<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: March 31, 1998
[ ] 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.
(Exact name of small business issuer as specified in its charter)
TEXAS 75-2441557
(State or other jurisdiction of (I.R.S. Employer
Identification Number) incorporation or organization)
275 W. Princeton Drive
Princeton, Texas 75407
(Address of principal executive offices)
(972) 736-2424
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
<TABLE>
<S> <C>
Title of Each Class Outstanding at May 7, 1998
Common stock, par value $.01 per share 4,526,099
</TABLE>
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets - December 31, 1997
and March 31, 1998 (unaudited) . . . . . . . . . . . . 3
Consolidated Statements of Income - Three months
ended March 31, 1997 and 1998 (unaudited). . . . . . . 4
Statement of Shareholders' Equity - Three months ended
March 31, 1998 (unaudited) . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows - Three months
ended March 31, 1997 and 1998 (unaudited). . . . . . . 6
Notes to Financial Statements (unaudited) . . . . . . . . . 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 10
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 16
Changes in Securities and Use of Proceeds . . . . . . . . . 16
Other Information . . . . . . . . . . . . . . . . . . . . . 16
Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HORIZON PHARMACIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
ASSETS December 31, March 31,
1997 1998
----------- -----------
(audited) (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . $4,084,088 $ 2,388,288
Accounts receivable, net:
Third-party providers. . . . . . . . . . . . 2,763,481 3,622,865
Others . . . . . . . . . . . . . . . . . . . 1,477,953 1,406,161
Inventories . . . . . . . . . . . . . . . . . . 7,900,994 9,827,570
Prepaid expenses and deposits . . . . . . . . . 120,915 144,994
Deferred income taxes . . . . . . . . . . . . . 42,000 42,000
----------- -----------
Total current assets . . . . . . . . . . . . . . . 16,389,431 17,431,878
Property, equipment and capital lease assets:
Property and equipment:
Land and building. . . . . . . . . . . . . . 204,389 204,389
Equipment. . . . . . . . . . . . . . . . . . 1,453,112 1,910,014
----------- -----------
1,657,501 2,114,403
Less accumulated depreciation . . . . . . . . . 200,855 262,725
----------- -----------
Property and equipment, net . . . . . . . . . . 1,456,646 1,851,678
Equipment under capital leases. . . . . . . . . 374,209 373,509
Less accumulated amortization . . . . . . . . . 92,238 112,568
----------- -----------
Equipment under capital leases, net . . . . . . 281,971 260,941
----------- -----------
Property, equipment and capital lease assets, net. 1,738,617 2,112,619
Intangibles, at cost:
Noncompete covenants. . . . . . . . . . . . . . 441,788 561,788
Customer lists. . . . . . . . . . . . . . . . . 531,147 688,747
Goodwill. . . . . . . . . . . . . . . . . . . . 1,879,782 3,015,818
----------- -----------
2,852,717 4,266,353
Less accumulated amortization . . . . . . . . . 327,058 395,369
----------- -----------
Intangibles, net . . . . . . . . . . . . . . . . . 2,525,659 3,870,984
----------- -----------
$20,653,707 $23,415,481
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 3,670,123 $ 3,999,972
Accrued liabilities . . . . . . . . . . . . . . 394,526 497,486
Notes payable . . . . . . . . . . . . . . . . . 161,865 319,958
Income taxes payable. . . . . . . . . . . . . . 220,000 177,771
Current portion of long-term debt . . . . . . . 572,254 802,215
Current obligations under capital leases. . . . 83,824 76,801
----------- -----------
Total current liabilities. . . . . . . . . . . . . 5,102,592 5,874,203
Long-term debt . . . . . . . . . . . . . . . . . . 3,332,682 4,507,285
Obligations under capital leases . . . . . . . . . 197,775 178,572
Deferred income taxes. . . . . . . . . . . . . . . 182,000 157,000
Shareholders' equity
Preferred stock . . . . . . . . . . . . . . . . -- --
Common stock. . . . . . . . . . . . . . . . . . 44,365 45,261
Additional paid-in capital. . . . . . . . . . . 11,516,834 12,100,570
Retained earnings . . . . . . . . . . . . . . . 277,459 552,590
----------- -----------
Total shareholders' equity . . . . . . . . . . . . 11,838,658 12,698,421
----------- -----------
$20,653,707 $23,415,481
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
HORIZON PHARMACIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
Three Months ended March 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net revenues:
Prescription drugs sales. . . . . . . . . . . . $ 4,060,266 $ 9,799,681
Other sales and services. . . . . . . . . . . . 1,052,981 3,022,568
----------- -----------
Total net revenues . . . . . . . . . . . . . . . . 5,113,247 12,822,249
Costs and expenses:
Cost of sales and services:
Prescription drugs . . . . . . . . . . . . . 2,809,258 7,181,401
Other. . . . . . . . . . . . . . . . . . . . 649,246 1,668,992
Depreciation and amortization . . . . . . . . . 58,696 150,511
Selling, general and administrative expenses. . 1,322,381 3,310,284
----------- -----------
Total costs and expenses . . . . . . . . . . . . . 4,839,581 12,311,188
----------- -----------
Income from operations . . . . . . . . . . . . . . 273,666 511,061
Other income (expense):
Interest and other income . . . . . . . . . . . 393 50,832
Interest expense. . . . . . . . . . . . . . . . (53,531) (103,762)
----------- -----------
Total other income (expense) . . . . . . . . . . . (53,138) (52,930)
----------- -----------
Income before provision for income taxes . . . . . 220,528 458,131
Provision for income taxes (Note 3). . . . . . . . 77,000 183,000
----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . $ 143,528 $ 275,131
----------- -----------
----------- -----------
Basic earnings per share (Note 2). . . . . . . . . $ 0.08 $ 0.06
----------- -----------
----------- -----------
Diluted earnings per share (Note 2). . . . . . . . $ 0.08 $ 0.06
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
4
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
COMMON STOCK
--------------------- ADDITIONAL TOTAL
SHARES AMOUNT PAID-IN CAPITAL RETAINED EARNINGS SHAREHOLDERS' EQUITY
--------- -------- --------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 4,436,494 $44,365 $11,516,834 $277,459 $11,838,658
Exercise of stock options 56,101 561 223,843 -- 224,404
Tax benefit from exercise of stock options -- -- 50,228 -- 50,228
Issuance of stock to acquire stores 31,282 313 289,687 -- 290,000
Issuance of stock to reduce debt 2,222 22 19,978 -- 20,000
Net income -- -- -- 275,131 275,131
--------- ------- ----------- -------- -----------
Balance at March 31, 1998 4,526,099 $45,261 $12,100,570 $552,590 $12,698,421
--------- ------- ----------- -------- -----------
--------- ------- ----------- -------- -----------
</TABLE>
See accompanying notes.
5
<PAGE>
HORIZON PHARMACIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . $ 143,528 $ 275,131
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization of property,
equipment and capital lease assets . . . . . 28,244 82,200
Amortization of intangibles . . . . . . . . . . 30,452 68,311
Provision for uncollectible accounts receivable 5,598 1,742
Pro forma provision for income taxes. . . . . . 77,000 --
Credit for deferred income taxes. . . . . . . . -- (25,000)
Changes in operating assets and liabilities,
net of acquisitions of businesses:
Accounts receivable. . . . . . . . . . . . . (529,881) (775,930)
Inventories. . . . . . . . . . . . . . . . . (212,899) (647,023)
Prepaid expenses and deposits. . . . . . . . 3,989 (24,080)
Bank overdraft . . . . . . . . . . . . . . . 482,480 --
Accounts payable . . . . . . . . . . . . . . 172,397 329,849
Accrued liabilities. . . . . . . . . . . . . 53,031 102,960
Income taxes payable . . . . . . . . . . . . -- 7,999
------------------------
Total adjustments. . . . . . . . . . . . . . . . . 110,411 (878,972)
------------------------
Net cash used provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . 253,939 (603,841)
INVESTING ACTIVITIES
Purchases of property and equipment. . . . . . . . (7,819) (135,482)
Assets acquired for cash in acquisitions of
businesses . . . . . . . . . . . . . . . . . . . -- (951,023)
------------------------
Net cash used in investing activities. . . . . . . (7,819) (1,086,505)
FINANCING ACTIVITIES
Principal payments on notes payable. . . . . . . . (85,000) (56,984)
Principal payments on long-term debt . . . . . . . (55,248) (146,648)
Principal payments on obligations under
capital leases . . . . . . . . . . . . . . . . . (10,583) (26,226)
Proceeds from sales of stock . . . . . . . . . . . (63,850) 224,404
Distributions to shareholders. . . . . . . . . . . (75,000) --
------------------------
Net cash used in financing activities. . . . . . . (289,681) (5,454)
------------------------
Net decrease in cash and cash equivalents. . . . . (43,561) (1,695,800)
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . . . . 153,260 4,084,088
------------------------
Cash and cash equivalents at end of period . . . . $ 109,699 $ 2,388,288
------------------------
------------------------
Supplemental disclosure of interest paid . . . . . $ 53,531 $ 103,762
NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment leased under capital leases. . . . . . . $ 59,694 $ --
Issuance of common stock to reduce long-term debt. -- 20,000
Acquisitions of businesses financed by debt and
common stock:
Accounts receivable and other . . . . . . . . $ 66,382 $ 12,703
Inventories . . . . . . . . . . . . . . . . . 482,260 1,279,553
Property and equipment. . . . . . . . . . . . 60,000 321,420
Intangibles . . . . . . . . . . . . . . . . . 390,000 1,413,635
------------------------
998,642 3,027,311
Less cash paid. . . . . . . . . . . . . . . . -- 951,023
------------------------
Assets acquired . . . . . . . . . . . . . . . $ 998,642 $ 2,076,288
------------------------
------------------------
</TABLE>
6
<PAGE>
HORIZON PHARMACIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) CONTINUED...
