas(1) 1997
14 McKinney, Texas(1)(2) 1997
15 Moriarity, New Mexico(1) 1997
16 Butte, Montana(1) 1997
17 Mesquite, Texas(1) 1997
18 Gering, Nebraska(1) 1997
19 Trinidad, Colorado(1) 1997
20 Canon City, Colorado(1) 1997
21 Raton, New Mexico(1) 1997
22 Lockhart, Texas(1) 1997
Cleburne, Texas(2) 1997
23 Dallas, Texas(1) 1997
24 Brookfield, Missouri(1) 1997
25 Floresville, Texas(1) 1998
26 Highlands Ranch, Colorado(1)(3)(4) 1998
Canon City, Colorado(2)(5) 1998
27 Steelville, Missouri(1) 1998
28 Ennis, Texas(1) 1998
29 Belen, New Mexico(1) 1998
30 St. John, Arizona(1) 1998
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(1) Free-standing pharmacy.
(2) HME offered.
(3) Closed-door institutional pharmacy.
(4) Wholesale company.
(5) The Company also purchased the pharmacy files, inventory and equipment of
two other pharmacies located in Canon City, Colorado which were consolidated
into this pharmacy.
EXPANSION
The Company intends to continue to expand its business by acquiring smaller
retail pharmacy chains, independent retail pharmacies and other related
businesses primarily located in communities having
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populations of fewer than 50,000 persons. In identifying retail pharmacies and
related businesses for potential acquisition, the Company evaluates a number of
demographic considerations, including the size, growth pattern and per capita
income of the population, as well as the competitive environment and the
accessibility of a proposed site to the customer. The Company also evaluates the
respective store's historical financial performance, focusing on pharmacies
having annual sales volumes between $1,500,000 and $5,000,000. The Company
previously acquired two retail pharmacy stores from the FTC and will continue to
evaluate the purchase of other stores which may be offered for sale by the FTC.
As part of its regulatory function, the FTC occasionally mandates the
divestiture of certain retail pharmacies, generally in connection with its
approval of a merger or acquisition of a group of pharmacies.
The Company's goal for the next two years is to acquire between 15 and 20
new retail pharmacies and between three and five HME operations in each of 1998
and 1999.
PRODUCTS AND SERVICES
PHARMACY. The primary focus of the Company is the sale of prescription and
over-the-counter drugs. During 1996 and 1997, the Company filled approximately
500,000 and 672,000 prescriptions, respectively, and sales of prescription drugs
generated approximately 80% and 76% of the Company's net revenues during such
periods.
The Company believes that it is well positioned to take advantage of certain
demographic trends, including the aging of the United States population. Twelve
of the Company's retail pharmacies are located in Texas, one of the top three
states experiencing the greatest migrations of persons over age 65. According to
industry studies, persons over age 65 purchase twice as many prescription drugs
and 50% more over-the-counter drugs than the national average. The Company also
believes that it is capable of meeting the needs of the increasing volume of
third-party prescription sales and is aggressively marketing itself to
third-party payors. See "Government Regulation and Healthcare Reform" and
"Third-Party Reimbursement."
The Company believes that new prescription drugs and drug therapies provide
an opportunity for increased demand for prescription drugs. In addition, the FDA
is approving an increasing number of prescription products for sale over the
counter. Prescription drugs which are approved for over-the-counter distribution
have historically shown significantly increased sales.
NONPHARMACEUTICAL MERCHANDISE. The Company's stores sell a wide variety of
nonpharmaceutical merchandise, including gifts, over-the-counter drugs, health
and beauty care, greeting cards and numerous other convenience products. Each of
the Company's stores offers a broad assortment of popular national brand
over-the-counter drugs and other products related to dental care, foot care,
vitamins and nutritional supplements, feminine hygiene, family planning and baby
care. In addition, the Company's stores provide a helpful environment in which
consumers can obtain product information from professional pharmacists,
knowledgeable sales employees and store managers or from literature available
throughout the store.
Each of the Company's stores also offers an assortment of popular brand name
cosmetics, fragrances and other beauty products. A wide selection of gifts,
greeting cards, gift wrap, bows and novelties are also offered. Assorted
convenience products including candy, food, tobacco products, books and
magazines, household products, seasonal merchandise and toys are also offered.
Certain of the Company's stores also offer fresh floral arrangements, veterinary
supplies, camera and photo accessories, photo processing, small electronics,
batteries and audio and video tapes.
HOME HEALTHCARE SERVICES. The Company's Farmington, New Mexico, store is
currently licensed and offers under the name HORIZON Home Care certain home
healthcare services. The home healthcare services offered by the Company's
Farmington store currently include: (i) respiratory therapy; (ii) patient
services, including nursing and para-professional services; and (iii) infusion
therapy. The Company provides patients with a variety of services and related
products, many of which are essential to the proper
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implementation of a physician's treatment plan. While the Company submitted an
application for and anticipated receiving a license to offer HME at its
Princeton, Texas store by mid-1997, a Federal moratorium on the enrollment of
new home healthcare providers enacted in September 1997 delayed the Company's
plans to convert its Princeton, Texas store into a home healthcare center. The
referenced moratorium was lifted in January 1998, and the Company is currently
evaluating the possibility of converting certain stores into home healthcare
centers at such time as the appropriate regulatory licences may be obtained.
RESPIRATORY THERAPY. The Company provides home respiratory services to
patients with a variety of conditions, including chronic obstructive pulmonary
disease (e.g., emphysema, chronic bronchitis and asthma), cystic fibrosis and
neurologically-related respiratory conditions. The Company contracts with
respiratory care professionals to provide support to its home respiratory
therapy patients. These professionals manage the needs of the Company's patients
according to physician-directed plans of care.
HOME MEDICAL EQUIPMENT. The Company also offers for sale and lease, certain
HME which primarily consists of patient room equipment (such as hospital beds,
patient lifts and commodes), ambulatory aids (such as walkers and canes) and
bathroom safety items. The Company's broad range of product offerings provides
patients requiring either infusion, nursing or respiratory services access to
needed HME through a single source.
NURSING AND PARA-PROFESSIONAL SERVICES. The Company offers a broad range of
professional nursing and para-professional services to meet a patient's medical
and personal needs, principally in the home. These services include pediatric
and adult care, such as ventilator care; administration of infusion therapies,
including chemotherapy, antibiotics, enteral and parenteral feeding; standard
skilled nursing services such as changing dressings, injections, catheterization
and administration of medication; physical, respiratory, occupational and speech
therapy; home health aide services, such as assistance with personal hygiene,
dressing and feeding; and homemaker services, such as the preparation of meals
and light house cleaning.
INFUSION THERAPY. Infusion therapy involves the intravenous administration
of nutrients, antibiotics or other medications to patients in their homes
usually as a continuation of treatment initiated in the hospital. The infusion
therapies provided by the Company include antibiotic and related therapies
(therapies used to treat various infections and diseases); parenteral nutrition
therapy (the intravenous feeding of life sustaining nutrients to patients with
impaired or altered digestive tracts due to gastrointestinal illness, such as an
intestinal obstruction or inflammatory bowel disease); enteral nutrition therapy
(the administration of nutrients through a feeding tube to patients who cannot
eat as a result of an obstruction to the digestive tract or because they are
otherwise unable to feed themselves orally); chemotherapy (the intravenous
administration of cancer inhibiting drugs through either rapid or continuous
infusion); pain management (the administration of pain controlling drugs such as
morphine and Demerol to terminally or chronically ill patients); and other
therapies.
WHOLESALE INJECTIBLES. In February, 1998, the Company acquired the assets
of a wholesale company in Highlands Ranch, Colorado which purchases injectable
pharmaceuticals direct from the manufacturer and resells them to physicians and
pharmacies located in Colorado. The injectibles are shipped directly or drop
shipped by the manufacturer to the physician or pharmacy. The Company plans to
apply for the licenses necessary to distribute pharmaceuticals and
non-pharmaceuticals in nine additional states, which would enable the Company to
expand its wholesale operations beyond Colorado.
STORE OPERATIONS
The Company's current stores are generally located in free-standing stores
or in shopping centers located near the respective community's main
thoroughfare. Although the Company does not remodel stores upon acquisition to
conform to a particular format, it arranges its stores to facilitate customer
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movement and to maximize product visibility. The Company's pharmacy departments
are generally located near the back of its stores to maximize customer exposure
to the store. Most of the stores are equipped with modern fixtures and equipment
and range in size from approximately 3,000 to 22,000 square feet.
The Company utilizes centrally prepared formats for the display and stocking
of its stores, while allowing individual store managers some flexibility with
regard to choice and display of the merchandise assortment based upon the
Company's strategy of tailoring its stores to the markets in which the
respective stores operate.
PURCHASING AND DISTRIBUTION
In 1997 the Company centrally purchased most of its merchandise from Bergen
Brunswig, Inc. ("Bergen Brunswig") and other vendors, enabling it to benefit
from promotional programs and volume discounts offered by such companies. All
merchandise is shipped directly to the Company's stores at prices negotiated on
an annual basis at the corporate level. The Company's primary vendor is Bergen
Brunswig which supplied approximately 91% of the Company's inventory purchases
in 1997.
MERCHANDISING AND MARKETING
GENERAL. The Company's merchandising strategy is to offer a broad selection
of traditional retail pharmacy items, including both nationally advertised and
private label products. Substantially all products are offered at competitive
prices. The Company emphasizes value and customer service in attractive,
conveniently located drugstores. It uses color, signs, packaging and other
merchandising aids to reinforce its name and low prices, and to showcase its
products.
The pharmacy department in each of the Company's stores carries a complete
line of both brand name and generic drugs. The Company has been expanding its
prescription drug business by promoting the use of less costly generic drugs
whenever possible, and by entering into arrangements with insurance companies,
HMOs and other healthcare groups for the sale of prescription drugs under
third-party reimbursement programs.
Each of the Company's pharmacy departments utilizes a computer system which
employs software that enables the Company's pharmacists to recall a customer's
pharmacy history with a view to identifying possible allergies, drug
interactions or therapeutic duplication, and to provide customers with a
complete record of medication dispensed. The Company's computer software system
also enables the Company to identify generic equivalents of brand name drugs,
centrally control prescription prices, increase the speed of processing
prescriptions and reduce the paperwork normally involved in, and thus expedite
the collection of amounts due the Company under third-party reimbursement
programs.
The Company sells certain private label products which enables the Company
to sell products, comparable in quality to name brand products, at lower prices
to its customers, but at higher gross margins for the Company.
Most photo processing services offered at Company stores are provided by an
independent contractor who provides the stores with a "drop box" into which the
customer places its film for processing. The independent contractor collects the
film, processes it and returns the printed photos to the respective stores for
pick-up and payment by the customer. Two of the Company's stores operate
in-house photo labs and offer customers one-hour film processing.
INTERNET CATALOG SALES. The Company is currently building an internet
catalog which will permit visitors to the Company's website to electronically
view and purchase certain gifts, cameras, and photo and veterinary supplies. The
Company anticipates that the website will be available to the public in May
1998.
ADVERTISING. The Company advertises principally through the use of radio,
newspaper, direct mail and advertising circulars.
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GOVERNMENTAL REGULATION AND HEALTHCARE REFORM
GENERAL. All of the Company's pharmacists and pharmacies are required to be
licensed by the appropriate state boards of pharmacy. The Company's retail
pharmacies are also registered with the Federal Drug Enforcement Administration.
By virtue of these license and registration requirements, the Company is
obligated to observe certain rules and regulations, and a violation of such
rules and regulations could result in a suspension or revocation of the licenses
or registrations.
The Company relies on prescription drug sales for a significant portion of
its revenues and profits, and prescription drug sales represent a significant
segment of the Company's business. These revenues are affected by changes within
the healthcare industry, including changes in programs providing for
reimbursement of the cost of prescription drugs by third-party payment plans,
such as government and private plans, and regulatory changes relating to the
approval process for prescription drugs.
The Company has a number of third-party payor contracts pursuant to which
the Company is a provider of prescription drugs. "Freedom of Choice" state
statutes, pursuant to which all pharmacies would be entitled to be a provider
under such a contract, have been enacted in certain states, including Alabama,
Georgia, New Jersey, North Carolina, Louisiana, South Carolina, Tennessee and
Texas, and may be enacted in others. Although such statutes may adversely affect
certain of the Company's third-party contracts, they may also provide the
Company with opportunities regarding additional third-party contracts.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the healthcare system, either nationally or at the state
level. The Company cannot predict whether any Federal or state healthcare reform
legislation will eventually be passed, and if so, the impact thereof on the
Company's financial position or results of operations. Healthcare reform, if
implemented, could adversely affect the pricing of prescription drugs or the
amount of reimbursement from governmental agencies and third-party payors, and
consequently could be adverse to the Company. However, to the extent healthcare
reform expands the number of persons receiving healthcare benefits covering the
purchase of prescription drugs, it may also result in increased purchases of
such drugs and could thereby have a favorable impact on both the Company and the
retail drug industry in general. Nevertheless, there can be no assurance that
any future Federal or state healthcare reform legislation will not adversely
affect the Company or the retail pharmacy industry generally.
In 1990, Congress enacted the Omnibus Budget Reconciliation Act of 1990
("OBRA 1990"), which includes a requirement that states implement pharmaceutical
drug use review programs for Medicaid beneficiaries receiving covered
out-patient prescription drugs. The OBRA 1990 legislation states that
pharmacists must offer to discuss with each Medicaid patient "common, severe
side or adverse effects or interactions and therapeutic contraindications that
may be encountered, including their avoidance and the action required if they
occur." In order to ensure reimbursement of out-patient prescription drugs under
Medicaid, states were required, pursuant to the OBRA 1990 legislation, to
implement drug use review programs by January 1, 1993. In all states where the
Company operates, the State Pharmacy Practices Acts have expanded the OBRA
requirements to include all patients receiving prescriptions in a retail
setting. Pharmacists now have a duty to warn the purchaser of a prescription
drug if the warning could reduce or negate the adverse effects of the use of
such drug.
