-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JpLAZsrq3afFVWZaOr8BSFZkJLtPpEsJiBs57JNrAgHNoRRVNE3fPTPfyYM/QrPp Q3oz7nX3nxiLreatJaEy5A== 0000912057-97-019147.txt : 19970602 0000912057-97-019147.hdr.sgml : 19970602 ACCESSION NUMBER: 0000912057-97-019147 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19970530 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORIZON PHARMACIES INC CENTRAL INDEX KEY: 0001036260 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-25257 FILM NUMBER: 97617166 BUSINESS ADDRESS: STREET 1: 275 W. PRINCETON DRIVE CITY: PRINCETON STATE: TX ZIP: 75407 BUSINESS PHONE: 9727362424 SB-2/A 1 SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1997 REGISTRATION NO. 333-25257 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ HORIZON PHARMACIES, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) TEXAS 5912 75-2441557 (State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
275 W. PRINCETON DRIVE PRINCETON, TEXAS 75407 (972) 736-2424 (Address and Telephone Number of Principal Executive Offices) RICK D. MCCORD, PRESIDENT HORIZON PHARMACIES, INC. 275 W. PRINCETON DRIVE PRINCETON, TEXAS 75407 (972) 736-2424 (Name, Address and Telephone Number of Agent for Service) ------------------------------ COPIES TO: DOUGLAS A. BRANCH, ESQ. MARK A. ROBERTSON, ESQ. Phillips McFall McCaffrey McVay & Robertson & Williams, Inc. Murrah, P.C. 211 North Robinson, 12th Floor 3033 N.W. 63rd, Suite 160 Oklahoma City, Oklahoma 73102 Oklahoma City, Oklahoma 73116 (405) 235-4100 (405) 848-1944 ------------------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. ------------------------------ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE REGISTRATION FEE Common Stock, $.01 par value................ 1,380,000(2) $ 5.00 $6,900,000 $2,090.91 Underwriters' Warrants(3)................... 120,000 .001 $ 120 (4) Common Stock Issuable Upon Exercise of Underwriters' Warrants(5)................. 120,000 6.00 $ 720,000 $ 181.82 TOTAL....................................... $7,620,120 $2,272.73(6)
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. (2) Includes 180,000 shares of Common Stock subject to the Underwriters' over-allotment option. (3) The Underwriters' Warrants entitle the Underwriters to purchase shares of Common Stock equal to 10% of the total number of shares sold pursuant to the Registration Statement, exclusive of any shares subject to the Underwriters' over-allotment option. (4) Pursuant to Rule 457(g), no registration fee is payable. (5) Pursuant to Rule 416, this Registration Statement also covers an indeterminate number of additional securities issuable upon future anti-dilution adjustments in accordance with the terms of the Underwriters' Warrants. (6) The Registrant previously paid $1,970.68 of the Registration Fee. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED MAY 30, 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS 1,200,000 SHARES HORIZON PHARMACIES, INC. COMMON STOCK ------------------ All of the 1,200,000 shares of common stock, $.01 par value per share (the "Common Stock"), offered hereby (the "Offering") are being sold by HORIZON Pharmacies, Inc. (the "Company"). Prior to this Offering, there has been no public market for the Company's Common Stock. It is currently anticipated that the initial public offering price will be $5.00 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. The Company has applied for listing of the Common Stock on the American Stock Exchange under the trading symbol "HZP" and has received a favorable preliminary listing eligibility opinion from the American Stock Exchange. ------------------------ THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGE 6. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING DISCOUNTS PROCEEDS TO PRICE TO THE PUBLIC AND COMMISSIONS(1) COMPANY(2)(3) Per Share....................................... $ $ $ Total(3)........................................ $ $ $
(1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting expenses in connection with this Offering payable by the Company, including a nonaccountable expense allowance to be paid to the Underwriters in the amount of $180,000 ($207,000 if the Underwriters' over-allotment option is exercised in full). See "Use of Proceeds" and "Underwriting." (3) The Company has granted the Underwriters an option, exercisable within 45 business days from the date of this prospectus, to purchase up to 180,000 additional shares of Common Stock upon the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such over-allotment option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $6,900,000, $690,000 and $6,210,000, respectively. See "Underwriting." ------------------------ The Common Stock is being offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to the approval of certain legal matters by counsel and to certain other conditions. It is expected that delivery of certificates representing the shares of Common Stock will be made against payment therefor at the offices of Capital West Securities, Inc. ("Capital West"), Oklahoma City, Oklahoma, on or about , 1997. ------------------------ CAPITAL WEST SECURITIES, INC. THE DATE OF THIS PROSPECTUS IS , 1997. ------------------------ The Company intends to furnish its shareholders with annual reports containing audited financial statements certified by an independent public accounting firm and with quarterly reports for the first three quarters of each year containing unaudited financial information. ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE OR PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING." ------------------------ 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS: (I) ASSUMES AN INITIAL OFFERING PRICE OF $5.00 PER SHARE; (II) REFLECTS A 2-FOR-1 STOCK SPLIT OF THE COMPANY'S COMMON STOCK; (III) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED; AND (IV) ASSUMES THE FILING OF AN AMENDED AND RESTATED ARTICLES OF INCORPORATION. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS REGARDING THE COMPANY'S BUSINESS AND PROSPECTS THAT ARE BASED UPON NUMEROUS ASSUMPTIONS ABOUT FUTURE CONDITIONS WHICH MAY ULTIMATELY PROVE TO BE INACCURATE AND ACTUAL EVENTS AND RESULTS MAY MATERIALLY DIFFER FROM ANTICIPATED RESULTS DESCRIBED IN SUCH STATEMENTS. THE COMPANY'S ABILITY TO ACHIEVE SUCH RESULTS IS SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, SUCH AS THOSE INHERENT GENERALLY IN THE RETAIL PHARMACY AND HOME HEALTHCARE INDUSTRIES, THE IMPACT OF COMPETITION AND PRICING, CHANGING MARKET CONDITIONS, THE RISKS DETAILED IN THE SECTIONS ENTITLED "RISK FACTORS" AND "LEGAL PROCEEDINGS," AND OTHER RISKS DETAILED THROUGHOUT THIS PROSPECTUS. THESE FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S JUDGMENT AS OF THE DATE OF THE FILING OF THIS PROSPECTUS. THE COMPANY DISCLAIMS, HOWEVER, ANY INTENT OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS. THE COMPANY The Company owns and operates a chain of 14 retail pharmacies, nine of which are located in Texas, two in Virginia, and one each in New Mexico, Oklahoma and Wisconsin. According to the April 28, 1997 issue of CHAIN DRUG REVIEW, the Company is among the top 100 retail pharmacy chains in the United States based on store count and dollar volume of sales. The Company plans to acquire between eight and 12 pharmacies annually in each of 1997, 1998 and 1999. In March 1997, the Company consummated the purchase of three pharmacies located in Mineola, Mt. Vernon and McKinney, Texas (the "Vista Stores"). The Company began operating in February 1994 for the purpose of acquiring and consolidating under the HORIZON Pharmacies, Inc. name, high volume, free-standing full-service retail pharmacies primarily located in communities having populations of fewer than 50,000 persons. The Company believes that its success is primarily due to its philosophy of retaining the individual, time-proven customer service characteristics of the stores it acquires, while enabling such stores to offer complete and competitively priced inventories to their small town customers through enhanced technology and the consolidation and management of such stores as a chain. Currently, the Company's primary source of revenue is the sale of prescription drugs. During 1996, sales of prescription drugs generated 80% of the Company's net sales. Management expects the Company's prescription drug business to continue to increase as a result of the demographic trends toward an aging population and the continued development of new pharmaceutical products. However, the Company anticipates that prescription sales will continue to decrease as a percentage of the Company's overall sales and gross margins as the Company continues to expand its home healthcare and other non-pharmaceutical sales and services which have historically provided higher margins. In addition to prescription drugs and services, the Company's retail pharmacies offer a broad range of over-the-counter medications, supplies and equipment, health and beauty aids, cosmetics, gifts, greeting cards, convenience foods, cameras, photo supplies and processing services and other general merchandise. Some stores incorporate special features such as drive-through windows and free home delivery for customer convenience, optical departments, fax, copying and package delivery services and soda fountains. In addition, the Company's Farmington, New Mexico store sells and leases under the name HORIZON Home Care durable medical equipment ("DME") and offers home healthcare services including, but not limited to, intravenous ("IV") infusion services and home oxygen therapy. The Company intends to expand such products and services to other stores in which attractive market opportunities exist. 3 The Company's business strategy is: (i) to expand by continuing to acquire small chains and independent pharmacies primarily in communities having populations of fewer than 50,000 persons; (ii) to improve profitability for each store in its chain; and (iii) to expand home healthcare and other non- pharmaceutical sales and services to certain of its other stores. In implementing its business strategy, the Company intends to maintain competitive pricing and a high level of customer service and convenience, continue to control costs and take advantage of the available economies of scale, improve the stores' use of technology and focus on management procedures and policies and employee training. The Company also plans to acquire and consolidate the inventory and pharmacy files of certain retail pharmacies in its existing market areas to increase sales volumes of existing stores in that market, while managing the overhead expense for those operations in a cost-effective manner. Stores which are acquired by the Company will not be remodeled to fit a standardized format, but will, to the extent practicable, be permitted to retain their individual layouts, locations and management styles. As part of its marketing strategy, the Company plans to convert between one and five of its existing stores into "healthcare centers" similar to that currently operated by its store located in Farmington, New Mexico. Each such center will offer home healthcare services and may lease to an unaffiliated third party owner-operator a small clinic staffed by a physician's assistant or nurse practitioner located adjacent to the store's traditional retail pharmacy operations. The Company intends for such healthcare centers to offer customers "one-stop shopping" at competitive prices for basic medical and home healthcare services. The Company believes that providing such home healthcare and basic medical services adjacent to its retail pharmacies will result in increased sales and profits for such stores. The Company was incorporated under the laws of the State of Texas on August 31, 1992 and began operations under the name HORIZON Pharmacies, Inc. in February 1994. The Company's principal office is located at 275 W. Princeton Drive, Princeton, Texas 75407, and its telephone number is (972) 736-2424. THE OFFERING Common Stock offered by the Company......................... 1,200,000 shares Shares of Common Stock to be outstanding after the Offering........................ 2,282,424 shares(1) Use of Proceeds................... To repay certain existing indebtedness, acquire additional retail pharmacies and/or the inventory and pharmacy files of other retail pharmacies, make a distribution to existing shareholders and for working capital and general corporate purposes. American Stock Exchange Symbol.... HZP (proposed)
- ------------------------ (1) Excludes 246,242 shares of Common Stock reserved for issuance pursuant to the Company's 1997 Stock Option Plan (the "Option Plan"). See "Management--Stock Option Plan" and "Description of Securities." RISK FACTORS Investment in the Common Stock offered hereby involves a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." 4 SUMMARY--FINANCIAL AND OPERATING DATA The following table sets forth historical and pro forma financial information of the Company. The historical information is derived from the audited financial statements of the Company for each of the two years in the period ended December 31, 1996 and from the unaudited financial statements of the Company for the three months ended March 31, 1996 and 1997, appearing elsewhere in this prospectus, and from the audited financial statements of the Company for the period from February 28, 1994 to December 31, 1994, not presented herein. The following financial information should be read in conjunction with such Financial Statements including the Notes thereto. See "Selected Financial Information," "Pro Forma Combined Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, PERIOD FROM --------------------------------- ---------------------------------- FEBRUARY 28, 1994 HISTORICAL HISTORICAL TO DECEMBER 31, --------------------- PRO FORMA ---------------------- PRO FORMA 1994(1) 1995 1996 1996(2) 1996 1997 1997(2) ---------------- --------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AND STORE DATA) STATEMENT OF INCOME DATA: Net Sales................... $ 1,671 $ 6,270 $ 13,136 $ 22,133 $ 2,367 $ 5,113 $ 5,892 Gross Profit................ 595 1,898 4,194 6,686 763 1,654 1,841 Income from operations...... 169 279 551 1,024 151 274 322 Interest expense............ 16 110 253 227 43 54 28 Income before pro forma provision for income taxes..................... 154 176 302 801 110 221 294 Pro forma provision for income taxes.............. 54 61 106 278 38 77 104 Pro forma net income........ 100 115 196 523 72 144 190 Pro forma net income per common share.............. 0.19 0.12 0.18 0.23 0.07 0.13 0.08 Shares used in computation............... 539,258 957,733 1,074,246 2,274,246 1,058,000 1,142,424 2,342,424 BALANCE SHEET DATA: Working capital............. $ 600 $ 1,029 $ 1,563 $ 4,518 $ 897 $ 1,057 $ 5,658 Total assets................ 1,268 3,545 6,589 9,518 3,868 8,350 11,411 Long-term obligations....... 346 930 1,467 1,367 716 1,338 1,238 Total liabilities........... 576 2,266 4,839 4,412 2,539 6,454 5,028 Shareholders' equity........ 692 1,279 1,750 5,106 1,329 1,896 6,383 NUMBER OF STORES AT END OF PERIOD...................... 3 7 11 14 7 14 14
- ------------------------ (1) The Company was organized August 31, 1992 but had no operations until February 28, 1994. (2) See "Pro Forma Combined Financial Data" for information regarding the pro forma adjustments made to the Company's historical financial data. 5 RISK FACTORS An investment in the securities being offered hereby involves substantial risk. Prospective investors should carefully consider the following factors in addition to the other information set forth in this prospectus. DEPENDENCE ON ACQUISITIONS FOR GROWTH. The Company has grown rapidly in recent periods and intends to continue to pursue an aggressive growth strategy. The Company's growth strategy depends upon its ability to continue to acquire, consolidate and operate existing free-standing pharmacies on a profitable basis. During 1996, the Company acquired four pharmacies and three pharmacies were acquired during the first quarter of 1997. By the end of 1997, the Company plans to acquire an additional five to nine stores and have in operation a total of approximately 20 stores. However, no assurance can be given that the Company will be able to find attractive acquisition candidates, consummate additional acquisitions or that it will successfully integrate, convert or operate any acquired business. In the event that the Company makes acquisitions, there can be no assurance that any such acquisition expenses will not have a material adverse effect upon the Company's operating results, particularly during the period in which such operations are being integrated into the Company. Furthermore, the Company's ability to make acquisitions may depend upon its ability to obtain financing. There can be no assurance that the Company will be able to obtain financing or, if available, that such financing will be on acceptable terms. The Company continually reviews acquisition proposals and is currently engaged in discussions with third parties with respect to possible acquisitions; however, the Company has no agreement or commitments with respect to any potential acquisition. The Company will compete for acquisition candidates with buyers who have greater financial and other resources than the Company and may be able to pay higher acquisition prices than the Company. To the extent the Company is unable to acquire suitable retail pharmacies, or to integrate such acquisitions successfully, its ability to expand its business would be reduced significantly. See "--Possible Need for Additional Capital," "--Substantial Indebtedness" and "Business--Expansion Strategy." SALES TO THIRD-PARTY PAYORS. A growing percentage of the Company's prescription drug volume has been accounted for by sales to customers who are covered by third-party payment programs. Third-party reimbursement accounted for approximately 52% of the Company's prescription sales in 1996, 46% in 1995 and 36% in 1994. It is anticipated that prescription sales to third-party payors, in terms of both dollar volume and as a percentage of total prescription sales, will continue to increase in the first quarter of 1997 and the Company expects this trend to continue. Although contracts with third-party payors may increase the volume of prescription sales and gross profits, third-party payors typically negotiate lower prescription prices than those of non third-party payors. Accordingly, there has been downward pressure on gross profit margins on sales of prescription drugs which is expected to continue in future periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--The Retail Pharmacy Industry." RELIANCE ON MEDICARE AND MEDICAID REIMBURSEMENTS. Substantially all of the Company's home healthcare revenues are attributable to third-party payors, including Medicare and Medicaid, private insurers, managed care plans and HMOs. The amounts received from government programs and private third-party payors are dependent upon the specific benefits included under the program or the patient's insurance policies. Like other medical service providers, the Company is subject to lengthy reimbursement delays as a result of third-party payment procedures. Any substantial delays in reimbursement could adversely affect the Company's business, financial condition, cash flows and results of operations. Accordingly, management of accounts receivable through effective billing and reimbursement procedures is critical to the Company's results of operations. Because alternate site healthcare is generally less costly to third-party payors than hospital-based care, alternate site healthcare providers have generally benefited from cost containment initiatives aimed at reducing the costs of medical care. However, as the alternate site market becomes a larger percentage of 6 the total healthcare market, cost containment initiatives aimed at reducing the costs of delivering services at non-hospital sites are increasing and may adversely affect the profitability of alternate site healthcare providers. A significant reduction in the coverage or payment rates of third-party payors, or from patients enrolled in the Medicare or Medicaid programs, would have a material adverse effect on the Company's revenues and profitability. The level of revenues and profitability of the Company, like those of other healthcare companies, are affected by the continuing efforts of third-party payors to contain or reduce the costs of healthcare by lowering reimbursement rates, increasing case management review of services and negotiating reduced contract pricing. Government reimbursement programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and governmental funding restrictions, all of which may materially increase or decrease the rate of program payments to the Company for its services. In addition to being subject to frequent changes in Federal and state laws governing Medicare and Medicaid coverage and reimbursement policies, the Company is subject to governmental audit of the reimbursements it receives under the Medicare and Medicaid programs. Any significant audit adjustment could have a material adverse effect on the Company's business, financial condition, cash flows or results of operations. There can be no assurance that payments under governmental and private third-party payor programs will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. Payment reform for post-acute care services is a top Medicare priority. The U.S. Department of Health and Human Services ("HHS") is studying, among other things, the feasibility of changing the Medicare reimbursement system for home healthcare from cost reimbursement to prospective payment (i.e., a fixed fee for services rendered per episode of illness). The impact of such a change, if implemented, on the Company's results of operations cannot be predicted at this time and will depend, to a large extent, on the reimbursement methodology ultimately established. The U.S. Congress and President Clinton have each proposed significant reductions in Medicare and Medicaid spending in connection with efforts to balance the budget of the United States. Although the Company cannot predict whether these or other Federal or state cost containment proposals will be adopted, the adoption of any such proposals could have an adverse effect on the Company's business, financial condition, cash flows and results of operations as it expands its home healthcare services. See "Business--Home Healthcare Services." EXPANSION. The Company's expansion will require the implementation and integration of enhanced operational and financial systems and additional management, operational and financial resources. Failure to implement and integrate these systems and add these resources could have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that the Company will be able to manage its expanding operations effectively or that it will be able to maintain or accelerate its growth. While the Company experienced growth in net sales and net income in 1995 and 1996, there can be no assurance that the Company will continue to experience growth in, or maintain the present level of, net sales or net earnings. See "Business--Expansion Strategy." GOVERNMENT REGULATION AND HEALTHCARE REFORM. The Company's pharmacists and pharmacies are required to be licensed by the appropriate state boards of pharmacy. The Company's pharmacies are also registered with the Federal Drug Enforcement Administration. Under the Omnibus Budget Reconciliation Act of 1990, the Company's pharmacists are required to offer counseling to customers covered by Medicaid about the medication, dosage, delivery system, common side effects and other information deemed significant by the pharmacists. The Company relies on prescription drug sales for a significant portion of its revenues and profits, and prescription drug sales represent a significant segment of the Company's business. These revenues are affected by changes within the healthcare industry, including changes in programs providing for reimbursement of the cost of prescription drugs by third-party payment plans, such as government and private plans, and regulatory changes relating to the approval process for prescription drugs. In recent years a number of 7 healthcare reform proposals have been introduced or proposed by Congress and in some state legislatures that would effect major changes in the healthcare system, either nationally or at the state level. The proposals ranged from the Clinton Administration's comprehensive healthcare reform proposal that would have restructured the financing and delivery of healthcare services through a combination of managed competition and mandated employer coverage of employees to less comprehensive proposals that would have required private health insurance to be "portable" and eliminated coverage limitations for pre-existing health conditions. No proposal was adopted by either house of Congress. The Company anticipates that additional healthcare reform proposals may continue to be introduced by Congress. It is difficult to predict whether any proposal will be adopted or the effect on the Company of any proposal that does become law. A number of states in which the Company has operations have either adopted or are considering healthcare reform proposals at the state level. These state reform laws have, in many cases, not been fully implemented. See "Business--Government Regulation and Healthcare Reform." In addition, the Company may be affected by any significant healthcare legislative proposals enacted in the state of Texas. Currently, the Texas legislature is considering a proposal which would reduce Medicaid reimbursements to Texas pharmacies by 5% in anticipation of a Federal reduction in Medicaid pharmacy payments. While any such reductions would affect the Company's Medicaid reimbursements, management believes that the Company's overall revenues and profitability will not be materially adversely affected, although there can be no assurance that revenues or profitability will not be affected by any such legislation. See "Business--Government Regulation and Healthcare Reform." REGULATION OF HOME HEALTHCARE SERVICES. The Company's Farmington, New Mexico store currently offers home healthcare services under the name HORIZON Home Care, and the Company expects to offer such services from certain of its other stores. The Company's home healthcare business is subject to extensive Federal and state regulation. Federal regulation covers, among other things, Medicare and Medicaid billing and reimbursement, reporting requirements, certification standards for certain home health agencies and other types of healthcare providers, limitations on ownership and other financial relationships between a provider and its referral sources and approval by the Food and Drug Administration ("FDA") of the safety and efficacy of pharmaceuticals and medical devices. In addition, the requirements that the Company must satisfy to conduct its businesses vary from state to state. The Company believes that its operations comply with applicable Federal and state laws and regulations in all material respects. However, changes in the law or new interpretations of existing laws can have a material effect on permissible activities of the Company, the relative costs associated with doing business and the amount of reimbursement for the Company's products and services paid by government and other third-party payors. Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental change. Although Congress has failed to pass comprehensive healthcare reform legislation, the Company anticipates that Congress and state legislatures will continue to review and assess alternative healthcare delivery and payment systems and may in the future propose and adopt legislation effecting fundamental changes in the healthcare delivery system. Legislative debate is expected to continue in the future. The Company cannot predict the ultimate timing, scope or effect of any legislation concerning healthcare reform. Any proposed Federal legislation, if adopted, could result in significant changes in the availability, delivery, pricing and payment for healthcare services and products, including alternate site healthcare. Various state agencies also have undertaken or are considering significant healthcare reform initiatives. Although it is not possible to predict whether any healthcare reform legislation will be adopted or, if adopted, the exact manner and the extent to which the Company will be affected, it is likely that the Company will be affected in some fashion, and there can be no assurance that any healthcare reform legislation, if and when adopted, will not have a material adverse effect on the Company's business, financial condition, cash flows or results of operations. Certain of the Company's facilities are subject to state licensure laws. Federal laws require certain of the Company's facilities to comply with rules applicable to controlled substances. These rules include an obligation to register with the Drug Enforcement Administration of the United States Department of 8 Justice and to meet certain requirements concerning security, record keeping, inventory controls, prescription and order forms and labeling. The Company's pharmacists, nurses, and certain of its radiology equipment also are subject to state licensing requirements. The Company believes that it is in compliance with all applicable licensure requirements. MALPRACTICE LIABILITY. The provision of home healthcare services entails an inherent risk of claims of medical and professional malpractice liability. The Company may be named as a defendant in such malpractice lawsuits, and is subject to the attendant risk of substantial damage awards. While the Company believes it has adequate professional and medical malpractice liability insurance coverage, there can be no assurance that a future claim or claims will not be successful or if successful will not exceed the limits of available insurance coverage or that such coverage will continue to be available at acceptable costs and on favorable terms. See "Business." COMPETITION. The Company's business is highly competitive. In each of its markets, the Company competes with one or more national retail pharmacy chains (including Eckerd's and CVS), regional retail pharmacy chains, local retail pharmacy chains, independent retail pharmacies, deep discount retail pharmacies (including Walgreen's), supermarkets (including Kroger's and Brookshire's), discount department stores (including Wal-Mart and K-Mart), mass merchandisers and other retail stores and mail order operations. Most of these competitors have financial resources that are substantially greater than those of the Company. Competition among retail pharmacies generally takes the form of price competition, store location, product selection and customer service. The Company has not yet implemented its plan to expand its home healthcare services through its stores, but as such plan is implemented, the Company's stores offering home healthcare services will compete with other larger providers of home healthcare services including chain operations and independent single unit stores which are more established in that market. The market for home healthcare services is highly competitive. Many of the Company's existing and potential competitors have substantially greater financial, marketing and personnel resources than the Company and have established generally greater name recognition in the home healthcare industry. Most of the Company's competitors also offer more extensive home healthcare services than the Company. There can be no assurance the Company will be able to successfully compete with its competitors in the home healthcare industry. See "Business-- Competition." GEOGRAPHIC CONCENTRATION. Currently, nine of the Company's 14 retail pharmacies are located in Texas, and other retail pharmacies located in Texas may be acquired by the Company. Consequently, the Company's results of operations and financial condition are dependent upon general trends in the Texas economy. Although the Texas economy was heavily dependent upon commodity-based industries such as oil and gas and agriculture during the 1980s, the Texas economy has, during the 1990s, become more closely correlated to the national economy. While retail sales in the state of Texas have been consistent with the generally favorable national economy during the past five years, there can be no assurance that this trend will continue or that retail spending will not decline in the future. SUBSTANTIAL INDEBTEDNESS. In connection with the Company's acquisition of retail pharmacies, the Company has incurred substantial debt. At March 31, 1997, the Company had long-term obligations (including current maturities) of $1,716,649, notes payable of $2,128,642 (including $948,642 debt incurred in connection with the acquisition of the Vista Stores) and accounts payable of $1,664,186, a substantial portion of which is payable under a 30-day credit arrangement with its primary supplier. While the Company intends to use a portion of the proceeds from this Offering to satisfy $1,475,000 of its notes payable and $100,000 of its long-term obligations, the Company may incur additional indebtedness in the future in connection with its planned acquisition of additional stores. In addition, the Company's ability to make cash payments to satisfy its substantial indebtedness will depend upon its future operating performance, which is subject to a number of factors including prevailing economic conditions and financial, business and other factors beyond the Company's control. Based on the Company's ability to generate cash 9 flow from operating activities, management believes that the Company will have the funds necessary to meet the principal and interest payments on its debt as they become due and to operate and expand its business. However, there can be no assurance that the Company will be able to do so. If the Company is unable to generate sufficient earnings and cash flow to meet its obligations with respect to its outstanding indebtedness, refinancing of certain of these debt obligations or disposition of certain assets may be required. In the event debt refinancing is required, there can be no assurance that the Company can effect such refinancing on satisfactory terms. Although the Company is current in its payments to its lenders, it is in breach of several covenants under a loan agreement covering certain demand notes, including a covenant prohibiting payment of dividends or distributions to shareholders. The referenced loan agreement covers certain notes payable totaling $1,180,000 at March 31, 1997 and such outstanding amounts will be repaid with the proceeds of this Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Use of Proceeds." POSSIBLE NEED FOR ADDITIONAL CAPITAL. Although the Company believes that the proceeds from this Offering combined with operating revenues will be adequate to satisfy its capital requirements for at least 12 months following the termination of the Offering, circumstances, including the acquisition of additional stores, may require the Company to obtain long or short-term financing to realize certain business opportunities. No assurance can be made that such financing will be obtained. See "--Substantial Indebtedness," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." RELIANCE ON SINGLE SUPPLIER. The Company currently purchases approximately 83.6% of its inventory from Bergen Brunswig Drug Co. ("Bergen Brunswig"). Bergen Brunswig also provides the Company with order entry machines, shelf labels and other supplies used in connection with the Company's purchase and sale of such inventory. The Company believes that the wholesale pharmaceutical and non-pharmaceutical distribution industry is highly competitive because of the consolidation of the retail pharmacy industry and the practice of certain large retail pharmacy chains to purchase directly from product manufacturers. Accordingly, the Company believes that it could obtain its inventory through another similar distributor at competitive prices and upon competitive payment terms in the event its relationship with Bergen Brunswig was terminated. See "Business--Purchasing and Distribution." DEPENDENCE ON KEY PERSONNEL. The Company's future success will be highly dependent on the continued efforts of Rick D. McCord, R.Ph., President and Chief Operating Officer; Sy S. Shahid, Executive Vice President and Secretary; and David W. Frauhiger, Chief Financial Officer and Treasurer. The Company has employment agreements with Messrs. McCord, Shahid and Frauhiger, and owns key man life insurance policies on each such individual. Notwithstanding the foregoing, the loss of the services of one or more of such key personnel could have a material adverse effect upon the Company's results of operations. The Company's success is also dependent upon its ability to attract and retain experienced retail managers, pharmacists, and employees skilled in home healthcare services, and the ability of the Company's personnel to manage the Company's growth and integrate its operations. There can be no assurance that the Company will be successful in attracting and retaining such personnel. See "Management." POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company expects to experience fluctuations in future quarterly operating results that may be caused by many factors, including the number and timing of store acquisitions, additional and existing competition, marketing programs, weather, special or unusual events and national, regional and local economic conditions that may affect retailers in general. Any concentration of acquisitions near the end of a quarter could have an adverse effect on the financial results for that quarter and could, in certain circumstances, lead to fluctuations in quarterly financial results. Furthermore, the retail pharmacy business is somewhat seasonal, with the highest net sales and net income levels historically occurring during the fourth and following first quarters of each year (which include the holiday selling season). The Company's results of operations depend significantly upon the net 10 sales generated during the first and fourth quarters, and any decrease in net sales for such periods could have a material adverse effect upon the Company's profitability. As a result, the Company believes that period-to-period comparisons of its results of operations are not and will not necessarily be meaningful, and should not be relied upon as an indication of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CONTROL BY MANAGEMENT. The Company's executive officers and directors and their respective affiliates will beneficially own an aggregate of approximately 32% of the Company's outstanding shares of Common Stock after the Offering (approximately 30% if the Underwriters' over-allotment option is exercised in full). Such shareholders, if voting together, may, as a practical matter, have sufficient voting power to elect the board of directors of the Company (the "Board of Directors"), exercise significant control over the business, policies and affairs of the Company and, in general, determine the outcome of any corporate transaction or other matters submitted to the shareholders for approval, such as any amendment to the Company's articles of incorporation (the "Articles of Incorporation"), any merger, consolidation, sale of all or substantially all of the Company's assets or "going private" transactions and prevent or cause a change in control of the Company, all of which may adversely affect the market price of the Common Stock. See "Principal Shareholders." POSSIBLE ISSUANCES OF PREFERRED STOCK. The Company's Articles of Incorporation authorize the Board of Directors, without shareholder approval, to issue up to 1,000,000 shares of preferred stock, $.01 per share par value (the "Preferred Stock"). The number of shares of each series and the designations, powers, preferences, qualifications, limitations or restrictions of each series shall be determined by the Board of Directors. The possible effects of such issuances include the grant of voting rights to holders of Preferred Stock superior to that of the holders of Common Stock, the grant of preferences in the payment of dividends and upon liquidation of the Company in favor of the holders of Preferred Stock, and the conferral of conversion rights which entitle the holders of Preferred Stock to convert their shares into Common Stock, thereby resulting in possible future dilution to the holders of Common Stock. The issuance of the Preferred Stock could have the effect of delaying or preventing a change in control of the Company. See "Description of Securities--Preferred Stock." ANTI-TAKEOVER PROVISIONS. Certain provisions of the Texas Business Corporation Act (the "Texas Act") may delay, discourage or prevent a change in control of the Company. Such provisions may discourage bids for the Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price and the voting and other rights of the holders of Common Stock. In addition, the Board of Directors has the authority without action by the Company's shareholders to fix the rights, privileges and preferences of and to issue shares of the Company's Preferred Stock which may have the effect of delaying, deterring or preventing a change in control of the Company. See "Description of Securities--Preferred Stock." In addition to the authorization of Preferred Stock, the Company's Articles of Incorporation and Bylaws include several other provisions which may have the effect of inhibiting a change of control of the Company. These include the division of the Board of Directors into three classes serving staggered three year terms (which could delay or prevent shareholders from effecting a change of control of the Company), no shareholder action by written consent and advance notice requirements for shareholder proposals and director nominations. The provisions may discourage a party from making a tender offer for or otherwise attempting to obtain control of the Company. The Board of Directors does not currently have any plans, arrangements, commitments or understandings to issue any Preferred Stock. SUBSTANTIAL DILUTION. On the basis of an assumed offering price of $5.00 per share, this Offering involves an immediate dilution of approximately $2.79 per share of Common Stock (approximately 56% of the offering price per share) between the offering price per share and the pro forma net tangible book value per share of the Common Stock immediately after the completion of this Offering. See "Dilution." 11 BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS. The Company's current shareholders will benefit from the Offering, principally through the creation of a public market for the Common Stock and the potential unrealized gains in the value of the Common Stock held by them. Based upon the difference between the initial public offering price of $5.00 per share and the average price per share of $1.64 paid by such current shareholders, the current shareholders will have potential unrealized gains of $3.36 per share, or an aggregate of $3,636,945. See "Dilution." In addition, current shareholders will receive a cumulative distribution of $300,000 out of the proceeds of this Offering. See "Dividend Policy" and "Use of Proceeds." LIMITED UNDERWRITING EXPERIENCE. Capital West, one of the Underwriters, was first registered as a broker-dealer in May 1995 and has participated in six public equity offerings as an underwriter, acting as a manager or co-manager in three of those offerings. Prospective purchasers of the securities offered hereby should consider this limited experience in evaluating this Offering. See "Underwriting." ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the Offering, there has been no public market for the Common Stock. The Company has applied for listing of the Common Stock on the American Stock Exchange under the trading symbol "HZP." There can be no assurance, however, that an active public market will develop for the Common Stock. The initial public offering price was determined solely through negotiations among the Company and representatives of the Underwriters based on several factors, and may not be indicative of the market price for the Common Stock after the completion of the Offering. Among the factors considered in such negotiations were prevailing market conditions, the results of operations of the Company in recent periods, the market capitalizations and stages of development of other companies which the Company and the Underwriters believe to be comparable to the Company, estimates of the business potential of the Company and the present state of the Company's development. See "Underwriting." Moreover, the trading price of the Company's Common Stock could be subject to fluctuations in response to quarterly variations in results of operations, announcements of new services or products by the Company or its competitors, changes in financial estimates by securities analysts and other events or factors. See "Business." Recent history relating to the market prices of other newly public companies indicates that the market price of the Company's Common Stock following the Offering may be highly volatile. At various times, the stock market has experienced volatility that has particularly affected the market prices for stock of particular industry groups, such as retail-oriented companies, often without regard to a particular company's operating results. SHARES ELIGIBLE FOR FUTURE SALE. Future sales of shares of Common Stock by the Company or its existing shareholders, or the perception that such sales may occur, could adversely affect the market price of the Common Stock. Upon completion of the Offering, 2,282,424 shares of Common Stock will be outstanding (2,462,424 shares outstanding assuming exercise of the Underwriters' over-allotment option in full). Additionally, the Company may in the future issue significant amounts of Common and/or Preferred Stock to finance acquisition and development activities. Of the outstanding shares, the 1,200,000 shares (1,380,000 shares assuming the Underwriters' over-allotment option is exercised in full) sold in the Offering, and 753,994 shares held by existing shareholders, will be tradeable without restriction by persons other than "affiliates" of the Company. The remaining 328,430 shares of Common Stock to be outstanding after the Offering are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act") and may not be publicly resold, except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration, including that provided by Rule 144 promulgated under the Securities Act. The directors and executive officers of the Company collectively will hold 741,352 shares (the "Affiliate Shares"), or approximately 32%, of the outstanding shares of Common Stock after the Offering. Such individuals have agreed not to, directly or indirectly, offer, sell, assign, transfer, encumber, pledge, contract to sell, grant an option to purchase or otherwise dispose of any Common Stock for a period of 12 24 months after the date of this prospectus without the prior written consent of the Underwriters. Upon expiration of the 24-month lockup period, the Affiliate Shares will be eligible for immediate resale without restriction under the Securities Act, subject, in certain cases, to certain volume, timing and other requirements of Rule 144 promulgated under the Securities Act. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock. See "Shares Eligible for Future Sale" and "Underwriting." DIVIDEND POLICY. The Company has previously made cash distributions to its shareholders and intends to distribute $300,000 to its existing shareholders out of the proceeds of this Offering. The Company does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. See "Dividend Policy." Approximately 45% of the intended distribution of $300,000 of the proceeds of this Offering is being paid to mitigate such shareholders' expected state and Federal income taxes payable in connection with the Company's S corporation status from January 1, 1997 to the date of the termination of such status. 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,200,000 shares of Common Stock being offered hereby are estimated to be approximately $5,000,000 (approximately $5,783,000 if the Underwriters' over-allotment option is exercised in full), assuming an initial offering price of $5.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses. The Company expects to use the net proceeds (assuming no exercise of the Underwriters' over-allotment option) approximately as follows:
APPROXIMATE APPROXIMATE PERCENTAGE OF USE DOLLAR AMOUNT NET PROCEEDS - ------------------------------------------------------ -------------- --------------- Repayment of certain existing indebtedness............ $1,575,000 31.5% Acquisitions.......................................... 2,375,000 47.5% Working capital and general corporate purposes........ 750,000 15.0% Distribution to existing shareholders................. 300,000 6.0% -------------- ----- Total................................................. $5,000,000 100.0% -------------- ----- -------------- -----
The Company plans to use approximately $1.15 million of the net proceeds to repay the principal amount expected to be outstanding at the close of this Offering under the Company's credit agreement with Bergen Brunswig (the "Bergen Brunswig Loan"). The proceeds of the Bergen Brunswig Loan were used primarily for the Company's acquisitions of six retail pharmacies located in Farmington, New Mexico; McLoud, Oklahoma; Cleburne, Texas; Covington and Marion, Virginia; and Tomah, Wisconsin. The Bergen Brunswig Loan bears interest at 2% above the prime rate announced from time to time by two banks. As of March 31, 1997, the effective interest rate on the Bergen Brunswig Loan was 10.5%. In addition, $325,000 will be paid to retire a portion of the debt incurred in connection with the Company's acquisition of the Vista Stores in March 1997, which bears interest at the rate of 8.5% and matures December 25, 1997, and $100,000 will be paid to retire certain debt incurred in connection with the redemption of the Common Stock held by a former shareholder. The Company will use approximately $2.4 million of the net proceeds of the Offering and may, in the future, incur additional debt, in connection with the acquisition of additional stores. The Company continually reviews acquisition proposals and is currently engaged in discussions with third parties with respect to possible acquisitions; however, the Company has no current agreements or commitments with respect to any potential acquisition. The Company will distribute $300,000 of the net proceeds to its existing shareholders. Approximately 45% of such distribution is intended to mitigate such shareholders' 1997 state and Federal tax liabilities accruing as a result of the Company's S corporation status from January 1, 1997 to the date such status will be terminated. Any remaining net proceeds are to be used for working capital and other general corporate purposes. Pending application of the proceeds described above, the net proceeds of the Offering will be invested in short-term, investment grade, interest-bearing securities. DIVIDEND POLICY The Company does not intend to pay cash dividends on its Common Stock in the foreseeable future. The Company intends to retain earnings in order to provide funds for use in the operation and expansion of its business. Notwithstanding the Company's future intentions respecting the payment of dividends, a distribution of $300,000 will be made from the proceeds of this Offering to the Company's shareholders. Approximately 45% of such distribution is being paid for the purpose of mitigating the state and Federal 14 income tax liability expected to be incurred by such shareholders in connection with the Company's S corporation status from January 1, 1997 until the date of the termination of such status. See "Use of Proceeds." The payment of dividends, if any, in the future is within the discretion of the Board of Directors and will depend on the Company's earnings, its capital requirements, restrictions imposed by lenders and financial condition, and other relevant factors. DILUTION At March 31, 1997, net tangible book value of the Company's Common Stock was approximately $489,000, or $.45 per share. Net tangible book value per share of Common Stock is defined as total tangible assets of the Company less total liabilities, divided by the total number of shares of Common Stock outstanding. The consummation of this Offering will result in a pro forma net tangible book value of $2.21 per share which will represent an immediate dilution of $2.79 per share to new investors purchasing shares of Common Stock in this Offering, assuming an initial public offering price of $5.00 per share. The following table summarizes the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share by existing shareholders and new investors purchasing shares in this Offering:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ----------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- --------- ------------ --------- --------------- Existing shareholders (cash)...................... 1,082,424 47.4% $ 1,771,127 22.8% $ 1.64 New investors..................................... 1,200,000 52.6% 6,000,000 77.2% 5.00 ---------- --------- ------------ --------- Total............................................. 2,282,424 100.0% $ 7,771,127 100.0% $ 3.40 ---------- --------- ------------ --------- ---------- --------- ------------ ---------
15 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1997 and as adjusted to give effect to the sale of the 1,200,000 shares of Common Stock offered hereby at an assumed per-share price of $5.00 and the application of the estimated net proceeds as described under "Use of Proceeds." This table should be read in conjunction with "Use of Proceeds," "Pro Forma Combined Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes appearing elsewhere in this prospectus.