<TABLE>
<S> <C> <C>
Financed by:
Notes payable . . . . . . . . . . . . . . . . $898,642 $215,077
Long-term debt. . . . . . . . . . . . . . . . -- 1,571,211
Advance by shareholder. . . . . . . . . . . . 100,000 --
Common stock. . . . . . . . . . . . . . . . . -- 290,000
---------------------
$998,642 $2,076,288
---------------------
---------------------
</TABLE>
See accompanying notes.
7
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1
The unaudited financial statements include all adjustments, consisting
of normal, recurring accruals, which HORIZON Pharmacies, Inc. (the "Company")
considers necessary for a fair presentation of the financial position and the
results of operations for the indicated periods. The notes to the financial
statements should be read in conjunction with the notes to the financial
statements contained in the Company's Form 10-KSB, for the year ended December
31, 1997. The results of operations for the three months ended March 31, 1998,
are not necessarily indicative of the results to be expected for the full year
ending December 31, 1998. The Company's sales and earnings are higher during
peak holiday periods and from Christmas through Easter (the first and fourth
quarters of the calendar year). Estimated gross profit rates were used to
determine costs of sales for the three months ended March 31, 1997 and 1998.
NOTE 2
Weighted average common shares outstanding used in the calculation of
basic earnings per share of the three months ended March 31, 1997 and 1998
totaled 1,713,636 and 4,492,576, respectively. Common shares used in the
calculation of diluted earnings per share for the three months ended March 31,
1997 and 1998 were 1,713,636 and 4,751,797, respectively. The difference in the
number of shares for 1998 is attributable to dilutive stock options and warrants
of 259,221.
NOTE 3
Prior to completion of the Company's initial public offering (the
"Offering") on July 11, 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 provision for income taxes included in the accompanying financial
statements of income for the three months ended March 31, 1997 is a pro forma
provision based on an estimated effective tax rate of 35% presented as if the
Company was required to pay income taxes for the period. The income tax
provision for the three months ended March 31, 1998 is based on an estimated
actual tax rate of 40%.
NOTE 4
At March 31, 1998, the Company operated 30 free-standing retail
pharmacies, all of which were acquired from third parties in purchase
transactions. Such acquisitions have each been structured as asset purchases
and generally have included inventories, store fixtures and the assumption of
store operating lease arrangements. The acquisitions generally have been
financed by debt to the sellers and/or an inventory supplier. A summary of
acquisitions for the three months ended March 31, 1997 and 1998 follows:
<TABLE>
ASSETS ACQUIRED
--------------------------------------
ACCOUNTS
THREE MONTHS RECEIVABLE
ENDED STORES PURCHASE AND DEBT COMMON
MARCH 31 ACQUIRED PRICE INVENTORIES INTANGIBLES EQUIPMENT INCURRED STOCK ISSUED
-------- -------- ----- ----------- ----------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 3 $ 998,642 $ 482,260 $ 390,000 $126,382 $ 998,642 --
1998 6 3,027,311 1,279,553 1,413,635 334,123 1,786,288 $290,000
</TABLE>
8
<PAGE>
The following unaudited pro forma results of operations data gives
effect to the acquisitions completed during the three months ended March 31,
1997 and 1998 as if the transactions had been consummated as of January 1, 1997.
The unaudited pro forma results of operations data is presented for illustrative
purposes and is not necessarily indicative of the actual results that would have
occurred had the acquisitions been consummated as of January 1, 1997, 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, reductions in employee benefits and
rent expense and income taxes.
<TABLE>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
---- ----
<S> <C> <C>
Unaudited pro forma information:
Net revenues $11,034,837 $11,802,915
Net income $ 269,606 $ 346,047
Basic earnings per share $ .10 $ .08
Diluted earnings per share $ .10 $ .07
</TABLE>
In April and May 1998, the Company acquired from third parties in
purchase transactions one home healthcare agency, and one intravenous operation
and closed door institutional pharmacy. The total purchase price of $360,000
has been preliminarily allocated to inventories ($20,000), property and
equipment ($235,000), intangibles ($60,000) and accounts receivable ($45,000).
The purchases were financed by the issuance of shares of common stock (valued at
$192,500) and cash of $167,500.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion and analysis reviews the operating results of
the Company for the three months ended March 31, 1998 and compares those results
to the comparable period of 1997. Certain statements contained in this
discussion are not based on historical facts, but are forward-looking statements
that are based upon numerous assumptions about future conditions which may
ultimately prove to be inaccurate and actual events and results may materially
differ from anticipated results described in such statements. The Company's
ability to achieve such results is subject to certain risks and uncertainties,
such as those inherent generally in the retail pharmacy industry and the impact
of competition, pricing and changing market conditions. The Company disclaims,
however, any intent or obligation to update these forward-looking statements.
As a result, the reader is cautioned not to place reliance on these
forward-looking statements.
The Company's principal business strategy since commencing operations in
1994 has been to establish a chain of retail pharmacies through the acquisition
of free standing full-line retail pharmacies and related businesses. In
evaluating a retail pharmacy for potential acquisition, the Company (i)
evaluates the target store's profits and losses for preceding years; (ii)
reviews the store's income tax returns for preceding years; (iii) reviews
computer-generated prescription reports showing historical information including
prescriptions sold, average price of each prescription, gross margins and trends
in prescription sales; (iv) analyzes the store's location and competition in the
immediate area; (v) reviews the store's lease agreement, if any; and (vi)
assesses targeted areas for growth patterns and trends. Based on the Company's
analysis of the foregoing items, the Company prepares an offer to purchase the
particular store. To assess the reasonableness of the seller's purchase price,
the Company considers the anticipated rate of return, payback period and the
availability and terms of seller financing, it being generally desired that 50%
of the purchase price be seller-financed with the balance split between cash and
other consideration such as Company stock.
During the three months ended March 31, 1997 and 1998, the Company
acquired three and six retail pharmacies, respectively. The primary measurement
of the effect of acquisitions on the Company's operating performance is the
number of store operating months, which is the number of months all stores were
owned by the Company during the relevant measuring period. Acquisitions are
expected to continue as the most significant factor in the Company's growth
strategy. Since March 31, 1998, the Company has acquired a home healthcare
agency in McKinney, Texas and an intravenous operation and closed door
institutional pharmacy in Brookfield, Missouri. The financial information for
these two operations is not included in the financial statements presented in
this Quarterly Report on Form 10-QSB.
Currently, the Company's primary source of revenue is the sale of
prescription drugs. During the three months ended March 31, 1997, sales of
prescription drugs generated 79.4% of the Company's net sales; during the three
months ended March 31, 1998, prescription drugs generated 76.4% of net sales.
Management expects the Company's prescription drug business to increase on an
annual basis as a result of the demographic trends towards an aging population
and the continued development of new pharmaceutical products. However, the
Company anticipates that such sales will decrease as a percentage of the
Company's overall sales and gross margins as the Company expands its home
healthcare and other non-pharmaceutical sales and services which have
historically generated higher margins.
The Company's sales and profits are higher during peak holiday periods
and from Christmas through Easter. Sales of health-related products peak during
seasonal outbreaks of cough and cold/flu viruses, which typically occur during
the winter and spring. Accordingly, sales and profits are typically highest in
the fourth quarter and the first quarter of the ensuing year.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
income statement data for the periods indicated:
<TABLE>
THREE MONTHS ENDED
MARCH 31,
---------
1997 1998
---- ----
<S> <C> <C>
INCOME STATEMENT DATA
NET REVENUES:
Prescription drugs sales 79.4% 76.4%
Other sales and services 20.6% 23.6%
----- -----
Total net revenues 100.0% 100.0%
----- -----
----- -----
COSTS AND EXPENSES:
Cost of sales -- prescription drugs(1) 69.2% 73.3%
Cost of sales -- other(2) 61.7% 55.2%
Selling, general and administrative expenses(3) 25.9% 25.8%
Depreciation and amortization(3) 1.1% 1.2%
Interest expense net(3) 1.0% .4%
Income before provision for income taxes(3) 4.3% 3.6%
Net Income (3) 2.8% 2.1%
</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.
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, the amortization of intangible
assets is not expected to have a significant effect on the Company's future
results of operations.
NET SALES
The Company's total net revenues increased $7,709,002 or 151%, to
$12,822,249 for the three months ended March 31, 1998 compared to $5,113,247 for
the three months ended March 31, 1997. The increase was attributable primarily
to the increase in store operating months from 36 in the first three months of
1997 to 81 in the first three months of 1998.