The Company's operations are also subject to Federal and state laws
governing such matters as wages, working conditions and overtime.
TEXAS LEGISLATION. As of December 31, 1997, 12 of the Company's 24 retail
pharmacies owned at that date were located in Texas. Since the end of 1997, the
Company acquired two additional pharmacies in Texas, and other retail pharmacies
located in Texas may be acquired by the Company in the future.
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Consequently, the Company may be affected by any significant healthcare
legislative proposals enacted in the state of Texas.
THIRD-PARTY REIMBURSEMENT
A growing percentage of the Company's prescription drug volume has been
accounted for by sales to customers who are covered by third-party payment
programs. Third-party reimbursement accounted for approximately 55% of the
Company's prescription sales in 1997 and 52% in 1996; the Company expects this
trend to continue. Although contracts with third-party payors may increase the
volume of prescription sales and gross profits, third-party payors typically
negotiate lower prescription prices than those of non third-party payors.
Accordingly, there has been downward pressure on gross profit margins on sales
of prescription drugs which is expected to continue in future periods. Further,
payments from Medicare and Medicaid represent approximately 31% of all
third-party payor sales. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COMPETITION
The Company's retail pharmacies operate in a highly competitive industry,
and compete primarily on the basis of customer service, convenience of location
and store design, price and product mix and selection. In addition to
traditional competition from independent retail pharmacies and other retail
pharmacy chains, the Company faces competition from mass merchants (including
discounters and deep discounters), supermarkets, combination food and retail
pharmacies, mail order distributors, hospitals and HMOs. These other formats
have experienced significant growth in their market share of the prescription
and over-the-counter drug business. The Company's home healthcare services
compete with certain chain operations and independent single unit stores. Many
of the Company's competitors have greater financial resources than the Company.
TRADEMARKS AND SERVICE MARKS
No patent, trademark, license, franchise or concession is considered to be
of material importance to the business of the Company other than the trade names
under which the Company operates its retail businesses, including the HORIZON
Pharmacies and HORIZON Home Care names. In May 1997, the Company filed
applications for Federal trademark protection of such trade names, which are
currently pending. Additionally, the Company has filed and received trademark
protection in the laws of the states of Texas and Oklahoma, and plans to file
for additional state trademark protection in all states in which it operates.
EMPLOYEES
At December 31, 1997, the Company employed approximately 394 employees,
approximately 304 on a full-time basis. None of the Company's employees are
represented by a labor union and the Company believes that its relations with
its employees are good.
ITEM 2. PROPERTIES.
The Company's principal offices are currently located at 275 W. Princeton
Drive, Princeton, Texas, 75407, where it owns a 5,500 square foot building which
is in good condition. The Company also owns the furniture and fixtures in each
of its stores. However, the Company conducts substantially all of its retail
businesses under noncancelable leases, many of which expire within the next five
years. In the normal course of business, however, it is expected that leases
will be renewed or replaced by leases on other properties. No single lease is
material to the Company's operations.
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ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company may be involved in litigation relating to
claims arising out of its normal business operation. The Company does not have
any material legal proceedings pending against it, any of its subsidiaries or
any of their properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of shareholders during the
Company's fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock trades on the American Stock Exchange ("AmEx")
under the symbol "HZP." The following table shows the high and low closing sales
prices per share for the Common Stock from July 11, 1997, when the Common Stock
was first listed on AmEx, through December 31, 1997. In November 1997, the
Company consummated a stock split (the "Stock Split") effected as a stock
dividend whereby each two issued and outstanding shares of the Common Stock were
converted into three shares of Common Stock. Accordingly, all share and per
share amounts presented herein have been retroactively adjusted to reflect the
stock split.
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HIGH LOW
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FISCAL 1997
Third Quarter......................... 8 3 1/2
Fourth Quarter........................ 13 1/2 6 11/12
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SHAREHOLDERS
As of March 24, 1998, there were 80 holders of record of the Common Stock
according to the records maintained by the Company's transfer agent. As of that
date, the Company had approximately 1,550 shareholders, including beneficial
owners holding shares in street or nominee names.
DIVIDENDS
The Company did not pay any dividends on its Common Stock during its two
most recent fiscal years and does not intend to pay any dividends in the
foreseeable future.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
As previously reported on the Company's Form 10-QSB/A for the quarterly
period ended September 30, 1997 (filed electronically on December 5, 1997), the
Company commenced an initial public offering (the "Offering") of 1,200,000
shares (1,800,000 shares as adjusted for the Stock Split) (the "IPO Shares") of
its Common Stock at a price of $5.00 per share ($3.33 as adjusted for the
referenced stock split) pursuant to a Registration Statement on Form SB-2 (No.
333-25257) (the "Registration Statement"). The Offering terminated upon the sale
of all the IPO Shares at the offering price. Capital West Securities, Inc. and
ComVest Partners, Inc. (the "Underwriters") acted as the managing underwriters
of the Offering.
In connection with the issuance and distribution of the IPO Shares, direct
or indirect payments to others were made as follows: (i) underwriting discounts
and commissions of $690,000; (ii) expenses paid to or for underwriters of
$243,000; and (iii) estimated other expenses of $431,599. Estimated expenses for
the Offering totaled $1,364,599. The Company received net offering proceeds of
$5,535,401, of which as of December 31, 1997: (i) an estimated $1,700,000 had
been used for the purchase of additional pharmacies; (ii) $300,000 had been used
to pay distributions to shareholders; (iii) approximately $2,600,000 had been
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used for the repayment of indebtedness; (iv) $600,000 had been used for
purchases of property and equipment; and (v) $335,000 had been used for general
corporate purposes. These uses of net offering proceeds were made in the form of
direct or indirect payments to others.
RECENT SALES OF UNREGISTERED SECURITIES
ACQUISITIONS. On September 18, 1997, the Company issued 15,234 shares of
unregistered shares of Common Stock (adjusted to give effect to the Stock Split)
in partial consideration of its acquisition of a store located in Trinidad,
Colorado. On October 11, 1997 the Company issued 13,552 unregistered shares of
Common Stock (adjusted to give effect to the Stock Split) in partial
consideration of its acquisition of a pharmacy located in Raton, New Mexico. On
October 24, 1997 the Company issued 8,112 unregistered shares of Common Stock
(adjusted to give effect to the Stock Split) in partial consideration of its
acquisition of a pharmacy located in Lockhart, Texas. On November 19, 1997 the
Company issued 4,974 unregistered shares of Common Stock (adjusted to give
effect to the Stock Split) in partial consideration of its acquisition of an HME
operation located in Cleburne, Texas.
DEBT CONVERSION. Since the filing of the Company's 3rd Quarter 10-QSB, the
Company issued 3,496 unregistered shares of Common Stock (adjusted to give
effect to the Stock Split) in connection with the conversion of $30,000 of
long-term debt owed by the Company in connection with the acquisition of Roof
Family Pharmacies in 1995.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
From time to time, the Company may publish forward-looking statements
relating to certain matters, including anticipated financial performance,
business prospects, the future acquisition of additional stores, anticipated
capital expenditures and other similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of that safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. In addition,
the Company disclaims any intent or obligation to update those 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 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 in connection with a potential
acquisition, the Company considers the availability and terms of owner financing
of approximately 50% of the purchase price, including such terms as rate of
return and payback period, with the balance split between cash and other
consideration such as Company stock.
In 1996 and 1997 the Company acquired four and 14 retail pharmacies or
related businesses, respectively. These acquisitions are the principal influence
on the Company's results of operations and financial condition. The primary
measurement of the effect of acquisitions on the Company's operating performance
is the number of store operating months, which is the number of months all
stores were owned by the Company during the relevant measuring period.
Acquisitions are expected to continue as the most significant factor in the
Company's growth strategy.
9
<PAGE>
Currently, the Company's primary source of revenue is the sale of
prescription drugs. During 1996, sales of prescription drugs generated 80% of
the Company's net revenues; during 1997, prescription drugs generated 76% of
revenues. Management expects the Company's prescription drug business to
continue to increase on an annual basis as a result of the demographic trends
towards an aging population and the continued development of new pharmaceutical
products. However, the Company anticipates that such sales will decrease as a
percentage of the Company's overall revenues 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 revenues 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, revenues and profits are typically highest
in the fourth quarter and the first quarter of the ensuing year.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain income
statement data:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
INCOME STATEMENT DATA
Prescription drugs sales......................................................... 80.0% 75.6%
Other sales and services......................................................... 20.0% 24.4%
----- -----
Total net revenues............................................................. 100.0% 100.0%
----- -----
----- -----
COSTS AND EXPENSES:
Cost of sales--prescription drugs(1)............................................. 69.5% 71.2%
Cost of sales--other(2).......................................................... 62.3% 55.3%
Selling, general and administrative expenses(3).................................. 26.4% 27.9%
Depreciation and amortization(3)................................................. 1.3% 1.2%
Interest expense(3).............................................................. 1.9% 1.1%
NET INCOME(3)(4)(5)................................................................ 1.5% 1.1%
</TABLE>
- ------------------------
(1) As a percentage of prescription drugs sales.
(2) As a percentage of other sales and services.
(3) As a percentage of total net revenues.
(4) After pro forma provisions for income taxes in 1996 and the first six months
of 1997.
(5) After a one-time provision for deferred income taxes in 1997 resulting from
a change in tax status.
NET REVENUES
The Company's total net revenues increased $15,293,285 or 116%, to
$28,429,604 in fiscal 1997 compared to $13,136,319 in fiscal 1996. The increase
was attributable primarily to the increase in store operating months from 101 in
fiscal 1996 to 193 in fiscal 1997, an increase of 91%.
Net sales of prescription drugs increased by $10,977,961 or 104% to
$21,493,314 for fiscal 1997 compared to $10,515,353 for 1996. Third-party
reimbursed sales accounted for approximately 55% of the Company's total
prescription sales in 1997, as compared to 52% in 1996. Higher reimbursement
sales have typically resulted in a decrease in gross margins due to the lower
prices negotiated by third party payors.
10
<PAGE>
This decrease has been more than offset, however, by the Company's efforts to
manage inventory levels and by purchasing efforts, resulting in a slight margin
percentage increase in 1996 as well as in 1997.
The following tables show the Company's prescription drug gross margins and
total sales margins for 1996 and 1997:
<TABLE>
<CAPTION>
GROSS MARGINS ON GROSS MARGINS ON
PRESCRIPTION DRUG SALES TOTAL REVENUES
------------------------- -------------------------
YEAR AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ----------------------------------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
1997..................................... $ 6,200,222 28.8% $ 9,297,676 32.7%
1996..................................... $ 3,205,973 30.5% $ 4,194,614 31.9%
</TABLE>
Sales of prescription drugs decreased from 80.0% of total revenues for 1996
to 75.6% of total revenues for 1997. The Company expects that prescription drug
sales will continue to decrease as a percentage of total revenues 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 11 stores increased from
$12,927,593 in 1996 to $14,714,811 in 1997. Management believes that this 13.8%
increase is primarily the result of increased advertising and promotions as well
as an enhanced product mix. The Company currently has non-compete agreements
with the previous owners of all of the stores which it has acquired except for
the Marion and Covington, Virginia stores, which were acquired from the Federal
Trade Commission (the "FTC"), and three stores located in Mineola, Mt. Vernon
and McKinney, Texas, which were acquired from True Quality Pharmacies, Inc.
COSTS AND EXPENSES
Cost of sales increased $10,190,223 or 114% to $19,131,928 in 1997 as
compared to $8,941,705 in 1996. This increase is primarily the result of
increased sales volume due to the increased number of store operating months for
the respective periods. Total cost of sales as a percentage of total revenues
decreased 0.8% from 1996 to 1997. This decrease is primarily the result of more
favorable pricing terms from the Company's primary wholesaler, management's
continual monitoring and adjusting of pricing, and the shift in product mix.
The increase of $4,471,430 in selling, general and administrative expenses
from $3,471,370 in 1996 to $7,942,800 in 1997 is principally due to increased
store count and resulting increased store operating months. Such expenses,
expressed as a percentage of net revenues, were 27.9% and 26.4% for 1997 and
1996. These increases in expenses as a percentage of net revenues were primarily
due to an increase in personnel.
Depreciation and amortization expense was $329,597 in 1997 compared to
$171,807 in 1996. The increase primarily resulted from the Company's acquisition
of stores in 1997.
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 40 years. Accordingly, intangible assets are not
expected to have a significant effect on the Company's future results of
operations.
Interest expense was $299,454 in 1997 compared to $252,767 in 1996. The
increase in interest expense resulted primarily from the increase in the
Company's indebtedness associated with the Company's acquisition of stores in
1997.
11
<PAGE>
EARNINGS
Income before provision for income taxes increased from $302,353 (2.3% of
net revenues) in 1996 to $806,915 (2.8% of net revenues) in 1997, an increase of
$504,562 (0.5% of net revenues).
Because the Company operated as an S Corporation prior to the Offering, it
had not incurred any income taxes prior to such time. As a result of the
termination of its S Corporation election in connection with the Offering, the
Company became a taxpaying entity and is subject to the payment of taxes on all
non-exempt income at applicable Federal and state income tax rates. In 1997, the
Company incurred a noncash one-time charge for deferred income taxes of $170,000
as a result of the change in tax status.
Net income for 1997 rose to $326,915 (after the one time noncash charge for
deferred taxes of $170,000) from $196,353 in 1996, primarily as the result of
increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $125,845 in 1997 as compared to
$49,456 provided by operating activities in 1996. Although earnings have
increased, less cash was provided by operations largely due to an increase in
accounts receivable. 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 a $2,000,000 line of credit.