MARCH 31, 1997 ---------------------------- ACTUAL AS ADJUSTED(3) ------------ -------------- Notes Payable....................................................................... $ 2,128,642 $ 653,642 Long-term obligations, including current portion.................................... 1,716,649 1,616,649 Shareholders' Equity: Common Stock; $.01 par value, 14,000,000 shares authorized; 1,082,424 shares issued and outstanding; 2,282,424 shares as adjusted(1)(2)...................... 10,824 22,824 Preferred Stock; $.01 par value, 1,000,000 shares authorized, no shares issued and outstanding, actual or adjusted................................................. -- -- Additional paid-in capital........................................................ 1,760,303 6,360,303 Retained Earnings................................................................. 124,474 -- ------------ -------------- Total shareholders' equity........................................................ 1,895,601 6,383,127 ------------ -------------- Total Capitalization................................................................ $ 5,740,892 $ 8,653,418 ------------ -------------- ------------ --------------
- ------------------------ (1) Excludes shares of Common Stock reserved for issuance pursuant to the Company's 1997 Stock Option Plan, estimated at 246,242. See "Management--1997 Stock Option Plan" and "Description of Securities." (2) Reflects a 2-for-1 stock split for shares of Common Stock. (3) The as adjusted amounts consider the effect of the Offering and the expected application of its net proceeds. 16 SELECTED FINANCIAL INFORMATION The following table sets forth the historical operating results and selected balance sheet data of the Company since beginning operations in February 1994 as an S corporation. The historical information has been adjusted to provide pro forma charges for income taxes as explained below. The information should be read in conjunction with the historical financial statements and the Pro Forma Combined Financial Data included elsewhere in this prospectus.
PERIOD FROM YEAR ENDED DECEMBER THREE MONTHS ENDED FEBRUARY 28, 31, MARCH 31, 1994 TO DECEMBER --------------------- ---------------------- 31, 1994(1) 1995 1996 1996 1997 ---------------- --------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) INCOME STATEMENT DATA: NET SALES: Prescription drugs................................. $ 1,387 $ 5,235 $ 10,515 $ 1,989 $ 4,060 Other.............................................. 284 1,035 2,621 378 1,053 ------- --------- ---------- ---------- ---------- Total net sales...................................... 1,671 6,270 13,136 2,367 5,113 COST OF SALES: Prescription drugs................................. 902 3,595 7,310 1,321 2,810 Other.............................................. 174 777 1,632 283 649 ------- --------- ---------- ---------- ---------- Total cost of sales.................................. 1,076 4,372 8,942 1,604 3,459 ------- --------- ---------- ---------- ---------- Gross profit......................................... 595 1,898 4,194 763 1,654 Selling, general and administrative expenses......... 396 1,519 3,471 580 1,322 Depreciation and amortization........................ 30 100 172 32 58 ------- --------- ---------- ---------- ---------- Income from operations............................... 169 279 551 151 274 Interest expense and other, net...................... 15 103 249 41 53 ------- --------- ---------- ---------- ---------- Income before income taxes(2)........................ 154 176 302 110 221 Pro forma provision for income taxes(2).............. 54 61 106 38 77 ------- --------- ---------- ---------- ---------- Pro forma net income(2).............................. $ 100 $ 115 $ 196 $ 72 $ 144 ------- --------- ---------- ---------- ---------- ------- --------- ---------- ---------- ---------- Pro forma net income per share(2).................... $ 0.19 $ 0.12 $ 0.18 $ 0.07 $ 0.13 Shares used in computation........................... 539,258 957,733 1,074,246 1,058,000 1,142,424
BALANCE SHEET DATA:
DECEMBER 31, ------------------------------- 1994 1995 1996 MARCH 31, 1997 --------- --------- --------- --------------- (IN THOUSANDS) Working capital................................................. $ 600 $ 1,029 $ 1,563 $ 1,057 Total assets.................................................... 1,268 3,545 6,589 8,350 Long-term obligations........................................... 346 930 1,467 1,338 Total liabilities............................................... 576 2,266 4,839 6,454 Shareholders' equity............................................ 692 1,279 1,750 1,896
- ------------------------ (1) The Company was organized August 31, 1992 but had no operations until February 28, 1994. (2) The Company is organized as an S corporation and has not historically included charges for income taxes. The pro forma provisions for income taxes are based on a rate of 35% applied to income before income taxes in each of the periods presented. 17 PRO FORMA COMBINED FINANCIAL DATA The following unaudited Pro Forma Combined Condensed Statements of Income for the year ended December 31, 1996 and the three months ended March 31, 1997 reflect the historical results of operations of the Company, adjusted to give effect to the acquisition of the Farmington, New Mexico store (the "Farmington Store") in April 1996 and the Vista Stores in March 1997 as though such stores were acquired January 1, 1996 and to give pro forma effect to the Offering as though it occurred January 1, 1996. The Pro Forma Combined Condensed Balance Sheet as of March 31, 1997 reflects the historical financial position of the Company as of that date adjusted to give pro forma effect to the Offering as if it had occurred as of March 31, 1997. The pro forma adjustments are based upon available information and assumptions that management of the Company believes are reasonable and fairly reflect all expenses associated with the acquired businesses. The Pro Forma Combined Financial Data do not purport to represent the financial position or results of operations which would have occurred had such transactions been consummated on the dates indicated or the Company's financial position or results of operations for any future date or period. These Pro Forma Combined Condensed Financial Statements and notes thereto should be read in conjunction with the historical financial statements and notes included elsewhere herein. 18 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
HISTORICAL ------------------------------------------------ FARMINGTON OTHER VISTA STORE STORES PRO FORMA COMPANY STORES (NOTE A) (NOTE A) ADJUSTMENTS ----------- --------- ----------- ----------- ------------- Net sales................................................. $ 13,136 $ 4,229 $ 1,247 $ 3,521 Costs and expenses: Cost of sales........................................... 8,942 3,021 826 2,658 Depreciation and amortization........................... 172 10 8 -- $ (18)(1) (48)(1) Selling, general and administrative..................... 3,471 785 299 790 97(3) ----------- --------- ----------- ----------- ----- Total costs and expenses.................................. 12,585 3,816 1,133 3,448 127 ----------- --------- ----------- ----------- ----- Income from operations.................................... 551 413 114 73 (127) Interest expense and other, net........................... 249 -- -- -- 142(2) ----------- --------- ----------- ----------- ----- Income before income taxes................................ 302 413 114 73 (269) Pro forma provision for income taxes (Note B)............. 106 145 40 26 (95)(4) ----------- --------- ----------- ----------- ----- Pro forma net income (Note B)............................. $ 196 $ 268 $ 74 $ 47 $ (174) ----------- --------- ----------- ----------- ----- ----------- --------- ----------- ----------- ----- Pro forma net income per share (Note B)................... Shares used in computation................................ PRO FORMA PRO FORMA ADJUSTMENTS FOR FOR THE ACQUISITIONS OFFERING PRO FORMA ----------- -------------- ------------ Net sales................................................. $ 22,133 $ 22,133 Costs and expenses: Cost of sales........................................... 15,447 15,447 Depreciation and amortization........................... 220 220 Selling, general and administrative..................... 5,442 5,442 ----------- ----- ------------ Total costs and expenses.................................. 21,109 21,109 ----------- ----- ------------ Income from operations.................................... 1,024 1,024 Interest expense and other, net........................... 391 $ (168)(6) 223 ----------- ----- ------------ Income before income taxes................................ 633 168 801 Pro forma provision for income taxes (Note B)............. 222 56(7) 278 ----------- ----- ------------ Pro forma net income (Note B)............................. $ 411 $ 112 $ 523 ----------- ----- ------------ ----------- ----- ------------ Pro forma net income per share (Note B)................... $ 0.23 ------------ ------------ Shares used in computation................................ 2,274,246 ------------ ------------
- ------------------------ Note A: The Farmington Store was acquired by the Company April 27, 1996. The amounts shown for the Farmington Store are for the period January 1, 1996 to April 26, 1996. Additionally, the Company acquired three other stores in 1996 (one in July 1996 and two in November 1996). The historical results of these stores are included for the months in 1996 prior to their respective acquisition. Note B: The adjustments do not include a provision (non-recurring) for deferred income taxes, resulting from a change in S corporation status, related to the tax effect of cumulative differences in financial and tax bases of net assets of approximately $131,000 ($.06 per share) at January 1, 1996. 19 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME THREE MONTHS ENDED MARCH 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
HISTORICAL PRO FORMA ------------------------ ADJUSTMENTS VISTA PRO FORMA PRO FORMA FOR FOR THE COMPANY STORES(A) ADJUSTMENTS ACQUISITIONS OFFERING PRO FORMA ----------- ----------- -------------- ------------- -------------- ---------- Net sales............................... $ 5,113 $ 779 $ 5,892 $ 5,892 Costs and expenses: Cost of sales......................... 3,459 592 4,051 4,051 Depreciation and amortization......... 58 3 $ (3)(1) 64 64 6(1) Selling, general and administrative... 1,322 133 -- 1,455 1,455 ----------- ----- --- ------ --- ---------- Total costs and expenses................ 4,839 728 3 5,570 5,570 ----------- ----- --- ------ --- ---------- Income from operations.................. 274 51 (3) 322 322 Interest expense and other, net......... 53 -- 14(2) 67 $ (39)(6) 28 Income before income taxes.............. 221 51 (17) 255 39 294 Pro forma provision for income taxes (Note B).............................. 77 19 (6)(4) 90 14(7) 104 ----------- ----- --- ------ --- ---------- Pro forma net income (Note B)........... $ 144 $ 32 $ (11) $ 165 $ 25 $ 190 ----------- ----- --- ------ --- ---------- ----------- ----- --- ------ --- ---------- Pro forma net income per share (Note B).................................... $ .08 ---------- ---------- Shares used in computation.............. 2,342,424
- ------------------------ Note A: The Vista Stores were acquired by the Company March 6 and 7, 1997. The amounts shown for the Vista Stores are for the period January 1, 1997 to February 28, 1997. Note B: The adjustments do not include a provision (non-recurring) for deferred income taxes, resulting from a change in S corporation status, related to the tax effect of cumulative differences in financial and tax bases of net assets of approximately $149,000 ($.06 per share) at January 1, 1997. 20 PRO FORMA COMBINED CONDENSED BALANCE SHEET MARCH 31, 1997 (IN THOUSANDS) ASSETS
PRO FORMA ADJUSTMENTS FOR THE HISTORICAL OFFERING PRO FORMA ----------- ------------ ----------- Current assets: Cash...................................................................... $ 110 $ 3,125(5) $ 3,235 Accounts receivable....................................................... 2,051 2,051 Inventories............................................................... 3,986 3,986 Prepaid expenses.......................................................... 27 27 ----------- ------------ ----------- Total current assets........................................................ 6,174 3,125 9,299 Deferred offering costs..................................................... 64 (64)(5) Property and equipment, net................................................. 770 770 Intangibles, net............................................................ 1,342 1,342 ----------- ------------ ----------- Total assets................................................................ $ 8,350 $ 3,061 $ 11,411 ----------- ------------ ----------- ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank overdraft............................................................ $ 730 $ 730 Accounts payable.......................................................... 1,664 1,664 Accrued liabilities....................................................... 214 214 Notes payable............................................................. 2,129 $ (1,475)(5) 654 Current portion of long-term obligations.................................. 379 379 ----------- ------------ ----------- Total current liabilities................................................... 5,116 (1,475) 3,641 Deferred income taxes....................................................... -- 149(8) 149 Long-term obligations....................................................... 1,338 (100)(5) 1,238 Shareholders' equity: Common stock.............................................................. 11 12(5) 23 Additional paid-in capital................................................ 1,760 4,924(5) (324)(9) 6,360 Retained earnings......................................................... 125 (149)(8) (300)(5) 324(9) -- ----------- ------------ ----------- Total shareholders' equity.................................................. 1,896 4,487 6,383 ----------- ------------ ----------- Total liabilities and shareholders' equity.................................. $ 8,350 $ 3,061 $ 11,411 ----------- ------------ ----------- ----------- ------------ -----------
21 ADJUSTMENTS TO PRO FORMA FINANCIAL STATEMENTS ACQUISITIONS OF STORES: (1) Adjust depreciation and amortization of acquired equipment and intangibles to reflect new basis in acquired stores: Eliminate historical depreciation of Vista and Farmington stores: Year ended December 31, 1996.................................... $ 18,000 --------- --------- Three months ended March 31, 1997............................... $ 3,000 --------- --------- Provide depreciation and amortization on acquired bases in equipment and intangibles: Equipment--7 year life--purchase price allocated: Vista stores.................................................. $ 60,000 Farmington store.............................................. $ 75,000 Other stores.................................................. $ 10,000 Intangibles--5 to 20 year life--purchase price allocated: Vista stores.................................................. $ 390,000 Farmington store.............................................. $ 125,000 Other stores.................................................. $ 40,000 Year ended December 31, 1996: Depreciation of equipment-- Vista stores.................................................. $ 9,000 Farmington store.............................................. 2,000 Other stores.................................................. 1,000 Amortization of intangibles-- Vista stores.................................................. 30,000 Farmington store.............................................. 2,000 Other stores.................................................. 4,000 --------- Total....................................................... $ 48,000 --------- --------- Three months ended March 31, 1997: Vista stores Depreciation of equipment..................................... $ 1,000 Amortization of intangibles................................... 5,000 --------- Total....................................................... $ 6,000 --------- ---------
(2) Provide for interest expense on debt issued in acquisitions:
INTEREST ------------------------ ACQUISITIONS DEBT RATE ADJUSTMENTS - ----------------------------------------------------------- ---------- ----------- ----------- Vista stores............................................... $ 999,000 8.6% $ 86,000 Farmington store........................................... $ 662,000 9% 17,000 Other stores............................................... $ 601,000 10.3% 39,000 ----------- Year ended December 31, 1996............................... $ 142,000 ----------- ----------- Three months ended March 31, 1997: (Vista stores)........................................... $ 14,000 ----------- -----------
22 (3) Record additional compensation expense related to management personnel (two persons) converted from part-time to full-time positions to supervise stores acquired in 1996 and 1997: Annualized salary and bonus for 1996............................ $ 180,000 Actual compensation for 1996 (part-time employment basis)....... (83,000) --------- $ 97,000 --------- ---------
(4) Adjust pro forma income taxes (at a rate of 35%) for acquisition adjustments: Year ended December 31, 1996.................................... $ 95,000 --------- --------- Three months ended March 31, 1997............................... $ 6,000 --------- ---------
THE OFFERING: (5) Record the issuance of 1,200,000 shares of Common Stock of the Company in connection with this Offering and the payment of debt and distributions to existing shareholders from the proceeds: Estimated Offering proceeds..................................... $6,000,000 Estimated expenses of Offering.................................. 1,000,000 Estimated net proceeds of Offering.............................. 5,000,000 Repayment of existing indebtedness.............................. 1,575,000 Distributions to existing shareholders.......................... 300,000 --------- Estimated net cash proceeds..................................... $3,125,000 --------- ---------
(6) Reduce interest expense including pro forma amounts related to acquisitions related to repayment of debt of $1,575,000 including $1,150,000 notes payable, at prime + 2%; $325,000 note payable, at 8.5% and $100,000 note payable, at prime + 4%: Year ended December 31, 1996.................................... $ 168,000 --------- --------- Three months ended March 31, 1997............................... $ 39,000 --------- ---------
(7) Record income tax effects (at a rate of 35%) of adjustments: Year ended December 31, 1996.................................... $ 56,000 --------- --------- Three months ended March 31, 1997............................... $ 14,000 --------- ---------
(8) Record deferred income taxes on cumulative differences in financial and tax bases of net assets at date of change from S corporation status as a result of the Offering assuming change of tax status at March 31, 1997: $ 149,000 --------- ---------
(9) Reclassify net accumulated deficit, after the Offering, as paid in capital as a result of termination of Subchapter S election: $ 324,000 --------- ---------
23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's principal business strategy since commencing operations in 1994 has been to establish a chain of retail pharmacies through the acquisition of free-standing full-line retail pharmacies. In evaluating a retail pharmacy for potential acquisition, the Company (i) evaluates the target store's profits and losses for preceding years; (ii) reviews the store's tax returns for preceding years; (iii) reviews computer-generated prescription reports showing historical information including prescriptions sold, average price of each prescription, gross margins and trends in prescription sales; (iv) analyzes the store's location and competition in the immediate area; (v) reviews the store's lease agreement, if any; and (vi) assesses targeted areas for growth patterns and trends. Based on the Company's analysis of the foregoing items, the Company prepares an offer to purchase the particular store. To assess the reasonableness of the purchase price offered by a seller, the Company considers the anticipated rate of return, payback period, and the availability and terms of seller financing, it being generally desired that 50% of the purchase price be seller-financed with the balance split between cash and other consideration such as Company stock. In each of 1994, 1995 and 1996 the Company acquired three, four and four retail pharmacies, respectively. These acquisitions are the principal influence on the Company's results of operations and financial condition. The primary measurement of the effect of acquisitions on the Company's operating performance is the number of store operating months, which is the number of months all stores were owned by the Company during the relevant measuring period. Acquisitions are expected to continue as the most significant factor in the Company's growth strategy. Currently, the Company's primary source of revenue is the sale of prescription drugs. During 1996, sales of prescription drugs generated 80.0% of the Company's net sales; in the first quarter of 1997, prescription drugs generated 79.4% of sales. Management expects the Company's prescription drug business to continue to increase on an annual basis as a result of the demographic trends towards an aging population and the continued development of new pharmaceutical products. However, the Company anticipates that such sales will decrease as a percentage of the Company's overall sales and gross margins as the Company expands its home healthcare and other non-pharmaceutical sales and services which have historically generated higher margins. The Company's sales and profits are higher during peak holiday periods and from Christmas through Easter. Sales of health-related products peak during seasonal outbreaks of cough and cold/flu viruses, which typically occur during the winter and spring. Accordingly, sales and profits are typically highest in the fourth quarter and the first quarter of the ensuing year. 24 RESULTS OF OPERATIONS The following table sets forth the percentage relationship of certain income statement data:
YEAR ENDED DECEMBER THREE MONTHS ENDED 31, MARCH 31, -------------------- -------------------- 1995 1996 1996 1997 --------- --------- --------- --------- INCOME STATEMENT DATA Prescription drugs................................................ 83.5% 80.0% 84.0% 79.4% Other............................................................. 16.5% 20.0% 16.0% 20.6% --------- --------- --------- --------- Total net sales................................................. 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- --------- --------- --------- COSTS AND EXPENSES: Cost of sales--prescription drugs(1).............................. 68.7% 69.5% 66.4% 69.2% Cost of sales--other(2)........................................... 75.1% 62.3% 74.9% 61.7% Selling, general and administrative expenses(3)................... 24.2% 26.4% 24.5% 25.9% Depreciation and amortization(3).................................. 1.6% 1.3% 1.4% 1.1% Interest expense(3)............................................... 1.8% 1.9% 1.8% 1.0% PRO FORMA NET INCOME(3)(4).......................................... 1.8% 1.5% 3.0% 2.8%
- ------------------------ (1) As a percentage of prescription drug sales. (2) As a percentage of other sales. (3) As a percentage of total net sales. (4) After pro forma provisions for income taxes. The Company's historical operating results include the operating results of the Vista Stores after these acquisitions in March 1997. In connection with the acquisition of the Vista Stores, the Company acquired certain accounts receivable, supplies, furniture, fixtures and equipment, as well as intangible assets including pharmacy files and goodwill. In consideration for the purchase of such assets the Company paid $100,000 (proceeds from a note payable to a shareholder) and executed a promissory note in the amount of $898,642 payable in varying installments until December 25, 1997 and bearing interest at 8.5% per year. Historically, the Vista Stores have had positive operating results, recognizing net sales of $4,229,000 in 1996 and pro forma net income in 1996 of $268,000. The Company expects that the Vista Stores will increase the Company's income from operations, however, the extent to which the Vista Stores may contribute is uncertain and there can be no assurance that such stores will actually operate at a profit. Intangible assets, including but not limited to goodwill, pharmacy files and non-compete covenants, have historically represented a substantial portion of the Company's acquisition costs. Such assets are generally amortized over a period of not more than 20 years. Accordingly, the amortization of intangible assets is not expected to have a significant effect on the Company's future results of operations. NET SALES The Company's total net sales increased $2,746,667 or 116%, to $5,113,247 in the first quarter of 1997 compared to $2,366,580 in the first quarter of 1996. The increase was attributable primarily to the increase in store operating months from 21 in the first quarter of 1996 to 36 in the first quarter of 1997. Total net sales increased by $6,866,738 or 110%, to $13,136,319 in 1996, from $6,269,581 in 1995. The increase was attributable primarily to the increase in store operating months from 58 in 1995 to 101 in 1996. Net sales of prescription drugs increased by $5,280,107, or 101% to $10,515,353 for 1996 compared to $5,235,246 for 1995 and by $2,071,832, or 104% to $4,060,266 for the first quarter of 1997 compared to $1,988,434 in the first quarter of 1996. Third-party reimbursed sales accounted for approximately 52% of 25 the Company's total prescription sales in 1996, as compared to 46% in 1995. Higher reimbursement sales have typically resulted in a decrease in gross margins due to the lower prices negotiated by third party payors. This decrease has been more than offset, however, by the Company's efforts to manage inventory levels and by purchasing efforts, resulting in a slight margin percentage increase in 1996 as well as in the first quarter of 1997. The following tables show the Company's prescription drug gross margins and total sales margins for 1995, 1996 and the first quarters of 1996 and 1997:
GROSS MARGINS ON GROSS MARGINS ON PRESCRIPTION DRUG SALES TOTAL SALES --------------------------- --------------------------- YEAR AMOUNT PERCENTAGE AMOUNT PERCENTAGE - -------------------------------------- ------------ ------------- ------------ ------------- 1996.................................. $ 3,205,973 30.5% $ 4,194,614 31.9% 1995.................................. 1,639,956 31.3% 1,897,774 30.3% GROSS MARGINS ON GROSS MARGINS ON PRESCRIPTION DRUG SALES TOTAL SALES --------------------------- --------------------------- FIRST QUARTER AMOUNT PERCENTAGE AMOUNT PERCENTAGE - -------------------------------------- ------------ ------------- ------------ ------------- 1997.................................. $ 1,251,008 30.8% $ 1,654,743 32.4% 1996.................................. 668,152 33.6% 763,068 32.2%
Sales of prescription drugs decreased from 83.5% of total sales for 1995 to 80.0% of total sales for 1996 and from 84.0% of total sales for the first quarter of 1996 to 79.4% for the first quarter of 1997. The Company expects that prescription drug sales will continue to decrease as a percentage of total sales as the Company expands its home healthcare and other non-pharmaceutical sales and services, whose gross margins exceed those of pharmaceutical sales. Same store sales, which includes only the first three stores acquired by the Company, decreased from $3,344,552 in 1995 to $3,265,627 in 1996. Management believes the decrease is not representative of Company-wide sales because of the small size of the comparison sample and the three stores subject to the comparison are among the smallest stores in the Company's chain. Same store sales for the Company's first seven stores increased from $2,366,580 in the first quarter of 1996 to $2,558,755 in the first quarter of 1997. Management believes that this 8.12% increase is primarily the result of increased advertising and promotions as well as an enhanced product mix. COSTS AND EXPENSES Cost of sales increased $4,569,898 or 105%, to $8,941,705 in 1996 as compared to $4,371,807 in 1995. For the first quarter of 1997, the cost of sales increased $1,854,992, or 116%, to $3,458,504 as compared to $1,603,512 in the first quarter of 1996. These increases are primarily the result of increased sales volume due to the increased number of store operating months for the respective periods. Cost of total sales as a percentage of total sales decreased 1.6% from 1995 to 1996 and .2% for the first quarter of 1997 from the first quarter of 1996. These decreases are primarily the result of more favorable pricing terms from the Company's primary wholesaler, as well as management's continual monitoring and adjusting of pricing. The increase of selling, general and administrative expenses from $1,519,439 in 1995 to $3,471,370 in 1996 and from $580,035 in the first quarter of 1996 to $1,322,381 in the first quarter of 1997 are principally due to increased store count and resulting increased store operating months. Such expenses, expressed as a percentage of net sales, were 26.4% and 24.2% for 1996 and 1995, and 25.9% and 24.5% for the first quarters of 1997 and 1996, respectively. These percentage increases in expense were primarily due to increases in payroll associated with the recruiting and hiring of personnel and costs associated with the acquisition of the Company's corporate office building in 1996. Salary and bonus expenses will increase as a result of the execution of the Employment Agreements between the Company and Messrs. Frauhiger, 26 Herr, McCord, Mueller and Shahid, and Ms. Papaneri, respectively. The Company expects that such increases in salary and bonus costs will be offset by the expected increase in revenues associated with the Company's planned acquisition of additional retail pharmacy stores. Interest expense was $252,767 in 1996 compared to $109,828 in 1995 and $53,531 in the first quarter of 1997 compared to $42,660 in the first quarter of 1996. The increase in interest expense resulted primarily from the increase in the Company's indebtedness associated with the Company's acquisition of four stores and its corporate office building in 1996 and higher interest rates. Because the Company has historically operated as an S Corporation, it has not heretofore incurred any income taxes. As a result of the termination of its S Corporation election in connection with this Offering, the Company will be a taxpaying entity, and will be subject to the payment of taxes on all non-exempt income at applicable Federal and state income tax rates. EARNINGS Pro forma net income for 1996 rose to $196,353 from $114,629 in 1995, and continued to increase from $71,515 in the first quarter of 1996 to $143,528 in the first quarter of 1997. Because the Company has maintained S corporation status since 1994, no income taxes have been included in the determination of historical net income. LIQUIDITY AND CAPITAL RESOURCES Cash flow provided by operating activities was $49,456 in 1996 and $287,519 in 1995. Although earnings have increased, less cash was provided by operations largely due to increases in accounts receivable resulting from store acquisitions. Typically, cash provided by operations is adequate to supply working capital, and contribute to investing activities. External sources of cash are used mainly to help finance store acquisitions. The Company believes that the operating needs to be incurred in connection with its capital expansion program, including growth in accounts receivable and inventory, will be funded by cash flow from operations supplemented by the approximately $750,000 of the proceeds from the Offering designated for working capital. The Company will have available approximately $2,375,000 from the proceeds of the Offering which will be used to support an aggressive store acquisition program. The Company believes that based on prior acquisitions, the average acquisition cost per store will be approximately $500,000 to $700,000 based on such variables as store sales and profits. Management believes it will be able to obtain seller financing for approximately 50% of the cost of each such acquisition. In addition to the expansion capital expected to be available from the proceeds of the Offering, the Company has had discussions with Plano Bank and Trust, Plano, Texas with regard to a $2,000,000 credit facility which would be provided to the Company upon completion of the Offering. Although the terms of the proposed credit facility have not yet been negotiated, nor approved by Plano Bank and Trust, such terms may include restrictive covenants such as financial ratio requirements with which the Company would have to comply to maintain the credit facility. No funds have been borrowed under this credit facility. In the event the Company does not obtain the credit facility, the Company will modify or reduce its acquisition schedule. While management does not expect that the failure to obtain the credit facility would adversely affect the Company's cash flow, there can be no assurance that cash flow would not be affected. Based on the foregoing and with the expected $2,375,000 of Offering proceeds available for acquisitions, the Company expects to be able to meet its current expansion schedule without additional borrowings assuming the contemplated seller financing is available. Management expects that the proceeds generated from the Offering will be sufficient to support the ongoing acquisition activities of the business for approximately 12 to 18 months, although there can be no assurance that such proceeds will be adequate to support the Company's acquisitions during such period. 27 The Company expects to fund ongoing acquisitions after 1997 with proceeds from this Offering, income from current operations, seller financing of acquisitions and possible future equity offerings. In addition, management expects to convert, during the next 12 to 18 months, between two and three of its existing stores to "healthcare centers." Management expects to incur a minimum of $20,000 to $40,000 in conversion costs per store. The costs of such conversion are expected to be funded from operations. IMPACT OF INFLATION AND CHANGING PRICES Though not significant, inflation continues to cause increases in product, occupancy and operating expenses, as well as the cost of acquiring capital assets. The effect of higher costs is minimized by achieving operating efficiencies and passing vendor price increases along to the consumers. 28 BUSINESS GENERAL The Company owns and operates a chain of 14 retail pharmacies (including the three Vista Stores acquired in March 1997), nine of which are located in Texas, two in Virginia, and one each in New Mexico, Oklahoma and Wisconsin. According to the April 28, 1997 issue of CHAIN DRUG REVIEW, the Company is among the top 100 retail pharmacy chains in the United States based on store count and dollar volume of sales. The Company plans to acquire between eight and 12 pharmacies annually in each of 1997, 1998 and 1999. The Company was formed by Messrs. Frauhiger, Herr, McCord and Shahid who each were employed by True Quality Pharmacies, Inc. ("True Quality") at the time of the Company's formation. Mr. McCord also served on the Board of Directors of True Quality prior to the Company's formation. Although for a period of time following their departure from True Quality Messrs. Frauhiger, Herr, McCord and Shahid continued as part-time employees of True Quality as a means of easing the transition for their successors, and the Company has acquired three pharmacies from True Quality, there is no continuing business relationship between True Quality and the Company or its management. The Company began operating in February 1994 for the purpose of acquiring and consolidating under the HORIZON Pharmacies, Inc. name, high volume, free-standing full-service retail pharmacies primarily located in communities having populations of fewer than 50,000 persons. The primary sources of the Company's acquisitions are retiring pharmacists, small chains and the Federal Trade Commission ("FTC"). The Company believes that its success is primarily due to its philosophy of retaining the individual, time-proven customer service characteristics of the stores it acquires, while enabling such stores to offer complete and competitively priced inventories to their small town customers through enhanced technology and the consolidation and management of such stores as a chain. Furthermore, the Company believes that communities of this size offer more competitive rent and labor costs. In addition to prescription drugs and services, the Company's retail pharmacies offer a broad range of over-the-counter medications, supplies and equipment, health and beauty aids, cosmetics, gifts, greeting cards, convenience foods, cameras, photo supplies and processing services and other general merchandise. Some stores incorporate special features such as drive-through windows and free home delivery for customer convenience, optical departments, fax, copying and package delivery services and soda fountains. In addition, the Company's Farmington, New Mexico store sells and leases DME, IV infusion and home oxygen therapy, and offers home healthcare services under the name HORIZON Home Care. The Company intends to expand such services to certain of its other stores and in April 1997 formed a wholly-owned subsidiary named HORIZON Home Care, Inc. The Company also plans to acquire and consolidate the inventory and pharmacy files of certain retail pharmacies in its existing market areas to increase sales volume in existing stores in a cost-effective manner. Stores which are acquired by the Company will not be remodeled to fit a standardized format, but will, to the extent practicable, be permitted to retain their individual layouts, locations and management styles. As part of its marketing strategy, the Company plans to convert between one and five of its existing stores into "healthcare centers" similar to that currently operated by its store located in Farmington, New Mexico. Each such center will offer home healthcare services and may lease to an unaffiliated third party owner-operator a small clinic staffed by a physician's assistant or nurse practitioner located adjacent to the store's traditional retail pharmacy operations. The Company intends for such healthcare centers to offer customers "one-stop shopping" at competitive prices for basic medical and home healthcare services. The Company believes that providing such home healthcare and basic medical services adjacent to its retail pharmacies will result in increased sales and profits for such stores. 29 The Company was incorporated under the laws of the State of Texas on August 31, 1992 and began operations under the name HORIZON Pharmacies, Inc. in February 1994. The Company's principal office is located at 275 W. Princeton Drive, Princeton, Texas 75407, and its telephone number is (972) 736-2424. THE RETAIL PHARMACY INDUSTRY Prescription and over-the-counter medications have traditionally been sold by independent retail pharmacies as well as conventional retail pharmacy chains, and purchased by consumers with cash or credit cards. The retail pharmacy industry has recently undergone significant changes as a result of the following important trends: (i) the increase in third-party reimbursement for prescription drugs; (ii) the consolidation within the retail pharmacy industry; (iii) the aging of the United States population; and (iv) the increase in competition from non-traditional retailers of prescription and over-the-counter drugs. During the last several years, a growing percentage of prescription drug volume throughout the industry has been accounted for by sales to customers who are covered by third-party reimbursement plans. According to the 1995 NARD--Lilly Digest, in 1994, third-party reimbursement represented approximately 56% of total prescription drug sales in the United States, an increase of 4% over the previous year. In a typical third-party reimbursement plan, the retail pharmacy has a contract with a third-party payor, such as an insurance company, HMO, PPO, other managed care provider, government agency or private employer, which agrees to pay for part or all of a customer's eligible prescription purchases. Although these third-party payors often account for a high volume of prescription sales, such sales typically generate lower gross margins than non third-party payor sales due principally to the highly competitive nature of this business and recent efforts by third-party payors to contain costs. As a result of the economies of scale from which larger retail chains benefit as well as the trend toward third-party reimbursement, the number of independent retail pharmacies and smaller retail pharmacy chains has decreased as many of such retailers have been acquired by larger retail pharmacy chains or gone out of business. This trend is expected to continue because larger chains are better positioned to handle the increased third-party payor sales, purchase inventory on more advantageous terms and achieve other economies of scale with respect to their marketing, advertising, distribution and other expenditures. The Company believes that the number of independent retail pharmacies and smaller retail pharmacy chains remaining in operation may provide significant acquisition opportunities for larger retail pharmacy chains, such as the Company. In 1996, retail pharmacy chains and independent retail pharmacies represented approximately 39% and 27%, respectively, of all retail prescription sales in the United States. In response to a number of factors, including the aging population of the United States, mass merchants (including discounters and deep discounters), supermarkets, combination food and retail pharmacies, mail order distributors, hospitals, HMOs and other managed care providers have entered the prescription industry. Supermarkets, including combination food and retail pharmacies, and mass merchants each represented approximately 11% of all prescription sales in the United States in 1995. Although the Company currently faces increased competition from these retailers, industry studies show that consumers in the over-65 age group tend to make purchases at traditional retail pharmacies, such as HORIZON Pharmacy stores, and maintain strong store loyalty. 30 HORIZON PHARMACIES As of May 29, 1997, the Company operated 14 stores. The following table summarizes the number of stores operated by the Company and the year in which each respective store was acquired by the Company.