The following tables show the Company's prescription drug gross margins
and total sales margins for the three months ended March 31, 1997 and 1998:
<TABLE>
GROSS MARGINS ON GROSS MARGINS ON
PRESCRIPTION DRUG SALES TOTAL SALES
----------------------- ----------------------
THREE MONTHS ENDED MARCH 31, AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ---------------------------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C>
1998 $2,681,280 26.7% $3,971,856 31.0%
1997 $1,251,058 30.8% $1,654,743 32.4%
</TABLE>
11
<PAGE>
The decrease in the gross margin on prescription drug sales from 1997 to
1998 was primarily the result of an increase in third-party sales, which have
lower margins and the acquisition of new stores which historically have had
lower margins than those of the Company.
Sales of prescription drugs decreased from 79.4% of total revenues for
the three months ended March 31, 1997 to 76.4% of total revenues for three
months ended March 31, 1998. The Company expects that prescription drug revenues
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
$4,799,200 in the first three months of 1997 to $5,447,200 in the first three
months of 1998. Management believes that the increase of 13.5% is primarily the
result of increased advertising and promotions as well as an enhanced product
mix.
COSTS AND EXPENSES
Cost of sales increased $5,391,889 or 156%, from $3,458,504 in the three
months ended March 31, 1997 as compared to $8,850,393 in the three months ended
March 31, 1998. This increase is primarily the result of increased sales volume
resulting from the increased number of store operating months.
Cost of sales as a percentage of total net sales increased 1.4% from
67.6% in the three months ended March 31, 1997 to 69.0% in the three months
ended March 31, 1998. This increase is primarily the result of an increase
in third party prescriptions, offset by the effects of management's continual
monitoring and adjustment of prices to the consumer and the addition of
non-pharmaceutical sales and services with lower cost of sales.
Selling, general and administrative expenses increased from
$1,322,381 in the three months ended March 31, 1997 to $3,310,284 in the
three months ended March 31, 1998. Such expenses, expressed as a percentage
of net revenues, were 25.9% and 25.8% for the three months ended March 31,
1997 and 1998, respectively. The amount increased principally due to
increased store count and resulting increased store operating months. The
percentage decrease of 0.1% is primarily due to efficiencies achieved as
revenues increase.
Interest expense was $53,531 in the first three months of 1997 compared
to $103,762 during the first three months of 1998. The increase in interest
expense resulted primarily from the increase in the Company's indebtedness
associated with the Company's acquisitions.
Interest income was $393 in the first three months of 1997 compared to
$50,832 in the first three months of 1998.
EARNINGS
Net income for the first three months of 1998 rose to $275,131 from
$143,528 in the comparable period of 1997; an increase of 91.7%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the three months ended March
31, 1998 was $603,841 as compared to net cash provided of $253,939 for the three
months ended March 31, 1997. Increases in accounts receivable and inventories,
which were partially offset by an increase in accounts payable, were the primary
reasons for the increased usage of cash.
12
<PAGE>
Net cash used in investing activities was $7,819 and $1,086,505 for the
three months ended March 31, 1997 and 1998, respectively. The principal cause
of this difference was the increase in the number of stores acquired by the
Company during the three months ended March 31, 1998.
Net cash decreased $1,695,800 during the three months ended March 31,
1998 from $4,084,088 at December 31, 1997 to $2,388,288 at March 31, 1998.
On April 30, 1998, the Company obtained a commitment from McKesson
Corporation ("McKesson") to provide certain credit facilities (the "Credit
Facilities") aggregating up to $33 million for financing the Company's
acquisitions, working capital and general corporate purposes. McKesson's
obligation to provide the Credit Facilities, which will include a term loan, a
factoring facility for eligible on-line adjudicated third-party receivables and
a revolving credit facility, is subject to the parties execution of definitive
credit agreements which, among other things, will require the Company to meet
certain restrictive ratios and covenants and to provide adequate collateral.
Management believes the Company's operations will not be adversely impacted by
these restrictive ratios and covenants. In addition, the Credit Facilities are
also contingent on the Company's use of McKesson as a primary supplier and, in
accordance with such requirement, on April 30, 1998, the Company and McKesson
entered into a Supply Agreement (the "McKesson Supply Agreement") which is
described in Item 5, below.
Management expects that the proceeds generated from income from
operations, seller-financing of acquisitions, the Credit Facilities and possible
future equity offerings will be sufficient to support the Company's current
expansion schedule and ongoing acquisition activities for the next 12 months,
although there can be no assurance that such proceeds will be adequate to
support the Company's acquisitions during such period.
In addition, management expects to convert, during the next 12 to 18
months, between two and three of its existing stores to "healthcare centers,"
although there can be no assurance that all or any part of such conversions will
be effected. In the event such conversions are undertaken, management expects
to incur a minimum of $20,000 to $40,000 in conversion costs per store
converted. The costs of such conversion are expected to be funded from
operations.
YEAR 2000
The Company is in the process of conducting a Year 2000 compliance
assessment of its information technology systems. The Year 2000 issue relates
to the ability of date-sensitive software to properly recognize the year 2000 in
calculating and processing computer system data. The Company has determined
that some existing software will need to be modified. Modifications to existing
software are expected to be completed well in advance of 2000. The Company
anticipates that timely completion of these modifications will mitigate the Year
2000 issue internally.
The Company has not determined the potential impact of the year 2000
issue on its significant vendors or suppliers at this time. Because third
party failures could have a material impact on the Company's ability to conduct
business, plans are being developed to address the Year 2000 issue with these
third parties. The Company anticipates completing this assessment process
during 1998. Based upon current expenditures and estimates, the costs of
addressing the Year 2000 issue are not expected to have a material impact on
future operating results or financial position.
13
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
Though not significant, inflation continues to cause increases in
product, occupancy and operating expenses, as well as the cost of acquiring
capital assets. The effect of higher costs is minimized by achieving operating
efficiencies and passing vendor price increases along to the consumers.
FACTORS AFFECTING OPERATIONS
DEPENDENCE ON ACQUISITIONS FOR GROWTH. The Company has grown rapidly in
recent periods and intends to continue to pursue an aggressive growth strategy.
The Company's growth strategy depends upon its ability to continue to acquire,
consolidate and operate existing free-standing pharmacies and related businesses
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, and may be able to pay
higher acquisition prices, than the Company. To the extent the Company is
unable to acquire suitable retail pharmacies, or to integrate such acquisitions
successfully, its ability to expand its business would be reduced significantly.
SALES TO THIRD-PARTY PAYORS. A growing percentage of the Company's
prescription drug sales has been accounted for by sales to customers who are
covered by third-party payment programs. Although contracts with third-party
payors may increase the volume of prescription sales and gross profits,
third-party payors typically negotiate lower prescription prices than those
of non third-party payors. Accordingly, there has been downward pressure on
gross profit margins on sales of prescription drugs which is expected to
continue in future periods.
RELIANCE ON MEDICARE AND MEDICAID REIMBURSEMENTS. Substantially all of
the Company's home healthcare revenues are attributable to third-party payors,
including Medicare and Medicaid, private insurers, managed care plans and HMOs.
The amounts received from government programs and private third-party payors are
dependent upon the specific benefits included under the program or the patient's
insurance policies. Any substantial delays in reimbursement or significant
reductions in the coverage or payment rates of third-party payors, or from
patients enrolled in the Medicare or Medicaid programs, would have a material
adverse effect on the Company's revenues and profitability.
EXPANSION. The Company's expansion will require the implementation and
integration of enhanced operational and financial systems and additional
management, operational and financial resources. Failure to implement and
integrate these systems and add these resources could have a material adverse
effect on the Company's results of operations and financial condition. There can
be no assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its growth. While
the Company experienced growth in net revenues and net income in 1996 and 1997,
there can be no assurance that the Company will continue to experience growth
in, or maintain the present level of, net sales or net earnings.
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.
14
<PAGE>
REGULATION OF HOME HEALTHCARE SERVICES. The Company's home healthcare
business is subject to extensive Federal and state regulation. In addition, the
requirements that the Company must satisfy to conduct its businesses vary from
state to state. Changes in the law or new interpretations of existing laws
could have a material effect on permissible activities of the Company, the
relative costs associated with doing business and the amount of reimbursement
for the Company's products and services paid by government and other third-party
payors.
MALPRACTICE LIABILITY. The provision of home healthcare services
entails an inherent risk of claims of medical and professional malpractice
liability. The Company may be named as a defendant in such malpractice
lawsuits, and is subject to the attendant risk of substantial damage awards.
While the Company believes it has adequate professional and medical malpractice
liability insurance coverage, there can be no assurance that a future claim or
claims will not be successful or if successful will not exceed the limits of
available insurance coverage or that such coverage will continue to be available
at acceptable costs and on favorable terms.