Approximately $4,000,000 from the proceeds of a private placement (the
"Private Placement") for which a final closing was held October 24, 1997, will
be used to support an aggressive store acquisition program and for working
capital. The Company believes that based on prior acquisitions, the average
acquisition cost per store will be approximately $500,000 to $700,000 based on
such variables as store sales and profits. Management believes it will be able
to obtain seller financing for approximately 50% of the cost of each such
acquisition.
In addition to the expansion capital available from the proceeds of the
Private Placement, BankOne of Dallas, Texas currently provides the Company a
$2,000,000 credit facility, subject to certain restrictive covenants including
financial ratio requirements which the Company must meet to maintain the credit
facility. No funds have been borrowed under this credit facility. BankOne has
also extended to the Company a lease line of credit in the amount of $600,000,
none of which had been borrowed at December 31, 1997.
The Company expects to be able to meet its current expansion schedule for
the next 12 months without additional borrowings assuming the contemplated
seller financing is available. The Company expects to fund ongoing acquisitions
after 1998 with cash flow from current operations, seller financing of
acquisitions and possible future equity offerings.
Because of the Federal moratorium on home healthcare licenses from September
1997 to January 1998, management's application to provide home healthcare
services from its Princeton, Texas store was withdrawn, thereby delaying the
Company's plan to convert that store to a "healthcare center" similar to its
Farmington, New Mexico store. Management still expects to convert two to four of
its existing stores into "healthcare centers" by the end of 1999, and 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.
12
<PAGE>
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 drugs 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 revenues and net income in 1995 through
1997, there can be no assurance that the Company will continue to experience
growth in, or maintain the present level of, net revenues 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.
13
<PAGE>
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, 14 of the Company's 30 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 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 its current working capital and credit facility 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
91% of its inventory from 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
14
<PAGE>
revenues 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.
YEAR 2000
Management believes that a significant portion of its computer systems are
year 2000 compliant and is in the process of assessing the balance of its
systems. The Company intends to communicate with its customers, suppliers,
financial institutions and others with which it does business to ensure that any
year 2000 issues will be resolved timely. This issue affects computer systems
that have time-sensitive programs that may not properly recognize the year 2000.
If necessary modifications and conversions by those with which the Company does
business are not completed timely or if all of the Company's systems are not
year 2000 compliant, the year 2000 issue may have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this Item are set forth beginning on
page F-l hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On March 17, 1997, Ernst & Young LLP replaced Herold, Howard & Madsen P.C.
as the Company's independent auditors. In the Company's view, this change was
not the result of any disagreement relating to any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures. The reports issued by Herold, Howard & Madsen P.C. did not contain
an adverse opinion or a disclaimer of opinion, nor were such reports qualified
or modified as to uncertainty, audit scope, or accounting principles. At no time
during the engagement of Herold, Howard & Madsen P.C. were there any
disagreements on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Herold, Howard & Madsen P.C., would have caused
it to make a reference to the subject matter of the disagreement in connection
with its report. Notwithstanding the engagement of Ernst & Young LLP as the
Company's independent auditors, Herold, Howard & Madsen P.C. continues to
perform individual audits of certain acquired stores and to perform tax and
other financial planning for the Company.
PART III
In accordance with General Instruction E(3), a presentation of information
required in response to Items 9, 10, 11, 12, and 13 shall appear in the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days of the year end covered hereby, and shall be incorporated herein
by reference when filed.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS. A list of financial statements is contained in
"Index to Financial Statements" on page F-l hereof.
15
<PAGE>
(b) REPORTS ON FORM 8-K. During the last quarter of fiscal 1997 the Company
filed the following Current Reports on Form 8-K:
<TABLE>
<CAPTION>
REPORT REPORT DATE
TYPE DATE FILED ITEMS REPORTED
- --------- --------- --------- ---------------------------------------------------------------------------------
<C> <C> <C> <S>
8-K/A 8/2/97 10/16/97 Item 7. Financial Statements and Exhibits.
8-K/A 8/2/97 10/24/97 Item 7. Financial Statements and Exhibits.
8-K 10/11/97 10/24/97 Item 2. Acquisition or Disposition of Assets; Item 7. Financial Statements and
Exhibits.
8-K 10/21/97 11/5/97 Item 2. Acquisition or Disposition of Assets; Item 7. Financial Statements and
Exhibits.
8-K 11/6/97 11/10/97 Item 5. Other Events.
8-K/A 8/30/97 11/13/97 Item 7. Financial Statements and Exhibits.
8-K/A 9/18/97 11/17/97 Item 5. Other Events; Item 7. Financial Statements and Exhibits.
8-K 12/10/97 12/17/97 Item 2. Acquisition or Disposition of Assets; Item 7. Financial Statements and
Exhibits.
8-K/A 11/11/97 12/24/97 Item 7. Financial Statements and Exhibits.
</TABLE>
(c) EXHIBITS. The exhibits listed below are included with this report. All
employment contracts and compensatory plans or arrangements are marked with an
asterisk (*).
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Articles of Incorporation of the Company, incorporated herein by reference to Exhibit 3.2 of
the Company's Registration Statement on Form SB-2, as amended (File No. 333-25257), (the
"Registration Statement")
3.2 Amended and Restated Bylaws of the Company, incorporated herein by reference to Exhibit 3.3 to the
Registration Statement.
4.1 Specimen Certificate of the Company's Common Stock, incorporated herein by reference to Exhibit 4.1
to the Registration Statement.
*4.2 HORIZON Pharmacies, Inc. 1997 Stock Option Plan, incorporated herein by reference to Exhibit 4.4 to
the Registration Statement.
4.3 Warrant Agreement dated July 11, 1997 between the Company and Capital West Securities, Inc. and
ComVest Partners, Inc., incorporated herein by reference to Exhibit 4.3 of the Registration
Statement.
4.4 Warrant Agreement dated November 7, 1997 by and between the Company and ComVest Partners, Inc. (filed
electronically herewith).
10.1 Loan Agreement dated October 16, 1996, by and between the Company and Bergen Brunswig Drug Company,
incorporated herein by reference to Exhibit 10.1 to the Registration Statement.
10.2 Purchase Agreement dated March 8, 1997 by and between the Company and Mesa Drug, Inc., incorporated
herein by reference to Exhibit 10.2 to the Registration Statement.
10.3 Asset Purchase Agreement dated March 4, 1997 by and between the Company and True Quality Pharmacies,
Inc. (d/b/a Vista Pharmacies), incorporated herein by reference to Exhibit 10.3 to the Registration
Statement.
*10.4 Form of Employment Agreement by and between the Company and each of Rick D. McCord, R.Ph., Sy S.
Shahid, David W. Frauhiger, Charlie K. Herr, R.Ph., Robert D. Mueller, R.Ph., and Nancy Papaneri,
R.Ph., incorporated herein by reference to Exhibit 10.4 to the Registration Statement.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
10.5 Form of Lockup Agreement incorporated herein by reference to Exhibit 10.5 to the Registration
Statement.
10.6 Supply Agreement dated effective January 1, 1995 by and between the Company and Bergen Brunswig,
Inc., incorporated herein by reference to Exhibit 10.6 to the Registration Statement.
10.7 Purchase Agreement dated August 2, 1997 by and between the Company and Sun Country Drug, Inc.,
incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed
electronically on August 18, 1997.
10.8 Purchase Agreement dated August 12, 1997 by and between the Company and Revco, Inc. d/b/a Northridge
Pharmacy, incorporated herein by reference to Exhibit 2.2 to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1997.
10.9 Purchase Agreement dated August 16, 1997 by and between the Company and Downey Drugs, Inc.,
incorporated herein by reference to Exhibit 2.3 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1997.
10.10 Purchase Agreement dated August 30, 1997 by and between the Company and McCosh Drug, Inc.,
incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed
electronically September 12, 1997.
10.11 Purchase Agreement dated October 17, 1997 by and between the Company and Kenn's Pharmacy, Inc.,
incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed
electronically on October 24, 1997.
10.12 Purchase Agreement dated December 1, 1997 by and between the Company and Mart Super Drugs,
incorporated herein by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed
electronically on December 17, 1997.
*10.13 HORIZON Pharmacies, Inc. 401(k) Plan, incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-8 (File No. 333-43604).
10.14 Loan Agreement dated November 20, 1997 by and between BankOne, Texas, National Association, and the
Company (filed electronically herewith).
16.1 Letter of Herold, Howard & Madsen, P.C., Independent Auditors, relating to change in auditors,
incorporated by referenced to Exhibit 16.1 to the Registration Statement.
21.1 Subsidiaries of the Company (filed electronically herewith).
23.1 Consent of Ernst & Young LLP, Independent Auditors (filed electronically herewith).
27.1 Financial Data Schedule (filed electronically herewith).
27.2 Restated Financial Data Schedule (December 31, 1996) (filed electronically herewith).
27.3 Restated Financial Data Schedule (3 Quarter Periods for 1997) (filed electronically herewith).
</TABLE>
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
HORIZON PHARMACIES, INC.
Date: April 14, 1998 By: /s/ RICKY D. MCCORD
-----------------------------------
Ricky D. McCord, PRESIDENT AND
CHIEF OPERATING OFFICER
Date: April 14, 1998 By: /s/ JOHN N. STOGNER
-----------------------------------
John N. Stogner, CHIEF FINANCIAL
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
- ----------------------------------- Chairman of the Board of
Rick D. McCord, R.Ph. Directors, President and April 14, 1998
PRINCIPAL EXECUTIVE OFFICER Chief Operating Officer
*
- ----------------------------------- Executive Vice President, April 14, 1998
Sy S. Shahid Secretary, Director
*
- -----------------------------------
John N. Stogner Chief Financial Officer, April 14, 1998
PRINCIPAL FINANCIAL AND ACCOUNTING Treasurer, Director
OFFICER
*
- ----------------------------------- Director April 14, 1998
Charlie K. Herr, R.Ph.
*
- ----------------------------------- Director April 14, 1998
Robert D. Mueller, R.Ph.
*
- ----------------------------------- Director April 14, 1998
Carson A. McDonald
*
- ----------------------------------- Director April 14, 1998
Philip H. Yeilding
*By: /s/ RICKY D. MCCORD
-------------------------
Ricky D. McCord
ATTORNEY-IN-FACT
18
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
HORIZON PHARMACIES, INC.
YEARS ENDED DECEMBER 31, 1996 AND 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
HORIZON PHARMACIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Financial Statements
Consolidated Balance Sheet................................................................................. F-3
Consolidated Statements of Income.......................................................................... F-4
Consolidated Statements of Shareholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
HORIZON Pharmacies, Inc.
We have audited the accompanying consolidated balance sheet of HORIZON
Pharmacies, Inc. as of December 31, 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the two
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HORIZON
Pharmacies, Inc. at December 31, 1997, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 16, 1998
F-2
<PAGE>
HORIZON PHARMACIES, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $4,084,088
Accounts receivable, net of allowance for uncollectible accounts of $112,000
(NOTE 4):
Third-party providers...................................................... 2,763,481
Others..................................................................... 1,477,953
Inventories, at the lower of specific identification cost or market (NOTE
4)......................................................................... 7,900,994
Prepaid expenses and deposits................................................ 120,915
Deferred income taxes........................................................ 42,000
----------
Total current assets........................................................... 16,389,431
Property, equipment and capital lease assets (NOTE 4):
Property and equipment, at cost:
Land and building.......................................................... 204,389
Equipment.................................................................. 1,453,112
----------
1,657,501
Less accumulated depreciation................................................ 200,855
----------
Property and equipment, net.................................................. 1,456,646
Equipment under capital leases............................................... 374,209
Less accumulated amortization................................................ 92,238
----------
Equipment under capital leases, net.......................................... 281,971
----------
Property, equipment and capital lease assets, net.............................. 1,738,617
Intangibles, at cost:
Noncompete covenants......................................................... 441,788
Customer lists............................................................... 531,147
Goodwill..................................................................... 1,879,782
----------
2,852,717
Less accumulated amortization................................................ 327,058
----------
Intangibles, net............................................................... 2,525,659
----------
$20,653,707
----------
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $3,670,123
Accrued liabilities.......................................................... 394,526
8% and 8.75% notes payable................................................... 161,865
Income taxes payable......................................................... 220,000
Current portion of long-term debt (NOTE 4)................................... 572,254
Current obligations under capital leases (NOTE 5)............................ 83,824
----------
Total current liabilities...................................................... 5,102,592
Long-term debt (NOTE 4)........................................................ 3,332,682
Obligations under capital leases (NOTE 5)...................................... 197,775
Deferred income taxes (NOTE 3)................................................. 182,000
Commitments (NOTE 5)
Shareholders' equity (NOTE 6):
Preferred stock, $.01 par value, authorized 1,000,000 shares; none issued....