STORE LOCATIONS YEAR ACQUIRED - ----------------------------------------------------------- --------------- Winnsboro, Texas 1994 Princeton, Texas** 1994 Cuero, Texas 1994 Bonham, Texas 1995 Uvalde, Texas 1995 Cleburne, Texas 1995 McLoud, Oklahoma 1995 Farmington, New Mexico* 1996 Tomah, Wisconsin 1996 Marion, Virginia 1996 Covington, Virginia 1996 Mineola, Texas 1997 Mt. Vernon, Texas 1997 McKinney, Texas 1997
- ------------------------ * Indicates home healthcare services offered. ** Indicates the Company has submitted an application for home healthcare license. BUSINESS STRATEGY The Company's business strategy is to continue to expand through acquisitions and to increase individual store profitability. In implementing its business strategy, the Company intends to continue cost-control programs, continue and improve employee training, negotiate increases in vendor rebates, maintain a high level of customer service and convenience, increase sales in each department in each store and maintain competitive pricing. To mitigate the effect of third-party reimbursement on pharmaceutical sales, the Company also plans to expand its home healthcare and non-pharmaceutical sales and services. CUSTOMER SERVICE AND CONVENIENCE. The Company believes that customer service and convenience are critical in positioning itself as an alternative to mass merchandisers, supermarkets and other large format retailing channels. The Company will continue to emphasize service and convenience through pharmacy support services, home healthcare services, store location and design, drive through pick-up and home delivery, merchandising programs and operating hours geared to the needs of the particular market. The Company offers a high level of professional pharmacy services, which the Company believes provides added value to its customers. The Company operates a computer software program which enables each of the Company's stores to provide to each prescription drug customer a printout which advises the customer of the specific dosages, drug interactions and side effects of his or her prescription medicine. See "--Merchandising and Marketing." The Company will continue to arrange and merchandise its stores to provide modern, well-identified stores, which are easily accessible to customers. The Company's stores range in size from approximately 3,600 to 12,000 square feet and are located primarily in neighborhood strip shopping centers or free standing locations in communities having populations of fewer than 50,000 persons. The Company's stores are typically open Monday through Saturday from 8:00 a.m. until 6:00 p.m. and certain stores are open from 11:00 a.m. to 5:00 p.m. on Sunday. 31 COMPETITIVE PRICING. While the Company believes that it competes primarily on the basis of customer service and convenience, price is also an important factor. The Company's policy is to price its prescription drug products competitively. The Company believes that this policy has enhanced its competitive position with retail pharmacies and other shopping formats. COST CONTROLS. The Company's continued commitment to control costs and maintain its competitive position in the marketplace focuses on decreasing expenses without decreasing the level of services provided in its stores. The Company continues to actively evaluate and pursue additional cost savings, such as inventory control and computerized point of sale information, which can be obtained without affecting the Company's customer service, quality or sales growth potential. There can be no assurance, however, that any additional cost reductions will be realized. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." EXPANSION STRATEGY The Company intends to continue to expand its business by acquiring smaller retail pharmacy chains and independent retail pharmacies primarily located in communities having populations of fewer than 50,000 persons. In identifying retail pharmacies for potential acquisition, the Company evaluates a number of demographic considerations, including the size, growth pattern and per capita income of the population, as well as the competitive environment and the accessibility of a proposed site to the customer. The Company also evaluates the respective store's historical financial performance, focusing on stores having annual sales volumes between $1,500,000 and $5,000,000. The Company has also acquired two retail pharmacy stores from the FTC and will continue to evaluate the purchase of other stores which may be offered for sale by the FTC. As part of its regulatory function, the FTC occasionally mandates the divestiture of certain retail pharmacies, generally in connection with its approval of a merger or acquisition of two companies which each own a group of pharmacies. The Company's goal for the next three years is to acquire between eight and 12 new retail pharmacies in each of 1997, 1998 and 1999. The Company intends to use a portion of the proceeds of this Offering and cash flow from operations to finance the cash costs of this growth, although borrowings may also be available to finance such growth. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." PRODUCTS AND SERVICES PHARMACY. The primary focus of the Company is the sale of prescription and over-the-counter drugs. During 1996, the Company filled approximately 500,000 prescriptions, and sales of prescription drugs generated approximately 80% of the Company's net sales. The Company believes that it is well positioned to take advantage of certain demographic trends, including the aging of the United States population. Nine of the Company's retail pharmacies are located in Texas, one of the top three states experiencing the greatest migrations of persons over age 65. The Company also believes that it is capable of meeting the needs of the increasing volume of third-party prescription sales and is aggressively marketing itself to third-party payors. See "Government Regulation and Healthcare Reform" and "Third-Party Reimbursement." The Company believes that new prescription drugs and drug therapies provide an opportunity for increased demand for prescription drugs. In addition, the FDA is approving an increasing number of prescription products for sale over the counter. Prescription drugs which are approved for over-the-counter distribution have historically shown significantly increased sales. NONPHARMACEUTICAL MERCHANDISE. HORIZON Pharmacy stores sell a wide variety of nonpharmaceutical merchandise, including gifts, over-the-counter drugs, health and beauty aids, greeting cards and numerous other convenience products. The Company's stores offer a broad assortment of popular national 32 brand over-the-counter drugs and other products related to dental care, foot care, vitamins and nutritional supplements, feminine hygiene, family planning and baby care. The Company's stores provide a helpful environment in which consumers can obtain product information from professional pharmacists, knowledgeable sales employees and store managers or from literature available throughout the store. Each of the Company's stores also offers an assortment of popular brand name cosmetics, fragrances and other beauty products. A wide selection of gifts, greeting cards, gift wrap, bows and novelties are also offered. Assorted convenience products including candy, food, tobacco products, books and magazines, household products, seasonal merchandise and toys are also offered. Certain of the Company's stores also offer camera and photo accessories, photo processing, small electronics, batteries and audio and video tapes. HOME HEALTHCARE SERVICES The Company's Farmington, New Mexico store is currently licensed and offers under the name HORIZON Home Care certain home healthcare services. In April 1997, the Company formed HORIZON Home Care, Inc. as its wholly-owned subsidiary. The Company has applied for a home healthcare services license for its Princeton, Texas store and anticipates receiving such license within the next 90 to 180 days. The home healthcare services offered by the Company's Farmington store currently include: (i) respiratory therapy; (ii) DME; (iii) patient services, including nursing and para-professional services; and (iv) infusion therapy. The Company provides patients with a variety of services and related products, many of which are essential to the proper implementation of a physician's treatment plan. RESPIRATORY THERAPY. The Company provides home respiratory services to patients with a variety of conditions, including chronic obstructive pulmonary disease (e.g., emphysema, chronic bronchitis and asthma), cystic fibrosis and neurologically-related respiratory conditions. The Company contracts with respiratory care professionals to provide support to its home respiratory therapy patients. These professionals manage the needs of the Company's patients according to physician-directed plans of care. DURABLE MEDICAL EQUIPMENT. The Company also offers for sale and lease, certain DME which primarily consists of patient room equipment (such as hospital beds, patient lifts and commodes), ambulatory aids (such as walkers and canes) and bathroom safety items. The Company's broad range of product offerings provides patients requiring either infusion, nursing or respiratory services access to needed DME through a single source. NURSING AND PARA-PROFESSIONAL SERVICES. The Company offers a broad range of professional nursing and para-professional services to meet a patient's medical and personal needs, principally in the home. These services include pediatric and adult care, such as ventilator care; administration of infusion therapies, including chemotherapy, antibiotics, enteral and parenteral feeding; standard skilled nursing services such as changing dressings, injections, catheterization and administration of medication; physical, respiratory, occupational and speech therapy; home health aide services, such as assistance with personal hygiene, dressing and feeding; and homemaker services, such as the preparation of meals and light house cleaning. INFUSION THERAPY. Infusion therapy involves the intravenous administration of nutrients, antibiotics or other medications to patients in their homes usually as a continuation of treatment initiated in the hospital. The infusion therapies provided by the Company include antibiotic and related therapies (therapies used to treat various infections and diseases); parenteral nutrition therapy (the intravenous feeding of life sustaining nutrients to patients with impaired or altered digestive tracts due to gastrointestinal illness, such as an intestinal obstruction or inflammatory bowel disease); enteral nutrition therapy (the administration of nutrients through a feeding tube to patients who cannot eat as a result of an obstruction to the digestive tract or because they are otherwise unable to feed themselves orally); chemotherapy (the intravenous administration of cancer inhibiting drugs through either rapid or continuous infusion); pain management 33 (the administration of pain controlling drugs such as morphine and Demerol to terminally or chronically ill patients); and other therapies. STORE OPERATIONS The Company's current stores are generally located in free-standing stores or in strip shopping centers located near the communities' main thoroughfare. Although the Company does not remodel stores upon acquisition to conform to a particular format, it arranges its stores to facilitate customer movement and to maximize product visibility. The Company's pharmacy departments are generally located near the back of its stores to maximize customer exposure to the store. Most of the stores are equipped with modern fixtures and equipment and range in size from approximately 3,600 to 12,000 square feet. The Company utilizes centrally prepared formats for the display and stocking of its stores, while allowing individual store managers some flexibility with regard to choice and display of the merchandise assortment based upon the Company's strategy of tailoring its stores to the markets in which the respective stores operate. PURCHASING AND DISTRIBUTION The Company centrally purchases most of its merchandise from Bergen Brunswig and other vendors, enabling it to benefit from promotional programs and volume discounts offered by such companies. All merchandise is shipped directly to the Company's stores at prices generally negotiated at the corporate level. The Company's primary vendor is Bergen Brunswig which supplied approximately 83.6% of the Company's inventory in 1996. Bergen Brunswig is also the Company's primary creditor. See "Risk Factors--Reliance on Single Supplier" and "Use of Proceeds." MERCHANDISING AND MARKETING The Company's merchandising strategy is to offer a broad selection of traditional retail pharmacy items, including both nationally advertised and private label products. Substantially all products are offered at competitive prices. The Company emphasizes value and customer service in attractive, conveniently located drugstores. It uses color, signs, packaging and other merchandising aids to reinforce its name and low prices, and to showcase its products. The pharmacy department in each of the Company's stores carries a complete line of both brand name and generic drugs. The Company has been expanding its prescription drug business by promoting the use of less costly generic drugs whenever possible, and by entering into arrangements with insurance companies, HMOs and other healthcare groups for the sale of prescription drugs under third-party reimbursement programs. Each of the Company's pharmacy departments utilizes a computer system which includes software which enables the Company's pharmacists to recall a customer's pharmacy history for the purpose of identifying possible allergies, drug interactions or therapeutic duplication, and to provide customers with a complete record of medication dispensed. The Company's computer software system also enables the Company to identify generic equivalents of brand name drugs, centrally control prescription prices, increase the speed of processing prescriptions and reduce the paperwork normally involved in, and thus expedite the collection of amounts due the Company under, third-party reimbursement programs. The Company sells certain private label products which enables the Company to sell products, comparable in quality to name brand products, at lower prices to its customers, but at higher gross margins for the Company. Most photo processing services offered at Company stores are provided by an independent contractor who provides the stores with a "drop box" into which the customer places its film for processing. The independent contractor collects the film, processes it and returns the printed photos to the respective 34 stores for pick-up and payment by the customer. One of the Company's stores operates its own photo lab and processes customers' film itself. The Company advertises principally through the use of radio, newspaper, direct mail and advertising circulars. GOVERNMENTAL REGULATION AND HEALTHCARE REFORM GENERAL. All of the Company's pharmacists and pharmacies are required to be licensed by the appropriate state boards of pharmacy. The Company's retail pharmacies are also registered with the Federal Drug Enforcement Administration. By virtue of these license and registration requirements, the Company is obligated to observe certain rules and regulations, and a violation of such rules and regulations could result in a suspension or revocation of the licenses or registrations. The Company relies on prescription drug sales for a significant portion of its revenues and profits, and prescription drug sales represent a significant segment of the Company's business. These revenues are affected by changes within the healthcare industry, including changes in programs providing for reimbursement of the cost of prescription drugs by third-party payment plans, such as government and private plans, and regulatory changes relating to the approval process for prescription drugs. The Company has a number of third-party payor contracts pursuant to which the Company is a provider of prescription drugs. "Freedom of Choice" state statutes, pursuant to which all pharmacies would be entitled to be a provider under such a contract, have been enacted in certain states, including Alabama, Georgia, New Jersey, North Carolina, Louisiana, South Carolina, Tennessee and Texas, and may be enacted in others. Although such statutes may adversely affect certain of the Company's third-party contracts, they may also provide the Company with opportunities regarding additional third-party contracts. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the healthcare system, either nationally or at the state level. The Company cannot predict whether any Federal or state healthcare reform legislation will eventually be passed, and if so, the impact thereof on the Company's financial position or results of operations. Healthcare reform, if implemented, could adversely affect the pricing of prescription drugs or the amount of reimbursement from governmental agencies and third-party payors, and consequently could be adverse to the Company. However, to the extent healthcare reform expands the number of persons receiving healthcare benefits covering the purchase of prescription drugs, it may also result in increased purchases of such drugs and could thereby have a favorable impact on both the Company and the retail drug industry in general. Nevertheless, there can be no assurance that any future Federal or state healthcare reform legislation will not adversely affect the Company or the retail pharmacy industry generally. In 1990, Congress enacted the Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990"), which includes a requirement that states implement pharmaceutical drug use review programs for Medicaid beneficiaries receiving covered out-patient prescription drugs. The OBRA 1990 legislation states that pharmacists must offer to discuss with each Medicaid patient "common, severe side or adverse effects or interactions and therapeutic contraindications that may be encountered, including their avoidance and the action required if they occur." In order to ensure reimbursement of out-patient prescription drugs under Medicaid, states were required, pursuant to the OBRA 1990 legislation, to implement drug use review programs by January 1, 1993. In all states where the Company operates, the State Pharmacy Practices Acts have expanded the OBRA requirements to include all patients receiving prescriptions in a retail setting. Pharmacists now have a duty to warn the purchaser of a prescription drug if the warning could reduce or negate the adverse effects of the use of such drug. 35 The Company's operations are also subject to Federal and state laws governing such matters as wages, working conditions and overtime. TEXAS LEGISLATION. Currently, nine of the Company's 14 retail pharmacies are located in Texas, and other retail pharmacies located in Texas may be acquired by the Company. Consequently, the Company may be affected by any significant healthcare legislative proposals enacted in the state of Texas. The Texas legislature is considering a proposal which would reduce Medicaid reimbursements to Texas pharmacies by 5% in anticipation of a Federal reduction in Medicaid pharmacy payments. While any such reductions would affect the Company's Medicaid reimbursements, management believes that the Company's overall revenues and profitability will not be materially adversely affected, although there can be no assurance that revenues or profitability will not be affected by any such legislation. THIRD-PARTY REIMBURSEMENT A growing percentage of the Company's prescription drug volume has been accounted for by sales to customers who are covered by third-party payment programs. Third-party reimbursement accounted for approximately 52% of the Company's prescription sales in 1996, 46% in 1995 and 36% in 1994, and the Company expects this trend to continue. Although contracts with third-party payors may increase the volume of prescription sales and gross profits, third-party payors typically negotiate lower prescription prices than those of non third-party payors. Accordingly, there has been downward pressure on gross profit margins on sales of prescription drugs which is expected to continue in future periods. Further, payments from Medicare and Medicaid represent 29% of all third-party payor sales. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The Company's retail pharmacies operate in a highly competitive industry, and compete primarily on the basis of customer service, convenience of location and store design, price and product mix and selection. In addition to traditional competition from independent retail pharmacies and other retail pharmacy chains, the Company faces competition from mass merchants (including discounters and deep discounters), supermarkets, combination food and retail pharmacies, mail order distributors, hospitals and HMOs. These other formats have experienced significant growth in their market share of the prescription and over-the-counter drug business. The Company's home healthcare services compete with certain chain operations and independent single unit stores. Many of the Company's competitors have greater financial resources than the Company. TRADEMARKS AND SERVICE MARKS No patent, trademark, license, franchise or concession is considered to be of material importance to the business of the Company other than the trade names under which the Company operates its retail businesses, including the HORIZON Pharmacies and HORIZON Home Care names. The Company recently filed applications for Federal trademark protection of such trade names. PROPERTIES The Company's principal offices are currently located at 275 W. Princeton Drive, Princeton, Texas, 75407, where it owns a 5,500 square foot building. The Company also owns the furniture and fixtures in each of its stores. However, the Company conducts substantially all of its retail businesses under noncancelable leases, many of which expire within the next eight years. In the normal course of business, however, it is expected that leases will be renewed or replaced by leases on other properties. No single lease is material to the Company's operations. 36 EMPLOYEES At March 31, 1997, the Company employed approximately 180 employees, approximately 110 on a full-time basis. None of the Company's employees are represented by a labor union and the Company believes that its relations with its employees are good. LEGAL PROCEEDINGS From time to time, the Company may be involved in litigation relating to claims arising out of its normal business operation. The Company is not now engaged in any legal proceedings. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the directors and executive officers of the Company.
NAME AGE POSITION - -------------------------------- --- -------------------------------------------------------------------------- Rick D. McCord, R.Ph.(1) 42 Chairman of the Board of Directors, President, Chief Operating Officer Sy S. Shahid(2) 46 Director, Executive Vice President, Secretary David W. Frauhiger(2) 35 Director, Chief Financial Officer, Treasurer Charlie K. Herr, R.Ph.(1) 57 Director, Southern Regional Manager Carson A. McDonald(3) 37 Director Robert D. Mueller, R.Ph.(2) 39 Director, Western Regional Manager Philip H. Yielding(3) 38 Director
- ------------------------ (1) Class III Director whose term expires in 2000. (2) Class II Director whose term expires in 1999. (3) Class I Director nominee whose term, if elected, will expire in 1998. RICK D. MCCORD, R.PH., has served as Director, President and Chief Operating Officer since the Company's inception. Mr. McCord, who has been a licensed pharmacist in the State of Texas since 1977, was employed by True Quality Pharmacies, Inc., a multi-location, multi-state retail pharmacy, from 1977 through 1993. During such time, Mr. McCord served as pharmacist and store manager from 1977 to 1981, as district manager from 1982 to 1992, and as a director from 1980 through 1990. SY S. SHAHID has served as Director, Executive Vice President and Secretary since the Company's inception. From February 1989 to February 1994, Mr. Shahid served full-time as the Director of Management Information Systems of True Quality Pharmacies, Inc., and thereafter, until October 1996, he served part-time in the same capacity. Mr. Shahid served as Financial Systems Manager for 1st Texas Savings during 1988, and as Financial Systems Manager for Lomas and Nettleton during 1987. DAVID W. FRAUHIGER has served as Director, Controller and Treasurer since the Company's inception, acting part time from February 1994 through June 1996 and full-time thereafter, and as Chief Financial Officer since March 1997. Mr. Frauhiger served as the full-time controller for True Quality Pharmacies, Inc. from June 1991 to March 1996, and as the part-time controller from March 1996 until April 1997. Prior to such time Mr. Frauhiger worked as an assistant controller for SunWest Companies, a commercial real estate company, from September 1988 to June 1991, and as an accountant for Jeffrey L. Harbin, CPA from January 1982 to September 1988. 37 CHARLIE K. HERR, R.PH., has served as Director and Southern Regional Manager since the Company's inception. Mr. Herr has been a practicing pharmacist since 1963, serving as Pharmacist in Charge (PIC) for True Quality Pharmacies, Inc. from July 1969 to December 1995. Mr. Herr is licensed to practice in Colorado, Kansas, Missouri, New Mexico, Oklahoma, Texas and Virginia. ROBERT D. MUELLER, R.PH., has served as Director and Western Regional Manager of the Company from August 1995 to the present. Mr. Mueller has been a practicing pharmacist since 1980, and is licensed in New Mexico, Oklahoma and Texas. Mr. Mueller served as Pharmacy Manager of True Quality Pharmacies, Inc. from August 1983 through August 1996, and as Staff Pharmacist from Eastland Memorial Hospital from September 1994 to August 1996. CARSON A. MCDONALD is a nominee for Director. From 1980 to the present, Mr. McDonald has been employed by Bergen Brunswig in various capacities, acting as Division Sales Manager since 1993. Bergen Brunswig is currently the Company's primary supplier and a creditor of the Company. See "Certain Transactions." PHILIP H. YIELDING is a nominee for Director. Mr. Yielding has served as a physician's assistant and a director of the Wilson and Jones Health Center since January 1995. From August 1991 through December 1994, Mr. Yielding was employed by the Farmersville Medical Center; from October 1989 to August 1991 he was employed by the Mitchell Family Care Center; and from August 1988 to October 1989 he was employed by the McKellar Clinic, serving as a physician's assistant for each center and as director of the Farmersville Medical Center. KEY EMPLOYEE NANCY J. PAPANERI, R.PH., 47, has served as Northern Regional Manager since the Company's inception. Ms. Papaneri is currently a licensed pharmacist in New Mexico, Oklahoma, Texas, Virginia and Wisconsin. From August 1990 to March 1995, Ms. Papaneri served as Pharmacist for True Quality Pharmacies, Inc. From February 1976 to July 1990 Ms. Papaneri served in a variety of positions for Revco Drug Stores, Inc., including clerk, intern, pharmacist and manager. THE BOARD OF DIRECTORS The Company's Articles of Incorporation and Bylaws provide for the division of the Board of Directors into three classes, each class consisting (as nearly as possible) of one-third of the whole. The term of office of one class of directors expires each year, with each class of directors being elected for a term of three years and until the shareholders elect their qualified successors. The Company's Bylaws provide that the Board of Directors by resolution from time to time may fix the number of directors that shall constitute the whole Board of Directors. The Board of Directors has set the number at seven and there are currently two vacancies which will be filled at the Company's upcoming shareholders' meeting. EXECUTIVE COMPENSATION During 1996, no executive officer was paid compensation in excess of $100,000. SUMMARY COMPENSATION TABLE The following table sets forth a summary of the compensation of the Company's President and Chief Operating Officer for services rendered in all capacities to the Company during the year ended December 31, 1996.
ANNUAL COMPENSATION ------------------------------- NAME YEAR SALARY BONUS - ---------------------------------------------------------------- --------- --------- --------- Rick D. McCord.................................................. 1996 $ 64,172 $ 25,334
38 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR The following table sets forth information with respect to the exercise of stock options during the year ended December 31, 1996, by the Company's President and Chief Operating Officer.
SHARES ACQUIRED VALUE NAME ON EXERCISE (#) REALIZED - ----------------------------------------------------------------- --------------- ---------- Rick D. McCord................................................... 50,000 $ 225,000
DIRECTORS' COMPENSATION Directors who are not employees of the Company are to be paid $1,000 for each regularly scheduled Board of Directors meeting attended and $250 for each special Board of Directors meeting attended. STOCK OPTION PLAN The Company's Board of Directors has approved the 1997 Stock Option Plan, subject to approval by the Company's shareholders. The description in this prospectus of the principal terms of the 1997 Stock Option Plan is a summary, does not purport to be complete, and is qualified in its entirety by the full text of the 1997 Stock Option Plan, a copy of which has been filed as an exhibit to the Registration Statement of which this prospectus is a part. Pursuant to the 1997 Stock Option Plan, employees and directors of the Company are eligible to receive awards of stock options. The 1997 Stock Option Plan provides for grants of "incentive stock options" ("ISO's") meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and "non-qualified stock options" ("NQSO's"). Under the 1997 Stock Option Plan, the Company has reserved 10% of its outstanding Common Stock (246,242 shares of Common Stock in the event the Underwriters' overallotment option is exercised in full) for issuance of awards under the 1997 Stock Option Plan (subject to antidilution and similar adjustments). The 1997 Stock Option Plan will be administered by a Compensation Committee (the "Committee") composed of two or more directors of the Company who are "Non-Employee Directors" as such term is used in Rule 16b-3 promulgated under the Exchange Act. Subject to the provisions of the 1997 Stock Option Plan, the Committee will determine the type of award, when and to whom awards will be granted, the number of shares covered by each award and the terms, provisions and kind of consideration payable with respect to awards. The Committee may interpret the 1997 Stock Option Plan and may at any time adopt such rules and regulations therefor as it deems advisable. The Committee may, additionally, cancel or amend awards. In determining the persons to whom awards shall be granted and the number of shares covered by each award the Committee shall take into account the duties of the respective persons, their present and potential contribution to the success of the Company and such other factors as the Committee shall deem relevant in connection with accomplishing the purposes of the 1997 Stock Option Plan. Management intends to recommend to the Committee that upon completion of the Offering all of the shares subject to the 1997 Stock Option Plan be granted to the Company's current officers, directors and key employee identified in this prospectus, with exercise prices equal to the greater of $5.00 per share or 85% of the fair market value of the Company's Common Stock at the date such options are granted. An option may be granted on such terms and conditions as the Committee may approve, and generally may be exercised for a period of up to 10 years from the date of grant. Generally, NQSO's and ISO's will be granted with an exercise price of not less than 85% of the "Fair Market Value" (as defined in the 1997 Stock Option Plan) on the date of grant and ISO's will be granted with an exercise price of not less than the Fair Market Value on the date of grant. In the case of ISO's, the aggregate value of option shares which can become exercisable for the first time during any one calendar year is limited to $100,000, and ISO's 39 granted to an employee who possesses more than 10% of the total combined voting power of all classes of stock of the Company may not be exercised unless the exercise price is at least 110% of the fair market value of the Common Stock on the date the options were granted. The Committee may provide for the payment of the option price in cash, by delivery of other Common Stock having a Fair Market Value equal to such option price, by a combination thereof or by such other manner as the Committee shall determine. Options granted under the 1997 Stock Option Plan will become exercisable at such times and under such conditions as the Committee shall determine. Options generally may not be exercised more than three months after an employee terminates employment with the Company. The Board may at any time and from time to time suspend, amend, modify or terminate the 1997 Stock Option Plan; provided, however, that, to the extent required by Rule 16b-3 promulgated under the Exchange Act or any other law, regulation or stock exchange rule, no such change shall be effective without the requisite approval of the Company's shareholders. In addition, no such change may adversely affect any award previously granted, except with the written consent of the grantee. No awards may be granted under the 1997 Stock Option Plan after the tenth anniversary of the approval of the 1997 Stock Option Plan. EMPLOYMENT AGREEMENTS The Company has Employment Agreements with Rick D. McCord, R.Ph., Sy S. Shahid, David W. Frauhiger, Charlie K. Herr, R.Ph., Robert D. Mueller, R.Ph. and Nancy J. Papaneri, R.Ph. (each an "Employee" and collectively, the "Employees"). Each of these agreements runs for a term of three years and automatically renews for additional three year terms unless terminated by either the Company or the Employee. Each of the Employment Agreements may be terminated without cause by the Company upon 90 days written notice. Under the respective agreements Mr. McCord will receive an annual salary of $120,000 and an annual bonus of $24,000; Mr. Shahid will receive an annual salary of $112,568 and an annual bonus of $22,514; Mr. Frauhiger will receive an annual salary of $107,667 and an annual bonus of $21,533; Messrs. Herr and Mueller will each receive an annual salary of $97,518 and an annual bonus of $19,503; and Ms. Papaneri will receive an annual salary of $80,136 and an annual bonus of $8,014. For a period of two years following the termination of an Employee, the Employee is prohibited from engaging in or assisting in any business which is identical, competitive with or comparable to, the Company's business within any area in which the employee rendered services to the Company. Each agreement contains a provision prohibiting the Employee subsequent to termination of employment from disclosing to third parties proprietary information relating to the Company. A state court charged with enforcing any of the referenced Employment Agreements may determine that such non-competition provisions are not enforceable in whole or in part. OFFICER AND DIRECTOR LIABILITY As permitted by the provisions of the Texas Act, the Company's Articles of Incorporation eliminate, in certain circumstances, the monetary liability of directors of the Company for a breach of their fiduciary duty as directors. These provisions do not eliminate the liability of a director: (i) for a breach of a director's duty of loyalty to the Company or its shareholders; (ii) for acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law; or (iii) for any transaction from which the director derived an improper personal benefit. In addition, these provisions do not eliminate the liability of a director for violations of Federal securities laws or limit the rights of the Company or its shareholders, in appropriate circumstances, to seek equitable remedies such as injunctive or other forms of non-monetary relief. Such remedies may not be effective in all cases. The Company's Articles of Incorporation provide that the Company shall indemnify all directors and officers of the Company to the full extent permitted by the Texas Act. Under such provisions, any director or officer, who in his capacity as such, is made or threatened to be made, a party to any suit or proceeding, 40 may be indemnified if the Board of Directors determines such director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Company. The Articles and the Texas Act further provide that such indemnification is not exclusive of any other rights to which such individuals may be entitled under the Articles of Incorporation, the Bylaws, any agreement, vote of shareholders or disinterested directors or otherwise. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. CERTAIN TRANSACTIONS Carson A. McDonald, a nominee for director of the Company, is an employee of Bergen Brunswig, the Company's primary supplier and a lender to the Company. Approximately $1.15 million of the proceeds of this Offering are expected to be used to repay the principal owing under loans made to the Company by Bergen Brunswig. All future transactions between the Company and its directors, officers, principal shareholders or affiliates will be on terms no less favorable to the Company than may be obtained from unaffiliated third parties, and any such transactions will be approved by a majority of disinterested directors of the Company. 41 PRINCIPAL SHAREHOLDERS The following table sets forth information as of May 29, 1997 assuming the proposed 2-for-1 stock split, and as adjusted to reflect the sale of the 1,200,000 shares of Common Stock offered hereby, concerning the beneficial ownership of Common Stock by each of the Company's directors, each executive officer named in the table under the heading "Management--Directors, Executive Officers and Key Employees," and all directors and executive officers of the Company as a group, and by each person who is known by the Company to own more than 5% of the outstanding shares of Common Stock. Unless otherwise indicated, the beneficial owner has sole voting and investment power with respect to such stock.
PERCENT BENEFICIALLY OWNED(1) ----------------------------- NAME AND ADDRESS BEFORE AFTER OF BENEFICIAL HOLDER NUMBER OF SHARES OFFERING OFFERING - -------------------------------------------- ----------------- -------------- ------------- Rick D. McCord, R.Ph.(2).................... 221,740 20.48% 9.71% Charlie K. Herr, R.Ph.(2)................... 211,426 19.53% 9.26% Sy S. Shahid(2)............................. 209,748 19.38% 9.19% David W. Frauhiger(2)....................... 70,000 6.47% 3.07% Robert D. Mueller, R.Ph.(2)................. 28,438 2.63% 1.25% Carson A. McDonald(3)....................... -0- -- -- Philip H. Yielding(4)....................... -0- -- -- Directors and executive officers as a group (seven persons)........................... 741,352 68.49% 32.48%
- ------------------------ (1) Unless otherwise noted, the Company believes that each person named in the table has sole voting and investment power with respect to all shares beneficially owned by such person. (2) Address is c/o HORIZON Pharmacies, Inc., 275 W. Princeton Drive, Princeton, Texas 75407. (3) Director nominee; address is c/o Bergen Brunswig Drug Co., 1841 Monetary Lane, Carrollton, Texas 75006. (4) Director nominee; address is c/o Wilson and Jones Health Center, 1000 S FM 1417, Sherman, Texas 75092. DESCRIPTION OF SECURITIES The authorized capital stock of the Company as approved by the Board of Directors and pending approval by the Company's shareholders shall consist of: (i) 14,000,000 shares of Common Stock, having a par value of $.01 per share; and (ii) 1,000,000 shares of Preferred Stock, having a par value of $.01 per share. Immediately prior to this Offering, 1,082,424 shares of Common Stock were issued and outstanding and were held of record by 29 shareholders, and no shares of Preferred Stock were issued and outstanding. A total of 246,242 shares of Common Stock has been reserved for grants of options under the 1997 Stock Option Plan. COMMON STOCK The holders of Common Stock are entitled to one vote for each share on all matters submitted to a vote of shareholders. There is no cumulative voting with respect to the election of directors. Accordingly, holders of a majority of the shares entitled to vote in any election of directors may elect all of the directors standing for election. Subject to preferences that may be applicable to any then outstanding class of Preferred Stock, the holders of Common Stock are entitled to receive such dividends, if any, as may be declared by the Board of Directors from time to time out of legally available funds. Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets of the Company that are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of holders of any class of Preferred Stock then outstanding. The 42 holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of Common Stock are subject to the rights of the holders of shares of any series of Preferred Stock that the Company may issue in the future. PREFERRED STOCK The Company's Articles of Incorporation provide that the Company may issue from time to time up to 1,000,000 shares of Preferred Stock in one or more series with such designations, voting powers, if any, preferences and relative, participating, optional or other special rights, and such qualifications, limitations and restrictions thereof, as are determined by resolution of the Board of Directors of the Company. The issuance of Preferred Stock, while providing flexibility in connection with possible financing, acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of holders of Common Stock and, under certain circumstances, be used as a means of discouraging, delaying or preventing a change in control of the Company. Currently, the Company has no shares of Preferred Stock outstanding. The Board of Directors does not currently have any plans, arrangements, commitments or understandings to issue any Preferred Stock. CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Articles of Incorporation and Bylaws may be deemed to have anti-takeover effects and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider to be in such shareholder's best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders. CLASSIFIED BOARD. The Company's Bylaws provide that: (i) the Board of Directors is divided into three classes of as equal size as possible, with such classes serving staggered three-year terms; (ii) the number of directors is to be fixed from time to time by the Board of Directors; and (iii) the term of office of each class expires in consecutive years so that each year only one class is elected. These provisions may render more difficult a change in control of the Company or the removal of incumbent management. NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The Company's Articles of Incorporation provide that no action shall be taken by shareholders except at an annual or special meeting of shareholders, and prohibits action by written consent in of lieu of a meeting. The Company's Bylaws provide that, unless otherwise proscribed by law, special meetings of shareholders can only be held pursuant to a resolution of the Board of Directors. ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. The Bylaws establish an advance notice procedure for the nomination, other than by or at the direction of the Board of Directors or a committee thereof, of candidates for election as directors as well as for other shareholder proposals to be considered at shareholders' meetings. Notice of shareholder proposals and director nominations must be timely given in writing to the Secretary of the Company prior to the meeting at which the matters are to be acted upon or Directors are to be elected. In all cases, to be timely, notice must be received at the principal offices of the Company not less than 40 days before the meeting, or, if on the day notice of the meeting is given to the shareholders less than 45 days remain until the meeting, (i) five days after notice is given but not less than five days prior to the meeting in the case of shareholder proposals, and (ii) 10 days after notice is given in the case of director nominations. Notice to the Company from a shareholder who proposes to nominate a person at a meeting for election as a director must contain all information about that person as would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee (including such person's written consent to serve as a Director if so elected) and certain information about the shareholder proposing to nominate that person. Shareholder proposals must also include certain specified information. 43 These limitations on shareholder proposals do not restrict a shareholder's right to include proposals in the Company's annual proxy materials pursuant to rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). TRANSFER AGENT The transfer agent for the Common Stock is American Securities Transfer & Trust, Inc. SHARES ELIGIBLE FOR FUTURE SALE Prior to this Offering, there has been no public market for the Company's Common Stock. Sales of substantial amounts of Common Stock in the public market could adversely affect the market price of the Common Stock. Upon completion of the Offering, the Company will have outstanding 2,282,424 shares of Common Stock. Of these shares all of the 1,200,000 shares sold in the Offering (assuming no exercise of the Underwriters' over-allotment option) will be transferable without restriction or further registration under the Securities Act, unless they are held by "affiliates" of the Company within the meaning of Rule 144 promulgated under the Securities Act. Of the remaining shares held by existing shareholders, 328,426 shares are "restricted shares" ("Restricted Shares") within the meaning of amendments to Rule 144 which became effective April 29, 1997, and, as such, may not be sold in the absence of registration under the Securities Act or an exemption therefrom under Rules 144 and 701, and 753,994 shares are eligible for sale without restriction or further registration under Rule 144(k), unless they are held by "affiliates" of the Company or subject to a "lock-up" agreement summarized below. Of the Restricted Shares held by existing shareholders, 100,006 shares will be eligible for sale without restriction or further registration on September 8, 1997, unless they are held by "affiliates" of the Company or subject to a "lock-up" agreement summarized below. The remaining 228,420 Restricted Shares will be eligible for sale without restriction or further registration on various dates in the fourth quarter of 1997, subject to the volume limitations of Rule 144. In general, under amendments to Rule 144 which became effective April 29, 1997, any person (or persons whose shares are aggregated for purposes of Rule 144) who beneficially owns Restricted Shares with respect to which at least one year has elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company, is entitled to sell, within any three month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock of the Company, or (ii) the average weekly trading volume in Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions and notice requirements, and to the availability of current public information about the Company. A person who is not an affiliate, has not been an affiliate within 90 days prior to sale and who beneficially owns Restricted Shares with respect to which at least two years have elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company, is entitled to sell such shares under Rule 144(k) without regard to any of the volume limitations or other requirements described above. The Company can make no prediction as to the effect, if any, that sales of shares of Common Stock or the availability of shares for sale will have on the market price of Common Stock. Nevertheless, sales of significant amounts of Common Stock could adversely affect the prevailing market price of Common Stock, as well as impair the ability of the Company to raise capital through the issuance of additional equity securities. Prior to this Offering, there has been no trading market for the Common Stock. The Company anticipates that the trading market in the Common Stock, if any, will be limited based upon the number of shares currently outstanding and anticipated to be sold in this Offering. 44 As of the date of this prospectus, the Company had reserved an aggregate of 246,242 shares of Common Stock for issuance pursuant to the Option Plan, and no options to purchase shares were outstanding under the 1997 Stock Option Plan. As soon as practicable following the Offering, the Company intends to file a registration statement under the Securities Act to register shares of Common Stock reserved for issuance under the Option Plan. Such registration statement will automatically become effective immediately upon filing. UNDERWRITING Each of the underwriters named below (the "Underwriters") have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their respective names below. The nature of the obligations of the Underwriters is such that if any of such shares are purchased, all must be purchased.