COMPETITION. The retail pharmacy and home healthcare businesses are
highly competitive. In each of its markets, the Company competes with one or
more national, regional and local retail pharmacy chains, independent retail
pharmacies, deep discount retail pharmacies, supermarkets, discount
department stores, mass merchandisers and other retail stores and mail order
operations. Similarly, the Company's stores offering home healthcare
services will compete with other larger providers of home healthcare services
including chain operations and independent single unit stores which are more
established in that market and which offer more extensive home healthcare
services than the Company. Most of the Company's competitors in the retail
pharmacy and home healthcare markets have financial resources that are
substantially greater than those of the Company. There can be no assurance
the Company will be able to successfully compete with its competitors in the
retail pharmacy and/or home healthcare industry.
GEOGRAPHIC CONCENTRATION. Currently, 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 the Company's initial public offering of the Company's
common stock, par value $.01 per share (the "Common Stock") which closed July
11, 1997 (the "Offering") and the private placement of the Common Stock which
closed October 23, 1997, combined with operating revenues and the Credit
Facilities 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. During the three months ended March 31,
1998, the Company purchased approximately 90% of its inventory from Bergen
Brunswig Drug Co. ("Bergen Brunswig").
15
<PAGE>
Bergen Brunswig also provided the Company with order entry machines, shelf
labels and other supplies used in connection with the Company's purchase and
sale of such inventory. On April 30, 1998, the Company entered into the
McKesson Supply Agreement pursuant to which McKesson will replace Bergen
Brunswig as the Company's primary supplier. 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
McKesson was terminated, there can be no assurance that the termination of
such relationship would not adversely affect the Company's business. See
Item 5. Other Information - Change in Primary Supplier.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company's
results of operations depend significantly upon the net sales generated during
the first and fourth quarters, and any decrease in net sales for such periods
could have a material adverse effect upon the Company's profitability. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not and will not necessarily be meaningful, and should not be
relied upon as an indication of future performance.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES. On February 1, 1998, the
Company issued to a corporation 13,206 unregistered shares of Common Stock in
partial consideration of its acquisition of a store located in Colorado. On
February 28, 1998, the Company issued to a corporation 5,252 unregistered
shares of Common Stock in partial consideration of its acquisition of a store
located in Missouri. On March 7, 1998, the Company issued to a corporation
4,115 unregistered shares of Common Stock in partial consideration of its
acquisition of a store located in Texas. On March 30, 1998, the Company
issued to a corporation 8,709 unregistered shares of Common Stock in partial
consideration of its acquisition of a store located in Arizona. The Company
claimed exemption from registration of such shares under Section 4(2) of the
Securities Act of 1933 on the basis that such issuances did not involve any
public offering.
On February 11, 1998, the Company issued to an individual 2,222
unregistered shares of Common Stock in connection with the conversion of $20,000
of long-term debt owed by the Company in connection with the acquisition of
substantially all of the assets of Mart Super Drugs, a Missouri partnership.
The Company claimed exemption from registration of such shares under Section
4(2) of the Securities Act of 1933 on the basis that such issuance did not
involve any public offering.
ITEM 5. OTHER INFORMATION.
CHANGE IN PRIMARY SUPPLIER. On April 30, 1998, the Company entered into
the McKesson Supply Agreement pursuant to which McKesson will supply the
Company with prescription drugs, health and beauty care products and durable
medical products for a term of five years beginning June 1, 1998. Management
believes that the McKesson Supply Agreement which among other things, provides a
declining cost of sales based on volume, will enable the Company to remain
competitive.
ACQUISITIONS. As indicated in the table below, during the period from
January 1, 1998 to the date of filing of this Quarterly Report on Form 10-QSB,
the Company acquired substantially all of the assets of seven separate
pharmacies located throughout Arizona, Colorado, Missouri and Texas, a HME
operation located in Colorado, a home healthcare agency located in Texas, and an
intravenous operation and closed door pharmacy located in Missouri. None of the
referenced acquisitions exceeded 10% of the Company's total
16
<PAGE>
assets or involved a "significant" business; accordingly, the financial
statements of such businesses have not been filed herein or on any Current
Report on Form 8-K.
<TABLE>
DATE OF ACQUISITION PHARMACY NAME STATE
- ------------------- ------------- -----
<S> <C> <C>
1/1/98 Health Call Equipment Rental Canon City, Colorado
1/12/98 Conoly-Herry Drugs, Inc. Floresville, Texas
1/31/98 Tom and Jim Pharmacy, Inc. d/b/a
Canon Pharmacy Canon City, Colorado
2/1/98 Lemtko, Inc. d/b/a Highlands Ranch
Pharmacy and Southside Medical, Inc. Highlands Ranch, Colorado
2/28/98 Steelville Drugs, Inc. Steelville, Missouri
3/7/98 Hesser Drug Co. d/b/a Towne Pharmacy Ennis, Texas
3/28/98 Belen Sav-On Drug, Inc. Belen, New Mexico
3/30/98 St. Johns Drug Co. St. Johns, Arizona
4/13/98 Community Home Care McKinney, Texas
5/1/98 Gardner Pharmacy Services, Inc. Brookfield, Missouri
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------
<S> <C>
10.1 Supply Agreement dated April 30, 1998 by and between HORIZON
Pharmacies, Inc. and McKesson Corporation (filed electronically
herewith).
10.2 Term Sheet dated April 30, 1998 by and between HORIZON Pharmacies,
Inc. and McKesson Corporation (filed electronically herewith).
Omitted from this agreement, as filed, are the exhibits thereto.
The Company will furnish supplementally a copy of any such omitted
exhibits to the Commission upon request.
27.1 Financial Data Schedule (filed electronically herewith).
</TABLE>
(b) Reports on Form 8-K
During the three months ended March 31, 1998, the Company filed the
following Current Reports on Form 8-K:
<TABLE>
REPORT DATE DATE FILED ITEM REPORTED FINANCIAL STATEMENTS
----------- ---------- -------------- --------------------
<S> <C> <C> <C>
1/1/98 1/7/98 Item 2 - Acquisition or Disposition of Assets No
1/29/98 2/12/98 Item 2 - Acquisition or Disposition of Assets No
12/19/97 2/19/98 Item 7 - Financial Statements and Exhibits Yes
2/28/98 3/13/98 Item 2 - Acquisition or Disposition of Assets No
</TABLE>
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HORIZON PHARMACIES, INC.,
a Texas corporation
Date: May 14, 1998 /s/ Ricky D. McCord
---------------------------------------
Ricky D. McCord
President, Chief Executive Officer
Date: May 14, 1998 /s/ John N. Stogner
---------------------------------------
John N. Stogner
Chief Financial Officer
18
<PAGE>
EXHIBIT 10.1
CONFIDENTIAL
SUPPLY AGREEMENT
This Supply Agreement dated this 30th day of April, 1998, between McKesson
U.S. Health Care, a division of McKesson Corporation ("McKesson") and Horizon
Pharmacies Inc. ("Horizon") shall be to establish a five (5) year program for
the supply of prescription drugs and other health and beauty care products by
McKesson to retail pharmacies owned or operated by Horizon (referred to
herein as "Pharmacies" or "Stores"). The parties hereto agree as follows:
1. MERCHANDISE
For purposes hereof, "Merchandise" shall comprise all items normally
stocked or drop-shipped by McKesson Drug Distribution Centers servicing
the 48 contiguous states, including prescription drugs, OTC drugs, health
and beauty aids and sundries. This Agreement does not apply to
merchandise sold to Horizon by McKesson Corporation divisions or
subsidiaries other than McKesson Drug Company.
2. TERM
The term of this Agreement shall be for the five year period commencing
on April 30, 1998, and during such period Horizon agrees to designate
McKesson as its primary supplier of prescription drugs and to purchase
from McKesson substantially all of the requirements of its retail
pharmacies for prescription drugs and other items covered hereunder.
3. ORDERING AND DELIVERY
A. Prescription products will be delivered to Horizon pharmacies up to
five (5) times per week, on mutually agreed upon days. Orders
transmitted by 8:00 p.m. local time Sunday through Thursday will be
delivered the next day, with every reasonable attempt to deliver by
noon (of next day). Currently Horizon has three stores requiring a
Saturday (Rx only and limited items) delivery (Store #21, #23, and
#29). In order to receive a Saturday delivery, orders for Stores #21
and #29 will be transmitted by no later than noon on Friday. Store
#23 will transmit no later than 2:00 p.m., Friday. Although Saturday
delivery is not a common practice, both parties mutually agree to
discuss future needs as Horizon acquires new stores. McKesson agrees
to maintain a [redacted - Confidential Treatment] service level to
Horizon Pharmacies chainwide on an aggregate basis for prescription
Merchandise, tested on a monthly basis. Service level is defined as
total lines ordered (partial lines included) less total omit lines
(ordered but not filled). Items that manufacturers are unable to
supply, manufacturer back-orders, product recalls, same item ordered
again within 72 hours, items the manufacturer has discontinued, and
new items with no inventory demand shall be excluded from the service
level calculation.
-1-
<PAGE>
CONFIDENTIAL
B. Non-prescription Merchandise will be delivered to Horizon Pharmacies
up to 5 days per week. McKesson agrees to maintain a [redacted -
Confidential Treatment] service level to Horizon Pharmacies
chainwide on an aggregate basis for non-prescription Merchandise.