Common stock, $.01 par value, authorized 14,000,000 shares; issued 4,436,494
shares..................................................................... 44,365
Additional paid-in capital................................................... 11,516,834
Retained earnings............................................................ 277,459
----------
Total shareholders' equity..................................................... 11,838,658
----------
$20,653,707
----------
----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
HORIZON PHARMACIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Net revenues:
Prescription drugs sales......................................................... $ 10,515,353 $ 21,493,314
Other sales and services......................................................... 2,620,966 6,936,290
------------- -------------
Total net revenues................................................................. 13,136,319 28,429,604
Costs and expenses:
Cost of sales and services:
Prescription drugs............................................................. 7,309,380 15,293,092
Other.......................................................................... 1,632,325 3,838,836
Depreciation and amortization.................................................... 171,807 329,597
Selling, general and administrative expenses..................................... 3,471,370 7,942,800
------------- -------------
Total costs and expenses........................................................... 12,584,882 27,404,325
------------- -------------
Income from operations............................................................. 551,437 1,025,279
Other income (expense):
Interest and other income........................................................ 3,683 81,090
Interest expense................................................................. (252,767) (299,454)
------------- -------------
Total other income (expense)....................................................... (249,084) (218,364)
------------- -------------
Income before provision for income taxes........................................... 302,353 806,915
Provision for income taxes (NOTE 3)................................................ 106,000 480,000
------------- -------------
Net income......................................................................... $ 196,353 $ 326,915
------------- -------------
------------- -------------
Basic earnings per share........................................................... $ .13 $ .12
------------- -------------
------------- -------------
Diluted earnings per share......................................................... $ .13 $ .11
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
HORIZON PHARMACIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
--------------------- PAID-IN (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
---------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995................... 854,000 $ 8,540 $ 1,340,467 $ (69,907) $ 1,279,100
Exercise of common stock options............... 160,000 1,600 78,400 -- 80,000
Sale of common stock........................... 64,424 644 321,476 -- 322,120
Issuance of common stock to reduce long-term
debt......................................... 4,000 40 19,960 -- 20,000
Net income, exclusive of pro forma provision
for income taxes of $106,000 (NOTE 3)........ -- -- -- 302,353 302,353
Distributions to shareholders ($.19 per
share)....................................... -- -- -- (253,500) (253,500)
---------- --------- ------------- ------------ -------------
Balance at December 31, 1996................... 1,082,424 10,824 1,760,303 (21,054) 1,750,073
Sales of common stock (net of offering costs):
Initial public offering...................... 1,380,000 13,800 5,521,601 -- 5,535,401
Private placement............................ 465,000 4,650 4,200,357 -- 4,205,007
Issuance of common stock in acquisitions....... 27,913 279 320,983 -- 321,262
Issuance of common stock to reduce long-term
debt......................................... 2,331 23 29,977 -- 30,000
Net income, exclusive of pro forma provision
for income taxes of $120,000 (NOTE 3)........ -- -- -- 446,915 446,915
Distributions to shareholders ($.17 per
share)....................................... -- -- -- (450,000) (450,000)
Reclassification of accumulated deficit as a
result of termination of S corporation
status....................................... -- -- (301,598) 301,598 --
Three-for-two stock split effected in the form
of a dividend................................ 1,478,826 14,789 (14,789) -- --
---------- --------- ------------- ------------ -------------
Balance at December 31, 1997................... 4,436,494 $ 44,365 $ 11,516,834 $ 277,459 $ 11,838,658
---------- --------- ------------- ------------ -------------
---------- --------- ------------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
HORIZON PHARMACIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1996 1997
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................................ $ 196,353 $ 326,915
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization of property, equipment and capital lease assets........... 64,058 191,956
Amortization of intangibles............................................................. 107,749 137,641
Provision for uncollectible accounts receivable......................................... 21,241 103,341
Provision for deferred income taxes..................................................... -- 140,000
Pro forma provision for income taxes.................................................... 106,000 120,000
Changes in operating assets and liabilities, net of acquisitions of businesses:
Accounts receivable................................................................... (847,494) (2,425,255)
Inventories........................................................................... (716,553) (1,014,335)
Prepaid expenses and deposits......................................................... 4,302 (89,844)
Bank overdraft........................................................................ 116,929 (247,759)
Accounts payable...................................................................... 888,348 2,178,334
Accrued liabilities................................................................... 108,523 233,161
Income taxes payable.................................................................. -- 220,000
--------- ----------
Total adjustments......................................................................... (146,897) (452,760)
--------- ----------
Net cash provided by (used in) operating activities....................................... 49,456 (125,845)
INVESTING ACTIVITIES
Purchases of property and equipment....................................................... (156,625) (656,658)
Assets acquired for cash in acquisitions of businesses.................................... -- (1,696,031)
--------- ----------
Net cash used in investing activities..................................................... (156,625) (2,352,689)
FINANCING ACTIVITIES
Borrowings on notes payable............................................................... 210,535 --
Principal payments on notes payable....................................................... (35,000) (2,227,748)
Principal payments on long-term debt...................................................... (180,643) (588,858)
Principal payments on obligations under capital leases.................................... (18,716) (64,440)
Proceeds from sales of stock, net of offering costs paid in 1997 of $699,498.............. 402,120 9,740,408
Distributions to shareholders............................................................. (253,500) (450,000)
--------- ----------
Net cash provided by financing activities................................................. 124,796 6,409,362
--------- ----------
Net increase in cash and cash equivalents................................................. 17,627 3,930,828
Cash and cash equivalents at beginning of year............................................ 135,633 153,260
--------- ----------
Cash and cash equivalents at end of year.................................................. $ 153,260 $4,084,088
--------- ----------
--------- ----------
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID.................................................. $ 240,767 $ 309,454
NONCASH INVESTING AND FINANCING ACTIVITIES
Additions to property and equipment financed by long-term debt............................ $ 150,000 $ 14,561
Equipment leased under capital leases..................................................... 88,208 215,870
Issuance of common stock to reduce long-term debt......................................... 20,000 30,000
Acquisitions of businesses financed by debt and common stock:
Accounts receivable and other........................................................... $ (1,793) $ 459,463
Inventories............................................................................. 1,014,247 3,595,942
Property and equipment.................................................................. 85,000 372,900
Intangibles............................................................................. 165,000 1,680,217
--------- ----------
1,262,454 6,108,522
Less cash paid.......................................................................... -- 1,696,031
--------- ----------
Assets acquired........................................................................... $1,262,454 $4,412,491
--------- ----------
--------- ----------
Financed by:
Notes payable........................................................................... $ 639,465 $1,074,613
Advance by shareholder.................................................................. -- 100,000
Long-term debt.......................................................................... 622,989 2,916,616
Common stock............................................................................ -- 321,262
--------- ----------
$1,262,454 $4,412,491
--------- ----------
--------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
HORIZON Pharmacies, Inc., a Texas corporation (the "Company"), was organized
on August 31, 1992. At December 31, 1997, the Company owns and operates 24
retail pharmacies located in five states (NOTE 2), including 12 pharmacies
located in Texas. Purchases from the Company's largest supplier amounted to
$8,077,406 in 1996 and $18,343,872 in 1997. Accounts payable to this supplier
totaled $2,823,157 at December 31, 1997.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and a wholly-owned subsidiary. All significant intercompany accounts
and transactions have been eliminated.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Accounts receivable are unsecured and consist principally of receivables from
third-party providers (insurance companies and government agencies) under
third-party payment plans. Certain of these receivables are recorded net of any
allowances provided under the respective plans. Since payments due from certain
third-party payers are sensitive to payment criteria changes and legislative
actions, the allowance is reviewed continually and adjusted for accounts deemed
uncollectible by management.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
CASH EQUIVALENTS
Cash equivalents include money-market investments with maturities of three
months or less when purchased.
ADVERTISING
Advertising costs are charged to expense as incurred and amounted to $84,057
in 1996 and $173,693 in 1997.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided on a straight-line basis
over the estimated useful lives of 30 years for building and 3 to 15 years for
equipment. Amortization of equipment under capital leases is provided on a
straight-line basis over the estimated useful lives of the equipment or over the
terms of the leases, whichever is shorter. Intangibles, including noncompete
covenants, customer lists and
F-7
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
goodwill are being amortized using the straight-line method over 2 to 7 years, 5
years and 20 to 40 years, respectively.
The Company reviews each store for impairment of intangibles annually, based
upon expectations of undiscounted future cash flows.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
The carrying amount reported in the consolidated balance sheet for
variable-rate long-term debt approximates its fair value. The fair values of
the Company's fixed-rate notes payable and long-term debt are estimated
using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. At
December 31, 1997, the fair value of the Company's notes payable and
long-term debt was approximately $4,145,000.
INCOME TAXES
Prior to completion of the Company's initial public offering (the
"Offering") in July 1997, no historical provisions for income taxes were
included in the Company's financial statements as income taxes, if any, were
payable by the shareholders under provisions of subchapter S of the Internal
Revenue Code. Upon completion of the Offering, the S status of the Company was
automatically terminated and the Company became subject to income taxes.
The pro forma provisions for income taxes included in the accompanying
consolidated statements of income for periods prior to July 1997 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 (NOTE 3).
The financial statements for the year ended December 31, 1997 include a
provision (non-recurring) for deferred income taxes, resulting from a change in
S corporation status related to the tax effect of cumulative temporary
differences in financial and tax bases of net assets of $170,000 as of the date
of completion of the Offering (NOTE 3).
STOCK OPTIONS
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
No compensation expense is recorded with respect to stock options granted at
prices equal to the market value of the Company's common stock at the date of
grant.
EARNINGS PER SHARE
The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
defines the method used to compute earnings per share. Weighted average common
shares outstanding used in the calculation of basic earnings per share for the
years ended December 31, 1996 and 1997 totaled 1,521,301 and 2,769,236,
respectively. Common shares used in the calculation of diluted earnings per
share for the years ended December 31,
F-8
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1996 and 1997 were 1,521,301 and 2,864,804, respectively. The difference in the
number of shares for 1997 is attributable to dilutive stock options and warrants
of 56,844 and 38,724, respectively. See Note 6 for a description of potentially
dilutive securities of the Company.
2. ACQUISITIONS
At December 31, 1997, the Company operates 24 freestanding retail
pharmacies, all of which were acquired from third parties in purchase
transactions beginning in 1994. Such acquisitions have each been structured as
asset purchases and generally have included inventories, store fixtures and the
assumption of store operating lease arrangements (NOTE 5). The acquisitions
generally have been financed by debt to the sellers and/or an inventory supplier
during 1995 and 1996 (NOTE 4). A summary of acquisitions follows:
<TABLE>
<CAPTION>
ASSETS ACQUIRED
---------------------------------------
ACCOUNTS
RECEIVABLE COMMON
STORE PURCHASE AND DEBT STOCK
YEAR OPERATIONS PRICE INVENTORIES INTANGIBLES EQUIPMENT INCURRED ISSUED
- -------------------- --------------- ------------ ------------ ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1994................ 3 $ 944,201 $ 506,680 $ 369,500 $ 68,021 $ 368,080 $ --
1995................ 4 1,603,967 801,000 638,000 164,967 1,058,967 --
1996................ 4 1,262,454 1,014,247 165,000 83,207 1,262,454 --
1997................ 13 6,108,522 3,595,942 1,680,217 832,363 4,091,229 321,262
</TABLE>
The following unaudited pro forma results of operations data gives effect to
the acquisitions completed in 1996 and 1997 as if the acquisitions had been
consummated as of January 1, 1996. The unaudited pro forma results of operations
data is presented for illustrative purposes and is not necessarily indicative of
the actual results that would have occurred had the acquisitions been
consummated as of January 1, 1996 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, adjustments to employee benefits and rent expense and income
taxes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Unaudited pro forma information:
Net revenues................................................. $ 41,757,620 $ 44,455,152
------------- -------------
------------- -------------
Net income................................................... $ 885,599 $ 965,412
------------- -------------
------------- -------------
Basic and diluted earnings per share......................... $ .40 $ .30
------------- -------------
------------- -------------
</TABLE>
During the period from January 1, 1998 to March 16, 1998, the Company
acquired from third parties four retail pharmacies in purchase transactions. The
total of the purchase prices of $2,094,213 has been preliminarily allocated to
inventories ($1,013,718), property and equipment ($108,000), intangibles
($957,000) and accounts receivable ($15,495). The purchases were financed by the
issuance of 7.7% to 8.5% notes payable to the sellers for $1,107,213, an
aggregate 22,557 shares of common stock (valued at
F-9
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
2. ACQUISITIONS (CONTINUED)
$205,000) and cash of $782,000. The notes to the sellers are secured by the
assets acquired and are due in monthly installments from 8 to 84 months.
3. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Current:
Federal............................................................. $ -- $ 185,000
State............................................................... -- 35,000
---------- ----------
-- 220,000
Deferred:
Federal............................................................. -- (25,000)
State............................................................... -- (5,000)
---------- ----------
-- (30,000)
Deferred resulting from change in tax status.......................... -- 170,000
Pro forma............................................................. 106,000 120,000
---------- ----------
Provision for income taxes............................................ $ 106,000 $ 480,000
---------- ----------
---------- ----------
</TABLE>
The provision for income taxes differs from the computed "expected" income
tax provision using federal statutory rates on income before provision for
income taxes for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Computed "expected" income tax at 35%................................. $ 105,824 $ 282,420
Increases in taxes resulting from:
Nonrecurring deferred tax charge due to termination of S corporation
status............................................................ -- 170,000
State income taxes, net of federal benefit.......................... 5,896 31,470
Other............................................................... (5,720) (3,890)
---------- ----------
$ 106,000 $ 480,000
---------- ----------
---------- ----------
</TABLE>
F-10
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
3. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities consist of the following at December 31,
1997:
<TABLE>
<S> <C>
Deferred tax liabilities:
Property, equipment and capital leases.......................... $ 50,000
Intangibles..................................................... 132,000
---------
Deferred tax liabilities.......................................... 182,000
Less deferred tax assets--
Allowance for doubtful accounts receivable...................... 42,000
---------
Net deferred tax liabilities...................................... $ 140,000
---------
---------
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Installment notes due in varying installments (totaling $74,129
per month, as of December 31, 1997) including interest at
rates ranging from 8% to 10.5% and maturing on various dates
from November 1999 to June 2011............................... $3,904,936
Less current portion of long-term debt.......................... 572,254
---------
Long-term debt.................................................. $3,332,682
---------
---------
</TABLE>
Long-term debt is secured by certain accounts receivable, inventories and
property and equipment. Certain long-term debt is secured by guarantees of
certain shareholders.
Long-term debt maturing during the five years subsequent to 1997 is as
follows: 1998--$572,254; 1999--$618,905; 2000--$615,487; 2001--$665,711 and
2002--$610,948.
In November 1997, the Company entered into a loan agreement with a bank
which provides for revolving borrowings and letters of credit up to an aggregate
of $2 million to be used for working capital purposes. Borrowings under the line
(none at December 31, 1997) are secured principally by accounts receivable and
inventories, bear interest at the bank's prime rate and are due on May 20, 1999.