NAME NUMBER OF SHARES - --------------------------------------------------------------------------- ----------------- Capital West............................................................... ----------------- Total.................................................................... 1,200,000 ----------------- -----------------
The Underwriters have advised the Company that they propose initially to offer the shares of Common Stock offered hereby to the public at the price to public set forth on the cover page of this prospectus. The Underwriters may allow a concession to selected dealers who are members of the National Association of Securities Dealers, Inc. ("NASD") not in excess of $ per share, and the Underwriters may allow, and such dealers may reallow, to members of the NASD a concession not in excess of $ per share. After the public offering, the price to public, the concession and the reallowance may be changed by the Underwriters. Capital West, one of the Underwriters, was first registered as a broker-dealer in May 1995. Capital West has participated in six public equity offerings as an underwriter, acting as a manager or co-manager in three such offerings, although certain of its employees have had experience in underwriting public offerings while employed by other broker-dealers. Prospective purchasers of the securities offered hereby should consider Capital West's limited underwriting experience in evaluating this Offering. The Company has granted an option to the Underwriters, exercisable within 45 business days after the date of this prospectus, to purchase up to an aggregate of 180,000 additional shares of Common Stock, at the initial price to public, less the underwriting discount, set forth on the cover page of this prospectus. The Underwriters may exercise the option only for the purpose of covering over-allotments. To the extent that the Underwriters exercise such option, each Underwriter will be committed, subject to certain conditions, to purchase from the Company on a pro rata basis that number of additional shares of Common Stock which is proportionate to such Underwriters' initial commitment. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company has agreed to pay to the Underwriters a nonaccountable expense allowance of 3% of the gross proceeds derived from the sale of the shares of Common Stock underwritten (including the sale of any shares of Common Stock subject to the Underwriters' over-allotment option), $45,000 of which has been paid as of the date of this prospectus. The Company also has agreed to pay all expenses in connection 45 with qualifying the Common Stock offered hereby for sale under the laws of such states as the Underwriters may designate, including filing fees and fees and expenses of counsel retained for such purposes by the Underwriters and registering the Offering with the NASD. In connection with this Offering, the Company has agreed to sell to the Underwriters, for a price of $.001 per warrant, warrants (the "Underwriters' Warrants") to purchase shares of Common Stock equal to 10% of the total number of shares sold pursuant to this Offering, excluding shares subject to the over- allotment option. The Underwriters' Warrants are exercisable at a price equal to 120% of the initial public offering price ($6.00 assuming an initial public offering price of $5.00 per share) for a period of four years commencing one year from the date of this prospectus (the "Exercise Period"). The Underwriters' Warrants grant to the holders thereof, with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the Underwriters' Warrants, one demand registration right during the Exercise Period, as well as piggyback registration rights at any time during the Exercise Period. The Company and its executive officers and directors have agreed that for a period of 24 months after the date of this prospectus, they will not offer, sell or otherwise dispose of any shares of Common Stock beneficially owned or controlled by them (including subsequently acquired shares) without the prior written consent of Capital West which consent shall not be unreasonably withheld. At the Company's request, the Underwriters have reserved up to 45,000 shares of Common Stock (the "Directed Shares") for sale at the public offering price to approximately 20 persons who are directors, officers or employees of, or otherwise associated with, the Company and who have advised the Company of their desire to participate in its future growth. Each director and executive officer who is a purchaser of Directed Shares will be required to agree to restrictions on resale similar to those described in the immediately preceding paragraph. However the Underwriters are not obligated to sell any shares to any such persons. The number of shares of Common Stock available for sale to the general public will be reduced to the extent of sales of Directed Shares to any of the persons for whom they have been reserved. Any shares not so purchased will be offered by the Underwriters on the same basis as all other shares offered hereby. Prior to this Offering, there has been no market for the Common Stock and there can be no assurance that a regular trading market will develop upon the completion of this Offering. The initial public offering price was determined by negotiations between the Company and the Underwriters. The primary factors considered in determining such offering price included the history of and prospects for the Company's business and the industry in which the Company competes, market valuation of comparable companies, market conditions for public offerings, the prospects for future earnings of the Company, an assessment of the Company's management, the general condition of the securities markets, the demand for similar securities of comparable companies and other relevant factors. In order to facilitate the Offering, certain persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock during and after the Offering. Specifically, the Underwriters may over-allot or otherwise create a short position in the Common Stock for their own account by selling more shares of Common Stock than have been sold to them by the Company. The Underwriters may elect to cover any such short position by purchasing shares of Common Stock in the open market or by exercising the over-allotment option granted to the Underwriters. In addition, such persons may stabilize or maintain the price of the Common Stock by bidding for or purchasing shares of Common Stock in the open market and may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in the Offering are reclaimed if shares of Common Stock previously distributed in the Offering are repurchased in connection with stabilizing transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the Common Stock to the extent that it discourages resales thereof. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions, if commenced, may be discontinued at any time. 46 The Underwriters have advised the Company that the Underwriters do not expect any sales by the Underwriters to accounts over which they exercise discretionary authority. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby has been passed upon for the Company by Phillips McFall McCaffrey McVay & Murrah, P.C., Oklahoma City, Oklahoma. Robertson & Williams, Inc. of Oklahoma City, Oklahoma, has served as counsel to the Underwriters in connection with this Offering. EXPERTS The financial statements of HORIZON Pharmacies, Inc. at December 31, 1996, and for the year then ended, appearing in this prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, and for the year ended December 31, 1995, by Herold, Howard & Madsen P.C., independent auditors, as set forth in their respective reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. The statements of operating revenues and direct operating expenses of the Farmington Store Acquisition for the year ended December 31, 1995 and the period from January 1, 1996 to April 26, 1996 and of the Vista Store Acquisition for each of the two years in the period ended December 31, 1996, appearing in this prospectus and Registration Statement have been audited by Herold, Howard & Madsen P.C., independent auditors as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. On March 17, 1997, Ernst & Young LLP replaced Herold, Howard & Madsen P.C. as the Company's independent auditors. In the Company's view, this change was not the result of any disagreement relating to any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures. The reports issued by Herold, Howard & Madsen P.C. did not contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principles. At no time during the engagement of Herold, Howard & Madsen P.C. were there any disagreements on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Herold, Howard & Madsen P.C., would have caused it to make a reference to the subject matter of the disagreement in connection with its report. Notwithstanding the engagement of Ernst & Young LLP as the Company's independent auditors, Herold, Howard & Madsen P.C. continues to perform individual audits of certain acquired stores and to perform tax and other financial planning for the Company. ADDITIONAL INFORMATION The Company has not previously been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. The Company has filed a Registration Statement on Form SB-2 (the "Registration Statement") with the Commission under the Securities Act with respect to the Common Stock offered hereby. As permitted by the rules and regulations of the Commission, this prospectus does not contain all of the information set forth in the Registration Statement and in the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits thereto. Statements contained in this prospectus concerning the provisions of documents filed with the Registration Statement as exhibits and schedules are necessarily summaries of such documents, and each such statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge and copied upon 47 payment of the charges prescribed by the Commission at the Public Reference Room of the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission at http://www.sec.gov. 48 INDEX TO FINANCIAL STATEMENTS FINANCIAL STATEMENTS OF HORIZON PHARMACIES, INC...................................... F-2 Report of Independent Auditors..................................................... F-3 Independent Auditor's Report....................................................... F-4 Balance Sheets at December 31, 1996 and March 31, 1997............................. F-5 Statements of Income for the years ended December 31, 1995 and 1996 and the three months ended March 31, 1996 and 1997............................................. F-6 Statements of Shareholders' Equity for the years ended December 31, 1995 and 1996 and the three months ended March 31, 1997........................................ F-7 Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the three months ended March 31, 1996 and 1997....................................... F-8 Notes to Financial Statements...................................................... F-10 FINANCIAL STATEMENTS OF MESA DRUG, INC.--FARMINGTON STORE............................ F-17 Report of Independent Auditors..................................................... F-18 Statements of Operating Revenues and Direct Operating Expenses for the year ended December 31, 1995 and the period from January 1, 1996 to April 26, 1996.......... F-19 Notes to Financial Statements...................................................... F-20 FINANCIAL STATEMENTS OF TRUE QUALITY PHARMACIES, INC.--VISTAS........................ F-21 Report of Independent Auditors..................................................... F-22 Combined Statements of Operating Revenues and Direct Operating Expenses for the years ended December 31, 1995 and 1996........................................... F-23 Combined Statement of Net Assets as of March 6, 1997............................... F-24 Notes to Financial Statements...................................................... F-25
F-1 FINANCIAL STATEMENTS HORIZON PHARMACIES, INC. YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THREE MONTHS ENDED MARCH 31, 1996 AND 1997 WITH REPORTS OF INDEPENDENT AUDITORS F-2 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders HORIZON Pharmacies, Inc. We have audited the accompanying balance sheet of HORIZON Pharmacies, Inc. (an S corporation) as of December 31, 1996, and the related statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HORIZON Pharmacies, Inc. at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Oklahoma City, Oklahoma April 4, 1997, except for the third and fourth paragraphs of Note 6, as to which the date is May , 1997 The foregoing report is in the form that will be signed upon completion of the reorganization of the capital accounts of the Company as described in the fourth paragraph of Note 6 to the accompanying financial statements. ERNST & YOUNG LLP Oklahoma City, Oklahoma May 30, 1997 F-3 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders HORIZON Pharmacies, Inc. We have audited the accompanying statements of income, shareholders' equity and cash flows of HORIZON Pharmacies, Inc. for the year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of HORIZON Pharmacies, Inc. for the year ended December 31, 1995, in conformity with generally accepted accounting principles. Dallas, Texas April 24, 1996 except for the fourth paragraph of Note 6, as to which the date is May , 1997 The foregoing report is in the form that will be signed upon completion of the reorganization of the capital accounts of the Company as described in the fourth paragraph of Note 6 to the accompanying financial statements. HEROLD, HOWARD & MADSEN P.C. Dallas, Texas May 30, 1997 F-4 HORIZON PHARMACIES, INC. BALANCE SHEETS ASSETS (NOTES 3 AND 4)
DECEMBER 31, MARCH 31, 1996 1997 ------------ ----------- (UNAUDITED) Current assets: Cash................................................................................ $ 153,260 $ 109,699 Accounts receivable, net of allowance for uncollectible accounts of $20,000 in 1996 and $25,000 in 1997: Third-party providers........................................................... 1,047,348 1,439,493 Others.......................................................................... 412,709 611,229 Inventories, at the lower of specific identification cost or market................. 3,290,717 3,985,876 Prepaid expenses.................................................................... 31,071 27,082 ------------ ----------- Total current assets.................................................................. 4,935,105 6,173,379 Deferred offering costs............................................................... -- 63,850 Property, equipment and capital lease assets: Property and equipment, at cost: Land.............................................................................. 10,000 10,000 Building.......................................................................... 193,220 193,220 Equipment......................................................................... 410,162 477,980 ------------ ----------- 613,382 681,200 Less accumulated depreciation....................................................... 67,253 85,222 ------------ ----------- Property and equipment, net......................................................... 546,129 595,978 Equipment under capital leases...................................................... 158,339 218,033 Less accumulated amortization....................................................... 33,884 44,158 ------------ ----------- Equipment under capital leases, net................................................. 124,455 173,875 ------------ ----------- Property, equipment and capital lease assets, net..................................... 670,584 769,853 Intangibles, at cost (NOTE 2): Noncompete covenants................................................................ 146,788 146,788 Customer lists...................................................................... 211,605 279,996 Goodwill............................................................................ 814,107 1,135,716 ------------ ----------- 1,172,500 1,562,500 Less accumulated amortization....................................................... 189,417 219,869 ------------ ----------- Intangibles, net...................................................................... 983,083 1,342,631 ------------ ----------- $6,588,772 $8,349,713 ------------ ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank overdraft...................................................................... $ 247,759 $ 730,239 Accounts payable.................................................................... 1,491,789 1,664,186 Accrued liabilities................................................................. 161,365 214,396 Notes payable: Supplier (NOTE 3)................................................................. 1,215,000 1,180,000 Other (NOTE 2).................................................................... -- 898,642 Shareholder (NOTE 2).............................................................. -- 50,000 Current portion of long-term debt (NOTE 4).......................................... 228,759 332,268 Current obligations under capital leases (NOTE 5)................................... 27,400 46,680 ------------ ----------- Total current liabilities............................................................. 3,372,072 5,116,411 Long-term debt (NOTE 4)............................................................... 1,363,858 1,205,101 Obligations under capital leases (NOTE 5)............................................. 102,769 132,600 Commitments (NOTE 5) Shareholders' equity (NOTE 6): Preferred stock, $.01 par value, authorized 1,000,000 shares; none issued Common stock, $.01 par value, authorized 14,000,000 shares; issued 1,082,424 shares............................................................................ 10,824 10,824 Additional paid-in capital.......................................................... 1,760,303 1,760,303 Retained earnings (accumulated deficit)............................................. (21,054) 124,474 ------------ ----------- Total shareholders' equity............................................................ 1,750,073 1,895,601 ------------ ----------- $6,588,772 $8,349,713 ------------ ----------- ------------ -----------
See accompanying notes. F-5 HORIZON PHARMACIES, INC. STATEMENTS OF INCOME
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------- -------------------------- 1995 1996 1996 1997 ------------ ------------- ------------ ------------ (UNAUDITED) Net sales: Prescription drugs.................................... $ 5,235,246 $ 10,515,353 $ 1,988,434 $ 4,060,266 Other................................................. 1,034,335 2,620,966 378,146 1,052,981 ------------ ------------- ------------ ------------ Total net sales......................................... 6,269,581 13,136,319 2,366,580 5,113,247 Costs and expenses: Cost of sales: Prescription drugs.................................. 3,595,290 7,309,380 1,320,282 2,809,258 Other............................................... 776,517 1,632,325 283,230 649,246 Depreciation and amortization: Property, equipment and capital lease assets........ 32,305 64,058 9,361 28,244 Intangibles......................................... 67,412 107,749 22,657 30,452 Selling, general and administrative expenses.......... 1,519,439 3,471,370 580,035 1,322,381 ------------ ------------- ------------ ------------ Total costs and expenses................................ 5,990,963 12,584,882 2,215,565 4,839,581 ------------ ------------- ------------ ------------ Income from operations.................................. 278,618 551,437 151,015 273,666 Other income (expense): Interest and other income............................. 6,839 3,683 1,160 393 Interest expense...................................... (109,828) (252,767) (42,660) (53,531) ------------ ------------- ------------ ------------ Total other income (expense)............................ (102,989) (249,084) (41,500) (53,138) ------------ ------------- ------------ ------------ Income before pro forma provision for income taxes...... 175,629 302,353 109,515 220,528 Pro forma provision for income taxes.................... 61,000 106,000 38,000 77,000 ------------ ------------- ------------ ------------ Pro forma net income.................................... $ 114,629 $ 196,353 $ 71,515 $ 143,528 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Pro forma net income per share (Note 6)................. $ .12 $ .18 $ .07 $ .13 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Weighted average shares outstanding (Note 6)............ 957,733 1,074,246 1,058,000 1,142,424
See accompanying notes. F-6 HORIZON PHARMACIES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (NOTE 6)
RETAINED COMMON STOCK ADDITIONAL EARNINGS TOTAL --------------------- PAID-IN (ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT) EQUITY ---------- --------- ------------ ------------ ------------- Balance at December 31, 1994.................. 554,482 $ 5,545 $ 672,178 $ 14,464 $ 692,187 Sale of common stock.......................... 355,518 3,555 743,609 -- 747,164 Redemption of common stock for debt........... (56,000) (560) (75,320) -- (75,880) Net income.................................... -- -- -- 175,629 175,629 Distributions to shareholders................. -- -- -- (260,000) (260,000) ---------- --------- ------------ ------------ ------------- Balance at December 31, 1995.................. 854,000 8,540 1,340,467 (69,907) 1,279,100 Sale of common stock.......................... 64,424 644 321,476 -- 322,120 Exercise of common stock options.............. 160,000 1,600 78,400 -- 80,000 Issuance of common stock to reduce long-term debt........................................ 4,000 40 19,960 -- 20,000 Net income.................................... -- -- -- 302,353 302,353 Distributions to shareholders................. -- -- -- (253,500) (253,500) ---------- --------- ------------ ------------ ------------- Balance at December 31, 1996.................. 1,082,424 10,824 1,760,303 (21,054) 1,750,073 Net income (unaudited)........................ -- -- -- 220,528 220,528 Distributions to shareholders (unaudited)................................. -- -- -- (75,000) (75,000) ---------- --------- ------------ ------------ ------------- Balance at March 31, 1997 (unaudited)......... 1,082,424 $ 10,824 $ 1,760,303 $ 124,474 $ 1,895,601 ---------- --------- ------------ ------------ ------------- ---------- --------- ------------ ------------ -------------
See accompanying notes. F-7 HORIZON PHARMACIES, INC. STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------- ----------------------- 1995 1996 1996 1997 ------------ ------------ ---------- ----------- (UNAUDITED) OPERATING ACTIVITIES Income before pro forma provision for income taxes.......... $ 175,629 $ 302,353 $ 109,515 $ 220,528 Adjustments to reconcile income before pro forma provision for income taxes to net cash provided by operating activities: Depreciation and amortization of property, equipment and capital lease assets.................................... 32,305 64,058 9,361 28,244 Amortization of intangibles............................... 67,412 107,749 22,657 30,452 Provision for uncollectible accounts receivable........... 19,876 21,241 2,084 5,598 Changes in operating assets and liabilities, net of acquisitions of businesses: Accounts receivable................................... (415,094) (847,494) 63,357 (529,881) Inventories........................................... (199,330) (716,553) (106,976) (212,899) Prepaid expenses...................................... (27,495) 4,302 17,143 3,989 Bank overdraft........................................ 130,830 116,929 (6,737) 482,480 Accounts payable...................................... 477,990 888,348 200 172,397 Accrued liabilities................................... 25,396 108,523 15,895 53,031 ------------ ------------ ---------- ----------- Total adjustments........................................... 111,890 (252,897) 16,984 33,411 ------------ ------------ ---------- ----------- Net cash provided by operating activities................... 287,519 49,456 126,499 253,939 INVESTING ACTIVITIES Purchases of property and equipment......................... (33,129) (156,625) (5,161) (7,819) Proceeds from sales of property and equipment............... -- -- 5,557 -- Assets acquired for cash in acquisitions of businesses...... (545,000) -- -- -- ------------ ------------ ---------- ----------- Net cash provided by (used in) investing activities......... (578,129) (156,625) 396 (7,819) FINANCING ACTIVITIES Borrowings on notes payable................................. -- 210,535 300,000 -- Borrowings on long-term debt................................ 24,120 -- -- -- Principal payments on notes payable......................... -- (35,000) -- (85,000) Principal payments on long-term debt........................ (128,869) (180,643) (33,224) (55,248) Principal payments on obligations under capital leases.................................................... (5,562) (18,716) (2,680) (10,583) Proceeds from sale of stock................................. 747,164 402,120 -- -- Payments for deferred offering costs........................ -- -- -- (63,850) Distributions to shareholders............................... (260,000) (253,500) (60,000) (75,000) ------------ ------------ ---------- ----------- Net cash provided by (used in) financing activities......... 376,853 124,796 204,096 (289,681) ------------ ------------ ---------- ----------- Net increase (decrease) in cash............................. 86,243 17,627 330,991 (43,561) Cash at beginning of period................................. 49,390 135,633 135,633 153,260 ------------ ------------ ---------- ----------- Cash at end of period....................................... $ 135,633 $ 153,260 $ 466,624 $ 109,699 ------------ ------------ ---------- ----------- ------------ ------------ ---------- -----------
PAGE) F-8 HORIZON PHARMACIES, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------- ----------------------- 1995 1996 1996 1997 ------------ ------------ ---------- ----------- (UNAUDITED) SUPPLEMENTAL DISCLOSURE OF INTEREST PAID.................... $ 106,828 $ 240,767 $ 39,660 $ 53,531 NONCASH INVESTING AND FINANCING ACTIVITIES Additions to property and equipment for long-term debt...... $ -- $ 150,000 $ -- $ -- Equipment leased under capital leases....................... 32,692 88,208 -- 59,694 Issuance of common stock to reduce long-term debt........... -- 20,000 -- -- Redemption of common stock for long-term debt, excluding cash proceeds of $24,120.................................. 75,880 -- -- -- Acquisitions of businesses financed by debt: Accounts receivable and other............................. 24,967 (1,793) -- 66,382 Inventories............................................... 801,000 1,014,247 -- 482,260 Property and equipment.................................... 140,000 85,000 -- 60,000 Intangibles............................................... 638,000 165,000 -- 390,000 ------------ ------------ ---------- ----------- 1,603,967 1,262,454 -- 998,642 Less cash paid............................................ (545,000) -- -- -- ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Assets acquired........................................... $ 1,058,967 $ 1,262,454 $ -- $ 998,642 ------------ ------------ ---------- ----------- ------------ ------------ ---------- ----------- Financed by: Notes payable............................................. $ 400,000 $ 639,465 $ -- $ 898,642 Advance by shareholder.................................... -- -- -- 100,000 Long-term debt............................................ 658,967 622,989 -- -- ------------ ------------ ---------- ----------- $ 1,058,967 $ 1,262,454 $ -- $ 998,642 ------------ ------------ ---------- ----------- ------------ ------------ ---------- -----------
See accompanying notes. F-9 HORIZON PHARMACIES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION HORIZON Pharmacies, Inc., a Texas corporation (the "Company"), was organized on August 31, 1992. During the period from inception (August 31, 1992) to February 27, 1994, the Company had no operations (NOTE 2). NATURE OF OPERATIONS At March 31, 1997, the Company owns and operates fourteen retail pharmacies located in five states (NOTE 2), including nine pharmacies located in Texas. Purchases from the Company's largest supplier amounted to $3,356,215 in 1995 and $8,077,406 in 1996. Accounts payable to this supplier totaled $1,001,023 at December 31, 1996. Notes payable to this supplier were $1,215,000 at December 31, 1996 and $1,180,000 at March 31, 1997 (NOTE 3). CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. Accounts receivable are unsecured and consist principally of receivables from third-party providers (insurance companies and government agencies) under third-party payment plans and receivables from individuals. Receivables from third-party providers are recorded net of any allowances provided under the respective payment plans. Since payments due from third-party payers are sensitive to payment criteria changes and legislative actions, the allowances are reviewed continually and adjusted for accounts deemed uncollectible by management. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. ADVERTISING Advertising costs are charged to expense as incurred and amounted to $35,962 in 1995 and $84,057 in 1996. DEPRECIATION AND AMORTIZATION Depreciation of property and equipment is provided on a straight-line basis over the estimated useful lives of the assets. Amortization of equipment under capital leases is provided on a straight-line basis over the estimated useful lives of the equipment or over the terms of the leases, whichever is shorter. Amortization of intangibles, including noncompete covenants, customer lists and goodwill are being amortized using the straight-line method over 2 to 7 years, 5 years and 20 years, respectively. The Company reviews each store for impairment whenever events or changes in circumstances indicate that the carrying amounts of intangibles may not be recoverable, based upon expectations of undiscounted future cash flows. F-10 HORIZON PHARMACIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: NOTES PAYABLE: The carrying amount reported in the balance sheet for variable-rate notes payable approximates its fair value. LONG-TERM DEBT: The carrying amount reported in the balance sheet for variable-rate long-term debt approximates its fair value. The fair values of the Company's fixed-rate long-term debt are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. At December 31, 1996, the fair value of the Company's long-term debt was approximately $1,614,000. INCOME TAXES No historical provisions for income taxes have been included in the accompanying financial statements as income taxes, if any, are payable by the shareholders under provisions of subchapter S of the Internal Revenue Code. At December 31, 1996, the net bases of assets and liabilities for financial reporting purposes exceeds such bases for tax purposes by $427,000. The pro forma provision for income taxes included in the accompanying statements of income are based on an estimated effective tax rate of 35% and are presented as though the Company was required to pay income taxes in the periods presented. DEFERRED OFFERING COSTS Specific incremental costs directly attributable to a proposed initial public offering of common stock (the "Offering") have been deferred and will be charged against the gross proceeds of the Offering or charged to expense if the Offering is aborted. UNAUDITED FINANCIAL STATEMENTS The accompanying unaudited financial statements include all adjustments, consisting of normal, recurring accruals, which the Company considers necessary for a fair presentation of the financial position and the results of operations for the indicated periods. The results of operations for the three months ended March 31, 1997, are not necessarily indicative of the results to be expected for the full year ending December 31, 1997. The Company's sales and earnings are higher during peak holiday periods and from Christmas through Easter (the first and fourth quarters of the calendar year). Estimated gross profit rates were used to determine cost of sales for the three months ended March 31, 1996 and 1997. PRO FORMA NET INCOME PER SHARE Pro forma net income per share is based upon the weighted average number of shares of common stock and dilutive common stock equivalent shares outstanding during each period (NOTE 6) adjusted in all periods presented for the effect of the exercise of stock options in 1996 at less than the expected price of shares in the proposed Offering and the number of shares of stock required to pay proposed distributions of $300,000 to shareholders from the proceeds of the Offering. F-11 HORIZON PHARMACIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share," which is required to be adopted by the Company in the reporting period ending December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The Company has determined the impact of SFAS 128 on the calculation of net income per share would not be material. 2. ACQUISITIONS At December 31, 1996, the Company operates eleven conventional, freestanding retail pharmacies, all of which were acquired from third parties in purchase transactions beginning February 27, 1994. Such acquisitions have each been structured as asset purchases and generally have included inventories, store fixtures and the assumption of store operating lease arrangements (NOTE 5). The acquisitions generally have been financed by debt to the sellers and/or an inventory supplier (NOTES 3 AND 4). A summary of acquisitions follows:
ASSETS ACQUIRED STORE PURCHASE ------------------------------------- DEBT YEAR OPERATIONS PRICE INVENTORIES INTANGIBLES OTHER INCURRED - -------------- ------------- ------------ ------------ ----------- ---------- ------------ 1994.......... 3 $ 944,201 $ 506,680 $ 369,500 $ 68,021 $ 368,080 1995.......... 4 1,603,967 801,000 638,000 164,967 1,058,967 1996.......... 4 1,262,454 1,014,247 165,000 83,207 1,262,454
The following unaudited pro forma results of operations data gives effect to the acquisitions completed in 1995 and 1996 as if the transactions had been consummated as of January 1, 1995 and 1996. The unaudited pro forma results of operations data is presented for illustrative purposes and is not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated as of January 1, 1995 or 1996, respectively, or of future results of operations. The data reflects adjustments for amortization of intangibles resulting from the purchases, incremental interest expense resulting from borrowings to fund the acquisitions and income taxes.
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1996 ------------- ------------- Unaudited pro forma information: Net sales.................................................... $ 16,177,000 $ 17,904,000 ------------- ------------- ------------- ------------- Net income................................................... $ 121,000 $ 281,000 ------------- ------------- ------------- ------------- Net income per share......................................... $ .13 $ .26
In March 1997, the Company acquired from a third party three retail pharmacies in a purchase transaction. The total purchase price of $998,642 was allocated to inventories ($482,260), property and equipment ($60,000), intangibles ($390,000) and other assets ($66,382). The purchase was financed by an unsecured 13% demand note to a shareholder of $100,000 ($50,000 repaid by March 31, 1997) and the issuance of a 8.5% note payable to the seller for $898,642. The note to the seller is secured by the assets acquired and guarantees by certain shareholders and is due in varying installments until December 25, 1997. F-12 HORIZON PHARMACIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) The following unaudited pro forma results of operations data gives effect to the acquisition completed in March 1997 as if the transaction had been consummated as of January 1, 1996 and 1997. The unaudited pro forma results of operations data is presented for illustrative purposes and is not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated as of January 1, 1996 and 1997, respectively, or of future results of operations. The data reflects adjustments for amortization of intangibles resulting from the purchase, incremental interest expense resulting from borrowing to fund the acquisition and income taxes.
THREE MONTHS ENDED MARCH 31, -------------------------- 1996 1997 ------------ ------------ Unaudited pro forma information: Net sales....................................................... $ 3,463,000 $ 5,892,000 ------------ ------------ ------------ ------------ Net income...................................................... $ 94,000 $ 165,000 ------------ ------------ ------------ ------------ Net income per share............................................ $ .09 $ .14
3. NOTES PAYABLE TO SUPPLIER In October 1996, the Company entered into a Loan Agreement under the terms of which a supplier committed until May 17, 1997 to loan to the Company a maximum of $1,500,000 ($800,000 under Note A and $700,000 under Note B) to be used principally to acquire specified operating assets of retail pharmacies. Borrowings under the facility are secured by certain accounts receivable, inventories, property and equipment, and guarantees by certain shareholders. The Loan Agreement contains various covenants which limit, among other things, the Company's ability to incur additional debt, redeem common stock, enter into certain transactions with affiliates, pay dividends and sell assets. The Company is also required to meet a specified debt to equity ratio. Notes payable to supplier consist of the following:
DECEMBER 31, MARCH 31, 1996 1997 ------------ ------------ Note A due on demand, plus interest at a specified bank's prime rate plus 2% (10.25% at December 31, 1996)..................... $ 550,000 $ 550,000 Note B due on demand or in monthly installments of $11,667 until September 10, 2001, plus interest at a specified bank's prime rate plus 2% (10.25% at December 31, 1996)..................... 665,000 630,000 ------------ ------------ $1,215,000 $ 1,180,000 ------------ ------------ ------------ ------------
F-13 HORIZON PHARMACIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, MARCH 31, 1996 1997 ------------ ------------ Note payable to former shareholder, due on March 1, 1998, interest at New York prime plus 4% (12.25% at December 31, 1996).......................................................... $ 100,000 $ 100,000 Installment notes due in varying installments (totaling $29,524 per month, as of December 31, 1996) including interest at rates ranging from 8% to 10.25% and maturing on various dates from November 1999 to June 2011..................................... 1,492,617 1,437,369 ------------ ------------ 1,592,617 1,537,369 Less current portion of long-term debt........................... 228,759 332,268 ------------ ------------ Long-term debt................................................... $1,363,858 $ 1,205,101 ------------ ------------ ------------ ------------
Long-term debt is secured by certain accounts receivable, inventories and property and equipment. Certain long-term debt is secured by guarantees of certain shareholders. Long-term debt maturing during the five years subsequent to 1996 is as follows: 1997--$228,759; 1998--$350,622; 1999--$271,305; 2000--$227,585 and 2001--$207,657. 5. LEASES The Company leases all of its retail store facilities under noncancelable operating leases, many of which expire within eight years. These leases require the Company to pay for taxes, maintenance and insurance and contain renewal options, certain of which involve rent increases. Rent expense was $100,725 in 1995 and $195,609 in 1996. The Company leases most of its retail store pharmacy computer equipment under capital lease agreements which expire from 1999 to 2001. F-14 HORIZON PHARMACIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. LEASES (CONTINUED) At December 31, 1996, the future minimum lease payments under operating and capital leases are as follows:
OPERATING CAPITAL YEAR LEASES LEASES - ---------------------------------------------------------------------- ---------- ---------- 1997.................................................................. $ 203,951 $ 41,847 1998.................................................................. 164,309 41,847 1999.................................................................. 97,697 37,535 2000.................................................................. 77,596 27,605 2001.................................................................. 38,985 18,201 ---------- ---------- Total................................................................. $ 582,538 167,035 ---------- ---------- Less amount representing interest..................................... 36,866 ---------- Net present values.................................................... 130,169 Current obligations under capital leases.............................. 27,400 ---------- Obligations under capital leases...................................... $ 102,769 ---------- ----------
6. SHAREHOLDERS' EQUITY During 1995, the Company sold 255,512 and 100,006 shares of common stock at $1.75 and $3.00 per share, respectively. In addition, the Company redeemed 56,000 shares of common stock at $1.36 per share and received cash of $24,120 in exchange for a note payable (Note 4). During 1996, the Company issued 160,000 shares of common stock at $.50 per share relating to the exercise of all stock options granted to the officers and founders of the Company in 1994. Additionally, the Company sold 64,424 shares of common stock at $5.00 per share. The Company also issued 4,000 shares of common stock at $5 per share in exchange for a $20,000 reduction in long-term debt. In March 1997, the Board of Directors approved the 1997 Stock Option Plan (the "Plan"). The Plan was amended by the Board of Directors and was approved by the shareholders on May , 1997. Options for up to 10% of the Company's outstanding shares of common stock may be granted until March 2007 to key employees and directors at prices as specified in the Plan on the dates the options are granted. Except as provided in the option agreements, options are exercisable at any time during a ten-year term. No options have been granted to date. In April 1997, the Board of Directors of the Company approved a two-for-one split of the Company's common stock. The split and an amendment to the Company's articles of incorporation to change the authorized capitalization from 1,000,000 shares of $1 par common stock to 14,000,000 shares of $.01 par common stock and 1,000,000 shares of $.01 par preferred stock were approved by the shareholders on May , 1997. The Board of Directors has the authority to issue preferred stock in one or more classes or series and to fix from time to time the number of shares to be included in each such class or series and the designations, preferences, qualifications, limitations, restrictions and rights of the shares of each such class or series. The effects of the stock split and recapitalization have been reflected retroactively in the accompanying financial statements. F-15 HORIZON PHARMACIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. EMPLOYEE BENEFIT PLAN Effective January 1, 1996, the Company adopted a profit sharing plan for certain full-time employees. Each participant in the plan may contribute by payroll deduction up to 15% of their earnings. The Company may make matching contributions of a portion of each participant's contribution up to 6% of their earnings. The Company may also make a profit sharing contribution. No matching or profit sharing contributions were made in 1996. F-16 FINANCIAL STATEMENTS MESA DRUG, INC.--FARMINGTON STORE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM JANUARY 1, 1996 TO APRIL 26, 1996 WITH REPORT OF INDEPENDENT AUDITORS F-17 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders HORIZON Pharmacies, Inc. We have audited the accompanying statements of operating revenues and direct operating expenses for Mesa Drug, Inc.--Farmington Store for the year ended December 31, 1995 and the period from January 1, 1996 to April 26, 1996. These statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the accompanying statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accompanying statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, the accompanying statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete presentation of the revenues and expenses of Mesa Drug, Inc.--Farmington Store. In our opinion, the statements referred to above present fairly, in all material respects, the operating revenues and direct operating expenses of Mesa Drug, Inc.--Farmington Store for the year ended December 31, 1995 and the period from January 1, 1996 to April 26, 1996. HEROLD, HOWARD & MADSEN P.C. Dallas, Texas March 28, 1997 F-18 MESA DRUG, INC.--FARMINGTON STORE STATEMENTS OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES
YEAR ENDED PERIOD FROM JANUARY 1, DECEMBER 31, 1995 1996 TO APRIL 26, 1996 ----------------- -------------------------- Sales--RX.......................................................... $ 2,342,399 $ 914,834 Sales--Other....................................................... 1,265,463 332,156 ----------------- ----------- Total Sales........................................................ 3,607,862 1,246,990 Cost of Goods Sold................................................. 2,357,352 826,053 ----------------- ----------- Gross Profit....................................................... 1,250,510 420,937 Operating expenses: Professional fees................................................ 64,122 16,940 Advertising...................................................... 25,614 6,148 Bad debts........................................................ 4,215 -- Depreciation..................................................... 51,293 8,324 Rent............................................................. 60,696 22,843 Security......................................................... 1,163 639 Dues & Subscriptions............................................. 10,227 3,232 Repairs/Maintenance.............................................. 8,724 4,760 Meals & Entertainment............................................ 4,185 3,614 Insurance........................................................ 51,624 5,715 Janitorial....................................................... 2,041 718 Miscellaneous.................................................... 4,279 367 Office supplies.................................................. 35,855 10,502 Supplies......................................................... 64,263 24,781 Taxes............................................................ 54,329 18,190 Telephone........................................................ 32,260 7,924 Travel........................................................... 3,622 80 Utilities........................................................ 21,969 7,473 Wages............................................................ 518,458 160,606 Auto expenses.................................................... 23,172 4,273 Uniforms......................................................... 385 -- Royalties........................................................ 7,393 -- ----------------- ----------- Total operating expenses........................................... 1,049,889 307,129 ----------------- ----------- Operating profit................................................... $ 200,621 $ 113,808 ----------------- ----------- ----------------- -----------
See accompanying notes. F-19 MESA DRUG, INC.--FARMINGTON STORE NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM JANUARY 1, 1996 TO APRIL 26, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Mesa Drug, Inc. owns and operates two retail pharmacies located in New Mexico. The financial statements presented include only the operations of the retail pharmacy located in Farmington, New Mexico for the year ended December 31, 1995 and the period from January 1, 1996 to April 26, 1996. The financial statements represent the operations of the retail pharmacy prior to the sale to HORIZON Pharmacies, Inc. ("HORIZON"). HORIZON purchased the business, including various assets, on April 27, 1996. Expenses relating to income taxes, interest and executive compensation are not included because they are not directly related to the sale. DEPRECIATION Depreciation is provided on a straight-line basis over the estimated life of the assets. In these financial statements, depreciation is included only for those assets to be sold to HORIZON. BASIS OF ACCOUNTING The financial statements are prepared on the accrual basis of accounting and accordingly reflect revenues at the time products are sold or services are rendered. Expenses are recognized when the products are received or the services are performed. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. F-20 FINANCIAL STATEMENTS TRUE QUALITY PHARMACIES, INC.--VISTAS AS OF MARCH 6 AND 7, 1997 YEARS ENDED DECEMBER 31, 1995 AND 1996 WITH REPORT OF INDEPENDENT AUDITORS F-21 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders HORIZON Pharmacies, Inc. We have audited the accompanying combined statements of operating revenues and direct operating expenses for True Quality Pharmacies, Inc.--Vistas for the years ended December 31, 1995 and 1996 and the Combined Statement of Net Assets Sold as of March 6 and 7, 1997. These statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the accompanying statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accompanying statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, the accompanying statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete presentation of the revenues and expenses nor the financial position of True Quality Pharmacies, Inc.--Vistas. In our opinion, the statements referred to above present fairly, in all material respects, the combined operating revenues and direct operating expenses of True Quality Pharmacies, Inc.--Vistas for the years ended December 31, 1995 and 1996 and the net assets sold as of March 6 and 7, 1997. HEROLD, HOWARD & MADSEN P.C. Dallas, Texas March 28, 1997 F-22 TRUE QUALITY PHARMACIES, INC.--VISTAS COMBINED STATEMENTS OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, -------------------------- 1995 1996 ------------ ------------ Sales--RX........................................................................... $ 3,628,467 $ 3,726,405 Sales--Other........................................................................ 522,814 502,766 ------------ ------------ Total Sales......................................................................... 4,151,281 4,229,171 Cost of Goods Sold.................................................................. 2,900,035 3,021,070 ------------ ------------ Gross Profit........................................................................ 1,251,246 1,208,101 Operating expenses: Inventory services................................................................ 2,615 5,685 Commissions....................................................................... -- 600 Delivery.......................................................................... 6,113 6,105 Advertising....................................................................... 40,118 29,167 Bank charges...................................................................... 3,201 3,269 Bad debt expense.................................................................. 14,878 5,274 Data processing................................................................... 24,519 25,250 Depreciation...................................................................... 10,440 9,628 Rent.............................................................................. 53,975 52,743 Credit card charges............................................................... 2,062 2,211 Dues & Subscriptions.............................................................. 3,279 2,868 Repairs/Maintenance............................................................... 9,669 12,953 Meals & Entertainment............................................................. 459 531 Insurance......................................................................... 44,382 39,804 Professional fees................................................................. 25,895 26,876 Miscellaneous..................................................................... 1,465 1,875 Office supplies................................................................... 3,658 4,002 Postage........................................................................... 2,630 17,924 Supplies.......................................................................... 4,069 2,411 Taxes/Licenses.................................................................... 35,383 50,130 Telephone......................................................................... 14,012 15,227 Travel............................................................................ 2,181 2,728 Utilities......................................................................... 17,198 17,523 Wages............................................................................. 431,504 434,817 Accounts receivable fee........................................................... 10,322 12,180 Vials and labels.................................................................. 12,602 12,146 ------------ ------------ Total Operating expenses............................................................ 776,629 793,927 ------------ ------------ Operating profit.................................................................... $ 474,617 $ 414,174 ------------ ------------ ------------ ------------
See accompanying notes. F-23 TRUE QUALITY PHARMACIES, INC.--VISTAS COMBINED STATEMENT OF NET ASSETS SOLD
MARCH 6 AND 7, 1997 ---------- ASSETS SOLD Current assets: Accounts receivable, net............................................................................ $ 66,494 Inventories, at cost................................................................................ 482,260 ---------- Total current assets.................................................................................. 548,754 Equipment, at cost.................................................................................... 112,952 Less accumulated depreciation......................................................................... 94,893 ---------- Equipment, net........................................................................................ 18,059 ---------- Total assets sold..................................................................................... 566,813 Liabilities assumed................................................................................... -- ---------- Net assets sold....................................................................................... $ 566,813 ---------- ----------
See accompanying notes. F-24 TRUE QUALITY PHARMACIES, INC.--VISTAS NOTES TO THE FINANCIAL STATEMENTS AS OF MARCH 6 AND 7, 1997 AND THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION True Quality Pharmacies, Inc. owns and operates fourteen retail pharmacies located in Texas, Oklahoma and Kansas. The financial statements presented include only the operations of the retail pharmacies operating as Vistas and located in Mineola, Mt. Vernon and McKinney, Texas for the years ended December 31, 1995 and 1996 on a combined basis and their combined net assets sold as of March 6, 1997, prior to the sale of such assets to HORIZON Pharmacies, Inc. ("HORIZON"). The financial statements represent the operations of the retail pharmacies prior to the sale. HORIZON purchased the business, including various assets on March 6 and 7, 1997. Expenses relating to income taxes, interest and executive compensation are not included because they are not directly related to the sale. DEPRECIATION Depreciation is provided on a straight-line basis over the estimated useful life of the assets. In these financial statements, depreciation is only included for those assets to be sold to HORIZON. BASIS OF ACCOUNTING The financial statements are prepared on the accrual basis of accounting and accordingly reflect revenues at the time products are sold or services are rendered. Expenses are recognized when the products are received or the services are performed. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. F-25 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER, TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. -------------------------- TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................. 3 Risk Factors................................... 6 Use of Proceeds................................ 14 Dividend Policy................................ 14 Dilution....................................... 15 Capitalization................................. 16 Selected Financial Information................. 17 Pro Forma Combined Financial Data.............. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 24 Business....................................... 29 Management..................................... 37 Certain Transactions........................... 41 Principal Shareholders......................... 42 Description of Securities...................... 42 Shares Eligible for Future Sale................ 44 Underwriting................................... 45 Legal Matters.................................. 47 Experts........................................ 47 Additional Information......................... 47 Financial Statements........................... F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 1,200,000 SHARES HORIZON PHARMACIES, INC. COMMON STOCK --------------------- PROSPECTUS --------------------- CAPITAL WEST SECURITIES, INC. , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HORIZON PHARMACIES, INC. REGISTRATION STATEMENT ON FORM SB-2 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article 2.02 of the Texas Business Corporation Act provides broadly for indemnification of directors and officers against claims and liabilities against them in their capacities as such. The Company's Bylaws also provide for the indemnification of directors and officers by the Company. In addition, the Company has purchased Directors' and Officers' Liability and Company Reimbursement Liability Insurance which, in certain circumstances, provide for payments to the directors and officers of the Company, in the event of such liabilities. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All expenses of registration will be borne by the Company. All of the amounts shown are estimates, except the registration fee, and assume exercise of the underwriters' over-allotment option. Securities and Exchange Commission registration fee............ $ 2,272.73 NASD fees...................................................... 1,300.00 Underwriters' non-accountable expense allowance................ 207,000.00 Blue Sky Fees.................................................. 15,000.00 Legal fees and expenses........................................ 80,000.00 Accounting fees and expenses................................... 65,000.00 Printing and engraving expenses................................ 35,000.00 Exchange listing fees.......................................... 21,000.00 ---------- TOTAL EXPENSES............................................... $426,572.73 ---------- ----------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. The following sets forth certain information regarding sales of securities of the Company issued within the past three years, which were not registered pursuant to the Securities Act of 1933, as amended (the "Securities Act"). The following information has been adjusted to reflect the 2-for-1 split for all Common Stock approved by the Company's Board of Directors on April 14, 1997: On June 6, 1994, the Company sold 120,000 shares of Common Stock to five officers, directors and an employee for an aggregate price of $150,000. The Company sold an additional 136,000 shares to five officers and directors, one person with whom the Company's officers and/or directors had a prior business relationship ("Business Associate"), and one employee on August 9, 1994 for an aggregate price of $170,000. The Company sold an additional 118,482 shares of Common Stock on November 18, 1994 to its officers and directors, one employee, one Business Associate, and one additional investor for an aggregate of $177,723. On February 27, 1995, the Company sold 255,512 shares of Common Stock to five officers and directors, seven employees (one of whom was an existing shareholder), two existing shareholders, three Business Associates and three other investors for an aggregate of $447,146; on September 8, 1995 the Company sold 100,006 shares of Common Stock for an aggregate of $300,018 to five officers and directors, and 12 existing shareholders. II-1 On September 25, 1996, the Company sold 19,424 shares of Common Stock for an aggregate $97,120 to 19 officers, directors and existing shareholders. On September 26, 1996, the Company issued 160,000 shares of Common Stock for an aggregate $80,000 in connection with the exercise of certain stock options held by the Company's officers and directors. On September 30, 1996, the Company sold 31,000 shares of Common Stock to certain relatives of its officers and directors for an aggregate $155,000. On October 18, 1996, the Company sold 14,000 shares of Common Stock to a relative of one of the Company's directors for an aggregate price of $70,000, and on November 30, 1996 the Company issued 4,000 shares of Common Stock for an aggregate $20,000 to one of its lenders to reduce long-term debt. No sales commissions were paid in connection with any of the sales of securities described above. The Company believes that the securities were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as set forth below. In determining the availability of an exemption under Section 4(2), all offerees of the Company's Common Stock had a prior business or personal relationship with the Company, its officers or directors, and the amount of securities offered in each offering was less than $500,000. No general solicitation or advertising was employed in connection with any of the offerings, and with the exception of the Company's offering in September 1996, which was extended to each of the Company's existing 27 shareholders in connection with such shareholders' preemptive rights under Texas law, no offer was made to more than 25 persons. Each of the offerings was separately conducted in connection with the acquisition of one or more stores, and in no offering did the amount of Common Stock sold to non-officers or -directors exceed $337,000 in the aggregate, nor $812,000 for all such offerings combined. Although no formal offering documents were prepared and distributed to potential investors, each investor was given an opportunity to receive financial and other information regarding the Company's operations by means of the close business and/or personal relationship of each investor to the Company or its officers or directors. Similarly, while no investment intent letters were obtained by the Company and the stock certificates issued by the Company did not bear any restrictive legends, the Company's stock transfer records were marked with stop transfer instructions in connection with the stock split approved by the Board of Directors on April 14, 1997, and stock certificates replacing the original certificates will bear appropriate restrictive legends. ITEM 27. EXHIBITS.
EXHIBIT NUMBER NAME OF EXHIBIT - --------- -------------------------------------------------------------------------------------------------------- 1.1 Underwriting Agreement between the Company and Capital West Securities, Inc. (filed electronically herewith). *3.1 Restated Articles of Incorporation. 3.2 Amended and Restated Articles of Incorporation (filed electronically herewith). 3.3 Amended and Restated Bylaws (filed electronically herewith). 4.1 Specimen Certificate of the Common Stock (filed electronically herewith). 4.3 Form of Warrant Agreement between the Company and the Underwriters (filed electronically herewith). 4.4 Stock Option Plan (filed electronically herewith). 5.1 Opinion of Phillips McFall McCaffrey McVay & Murrah, P.C. as to the legality of the securities being registered (filed electronically herewith). 10.1 Loan Agreement dated October 16, 1996, by and between the Company and Bergen Brunswig Drug Company (filed electronically herewith). *10.2 Purchase Agreement dated March 8, 1997 by and between Mesa Drug, Inc. and Horizon Pharmacies, Inc.
II-2
EXHIBIT NUMBER NAME OF EXHIBIT - --------- -------------------------------------------------------------------------------------------------------- *10.3 Asset Purchase Agreement dated March 4, 1997 by and between True Quality Pharmacies, Inc. (d/b/a Vista Pharmacies) and Horizon Pharmacies, Inc. 10.4 Form of Employment Agreement by and between the Company and each of Rick D. McCord, R.Ph., Sy S. Shahid, David W. Frauhiger, Charlie K. Herr, R.Ph., Robert D. Mueller, R.Ph., and Nancy Papaneri, R.Ph. (filed electronically herewith). 10.5 Form of Lockup Agreement (filed electronically herewith). 10.6 Supply Agreement dated effective January 1, 1995 by and between the Company and Bergen Brunswig, Inc. (filed electronically herewith). 16.1 Letter of Herold, Howard & Madsen P.C., Independent Auditors, relating to change in auditors (filed electronically herewith). 23.1 Consent of Herold, Howard & Madsen P.C., Independent Auditors (filed electronically herewith). 23.2 Consent of Ernst & Young LLP, Independent Auditors (filed electronically herewith). *23.3 Consent of Phillips McFall McCaffrey McVay & Murrah, P.C. *24.1 Powers of Attorney of Messrs. Frauhiger, Herr, McCord, Mueller and Shahid (included as part of the signature page filed with the initial Registration Statement). 24.2 Powers of Attorney of Carson A. McDonald and Philip H. Yielding (filed electronically herewith). 27 Financial data schedule (filed electronically herewith).