Service level is defined as total lines ordered (partial lines
included) less total omit lines (ordered but not filled). Items that
manufacturers are unable to supply, manufacturer back-orders,
product recalls, same item ordered again within 72 hours, items the
manufacturer has discontinued, and new items with no inventory
demand shall be excluded from the service level calculation.
C. McKesson will provide daily updates of AWP and acquisition cost to
the National Data Corporation pharmacy system for pharmaceutical
Merchandise. In addition, McKesson will provide retail and
acquisition cost fields for non-pharmaceutical Merchandise to the
Horizon system no less often than weekly.
4. PAYMENT TERMS
A. The payment terms options for the Merchandise covered by this
Agreement are as follows: Horizon Pharmacies may elect one of the
following options for payment terms for the Merchandise covered by
this Agreement, and shall have the right to elect to switch to the
other options during the term of this Agreement after giving a 30
day written notice. Any changes to payment terms will be made at the
beginning of a payment cycle.
STANDARD SEMI-MONTHLY PAYMENT TERMS
Payment for Merchandise delivered to Horizon retail pharmacies shall
be paid by Horizon as follows: Invoices dated from the 1st to the
15th of the month are due and payable on the 25th day of the same
month. Invoices dated from the 16th to the end of the month are due
and payable on the 10th of the following month.
30-DAY EXTENDED PAYMENT TERMS
Invoices dated from the 1st to the end of the month are due and
payable on the 10th day of the following month.
45 DAY EXTENDED PAYMENT TERMS
Invoices dated from the 1st of the month to the end of same month
are due and payable on the 25th day of the following month.
-2-
<PAGE>
CONFIDENTIAL
PREPAYMENT INCENTIVES
Prepayment Terms (30 day, 15 day and 7 day): The prepayment is a
one-time payment equivalent to thirty (30) or fifteen (15) or seven
(7) days worth of purchases (based on the most recent three-month
purchase history) which is held as a deposit by McKesson. The amount
of the required deposit will be adjusted quarterly, and may be
adjusted as often as monthly, to cover increases or decreases in
purchase volume. Following such one-time payment, all purchases are
payable under the Standard Semi-Monthly Payment Terms as described
above.
Horizon shall be entitled to a reduction in the markup set forth in
the cost of goods schedule for prepayment if Horizon elects this
prepayment option. The prepay incentive shall be as follows:
PREPAY INCENTIVE MARKUP REDUCTION
30 Days [redacted - Confidential Treatment]
15 Days [redacted - Confidential Treatment]
7 Days [redacted - Confidential Treatment]
B. Any payments made after the due date indicated herein shall result
in a [redacted - Confidential Treatment] (or the maximum amount
permissible under applicable law, if lower) increase in the purchase
price of the Merchandise. A [redacted - Confidential Treatment]
percent ([redacted Confidential Treatment]%) service charge
(or the maximum amount permissible under applicable law, if
lower) will be imposed semi-monthly on all balances delinquent
more than [redacted - Confidential Treatment] days. If payment
is due on a Saturday or Sunday, the payment due date will be
the Monday immediately following any such Saturday or Sunday.
C. Horizon hereby grants to McKesson a purchase money security interest
covering all Merchandise sold and shipped to Horizon by McKesson to
secure repayment of amounts due McKesson under this Agreement. Such
security interest shall be subject and inferior to security
interests covering inventory of specific pharmacies granted by
Horizon in favor of prior owners of such pharmacies who have
provided Horizon with secured seller financing in the past or who
provide such secured seller financing in the future for new
pharmacies acquired by Horizon. The security interest of McKesson
shall be subordinate to seller financing security interests
notwithstanding the filing dates of financing statements or any
rights under applicable law which McKesson may otherwise have as the
holder of a purchase money security interest. Horizon agrees to
execute from time to time such financing statements as McKesson may
request for the purpose of perfecting McKesson's security interest.
-3-
<PAGE>
CONFIDENTIAL
D. This Agreement is conditioned upon Horizon not being in default
under the terms of the Credit Agreement throughout the term hereof
and to that end, Horizon agrees to promptly substantiate in writing,
at McKesson's request, the existence of such condition with annual
audited and quarterly unaudited financial statements and any other
supporting information required by McKesson.
E. McKesson reserves the right, in its sole discretion, to change a
payment term (including imposing the requirement of cash payment
upon delivery) or limit total credit, if (i) McKesson concludes
there has been a material adverse change in Horizon's financial
condition or an unsatisfactory payment performance; or (ii) Horizon
is in default under the terms of the Credit Agreement. Upon the
occurrence of any of the events of default specified above in (i) or
(ii) of this Section, McKesson shall allow a five (5) day period from
receipt of written notice of default to cure the default before
changing the payment terms. During that period, Horizon must adhere
to its normal buying patterns. If the default is not cured after five
days, McKesson will change the payment term to limit its risk, but
will continue to ship product for thirty (30) days before
suspending or discontinuing shipment of any additional orders to
Horizon pharmacies.
5. COST OF GOODS
A. In consideration for the Cost of Goods specified herein, Horizon
expressly commits to purchase throughout the term of this Agreement
(i) no less than [redacted - Confidential Treatment] percent
(redacted %) of its pharmaceutical Merchandise from McKesson, (ii)
no less than [redacted - Confidential Treatment] percent (redacted
%) of its OTC drug, HBA, and DME Merchandise from McKesson, and
(iii) not less than a monthly average of [redacted - Confidential
Treatment] percent (redacted %) (net of returns, allowances and
rebates) during any three month period of this Agreement in Direct
Store Pharmacy Delivery ("D.S.D.") volume of Merchandise from
McKesson ("Volume Purchase Commitment"). Unless otherwise
indicated, Horizon shall at the time of implementation of service
under this Agreement ("Implementation Date") be charged, in
accordance with its designated payment terms, the applicable markup
specified below for such Purchase Volume Commitment amount.
Horizon's Cost of Goods thereafter shall be subject to quarterly
review by McKesson and will be adjusted, if and to the extent
necessary, to reflect Horizon's actual chain-wide monthly average
purchase volume. If at any time after the first year of this
Agreement Horizon has not achieved the appropriate pro rata
purchase volume based on its Volume Purchase Commitment, McKesson,
in addition to the other rights and remedies available to it
hereunder, reserves the right in its sole discretion to redetermine
the Cost of Goods pricing specified below.
B. Horizon hereby further agrees to maintain a minimum chain-wide
monthly average volume per retail pharmacy operation location of
[redacted - Confidential Treatment] in D.S.D. prescription and OTC
product purchases (net of returns, allowances and rebates) from
McKesson throughout the term of this Agreement. In the event that
Horizon
-4-
<PAGE>
CONFIDENTIAL
fails to maintain this minimum chainwide average volume of
$ [redacted-Confidential Treatment] in net D.S.D. prescription drug
and OTC product purchases per retail pharmacy operation location per
month from McKesson during any three month period of this Agreement
[excluding the first three (3) months of this Agreement], all Cost
of Goods mark-ups hereunder shall be increased by
[redacted - Confidential Treatment] during each subsequent three (3)
month period until such time as the minimum chainwide net D.S.D.
prescription drug and OTC product purchases volume requirement of
$ [redacted-Confidential Treatment] is met for three (3) consecutive
months.
C. Subject to the terms and conditions of this Section, the Cost of
Goods for Merchandise delivered to Horizon shall be Cost plus the
applicable markup as specified below. [redacted - Confidential
Treatment]
D. Subject to the terms and conditions herein, the Cost of Goods hereunder
shall be in accordance with the pricing schedule set forth below.
<TABLE>
<CAPTION>
CHAIN-WIDE MONTHLY VOLUME FOR
[REDACTED - CONFIDENTIAL TREATMENT] PAYMENT COST PLUS MARKUP
TERMS (NET OF RETURNS, ALLOWANCES AND REBATES) RX OTC
---------------------------------------------- ------- -------------------
<S> <C> <C>
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
</TABLE>
<TABLE>
<CAPTION>
CHAIN-WIDE MONTHLY VOLUME FOR
[REDACTED - CONFIDENTIAL TREATMENT] PAYMENT COST PLUS MARKUP
TERMS (NET OF RETURNS, ALLOWANCES AND REBATES) RX OTC
----------------------------------------------------- ------- -------------------
<S> <C> <C>
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
-5-
<PAGE>
CONFIDENTIAL
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
</TABLE>
<TABLE>
<CAPTION>
CHAIN-WIDE MONTHLY VOLUME FOR
[REDACTED - CONFIDENTIAL TREATMENT] PAYMENT COST PLUS MARKUP
TERMS (NET OF RETURNS, ALLOWANCES AND REBATES) RX OTC
---------------------------------------------- ------- -------------------
<S> <C> <C>
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
</TABLE>
NET BILLED ITEMS: The purchase price for selected Merchandise,
including but not limited to the following product lines, will be
net-billed and not covered by the above-specified Cost of Goods
pricing: [redacted - Confidential Treatment]
E. All Horizon pharmacies will be invoiced at Cost plus [redacted -
Confidential Treatment] for all Merchandise except net-billed items.