The agreement contains provisions which, among other things, limit the Company's
ability to sell assets, incur additional debt and enter into transactions with
related parties. The agreement also requires the Company to maintain at least a
specified amount of tangible net worth and satisfy certain financial ratios.
5. LEASES
The Company leases all of its retail store facilities under noncancelable
operating leases, many of which expire within eight years. These leases require
the Company to pay for taxes, maintenance and insurance and contain renewal
options, certain of which involve rent increases. Rent expense was $195,609 in
1996 and $417,626 in 1997.
The Company leases most of its retail store pharmacy computer equipment
under capital lease agreements which expire from 1999 to 2001.
F-11
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
5. LEASES (CONTINUED)
At December 31, 1997, the future minimum lease payments under operating and
capital leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- -------------------------------------------------------------------- ------------ ----------
<S> <C> <C>
1998................................................................ $ 760,000 $ 116,414
1999................................................................ 700,000 107,654
2000................................................................ 630,000 66,251
2001................................................................ 520,000 43,136
2002................................................................ 370,000 18,161
------------ ----------
Total............................................................... $ 2,980,000 351,616
------------
------------
Less amount representing interest................................... 70,017
----------
Net present values.................................................. 281,599
Current obligations under capital leases............................ 83,824
----------
Obligations under capital leases.................................... $ 197,775
----------
----------
</TABLE>
6. SHAREHOLDERS' EQUITY
In April 1997, the Board of Directors of the Company approved a two-for-one
split of the Company's common stock. The split and an amendment to the Company's
articles of incorporation to change the authorized capitalization from 1,000,000
shares of $1 par common stock to 14,000,000 shares of $.01 par common stock and
1,000,000 shares of $.01 par preferred stock were approved by the shareholders
on May 31, 1997. The Board of Directors has the authority to issue preferred
stock in one or more classes or series and to fix from time to time the number
of shares to be included in each such class or series and the designations,
preferences, qualifications, limitations, restrictions and rights of the shares
of each such class or series. The effects of the stock split and
recapitalization have been reflected retroactively in the accompanying financial
statements.
In July 1997, the Company completed the Offering pursuant to which 1,380,000
shares of common stock were sold. The proceeds of the Offering, after deducting
the underwriting discount and offering expenses, were $5,535,401. The proceeds
were used to repay certain notes payable and long-term debt, to acquire
pharmacies (NOTE 2), to purchase property and equipment, and to pay
distributions to shareholders.
In October 1997, the Company completed a private placement of 465,000 shares
of common stock. The proceeds of the private placement, after deducting brokers'
fees, were $4,205,007. The proceeds are expected to be used in connection with
the acquisition of additional pharmacies.
In connection with the Offering and private placement, the Company sold
warrants to purchase an aggregate 210,000 shares of common stock (180,000 shares
exercisable from July 1998 to July 2002 at $4 per share and 30,000 shares
exercisable from November 1998 to November 2002 at $6.72 per share). At December
31, 1997, 210,000 shares of common stock have been reserved for issuance upon
exercise of these warrants.
F-12
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
6. SHAREHOLDERS' EQUITY (CONTINUED)
In November 1997, the Board of Directors of the Company approved a
three-for-two split of the Company's common stock in the form of a stock
dividend. Shareholders received one additional share of common stock for each
two shares held. In connection therewith, 1,478,834 shares of stock were issued
and $14,789 was transferred from additional paid-in capital to common stock. The
effects of the split have been reflected retroactively in the accompanying
financial statements.
In March 1997, the Board of Directors approved the 1997 Stock Option Plan
(the "1997 Plan"). The 1997 Plan was amended by the Board of Directors and was
approved by the shareholders on May 31, 1997. Under the 1997 Plan, options for
up to 369,366 shares of common stock may be granted until March 2007 to key
employees and directors at prices as specified in the 1997 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 369,366 shares were
granted by the Company in July 1997 at an option price equal to the market value
of the Company's common stock at the date of grant ($4 per share). These options
became exercisable in October 1997. None of these options have been exercised as
of December 31, 1997.
Outstanding options to acquire 369,366 shares of stock at December 31, 1997
had exercise prices of $4 per share and had remaining contractual lives of nine
and one-half years.
The following pro forma information, as required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"), presents net loss and loss per share information as if the Company had
accounted for stock options issued in 1997 using the fair value method
prescribed by the Statement. The fair value of issued stock options ($6.11 per
share) was estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions for 1997: weighted average risk-free
interest rate of 6%; no dividends over the option term; stock price volatility
factor of 83.2, and a weighted average expected option life of two and one-half
years. The estimated fair value as determined by the model is amortized to
expense over the respective vesting period. The SFAS 123 pro forma information
presented below is not necessarily indicative of the pro forma effects to be
presented in future periods.
The SFAS 123 pro forma information is as follows for the year ended December
31, 1997:
<TABLE>
<S> <C>
Net loss......................................................... $(262,792)
Basic and diluted loss per share................................. $ (.09)
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of fair value of its stock options.
In February 1998, the Board of Directors approved the 1998 Stock Option Plan
(the "1998 Plan") subject to approval by the shareholders. Options for up to
450,000 shares of common stock may be granted until February 2008 to key
employees and directors at prices as specified in the 1998 Plan on the dates the
F-13
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
6. SHAREHOLDERS' EQUITY (CONTINUED)
options are granted. Except as provided in the option agreements, options are
exercisable at any time during a ten-year term. No options have been granted to
date.
7. EMPLOYEE BENEFIT PLAN
Effective January 1, 1996, the Company adopted a profit sharing plan for
certain full-time employees. Each participant in the plan may contribute by
payroll deduction up to 15% of their earnings. The Company may make matching
contributions of a portion of each participant's contribution up to 6% of their
earnings. The Company may also make a profit sharing contribution. No matching
or profit sharing contributions were made in 1996 or 1997.
F-14
<PAGE>
WARRANT AGREEMENT
November 7, 1997
COMVEST PARTNERS, INC.
8235 Douglas Ave., Suite 525
Dallas, Texas 75225
Ladies and Gentlemen:
HORIZON Pharmacies, Inc., a Texas corporation (the "Company"), agrees to
issue and sell to you (the "Warrant Holder") warrants (the "Warrants") to
purchase the number of shares of common stock, $0.01 par value per share (the
"Common Stock"), of the Company set forth herein, subject to the terms and
conditions contained herein.
1. ISSUANCE OF WARRANTS; EXERCISE PRICE. The Warrants, which shall be
in the form attached hereto as Exhibit A, shall be issued to the Warrant
Holder concurrently with the execution hereof in consideration of the payment
by the Warrant Holder to the Company of the sum of $0.001 cash per share of
Common Stock subject to the Warrants, the receipt and sufficiency of which
are hereby acknowledged. The Warrant shall provide that the Warrant Holder
(or such other holder or holders of the Warrants to whom transfer is
authorized in accordance with the terms of this Agreement) shall have the
right to purchase an aggregate of 30,000 shares of Common Stock (the "Option
Shares") for an exercise price equal to $6.72 per share (the "Exercise
Price") or $201,600 in the aggregate (both the Option Shares and Exercise
Price give effect to a 3-for-2 split of the Common Stock which has a record
date of November 21, 1997). The number, character and Exercise Price of such
shares of Common Stock are subject to adjustment as hereinafter provided, and
the term "Common Stock" shall mean, unless the context otherwise requires,
the stock and other securities and property receivable upon exercise of the
Warrants. The term "Exercise Price" shall mean, unless the context otherwise
requires, the price per share of the Common Stock purchasable under the
Warrants as set forth in this Section 1, as adjusted from time to time
pursuant to Section 5. Upon exercise of the Warrants by the holder thereof,
the shares of Common Stock with respect to which the Warrants are exercised
will be validly issued, fully paid, and nonassessable, and good and
marketable title to such shares of Common Stock shall be delivered to such
holder free and clear of all liens, encumbrances, equities, claims or
preemptive or similar rights.
2. NOTICES OF RECORD DATE; ETC.. In the event of (i) any taking by
the Company of a record date with respect to the holders of any class of
securities of the Company for purposes of determining which of such holders
are entitled to dividends or other distributions (other than regular
quarterly dividends), or any right to subscribe for, purchase or otherwise
acquire shares of stock of any class or any other securities or property, or
to receive any other right, (ii) any capital reorganization of the Company,
or reclassification or recapitalization of capital stock of the Company or
any transfer in one or more related transactions of all or a majority of the
assets or revenue or income generating capacity of the Company to, or
consolidation or merger of the Company with or into, any other entity or
person, or (iii) any voluntary or involuntary dissolution or winding up of
the Company, then and in each such event the Company will mail or cause to be
mailed to the Warrant Holder a notice specifying, as the case may be, (A) the
date on which any such record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right; or (B) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, conveyance, dissolution, liquidation or winding-up is to take place
and the time, if any is to be fixed, as of which the holders of record of
Common Stock (or any other class of stock or securities of the Company, or
another issuer pursuant to Section 5, receivable upon the exercise of the
Warrants) shall be entitled to exchange their shares of Common Stock (or such
other stock or securities) for securities or other property deliverable upon
such event. Any such notice shall be deposited in the United States mail,
postage prepaid, at least ten (10) days prior to the date therein specified,
and the holders(s) of the Warrant(s) may exercise the Warrant(s) and
participate in such event as a registered holder of Common Stock, upon
exercise of the Warrant(s) so held, within the ten (10) day period from the
date of mailing of such notice.
<PAGE>
3. NO IMPAIRMENT. The Company shall not, by amendment of its
organizational documents or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
action, avoid or seek to avoid the observance or performance of any of the
terms of this Agreement or of the Warrants, but will at all times in good
faith take any and all action as may be necessary in order to protect the
rights of the Warrant Holder against impairment. Without limiting the
generality of the foregoing, the Company (a) will at all times reserve and
keep available, solely for issuance and delivery upon exercise of the
Warrants, shares of Common Stock issuable from time to time upon exercise of
the Warrants, (b) will not increase the par value of any shares of stock
receivable upon exercise of the Warrants above the amount payable in respect
thereof upon such exercise, and (c) will take all such action as may be
necessary or appropriate in order that the Company may validly and legally
issue fully paid and non-assessable stock upon the exercise of the Warrants,
or any of them.
4. EXERCISE OF WARRANTS. At any time and from time to time on and
after the first anniversary of the date hereof and expiring on the fifth
anniversary of the effective date of this Agreement at 5:00 p.m., Dallas,
Texas time, the Warrants may be exercised as to all or any portion of the
whole number of shares of Common Stock covered by the Warrants by the Warrant
Holder by surrender of the Warrants, accompanied by a subscription for shares
to be purchased in the form attached hereto as Exhibit B and by a check
payable to the order of the Company in the amount required for purchase of
the shares as to which the Warrant is being exercised, delivered to the
Company at its principal office at 275 W. Princeton Drive, Princeton, Texas
75407, Attention: President. Certificates for shares of Common Stock issuable
by reason of the exercise of the Warrant or Warrants shall be dated and shall
be effective as of the date of the surrendering of the Warrant for exercise,
notwithstanding any delays in the actual execution, issuance or delivery of
the certificates for the shares so purchased. In the event a Warrant or
Warrants is exercised as to less than the aggregate amount of all shares of
Common Stock issuable upon exercise of all Warrants held by the Warrant
Holder, the Company shall issue a new Warrant to the Warrant Holder so
exercised covering the aggregate number of shares of Common Stock as to which
Warrants remain unexercised.
5. PROTECTION AGAINST DILUTION. The Exercise Price for the shares of
Common Stock and number of shares of Common Stock issuable upon exercise of
the Warrants is subject to adjustment from time to time as follows:
(a) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS, ETC.. In
case at any time or from time to time after the date of execution of this
Agreement, the Company shall (i) take a record of the holders of Common Stock
for the purpose of entitling them to receive a dividend or a distribution on
shares of Common Stock payable in shares of Common Stock or other class of
securities; (ii) subdivide or reclassify its outstanding shares of Common
Stock into a greater number of shares; or (iii) combine or reclassify its
outstanding Common Stock into a smaller number of shares, then, and in each
such case, the Exercise Price in effect at the time of the record date for
such dividend or distribution or the effective date of such subdivision,
combination or reclassification shall be adjusted in such a manner that the
Exercise Price for the shares issuable upon exercise of the Warrants
immediately after such event shall bear the same ratio to the Exercise Price
in effect immediately prior to any such event as the total number of shares
of Common Stock outstanding immediately prior to such event shall bear to the
total number of shares of Common Stock outstanding immediately after such
event.
(b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE. When any
adjustment is required to be made in the Exercise Price under this Section 5:
(i) the number of shares of Common Stock issuable upon exercise of the
Warrants shall be changed (upward to the nearest full share) to the number of
shares determined by dividing (x) an amount equal to the number of shares
issuable pursuant to the exercise of the Warrants immediately prior to the
adjustment, multiplied by the Exercise Price in effect immediately prior to
the adjustment, by (y) the Exercise Price in effect immediately after such
adjustment; and (ii) upon exercise of the Warrant, the Warrant Holder will be
entitled to receive the number of shares of other securities referred to in
Section 5(a) that such Warrant Holder would have received had the Warrant
been exercised prior to the events referred to in Section 5(a).
2
<PAGE>
(c) ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.. In
case of any reorganization or consolidation of the Company with, or any
merger of the Company with or into, another entity (other than a
consolidation or merger in which the Company is the surviving corporation) or
in case of any sale or transfer to another entity of the majority of assets
of the Company, the entity resulting from such reorganization or
consolidation or surviving such merger or to which such sale or transfer
shall be made, as the case may be, shall make suitable provision (which shall
be fair and equitable to the Warrant Holder) and shall assume the obligations
of the Company hereunder (by written instrument executed and mailed to the
Warrant Holder) pursuant to which, upon exercise of the Warrants, at any time
after the consummation of such reorganization, consolidation, merger or
conveyance, the Warrant Holder shall be entitled to receive the stock or
other securities or property that the Warrant Holder would have been entitled
to upon consummation if such Warrant Holder had exercised the Warrants
immediately prior thereto, all subject to further adjustment as provided in
this Section 5.