- ------------------------ * Previously filed ITEM 28. UNDERTAKINGS. 1. The undersigned Registrant hereby undertakes: (a) To provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective. (c) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (i) include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) include any additional or changed material information on the plan of distribution. (d) That, for the purpose of determining liability under the Securities Act, each post-effective amendment shall be deemed to be a new registration statement of the securities offered, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 (e) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the termination or end of the offering. 2. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements of filing on Form SB-2 and has duly caused this Amendment No. 1 to Registration Statement on Form SB-2, to be signed on its behalf by the undersigned, thereon duly authorized in the City of Princeton, State of Texas, on May 30, 1997. HORIZON PHARMACIES, INC. a Texas corporation By: /s/ RICK D. MCCORD, R.PH. ----------------------------------------- Rick D. McCord, R.Ph. PRESIDENT AND CHIEF OPERATING OFFICER Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities and on the date indicated. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ RICK D. MCCORD, R.PH. - ------------------------------ Chairman of the Board of Rick D. McCord, R.Ph. Directors, President and May 30, 1997 PRINCIPAL EXECUTIVE OFFICER Chief Operating Officer /s/ SY S. SHAHID* - ------------------------------ Executive Vice President, May 30, 1997 Sy S. Shahid Secretary, Director /s/ DAVID W. FRAUHIGER* - ------------------------------ David W. Frauhiger Chief Financial Officer, May 30, 1997 PRINCIPAL FINANCIAL AND Treasurer, Director ACCOUNTING OFFICER /s/ CHARLIE K. HERR* - ------------------------------ Director May 30, 1997 Charlie K. Herr /s/ ROBERT D. MUELLER* - ------------------------------ Director May 30, 1997 Robert D. Mueller, R.Ph. /s/ CARSON A. MCDONALD - ------------------------------ Director Nominee May 30, 1997 Carson A. McDonald /s/ PHILIP H. YIELDING - ------------------------------ Director Nominee May 30, 1997 Philip H. Yielding *By: /s/ RICK D. MCCORD ------------------------- Rick D. McCord ATTORNEY-IN-FACT II-5 INDEX TO EXHIBITS
EXHIBIT NUMBER NAME OF EXHIBIT - ----------- --------------------------------------------------------------------------------------------------- 1.1 Underwriting Agreement between the Company and Capital West Securities, Inc (filed electronically herewith). *3.1 Restated Articles of Incorporation. 3.2 Amended and Restated Articles of Incorporation (filed electronically herewith). 3.3 Amended and Restated Bylaws (filed electronically herewith). 4.1 Specimen Certificate of the Common Stock (filed electronically herewith). 4.3 Form of Warrant Agreement between the Company and the Underwriters (filed electronically herewith). 4.4 Stock Option Plan (filed electronically herewith). 5.1 Opinion of Phillips McFall McCaffrey McVay & Murrah, P.C. as to the legality of the securities being registered (filed electronically herewith). 10.1 Loan Agreement dated October 21, 1996 by and between Bergen-Brunswig Drug Co. and Horizon Pharmacies, Inc. (filed electronically herewith). *10.2 Purchase Agreement dated March 8, 1997 by and between Mesa Drug, Inc. and Horizon Pharmacies, Inc. *10.3 Asset Purchase Agreement dated March 4, 1997 by and between True Quality Pharmacies, Inc. (d/b/a Vista Pharmacies) and Horizon Pharmacies, Inc. 10.4 Form of Employment Agreement by and between the Company and each of Rick D. McCord, R.Ph., Sy S. Shahid, David W. Frauhiger, Charlie K. Herr, R.Ph., Robert D. Mueller, R.Ph. and Nancy Papaneri, R.Ph. (filed electronically herewith). 10.5 Form of Lockup Agreement (filed electronically herewith). 10.6 Supply Agreement dated effective January 1, 1995 by and between the Company and Bergen Brunswig, Inc. (filed electronically herewith). 16.1 Letter of Herold, Howard & Madsen P.C., Independent Auditors, relating to change in auditors (filed electronically herewith). 23.1 Consent of Herold, Howard & Madsen P.C., Independent Auditors (filed electronically herewith). 23.2 Consent of Ernst & Young LLP, Independent Auditors (filed electronically herewith). *23.3 Consent of Phillips McFall McCaffrey McVay & Murrah, P.C. *24.1 Powers of Attorney of Messrs. Frauhiger, Herr, McCord, Mueller and Shahid (included as part of the signature page filed with the initial Registration Statement). 24.2 Powers of Attorney of Carson A. McDonald and Philip H. Yielding (filed electronically herewith). 27 Financial data schedule (filed electronically herewith).
- ------------------------ * Previously filed EX-1.1 2 EXHIBIT 1.1 - UNDERWRITING AGREEMENT 1,200,000 SHARES HORIZON PHARMACIES, INC. (A Texas Corporation) (Par Value $0.01 Per Share) UNDERWRITING AGREEMENT May ___, 1997 CAPITAL WEST SECURITIES, INC. 211 N. Robinson 16th Floor, One Leadership Square Oklahoma City, Oklahoma 73102 Ladies/Gentlemen: HORIZON Pharmacies, Inc., a Texas corporation (the "Company"), hereby confirms its agreement with Capital West Securities, Inc. ("Capital West") as representative of the several underwriters named in Schedule A hereto (herein collectively called the "Underwriters") as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 1,200,000 shares (the "Firm Shares") of its authorized and unissued common stock, par value $0.01 per share (the "Common Stock") to the Underwriters upon the terms and subject to the conditions set forth herein. The Company also proposes to grant to the Underwriters an option to purchase, for the sole purpose of covering over-allotments in connection with the sale of Firm Shares, an aggregate of up to 180,000 additional shares ("Option Shares") of Common Stock upon the terms and subject to the conditions set forth herein and as provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. All shares of Common Stock of the Company, including the Shares, are hereinafter referred to as "Common Stock." 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. Unless otherwise indicated or the context otherwise requires, references to the "Company" in this Section 2 are references to HORIZON Pharmacies, Inc., a Texas corporation. The Company represents and warrants to and agrees with the Underwriters, as follows: (a) A registration statement on Form SB-2 (File No. 333-25257) with respect to the Shares, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement and such amended prospectuses subject to completion, as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement and such amended prospectuses subject to completion, as may hereafter be required. The Company meets the requirements for use of a Registration Statement on Form SB-2. Copies of such registration statement and any amendments and of each related prospectus subject to completion have been delivered to you. If the registration statement has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information omitted from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement has not been declared effective under the Act by the Commission, the Company will prepare and promptly file a further amendment to the registration statement, including a final form of prospectus. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations) and, in the event of any amendment thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations), except that if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the Prospectus on file with the Commission at the time the Registration Statement became or becomes, as the case may be, effective (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up, to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement -2- and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, and (ii) neither the Registration Statement nor the Prospectus, nor any amendments or supplements thereto, will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties contained in this subparagraph shall apply to information contained in or omitted from the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon, and in conformity with, written information furnished to the Company by any Underwriter specifically for inclusion therein. (c) Each contract, agreement, instrument, lease, license or other item required to be described in the Registration Statement or the Prospectuses or filed as an exhibit to the Registration Statement has been so described or filed, as the case may be. (d) Each of the Company and its Subsidiary (as such term is defined in Rule 405 under the Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its organization, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement; each of the Company and its Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification except where the failure to be so qualified or to be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiary considered as a whole; each of the Company and its Subsidiary is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, Federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect; neither the Company nor its Subsidiary is in violation of its charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, or any material lease, contract, joint venture, or other agreement or instrument to which it is a party or by which its property is bound or in violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any government, governmental agency or body or court, domestic or foreign, of which it has knowledge except such failures to comply as would not, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiary considered as a whole. (e) The Company has full legal right, power and authority to enter into this Agreement and to perform the transactions contemplated hereby. This Agreement and the Warrant Agreement (the "Warrant Agreement") by and between the Company and the Underwriters have been duly authorized, executed and delivered by the Company and are valid and binding agreements on the part of the Company, enforceable in accordance with their respective terms, except as rights to indemnification and contribution hereunder may be limited -3- by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally, or by general equitable principles; the performance of this Agreement and the Warrant Agreement and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any material indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, or any material lease, contract, joint venture or other agreement or instrument to which the Company is a party or by which the property of the Company is bound including any licenses from third parties, or (ii) the Certificate of Incorporation and Bylaws of the Company, or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any government or governmental agency or body or court, domestic or foreign, having jurisdiction over the Company or over the properties of the Company, except for breaches, violations or defaults that individually or in the aggregate, would not have a material adverse effect on the Company; and no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions herein contemplated, except such as may be required under the Act, the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), or under state or other securities or Blue Sky laws, all of which requirements have been satisfied in all material respects. (f) Except as disclosed in the Registration Statement or the Prospectus, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or its Subsidiary which (i) is required to be disclosed in the Registration Statement or the Prospectus or which might result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, or which might materially and adversely affect the properties or assets thereof; or (ii) which might be expected to materially and adversely affect the consummation of the transactions contemplated by this Agreement; all pending legal or governmental proceedings to which the Company or its Subsidiary is a party or of which any of their respective properties or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the Company's business, could not reasonably be expected to result in a material adverse change in the condition, financial or otherwise, or the earnings, business affairs or business properties of the Company and its Subsidiary considered as one enterprise; and there are no contracts or documents of the Company or its Subsidiary which are required to be described in the Registration Statement or the Prospectus, or to be filed as exhibits thereto, by the Act or by the Rules and Regulations which have not been accurately described in all material respects and filed as exhibits to the Registration Statement. To the best of the Company's knowledge, the contracts so described in the Prospectus are in full force and effect on the date hereof, and neither the Company nor its Subsidiary is in breach of or default under, and to the Company's knowledge, no other party is in material breach of or material default under, any of such contracts. (g) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all Federal and state securities laws, were not issued in violation of or subject to -4- any preemptive rights or other rights to subscribe for or purchase securities (other than such preemptive rights or other rights to subscribe for or purchase securities as were fully complied with or expressly waived or with respect to the violation of which the right to make claim is barred by the applicable statute of limitations), and the authorized and outstanding capital stock of the Company conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Firm Shares and the Option Shares to be purchased from the Company hereunder have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable; the shares of Common Stock issuable under the warrant (the "Underwriters' Warrant") to be granted to the Underwriters under the Warrant Agreement have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of the Warrant Agreement, will be duly and validly issued and fully paid and nonassessable; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders exists with respect to any of the Firm Shares, Option Shares or shares of Common Stock issuable under the Underwriters' Warrant or the issuance and sale thereof other than those that have been expressly waived prior to the date hereof and those that will automatically expire upon the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any stockholder, the Board of Directors or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act, the Exchange Act or under state or other securities or Blue Sky laws. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company (including the notes thereto) included in the Prospectus, the Company has no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. The shares of Common Stock reserved for issuance upon exercise of the Company's outstanding options and warrants have been duly and validly authorized and are sufficient in number to meet the exercise requirements of such options. (h) Ernst & Young LLP, which has audited the 1996 historical financial statements of the Company filed with the Commission as a part of the Registration Statement and which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited and pro forma financial statements of the Company, together with the notes, and the unaudited financial information, forming part of the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply; and all audited and pro forma financial statements, together with the notes, and the unaudited and pro forma financial information, filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting -5- principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. Herold, Howard & Madsen, P.C., which has audited the 1995 historical financial statements of the Company; the statements of operating revenues and direct operating expenses for Mesa Drug, Inc. - Farmington Store for the year ended December 31, 1995 and the period from January 1, 1996 to April 26, 1996; and the combined statements of operating revenues and direct operating expenses for True Quality Pharmacies, Inc. - Vistas for the years ended December 31, 1995 and 1996 and the Combined Statement of Net Assets Sold as of March 6, 1997, filed with the Commission as part of the Registration Statement and which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited financial statements of the Company, and the notes thereto, the audited combined statements of revenues and expenses of Mesa Drugs, Inc. - Farmington Store, and the notes thereto, the audited statements of revenues and expenses and of Net Assets Sold of True Quality Pharmacies, Inc. - Vistas and the notes thereto, forming part of the Registration Statement and Prospectus, fairly represent the financial position and the results of operations of the Company, Mesa Drugs, Inc. - Farmington Store and True Quality Pharmacies, Inc. - Vistas and the other information purported to be shown therein at the respective dates and for the respective periods to which they apply; and all such audited statements filed with the Commission as part of the Registration Statement have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. (i) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (i) there has been no material adverse change in the business, properties, operations, condition (financial or otherwise) or in the earnings, business affairs or business prospects of the Company and its Subsidiary, whether or not arising in the ordinary course of business, (ii) there have been no transactions entered into by the Company other than those in the ordinary course of business, which are material with respect to the Company, (iii) there has been no obligation that is material to the Company, direct or contingent, incurred by the Company or its Subsidiary, except obligations incurred in the ordinary course of business, (iv) there has been no change in the capital stock of the Company, (v) there has been no change in the outstanding indebtedness of the Company which is material to the Company, (vi) there has been no dividend or distribution of any kind declared, paid or made by the Company on behalf of any class of its respective capital stock, (vii) there has been no redemption, purchase or acquisition or agreement to redeem, purchase or acquire shares of Common Stock of the Company, or (viii) to the knowledge of the Company, there has been no change in any Federal, state, or other laws, rules, or regulations (or interpretations thereof) applicable to the business of the Company that would have a material adverse effect on the Company, and, to the knowledge of the Company, no such change is pending other than as described in the Prospectus. (j) Except as described in the Prospectus, (i) the Company and its Subsidiary -6- have good and marketable title to all properties and assets described in the Prospectus as owned by them, free and clear of all liens, charges, encumbrances or restrictions of any kind, except those described in the Prospectus, or those not material, singly or in the aggregate, to the business of the Company and its Subsidiary considered as a whole, (ii) the agreements to which the Company is a party described in the Prospectus are valid agreements, enforceable by the Company, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles, and (iii) the Company has valid and enforceable leases for the properties described in the Prospectus as leased by it except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (k) All Federal, state, local and foreign tax returns required to be filed by the Company or its Subsidiary in any jurisdiction have been filed, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due or claimed to be due from such entities have been paid other than those being contested in good faith and for which adequate reserves have been provided or those currently payable without penalty or interest; and adequate charges, accruals and reserves have been provided for in the financial statements referred to in Section 2(g) above in respect of all Federal, state, local and foreign taxes for all periods as to which the tax liability of the Company or its Subsidiary has not been finally determined or remains open to examination by applicable taxing authorities. (l) No labor dispute with the employees of the Company or its Subsidiary exists or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers, contractors or customers which might be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. No collective bargaining agreement exists with any of the Company's employees and, to the Company's knowledge, no such agreement is imminent. (m) The Company and its Subsidiary own or possess, or can acquire on reasonable terms, the patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names presently employed by them in connection with the business now operated by them and neither the Company nor its Subsidiary has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any patent or proprietary rights or of any facts or circumstances which would render any patent and proprietary rights invalid or inadequate to protect the interest of the Company or its Subsidiary therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy singly or in the aggregate, would result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. -7- (n) Except as set forth in the Prospectus, the Company and its Subsidiary are in compliance in all material respects with all applicable laws, statutes, ordinances, rules or regulations, the enforcement of which, individually or in the aggregate, would be reasonably expected to have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. (o) The Common Stock has been approved for quotation on the Nasdaq SmallCap Market subject to official notice of issuance. (p) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" within the meaning of the 1940 Act and such rules and regulations. (q) The Company has not distributed and will not distribute prior to the Closing Date or on any date on which Option Shares are to be purchased, as the case may be, any offering material in connection with the offering and sale of the Shares other than the Prospectus, the Registration Statement and other materials permitted by the Act. (r) The Company has not at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any Federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (s) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. The Company has not effected any sales of securities required to be disclosed in Item 26 of Form SB-2 under the Act, other than as disclosed in the Registration Statement. (t) Each officer and director of the Company and each beneficial owner of at least 5% of the outstanding shares of Common Stock and options and warrants to purchase Common Stock outstanding prior to the effective date of the Registration Statement have agreed in writing that such persons will not, for a period expiring 24 months after the effective date of the Registration Statement, offer to sell, contract to sell, sell short, or otherwise sell or dispose of any shares of Common Stock of the Company, any options or warrants to purchase any shares of Common Stock of the Company, or any securities convertible into or exchangeable for shares of the Common Stock owned directly by such person or with respect to which such person has the power of disposition otherwise than (i) as a gift or gifts, provided the donee or donees thereof agree to be bound by this restriction or (ii) with the prior written consent of Capital West. (u) Except as described in the Registration Statement, (i) neither the Company nor its Subsidiary is in violation of any Federal, state, local or foreign laws or regulations relating -8- to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Environmental Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Environmental Materials (collectively, the "Environmental Laws"), except such violations as would not, singly or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, and (ii) to the best of the Company's knowledge, there are no events or circumstances that could form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or its Subsidiary relating to any Environmental Materials or the violation of any Environmental Laws, which, singly or in the aggregate, could reasonably be expected to have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. (v) The Company and its Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles as in effect in the United States and to maintain asset accountability; (iii) access to bank accounts is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (w) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. Neither the Company nor any employee or agent of the Company has made any payment or transfer of any funds or assets of the Company or conferred any personal benefit by use of the Company's assets, or received any funds, assets or personal benefit in violation of any law, rule or regulation. (x) On the Closing Date and upon delivery of the Option Shares, as applicable, all transfer and other taxes (other than income taxes) that are required to be paid in connection with the sale and transfer of the Shares to the Underwriters will have been paid. (y) The Company currently has a pension plan subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to such "pension plan" (as defined in ERISA) for which the Company would have any liability, the Company has not incurred and does not expect to incur liability under (I) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension -9- plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (z) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida) AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA (the "Cuba Act"), and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business in Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (aa) Any certificate signed by any officer of the Company and delivered to the Underwriters or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (bb) Except as may be set forth in the Prospectus, the Company has not incurred any liability for a fee, commission, or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by the Underwriting Agreement. (cc) The Company and its Subsidiary is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and its Subsidiary are engaged. 3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Company, respectively, at a purchase price per share of $5.00 per Share, the number of Shares set forth in SCHEDULE A hereto (subject to adjustment as provided in Section 10). Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the Underwriters by certified or official bank check in next day funds, payable to the order of the Company at the offices of Capital West Securities, Inc., 211 N. Robinson, 16th Floor, One Leadership Square, Oklahoma City, Oklahoma 73102, or at such other place as shall be agreed upon by the Underwriters and the Company, at 9:30 a.m. on the third business day following the first day that Shares are traded (or at such time and date to which payments and -10- delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date." The certificates for the Firm Shares to be so delivered will be made available to you at such office or at such other location as you may reasonably request for checking at least one business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two business days prior to the Closing Date. If the Underwriters so elect, delivery of the Shares may be made by credit through full fast transfer to the accounts at Depository Trust Company designated by the Underwriters. It is understood that Capital West, individually and not as representative of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by Capital West prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by Capital West shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. After the Registration Statement becomes effective, the several Underwriters intend to offer the Firm Shares to the public as set forth in the Prospectus. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters) and under "Underwriting" in any Preliminary Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b) constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the Underwriters, represent and warrant to the Company that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such statements, in the light of the circumstances in which they were made, not misleading. 4. FURTHER COVENANTS OF THE COMPANY. The Company covenants with the several Underwriters as follows: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; it will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement or any subsequent amendment to the Registration Statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if for any reason the -11- filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; promptly upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of counsel for the several Underwriters, may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act, the Rules and Regulations thereunder and the provisions of this Agreement. (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge thereof of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will cooperate with the Underwriters and Underwriters' counsel in connection with their efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or to make any undertaking with respect to the conduct of its business. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be reasonably required by the laws of such jurisdiction. (d) The Company will furnish you, as soon as available, copies of the Registration Statement (three of which will be signed and include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including -12- any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all in such quantities as you may from time to time reasonably request. (e) The Company will make generally available to its stockholders as soon as practicable, but in any event not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve-month period beginning after the effective date of the Registration Statement. (f) As long as the Company is a reporting company under the Exchange Act, the Company will furnish to its stockholders, as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and for a period of five years after the effective date of the Registration Statement, the Company will furnish to the several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its stockholders, statements of operations of the Company for each of the first three quarters in the form furnished to the Company's stockholders; (ii) concurrently with furnishing to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent accountants; (iii) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the National Association of Securities Dealers, Inc. ("NASD"); (iv) every material press release and every material news item or article in respect of the Company or its affairs which was released or prepared by the Company (excluding, in each case customary product-related press releases and articles); and (v) any additional information of a public nature concerning the Company, or its business which you may reasonably request. During such five-year period, if the Company shall have active Subsidiary, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its Subsidiary are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. For a period of five years from the date of the Registration Statement, the Company will furnish to you and, upon request, to each of the other Underwriters, as soon as available, a copy of each report of the Company mailed to holders of the Common Stock or publicly filed with the Commission or any automated quotation system or national securities exchange on which any class of securities of the Company is listed. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. -13- (i) The Company will file Form SR in conformity with the requirements of the Act and the Rules and Regulations. (j) The Company shall comply with all provisions of all undertakings contained in the Registration Statement. (k) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement under Section 11(a), the Company will reimburse the several Underwriters for all out-of-pocket accountable expenses (including fees and disbursements of counsel for the several Underwriters) actually incurred by the Underwriters in investigating, preparing to market or marketing the Shares, up to an aggregate of $40,000, which amount has already been paid and which shall be reimbursed to the Company to the extent not actually incurred. (l) If at any time during the 90-day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (m) For a period of 180 days after the date of this Agreement, without the prior written consent of Capital West, the Company shall not, directly or indirectly, offer, sell, contract to sell, pledge, grant any option to purchase or otherwise dispose (or announce any offer, sale, contract of sale or other disposition of), any shares of Common Stock or any other shares of capital stock of the Company, or any securities convertible into or exercisable or exchangeable for, or warrants, options or rights to purchase or acquire, shares of Common Stock or any other shares of capital stock of the Company, or any interest in the Common Stock (including derivative interests) other than the Company's issuance and sale of Shares in accordance with the Underwriting Agreement, and the issuance of stock options under, or the issuance of Common Stock upon the exercise of stock options granted under, any stock option plan described in the Prospectuses. (n) During a period of 90 days from the effective date of the Registration Statement, the Company will not file a registration statement registering shares under any employee benefit plan. (o) On the Closing Date the Company will sell to you, for $.001 per share of Common Stock covered by each warrant, the Underwriters' Warrants to purchase one share of Common Stock of the Company for each ten shares of the Company's Common Stock which -14- have been sold (or purchased by the Underwriters), excluding any over-allotment shares, as set forth in the Prospectus. The Underwriters' Warrants shall have the terms and be in the form filed as an exhibit to the Registration Statement. At any time during the period commencing 12 months and ending five years after the effective date of the offering and at the written request of the then holders of 51% of the Underwriters' Warrants and the Common Stock of the Company issued upon the exercise of the Underwriters' Warrants, and on one occasion, the Company will file with the Commission and process to effectiveness a registration statement covering not less than 51% of the shares of the Common Stock of the Company issuable and/or issued upon the exercise of the Underwriters' Warrants. The Company must file a registration statement only if the shares of Common Stock issuable under the Underwriters' Warrants cannot be sold without registration under Rule 144 promulgated under the Act. The Company agrees to use its commercially reasonable best efforts to cause the filing to become effective. The costs of the filing of such registration statement including but not limited to, legal (including legal fees relating to clearance in the various states, limited however to such states as may be reasonably requested), accounting and printing fees, shall be borne by the Company but the Company shall not be responsible for the cost of any separate counsel to review the registration statement on behalf of or to advise the selling stockholders and shall not be responsible for the payment of any underwriting discount or commissions with respect to such sale. Such registration statement shall comply with any undertaking applicable to such shares. If the Company otherwise than upon the request of the owners of the Underwriters' Warrants or the shares of Common Stock issuable upon the exercise thereof files a registration statement under the Act with respect to any of its securities at any time (other than on Form S-4, S-8, or any other form that does not provide for resales by selling security holders), the Company will give such persons 30 days' notice of its intention to do so, and at their written request given within 10 days of the receipt of such notice, will include in such registration statement such number of such Shares as they may specify, all at no cost to them (except for underwriting discounts and the fees and expenses of counsel to such holders). In connection with any such registration statement covering all or a part of such shares, the Company agrees that it will covenant with the owners of such shares with respect to such shares and the offering thereof, in customary form substantially to the effect contained in this Section 4. If the offering pursuant to any registration statement provided for herein is made through Underwriters, the Company agrees to enter into an underwriting agreement in customary form with such underwriters in which the Company and the underwriters and each person who controls such underwriters within the meaning of the Act grant to each other customary reciprocal indemnities against liabilities under the Act. (p) As long as the Company is a reporting company under the Exchange Act, the Company will comply with the Act, the Exchange Act, the rules and regulations of the NASD and applicable state securities or Blue Sky laws so as to permit the continuance of sales and dealings in the Common Stock under the Act, the Exchange Act, the rules and regulations of the NASD, and applicable state securities or Blue Sky laws, including the filing with the NASD and the Commission of all reports required to be filed pursuant to the applicable provisions of the rules and regulations of the NASD, the Act, and the Exchange Act, and will deliver to the holders of the Common Stock all reports required to be provided to such holders pursuant to the applicable provisions of the rules and regulations of the NASD, the Act, the Exchange Act, and applicable state securities or Blue Sky laws. -15- (q) Immediately following the later to occur of: (I) the Option Closing Date, as defined in Section 6(h)(3), below, or (ii) 30 days following the Closing Date, the Company shall take and complete all necessary corporate and stockholder action that will allow Capital West to designate one person of its choosing to serve as a member of the Board of Directors of the Company. 5. EXPENSES. (a) The Company agrees with each Underwriter that the Company will pay and bear all costs and expenses of the Company incurred in connection with (i) the preparation, printing, filing and mailing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; (ii) the approval of the Common Stock for listing on the American Stock Exchange; (iii) the printing and mailing of this Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney and any instruments related to any of the foregoing; (iv) the issuance, transfer and delivery of the Shares hereunder to the Underwriters or to Depository Trust Company, including transfer taxes, if any, and the cost of all certificates representing the Shares and transfer agents' and registrars' fees; (v) the fees and disbursements of counsel for the Company; (vi) all fees and other charges of the Company's independent public accountants; (vii) the cost of furnishing to the Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus, and any amendments or supplements to any of the foregoing; and (viii) all costs incurred in connection with the qualification of the Shares under the securities laws of such states as the Company, and Capital West may designate including the fees and disbursements of counsel to the Underwriters retained to qualify the Shares in the various states; and (ix) all other expenses directly incurred by the Company in connection with the performance of its obligations hereunder. (b) Capital West shall be entitled to receive from the Company, for itself and not as representative of the Underwriters, a nonaccountable expense allowance equal to three percent of the aggregate public offering price of Shares sold to the Underwriters in connection with the Offering reduced by any amounts advanced by the Company to Capital West pursuant to the terms of the Letter of Intent. Capital West shall be entitled to withhold this allowance on the Closing Date. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters to purchase and pay for Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased (the "Option Closing Date"), as the case may be, of the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:30 p.m. on the date hereof, or with the consent of the Underwriters, at a later time and date, not later, -16- however, than 5:30 p.m. on the first business day following the date hereof, or at such later time and date as may be approved by a majority in interest of the Underwriters; and no stop order suspending the effectiveness of the Registration Statement shall have been issued under the Act or proceedings therefor initiated or threatened by the Commission and any request on the part of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. If the Company has elected to rely upon Rule 430A of the Rules and Regulations, the price of the Shares and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations within the prescribed time period, and prior to the Closing Date the Company shall have provided evidence satisfactory to the Underwriters of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Rules and Regulations. Qualification under the securities laws of such states as you may deem necessary to the success of the underwriting of the issue and sale of the Shares upon the terms and conditions set forth in this Agreement or contemplated by this Agreement and containing no provisions unacceptable to you will have been secured, and no stop order (or the equivalent thereof) will be in effect denying or suspending effectiveness of such qualification, nor will any stop order proceedings (or the equivalent thereof) with respect thereto be instituted or pending or threatened under such laws. (b) At the Closing Date and the Option Closing Date, if any, counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Shares as contemplated herein and related proceedings or in order to evidence the accuracy of any of the representations and warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Shares as herein contemplated shall be satisfactory in form and substance to the Underwriters and counsel for the Underwriters. (c) There shall not have been, since the date hereof or since the respective dates as of which information is given in the Registration Statement and the Prospectus, any change in the condition (financial or otherwise), earnings, operations, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, whether or not arising in the ordinary course of business which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus, and the Underwriters shall have received a certificate of the President or Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of the Closing Date, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 2 hereof are true and correct with the same force and effect as though expressly made at and as of the Closing Date, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or threatened by the Commission or any Blue Sky -17- jurisdiction. (d) At the Closing Date the Underwriters shall have received: (1) The opinions, dated as of the Closing Date of Phillips McFall McCaffrey McVay and Murrah, P.C., special counsel for the Company and Steven Pitzner, counsel to the Company, in form and substance satisfactory to counsel for the Underwriters, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Texas. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus and to enter into and perform its obligations under this Agreement and to issue, sell and deliver to the Underwriters the Firm Shares or the Option Shares, as the case may be, to be issued and sold by it hereunder. (iii) The Company is duly qualified to do business as a foreign corporation and is in good standing in the States of Texas, Oklahoma, Virginia, New Mexico and Wisconsin, and to the best of its knowledge is not required to be qualified to do business as a foreign corporation in any other jurisdiction. (iv) At the Closing Date, after giving effect to the sale of the Firm Shares, the authorized capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein; the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and have not been issued in violation of any preemptive right contained in the Certificate of Incorporation or Bylaws of the Company or, to such counsel's knowledge, any co-sale right, registration right, right of first refusal or other similar right (other than such preemptive rights or other rights to subscribe for or purchase securities as were fully complied with or expressly waived or with respect to the violation of which the right to make a claim is barred by the applicable statute of limitation). (v) The Firm Shares and the Option Shares, as the case may be, to be purchased from the Company hereunder have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment therefor in accordance with the terms hereof, will be validly issued and fully paid and nonassessable, and will not be issued in violation of any preemptive right under the Certificate of Incorporation or Bylaws of the Company or, to such counsel's knowledge, any co-sale right, right of first refusal or other similar right and the stockholders of the Company have no preemptive right under the Certificate of Incorporation or Bylaws of the Company or, to such counsel's knowledge, other rights to purchase any of the Shares; the shares of Common Stock reserved for issuance upon the exercise of the Underwriters' Warrants have been duly and validly authorized and are sufficient in number to -18- meet the exercise requirements thereof, and such shares of Common Stock, when issued upon exercise, will be duly and validly issued, fully paid (assuming exercise in accordance with the Warrant Agreement and receipt by the Company of the exercise price thereof) and nonassessable; the stockholders of the Company have no preemptive right under the Certificate of Incorporation or Bylaws of the Company or, to such counsel's knowledge, other rights to purchase any of the Shares; and the shares of Common Stock reserved for issuance upon the exercise of the Company's outstanding options have been duly and validly authorized and are sufficient in number to meet the exercise requirements of such options, and such shares of Common Stock, when issued upon exercise, will be duly and validly issued, fully paid (assuming exercise in accordance with the governing instruments therefor and receipt by the Company of the exercise price thereof) and nonassessable. (vi) The issuance of the Shares to be purchased hereunder is not subject to preemptive or other similar rights arising by operation of law or, to the best of their knowledge and information, otherwise. (vii) Each Subsidiary has been duly incorporated and is validly existing as a corporation and is in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own, lease and operate its properties and to conduct it business as described in the Registration Statement, and is duly qualified as a foreign corporation to transact business and is in good standing in the States of Texas, Oklahoma, Virginia, New Mexico and Wisconsin, and to the best of its knowledge any Subsidiary is not required to be qualified to do business as a foreign corporation in any other jurisdiction; all of the issued and outstanding capital stock of such Subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and, to the best of their knowledge and information, is owned by the Company directly, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (viii) This Agreement and the Warrant Agreement have been duly authorized by all necessary corporate action on the part of the Company and have been duly executed and delivered by the Company and assuming due authorization, execution and delivery by the Underwriters, are valid and binding agreements of the Company, except insofar as indemnification and contribution provisions may be limited by applicable law or equitable principles, and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or any general equitable principles; (ix) The Registration Statement has been declared effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b) and, to the best of their knowledge and information, no stop order suspending the effectiveness of the Registration Statement has been issued under the Act or proceedings therefor have been initiated or are pending or threatened by the Commission. (x) The Registration Statement, Prospectus and each amendment or -19- supplement to the Registration Statement and Prospectus, as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations. (xi) The terms and provisions of the capital stock of the Company conform in all material respects to the description thereof contained in the Prospectus under the caption "Description of Securities"; (xii) The information in the Prospectus under the caption "Description of Securities" to the extent that they constitute matters of law or legal conclusions, has been reviewed by such counsel and accurately and fairly summarizes in such counsel's opinion the matters described therein and to the knowledge of such counsel, there are no outstanding options, warrants, convertible securities, or other rights to acquire from the Company any capital stock, except as described in the Registration Statement; in addition, the forms of certificates evidencing the Company stock comply with Texas law; (xiii) To the best of their knowledge and information, except as set forth in the Prospectus, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or its Subsidiary is a party, or to which the property of the Company or its Subsidiary is subject, before or brought by any court or government agency or body, which might reasonably be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of this Agreement or the performance by the Company of its obligations hereunder; and all pending legal or governmental proceedings to which the Company or its Subsidiary is a party or that affect any of their respective properties that are not described in the Prospectus, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. (xiv) The information in the Prospectus under the captions "Business and Properties - Legal Proceedings", " -Governmental Regulation" and "- Properties", "Certain Transactions" and "Description of Capital Stock" in the Prospectus and Items 24 and 26 of Part II of the Registration Statement to the extent that such items constitute matters of law, summaries of legal matters, documents or proceedings, or legal conclusions, has been reviewed by them and is correct in all material respects, and there are no legal or governmental actions, suits or proceedings pending or threatened against the Company or its Subsidiary that are required to be described in the Prospectus are not described as required by the Act or the applicable Rules and Regulations. (xv) All descriptions in the Prospectus of contracts and other documents are accurate in all material respects; to the best of their knowledge and information, there are no agreements, no contracts, indentures, mortgages, loan agreements, notes, leases or other -20- instrument required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto, the descriptions thereof or references thereto are correct in all material respects, and to the best of counsel's knowledge and information, the Company is not in default in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument so described, referred to or filed as exhibits thereto. (xvi) No authorization, approval, consent or order of any court or governmental authority or agency (other than under the Act or the Rules and Regulations, which have been obtained, or as may be required under the securities or Blue Sky laws of the various states) is required in connection with the due authorization, execution and delivery of this Agreement or for the offering, issuance or sale of the Shares to the Underwriters; and the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and compliance by the Company with its obligations hereunder (other than performance of the Company's indemnification and contribution obligations hereunder, concerning which no opinion need be expressed) will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach or violation of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or its Subsidiary pursuant to any material contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Company or its Subsidiary is a party or by which either of them may be bound, or to which any of the property or assets of the Company or its Subsidiary is subject, nor will such action result in any violation of the provisions of the Certificate of Incorporation or Bylaws of the Company, or any applicable law, administrative regulation or court decree, provided, however, no opinion need be rendered concerning state securities or Blue Sky laws. (xvii) To the best of such counsel's knowledge and information, with the exception of the Underwriters' Warrants, no holder of any security of the Company has any right to require registration of any shares of Common Stock or any other security of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights to registration of such shares of Common Stock, or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement, or have included securities in the Registration Statement pursuant to the exercise of such rights. (xviii) The Company is not an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the 1940 Act. (xix) To the best of such counsel's knowledge and information, neither the Company nor its Subsidiary is in violation of its charter or by-laws. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the -21- Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). In giving their opinion required by subsection (d)(1) of this Section, Phillips McFall McCaffrey McVay and Murrah, P.C. shall additionally state that nothing has come to their attention that would lead them to believe that the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, at the effective date of the Registration Statement (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriters by the Company for use in connection with the offering of the Shares which differs from the Prospectus declared effective by the Commission, in which case at the time it is first provided to the Underwriters for such use) or at the Closing Date, included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such opinion may state that such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus except as otherwise expressly provided in such opinion, and such counsel need express no opinion or belief as to the financial statements, schedules, and other financial or statistical data included in the Registration Statement or Prospectus. (2) The opinion, dated as of Closing Date, of Robertson & Williams, Inc., counsel for the Underwriters, in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such papers, opinions and information as they request to enable them to pass upon such matters. (e) At the time of the execution of this Agreement, the Underwriters shall have received from Ernst & Young LLP a letter dated such date, in form and substance satisfactory to the Underwriters, to the effect that: (1) they are independent public accountants with respect to the Company and its Subsidiary within the meaning of the Act and the Rules and Regulations; (2) it is their opinion that the consolidated balance sheet and the related statements of income, shareholders' equity and cash flows of the Company included in the Registration Statement and covered by their opinion therein comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations; (3) based upon limited procedures set forth in detail in such letter, nothing has come to their attention which causes them to believe that, at a specified date not more than three days prior to the date of this Agreement, (A) the unaudited consolidated balance -22- sheet and the related statements of income, shareholders' equity and cash flows of the Company and its Subsidiary included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or is not presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement, or (B) at a specified date not more than three days prior to the date of this Agreement, there has been any change in the capital stock of the Company or any increase in the combined long term debt of the Company and its Subsidiary or any decrease in combined net current assets or net assets as compared with the amounts shown in the December 31, 1996 balance sheet included in the Registration Statement or, during the period from December 31, 1996 to a specified date not more than three days prior to the date of this Agreement, there were any decreases, as compared with the corresponding period in the preceding year, in combined revenues, net income or net income per share of the Company and its Subsidiary, except in all instances for changes, increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur; (4) in addition to the examination referred to in their opinion and the limited procedures referred to in clause (3) above, they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information which are included in the Registration Statement and Prospectus and which are specified by the Underwriters, and have found such amounts, percentages and financial information to be in agreement with the relevant accounting, financial and other records of the Company and its Subsidiary identified in such letter; and (5) they have compared the information in the Prospectus under selected captions with the disclosure requirements of Regulation S-B and on the basis of limited procedures specified in such letter nothing came to their attention as a result of the foregoing procedures that caused them to believe that this information does not conform in all material respects with the disclosure requirements of Item 402 of Regulation S-B. (f) At the Closing Date, the Underwriters shall have received from Ernst & Young LLP a letter, dated as of the Closing Date, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section 6, except that the specified date referred to shall be a date not more than three days prior to the Closing Date and, if the Company has elected to rely on Rule 430A of the 1933 Act Regulations, to the further effect that they have carried out procedures as specified in clause (4) of subsection (e) of this Section 6 with respect to certain amounts, percentages and financial information specified by the Underwriters and deemed to be a part of the Registration Statement pursuant to Rule 430(A)(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (4). (g) At the time of the execution of this Agreement, the Underwriters shall have received from Herold, Howard & Madsen, P.C. a letter dated such date, in form and substance satisfactory to the Underwriters, to the effect that: -23- (1) they are independent public accountants with respect to the Company and its Subsidiary within the meaning of the Act and the Rules and Regulations; (2) it is their opinion that the statements of income, shareholder's equity and cash flows for the Company; the statement of operating revenues and direct operating expenses for Mesa Drug, Inc. - Farmington Store; and the combined statements of operating revenues and direct operating expenses and combined statement of net assets sold for True Quality Pharmacies, Inc. -Vistas included in the Registration Statement and covered by their opinion therein complies as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations; (3) based upon limited procedures set forth in detail in such letter, nothing has come to their attention which causes them to believe that, at a specified date not more than three days prior to the date of this Agreement, there were any decreases, as compared with the corresponding period in the preceding year, in combined revenues, net income or net income per share of the Company and its Subsidiary, except in all instances for changes, increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur; (4) in addition to the examination referred to in their opinion and the limited procedures referred to in clause (3) above, they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information which are included in the Registration Statement and Prospectus and which are specified by the Underwriters, and have found such amounts, percentages and financial information to be in agreement with the relevant accounting, financial and other records of the Company and its Subsidiary identified in such letter; and (5) they have compared the information in the Prospectus under selected captions with the disclosure requirements of Regulation S-B and on the basis of limited procedures specified in such letter nothing came to their attention as a result of the foregoing procedures that caused them to believe that this information does not conform in all material respects with the disclosure requirements of Item 402 of Regulation S-B. (h) At the Closing Date, the Underwriters shall have received from Herold, Howard & Madsen, P.C. a letter, dated as of the Closing Date, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (g) of this Section 6, except that the specified date referred to shall be a date not more than three days prior to the Closing Date and, if the Company has elected to rely on Rule 430A of the 1933 Act Regulations, to the further effect that they have carried out procedures as specified in clause (4) of subsection (g) of this Section 6 with respect to certain amounts, percentages and financial information specified by the Underwriters and deemed to be a part of the Registration Statement pursuant to Rule 430(A)(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (4). (i) At the Closing Date, the Common Stock shall have been approved for -24- listing on the American Stock Exchange. (j) In the event that the Underwriters exercise their option provided in Section 7 hereof to purchase all or any portion of the Option Shares, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company hereunder shall be true and correct as of the Option Closing Date and, at the Option Closing Date, the Underwriters shall have received: (1) A certificate, dated the Option Closing Date, of the President or a Vice President of the Company and of the Chief Financial or Chief Accounting Officer of the Company confirming that the certificate delivered at the Closing Date pursuant to Section 5(c) hereof remains true and correct as of the Option Closing Date (except that all references in such Section to "Closing Date" shall be deemed to refer to the "Option Closing Date"). (2) The opinions of Phillips McFall McCaffrey McVay and Murrah, P.C., counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, dated the Option Closing Date, relating to the Option Shares and otherwise to the same effect as the opinion required by Section 5(b)(1) hereof (except that all references in such Section to "Closing Date" shall be deemed to refer to the "Option Closing Date"). (3) The opinion of Robertson & Williams, Inc., counsel for the Underwriters, dated the Option Closing Date, relating to the Option Shares to be purchased on the Option Closing Date and otherwise to the same effect as the opinion required by Section 5(b)(2) hereof (except that all references in such Section to "Closing Date" shall be deemed to refer to the "Option Closing Date"). (4) A letter from Ernst & Young LLP in form and substance satisfactory to the Underwriters and dated the Option Closing Date, substantially the same in form and substance as the letter furnished to the Underwriters pursuant to Section 5(e) hereof, except that the "specified date" in the letter furnished pursuant to this Section 6(h)(4) shall be a date not more than three days prior to the Option Closing Date. (5) A letter from Herold, Howard & Madsen, P.C. in form and substance satisfactory to the Underwriters and dated the Option Closing Date, substantially the same in form and substance as the letter furnished to the Underwriters pursuant to Section 5(g) hereof, except that the "specified date" in the letter furnished pursuant to this Section 6(h)(5) shall be a date not more than three days prior to the Option Closing Date. (k) The Company and the Underwriters shall have entered into the Warrant Agreement and the Company shall have sold to the Underwriters the Underwriters' Warrants, which shall be in the form attached as an exhibit to the Warrant Agreement. -25- If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by Capital West by notice to the Company at any time at or prior to Closing Date, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 4(j) and 8 shall survive any such termination and remain in full force and effect. 7. OPTION SHARES. (a) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a non-transferable option to purchase up to an aggregate 180,000 Option Shares at the purchase price per share for the Firm Shares set forth in Section 3 hereof. Such option may be exercised by Capital West on behalf of the several Underwriters on one occasion in whole or in part during the period of 30 days from and after the date on which the Firm Shares are initially offered to the public, by giving notice to the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in SCHEDULE A hereto) bears to the total number of Firm Shares purchased by the several Underwriters (set forth in SCHEDULE A hereto), adjusted by the Underwriters in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in same day funds, payable to the order of the Company. Such delivery and payment shall take place at the offices of Capital West Securities, Inc., 211 N. Robinson, 16th Floor, Oklahoma City, Oklahoma 73102 or at such other place as may be agreed upon between the Underwriters and the Company on the Option Closing Date, if written notice of the exercise of such option is received by the Company not later than three full business days prior to the Option Closing Date. The certificates for the Options Shares so to be delivered will be made available to you at such office or other location including, without limitation, in Oklahoma City, as you may reasonably request for checking at least two full business days prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least three full days prior to such date of payment and delivery. If the Underwriters so elect, delivery of the Shares may be made by credit through full fast transfer to the accounts at Depository Trust Company by the Underwriters. It is understood that Capital West, individually, and not as the representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the date of payment and delivery for the Option Shares to be -26- purchased by such Underwriter or Underwriters. Any such payment by Capital West shall not relieve any Underwriter of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 7(a) hereof the obligations of the Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment for such Option Shares) to the accuracy of and compliance with the representations and warranties of the Company herein, to the accuracy of the statements of the Company and officers of the Company made pursuant to the provisions hereof, to the performance by the Company of their respective obligations hereunder, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be satisfactory in form and substance to you and to Underwriters' counsel, and you shall have been furnished with all such documents, certificates and opinions as you may reasonably request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants of the Company or the compliance with any of the conditions herein contained. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, as incurred, to which such Underwriter may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, or (ii) any untrue statement or alleged untrue statement made by the Company in Section 2 hereof, or (iii) any untrue statement or alleged untrue statement of a material fact contained (A) in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (B) in any blue sky application or other document executed by the Company specifically for that purpose or based upon written information furnished by the Company filed in any state or other jurisdiction in order to qualify any or all of the Shares under the securities laws thereof (any such application, documents or information being hereinafter called a "Blue Sky Application"), or (iv) the omission or alleged omission to state in the Registration Statement or any amendment thereto a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or the omission or alleged omission to state in any Preliminary Prospectus, the Prospectus or any supplement thereto or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and shall reimburse each Underwriter on a regular basis for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action,; except that the Company shall not be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter specifically for use in the -27- preparation thereof and, provided further, that the indemnity agreement provided in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, charges, liabilities or litigation based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected has not been sent or given to such person within the time required by the Act and the Rules and Regulations thereunder, unless such failure is the result of noncompliance by the Company with Section 4(c) hereof. (b) Each Underwriter severally, but not jointly, shall indemnify and hold harmless the Company against any losses, claims, damages or liabilities, joint or several, as incurred, to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained (A) in the Registration Statement, Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (B) in any Blue Sky Application, or (ii) the omission or alleged omission to state in the Registration Statement or any amendment thereto a material fact required to be stated therein or necessary to make the statements therein not misleading, or the omission or alleged omission to state in any Preliminary Prospectus, the Prospectus or any supplement thereto or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; except that such indemnification shall be available in each such case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through the Underwriters by or on behalf of such Underwriter specifically for use in the preparation thereof; and shall reimburse the Company on a regular basis any legal or other expenses reasonably incurred by the Company in connection with investigating or defending against any such loss, claim, damage, liability or action, notwithstanding the possibility that payments for such expenses might later be held to be improper, in which case the person receiving them shall promptly refund them. (c) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 8(a) and (b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted pursuant to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. In the event the party giving written notice of its demand for arbitration does not designate in such written notice its preferences as to the arbitration tribunal, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 8(a) and (b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a), 8(b) and 8(c). (d) Promptly after receipt by an indemnified party under subsection (a) or (b) -28- above of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the claim or the commencement of that action; the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under such subsection. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party; provided, however, if the defendants in any such action include both the indemnified parties and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under such subsection for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party, representing all the indemnified parties under Section 8(a) and 8(b) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided, however, that such consent shall not be unreasonably withheld. (e) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 for which it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Underwriters are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the initial public offering price, and the Company is responsible for the remaining portion; provided, however, that (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter, and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to a contribution from any person who is not guilty of such fraudulent misrepresentation. This subsection (d) shall not be operative as to any Underwriter to the extent that the Company has -29- received indemnity under this Section 8. (f) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have, and shall extend, upon the same terms and conditions, to each officer and director of each Underwriter and to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability that the respective Underwriters may otherwise have, and shall extend, upon the same terms and conditions, to each director of the Company (including any person who, with his consent, is named in the Registration Statement as about to become a director of the Company), to each officer of the Company who has signed the Registration Statement and to each person, if any, who controls the Company within the meaning of the Securities Act, in either case, whether or not such person is a party to any action or proceeding. (g) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including without limitation the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. The parties are advised that Federal or state public policy, as interpreted by the courts in certain jurisdictions, may be contrary to certain of the provisions of this Section 8, and the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under this Section 8 and further agree not to attempt to assert any such defense. 9. Representations, Warranties and Agreements to Survive DELIVERY . All representations, warranties, covenants and agreements of the Company contained in this Agreement (including, without limitation, the agreements of the Company set forth in Sections 4(i)-(n)), or contained in certificates of officers of the Company submitted pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Company, or any of its officers, controlling persons or directors and shall survive delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. SUBSTITUTION OF UNDERWRITER. If any Underwriter or Underwriters shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. -30- If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty-four hours to allow the several Underwriters the privilege of substituting within twenty-four hours (including non-business hours) another underwriter or underwriters (which may include any non-defaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four hours, if necessary to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substitute underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section, neither the Company shall be liable to any Underwriter (except as provided in Sections 5 and 8 hereof )nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company and the other Underwriters for damages, if any, resulting from such default) be liable to the Company (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section. -31- 11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at the later of (i) execution of this Agreement, or (ii) when notification of the effectiveness of the Registration Statement has been released by the Commission. (b) You shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time at or prior to the Closing Date (i) if the Company shall have failed, refused or been unable, to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled including, without limitation, any change in the financial condition, earnings, operations, business, management, technical staff, or business prospects of the Company from that set forth in the Registration Statement or Prospectus which, in your sole judgment, is material and adverse, or (ii) if trading on the New York Stock Exchange or the Nasdaq Stock Market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the New York Stock Exchange or the Nasdaq Stock Market, by the New York Stock Exchange, the Nasdaq Stock Market or by order of the Commission or any other governmental authority having jurisdiction, or if a banking moratorium shall have been declared by Federal, New York, Oklahoma or Texas authorities, or (iii) if on or prior to the Closing Date, or on or prior to any later date on which Option Shares are to be purchased, as the case may be, the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially and adversely with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets in the United States as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if on or prior to the Closing Date, or on or prior to any later date on which Option Shares are to be purchased, as the case may be, there shall have been an outbreak or escalation of hostilities or other international or domestic calamity, crises or material adverse change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it in your reasonable judgment, inadvisable to proceed with the marketing of the Shares. In the event of termination pursuant to this Section 11(b), the Company shall remain obligated to pay costs and expenses pursuant to Section 4(k), 5 and 8 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone or telecopy, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone or telecopy, in each case, confirmed by letter. 12. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Underwriters in care of Capital West Securities, Inc., 211 N. Robinson, 16th Floor, One Leadership Square, Oklahoma -32- City, Oklahoma 73102, attention of Robert O. MacDonald; notices to the Company shall be directed to it at 275 W. Princeton Drive, Princeton, Texas 75407, attention of Rick McCord. 13. PARTIES. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and their respective executors, administrators, successors, and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto and their respective executors, administrators, successors, and assigns and the controlling persons and officers and directors referred to in Section 8 hereof any legal or equitable right, remedy or claim under or in respect of this Agreement or any provisions herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors, and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or corporation. No purchaser of the Shares from any Underwriter shall be construed to be a successor by reason merely of such purchase. 14. GOVERNING LAW. This Agreement and the Pricing Agreement shall be governed by and construed in accordance with the laws of the State of Oklahoma applicable to agreements made and to be performed in said State. Specified times of day refer to Central time. 15. COUNTERPARTS. This Agreement may be signed in several counterparts, each of which will constitute an original. * * * * * * * -33- If the foregoing correctly sets forth your understanding of our agreement, please sign in the space provided below for that purpose, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriter and the Company in accordance with its terms. HORIZON PHARMACIES, INC. By: ---------------------------------------- Rick McCord, President CONFIRMED AND ACCEPTED, as of the date first above written: CAPITAL WEST SECURITIES, INC. By: ---------------------------------------- Robert O. McDonald, Chairman -34- SCHEDULE A UNDERWRITER SHARES PURCHASED ----------- ---------------- Capital West Securities, Inc. EX-3.2 3 EXHIBIT 3.2 - AMENDED AND RESTATED ARTICLES OF INC EXHIBIT 3.2 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HORIZON PHARMACIES, INC. HORIZON Pharmacies, Inc. (the "Corporation"), pursuant to the provisions of Section 4.07 of the Business Corporation Act (the "Act") does hereby adopt these Amended and Restated Articles of Incorporation (the "Amended Articles") which accurately copy the Articles of Incorporation and all amendments thereto that are in effect to date (the "Old Articles") and further amend such Old Articles as hereinafter set forth, and which contain no other change in any provision thereof. Section One The Amended Articles restate and integrate and further amend the Old Articles by substituting for the provisions of the Old Articles in their entirety the provisions of the Amended Articles set forth in Section Five hereof. The amendments effected by these Amended Articles affect the Old Articles as follows: 1) by amending Article III to delete the reference to the retail pharmacy business; 2) by amending Article IV to increase the number of authorized shares of capital stock from 1,000,000 to 15,000,000 and to designate 14,000,000 of such shares as common stock and 1,000,000 of such shares as preferred stock and to decrease the par value of the common stock from $1.00 per share to $.01 per share and to set the par value of the preferred stock at $.01 per share; 3) by amending Article V to substitute the words "labor done" for the word "services;" 4) by amending Article VI to provide for a new registered agent; 5) by amending Article VII to provide that the number of directors shall be as set specified by the Corporation's Bylaws; 6) by adding an Article VIII to permit the Board of Directors to adopt, amend or repeal the Corporation's Bylaws; 7) by adding an Article IX to prohibit shareholder action by written consent without prior approval of the Board of Directors; 8) by adding an Article X to provide for limitation of liability and indemnification of the Corporation's officers and directors; 9) by adding an Article XI to eliminate any preemptive shareholder rights; 10) by adding an Article XII to eliminate any cumulative voting rights; 11) by adding an Article XIII to prohibit certain business combinations between the Corporation and certain affiliated persons; and 12) by adding an Article XIV to provide for the further amendment of the Articles of Incorporation; amendart.no2 Section Two Each amendment made by these Amended Articles has been effected in conformity with the provisions of the Act. Section Three Each one (1) share of common stock, par value $1.00 per share, of the Corporation issued and outstanding or held by the Corporation as treasury stock, immediately prior to the time these Amended Articles are filed with the Secretary of State of the State of Texas, shall be and are hereby automatically reclassified and changed (without any further act) into two (2) shares of Common Stock, par value $.01 per share, of the Corporation. Section Four The number of shares outstanding was 541,212; the number of shares entitled to vote on these Amended Articles was 541,212; the number of shares voted for such Amended Articles and the amendments effected thereby was _____ and the number of shares voted against such Amended Articles and the amendments effected thereby was ___________. Section Five The Old Articles are hereby superseded by the following Amended Articles, which Amended Articles accurately copy the entire text thereof as amended: AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HORIZON PHARMACIES, INC. ARTICLE I The name of the corporation is HORIZON Pharmacies, Inc. ARTICLE II The period of the Corporation's duration is perpetual. ARTICLE III The purpose for which the Corporation is organized is to engage in any and all lawful business or activity for which corporations may be organized under the Business Corporation Act (the "Act") of the State of Texas. ARTICLE IV Section 1. The amount of total authorized capital stock of the Corporation is 15,000,000 shares, of which 14,000,000 shares shall be common stock, having a par value of $.01 per share ("Common Stock"), and 1,000,000 shares shall be preferred stock, having a par value of $.01 per share ("Preferred Stock"). amendart.no2 2 Section 2. Except for and subject to those rights expressly granted to the holders of Preferred Stock, or any series thereof, by the Board of Directors of the Corporation (the "Board of Directors"), pursuant to the authority hereby vested in the Board of Directors or as provided by the laws of the State of Texas, the holders of the Corporation's Common Stock shall have exclusively all rights of shareholders and shall possess exclusively all voting power. Each holder of Common Stock of the Corporation shall be entitled, on each matter submitted for a vote to holders of Common Stock, to one vote for each share of Common Stock standing in such holder's name on the books of the Corporation. Section 3. The Board of Directors is hereby expressly authorized, at any time and from time to time by a resolution or resolutions, to divide the shares of Preferred Stock or the shares of any series thereof, and to fix and determine in the resolution or resolutions providing for the issue of shares of Preferred Stock of a particular series the voting rights, if any, of the holders of shares of such series, the designations, preferences, and relative, participating, optional and other special rights of such series, and the qualifications, limitations and restrictions thereof, to the fullest extent now or hereafter permitted by the laws of the State of Texas. The voting rights, if any, of each such series and the preferences and relative, participating, optional and other special rights of each such series, and the qualifications, limitations and restrictions thereof, if any, may differ from those of any and all other series. Unless otherwise provided in the resolution or resolutions of the Board of Directors providing for the issuance thereof, shares of any series of Preferred Stock that shall be issued and thereafter acquired by the Corporation through purchase, redemption, exchange, conversion or otherwise shall return to the status of authorized but unissued Preferred Stock. Without limiting the generality of the foregoing authority of the Board of Directors, the Board of Directors from time to time may (if otherwise permitted under the Act): (1) designate a series of Preferred Stock, which may be distinguished by number, letter or title from other Preferred Stock of the Corporation; (2) fix and thereafter increase or decrease (but not below the number of shares thereof then outstanding) the number of shares of Preferred Stock that shall constitute such series; (3) provide for dividends on shares of Preferred Stock of such series and, if provisions are made for dividends, determine the dividend rate and the times at which holders of shares of Preferred Stock of such series shall be entitled to receive the dividends, whether the dividends shall be cumulative and, if so, from what date or dates, and the other conditions, if any, including rights of priority, if any, upon which the dividends shall be paid; (4) determine the rights, if any, to which holders of the shares of Preferred Stock of such series shall be entitled in the event of any liquidation, dissolution or winding up of the Corporation; provided, however, that in the event of any such liquidation, dissolution or winding up of the Corporation, the holders of the shares of Preferred Stock of such series shall not be entitled to be paid out of the assets of the Corporation available for distribution to its shareholders, whether from capital, surplus or earnings, an amount in cash greater than $100.00 per share, plus accrued and unpaid dividends to the date fixed for liquidation, dissolution or winding up, whether or not declared; (5) provide for the redemption or purchase of shares of Preferred Stock of such series and, if provisions are made for redemption, determine the time or times and the price or prices at which the shares of Preferred Stock of such series shall be subject to redemption in whole or in part, and the other terms and conditions, if any, on which shares of Preferred Stock of such series may be redeemed or purchased; amendart.no2 3 (6) provide for a sinking fund or purchase fund for the redemption or purchase of shares of Preferred Stock of such series and, if any such fund is so provided for the benefit of such shares of Preferred Stock, the amount of such fund and the manner of its application; (7) determine the extent of the voting rights, if any, of the shares of Preferred Stock of such series, including but not limited to the right of the holders of such shares to vote as a separate class acting alone or with the holders of one or more other series of Preferred Stock and the right to have more (or less) than one vote per share; (8) provide for whether or not the shares of Preferred Stock of such series shall be convertible into, or exchangeable for, shares of any other class or classes of capital stock, or any series thereof, of the Corporation and, if so convertible or exchangeable, determine the conversion or exchange price or rate, the adjustments thereof and the other terms and conditions, if any, on which such shares of Preferred Stock shall be so convertible or exchangeable; and (9) provide for any other preferences, any relative, participating, optional or other special rights, any qualifications, limitations or restrictions thereof, or any other terms or provisions of shares of Preferred Stock of such series as the Board of Directors may deem appropriate or desirable. Section 4. Shares of Common Stock or Preferred Stock may be issued by the Corporation from time to time for such consideration, having a value of not less than the par value, if any, thereof, as is determined from time to time by the Board of Directors. Any and all shares issued and for which full consideration has been paid or delivered shall be deemed fully paid stock and the holder thereof shall not be liable for any further payment thereon. Section 5. The Corporation may issue rights and options to purchase shares of Common Stock or Preferred Stock of the Corporation to directors, officers or employees of the Corporation or any affiliate thereof, and no shareholder approval or ratification of any such issuance of rights and options shall be required. ARTICLE V The Corporation will not commence business until it has received for the issuance of shares consideration of the value of not less than one thousand dollars ($1,000) consisting of money, services, or property actually received. ARTICLE VI The address of the Corporation's registered office in the State of Texas is 350 N. St. Paul Street, Dallas, Dallas County, Texas 75201. The name of its registered agent at such address is CT Corporation System. ARTICLE VII The number of directors which shall constitute the whole Board of Directors of the Corporation shall be as specified pursuant to the Bylaws of the Corporation and may be altered from time to time as may be provided therein. The names and addresses of the persons currently serving as directors are as follows and such persons shall serve as directors until the annual meeting of the shareholders of the Corporation or until their successors are duly elected and qualified: amendart.no2 4 Rick D. McCord, R.Ph. 275 W. Princeton Drive, Princeton, Texas 75407 Sy S. Shahid 275 W. Princeton Drive, Princeton, Texas 75407 David W. Frauhiger 275 W. Princeton Drive, Princeton, Texas 75407 Charlie K. Herr, R.Ph. 275 W. Princeton Drive, Princeton, Texas 75407 Robert D. Mueller, R.Ph. 275 W. Princeton Drive, Princeton, Texas 75407 ARTICLE VIII The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the Bylaws of the Corporation. The shareholders of the Corporation may not adopt, amend or repeal the Bylaws of the Corporation other than by the affirmative vote of 66 2/3% of the combined voting power of all outstanding voting securities of the Corporation entitled to vote generally in the election of directors of the Board of Directors of the Corporation ("Voting Power"), voting together as a single class. In addition to any affirmative vote required by applicable law and in addition to any vote of the holders of any series of Preferred Stock provided for or fixed pursuant to the provisions of Article IV of these Articles of Incorporation, any alteration, amendment or repeal relating to this Article VIII must be approved by the affirmative vote of the holders of at least 66 2/3% of the Voting Power, voting together as a single class. ARTICLE IX No action that is required or permitted to be taken by the shareholders of the Corporation at any annual or special meeting of shareholders may be effected by written consent of shareholders in lieu of a meeting of shareholders, unless the action to be effected by written consent of shareholders and the taking of such action by such written consent have expressly been approved in advance by the Board. In addition to any affirmative vote required by applicable law and in addition to any vote of the holders of any series of Preferred Stock provided for or fixed pursuant to the provisions of Article IV of these Articles of Incorporation, any alteration, amendment or repeal relating to this Article IX must be approved by the affirmative vote of the holders of at least 66 2/3% of the Voting Power, voting together as a single class. ARTICLE X Section 1. In addition to any other limitation of liability for directors provided for at law (including the Act), the Articles of Incorporation or the Bylaws, no director of this Corporation shall be personally liable to the Corporation or any of its shareholders for monetary damages for an act or omission in the director's capacity as a director, except that this Section 1 of Article X does not eliminate or limit the liability of a director to the extent the director is found liable for: (i) a breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) an act or omission not in good faith that constitutes a breach of duty of the director to the Corporation or an act or omission that involves intentional misconduct or knowing violation of the law; (iii) a transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; (iv) an act or omission for which the liability of a director is expressly provided by an applicable statute. Neither the amendment nor repeal of this Section 1 of Article X, nor the adoption of any provisions of the Articles of Incorporation of this Corporation inconsistent with this Section 1 of Article X, shall eliminate or reduce the effect this Section 1 of Article X in respect of any matter occurring, or any cause of action, suit or claim that, but for this Section 1 of Article X, would accrue or arise, prior to such amendment, repeal or adoption of any inconsistent provision. If, after approval of this Section 1 of Article X, the Act, the Texas Miscellaneous Corporation Laws Act (the "TMCLA") or any other laws of the State of Texas are enacted or amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of this Corporation shall be eliminated or limited to the fullest extent permitted by such laws as so enacted or amended from time to time. amendart.no2 5 Section 2. (1) The Corporation shall indemnify a person who was, is, or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director to the fullest extent and manner permissible under the Act or applicable rules, regulations or laws. (2) A person shall be indemnified under paragraph (1) of this Section 2 of Article X against judgments, penalties (including excise and similar taxes), fines, settlements, and reasonable expenses actually incurred by the person in connection with the proceeding; but if the person is found liable to the Corporation or is found liable on the basis that personal benefit was improperly received by the person, the indemnification (a) shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding and (b) shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of his duty to the Corporation. (3) The mandatory indemnification provision set forth in paragraph (1) of this Section 2 of Article X shall be deemed to constitute authorization of indemnification in the manner required by the Act even though this provision may not have been adopted or authorized in the same manner as the determination that indemnification is permissible. (4) The Corporation shall indemnify a director against reasonable expenses incurred by him in connection with a proceeding in which he is a named defendant or respondent because he is or was a director if he has been wholly successful, on the merits or otherwise, in the defense of the proceeding. (5) Reasonable expenses incurred by a director who was, is, or is threatened to be made a named defendant or respondent in a proceeding shall be paid or reimbursed by the Corporation in advance of the final disposition of the proceeding (and without any prior determination or authorization being first required) after (a) the Corporation receives a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification under this Article X and the Act, and (b) a written undertaking by or on behalf of the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is prohibited by the Act. This mandatory payment or reimbursement provision shall be deemed to constitute authorization of that payment or reimbursement. (6) The written undertaking required by paragraph (5) of this Section 2 of Article X must be an unlimited general obligation of the director that need not be secured. It may be accepted without reference to financial ability to make repayment. (7) Notwithstanding any other provision of this Article X, the Corporation shall pay or reimburse expenses incurred by a director in connection with his appearance as a witness or other participation in a proceeding at a time when he is not a named defendant or respondent in the proceeding. (8) An officer of the Corporation shall be indemnified as, and to the same extent, provided by the Act and this Article X for a director and is entitled to indemnification to the same extent as a director. The Corporation shall indemnify and advance expenses to an officer, and may indemnify advance expenses to an employee or agent, of the Corporation to the same extent that it is authorized to indemnify and advance expenses to directors under this Article X. amendart.no2 6 (9) The Corporation may indemnify and advance expenses to persons who are not or were not officers, employees or agents of the Corporation, but who are or were serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, a partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise to the same extent that it is authorized to indemnify and advance expenses to directors under this Article X. (10) The Corporation shall indemnify and advance expenses to an officer, and may indemnify and advance expenses to an employee, agent or person indemnified in paragraph (9) of this Section 2 of Article X and who is not a director, to such further extent, consistent with law, as may be provided by the Articles of Incorporation of this Corporation, the bylaws, general or specific action of the Board of Directors of this Corporation, or contract or is permitted or required by common law. Section 3. The Corporation may purchase and maintain insurance or another arrangement on behalf of any person who is or was a director, officer, employee or agent of this Corporation or who is or was serving at the request of this Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the Corporation would have the power to indemnify him against that liability under this Article X. If the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the Corporation would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of the Corporation. Section 4. Any indemnification of or advance of expenses to a director in accordance with this Article X shall be reported in writing to the shareholders of this Corporation with or before the notice or waiver of notice of the next shareholders' meeting or with or before the next submission to shareholders of a consent to action without a meeting pursuant to the Act and, in any case, within the twelve month period immediately following the date of the indemnification or advance. For purposes of this Article X, the Corporation is deemed to have requested a director to serve an employee benefit plan whenever the performance by him of his duties to the Corporation also imposes duties on or otherwise involve services by him to the plan or participants or beneficiaries of the plan. Excise taxes assessed on a director with respect to an employee benefit plan pursuant to applicable law are deemed fines. Action taken or omitted by him with respect to a employee benefit plan in the performance of his duties for a purpose reasonably believed by him to be in the best interest of the participants and beneficiaries of the plan is deemed to be for a purpose which is not opposed to the best interest of the Corporation. Section 5. As used in this Article X the following terms shall have the following meanings: (1) The terms "corporation," "director," "expenses," and "proceeding," shall have the meanings given such terms in Art. 2.02-1 of the Act. (2) The term "Act" means the Texas Business Corporation Act as now in effect or as hereafter amended. Section 6. This Article X shall be given its broadest effect and application permissible under the Act and other applicable law and only to such extent. If it is finally determined by a court of competent jurisdiction that this Article X is invalid, illegal or unenforceable in any respect or respects, it shall nevertheless be amendart.no2 7 enforceable to the extent and given its broadest effect and application found by such court to be consistent with the Act and other applicable law. Section 7. The rights of indemnification and reimbursement provided herein shall not be exclusive of any other rights to which such person may be entitled by law, agreement, general or specific action of the board of directors, shareholders' vote or otherwise. ARTICLE XI No shareholder of the Corporation shall have any preemptive or preferential right whatsoever to acquire additional, unissued, or treasury shares of the Corporation, or securities of the Corporation convertible into or carrying a right to subscribe to or acquire shares of any class of stock of the Corporation. ARTICLE XII Directors shall be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present. Cumulative voting in the election of directors of the corporation is expressly denied. ARTICLE XIII (A) The Corporation shall not, directly or indirectly, enter into or engage in a business combination with an affiliated shareholder, or any affiliate or associate of such affiliated shareholder, during the three (3) year period immediately following such affiliated shareholder's share acquisition date unless: (1) the business combination or the purchase or acquisition of shares of the Corporation made by such affiliated shareholder on the affiliated shareholder's share acquisition date is approved by the board of directors of the Corporation before the affiliated shareholder's share acquisition date; or (2) the business combination is approved, by the affirmative vote of the holders of at least two-thirds of the issued and outstanding voting shares of the Corporation not beneficially owned by such affiliated shareholder or an affiliate or associate of such affiliated shareholder, at a meeting of shareholders and not by written consent, duly called for that purpose not less than six months after the affiliated shareholder's share acquisition date. (B) Article XIII(A) shall not apply to: (1) a business combination of the Corporation with an affiliated shareholder that became an affiliated shareholder inadvertently, if the affiliated shareholder: (a) as soon as practicable divests itself of a sufficient number of the voting shares of the Corporation so that it no longer is the beneficial owner, directly or indirectly, of twenty percent (20%) or more of the issued and outstanding voting shares of the Corporation; and (b) would not at anytime within the three (3) year period preceding the announcement date of the business combination, have been an affiliated shareholder but for the inadvertent acquisition; amendart.no2 8 (2) a business combination with an affiliated shareholder or an affiliate or associate of an affiliated shareholder who became an affiliated shareholder through a transfer of shares of the Corporation by will or intestate succession and continuously was such an affiliated shareholder until the announcement date of the business combination; or (3) a business combination of the Corporation with a domestic wholly- owned subsidiary if the domestic subsidiary is not an affiliate or associate of the affiliated shareholder other than by reason of the affiliated shareholder's beneficial ownership of voting shares in the Corporation. (C) This Article shall not affect, directly or indirectly, the validity of any other action by the board of directors of the Corporation, nor does it preclude the board of directors from taking other action in accordance with law, nor does the board of directors incur a liability for elections made or not made under this Article. (D) In discharging the duties of director under the Act or otherwise, a director, in considering the best interests of the Corporation, may consider the long-term as well as the short-term interests of the Corporation and its shareholders, including the possibility that those interests may be best served by the continued independence of the Corporation. (E) If any provision or clause of this Article or application thereof to any person or circumstance is held invalid, such invalidity shall not affect other provisions or applications of this Article that can be given effect without the invalid provision or application and without being inconsistent with the intent of this Article, and to this end, the provisions of this Article are declared to be severable. (F) In this Article XIII: (1) "Affiliate" means a person who directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, a specified person. (2) "Affiliated Shareholder" means a person, other than the Corporation or a wholly-owned subsidiary of the Corporation, that is the beneficial owner of twenty percent (20%) or more of the issued and outstanding voting shares of the Corporation, or that, within the preceding three (3) year period, was the beneficial owner of twenty percent or more of the then issued and outstanding voting shares of the Corporation. For purposes of determining whether a person is an affiliated shareholder, the number of voting shares of the Corporation considered outstanding includes shares considered beneficially owned by that person under subdivision 4 of this Article XIII(F), but does not include other unissued voting shares of the Corporation that may be issuable pursuant to an agreement, arrangement or understanding, or upon exercise or conversion of rights, warrants, or options, or otherwise. (3) "Associate," when used to indicate a relationship with any person, means: (a) a corporation or organization (other than the corporation or a majority owned subsidiary of the corporation) of which such person is an officer, director or partner or is, directly or indirectly, the beneficial owner of ten percent (10%) or more of any class of equity securities; amendart.no2 9 (b) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar capacity; or (c) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of such person or any subsidiary of such person. (4) "Beneficial Owner" means a person who, with respect to shares or similar securities: (a) individually, or with or through an affiliate or associate, beneficially owns the shares or similar securities, directly or indirectly; (b) individually, or with or through an affiliate or associate, has the right to: (i) acquire the shares or similar securities, whether the right may be exercised immediately or only after the passage of time, pursuant to an agreement, arrangement, or understanding, whether or not in writing, or upon the exercise of conversion rights, exchange rights, warrants, or options, or otherwise, except that a person is not considered the beneficial owner of shares or similar securities (aa) tendered pursuant to a tender or exchange offer made by the person or an affiliate or associate until the tendered shares or similar securities are accepted for purchase or exchange, or (bb) that may be subject to an agreement, arrangement, or understanding that expressly conditions the acquisition or purchase on the approval of the acquisition or purchase pursuant to Article XIII(A) as long as such person has no direct or indirect rights of ownership or voting with respect to such shares until such time that such approval is obtained, at which time such person shall be considered the beneficial owner of such shares; or (ii) vote the shares or similar securities pursuant to an agreement, arrangement, or understanding, whether or not in writing, except that a person is not considered the beneficial owner of shares or similar securities for purposes of this subparagraph if the agreement, arrangement, or understanding to vote the shares: (aa) arises solely from an immediately revocable proxy that authorizes the person named in the proxy to vote at a meeting of shareholders that has been called when the proxy is delivered or at any adjournment of the meeting, and (bb) is not then reportable on a Schedule 13D under the Securities Exchange Act of 1934 or a comparable or successor report; or (c) has an agreement, arrangement, or understanding, whether or not in writing, to acquire, hold, or dispose (except pursuant to an agreement, arrangement, or understanding permitted by subdivision (4)(b)(i) of this Article XIII) or to vote (except under an immediately revocable proxy under subdivision (4)(b)(ii) of this Article XIII) the shares or similar securities with another person who beneficially owns, or whose affiliate or amendart.no2 10 associate beneficially owns, directly or indirectly, the shares or similar securities. (5) "Business combination" means: (a) any merger, share exchange, or conversion of the Corporation or a subsidiary with: (i) an affiliated shareholder; (ii) a foreign or domestic corporation or other entity that is, or after the merger, share exchange, or conversion would be, an affiliate or associate of the affiliated shareholder; or (iii) another domestic or foreign corporation or other entity, if the merger, share exchange, or conversion is caused by an affiliated shareholder, or an affiliate or associate of an affiliated shareholder, and as a result of the merger, share exchange, or conversion this Article XIII does not apply to the surviving corporation or other entity; (b) a sale, lease, exchange, mortgage, pledge, transfer, or other disposition, in one transaction or a series of transactions, including an allocation of assets pursuant to a merger, to or with the affiliated shareholder, or an affiliate or associate of the affiliated shareholder, of assets of the Corporation or any subsidiary that: (i) have an aggregate market value equal to ten percent (10%) or more of the aggregate market value of all the assets, determined on a consolidated basis, of the Corporation; (ii) have an aggregate market value equal to 10 percent or more of the aggregate market value of all the outstanding common stock of the Corporation; or (iii) represent ten percent (10%) or more of the earning power or net income, determined on a consolidated basis, of the Corporation; (c) the issuance or transfer by the Corporation or a subsidiary to an affiliated shareholder or an affiliate or associate of the affiliated shareholder, in one transaction or a series of transactions, of shares of the Corporation or a subsidiary, except by the exercise of warrants or rights to purchase shares of the Corporation offered, or a share dividend paid, pro rata to all shareholders of the Corporation after the affiliated shareholder's share acquisition date; (d) the adoption of a plan or proposal for the liquidation or dissolution of a corporation proposed by, or pursuant to any agreement, arrangement, or understanding, whether or not in writing, with an affiliated shareholder or an affiliate or associate of the affiliated shareholder; amendart.no2 11 (e) a reclassification of securities, including a reverse share split or a share split-up, share dividend, or other distribution of shares, a recapitalization of the Corporation, a merger of the Corporation with a subsidiary or pursuant to which the assets and liabilities of the Corporation are allocated among two or more surviving or new domestic or foreign corporations or other entities, or any other transaction, whether or not with, into, or otherwise involving the affiliated shareholder, proposed by, or pursuant to an agreement, arrangement, or understanding, whether or not in writing, with an affiliated shareholder or an affiliate or associate of the affiliated shareholder that has the effect, directly or indirectly, of increasing the proportionate ownership percentage of the outstanding shares of a class or series of voting shares or securities convertible into voting shares of the corporation that is beneficially owned by the affiliated shareholder or an affiliate or associate of the affiliated shareholder, except as a result of immaterial changes due to fractional share adjustments; or (f) the direct or indirect receipt by an affiliated shareholder or an affiliate or associate of the affiliated shareholder of the benefit of a loan, advance, guarantee, pledge, or other financial assistance or a tax credit or other tax advantage provided by or through the Corporation, except proportionately as a shareholder of the Corporation. (6) "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of equity securities, by contract, or otherwise. A person's beneficial ownership of ten percent (10%) or more of a person's outstanding voting shares or similar interests creates a presumption that the person has control of such other person. (7) "Person" means an individual, trust, domestic or foreign corporation or other entity, or a government, or a political subdivision, agency, or instrumentality of a government. If two or more persons act as a partnership, limited partnership, syndicate, or other group under an agreement, arrangement, or other understanding, whether or not in writing, to acquire, hold, vote, or dispose of shares of a corporation, all members of the partnership, limited partnership, syndicate, or other group are considered to be a person. (8) "Share acquisition date" means the date that a person first becomes an affiliated shareholder of the Corporation. (9) "Subsidiary" means a domestic or foreign corporation or other entity of which a majority of the outstanding voting shares are owned, directly or indirectly, by the Corporation. (10) "Voting share" means a share of capital stock of a corporation entitled to vote generally in the election of directors. amendart.no2 12 ARTICLE XIV The Corporation reserves the right to amend and repeal any provision contained in these Articles of Incorporation in the manner from time to time prescribed by the laws of the State of Texas. All rights herein conferred are granted subject to this reservation. IN WITNESS WHEREOF, these Amended and Restated Articles of Incorporation has been executed this ____ day of May, 1997. HORIZON PHARMACIES, INC. By: ------------------------------- Rick D. McCord, President STATE OF TEXAS ) ) COUNTY OF COLLIN ) Before me, a notary public, on this day personally appeared Rick D. McCord, known to me to be the person whose name is subscribed to the foregoing document and, being by me first duly sworn, declared that the statements therein contained are true and correct. Given under my hand and seal this _____ day of May, 1997. (Notarial Seal) ---------------------------------- Notary Public, State of Texas My commission expires: ------------------------- , ------ amendart.no2 13 EX-3.3 4 EXHIBIT 3.3 - AMENDED AND RESTATED BYLAWS EXHIBIT 3.3 AMENDED AND RESTATED BYLAWS OF HORIZON PHARMACIES, INC. (ADOPTED AS OF MAY 31, 1997) TABLE OF CONTENTS Page No. -------- ARTICLE I - OFFICES. . . . . . . . . . . . . . . . . . . . . . . 