A rebate will be calculated based on the difference between such
invoiced amount and the then applicable Cost of Goods pricing as
determined by the Horizon's respective chainwide monthly Volume
Level and current payment terms. Said rebate amount will be issued
monthly via check to Horizon's headquarters by the eighteenth (18th)
of the following month.
F. If Horizon Pharmacies elects not to participate in the McKesson
Select Generic Program as specified in Section 10 of this Agreement
or discontinues its participation in the McKesson Select Generics
Program at any time during the term of this Agreement, an
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CONFIDENTIAL
increase in the Cost of Goods markups set forth in Section 5.D. above will
apply in accordance with the following schedule:
<TABLE>
<CAPTION>
Applicable Payment Terms Markup Increase
------------------------ ---------------
<S> <C>
45 Days [redacted - Confidential Treatment]%
30 Days [redacted - Confidential Treatment]%
15 Days [redacted - Confidential Treatment]%
</TABLE>
Such increase will become effective immediately upon the occurrence of
either the above-referenced events regarding participation in the
McKesson Select Generics Program.
G. It is further understood and agreed by the parties that if:
i) Horizon fails to maintain a minimum chain-wide average volume
of [redacted - Confidential Treatment] in D.S.D. prescription
drug and OTC product purchases (net of returns, allowances and
rebates) per month from McKesson during any consecutive three
(3) months of this Agreement (excluding the first three (3)
month period of this Agreement); or
ii) Horizon fails to maintain a minimum average volume per Store
per month of [redacted - Confidential Treatment] in D.S.D.
prescription drug and OTC product purchases (net of returns,
allowances and rebates) from McKesson during any consecutive
three (3) months of this Agreement (excluding the first (3)
month period of this Agreement),
either such failure shall constitute a non-monetary default under
this Agreement by Horizon as contemplated in Section 13.A.
H. Prior to making any adjustments to amounts payable by Horizon
pursuant to Section 5.D. as a result of different volumes of
Merchandise purchased, McKesson will first give written notice to
Horizon of the proposed change and provide sufficiently detailed
backup information to Horizon to substantiate the proposed change.
Horizon will have an opportunity to review the information provided
by McKesson to verify the accuracy of the calculations, to request
additional information and to discuss the matter with McKesson
personnel responsible for such information, and in any event, shall
have no less than thirty (30) days to complete such verification.
6. CONVERSION ALLOWANCE
In consideration for Horizon's Volume Purchase Commitment specified
above, McKesson agrees to pay to Horizon a conversion allowance
("Conversion Allowance") based on the following terms and conditions:
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CONFIDENTIAL
A. The Conversion Allowance to be paid under this Agreement shall be
[redacted - Confidential Treatment]% of the [redacted - Confidential
Treatment] as hereinafter defined. Such Run Rate shall equal the
amount of Horizon's [redacted - Confidential Treatment] purchases,
net of returns, allowances, rebates and any net-billed items, from
McKesson following the Implementation Date of this Agreement. The
[redacted - Confidential Treatment] shall be defined as those
purchases hereunder beginning [redacted - Confidential Treatment].
This one-time payment will occur thirty (30) days following
expiration of the [redacted - Confidential Treatment] set forth
above.
B. If Horizon has not met its Purchase Volume Commitment as specified
in Section 5.A. above at the time of either expiration of this
Agreement or termination of this Agreement by either party, Horizon
shall repay to McKesson in accordance with the following formula a
pro-rata portion of the Conversion Allowance previously paid
hereunder to Horizon pursuant to Section 6.A. above:
[redacted - Confidential Treatment]
Such repayment amount shall be paid in full by Horizon within five
(5) days of the effective date of such expiration or termination of
this Agreement in immediately available funds, without making any
deductions, offsets, short payments or other unauthorized accounts
payable adjustments. Notwithstanding anything in this Section 6 to
the contrary, Horizon shall have no repayment obligation hereunder
in the event of termination of this Agreement by Horizon due to a
default by McKesson resulting from a material breach of its
obligations that is not cured in accordance with the terms and
conditions set forth in Section 13.A. below.
7. RETURNED GOODS
A. Credits for returned goods from McKesson are divided into four
categories, depending on the reason for the claim. Credits will be
issued for any of the following reasons:
1) Non-merchandise problems, such as shortages and pricing errors;
2) McKesson merchandise received in error;
3) Recalls; and
4) Outdated merchandise (defined as items with less than 6 months
dating)
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CONFIDENTIAL
B. The amount of credit allowed by McKesson will vary as follows:
1) [redacted - Confidential Treatment] credit will be given for:
a) Pricing errors, shipping errors and billing errors;
b) Shortages (required to be phoned into the Customer Service
Center within 48 hours of receipt of Merchandise);
c) Ordering errors (must be returned within 30 days of receipt);
d) Manufacturer recalls;
e) Items received from McKesson with less than six (6)
months dating; and
f) Merchandise that had concealed damage.
Invoice number is required in each of the above-specified instances,
except recalls, for full credit.
2) [redacted - Confidential Treatment] credit will be given for:
Clean, salable merchandise with at least nine (9) months dating
returned more than 30 days after store receipt.
3) [redacted - Confidential Treatment] credit will be given for:
a) Unsalable merchandise which can be returned to manufacturer,
b) Outdated items (subject to the approved vendor list); and
c) Salable merchandise with price tickets NOT removed.
4) [redacted - Confidential Treatment] credit will be given for:
a) Merchandise damaged in store pharmacies;
b) Merchandise from manufacturers not listed on the approved
vendor list; and
c) Merchandise not purchased from McKesson.
These items will be sent back to the store which initiated the return.
C. [redacted - Confidential Treatment]
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CONFIDENTIAL
8. CUSTOMER SUPPORT CENTER
A. Customer Service Support personnel will be available at the McKesson
Premier Service Center from 8:00 a.m. EST to 8:00 p.m. EST Monday
through Friday. Technical and emergency support is available 24 hours
a day, seven (7) days a week. A Customer Service POD will be assigned
to the Horizon chain of Stores with a key National Account contact as
well.
B. Horizon will be provided the names and telephone numbers of its key
contacts at McKesson as well as the names and telephone numbers of
McKesson's designated support personnel.
C. McKesson will provide the necessary training for Horizons employees
on all programs and services described in this Agreement and provide
personnel to complete the initial store conversion at no charge.
Additionally McKesson will provide assistance for a one-time reset to
coincide with POS installation (this may or may not occur at the same
time as conversion).
9. CONTRACT MANAGEMENT
A. McKesson agrees to service all manufacturers' contracts negotiated by
Horizon, provided such manufacturers are approved suppliers of
McKesson. Merchandise will be supplied at Horizon's negotiated bid
price plus McKesson's applicable markup as described above in the
Cost of Goods section.
B. Horizon's eligibility for participation under a vendor contract must
be authorized by the vendor, before the contract is loaded by
McKesson. Horizon shall be liable for unpaid charge backs resulting
from eligibility issues.
C. In the event that a manufacturer in the case of a Horizon negotiated
contract (i) makes an assignment for the benefit of creditors, files
a petition in bankruptcy, is adjudicated insolvent or bankrupt, or
if a receiver of trustee is appointed with respect to a substantial
part of the vendor's property or a proceeding is commenced against it
which will substantially impair its ability to pay on charge backs or
(ii) otherwise defaults in the payment of charge backs to McKesson,
Horizon shall be invoiced and become liable for the unpaid charge
backs allocable to its purchases from such vendor.
10. GENERIC PHARMACEUTICALS
Horizon agrees that upon commencement of the term of this Agreement to
participate in McKesson's Select Generics Program through its
auto-substitution feature and to thereby designate this program as
Horizon's primary source of generic pharmaceuticals. A
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CONFIDENTIAL
quarterly rebate shall be paid to Horizon in accordance with the
following matrix based on such participation:
<TABLE>
<CAPTION>
CHAIN-WIDE QUARTERLY SELECT
GENERICS VOLUME (NET OF RETURNS, QUARTERLY REBATE % ON
ALLOWANCES AND REBATES) SELECT GENERICS PURCHASES
------------------------------- -------------------------
REBATE UNDER [REDACTED - CONFIDENTIAL REBATE UNDER [REDACTED - CONFIDENTIAL
TREATMENT] PAYMENT TERMS TREATMENT] PAYMENT TERMS
<S> <C> <C>
[redacted - Confidential Treatment] [redacted - Confidential Treatment]00% [redacted - Confidential Treatment]00%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]00% [redacted - Confidential Treatment]00%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]00% [redacted - Confidential Treatment]00%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]00% [redacted - Confidential Treatment]00%
[redacted - Confidential Treatment] [redacted - Confidential Treatment]00% [redacted - Confidential Treatment]00%
</TABLE>
11. REPACKAGED PHARMACEUTICALS
A competitive and comprehensive program will be made available to
Horizon to participate in, at its option, for repackaged pharmaceutical
products. Stores shall be net-billed on McKesson's RxPak line of
repackaged branded pharmaceutical products.
12. SYSTEM SERVICES, EQUIPMENT AND PROGRAMS
The following systems and services will be made available to Horizon
Pharmacy as specified:
REQUIRED:
A. ECONOMOST order system offers the following:
1) Telxon order entry device
2) Customized retail price capabilities
3) Scannable shelf identification labels
4) Item price stickers for pharmaceutical and H.B.C. merchandise
5) Controlled substance report (A detailed listing of all
controlled substances purchased from the servicing McKesson DC.