(d) CERTIFICATE AS TO ADJUSTMENTS. In the event of adjustment as
herein provided in paragraphs of this Section 5, the Company shall promptly
mail to the Warrant Holder a certificate setting forth the Exercise Price and
number of shares of Common Stock issuable upon exercise after such adjustment
and setting forth a brief statement of facts requiring such adjustment. Such
certificate shall also set forth a brief statement of facts requiring such
adjustment. Such certificate shall also set forth the kind and amount of
stock or other securities or property into which the Warrants shall be
exercisable after any adjustment of the Exercise Price as provided in this
Agreement.
(e) MINIMUM ADJUSTMENT. Notwithstanding the foregoing, no
certificate as to adjustment of the Exercise Price hereunder shall be made if
such adjustment results in a change in the Exercise Price then in effect of
less than five cents ($0.05) and any adjustment of less than five cents
($0.05) of any Exercise Price shall be carried forward and shall be made at
the time of and together with any subsequent adjustment that, together with
the adjustment or adjustments so carried forward, amounts to five cents
($0.05) or more; provided however, that upon the exercise of a Warrant, the
Company shall have made all necessary adjustments (to the nearest cent) not
theretofore made to the Exercise Price up to and including the date upon
which such Warrant is exercised.
6. REGISTRATION RIGHTS. The Company agrees that if any time on or
after the first anniversary of the date hereof but before the fifth
anniversary of the date hereof the Company proposes to file a registration
statement under the Act covering a proposed sale of shares of Common Stock,
it shall give to the Warrant Holder notice of such proposed registration at
least 30 days prior to the filing of the registration statement and shall
afford the Warrant Holder who then proposed to sell or distribute publicly
any of the shares subject to the Warrants (including shares of Common Stock
acquired pursuant to the prior exercise of the Warrants) upon giving not less
than 10 days notice prior to such filing, the opportunity to have such shares
included in the securities registered under the registration statement. All
expenses, disbursements and fees (including, but without limitation, fees and
expenses of counsel, auditing fees, printing expenses, SEC filing fees and
expenses, but excluding any underwriting discounts or commissions) incurred
in connection with the registration by the Company of the sale of any shares
for the Warrant Holder under this Section 6 shall be borne by the Company.
7. STOCK EXCHANGE LISTING. In the event the Company's Common Stock
is listed on an national securities exchange at the time of exercise of a
Warrant, the Company will, at its expense, also list on such exchange, upon
exercise of the Warrant, all shares of Common Stock issuable pursuant to such
Warrant.
8. SUCCESSORS AND ASSIGNS; BINDING EFFECT. This Agreement shall be
binding upon and inure to the benefit of the Warrant Holder and the Company
and their respective successors and permitted assigns.
9. NOTICES. Any notice hereunder shall be given by registered or
certified mail, if to the Company, at its principal office referred to in
Section 4 and, if to the Warrant Holder, to its address shown in the Warrant
ledger of the Company, provided that the Warrant Holder may at any time on three
(3) days'
3
<PAGE>
written notice to the Company designate or substitute another address where
notice is to be given. Notice shall be deemed given and received after a
certified or registered letter, properly addressed with postage prepaid, is
deposited in the U.S. mail.
10. SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any
reason whatsoever, such illegality or invalidity shall not affect the
remainder of this Agreement.
11. ASSIGNMENT; REPLACEMENT OF WARRANTS. If the Warrant or Warrants
are assigned, in whole or in part, the Warrants shall be surrendered at the
principal office of the Company, and thereupon, in the case of a partial
assignment, a new Warrant shall be issued to the Warrant Holder covering the
number of shares not assigned, and the assignee shall be entitled to receive
a new Warrant covering the number of shares so assigned. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft,
destruction, or mutilation of any Warrant and appropriate bond or
indemnification protection, the Company shall issue a new Warrant of like
tenor. The Warrants will not be transferred, sold, or otherwise hypothecated
by the Warrant Holder and the Warrants will be nontransferable, except to (i)
one or more persons, each of which on the date of transfer is an officer,
shareholder, or employee of the Warrant Holder; (ii) a partnership or
partnerships, the partners of which are the Warrant Holder and one or more
persons, each of whom on the date of transfer is an officer of the Warrant
Holder; (iii) a successor to the Warrant Holder in merger or consolidation;
(iv) a purchaser of all or substantially all of the Warrant Holder's assets;
or (v) a person that receives a Warrant upon death of the Warrant Holder
pursuant to will, trust, or the laws of intestate succession.
12. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas without giving effect to the
principles of choice of laws thereof.
13. DEFINITION. All references to the word "Warrant Holder", and to
"ComVest Partners, Inc." in this Agreement shall be deemed to apply with
equal effect to any persons or entities to whom Warrants have been
transferred in accordance with the terms hereof, and, where appropriate, to
any persons or entities holding shares of Common Stock issuable upon exercise
of Warrants.
14. HEADINGS. The headings herein are for purposes of reference only
and shall not limit or otherwise affect the meaning of any of the provisions
hereof.
Very truly yours,
HORIZON PHARMACIES, INC.
By:
----------------------------------------
Ricky D. McCord, President
Accepted as of the ____ day of November, 1997.
COMVEST PARTNERS, INC.
By:
---------------------------------
4
<PAGE>
EXHIBIT "A"
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO
(i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO THE
ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
No. W-11 30,000 Warrants
HORIZON PHARMACIES, INC.
COMMON STOCK PURCHASE WARRANT
THIS IS TO CERTIFY that ComVest Partners, Inc. (the "Warrant Holder") or
its assigns as permitted in that certain Warrant Agreement (the "Warrant
Agreement") dated November 7, 1997, by and between the Company (as hereinafter
defined) and the Warrant Holder is entitled to purchase at any time or from time
to time on or after November 7, 1998 until 5:00 p.m., Oklahoma City, Oklahoma
time on November 7, 2002, an aggregate of Thirty Thousand (30,000) shares of
Common Stock, par value $0.01 per share, of HORIZON Pharmacies, Inc., a Texas
corporation (the "Company"), for an exercise price per share as set forth in the
Warrant Agreement referred to herein. This Warrant is issued pursuant to the
Warrant Agreement, and all rights of the holder of this Warrant are further
governed by, and subject to the terms and provisions of such Warrant Agreement,
copies of which are available upon request to the Company. The holder of this
Warrant and the shares issuable upon the exercise hereof shall be entitled to
the benefits, rights and privileges and subject to the obligations, duties and
liabilities provided in the Warrant Agreement.
The issuance of this Warrant and the shares issuable upon the due and
timely exercise hereof have not been registered under the Securities Act of
1933, as amended (the "Act"), or any similar state securities law or act, and,
as such, no public offering of either this Warrant of any of the shares of
Common Stock issuable upon exercise of this Warrant may be made other than under
an exemption under the Act or until the effectiveness of a registration
statement under such Act covering such offering. Transfer of this Warrant is
restricted as provided in Section 11 of the Warrant Agreement.
Subject to the provisions of the Act, of the Warrant Agreement and of
this Warrant, this Warrant and all rights hereunder are transferable, in
whole or in part, only to the extent expressly permitted in such documents
and then only at the office of the Company at 275 W. Princeton Drive,
Princeton, Texas 75407, Attention: President, by the Warrant Holder or by a
duly authorized attorney-in-fact, upon surrender of this Warrant duly
endorsed, together with the Assignment hereof duly endorsed. Until transfer
hereof on the books of the Company, the Company may treat the registered
holder hereof as the owner hereof for all purposes.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
and its corporate seal to be hereunto affixed by its proper corporate
officers thereunto duly authorized.
HORIZON PHARMACIES, INC.
By:
-------------------------------
Ricky D. McCord, President
(SEAL)
Attest:
- ---------------------------------
Sy S. Shahid, Secretary
<PAGE>
EXHIBIT "B"
WARRANT EXERCISE FORM
The undersigned hereby irrevocably elects to exercise the right to
purchase such number of shares indicated below, of common stock, $.01 par
value ("Common Stock"), of HORIZON Pharmacies, Inc., pursuant to the terms of
the attached Warrant Certificate, at the Purchase Price of $6.72 per share.
The number of shares exercisable under such Warrant Certificate. The
undersigned requests that a certificate for such securities be registered in
the name of _______________________ whose address is _______________________,
and that such certificate be delivered to the undersigned at such address.
Accompanying this Warrant Exercise Form is a check in the amount of the
aggregate Purchase Price for the shares of Common Stock purchased hereby.
The number of shares as to which the Warrants are exercised: ____________.
Dated: WARRANT HOLDER:
--------------- ----------------------------------------
By:
----------------------------------------------
Name (Print):
-----------------------------------------
Title:
------------------------------------------------
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
------------------------------------------------------
(Social Security/Employer ID Number of Warrant Holder)
<PAGE>
[LETTERHEAD]
LOAN AGREEMENT
November 20, 1997
Horizon Pharmacies. Inc.
275 W. Princeton Drive
Princeton, Texas 75407
Ladies and Gentlemen:
This Loan Agreement (the "LOAN AGREEMENT") will serve to set forth the
terms of the financing transactions by and between HORIZON PHARMACIES, INC.
("BORROWER"), and BANK ONE, TEXAS, NATIONAL ASSOCIATION ("BANK"):
1. CREDIT FACILITY. Subject to the terms and conditions set forth in
this Agreement and the other agreements, and documents evidencing, securing,
governing, guaranteeing and/or pertaining to the loan, as hereinafter
defined (collectively, together with the Loan Agreement, referred to
hereinafter as the "LOAN AGREEMENT"), Bank hereby agrees to provide to
Borrower the credit facility or facilities hereinbelow (whether one or more,
the "CREDIT FACILITY"):
BORROWING BASE LINE OF CREDIT. Subject to the terms and conditions
set forth herein, Bank agrees to lend to Borrower (the "BORROWING BASE LINE
OF CREDIT"), on a revolving basis from time to time during the period
commencing on the date hereof and continuing through the maturity date of
the promissory note evidencing this Credit Facility from time to time, such
amounts as Borrower may request hereunder: PROVIDED, HOWEVER, the total
principal amount outstanding at any time shall not exceed the lesser of
(a)(i) an amount equal to the Borrowing Base Amount (as such term is
defined hereinbelow), or (ii) $2,000,000.00 LESS (b) the amount of the
outstanding Letter of Credit Liabilities (as hereinafter defined). If at
any time the sum of the aggregate principal amount outstanding under the
Borrowing Line of Credit PLUS the amount of the outstanding Letter of
Credit Liabilities exceeds and amount equal to the Borrowing Base Amount,
Borrower agrees to immediately repay to Bank such excess amount, PLUS all
accrued but unpaid
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 2
interest thereon. Subject to the terms and conditions hereof Borrower may
borrow, repay and reborrow hereunder. Borrower agrees that for a period
of not less than 30 consecutive days during each calendar year, Borrower
shall have repaid the entire outstanding principal amount of the Borrowing
Base Line of Credit, together with all accrued but unpaid interest thereon.
The sums advanced under the Borrowing Base Line of Credit shall be used for
working capital.
As used in this Loan Agreement, the term "BORROWING BASE AMOUNT" shall have
the meaning set forth hereinbelow:
An amount equal to 50% of the Borrower's Eligible Inventory.
As used herein, the term "ELIGIBLE INVENTORY" shall mean as of any date,
the aggregate value of all inventory of raw materials and finished goods
(excluding work in progress and packaging materials, supplies and any
advertising costs capitalized into inventory) then owned by Borrower and
held for sale, lease or other disposition in the ordinary course of its
business, in which Bank has a first priority lien, excluding (i) inventory
which is damaged, defective, obsolete or otherwise unsalable in the
ordinary course of Borrower's business, (ii) inventory which has been
returned or rejected, and (iii) inventory subject to any consignment
arrangement between Borrower and any other person or entity. For purposes
of this definition, EligibLe Inventory shall be valued at the lower of cost
(excluding the cost of labor) or market value.
All advances under the Credit facility shall be collectively called the
"LOAN". Bank reserves the right to require Borrower to give Bank not less
than one (1) business day prior notice of each requested advance under the
Credit Facility, specifying (i) the aggregate count of such requested
advance, (ii) the requested date of such advance, and (iii) the purpose for
such advance, with such advances to be requested in a form satisfactory to
Bank.
2. PROMISSORY NOTE. The Loan shall be evidenced by one or more
promissory notes (whether one or more, together with any renewals, extensions
and increases thereof, the "NOTE") duly executed by Borrower and payable to
the order of Bank, in form and substance acceptable to Bank. Interest on the
Note shall accrue at the rate set forth therein. The principal of and
interest on the Note shall be due and payable in accordance with the terms
and conditions set forth in the Note and in this Loan Agreement.
3. LETTERS OF CREDIT.
(a) ISSUANCE OF LETTERS OF CREDIT. Subject to the terms and
conditions of this Loan Agreement, Bank agrees to issue one or more letters
of credit (collectively, the "LETTERS OF CREDIT") for the account of
Borrower from time to time from the date hereof to and including the
maturity date of the Note, PROVIDED, however, that the Bank's outstanding
commitments under all outstanding Letters of Credit (the "LETTER OF CREDIT
LIABILITIES") shall not at any time exceed (i) the lesser of (1) an amount
equal to the
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 3
Committed Sum, or (2) an amount equal to the Borrowing Base Amount, LESS
(ii) the aggregate principal amount outstanding under the Borrowing Base
Line of Credit. All Letters of Credit shall have an expiration date of on
or prior to the maturity date of the Note, must support a transaction that
is entered into in the ordinary course of business, must otherwise be
satisfactory in form and substance to Bank, and shall be issued pursuant to
such documents and instruments, including, without limitation, Bank's
standard application and agreement for issuance of letters of credit, as
then in effect ("LETTER OF CREDIT APPLICATION") as Bank may require. No
Letter of Credit shall require any payment by Bank to the beneficiary
thereunder pursuant to a drawing prior to the third business day following
presentment of a draft and any related documents to Bank. Each Letter of
Credit shall be issued on at least one (1) business days prior notice from
Borrower to Bank.