1 Section 1. Registered Office . . . . . . . . . . . . . . . 1 Section 2. Other Offices . . . . . . . . . . . . . . . . . 1 ARTICLE II - SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . 1 Section 1. Time and Place of Meetings. . . . . . . . . . . 1 Section 2. Annual Meetings . . . . . . . . . . . . . . . . 1 Section 3. Special Meetings. . . . . . . . . . . . . . . . 1 Section 4 Notice. . . . . . . . . . . . . . . . . . . . . 1 Section 5 List of Shareholders. . . . . . . . . . . . . . 1 ARTICLE III - QUORUM AND VOTING OF STOCK . . . . . . . . . . . . 2 Section 1. Quorum. . . . . . . . . . . . . . . . . . . . . 2 Section 2. Voting and Proxies. . . . . . . . . . . . . . . 2 Section 3. No Action by Written Consent. . . . . . . . . . 3 Section 4. Presence at Meetings by Means of Communications Equipment . . . . . . . . . . . . . . . . . . 3 Section 5. Notice of New Shareholder Business. . . . . . . 3 Section 6. Inspectors. . . . . . . . . . . . . . . . . . . 3 ARTICLE IV - DIRECTORS . . . . . . . . . . . . . . . . . . . . . 4 Section 1. Number of Directors . . . . . . . . . . . . . . 4 Section 2. Classes . . . . . . . . . . . . . . . . . . . . 4 Section 3. Removal . . . . . . . . . . . . . . . . . . . . 4 Section 4. Vacancies . . . . . . . . . . . . . . . . . . . 5 Section 5. General Powers. . . . . . . . . . . . . . . . . 5 Section 6. Books and Records . . . . . . . . . . . . . . . 5 Section 7. Compensation. . . . . . . . . . . . . . . . . . 5 Section 8. Report of Financial Condition . . . . . . . . . 5 Section 9. Closing of Stock Transfer Books . . . . . . . . 5 ARTICLE V - MEETINGS OF THE BOARD OF DIRECTORS . . . . . . . . . 5 Section 1. Place of Meetings . . . . . . . . . . . . . . . 5 Section 2. Annual Meetings . . . . . . . . . . . . . . . . 5 Section 3. Special Meetings. . . . . . . . . . . . . . . . 5 Section 4. Regular Meetings. . . . . . . . . . . . . . . . 6 Section 5. Quorum. . . . . . . . . . . . . . . . . . . . . 6 Section 6. Action by Unanimous Consent . . . . . . . . . . 6 Section 7. Presence at Meetings by Means of Communications Equipment . . . . . . . . . . . . . . . . . . 6 Section 8. Director Nominations. . . . . . . . . . . . . . 6 horizon\exhibits\bylaws.doc -i- ARTICLE VI - COMMITTEES OF THE BOARD OF DIRECTORS. . . . . . . . 7 ARTICLE VII - NOTICES. . . . . . . . . . . . . . . . . . . . . . 7 Section 1. Form of Notice. . . . . . . . . . . . . . . . . 7 Section 2. Waiver. . . . . . . . . . . . . . . . . . . . . 8 ARTICLE VIII - OFFICERS. . . . . . . . . . . . . . . . . . . . . 8 Section 1. General . . . . . . . . . . . . . . . . . . . . 8 Section 2. Election. . . . . . . . . . . . . . . . . . . . 8 Section 3. Salaries. . . . . . . . . . . . . . . . . . . . 8 Section 4. Absence . . . . . . . . . . . . . . . . . . . . 8 Section 5. Chairman of the Board . . . . . . . . . . . . . 8 Section 6. President . . . . . . . . . . . . . . . . . . . 8 Section 7. Vice Presidents . . . . . . . . . . . . . . . . 9 Section 8. Assistant Vice Presidents . . . . . . . . . . . 9 Section 9. Secretary . . . . . . . . . . . . . . . . . . . 9 Section 10. Assistant Secretaries . . . . . . . . . . . . . 9 Section 11. Chief Financial Officer . . . . . . . . . . . . 9 ARTICLE IX - CERTIFICATE REPRESENTING SHARES . . . . . . . . . . 9 Section 1. Form of Certificates. . . . . . . . . . . . . . 9 Section 2. Facsimile Signatures. . . . . . . . . . . . . . 10 Section 3. Lost Certificates . . . . . . . . . . . . . . . 10 Section 4. Transfer of Shares. . . . . . . . . . . . . . . 10 Section 5. Record Date . . . . . . . . . . . . . . . . . . 10 Section 6. Registered Shareholders . . . . . . . . . . . . 10 ARTICLE X - INDEMNIFICATION OF OFFICERS AND DIRECTORS. . . . . . 11 Section 1. General . . . . . . . . . . . . . . . . . . . . 11 Section 2. Insurance or Other Arrangement. . . . . . . . . 12 Section 3. Miscellaneous . . . . . . . . . . . . . . . . . 12 Section 4. Definitions . . . . . . . . . . . . . . . . . . 12 Section 5. Enforceability. . . . . . . . . . . . . . . . . 13 Section 6. Non-Exclusive Rights. . . . . . . . . . . . . . 13 ARTICLE XI - GENERAL PROVISIONS. . . . . . . . . . . . . . . . . 13 Section 1. Facsimile Signatures. . . . . . . . . . . . . . 13 Section 2. Reliance on Corporate Books and Records . . . . 13 Section 3. Fiscal Year . . . . . . . . . . . . . . . . . . 13 Section 4. Corporate Seal. . . . . . . . . . . . . . . . . 13 ARTICLE XII - AMENDMENTS TO BYLAWS . . . . . . . . . . . . . . . 13 horizon\exhibits\bylaws.doc -ii- AMENDED AND RESTATED BYLAWS OF HORIZON PHARMACIES, INC. (ADOPTED AS OF MAY 31, 1997) ARTICLE I OFFICES SECTION 1. Registered Office. The registered office of the Corporation in the State of Texas shall be located at 350 N. St. Paul Street, City of Dallas, Dallas County, Texas 75201, or such other county as the Board of Directors of this Corporation (the "Board") may from time to time designate. SECTION 2. Other Offices. The Corporation may also have offices at such other places, both within and without the State of Texas, as the Board may from time to time determine or the business of the Corporation may require. ARTICLE II SHAREHOLDERS SECTION 1. Time and Place of Meetings. Meetings of Shareholders shall be held at such time and at such place in or outside the State of Texas as shall be determined by the Board. SECTION 2. Annual Meetings. Annual meetings of Shareholders shall be held at such time and on such date as shall be determined by the Board. At such meeting the Shareholders shall elect a Board and may transact such other business as shall properly come before the meeting. SECTION 3. Special Meetings. Special meetings of Shareholders may be called only pursuant to a resolution of the Board. The Board, from time to time, by resolution duly adopted by a majority of its members may amend these Bylaws to authorize other persons to call such special meetings of Shareholders. SECTION 4. Notice. Written or printed notice of every meeting of Shareholders, stating the date, time and place where it is to be held, and such other information as may be required by law, shall be served not less than ten (10) nor more than sixty (60) days before the meeting, either personally or by mail, courier, facsimile or telegram, upon each Shareholder entitled to vote at such meeting and upon each Shareholder of record who, by reason of any action proposed at such meeting, would be entitled to have his stock appraised if such action were taken. If mailed, such notice shall be deemed delivered when deposited in the United States mail, postage prepaid, addressed to the Shareholder at such Shareholder's address as it last appears on the Corporation's share transfer records. The attendance of any Shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice so such meeting, shall constitute a waiver of notice by him. SECTION 5. List of Shareholders. The officer or agent of the Corporation having charge of the Corporation's share transfer records shall make, at least ten (10) days before each meeting of the Shareholders, a complete list of the Shareholders entitled to vote at such meeting or any adjournment thereof. Such list shall be arranged in alphabetical order with the address of and the number of voting shares held by horizon\exhibits\bylaws.doc each Shareholder. For a period of ten (10) days prior to such meeting, such list shall be kept on file at the registered office or principal place of business of the Corporation and shall be subject to inspection by any Shareholder at any time during the Corporation's usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any Shareholder during the pendancy of the meeting. The original share transfer records shall be prima facie evidence of the Shareholders entitled to examine such list or transfer records or to vote at any meeting of Shareholders. Failure to comply with the requirements of this Section shall not affect the validity of any action taken at such meeting. ARTICLE III QUORUM AND VOTING OF STOCK SECTION 1. Quorum. The holders of a majority of the shares of stock issued and outstanding and entitled to vote, represented in person or by proxy, shall constitute a quorum at all meetings of the Shareholders for the transaction of business except as otherwise provided by statute or by the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the Shareholders, the Shareholders present in person or represented by proxy shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Notice of the adjourned meeting shall be given when required by law. SECTION 2. Voting and Proxies. If a quorum is present, the affirmative vote of a majority of the shares of stock represented at the meeting shall be the act of the Shareholders, unless the vote of a greater or lesser number of shares of stock is required by law or the Articles of Incorporation or pursuant to Article II, Section 3, above. Each outstanding share of stock having voting power shall be entitled to one vote on each matter submitted to a vote at a meeting of Shareholders. A Shareholder may vote either in person or by proxy executed in writing by the Shareholder or by his duly authorized attorney-in-fact. Cumulative voting is prohibited by the Articles of Incorporation. Each proxy shall be in writing and be executed by the Shareholder. A telegram, telex, cablegram, or similar transmission by the Shareholder, or a photographic, photostatic, facsimile, or similar reproduction of a writing executed by the Shareholder, shall be treated as an execution in writing for the purposes of this Section 2 of Article III. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided therein. Each proxy shall be revocable unless (i) the proxy form conspicuously states that the proxy is irrevocable, and (ii) the proxy is coupled with an interest, as defined in the Act and other Texas law. Shares standing in the name of a corporation may be voted by an officer, agent or proxy as the bylaws of such corporation may prescribe or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name as trustee. horizon\exhibits\bylaws.doc -2- Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without being transferred into his or her name, if such authority is contained in an appropriate order of the court appointing the receiver. A Shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee. Thereafter, the pledgee shall be entitled to vote the shares so transferred. Treasury shares, shares of this Corporation's stock owned by another corporation the majority of the voting stock of which is owned or controlled by this Corporation, and shares of this Corporation's own stock held by this Corporation in a fiduciary capacity shall not be voted, directly or indirectly, at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time. SECTION 3. No Action by Written Consent. No action or vote of the Shareholders may be taken by written consent. SECTION 4. Presence at Meetings by Means of Communications Equipment. Shareholders may not participate in and hold a meeting of the Shareholders by means of conference telephone or similar communications equipment. SECTION 5. Notice of New Shareholder Business. At an annual or special meeting of the Shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors; (b) brought before the meeting by or at the direction of the Board of Directors; (c) properly brought before an annual meeting by a Shareholder; or (d) if, and only if, the notice of a special meeting provides for business to be brought before the meeting by Shareholders, properly brought before the meeting by a Shareholder. For business to be properly brought before a meeting by a Shareholder, the Shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a Shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than forty (40) and no more than one hundred (100) days prior to the meeting; provided however, that in the event less than forty-five (45) days remain until the date of the meeting, notice by the Shareholder to be timely must be so received not later than the fifth (5th) day prior to the date of the meeting. A Shareholder's notice to the Secretary shall set forth in reasonable detail (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, and, in the event that such business includes a proposal to amend either the Articles of Incorporation or the Bylaws, the language of the proposed amendment; (b) the name and address, as they appear on the Corporation's books, of the Shareholder proposing such business; (c) the class and number of shares of the Corporation which are beneficially owned by the Shareholder; and (d) any material interest of the Shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 3 of Article III. The chairman of a meeting shall, if the facts warrant, determine that business was not properly brought before the meeting and in accordance with the provisions of this Section 3 of Article III, and if he or she should so determine, he or she shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. SECTION 6. Inspectors. The Board of Directors in advance of any Shareholders' meeting may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so horizon\exhibits\bylaws.doc -3- appointed, the person presiding at a Shareholders' meeting may, and on the request of any Shareholder entitled to vote thereat shall, appoint one or more inspectors. In case any person appointed as inspector fails to appear or act, the vacancy may be filled by the Board in advance of the meeting or at the meeting by the person present thereat. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. ARTICLE IV DIRECTORS SECTION 1. Number of Directors. The Board of Directors of the Corporation shall consist initially of five (5) members. The number of directors constituting the entire Board may be changed from time to time by resolution adopted by the Board of Directors or the Shareholders, provided no decrease made in such number shall shorten the term of any incumbent director. SECTION 2. Classes. Directors shall be at least eighteen (18) years of age and need not be residents of the State of Texas nor Shareholders of the Corporation. The Directors shall be divided into three classes, as nearly equal in number as reasonably possible, with the terms of office of the first class to expire at the 1998 annual meeting of Shareholders, the term of office of the second class to expire at the 1999 annual meeting of Shareholders and the term of office of the third class to expire at the 2000 annual meeting of Shareholders. At each annual meeting of Shareholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of Shareholders after their election. SECTION 3. Removal. Any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. The Board may remove a director for cause upon the vote of a majority of the members of the Board (excluding the director whose removal is sought). Such removal for cause shall be effective immediately upon such Shareholder or Board action even if successors are not elected simultaneously. The vacancies on the Board caused by such action shall be filled only by election by the Shareholders; provided that the Board may not fill more than two (2) such directorships during the period between any two successive Annual Shareholders' Meetings. Shareholders holding a majority of shares then entitled to vote at an election of directors may, at any time terminate the term of office of all or any of the directors for cause only by a vote at any Annual Shareholders' Meeting or any Special Shareholders' Meeting called for that purpose. The Board may remove a director for cause upon the vote of a majority of the members of the Board (excluding the director whose removal is sought). Such removal for cause shall be effective immediately upon such Shareholder or Board of Director action even if successors are not elected simultaneously. The vacancies on the Board caused by such action shall be filled only by election by the Shareholders. Notwithstanding the foregoing, whenever the holders of any class or series of shares are entitled to elect one or more directors by the provisions of the Articles of Incorporation, only the holders of shares of that class or series shall be entitled to vote for or against the removal of any director elected by the holders of shares of that class or series; and any vacancies in such directorships and any newly created directorships of such class or series to be filled by reason of an increase in the number of such directors may be filled by the affirmative vote of a majority of the directors elected by such class or series then in office or by a sole horizon\exhibits\bylaws.doc -4- remaining director so elected, or by the vote of the holders of the outstanding shares of such class or series, and such directorships shall not in any case be filled by the vote of the remaining directors or the holders of the outstanding shares as a whole unless otherwise provided in the Articles of Incorporation. SECTION 4. Vacancies. Vacancies and newly created directorships resulting from an increase in the authorized number of directors may be filled by a majority vote of the directors remaining in office, although less than a quorum, or by election by the Shareholders at any meeting thereof. A director elected to fill a vacancy shall be elected for the unexpired portion of the term of his predecessor in office. A director elected to fill a newly created directorship shall serve until the next succeeding annual meeting of Shareholders and until his successor shall have been elected and qualified; provided that the Board may not fill more than two (2) such directorships during the period between any two (2) successive annual meetings of Shareholders. SECTION 5. General Powers. The business affairs of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these Bylaws directed or required to be exercised by the Shareholders. SECTION 6. Books and Records. The directors may keep the books of the Corporation, except such as are required by law to be kept within the State, outside the State of Texas, at such place or places as they may from time to time determine. SECTION 7. Compensation. The Board of Directors, by the affirmative vote of a majority of the directors then in office, or any committee thereof, and irrespective of any personal interest of any of its members, shall have authority to establish reasonable compensation of all directors for services to the Corporation as directors, officers or otherwise. SECTION 8. Report of Financial Condition. At least once in each year, the directors shall make a complete and detailed report of the financial condition of the Corporation to its Shareholders, which report shall be filed with the Chief Financial Officer and shall be subject to inspection by the Shareholders. SECTION 9. Closing of Stock Transfer Books. The directors may close the stock transfer books for a period not exceeding twenty (20) days prior to Shareholders' meetings or payment of dividends or for such other reasons as they may see fit. ARTICLE V MEETINGS OF THE BOARD OF DIRECTORS SECTION 1. Place of Meetings. Meetings of the Board of Directors, regular or special, may be held either in or outside the State of Texas, at such places as the Board may from time to time determine. SECTION 2. Annual Meetings. The Board of Directors shall hold its annual meeting as soon after the Shareholders' annual meeting as may be practical. Annual meetings of the Board of Directors may be held without notice. SECTION 3. Special Meetings. Special meetings of the Board of Directors may be called by the President or any two or more directors. Notice of special meetings, specifying the time and day thereof, shall horizon\exhibits\bylaws.doc -5- be given by the President or the Secretary to each director not less than twenty-four (24) hours before such meeting, either personally or by facsimile, telegram or other means of immediate communication, and at least seventy-two (72) hours previous thereto if given by written notice mailed or otherwise transmitted to each director at the address of his business or residence. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board need be specified in the notice or waiver of notice of such meeting. Notice of a meeting need not be given to any director who submits a signed waiver of notice, whether before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement, the lack of notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 4. Regular Meetings. Regular meetings of the Board may be held with or without notice at such time and place as the Board may determine by resolution. SECTION 5. Quorum. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business unless a greater or lesser number is required by law or by the Articles of Incorporation. The vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, unless the vote of a greater number is required by law or by the Articles of Incorporation. If a quorum shall not be present at any meeting of directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Directors may not vote or take action by written consent by proxy. Directors with an interest in a business transaction of the Corporation and directors who are directors or officers or have a financial interest in any other corporation, partnership, association or other organization with which the Corporation is transacting business may be counted in determining the presence of a quorum at a meeting of the Board or of a committee of the Board to authorize such business transaction. SECTION 6. Action by Unanimous Consent. Any action required or permitted to be taken by the Board of Directors, or any committee thereof, may be taken without a meeting if all members of the Board of Directors, or the committee, consent in writing to the adoption of a resolution authorizing the action. Any such resolution and the written consents thereto by the members of the Board of Directors or the committee shall be filed with the minutes of the proceedings of the Board of Directors or the committee, and shall have the same force and effect as a unanimous vote at a meeting of the Board or such committee. SECTION 7. Presence at Meetings by Means of Communications Equipment. Any one or more members of the Board of Directors, or any committee thereof, may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. SECTION 8. Director Nominations. Nominations for the election of directors may be made by the Board of Directors or by any Shareholder entitled to vote in the election of directors generally. However, any Shareholder entitled to vote in the election of directors generally may nominate one (1) or more persons for election as directors at a meeting only if timely notice of such Shareholder's intent to make such nomination or nominations has been given in writing to the Secretary of the Corporation. To be timely, a Shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation in accordance with the notice provisions of Section 5 of Article III. Each such notice shall set forth (a) the name and address of the Shareholder who intends to make the nomination and of the person or horizon\exhibits\bylaws.doc -6- persons to be nominated; (b) a representation that the Shareholder is a holder of record of stock of the Corporation entitled to vote for the election of directors on the date of such notice and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the Shareholder and each nominee and any other person or persons (naming such persons or persons) pursuant to which the nomination or nominations are to be made by the Shareholder; (d) such other information regarding each nominee proposed by such Shareholders as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. If the chairman of the meeting for the election of directors determines that a nomination of any candidate for election as a director at such meeting was not made in accordance with the applicable provisions of this Section 8 of Article V, such nomination shall be void. ARTICLE VI COMMITTEES OF THE BOARD OF DIRECTORS The Board, by resolution adopted by a majority of the entire Board, may designate, from among its members, an Executive Committee and other committees, each consisting of one or more directors, and each of which, to the extent provided in the resolution, shall have all the authority of the Board, except as otherwise required by law; PROVIDED, HOWEVER, that no committee shall have the power or authority of the Board in reference to amending the Articles of Incorporation of the Corporation, adopting an agreement of merger or consolidation of the Corporation, recommending to the Shareholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the Shareholders a dissolution of the Corporation or a revocation of a dissolution, or amending the Bylaws of the Corporation. The Executive Committee shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it. The Board shall appoint the Chairman of the Executive Committee. The members of the Executive Committee shall receive such compensation and fees as from time to time may be fixed by the Board. Vacancies in the membership of a committee shall be filled by the Board at a regular or special meeting of the Board. All committees created by the Board shall keep regular minutes of their proceedings and report the same to the Board at the regular meeting of the Board immediately subsequent to any such committee proceeding. ARTICLE VII NOTICES SECTION 1. Form of Notice. Whenever, under the provisions of the statutes or of the Articles of Incorporation or of these Bylaws, notice is required to be given to any director or Shareholder and no provision is made as to how such notice shall be given, such notice may be given in writing, either personally or by courier, facsimile, telegram or mail, or other means of immediate communication, addressed or transmitted to such director or Shareholder, at his address as it appears on the records of the Corporation. Any notice required or permitted to given by facsimile, telegram or other means of immediate communication shall be deemed to be given at the time of actual delivery. Any notice required or permitted to be given by mail shall be deemed to be given at the time when the same is deposited, postage prepaid, in the United States mail as aforesaid. horizon\exhibits\bylaws.doc -7- SECTION 2. Waiver. Whenever any notice of a meeting is required to be given under the provisions of the statutes or under the provisions of the Articles of Incorporation or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE VIII OFFICERS SECTION 1. General. The officers of the Corporation shall be appointed by the Board and shall be a Chairman of the Board, a President and a Secretary. The Board of Directors may also appoint one or more Vice Presidents, with or without such descriptive titles as the Board shall deem appropriate, a Chief Financial Officer, one or more Assistant Vice Presidents, one or more Assistant Secretaries, and such other officers and agents as the Board of Directors may determine. Any two (2) or more offices may be held by the same person, except that there shall always be two (2) persons who hold offices which entitle them to sign instruments and stock certificates. SECTION 2. Election. The Board of Directors shall elect the officers of the Corporation at each annual meeting of the Board. The Board may appoint such other officers and agents as it deems necessary. The officers of the Corporation, unless removed by the Board of Directors as herein provided, shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. SECTION 3. Salaries. The salaries of all officers and agents of the Corporation shall be fixed by the Board. SECTION 4. Absence. In the event of the absence of any officer of the Corporation, or for any other reason that the Board may deem sufficient, the Board may at any time or from time to time delegate all or any part of the powers or duties of any officer to any other officer or officers or to any director or directors. SECTION 5. Chairman of the Board. The Chairman of the Board shall preside, when present, at all meetings of Shareholders and the Board. To the extent permitted by applicable law, upon resolution adopted by the Board, the Chairman of the Board may possess the same powers as the President to execute contracts, certificates and other instruments of the Corporation which may be authorized by the Board. During the absence or disability of the President, the Chairman of the Board shall exercise all the powers and discharge all the duties of the President. The Chairman of the Board shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by the Board or by amendment to these Bylaws. SECTION 6. President. The President shall be the Chief Executive Officer of the Corporation, subject to the control and supervision of the Board. The President shall preside at all meetings, shall have general supervision of the affairs of the Corporation or other obligations of the Corporation as authorized by the Board of Directors, and shall perform any other duties incident to his office which are properly required by the Board of Directors. horizon\exhibits\bylaws.doc -8- SECTION 7. Vice Presidents. The Vice-President or Vice-Presidents shall perform such duties as are assigned to him or them by the Board of Directors or the President, under whose supervision he or they shall be. The Vice-President, or, if there shall be more than one Vice-President, such designated Vice-President, shall perform the duties of the President hereinabove set forth in the absence, refusal, or incapacity of the President and the absence, inability or refusal of the Chairman of the Board to act. SECTION 8. Assistant Vice Presidents. In the absence of a Vice President or in the event of his inability or refusal to act, the Assistant Vice President, if any (or, if there be more than one, the Assistant Vice Presidents in the order designated or, in the absence of any designation, then in the order of their election), shall perform the duties and exercise the powers of that Vice President and shall perform such other duties and have such other powers as the Board, the Chief Executive Officer, the Chief Operating Officer or the Vice President under whose supervision he is appointed may from time to time prescribe. SECTION 9. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the Shareholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for any committee appointed by the Board when required. He shall give, or cause to be given, notice of all meetings of the Shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. He shall have custody and charge of the corporate books and the corporate seal of the Corporation and he, or an Assistant Secretary, shall have authority to affix the corporate seal to any instrument requiring it and, when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. SECTION 10. Assistant Secretaries. The Assistant Secretary or, if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. SECTION 11. Chief Financial Officer. The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Chief Financial Officer shall sign or countersign such instruments as require his signature and shall perform such other duties as are properly required of him. The Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Chief Financial Officer and of the financial condition of the Corporation. ARTICLE IX CERTIFICATE REPRESENTING SHARES SECTION 1. Form of Certificates. Every holder of shares of stock in the Corporation shall be entitled to have a certificate certifying the number of shares owned by him in the Corporation. Each such certificate shall be numbered and entered in the books of the Corporation as they are issued, and shall exhibit horizon\exhibits\bylaws.doc -9- the holder's name and the number of shares. Certificates shall be signed by the President or a Vice President, and by the Secretary or an Assistant Secretary, and may be sealed with the seal of the Corporation or a facsimile thereof. SECTION 2. Facsimile Signatures. The signatures of the officers of the Corporation upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or an employee of the Corporation. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. SECTION 3. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate has been lost or destroyed. When authorizing such issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may prescribe such terms and conditions as it deems expedient, and may require such indemnities as it deems adequate, to protect the Corporation from any claim that may be made against it with respect to any such certificate alleged to have been lost or destroyed. SECTION 4. Transfer of Shares. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto, and the old certificate canceled and the transaction recorded upon the books of the Corporation. SECTION 5. Record Date. For the purpose of determining Shareholders entitled to notice of or to vote at any meeting of Shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining Shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board may provide that the share transfer records shall be closed for a stated period but not to exceed, in any case, sixty (60) days. If the share transfer records are closed for the purpose of determining Shareholders, such records shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the share transfer records, the Board may fix, in advance, a date as the record date for any such determination of Shareholders. Such date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting nor more than sixty (60) days prior to any other action. If the share transfer records are not closed and no record date is fixed for the determination of Shareholders entitled to notice of or to vote at a meeting of Shareholders, or Shareholders entitled to receive payment of a distribution (other than a distribution involving a purchase or redemption by the corporaiton of any of its own shares) or share dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board declaring such distribution or share dividend is adopted, as the case may be, shall be the record date for such determination of Shareholders. When a determination of Shareholders of record entitled to notice of or to vote at any meeting of Shareholders have been made as provided in this Section, such determination shall apply to any adjournment thereof, unless the Board fixes a new record date for the adjourned meeting. SECTION 6. Registered Shareholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, and shall be entitled to hold liable for calls and assessments a person registered on its books as the owner, and the Corporation shall not be bound to recognize any equitable or other claim to or interest horizon\exhibits\bylaws.doc -10- in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Texas. ARTICLE X INDEMNIFICATION OF OFFICERS AND DIRECTORS SECTION 1. General. The Corporation shall indemnify a person who was, is or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director of this Corporation to the fullest extent and manner permissible under the Act or applicable rules, regulations or laws. A person shall be indemnified under Section of this Article X against judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses actually incurred by the person in connection with the proceeding; but if the person is found liable to the Corporation or is found liable on the basis that personal benefit was improperly received by the person, the indemnification (i) shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding and (ii) shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of his duty to the Corporation. The mandatory indemnification provision set forth in this Section 1 shall be deemed to constitute authorization of indemnification in the manner required by the Act even though this provision may not have been adopted or authorized in the same manner as the determination that indemnification is permissible. The Corporation shall indemnify a director against reasonable expenses incurred by such director in connection with a proceeding in which the director is a named defendant or respondent because the director is or was a director if such director has been wholly successful, on the merits or otherwise, in the defense of the proceeding. Reasonable expenses incurred by a director who was, is, or is threatened to be made a named defendant or respondent in a proceeding shall be paid or reimbursed by the Corporation in advance of the final disposition of the proceeding after the Corporation receives a written affirmation by the director of such director's good faith belief that such director has met the standard of conduct necessary for indemnification under this Article X and the Act and a written undertaking by or on behalf of the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by such director in connection with that proceeding is prohibited by the Act. A provision contained in the Articles of Incorporation, these Bylaws, a resolution of Shareholders or directors, or an agreement that makes mandatory the payment or reimbursement permitted by the Act, shall be deemed to constitute authorization of that payment or reimbursement. The written undertaking required by this Article X must be an unlimited general obligation of the director that need not be secured. It may be accepted without reference to financial ability to make repayment. Notwithstanding any other provision of this Article X, the Corporation shall pay or reimburse expenses incurred by a director in connection with such director's appearance as a witness or other participation in a proceeding at a time when the director is not a named defendant or respondent in the proceeding. An officer of the Corporation shall be indemnified as, and to the same extent, provided by the Act and this Article X for a director and is entitled to indemnification to the same extent as a director. The Corporation shall indemnify and advance expenses to an officer, and may indemnify and advance expenses to employees and agents of the Corporation to the same extent it is authorized to indemnify and advance expenses to directors under this Article X. horizon\exhibits\bylaws.doc -11- The Corporation may indemnify and advance expenses to persons who are not or were not officers, employees or agents of the Corporation, but who are or were serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, a partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise to the same extent that it is authorized to indemnify and advance expenses to directors under this Article X. The Corporation shall indemnify and advance expenses to an officer, and may indemnify and advance expenses to an employee, agent or person indemnified in this Article X and who is not a director, to such further extent, consistent with law, as may be provided by the Articles of Incorporation of this Corporation, these Bylaws, general or specific action of the Board, or contract or is permitted or required by common law. SECTION 2. Insurance or Other Arrangement. The Corporation may purchase and maintain insurance or another arrangement on behalf of any person who is or was a director, officer, employee or agent of this Corporation or who is or was serving at the request of this Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the corporation would have the power to indemnify him against that liability under this Article X. If the insurance or another arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the corporation would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the Shareholders of the corporation. SECTION 3. Miscellaneous. Any indemnification of or advance of expenses to a director in accordance with this Article X shall be reported in writing to the Shareholders with or before the notice or waiver of notice of the next Shareholders' meeting or with or before the next submission to Shareholders of a consent to action without a meeting pursuant to the Act and, in any case, within the twelve (12) month period immediately following the date of the indemnification or advance. For purposes of this Article X, the Corporation is deemed to have requested a director to serve an employee benefit plan whenever the performance by such director of the director's duties to the Corporation also imposes duties on or otherwise involve services by such director to the plan or participants or beneficiaries of the plan. Excise taxes assessed on a director with respect to an employee benefit plan pursuant to applicable law are deemed fines. Action taken or omitted by such director with respect to an employee benefit plan in the performance of the director's duties for a purpose reasonably believed by such director to be in the best interest of the participants and beneficiaries of the plan is deemed to be for a purpose which is not opposed to the best interest of the Corporation. SECTION 4. Definitions. As used in this Article X the following terms shall have the following meanings: (a) The terms "corporation," "director," "expenses," and "proceeding," shall have the meanings given such terms in Article. 2.02-1 of the Act. horizon\exhibits\bylaws.doc -12- (b) The term "Act" means the Texas Business Corporation Act as now in effect or as hereafter amended. SECTION 5. Enforceability. This Article X shall be given its broadest effect and application permissible under the Act and other applicable law and only to such extent. If it is finally determined by a court of competent jurisdiction that this Article X, in whole or in part, is invalid, illegal or unenforceable in any respect or respects, it shall nevertheless be enforceable to the extent and given its broadest effect and application found by such court to be consistent with the Act and other applicable law. SECTION 6. Non-Exclusive Rights. The rights of indemnification and reimbursement provided herein shall not be exclusive of any other rights to which such person may be entitled by law, agreement, general or specific action of the Board, Shareholders' vote or otherwise. ARTICLE XI GENERAL PROVISIONS SECTION 1. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. SECTION 2. Reliance on Corporate Books and Records. Each directors, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of such person's duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, by an appraiser selected with reasonable care. SECTION 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SECTION 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Texas." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. ARTICLE XII AMENDMENTS TO BYLAWS Unless otherwise provided by the Articles of Incorporation or a bylaw adopted by the Board, these Bylaws may be amended or repealed, or new bylaws may be adopted, by either: (i) a vote of two-thirds (2/3) of the members of the Board, or (ii) a vote of two-thirds (2/3) of the issued and outstanding shares of the Corporation entitled to vote. horizon\exhibits\bylaws.doc -13- CERTIFICATION I, the undersigned Secretary of the Corporation, hereby certify that the foregoing is true, accurate and complete copy of the Amended and Restated Bylaws of HORIZON Pharmacies, Inc., adopted by its Shareholders by resolution dated May 31, 1997. ------------------------------------------ Sy S. Shahid, Secretary horizon\exhibits\bylaws.doc -14- EX-4.1 5 EXHIBIT 4.1 - SPECIMEN CERT. OF THE COMMON STOCK NUMBER HORIZON PHARMACIES, INC. SHARES C (TRANSFERABLE ONLY IN DENVER, COLORADO) INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS OF THE STATE OF TEXAS CUSIP 439902 10 7 This certifies that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE OF $.01 EACH, OF THE COMMON STOCK OF HORIZON PHARMACIES, INC. a Corporation organized under the laws of the State of Texas transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are subject to all of the terms, conditions and limitations of the Articles of Incorporation of the Corporation, and amendments thereto. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. /s/ [illegible] /s/ illegible SECRETARY PRESIDENT HORIZON PHARMACIES, INC. TEXAS COUNTERSIGNED AND REGISTERED: AMERICAN SECURITIES TRANSFER & TRUST, INC. P.O. Box 1596, Denver, Colorado 80201 BY TRANSFER AGENT AND REGISTRAR AUTHORIZED SIGNATURE HORIZON PHARMACIES, INC. THE ARTICLES OF INCORPORATION OF HORIZON PHARMACIES, INC. ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF TEXAS SET FORTH A FULL STATEMENT OF (A) ALL OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF SHARES AUTHORIZED TO BE ISSUED, (B) THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX AND DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF THE SHARES OF PREFERRED STOCK WHICH THE CORPORATION IS AUTHORIZED TO ISSUE IN SERIES, AND IF AND TO THE EXTENT THAT THEY HAVE BEEN FIXED AND DETERMINED, THE RELATIVE RIGHTS AND PREFERENCES OF ANY SUCH SERIES, AND (C) THE DENIAL TO SHAREHOLDERS OF PREEMPTIVE RIGHTS TO ACQUIRE UNISSUED OR TREASURY SHARES OR OTHER SECURITIES OF THE CORPORATION. THE CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE ON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- ________ Custodian ________ (Cust) (Minor) Under Uniform Gifts to Minors Act _______________________ (State) Additional abbreviations may also be used though not in the above list. For Value Received,___________hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ---------------------------------------------- - ---------------------------------------------- - ------------------------------------------------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE Shares - ------------------------------------------------------------------------- of the Common Stock represented by the within Certificate and do(es) hereby irrevocably constitute and appoint - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Attorney - ----------------------------------------------------------------------- to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated --------------------------------- X ----------------------------------- (SIGNATURE) NOTICE: THE SIGNATURE(S) X TO THIS ASSIGNMENT ----------------------------------- MUST CORRESPOND (SIGNATURE) WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. - ------------------------------------------------ The signature(s) must be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15. - ------------------------------------------------ SIGNATURE(S) GUARANTEED BY: - ------------------------------------------------ EX-4.3 6 EXHIBIT 4.3 - WARRANT WARRANT AGREEMENT __________________, 1997 CAPITAL WEST SECURITIES, INC. c/o Capital West Securities, Inc. 211 N. Robinson 16th Floor, One Leadership Square Oklahoma City, Oklahoma 73102 Ladies and Gentlemen: HORIZON Pharmacies, Inc. (the "Company"), agrees to issue and sell to you warrants (the "Warrants") to purchase the number of shares of common stock, $0.01 par value per share (the "Common Stock"), of the Company set forth herein, subject to the terms and conditions contained herein. 1. ISSUANCE OF WARRANTS; EXERCISE PRICE. The Warrants, which shall be in the form attached hereto as Exhibit A, shall be issued to you concurrently with the execution hereof in consideration of the payment by you to the Company of the sum of $.001 cash per share of Common Stock subject to the Warrants, the receipt and sufficiency of which are hereby acknowledged. The Warrant shall provide that you, or such other holder or holders of the Warrants to whom transfer is authorized in accordance with the terms of this Agreement, shall have the right to purchase an aggregate of 120,000 shares of Common Stock for an exercise price equal to $6.00 per share (the "Exercise Price") or $720,000 in the aggregate. The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as hereinafter provided, and the term "Common Stock" shall mean, unless the context otherwise requires, the stock and other securities and property receivable upon exercise of the Warrants. The term "Exercise Price" shall mean, unless the context otherwise requires, the price per share of the Common Stock purchasable under the Warrants as set forth in this Section 1, as adjusted from time to time pursuant to Section 6. 2. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to you and to each subsequent holder of Warrants and agrees that: (a) This Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and binding obligation of the Company enforceable in accordance with its terms; and neither the issuance of the Warrants nor the issuance of the shares of Common Stock issuable upon exercise of the Warrants will result in a breach or violation of any terms or provisions of, or constitute a default under, any contract, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which the Company is bound, the Certificate of Incorporation or Bylaws of the Company, or any law, order, rule, regulation or decree of any government, governmental instrumentality or court, domestic or foreign, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company. (b) No consent, approval, authorization or order of any court or governmental agency or body is required for the sale and issuance of the Warrants or the sale and issuance of the shares of Common Stock issuable upon exercise of the Warrants, except such as have been obtained or may be required under the Securities Act of 1933, as amended (the "Act"), and such as may be required under state securities or blue sky laws in connection with the issuance of the Warrants and the shares of Common Stock issuable upon exercise of the Warrants. Upon exercise of the Warrants by the holder thereof, the shares of Common Stock with respect to which the Warrants are exercised will be validly issued, fully paid, and nonassessable, and good and marketable title to such shares of Common Stock shall be delivered to such holder free and clear of all liens, encumbrances, equities, claims or preemptive or similar rights. (c) During the term of this Agreement, the Company shall make timely filings of all periodic and other reports and forms and other materials required (but only to the extent required) to be filed with the Securities and Exchange Commission (the "Commission") pursuant to the Act or the Securities Exchange Act of 1934, as amended, and with any national securities exchange or quotation system upon which any of the securities of the Company may be listed. 3. NOTICES OF RECORD DATE; ETC. In the event of (i) any taking by the Company of a record date with respect to the holders of any class of securities of the Company for purposes of determining which of such holders are entitled to dividends or other distributions (other than regular quarterly dividends), or any right to subscribe for, purchase or otherwise acquire shares of stock of any class or any other securities or property, or to receive any other right, (ii) any capital reorganization of the Company, or reclassification or recapitalization of capital stock of the Company or any transfer in one or more related transactions of all or a majority of the assets or revenue or income generating capacity of the Company to, or consolidation or merger of the Company with or into, any other entity or person, or (iii) any voluntary or involuntary dissolution or winding up of the Company, then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant at the time outstanding a notice specifying, as the case may be, (A) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right; or (B) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place and the time, if any is to be fixed, as of which the holders of record of Common Stock (or any other class of stock or securities of the Company, or another issuer pursuant to Section 6, receivable upon the exercise of the Warrants) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such event. Any such notice shall be deposited in the United States mail, postage prepaid, at least ten (10) days prior to the date therein specified, and the holders(s) of the Warrant(s) may exercise the Warrant(s) and participate in such event as a registered holder of Common Stock, upon exercise of the Warrant(s) so held, within the ten (10) day period from the date of mailing of such notice. 