6) Manufacturer off invoice allowances automatically applied upon
ordering
7) McKesson Advantage. (Monthly publication that lists manufacturer
off invoice allowances, new Rx and OTC merchandise, advertising
allowances, etc.)
Fee is $ [redacted - Confidential Treatment] per month per location.
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<PAGE>
CONFIDENTIAL
OPTIONAL:
A. Valu-Rite offers the following:
1) National identification
2) Extensive line of Valu-Rite private label merchandise
3) Circular advertising (Promotions unlimited)
4) Chain class a contract pricing on Owens Brockway prescription
ware
5) No charge Yellow Page ad under Valu-Rite Pharmacies
6) 1-800 Valu-Rite locator number.
7) Quarterly rebate program ([redacted - Confidential Treatment]
McKesson Select Generics, [redacted - Confidential Treatment]
Private Label Products)
8) National advertising program
9) New neighbor program, and marketing services
10) Prefer Rx-Contract pricing on select branded name pharmaceuticals
11) MAP Zone pricing for each retail pharmacy location.
Fee is $[redacted - Confidential Treatment] per month per location.
B. Microfiche
Microfiche Updated twice per month
Fee is $[redacted - Confidential Treatment] per mo. per location.
C. EconoLink* offers the following:
1) Includes IBM compatible windows based system with color monitor,
printer and modem. Hardware and software maintenance are
included in monthly charge.
2) Customized data base and reports.
3) Contract compliance and best price search
4) Daily automatic price and product updates.
5) On line listing of product availability
6) Order submission via electronic data interchange
7) Quantity acknowledgments (instant purchase order confirmation
with a detailed listing of merchandise filled and out of stock
Fee is $ [redacted - Confidential Treatment] per mo. per location-
Optional.
* One (1) Econolink Host system shall be provided to Horizon's
headquarters, at [redacted - Confidential Treatment]. EconoLink shall
be subject to a separate license agreement between the parties
governing use and maintenance.
D. OmniLink: Terms and conditions for utilization of McKesson's OmniLink
program will be agreed to under separate contract.
-12-
<PAGE>
CONFIDENTIAL
13. DEFAULT AND REMEDIES
A. Failure of either party to make any payments within five (5) days of
when due in accordance with the terms of this Agreement shall
constitute a default. Any breach by either party of a material
non-monetary provision of the Agreement or any other agreement
between Horizon and McKesson (i.e. a provision not requiring the
payment of money), which is capable of being cured and has not been
caused by any action or omission of the other party, shall
constitute a default if not cured to the reasonable satisfaction of
the other party within sixty (60) days after the giving of written
notice of such breach by the non-breaching party. Such written
notice shall specify the nature of the breach and be accompanied by
calculations and other appropriate materials to substantiate the
allegation of breach in order for the alleged breach to be verified
if necessary. Upon default by either party the non-breaching party
may, at its option, terminate the Agreement immediately without
further notice and pursue any remedy available to it under this
Agreement, at law or in equity or any combination thereof.
B. Either party may, on ten (10) days notice, terminate this Agreement:
1) If the other party shall file any petition under any
bankruptcy, reorganization, insolvency or moratorium laws, or
any other law or laws for the relief of or in relation to the
relief of debtors; or
2) If the other party shall file any involuntary petition under
any bankruptcy statute or a receiver or trustee shall be
appointed to take possession of all or substantial part of the
assets of the party which has not been dismissed or terminated
within sixty (60) days of the date of such filing or
appointment, or
3) If the other party shall make a general assignment for the
benefit of creditors or shall become unable or admit in
writing its inability to meet its obligations as they mature;
or
4) If the other party shall institute any proceedings for
liquidation or the winding up of its business other than for
purposes of reorganization, consolidation or merger.
C. In the event of a termination hereunder the following continuing
obligations and liabilities shall survive termination and remain in
full force and effect:
1) Liability for accounts receivable balances or any other
payment due hereunder to the other party at the date of or upon
the occurrence of such termination; and
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<PAGE>
CONFIDENTIAL
2) Obligations imposed on each party under the Proprietary and
Confidentiality Information section set forth below.
14. PROPRIETARY AND CONFIDENTIAL INFORMATION
A. Any and all accounts, records, books, files, and lists regarding any
transaction provided for or contemplated hereunder, shall be
confidential and proprietary to the party creating or generating
such information. This Agreement, and the terms and conditions
hereof, are confidential. The parties expressly agree to maintain
such terms and conditions in confidence, and shall take every
precaution to disclose the contents of this Agreement only to those
employees of each of the parties who have a reasonable need to know
such information.
B. Horizon and McKesson each acknowledge that, in connection with their
respective businesses, they have developed certain operating
manuals, symbols, trademarks, trade names, service marks, trade
secrets, customer lists, procedures, formulas, and other patented,
copyrighted, or legally protected materials which are confidential
and proprietary to each of them.
C. Neither party may disclose the terms of this Agreement during the
term hereof and for an additional period of twenty-four (24) months
following the effective date of expiration or other termination of
this Agreement. Furthermore, except upon the prior written consent
of the other party, neither party may divulge, disclose,
communicate, or use any of the other party's confidential or
proprietary information generally described in Subsection A and B
above, in any manner or for any purpose, including, without
limitation, use in advertising or for promotional materials, except
upon the prior written consent of the other party. A party hereto
may refuse consent to the use of its confidential or proprietary
information for any or no reason. In the event that any such
confidential or proprietary information is used during the course of
this Agreement it shall retain its confidential and proprietary
nature and shall be returned immediately to its owner or destroyed
upon termination of this Agreement. Notwithstanding anything herein
to the contrary, nothing in this subsection shall require either
party to maintain in confidence any information, materials, or data
which is in the public domain, enters the public domain through
no fault of such party, was in possession of the party prior to being
furnished to it by the other, was supplied to the party by a third
party or parties lawfully in possession thereof, which is required
to be disclosed to the Securities and Exchange Commission or other
commission or agency regulating the activities of either party or
which the party is required to divulge pursuant to process of any
judicial or governmental body of competent jurisdiction, provided
that notice of receipt of such process is given to the other.
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<PAGE>
CONFIDENTIAL
15. FORCE MAJEURE
If service from any McKesson distribution center to any Horizon store(s)
is interrupted or delayed because of strike, lockout, labor dispute,
fire or other casualty, or any other reasons beyond the reasonable
control of McKesson, McKesson will take such action as may be reasonably
necessary, without additional cost or expense to Horizon, to maintain
service as mutually agreed upon to affected stores from an alternate
McKesson Distribution Center. Any adverse effects upon Horizon's
performance of this Agreement occurring as a result of the events
described in this section shall not in any way be considered a breach of
this Agreement.
16. NOTICES
All notices pertaining to this Agreement shall be delivered in person,
sent by certified mail, delivered by air courier, or transmitted by
facsimile and confirmed in writing (sent by air courier or certified
mail) to a party at the address or facsimile number shown in this
Section, or such other address or facsimile number as a party may
notify the other party from time to time. Notices delivered in person,
and notices dispatched by facsimile prior to 4:00 p.m. and confirmed,
shall be deemed to be received on the day sent. All other facsimiles
and notices shall be deemed to have been received on the business day
following receipt; provided, however, if such day falls on a weekend or
legal holiday, receipt shall be deemed to occur on the next business
day. Notices may also be transmitted electronically between the
parties, provided that proper arrangements are made in advance to
facilitate such communications and provide for their security and
verification.
IF TO MCKESSON: IF TO HORIZON:
McKesson Corporation Horizon Pharmacies Inc.
809 110th St. 275 W. Princeton Dr.
Arlington, TX 76011 Princeton, TX 75407
ATTENTION: Dennis Milsow ATTENTION: Rick McCord
Vice President Sales President
FAX: (817) 652-7699 FAX: (972) 736-2424
17. MISCELLANEOUS
A. This Agreement embodies the entire agreement between the parties with
regard to the subject matter hereof and supersedes all prior
agreements, understandings and representations with the exception
of any promissory note, security agreement or other credit or
financial related document(s) executed by Horizon or between
Horizon and McKesson. This Agreement may not be modified,
supplemented or extended except by a writing signed by both
parties.
-15-
<PAGE>
CONFIDENTIAL
B. This Agreement supersedes any and all prior McKesson agreements and
discount plans in which any Horizon pharmacy may currently be
participating.
C. Except as provided above in Section 15, neither party shall have any
obligation hereunder for failure or delay of performance due to
fire, shortage of materials or transportation, government acts, or
any other cause beyond its control.
D. Neither party shall have the right to assign this Agreement or any
interest therein without the prior written consent of the other
party, and any such attempted assignment shall be without effect,
except that either party may, without the consent of the other, assign
this Agreement to an affiliate of such party and except that this
provision shall not be applicable to any corporate reorganization
of either party, including but not limited to any merger,
reincorporation or sale of a significant portion of either party's
assets.
E. This Agreement shall be construed in accordance with the State of
California without regard to the provisions of Section 1654 of the
California Civil Code or the rules regarding conflict of laws.