(b) REPAYMENT. Each payment by Bank pursuant to a drawing under a
Letter of Credit must be repaid to Bank immediately by Borrower in
accordance with the terms of the subject Letter of Credit Application.
(c) FEE. Borrower shall pay to Bank a letter of credit fee payable on
the date each Letter of Credit is issued in an amount equal to one and
one-half (1.50%) per annum of the stated amount of such Letter of Credit,
for the stated term of such Letter of Credit, based on a 360 day year and
the actual number of days elapsed.
4. COLLATERAL. As collateral and security for the indebtedness
evidenced by the Note and any and all other indebtedness or obligations from
time to time owing by Borrower to Bank, Borrower shall grant, and hereby
grants, to Bank, its successors and assigns, a first and prior lien and
security interest in and to the property described hereinbelow, together with
any and all PRODUCTS AND PROCEEDS thereof (the "COLLATERAL"):
(a) All present and future accounts, chattel paper, documents,
instruments, deposit accounts and general intangibles (including any right
to payment for goods sold or services rendered arising out of the sale or
delivery of personal property or work done or labor performed by Borrower),
now or hereafter owned, held, or acquired by Borrower, together with any
and all books of account, customer lists and other records relating in any
way to the foregoing.
(b) All present and hereafter acquired inventory (including without
limitation, all raw materials, work in process and finished goods) held,
possessed, owned, held on consignment, or held for sale, lease, return or
to be furnished under contracts of service, in whole or in part, by
Borrower wherever located.
The term "Collateral" shall also include all records and data relating to any
of the foregoing (including, without limitation, any computer software on
which such records and data may be located). Borrower agrees to execute such
security agreements, assignments, deeds of trust and
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 4
other agreements and documents as Bank shall deem appropriate and otherwise
require from time to time to more fully create and perfect Bank's lien and
security interests in the Collateral.
5. GUARANTORS. As a condition precedent to the Bank's obligation to
make the Loan to Borrower, Borrower agrees to cause HORIZON HOME CARE, INC.,
a Texas corporation (whether one or more, the "GUARANTORS") to each execute
and deliver to Bank contemporaneously herewith a guaranty agreement, in form
and substance satisfactory to Bank.
6. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants, and upon each request for an advance under the Borrowing Base Line
of Credit and each request for the issuance of a Letter of Credit further
represents and warrants, to Bank as follows:
(a) EXISTENCE. Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas and all
other states where it is doing business, and has all requisite power and
authority to execute and deliver the Loan Documents.
(b) BINDING OBLIGATIONS. The execution, delivery, and performance of
this Loan Agreement and all of the other Loan Documents by Borrower have
been duly authorized by all necessary action by Borrower, and constitute
legal, valid and binding obligations of Borrower, enforceable in accordance
with their respective terms, except as limited by bankruptcy, insolvency or
similar laws of general application relating to the enforcement of
creditors' rights and except to the extent specific remedies may generally
be limited by equitable principles.
(c) NO CONSENT. The execution, delivery and performance of this Loan
Agreement and the other Loan Documents, and the consummation of the
transactions contemplated hereby and thereby, do not (i) conflict with,
result in a violation of, or constitute a default under (A) any provision
of its articles of certificate of incorporation or bylaws, if Borrower is a
corporation, or its partnership agreement, if Borrower is a partnership, or
any agreement or other instrument binding upon Borrower, or (B) any law,
governmental regulation, court decree or order applicable to Borrower, or
(ii) require the consent, approval or authorization of any third party.
(d) FINANCIAL CONDITION. Each financial statement of Borrower
supplied to the Bank truly discloses and fairly presents Borrower's
financial condition as of the date of each such statement. There has been
no material adverse change in such financial condition or results of
operations of Borrower subsequent to the date of the most recent financial
statement supplied to the Bank.
(e) LITIGATION. There are no actions, suits or proceedings, pending
or, to the knowledge of Borrower, threatened against or affecting Borrower
or the properties of Borrower, before any court or governmental department,
commission or board, which, if
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 5
determined adversely to Borrower, would have a material adverse effect on
the financial condition, properties, or operations of Borrower.
(f) TAXES; GOVERNMENTAL CHARGES. Borrower has filed all federal,
state and local tax reports and returns required by any law or regulation
to be filed by it and has either duly paid all taxes, duties and charges
indicated due on the basis of such returns and reports, or made adequate
provision for the payment thereof, and the assessment of any material
amount of additional taxes in excess of those paid and reported is not
reasonably expected.
7. CONDITIONS PRECEDENT TO ADVANCES. Bank's obligation to make any
advance under the Borrowing Base Line of Credit or issue any Letters of
Credit under this Loan Agreement and the other Loan Documents shall be subject
to the conditions precedent that, as of the date of such advance and after
giving effect thereto (i) all representations and warranties made to Bank in
this Loan Agreement and the other Loan Documents shall be true and correct,
as of and as if made on such date, (ii) no material adverse change in the
financial condition of Borrower since the effective date of the most recent
financial statements furnished to Bank by Borrower shall have occurred and be
continuing, (iii) no event has occurred and is continuing, or would result
from the requested advance, which with notice or lapse of time, or both,
would constitute an Event of Default (as hereinafter defined), (iv) Bank's
receipt of all Loan Documents appropriately executed by Borrower and all
other proper parties, (v) Bank's receipt of landlord waivers, in form and
substance satisfactory to Bank, from the landlord of each Property (as
hereinafter defined) within thirty (30) days of the date hereof, (vi) Bank's
receipt of UCC-3 financing statements terminating all security interests
other than those securing the Seller Financing (as hereinafter defined) or as
otherwise permitted by Bank, within thirty (30) days of the date hereof, and
(vii) Bank's receipt of all additional documentation necessary for Bank to
obtain a perfected security interest in the Collateral and exercise its
remedies with respect to such Collateral upon the occurrence of an Event of
Default.
8. AFFIRMATIVE COVENANTS. Until (i) the Note, the outstanding Letter
of Credit Liabilities and all other obligations and liabilities of Borrower
under this Loan Agreement and the other loan Documents are fully paid and
satisfied, and (ii) the Bank has no further commitment to lend hereunder,
Borrower agrees and covenants that it will, unless Bank shall otherwise
consent in writing:
(a) ACCOUNTS AND RECORDS. Maintain its books and records in
accordance with generally accepted accounting principles.
(b) RIGHT OF INSPECTION. Permit Bank to visit its properties and
installations and to examine, audit and make and take away copies or
reproductions of Borrower's books and records, at all reasonable times.
(c) RIGHT TO ADDITIONAL INFORMATION. Furnish Bank with such
additional information and statements, lists of assets and liabilities, tax
returns, and other reports
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 6
with respect to Borrower's financial condition and business operations as
Bank may request from time to time.
(d) COMPLIANCE WITH LAWS. Conduct its business in an orderly and
efficient manner consistent with good business practices, and perform and
comply with all statutes, rules, regulations and/or ordinances imposed by
any governmental unit upon Borrower its businesses, operations and
properties (including without limitation, all applicable environmental
statutes, rules, regulations and ordinances).
(e) TAXES. Pay and discharge when due all of its indebtedness
and obligations, including without limitation, all assessments, taxes,
governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to
the date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits, provided, however, Borrower will not be required to
pay and discharge any such assessment, tax, charge, levy, lien or claim
so long as (i) the legality of the same shall be contested in good faith
by appropriate judicial, administrative or other legal proceedings, and
(ii) Borrower shall have established on its books adequate reserves with
respect to such contested assessment, tax, charge, levy, lien or claim
in accordance with generally accepted accounting principles,
consistently applied.
(f) INSURANCE. Maintain insurance, including but not limited
to, fire insurance, comprehensive property damage, public liability,
worker's compensation, business interruption and other insurance deemed
necessary or otherwise required by Bank.
(g) NOTICE OF INDEBTEDNESS. Promptly inform Bank of the creation,
incurrence or assumption by Borrower of any actual or contingent
liabilities not permitted under this Loan Agreement.
(h) NOTICE OF LITIGATION. Promptly after the commencement thereof,
notify Bank of all actions, suits and proceedings before any court or
any governmental department, commission or board affecting Borrower or
any of its properties.
(i) NOTICE OF MATERIAL ADVERSE CHANGE. Promptly inform Bank of
(i) any and all material adverse changes in Borrower's financial
condition, and (ii) all claims made against Borrower which could
materially affect the financial condition of Borrower.
(J) ADDITIONAL DOCUMENTATION. Execute and deliver, or cause to
be executed and delivered, any and all other agreements, instruments or
documents which Bank may reasonably request in order to give effect to
the transactions contemplated under this Loan Agreement and the other
Loan Documents.
(k) LICENSE. At least two of the three licensed pharmacists on
the Board of Directors of Borrower shall maintain their pharmaceutical
licenses issued by the applicable
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 7
state Board of Pharmacy. Upon the occurrence of an Event of Default,
such licensed pharmacist agrees to assist Bank dispose of the
pharmaceuticals comprising the Eligible Inventory in compliance with
applicable state and federal law in the manner Bank determines appropriate
in its sole discretion.
9. NATIVE COVENANTS. Until (i) the Note, the outstanding Letter of
Credit Liabilities and all other obligations and liabilities of Borrower
under this Loan Agreement and the other Loan Documents are fully paid and
satisfied, and (ii) the Bank has no further commitment to lend hereunder,
Borrower will not, without the prior written consent of Bank:
(a) NATURE OF BUSINESS. Make any material change in the nature of its
business as carried on as of the date hereof.
(b) LIQUIDATIONS, MERGERS, CONSOLIDATIONS. Liquidate, merge or
consolidate with or into any other entity unless after such merger or
consolidation Borrower is the surviving entity.
(c) SALE OF ASSETS. Sell, transfer or otherwise dispose of any of
its assets or properties, other than in the ordinary course of business.
(d) LIENS. Create or incur any lien or encumbrance on any of its
assets, other than (i) Liens and security interest securing indebtedness
owing to Bank, (ii) liens for taxes, assessments or similar charges with
(1) not yet due or (2) being contested in good faith by appropriate
proceedings and for which Borrower has established adequate reserves, and
(iii) liens and security interest existing as of the date hereof which have
been disclosed to and approved by the Bank in writing and (iv) liens and
security interests granted by Borrower on inventory located at a retail
pharmacy ("PROPERTY") being acquired by Borrower in connection with the
Seller financing of the acquisition of such Property ("SELLER FINANCING").
(e) INDEBTEDNESS. Create, incur or assume any indebtedness for
borrowed money or issue or assume any other note, debenture, bond or other
evidences of indebtedness, or guarantee any such indebtedness or such
evidences of indebtedness of others, other than (i) borrowings from Bank,
and (ii) borrowings outstanding on the date hereof and disclosed in writing
to Bank and (iii) borrowings which do not exceed in the aggregate in any
fiscal year (A) $2,000,000.00 in additional Seller Financing and (B)
$500,000.00 for purchase money indebtedness.
(f) CHANGE IN MANAGEMENT. Permit a change in the senior management
of Borrower.
(g) LOAN. Make any loans to any person or entity.
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 8
(h) TRANSACTIONS WITH AFFILIATES. Enter into any transaction,
including, without limitation, the purchase, sale or exchange of property
or the rendering of any service, with any Affiliate (as hereinafter
defined) of Borrower, except in the ordinary course of and pursuant to the
reasonable requirements of Borrower's business and upon fair and reasonable
terms no less favorable to Borrower than would be obtained in a comparable
arm's-length transaction with a person or entity not an Affiliate of
Borrower. As used herein, the term "AFFILIATE" means any individual or
entity directly or indirectly controlling, controlled by, or under common
control with, another individual or entity.
10. FINANCIAL COVENANTS. Until (i) the Note, the outstanding Letter of
Credit Liabilities and all other obligations and liabilities of Borrower
under this Loan Agreement and the other Loan Documents are fully paid and
satisfied, and (ii) the Bank has no further commitment to lend hereunder,
Borrower will maintain the following financial covenants:
(a) CURRENT RATIO. Borrower will maintain, at all times, a ratio of
(i) current assets (excluding prepaid expenses) to (ii) current liabilities
of not less than 1.25 to 1.0.
(b) TANGIBLE NET WORTH. Borrower will maintain, at all times, its
Tangible Net Worth at not less than $8,500,000.00.
(c) LIABILITIES/TANGIBLE NET WORTH. Borrower will maintain, at all
times, a ratio of (i) total liabilities (excluding any Subordinated Debt),
to (ii) Tangible Net Worth of not greater than 1.50 to 1.0.
(d) DEBT SERVICE. Borrower will maintain, as of the last day of each
fiscal quarter, a ratio of (i) EBIDA defined as net income after taxes PLUS
depreciation, amortization and other non-cash expenses for the 12-month
period ending with such fiscal quarter (including actual, historical
rolling four-quarter EBIDA for any Properties acquired during the previous
12 months) LESS any Distributions and non-financed capital expenditures
during such 12-month period, to (ii) current maturities of long-term debt
(including any current maturities of long term debt associated with the
acquisition of any Properties) PLUS interest expense for such 12-month
period, of not less than 1.30 to 1.0.
As used herein, the term "TANGIBLE NET WORTH" means, as of any date,
Borrower's total assets excluding all intangible assets, LESS total
liabilities excluding any Subordinated Debt. As used herein, the term
"SUBORDINATED DEBT" means any indebtedness owing by Borrower which has been
subordinated by written agreement to all indebtedness now or hereafter owing
by Borrower to Lender, such agreement to be in form and substance acceptable
to Lender. As used herein, "DISTRIBUTIONS" shall mean all dividends and
other distributions made by Borrower to its shareholders or partners, as the
case may be, other than salary, bonuses and other compensation for services.
Unless otherwise specified, all accounting and financial terms and covenants
set forth above are to be determined according to generally accepted
accounting principles, consistently applied.
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 9
10. REPORTING REQUIREMENTS. Until (i) the Note, the outstanding Letter
of Credit Liabilities and all other obligations and liabilities of Borrower
under this Loan Agreement and the other Loan Document are fully paid and
satisfied, and (ii) the Bank has no further commitment to lend hereunder,
Borrower will, unless Bank shall otherwise consent in writing, furnish to
Bank:
(a) INTERIM FINANCIAL STATEMENTS. As soon as available, and in any
event within forty-five (45) days after the end of each quarter of each
fiscal year of Borrower, a balance sheet and income statement of Borrower
as of the end of such fiscal quarter, all in form and substance and in
reasonable detail satisfactory to Bank and duly certified (subject to
year-end review adjustments) by the President and/or Chief Financial
Officer of Borrower (i) as being true and correct in all material aspects
to the best of his or her knowledge and (ii) as having been prepared in
accordance with generally accepted accounting principles, consistently
applied.
(b) ANNUAL FINANCIAL STATEMENTS. As soon as available and in any
event within ninety (90) days after the end of each fiscal year of
Borrower, a balance sheet and income statement of Borrower as of the end of
such fiscal year, in each case audited by independent public accountants of
recognized standing acceptable to Bank.
(c) COMPLIANCE CERTIFICATE. A certificate signed by the President
and/or Chief Financial Officer within forty-five (45) days after the end of
each quarter of each fiscal year, stating that Borrower is in full
compliance with all of its obligations under this Loan Agreement and all
other Loan Documents and is not in default of any term or provisions hereof
or thereof, and demonstrating compliance with all financial ratios and
covenants set forth in this Loan Agreement.
(d) BORROWING BASE REPORT. A borrowing base report signed by the
President and/or Chief Financial Officer within thirty (30) days after the
end of each month of each fiscal year, in form and detail satisfactory to
Bank.
(e) (INVENTORY LISTING. A list of Borrower's inventory by location
and type (to include the following: raw materials, work in process and
finished goods) within thirty (30) days after the end of each month of each
fiscal year, in form and detail satisfactory to Bank.
(f) INVENTORY REPORT. A report of Borrower's physical inventory
prepared by an independent third party acceptable to Bank within sixty (60)
days after the end of each semi-annual period of each fiscal year, in form
and detail satisfactory to Bank.
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 10
11. EVENTS OF DEFAULT. Each of the following shall constitute an "Event
of Default" under this Loan Agreement:
(a) The failure, refusal or neglect of Borrower to pay when due any
part of the principal of, or interest on, the Note, the Letter of Credit
Liabilities or any other indebtedness or obligations owing to Bank by
Borrower from time to time.
(b) The failure of Borrower or any Obligated Party (as defined below)
to timely and properly observe, keep or perform any covenant, agreement,
warranty or condition required herein or in any of the other Loan Documents
and such failure continues for a period of ten (10) days after receipt of
written notice thereof from Bank to Borrower.
(c) The occurrence of an event of default under any of the other Loan
Documents or under any other agreement now existing or hereafter arising
between Bank and Borrower.
(d) Any representation contained herein or in any of the other Loan
Documents made by Borrower or any Obligated Party is false or misleading in
any material respect.
(e) The occurrence of any event which permits the acceleration of the
maturity of any indebtedness owing by Borrower to any third party under any
agreement or understanding.
(f) If Borrower or any Obligated Party: (i) becomes insolvent, or
makes a transfer in fraud of creditors, or makes an assignment for the
benefit of creditors, or admits in writing its inability to pay its debts
as they become due; (ii) generally is not paying its debts as such debts
become due, (iii) has a receiver, trustee or custodian appointed for, or
take possession of, all or substantially all of the assets of such party,
either in a proceeding brought by such party or in a proceeding brought
against such party and such appointment is not discharged or such
possession is not terminated within sixty (60) days after the effective
date thereof or such party consents to or acquiesces in such appointment or
possession; (iv) files a petition for relief under the United States
Bankruptcy Code or any other present or future federal or state insolvency,
bankruptcy or similar laws (all of the foregoing hereinafter collectively
called "APPLICABLE BANKRUPTCY LAW") or an involuntary petition for relief
is filed against such party under any Applicable Bankruptcy Law and such
involuntary petition is not dismissed within sixty (60) days after the
filing thereof, or an order for relief naming such party is entered under
any Applicable Bankruptcy Law, or any composition, rearrangement,
extension, reorganization or other relief of debtors now or hereafter
existing is requested or consented to by such party; (v) fails to have
discharged within a period of thirty (30) days any attachment,
sequestration or similar writ levied upon any property of such party; or
(vi) fails to pay within thirty (30) days any final money judgment against
such party.
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 11
(g) If Borrower or any Obligated Party is an entity, the liquidation,
dissolution, merger or consolidation of any such entity or, if Borrower or
any Obligated Party is an individual, the death or legal incapacity of any
such individual.
(h) The entry of any judgment against Borrower or the issuance or
entry of any attachment or other lien against any of the property of
Borrower for an amount in excess of $25,000.00, if undischarged, unbonded
or undismissed within thirty (30) days after such entry.
Nothing contained in this Loan Agreement shall be construed to limit the
events of default enumerated in any of the other Loan Documents and all such
events of default shall be cumulative. The term "OBLIGATED PARTY", as used
herein, shall mean any party other than Borrower who secures, guarantees
and/or is otherwise obligated to pay all or any portion of the indebtedness
evidenced by the Note.
12. REMEDIES. Upon the occurrence of any one or more of the foregoing
Events of Default, (a) the entire unpaid balance of principal of the Note,
together with all accrued but unpaid interest thereon, and all other
indebtedness owing to Bank by Borrower at such time shall, at the option of
Bank, become immediately due and payable without further notice, demand,
presentation, notice of dishonor, notice of intent to accelerate, notice of
acceleration, protest or notice of protest of any kind, all of which are
expressly waived by Borrower, and (b) Bank may, at its option, cease further
advances under any of the Note; PROVIDED, HOWEVER, concurrently and
automatically with the occurrence of an Event of Default under SUBPARAGRAPH
(f) in the immediately preceding paragraph (i) further advances under the
Note shall cease, and (ii) the Note and all other indebtedness owing to Bank
by Borrower at such time shall, without any action by Bank, become due and
payable, without further notice, demand, presentation, notice of dishonor,
notice of acceleration, notice of intent to accelerate, protest or notice of
protest of any kind, all of which are expressly waived by Borrower. All
rights and remedies of Bank set forth in this Loan Agreement and in any of
the other Loan Documents may also be exercised by Bank, at its option to be
exercised in its sole discretion upon the occurrence of an Event of Default.
13. RIGHTS CUMULATIVE. All rights of Bank under the terms of this Loan
Agreement shall be cumulative of, and in addition to, the rights of Bank
under any and all other agreements between Borrower and Bank (including, but
not limited to, the other Loan Documents), and not in substitution or
diminution of any rights now or hereafter held by Bank under the terms of any
other agreement.
4. WAIVER AND AGREEMENT. Neither the failure nor any delay on the
part of Bank to exercise any right, power or privilege herein or under any of
the other Loan Documents shall operate as a waiver thereof, nor shall any
single or partial exercise of such right, power or privilege preclude any
other or further exercise thereof or the exercise of any other right, power
or privilege. No waiver of any provision in this Loan Agreement or in any of
the other Loan Documents and no departure by Borrower therefrom shall be
effective unless the same shall be in writing and signed by Bank, and then
shall be effective only in the specific instance and for
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 12
the purpose for which given and to the extent specified in such writing. No
modification or amendment to this Loan Agreement or to any of the other Loan
Documents shall be valid or effective unless the same is signed by the party
against whom it is sought to be enforced.
15. BENEFITS. This Loan Agreement shall be binding upon and inure to
the benefit of Bank and Borrower, and their respective successors and
assigns, provided, however, that Borrower may not, without the prior written
consent of Bank, assign any rights, powers, duties or obligations under this
Loan Agreement or any of the other Loan Documents.
16. NOTICE. All notices, requests, demands or other communications
required or permitted to be given pursuant to this Agreement shall be in
writing and given by (i) personal delivery, (ii) expedited delivery service
with proof of delivery, or (iii) United States mail, postage prepaid,
registered or certified mail, return receipt requested, sent to the intended
addressee at the address set forth on the signature page hereof and shall be
deemed to have been received either, in the case of personal delivery, as of
the time of personal delivery, in the case of expedited delivery service, as
of the date of first attempted delivery at the address and in the manner
provided herein, or in the case of mail, upon deposit in a depository
receptacle under the care and custody of the United States Postal Service.
Either party shall have the right to change its address for notice hereunder
to any other location within the continental United States by notice to the
other party of such new address at least thirty (30) days prior to the
effective date of such new address.
17. CONSTRUCTION. This Loan Agreement and the other Loan Documents have
been executed and delivered in the State of Texas, shall be governed by and
construed in accordance with the laws of the State of Texas, and shall be
performable by the parties hereto in the county in Texas where the Bank's
address set forth on the signature page hereof is located.
18. INVALID PROVISIONS. If any provision of this Loan Agreement or any
of the other Loan Documents is held to be illegal, invalid or unenforceable
under present or future laws, such provision shall be fully severable and the
remaining provisions of this Loan Agreement or any of the other Loan
Documents shall remain in full force and effect and shall not be affected by
the illegal, invalid or unenforceable provision or by its severance.
19. EXPENSES. Borrower shall pay all reasonable costs and expenses
(including, without limitation, reasonable attorneys' fees) in connection
with (i) any action required in the course of administration of the
indebtedness and obligations evidenced by the Loan Documents, and (ii) any
action in the enforcement of Bank's rights upon the occurrence of Event of
Default.
20. PARTICIPATION OF THE LOAN. Borrower agrees that Bank may, at its
option, sell interests in the Loan and its rights under this Loan Agreement
to a financial institution or institutions and, in connection with each such
sale, Bank may disclose any financial and other information available to Bank
concerning Borrower to each perspective purchaser.
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 13
21. ENTIRE AGREEMENT. This Loan Agreement (together with the other
Loan Documents) contains the entire agreement among the parties regarding the
subject matter hereof and supersedes all prior written and oral agreements
and understandings among the parties hereto regarding same.
22. CONFLICTS. In the event any term or provision hereof is
inconsistent with or conflicts with any provision of the other Loan Documents,
the terms and provisions contained in this Loan Agreement shall be
controlling.
23. COUNTERPARTS. This Loan Agreement may be separately executed in any
number of counterparts, each of which shall be an original, but all of which,
taken together, shall be deemed to constitute one and the same instrument.
24. FEES. In consideration of the financial accommodations granted by
Bank to Borrower under the Borrowing Base Line of Credit, Borrower agrees to
pay to Bank a fee (the "UNUSED FEE") per annum (based on a year of 360 days)
equal to one-quarter percent (1/4%) of the average daily unborrowed amount
under the Borrowing Base Line of Credit. The Unused Fee shall be payable
quarterly in arrears on the first day of each January, April, July and
October during the term of the Borrowing Base Line of Credit. Borrower
acknowledges that the Unused Fee is required to be paid and is in
consideration of Bank taking appropriate action to ensure that all funds that
Bank may advance under the Borrowing Base Line of Credit are available to
Borrower when Borrower requests same.
If the foregoing correctly sets forth our mutual agreement, please so
acknowledge by signing and returning this Loan Agreement to the undersigned.
Very truly yours,
BANK ONE, TEXAS, N.A.
By: /s/ Julie Smith
-----------------------------------
Name: Julie Smith
----------------------------
Title: Banking Officer
---------------------------
Bank's Address:
1717 Main Street
Dallas, Texas 75201
<PAGE>
Horizon Pharmacies, Inc.
November 20, 1997
Page 14
ACCEPTED as of the date first written above.
BORROWER: Borrower's Address:
HORIZON PHARMACIES, INC., 275 W. Princeton Avenue
a Texas corporation Princeton, Texas 75407
By: /s/ David W. Frauhiger
-------------------------------
Name: David W. Frauhiger
------------------------
Title: C.F.O.
-----------------------
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF HORIZON PHARMACIES, INC.
HORIZON Home Care, Inc., a Texas corporation
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-40533) pertaining to the HORIZON Pharmacies, Inc. 1997
Stock Option Plan and the Registration Statement (Form S-8 No. 333-43607)
pertaining to the HORIZON Pharmacies, Inc. 401(k) Plan, of our report
dated March 16, 1998, with respect to the consolidated financial
statements of HORIZON Pharmacies, Inc. included in the Annual Report
(Form 10-KSB) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
April 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,084,088
<SECURITIES> 0
<RECEIVABLES> 4,241,434
<ALLOWANCES> 0
<INVENTORY> 7,900,994
<CURRENT-ASSETS> 16,389,431
<PP&E> 2,031,710
<DEPRECIATION> 293,093
<TOTAL-ASSETS> 20,653,707
<CURRENT-LIABILITIES> 5,102,592
<BONDS> 0
0
0
<COMMON> 44,365
<OTHER-SE> 11,794,293
<TOTAL-LIABILITY-AND-EQUITY> 20,653,707
<SALES> 28,429,604
<TOTAL-REVENUES> 28,429,604
<CGS> 19,131,928
<TOTAL-COSTS> 19,131,928
<OTHER-EXPENSES> 8,272,397
<LOSS-PROVISION> 0
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