F. If any provisions of this Agreement shall be held invalid under
any applicable law, such invalidity shall not affect any other
provision of this Agreement.
G. The failure of either party to enforce at any time or for any period
of time any one or more of the provisions thereof shall not be
construed to be a waiver of such provisions or of the right of
such party thereafter to enforce each such provision.
H. If any federal, state, or local tax currently or in the future
(e.g. Minnesota Care Tax) is levied upon McKesson in a
jurisdiction where either McKesson or Horizon does business and
such tax relates or applies to the Merchandise and or any
applicable service fees covered by this Agreement (excluding taxes
imposed on McKesson's net income), the Cost of Goods to those
Horizon pharmacies involved will be increased a corresponding
percentage amount.
I. Horizon represents and warrants that similar conditions, including
prices, rebates, terms and delivery, have been made available to
Horizon by wholesale drug competitors of McKesson in the areas
covered by this Agreement.
J. If and to the extent any product discounts, rebates or other
purchasing incentives are earned by or granted to Horizon and paid
by McKesson under this Agreement, then applicable provisions of the
Medicare/Medicaid and state health care fraud and
abuse/antikickback laws and regulations (collectively, "fraud and
abuse laws") may require disclosure of the applicable price
reduction on Horizon's claims or cost reports for reimbursement
from governmental or other third party health care programs or
provider plans. Horizon agrees to comply with all
-16-
<PAGE>
CONFIDENTIAL
applicable provisions of the fraud and abuse laws and to indemnify
and hold McKesson harmless for any failure on its part to do so.
K. Participation hereunder by any of Horizon's pharmacies in
McKesson's Preferred Provider Network may be terminated by McKesson
if such pharmacy fails to comply with the terms and conditions of
this Agreement or the M.P.P.N. Agreement. Membership to these two
Networks are granted as members of McKesson's Valu Rite program and
at Horizon's discretion pharmacies can opt out of individual
managed care plans it so designates. Such membership shall be
discontinued for any Horizon Pharmacy not using McKesson as its
primary wholesaler as defined herein.
L. McKesson shall be entitled to set off any delinquent amount owing
from Horizon to McKesson after either of the five day cure periods
referenced in Sections 4.E. and 13.A. against any amount payable at
such time by McKesson to Horizon, whether arising under this
Agreement or otherwise. For purposes of this Section, Horizon and
McKesson in each case shall include its subsidiaries and affiliates.
M. Whenever possible, each provision of this Agreement shall be
interpreted so as to be effective and valid under applicable law,
but if any provision of this Agreement should be prohibited or
invalid under applicable law, such provision shall be ineffective
to the extent of such prohibition or invalidity without
invalidating the other of such provision or the remaining
provisions of this Agreement. The parties agree to replace any such
invalid provision with a new provision which has the most nearly
similar permissible economic effect.
N. The section headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
O. This Agreement may be executed in any number of counterparts, and
each such counterpart hereof shall be deemed an original
instrument, but all such counterparts together shall constitute one
agreement.
P. In the event Horizon decides to develop its own private label (OTC)
line, McKesson, based on its current understanding of the
contemplated distribution requirements posed by such an arrangement,
agrees to establish a service fee of [redacted - Confidential
Treatment] percent ([redacted - Confidential Treatment]%) [separate
from any amounts due under this Agreement] for stocking and
shipping products covered by the designated Horizon private label.
It is understood and agreed by the parties that this fee would be
subject to an increase adjustment in the event of a material change
in the distribution requirements actually applicable at the time of
implementation of such services. All inventory of such private
label products stored at McKesson Distribution Centers will be
under the complete ownership of Horizon Pharmacies, Inc.
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<PAGE>
CONFIDENTIAL
Q. McKesson and Horizon agree to conduct an annual business review of
the supply arrangement created by this Agreement ("Annual Review")
which shall occur throughout the term hereof during the month
immediately preceding the anniversary of the commencement date of
this Agreement. The purpose of this Annual Review shall be to allow
the parties to discuss then current market conditions or other
competitive considerations which are directly related to the
parties' existing business relationship.
IN WITNESS WHEREOF the parties have caused this Agreement to be duly executed
as of the date and year written below and the persons signing warrant that
they are duly authorized to sign for and on behalf of the respective parties.
This Agreement shall be deemed accepted by McKesson only upon execution by a
designated signatory of McKesson.
HORIZON PHARMACIES INC. McKESSON U.S. HEALTH CARE,
A DIVISION OF McKESSON CORPORATION
By: /s/ Rick McCord By: /s/ William G. Hamik
------------------------------- -------------------------------
Name: Rick McCord Name: William G. Hamik
----------------------------- -----------------------------
(Print or Type) (Print or Type)
Senior Vice President,
Title: President Title: Customer Operations
----------------------------- -----------------------------
Date: 4/30/98 Date: 4/30/98
----------------------------- -----------------------------
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<PAGE>
MCKESSON CORPORATION
One Post Street, 34th Floor
San Francisco, CA 94104
April 30, 1998
Mr. John Stogner
Horizon Pharmacies, Inc.
275 W. Princeton Drive
Princeton, TX 75407
RE: LOAN FACILITIES
Dear John:
Pursuant to our recent discussion, McKesson Corporation ("McKesson")
is pleased to offer to Horizon Pharmacies, Inc. ("Horizon") the various loan
facilities described in Exhibit A attached hereto (the "Facilities") upon the
terms and subject to the conditions set forth herein and therein. Exhibit A
is hereby incorporated herein, and all references to this letter shall be
deemed to include Exhibit A hereto.
In submitting this letter, McKesson is relying on Horizon's
assurances that Horizon has obtained any necessary consent of its current
lenders and/or suppliers to negotiate and entertain the terms of this letter.
Horizon's execution and acceptance of this letter will constitute a
representation by Horizon that it has obtained all necessary consents from
its current lenders and/or suppliers to accept the terms of this letter.
This letter is not meant to encompass all of the terms and
conditions of the Facilities. This letter is intended to outline the
principal points of business understandings concerning the Facilities.
McKesson's commitment hereunder is subject to (a) the execution of a
definitive credit agreement (the "Credit Agreement") and other documentation,
including financial and other covenant definitions, all in form and substance
satisfactory to the McKesson, and (b) no material adverse change in the
operations, business, financial condition, properties or prospects of Horizon
or its subsidiaries having occurred since December 31, 1997.
In consideration of the commitment provided hereunder, Horizon
agrees to indemnify and hold harmless McKesson and its affiliates and
officers, directors, employees, agents, attorneys and advisors for all
claims, damages, liabilities and expenses (including, without limitation,
reasonable fees and disbursements of counsel) incurred by any of them in
connection with this letter, the Facilities, the use by Horizon of the
Facilities or the
<PAGE>
Mr. John Stogner April 30, 1998
Page 2
proceeds thereof, the credit documents or any related documents, instruments
or agreements or any transaction contemplated hereby or thereby, whether or
not such transactions are consummated, except to the extent such claims,
damages, losses, liabilities and expenses are caused by such party's gross
negligence or willful misconduct.
The commitment set forth herein with respect to the Facilities is
personal to Horizon and may not be transferred or assigned to any other party
without the prior written consent of McKesson. Neither this letter nor any
part hereof may, without our prior written consent, be disclosed or exhibited
to any other party, unless required by law, except to Horizon's accountants,
attorneys and other advisors, and then, in each case, only on a confidential
basis.
If the commitment offered herein is satisfactory, please indicate
Horizon's acceptance by signing and dating the enclosed copy of this letter
and returning it to the undersigned. Unless so accepted or otherwise
terminated by Horizon on or prior to May 5, 1998, the offer set forth herein
will expire on that date.
Upon Horizon's acceptance of the commitment offer set forth herein,
McKesson will commence its due diligence and instruct counsel to commence
documentation. By accepting this offer, Horizon agrees to reimburse McKesson
for all costs and expenses (including, without limitation, fees and
disbursement of counsel for McKesson but subject to any cap on legal fees set
forth in Exhibit A) incurred by McKesson in connection with due diligence for
the Facilities and the negotiation, preparation, execution, delivery and
enforcement of the credit documents, whether or not any loan is made under
the Facilities, any of the transactions contemplated hereby are consummated
or any credit documents are executed and delivered.
If Horizon accepts this offer, the commitment hereunder shall
continue until July 15, 1998, on which date McKesson's commitment shall
expire unless final credit documents have been executed by the parties
thereto on or prior to such date.
We look forward to working with you on this transaction. Please
let us know if you have any questions.
Very truly yours,
McKESSON CORPORATION
By: Alan Pearce
------------------------------------
Title: Senior Vice President
Financial Services
<PAGE>
Mr. John Stogner April 30, 1998
Page 3
ACCEPTED:
HORIZON PHARMACIES, INC.
By: John Stogner
-----------------------------
Title: CFO
---------------------------
4-30-98
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<PAGE>
<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,388,288
<SECURITIES> 0
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<CURRENT-ASSETS> 17,431,878
<PP&E> 2,487,912
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0
0
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<SALES> 12,822,249
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<CGS> 8,850,393
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