4. NO IMPAIRMENT. The Company shall not, by amendment of its organizational documents or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other action, avoid or seek to avoid the observance or performance of any of the terms of this Agreement or of the Warrants, but will at all times in good faith take any and all action as may be necessary in order to protect the rights of the holders of the Warrants against impairment. Without limiting the generality of the foregoing, the Company (a) will at all times reserve and keep 2 available, solely for issuance and delivery upon exercise of the Warrants, shares of Common Stock issuable from time to time upon exercise of the Warrants, (b) will not increase the par value of any shares of stock receivable upon exercise of the Warrants above the amount payable in respect thereof upon such exercise, and (c) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable stock upon the exercise of the Warrants, or any of them. 5. EXERCISE OF WARRANTS. At any time and from time to time on and after the first anniversary of the date hereof and expiring on the fifth anniversary of the effective date of the public offering of the Common Stock at 5:00 p.m., Oklahoma City, Oklahoma time, Warrants may be exercised as to all or any portion of the whole number of shares of Common Stock covered by the Warrants by the holder thereof by surrender of the Warrants, accompanied by a subscription for shares to be purchased in the form attached hereto as Exhibit B and by a check payable to the order of the Company in the amount required for purchase of the shares as to which the Warrant is being exercised, delivered to the Company at its principal office at 275 W. Princeton Drive, Princeton, Texas 75407, Attention: Rick D. McCord. Warrants may also be exercised from time to time, without any payment required for the purchase of the shares as to which the Warrant is being exercised, as to all or any portion of the number of shares of Common Stock covered by the Warrant(s) by the holder thereof by surrender of the Warrants, accompanied by a subscription for shares in the form attached as Exhibit C, pursuant to which the holder thereof will be entitled to receive upon such surrender of the Warrant(s) (and without any further payment) that number of shares of Common Stock equal to the product of the number of shares of Common Stock obtainable upon exercise of the Warrant(s) (or the portion thereof as to which the exercise relates) multiplied by a fraction: (i) the numerator of which shall be the difference between the then Current Value (as defined in this Section 5 and Section 7(d)) of one full share of Common Stock on the date of exercise and the Exercise Price, and (ii) the denominator of which shall be the Current Value of one full share of Common Stock on the date of exercise. Upon the exercise of a Warrant in whole or in part, the Company will within five (5) days thereafter, at its expense (including the payment by the Company of any applicable issue or transfer taxes), cause to be issued in the name of and delivered to the Warrant holder a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock to which such holder is entitled upon exercise of the Warrant. In the event such holder is entitled to a fractional share, in lieu thereof such holder shall be paid a cash amount equal to such fraction, multiplied by the Current Value of one full shares of Common Stock on the date of exercise. Certificates for shares of Common Stock issuable by reason of the exercise of the Warrant or Warrants shall be dated and shall be effective as of the date of the surrendering of the Warrant for exercise, notwithstanding any delays in the actual execution, issuance or delivery of the certificates for the shares so purchased. In the event a Warrant or Warrants is exercised as to less than the aggregate amount of all shares of Common Stock issuable upon exercise of all Warrants held by such person, the Company shall issue a new Warrant to the holder of the Warrant so exercised covering the aggregate number of shares of Common Stock as to which Warrants remain unexercised. For purposes of this section, Current Value is defined (i) in the case for which a public market exists for the Common Stock at the time of such exercise, according to Section 7(d), and (ii) in the case no public market exists at the time of such exercise, at the Appraised Value. For the purposes of this Agreement, "Appraised Value" is the value determined in accordance with the following procedures. For a period of five (5) days after the date of an event (a "Valuation Event") requiring determination of Current Value at a time when no public market exists for the Common Stock (the "Negotiation Period"), each party to this Agreement agrees to negotiate in good faith to reach agreement upon the Appraised Value of the securities or property at issue, as of the date of the Valuation Event, which will be the fair 3 market value of such securities or property, without premium for control or discount for minority interests, illiquidity or restrictions on transfer. In the event that the parties are unable to agree upon the Appraised Value of such securities or other property by the end of the Negotiation Period, then the Appraised Value of such securities or property will be determined for purposes of this Agreement by a recognized appraisal or investment banking firm mutually agreeable to the holders of the Warrants and the Company (the "Appraiser"). If the holders of the Warrants and the Company cannot agree on an Appraiser within two (2) business days after the end of the Negotiation Period, the Company, on the one hand, and the holders of the Warrants, on the other hand, will each select an Appraiser within ten (10) business days after the end of the Negotiation Period and those two Appraisers will select ten (10) days after the end of the Negotiation Period an independent Appraiser to determine the fair market value of such securities or property, without premium for control or discount for minority interests. Such independent Appraiser will be directed to determine fair market value of such securities or property as soon as practicable, but in no event later than thirty (30) days from the date of its selection. The determination by an Appraiser of the fair market value will be conclusive and binding on all parties to this Agreement. Appraised Value of each share of Common Stock at a time when (i) the Company is not a reporting company under the Exchange Act and (ii) the Common Stock is not traded in the organized securities markets, will, in all cases, be calculated by determining the Appraised Value of the entire Company taken as a whole and dividing that value by the number of shares of Common Stock then outstanding, without premium for control or discount for minority interests, illiquidity or restrictions on transfer. The costs of the Appraiser will be borne by the Company. In no event will the Appraised Value of the Common Stock be less than the per share consideration received or receivable with respect to the Common Stock or securities or property of the same class in connection with a pending transaction involving a sale, merger, recapitalization, reorganization, consolidation, or share exchange, dissolution of the Company, sale or transfer of all or a majority of its assets or revenue or income generating capacity, or similar transaction. 6. PROTECTION AGAINST DILUTION. The Exercise Price for the shares of Common Stock and number of shares of Common Stock issuable upon exercise of the Warrants is subject to adjustment from time to time as follows: (a) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS, ETC.. In case at any time or from time to time after the date of execution of this Agreement, the Company shall (i) take a record of the holders of Common Stock for the purpose of entitling them to receive a dividend or a distribution on shares of Common Stock payable in shares of Common Stock or other class of securities, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding Common Stock into a smaller number of shares, then, and in each such case, the Exercise Price in effect at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted in such a manner that the Exercise Price for the shares issuable upon exercise of the Warrants immediately after such event shall bear the same ratio to the Exercise Price in effect immediately prior to any such event as the total number of shares of Common Stock outstanding immediately prior to such event shall bear to the total number of shares of Common Stock outstanding immediately after such event. (b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE. When any adjustment is required to be made in the exercise Price under this Section 6, (i) the number of shares of Common Stock issuable upon exercise of the Warrants shall be changed (upward to the nearest full share) to the number of shares determined by dividing (x) an amount equal to the number of shares issuable pursuant to the exercise of 4 the Warrants immediately prior to the adjustment, multiplied by the Exercise Price in effect immediately prior to the adjustment, by (y) the Exercise Price in effect immediately after such adjustment, and (ii) upon exercise of the Warrant, the holder will be entitled to receive the number of shares or other securities referred to in Section 6(a) that such holder would have received had the Warrant been exercised prior to the events referred to in Section 6(a). (c) ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.. In case of any reorganization or consolidation of the Company with, or any merger of the Company with or into, another entity (other than a consolidation or merger in which the Company is the surviving corporation) or in case of any sale or transfer to another entity of the majority of assets of the Company, the entity resulting from such reorganization or consolidation or surviving such merger or to which such sale or transfer shall be made, as the case may be, shall make suitable provision (which shall be fair and equitable to the holders of Warrants) and shall assume the obligations of the Company hereunder (by written instrument executed and mailed to each holder of the Warrants then outstanding) pursuant to which, upon exercise of the Warrants, at any time after the consummation of such reorganization, consolidation, merger or conveyance, the holder shall be entitled to receive the stock or other securities or property that such holder would have been entitled to upon consummation if such holder had exercised the Warrants immediately prior thereto, all subject to further adjustment as provided in this Section 6. (d) CERTIFICATE AS TO ADJUSTMENTS. In the event of adjustment as herein provided in paragraphs of this Section 6, the Company shall promptly mail to each Warrant holder a certificate setting forth the Exercise Price and number of shares of Common Stock issuable upon exercise after such adjustment and setting forth a brief statement of facts requiring such adjustment. Such certificate shall also set forth a brief statement of facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which the Warrants shall be exercisable after any adjustment of the Exercise Price as provided in this Agreement. (e) MINIMUM ADJUSTMENT. Notwithstanding the foregoing, no certificate as to adjustment of the Exercise Price hereunder shall be made if such adjustment results in a change in the Exercise Price then in effect of less than ______ ($_____) and any adjustment of less than ______ ($_____) of any Exercise Price shall be carried forward and shall be made at the time of and together with any subsequent adjustment that, together with the adjustment or adjustments so carried forward, amounts to ______ ($_____) or more; provided however, that upon the exercise of a Warrant, the Company shall have made all necessary adjustments (to the nearest cent) not theretofore made to the Exercise Price up to and including the date upon which such Warrant is exercised. 7. REGISTRATION RIGHTS. (a) The Company agrees that upon written notice given to the Company at any time on or after the first anniversary of the effective date of the public offering of the Common Stock but before the fifth anniversary of the effective date of the public offering, from the holder or holders of not less than fifty-one percent (51%) of the shares issued and issuable upon exercise of the Warrants, of a proposed distribution by such holder or holders of Common Stock issued or issuable upon exercise of Warrants, the Company will, within 45 days after receipt of such notice, promptly prepare, file and diligently prosecute to effectiveness, an appropriate filing with the Commission of a registration statement covering the proposed sale or distribution of all or any part of such shares under the Securities Act of 1933, as amended (the "Act"), and the appropriate registration statements or applications under the 5 securities laws of such states as such holders, in their discretion, shall determine, and will use its reasonable best efforts to have such registration and application (including both the registration under the Act and the registration or application made under the various state securities laws) declared effective as soon as practicable after the filing thereof and to remain effective for such period that may be reasonably necessary to complete the distribution of securities so registered or qualified. At least 15 days prior to such filing, the Company shall give written notice of such proposed filing to each registered holder of any Warrants at the holders' addresses appearing on the records of the Company and to each registered holder of Common Stock purchased from the exercise of any Warrants at such holder's address appearing on the Company records, and shall offer to include in such registration statement any proposed distribution of such Common Stock held or to be held by each such registered holder; provided, however, that except as provided in Section 7(e), the Company need not effect the registration of the sale or distribution of Common Stock purchased upon exercise of Warrants more than once. All expenses, disbursements and fees (including fees and expenses of counsel for the Company, special auditing fees specifically attributable to the sale by the selling holder or holders of Common Stock, printing expenses (including all necessary copies of the registration statement and prospectuses contained therein), registration and filing fees and blue sky fees and expenses, and fees and charges of the Company's transfer agent and registrar for services rendered in connection therewith) shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun (in which case holders shall bear such expenses), if the registration request is subsequently withdrawn at any time at the request of the holder or holders of not less than 51% of the shares issued and issuable upon exercise of the Warrants, unless such withdrawal is due to the misconduct of the Company or due to an unforeseen material adverse change in the business, properties, prospects or financial condition of the Company occurring prior to the effectiveness of the registration statement, in which case the Company will continue to bear such expenses. (b) In connection with any registration under the Act and specified state securities law pursuant to this Agreement, the Company will, without charge, furnish each holder whose shares are registered thereunder with copies of the registration statement and all amendments thereto and will, without charge, supply each such holder with copies of any preliminary and final prospectus included therein in such quantities as may be necessary for the purposes of such proposed sale or distribution that the holder or holders may reasonably request. (c) In connection with any registration of shares pursuant to this Section 7, the holders whose shares are being registered shall furnish the Company with such information concerning such holders and the proposed sale or distribution as shall be required for use in the preparation of such registration statement and applications. (d) Notwithstanding the foregoing provisions of this Section 7, upon receipt of such written notice from the holder or holders of not less than fifty one percent (51%) of the shares issued and issuable upon exercise of the Warrants requesting that the Company effect registration of the sale or distribution of Common Stock as provided in Section 7(a) or upon 6 election by holders of Warrants or Common Stock to participate in a registration pursuant to Section 7(e), the Company shall have the option, for a period of ten (10) days thereafter, to purchase all or any such Warrants and all or any such shares of Common Stock acquired pursuant to the exercise of the Warrants and held by holders providing the request for registration under Section 7(a) and/or 7(e) and held by any other holder of Warrants or shares issued and will exercise its option if it so elects as follows: (i) as to such Warrants, at a price per Warrant equal to the difference between (A) the average of the means between the closing bid and asked prices of the Common Stock in the over-the-counter market for 20 consecutive business days commencing 30 business days before the date of receipt of such notice, (B) if the Common Stock is quoted on the Nasdaq SmallCap Market, at the average of the means of the daily closing bid and asked prices of the Common Stock for 20 consecutive business days commencing 30 business days before the date of such notice, or (C) if the Common Stock is listed on any national securities exchange or quoted on the Nasdaq National Market System, at the average of the daily closing prices of the Common Stock for 20 consecutive business days commencing 30 business days before the date of such notice and the Exercise Price of the Warrant at the time of receipt of such notice; and (ii) as to shares of Common Stock previously purchased pursuant to the exercise of Warrants, at a price per share equal to (A) the average of the means between the closing bid and asked prices of the Common Stock in the over-the-counter market for 20 consecutive business days commencing 30 business days before the date of such notice, (b) if the Common Stock is quoted on the Nasdaq SmallCap Market, at the average of the means of the daily closing bid and asked prices of the Common Stock for 20 consecutive business days commencing 30 business days before the date of such notice or (C) if the Common Stock is listed on any national securities exchange or the Nasdaq National Market System, at the average of the daily closing prices of the Common Stock for 20 consecutive business days commencing 30 business days before the date of such notice (such value of shares so determined in this Section 7(d)(ii), as the case may be, is referred to herein as the "Current Value"). (e) If any time on or after the first anniversary of the date hereof but before the fifth anniversary of the date hereof the Company proposes to file a registration statement under the Act covering a proposed sale of shares of Common Stock, it shall give to each holder who then owns any Warrants or any shares of Common Stock acquired pursuant to the exercise of the Warrants notice of such proposed registration at least 30 days prior to the filing of the registration statement and shall afford each such holder who then proposed to sell or distribute publicly any of the shares subject to the Warrants upon giving not less than 10 days notice prior to such filing, the opportunity to have such shares included in the securities registered under the registration statement. All expenses, disbursements and fees (including, but without limitation, fees and expenses of counsel, auditing fees, printing expenses, SEC filing fees and expenses, but excluding any underwriting discounts or commissions) incurred in connection with the registration by the Company of the sale of any shares for any such holder under this Section 7(e) shall be borne by the Company. 7 8. INDEMNIFICATION; CONTRIBUTION. (a) The Company will indemnify and hold harmless each holder and each affiliate thereof of Common Stock registered pursuant to this Agreement with the Commission, or under any Blue Sky Law or regulation against any losses, claims, damages, or liabilities, joint or several, to which such holder may become subject under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, registration statement, prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such holder and affiliate for any legal or other expenses reasonably incurred by such holder in connection with investigating or defending any such action or claim regardless of the negligence of any such holder or affiliate; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus, registration statement or prospectus, or any such amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by any such holder expressly for use therein. (b) Each holder of Common Stock registered pursuant to this Agreement will indemnify and hold harmless the Company against any losses, claims, damages, or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, registration statement or prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any preliminary prospectus, registration statement or prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by such holder expressly for use therein. (c) Promptly after receipt by an indemnified party under Sections 8(a) or (b) above of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under either such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability that it may otherwise have to any indemnified party. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof the indemnifying party shall be entitled to assume the defense thereof by notice in writing to the indemnified party. After notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under either of such 8 subsections for any legal expenses of other counsel or any other expense, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation incurred prior to the assumption by the indemnifying party, unless such expenses have been specifically authorized in writing by the indemnifying party, the indemnifying party has failed to assume the defense and employ counsel, or the named parties to any such action include both the indemnified party and the indemnifying party, as appropriate, and such indemnified party has been advised by counsel that the representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate due to actual or potential differing interests between them, in each of which cases the fees of counsel for the indemnified party will be paid by the indemnifying party. (d) If the indemnification provided for in this Section 8 is unavailable or insufficient to hold harmless an indemnified party under Section 8(a) or 8(b) in respect of any losses, claims, damages, or liabilities (or action in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the holder or holders from this Agreement and from the offering of the shares of Common Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the holders in connection with the statement or omissions that resulted in such losses, claims, damages, or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the holders agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the holders were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this subsection (e). Except as provided in Section 8(c), the amount paid or payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or actions in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding any provision in this Section 8(d) to the contrary, no holder shall be liable for any amount, in the aggregate, in excess of the net proceeds to such holder from the sale of such holder's shares (obtained upon exercise of Warrants) giving rise to such losses, claims, damages, or liabilities. 9 (e) The obligations of the Company under this Section 8 shall be in addition to any liability that the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any holder of Warrants within the meaning of the Act. The obligations of the holders of Common Stock under this Section 8 shall be in addition to any liability that such holders may otherwise have and shall extend, upon the same terms and conditions to each person, if any, who controls the Company within the meaning of the Act. 9. STOCK EXCHANGE LISTING. In the event the Company lists its Common Stock on any national securities exchange, the Company will, at its expense, also list on such exchange, upon exercise of a Warrant, all shares of Common Stock issuable pursuant to such Warrant. 10. SPECIFIC PERFORMANCE. The Company stipulates that remedies at law, in money damages, available to the holder of a Warrant, or of a holder of Common Stock issued pursuant to exercise of a Warrant, in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Agreement are not and will not be adequate. Therefore, the Company agrees that the terms of this Agreement may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 11. SUCCESSORS AND ASSIGNS; BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of you and the Company and their respective successors and permitted assigns. 12. NOTICES. Any notice hereunder shall be given by registered or certified mail, if to the Company, at its principal office referred to in Section 5 and, if to the holders, to their respective addresses shown in the Warrant ledger of the Company, provided that any holder may at any time on three (3) days' written notice to the Company designate or substitute another address where notice is to be given. Notice shall be deemed given and received after a certified or registered letter, properly addressed with postage prepaid, is deposited in the U.S. mail. 13. SEVERABILITY. Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the remainder of this Agreement. 14. ASSIGNMENT; REPLACEMENT OF WARRANTS. If the Warrant or Warrants are assigned, in whole or in part, the Warrants shall be surrendered at the principal office of the Company, and thereupon, in the case of a partial assignment, a new Warrant shall be issued to the holder thereof covering the number of shares not assigned, and the assignee shall be entitled to receive a new Warrant covering the number of shares so assigned. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant and appropriate bond or indemnification protection, the Company shall issue a new Warrant of like tenor. Except as contemplated by Section 7 of this Agreement, the Warrants will not be transferred, sold, or otherwise hypothecated by you or any other person and the Warrants 10 will be nontransferable, except to (i) one or more persons, each of which on the date of transfer is an officer, shareholder, or employee of you; (ii) a partnership or partnerships, the partners of which are you and one or more persons, each of whom on the date of transfer is an officer to you; (iii) a successor to you in merger or consolidation; (iv) a purchaser of all or substantially all of your assets; or (v) a person that receives a Warrant upon death of a Holder pursuant to will, trust, or the laws of intestate succession. 15. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Oklahoma without giving effect to the principles of choice of laws thereof. 16. DEFINITION. All references to the word "you", and to "Capital West Securities, Inc." in this Agreement shall be deemed to apply with equal effect to any persons or entities to whom Warrants have been transferred in accordance with the terms hereof, and, where appropriate, to any persons or entities holding shares of Common Stock issuable upon exercise of Warrants. 17. HEADINGS. The headings herein are for purposes of reference only and shall not limit or otherwise affect the meaning of any of the provisions hereof. Very truly yours, HORIZON PHARMACIES, INC. By: ---------------------------------------- Rick D. McCord, President Accepted as of ___________________, 1997. CAPITAL WEST SECURITIES, INC. By: - ---------------------------------------- 11 EX-4.4 7 EXHIBIT 4.4 - 1997 STOCK OPTION PLAN HORIZON PHARMACIES, INC. 1997 STOCK OPTION PLAN 1. PURPOSE. The purposes of the HORIZON Pharmacies, Inc. 1997 Stock Option Plan are to enable the Company to attract and retain the services of employees and directors and to provide them with increased motivation and incentive to exert their best efforts on behalf of the Company by enlarging their personal stake in the Company's success. 2. DEFINITIONS. As used in the Plan, the following definitions apply to the terms indicated below: "BOARD" means the Board of Directors of the Company. "CHANGE IN CONTROL" means (i) the execution by the Company of an agreement to merge or consolidate with another corporation (other than a corporation 50% or more of which is controlled by, or is under common control with, the Company), or (ii) the execution of an agreement by shareholders of the Company to sell or transfer an amount of Shares equal to or greater than 50% of the outstanding Shares of the Company. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. "COMMITTEE" means the entire Board or any committee thereof consisting of two or more directors of the Company who are "Non-Employee Directors" as such term is used in Rule 16b-3 promulgated under the Exchange Act, or such number of directors or Non-Employee Directors as is required by Rule 16b-3 or any successor rule. "COMPANY" means HORIZON Pharmacies, Inc., a Texas corporation. "FAIR MARKET VALUE" of a Share on a given day means, if Shares are listed on an established stock exchange or exchanges, the highest closing sales price of a Share as reported on such stock exchange or exchanges; or if not so reported, the average of the bid and asked prices, as quoted on the Nasdaq Stock Market, Nasdaq Small-Cap Market, the Nasdaq National Association Bulletin Board, or by the National Quotations Bureau. If the Shares shall not be so quoted, the Fair Market Value shall be determined by the Board taking into account all relevant facts and circumstances. "INCENTIVE STOCK OPTION" means an Option that qualifies as an incentive stock option within the meaning of Section 422 of the Code and which is identified as an Incentive Stock Option in the agreement by which it is evidenced. "OPTION" means a right to purchase Shares under the terms and conditions of the Plan as evidenced by an option agreement in such form not inconsistent with the Plan, as the Board may adopt for general use or for specific cases from time to time. "NONQUALIFIED STOCK OPTION" means an Option that is not an Incentive Stock Option and which is identified as a Nonqualified Stock Option in the agreement by which it is evidenced. "PARTICIPANT" means an employee or director, eligible to participate in the Plan under Section 5 hereof, to whom an Option is granted under the Plan. "PLAN" means the HORIZON Pharmacies, Inc. 1997 Stock Option Plan, including any amendments thereto. "SHARES" means shares of the Company's Common Stock, $.01 par value, now or hereafter owned by the Company as treasury stock or authorized but unissued shares of the Company's Common Stock, subject to adjustment as provided in the Plan. "SUBSIDIARY" means any corporation, now or hereafter existent, in which the Company owns, directly or indirectly, stock comprising fifty percent (50%) or more of the total combined voting power of all classes of stock of such corporation. "TEN PERCENT SHAREHOLDER" means any person who, before or after the grant or exercise of any Option, owns or would own, directly or indirectly, more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, or its parent or any Subsidiary, or who is not an employee of the Company. 3. PLAN ADOPTION AND TERM. A. The Plan shall become effective upon its adoption by the Board, and Options may be issued upon such adoption and from time to time thereafter; provided, however, that the Plan shall be submitted to the Company's shareholders for their approval at the next annual meeting of shareholders, or prior thereto at a special meeting of shareholders expressly called for such purpose, or by written consent of the holders of a majority of the issued and outstanding shares of Common Stock; and provided further, that the approval of the Company's shareholders shall be obtained within twelve (12) months of the date of adoption of the Plan. If the Plan is not approved at the annual meeting or special meeting by the affirmative vote of a majority of all shares voting at such meeting, or by or by written consent of the holders of a majority of the issued and outstanding shares of Common Stock, then the Plan and all Options then outstanding hereunder shall forthwith automatically terminate and be of no force and effect. B. Subject to the provisions hereinafter contained relating to amendment or discontinuance, the Plan shall continue in effect for ten (10) years from the date of its adoption by the Board. No option may be granted hereunder after such ten-year period. 4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. Except as otherwise expressly provided in the Plan, the Committee shall have sole and final authority to interpret the provisions of the Plan and the terms of any Option issued under it and to promulgate and interpret such rules and regulations relating to the Plan and Options as it may deem necessary or desirable for the administration of the Plan. Without limiting the foregoing, the Committee shall, subject to Section 5 and to the extent and in the manner contemplated herein, determine who shall receive Options under the Plan and how many Shares shall be subject to each such Option. The Committee may correct any defect in the Plan or any Option in the manner and to the extent it shall deem expedient to carry the Plan into effect and shall be the sole and final judge of such expediency. -2- No member of the Committee shall be liable for any action taken or omitted or any determination made by him in good faith relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Board) arising out of any act or omission in connection with the Plan, unless arising out of such person's own fraud or bad faith. 5. ELIGIBILITY. The employees of the Company and its Subsidiaries, who, in the opinion of the Committee, have a capacity for contributing in a substantial measure to the success of the Company and its Subsidiaries, shall be eligible to participate in the Plan. Directors of the Company, who need not be employees, shall also be eligible to participate in the Plan. 6. STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in Section 13 hereof, Options may be granted pursuant to the Plan with respect to a number of Shares that, in the aggregate, does not exceed Two Hundred Thousand (200,000) Shares. If, prior to the termination of the Plan, an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan. 7. OPTIONS. A. All Options granted under the Plan shall be clearly identified either as Incentive Stock Options or as Nonqualified Stock Options. All Options granted under the Plan shall be evidenced by agreements in such form, not inconsistent with the Plan, as the Committee may adopt for general use or for specific use from time to time. An Option shall be deemed "granted" under the Plan on the date on which the Committee, by appropriate action, awards the Option to a Participant, or on such subsequent date as the Committee may designate. B. (i) The aggregate Fair Market Value of Shares with respect to which Incentive Stock Options granted under the Plan are exercisable for the first time by a Participant during any calendar year under the Plan and any other stock option plan of the Company (and its parent and subsidiary corporations as those terms are used in Section 422 of the Code) shall not exceed $100,000. Such Fair Market Value shall be determined as of the date on which each such Incentive Stock Option is granted. To the extent that the aggregate Fair Market Value of Shares with respect to such Incentive Stock Options exceeds $100,000, such Incentive Stock Options shall be treated as Nonqualified Options, but all other terms and provisions of such Incentive Stock Options shall remain unchanged. (ii) Subparagraph (i) of this Paragraph B shall be applied by taking Options into account in the order in which they were granted. 8. OPTION PRICE. The price per share at which Shares may be purchased pursuant to any Incentive Stock Option granted under the Plan shall be not less than 100% of the Fair Market Value of a -3- Share on the date the Option is granted. The price per share at which Shares may be purchased pursuant to any Nonqualified Stock Option granted under the Plan shall be not less than 85% of the Fair Market Value of a Share on the date the Option is granted. No options intended to qualify as Incentive Stock Options shall be granted under the Plan to any Ten Percent Shareholder unless the exercise price of said Option is at least 110% of the Fair Market Value of a Share on the date the Option is granted. 9. DURATION OF OPTIONS. No Option granted hereunder shall be exercisable after the expiration of ten (10) years from the date such Option was granted. All Options shall be subject to earlier termination as provided elsewhere in the Plan. 10. CONDITIONS RELATING TO EXERCISE OF OPTIONS. A. The Committee may, at its discretion, provide that an Option may not be exercised in whole or in part for any period or periods of time specified in the Option agreement. Except as provided in the Option agreement, an Option may be exercised in whole or in part at any time during its term. No Option may be exercised for a fractional share of stock. B. No Option shall be transferable by a Participant otherwise than by will or the laws of descent and distribution and Options shall be exercisable during the lifetime of a Participant only by such Participant. C. An Option shall be exercised by the delivery to the Company of a written notice signed by the Participant, which specifies the number of Shares with respect to which the Option is being exercised and the date of the proposed exercise. Such notice shall be delivered to the Company's principal office, to the attention of its Secretary, no less than three (3) business days in advance of the date of the proposed exercise and shall be accompanied by the applicable option certificate evidencing the Option. A Participant may withdraw such notice at any time prior to the close of business on the proposed date of exercise, in which case the option certificate evidencing the Option shall be returned to the Participant. D. Payment for Shares purchased upon exercise of an Option shall be made at the time of exercise either in cash, by certified check or bank cashier's check or in Shares owned by the Participant and valued at their Fair Market Value on the date of exercise, or partly in Shares with the balance in cash or by certified check or bank cashier's check. Any payment in Shares shall be effected by their delivery to the Secretary of the Company, endorsed in blank or accompanied by stock powers executed in blank. E. Certificates for Shares purchased upon exercise of Options shall be issued and delivered as soon as practicable following the date the Option is exercised. Certificates for Shares purchased upon exercise of Options shall be issued in the name of the Participant. F. Notwithstanding any other provision in the Plan, no Option may be exercised unless and until the Shares to be issued upon the exercise thereof have been registered under the Securities Act of 1933 and applicable state securities laws, or are, in the opinion of counsel to the Company, exempt from such registration. The Company shall not be under any obligation to register under applicable Federal or state -4- securities laws any Shares to be issued upon the exercise of an Option granted hereunder, or to comply with an appropriate exemption from registration under such laws in order to permit the exercise of an Option and the issuance and sale of the Shares subject to such Option. If the Company chooses to comply with such an exemption from registration, the Shares issued under the Plan may, at the discretion of the Committee, bear an appropriate restrictive legend restricting the transfer or pledge of the Shares represented thereby, and the Committee may also give appropriate stop-transfer instructions to the transfer agent to the Company. G. Any person exercising an Option or transferring or receiving Shares shall comply with all regulations and requirements of any governmental authority having jurisdiction over the issuance, transfer, or sale of capital stock of the Company, and as a condition to receiving any Shares, shall execute all such instruments as the Company in its sole discretion may deem necessary or advisable. H. Notwithstanding Paragraph A of this Section 10, the Committee may, in its sole discretion, accelerate the date on which any Option granted under the Plan, and outstanding at such time, shall become exercisable. I. In the event of termination of a Participant's employment by reason of such Participant's retirement in accordance with an applicable retirement plan, any outstanding Option held by such Participant shall be or immediately become fully exercisable as to the total number of Shares subject thereto (whether or not exercisable to that extent prior to termination of employment) and shall remain so exercisable but only for a period of three months after commencement of such retirement, at the end of which time it shall terminate (unless such Option expires earlier by its terms). J. In the event of termination of a Participant's employment by reason of such Participant's disability within the meaning of Section 22(e)(3) of the Code, any outstanding Option held by such Participant shall be or immediately become fully exercisable as to the total number of Shares subject thereto (whether or not exercisable to that extent prior to termination of employment) and shall remain so exercisable but only for a period of one year after termination of employment for such disability, at the end of which time it shall terminate (unless such Option expires earlier by its terms). K. In the event of the death of any Participant (including death during an approved leave of absence or following a Participant's retirement or disability), any Option then held by him which shall not have lapsed or terminated prior to his death shall be or immediately become fully exercisable by the executors, administrators, legatees, or distributees of his estate, as may be appropriate, as to the total number of Shares subject thereto (whether or not exercisable to that extent at the time of death) and shall remain so exercisable but only for a period of one year after death, at the end of which time it shall terminate (unless such Option expires earlier by its terms). L. In the event of the termination of the Participant's employment otherwise than as described in paragraphs I, J, and K, any outstanding Option held by such Participant shall be exercisable to the extent exercisable at the time of such termination and shall be so exercisable for a period of thirty (30) -5- days following such termination. Whether an authorized leave of absence, or absence in military or government service, shall constitute termination of employment shall be determined by the Committee. M. Notwithstanding Paragraph A of this Section 10, upon the occurrence of a Change in Control, any Option granted under the Plan and outstanding at such time shall become fully and immediately exercisable and shall remain exercisable until its expiration or termination as provided in the Plan. 11. NO EMPLOYMENT RIGHTS. Nothing contained in the Plan or any Option shall confer upon any Participant any right with respect to the continuation of his employment by the Company or interfere in any way with the right of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Option. 12. RIGHTS OF A SHAREHOLDER. No person shall have any rights with respect to any Shares covered by or relating to any grant hereunder of an Option until the date of issuance of a certificate to him evidencing such Shares. Except as otherwise expressly provided in the Plan, no adjustment to any Option shall be made for dividends or other rights for which the record date occurs prior to the date such certificate is issued. 13. ADJUSTMENT UPON CHANGES IN CAPITAL STOCK. A. If the capital stock of the Company shall be subdivided or combined, whether by reclassification, stock dividend, stock split, reverse stock split or other similar transaction, then the number of Shares authorized under the Plan, the number of Shares then subject to or relating to unexercised Options granted hereunder and the exercise price per Share will be adjusted proportionately. A stock dividend shall be treated as a subdivision of the whole number of Shares equal to such whole number of Shares so outstanding plus the number of Shares issued as a stock dividend. B. In the case of any capital reorganization or any reclassification of the capital stock of the Company (except pursuant to a transaction described in Paragraph A of this Section 13) (a "Reorganization"), appropriate adjustment may be made by the Board in the number and class of shares authorized to be issued under the Plan and the number and class of shares subject to or relating to Options awarded under the Plan and outstanding at the time of such Reorganization. C. Each Participant will be notified of any adjustment made pursuant to this Section 13 and any such adjustment, or the failure to make such adjustment, shall be binding on the Participant. D. Except as expressly set forth herein, the number and kind of Shares subject to Options, shall not be affected by any transaction (including, without limitation, any merger, recapitalization, stock split, stock dividend, issuance of stock or similar transaction) affecting the capital stock of the Company and no Participant shall be entitled to any additional Options on account thereof. 14. WITHHOLDING TAXES. -6- A. Whenever Shares are to be issued upon the exercise of an Option, the Company shall have the right to require the Participant to remit to the Company in cash an amount sufficient to satisfy federal, state and local withholding tax requirements, if any, prior to the delivery of any certificate or certificates for such Shares. B. Notwithstanding Paragraph A of this Section 14, at the election of a Participant, subject to the approval of the Committee, when Shares are to be issued upon the exercise of an Option, the Participant may tender to the Company a number of Shares, or the Company shall withhold a number of such shares, the Fair Market Value of which is sufficient to satisfy the federal, state and local tax requirements, if any, attributable to such exercise or occurrence. The Committee hereby grants its approval to any election made pursuant to this Paragraph B, but reserves the right, in its absolute discretion, to withdraw such approval in case of any such election effective upon its delivery of notice thereof to the Participant. C. Notwithstanding Paragraph E of Section 10 hereof, if a Participant subject to the provisions of Section 16(b) of the Exchange Act who has not made an election pursuant to Section 83(b) of the Code, makes an election described in Paragraph B of this Section 14 to have Shares withheld with respect to an Option, then the Company shall hold as custodian for the Participant certificates evidencing the total number of Shares required to be issued pursuant to the exercise of the Option until the expiration of six (6) months following the date of such exercise. Upon the expiration of such six-month period, the Company shall deliver to such Participant certificates evidencing such Shares minus a number of such Shares, the Fair Market Value of which on the date on which such period expires is sufficient to satisfy the federal, state and local tax requirements attributable to such exercise. D. Notwithstanding any other provisions of the Plan, a individual who is subject to Section 16(b) of the Exchange Act, may not make either of the elections described in Paragraph B of this Section 14 prior to the expiration of six (6) months after the date on which the applicable Option was granted. Such elections must be made either (i) during the 10-day window period described in Section (e)(3)(iii) of Rule 16b-3 promulgated under such Section 16(b) of the Exchange Act, or (ii) at least six months prior to the date as of which the income attributable to the exercise of the related Option is recognized under the Code. Such elections shall be irrevocable and shall be made by the delivery to the Company's principal office, to the attention of its Secretary, of a written notice signed by Participant. 15. AMENDMENT OF THE PLAN. A. The Board may at any time and from time to time suspend, discontinue, modify or amend the Plan in any respect whatsoever except that the Board may not suspend, discontinue, modify or amend the Plan so as to adversely affect the rights of a Participant with respect to any grants that have theretofore been made to such Participant without such Participant's approval. B. No amendment to or modification of the Plan which: (i) materially increases the benefits accruing to Participants; (ii) except as provided in Sections 6 and 13 hereof, increases the number -7- of Shares that may be issued under the Plan; or (iii) modifies the requirements as to eligibility for participation under the Plan shall be effective without shareholder approval. 16. RESOLUTION OF DISPUTES. The following provisions shall apply to any controversy between the Company and its Subsidiaries and the Participant (including any director, officer, employee, agent or affiliate of the Company and its Subsidiaries) relating to this Plan or any Option granted pursuant to this Plan. A. The parties first shall use their reasonable efforts to discuss and negotiate a resolution of the controversy. B. If the efforts to negotiate a resolution do not succeed, the parties shall resolve the controversy by final and binding arbitration in accordance with the Rules for Commercial Arbitration (the "Rules") of the American Arbitration Association in effect at the time of the adoption of this Plan and pursuant to the following additional provisions: (i) The Federal Arbitration Act (the "Federal Act"), as supplemented by the Texas Arbitration Act (to the extent not inconsistent with the Federal Act), shall apply to the arbitration and all procedural matters relating to the arbitration. (ii) The parties shall select one arbitrator within ten days after filing of a demand and submission in accordance with the Rules. If the parties fail to agree on an arbitrator within that ten day period or fail to agree to an extension of that period, the arbitration shall take place before an arbitrator selected in accordance with the Rules. (iii) The arbitration shall take place in McKinney, Texas, and the arbitrator shall issue any award at the place of arbitration. The arbitrator may conduct hearings and meetings at any place agreeable to the parties or, upon the motion of a party, determined by the arbitrator as necessary to obtain significant testimony or evidence. (iv) The arbitrator shall have the power to authorize all forms of discovery (including depositions, interrogatories and document production) upon the showing of (a) a specific need for the discovery, (b) that the discovery likely will lead to material evidence needed to resolve the controversy, and (c) that the scope, timing and cost of the discovery is not excessive. (v) Authority of Arbitrator. The arbitrator shall not have the power (a) to alter, modify, amend, add to, or subtract from any term or provision of this Plan or any Option; (b) to rule upon or grant any extension, renewal or continuance of this Plan or any Option; or (c) to grant interim injunctive relief prior to the award. (vi) Enforcement of Award. The prevailing party shall have the right to enter the award of the arbitrator in any court having jurisdiction over one or more of the parties or their assets. The parties specifically waive any right they may have to apply to any court for relief from the provisions of this Agreement or from any decision of the arbitrator made prior to the award. -8- B. Attorneys' Fees and Costs. The prevailing party to the arbitration shall have the right to an award of its reasonable attorneys' fees and costs (including the cost of the arbitrator) incurred after the filing of the demand and submission. If the Company prevails, the award shall include an amount for that portion of the administrative overhead reasonably allocable to the time devoted by the in-house legal staff of the Company. C. Other Rights. The provisions of this Section 16 shall not prevent the Company, its Subsidiaries, or the Participant from exercising any of their rights under this Plan, any Option, or under the common law, including (without limitation) the right to terminate any agreement between the parties or to end or change the party's legal relationship. 17. MISCELLANEOUS. A. It is expressly understood that the Plan grants powers to the Board but does not require their exercise; nor shall any person, by reason of the adoption of the Plan, be deemed to be entitled to the grant of any Option; nor shall any rights be deemed to accrue under the Plan except as Options may be granted hereunder. B. All rights hereunder shall be governed by and construed in accordance with the laws of Texas. C. All expenses of the Plan, including the cost of maintaining records, shall be borne by the Company. -9- EX-5.1 8 EXHIBIT 5.1 - OPINION OF PHILLIPS, MCFALL EXHIBIT 5.1 May 30, 1997 HORIZON Pharmacies, Inc. 275 W. Princeton Drive Princeton, Texas 75407 Gentlemen: We have acted as counsel to HORIZON Pharmacies, Inc., a Texas corporation (the "Company"), in connection with the preparation and filing of a Registration Statement on Form SB-2 (No. 333-25257) under the Securities Act of 1933, as amended (the "Registration Statement"), including the Prospectus which constitutes a part thereof, relating to the issuance and sale of 1,380,000 shares (the "Shares") of the Company's common stock, $.01 par value (the "Common Stock"), including an overallotment option of up to 180,000 shares. We have examined and are familiar with originals or copies, certified or otherwise, identified to our satisfaction, of such corporate records of the Company, certificates of officers of the Company and of public officials and such other documents as we have deemed appropriate as a basis for the opinion expressed below. Based on the foregoing, we are of the opinion that the Shares, when sold on the terms set forth in the Prospectus, will be legally issued, fully paid and nonassessable. PHILLIPS MCFALL MCCAFFREY MCVAY & MURRAH, P.C. EX-10.1 9 EXHIBIT 10.1 - LOAN AGREEMENT LOAN AGREEMENT Borrower: Horizon Pharmacies, Inc. Lender: Bergen Brunswig Drug Company 275 West Princeton Dr. 4000 Metropolitan Drive Princeton, TX 75407 Orange, California 92868 This Agreement is made as of 10/16/96 between the Borrower and Lender and outlines the specific terms and conditions governing the credit facilities extended by the Lender to the Borrower and is a supplement to the promissory notes, security agreements and other documents and instruments required by this Agreement, all of which are incorporated herein and made a part hereof by reference. In consideration of the mutual terms and provisions contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. CERTAIN DEFINITIONS. When used in this Agreement, the following terms shall have the following meanings: 1.1 "AFFILIATE" shall mean with respect to Borrower or Lender, a Person which controls, is controlled by, or is under common control with Borrower or Lender, respectively. 1.2 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 1.3 "COLLATERAL" shall mean at any time all property and rights that secure the obligations of Borrower and Guarantors under this agreement. 1.4 "COLLATERAL DOCUMENTS" shall means the Security Agreement, Financing Statements and any other agreement or instrument in which Collateral is being or has been provided to Lender to secure the obligations of Borrower or Guarantors under any of the Loan Documents. 1.5 "EVENT OF DEFAULT" shall means any of the events described in paragraph 7.1. 1.6 "FINANCIAL STATEMENTS" shall mean a Balance Sheet and a Statement of Income and Expense reflecting profit or loss for the periods covered, a Statement of Cash Flow and a Statement of Changes in Equity, maintained on generally accepted accounting principles and a consistent basis. 1.7 "GUARANTORS" shall mean Ricky D. McCord, Sy, S. Shahid and Charlie K. Herr. 1.8 "GUARANTY" shall mean the guaranty to be furnished pursuant to paragraph 3.3. 1.9 "LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Collateral Documents and the Guaranties. 1.10 "OBLIGATIONS" shall mean all obligations, now or hereafter owed by Borrower to Lender or an Affiliate of Lender under this Agreement or otherwise, including without limitation the indebtedness evidenced by the Notes, and any indebtedness evidenced by check, note, draft or open account obligations of Borrower for inventory purchases, and all obligations arising under franchise agreements and service agreements, and all other agreements between Borrower and Lender. 1.11 "NOTE" shall mean the Promissory Notes executed and delivered by Borrower pursuant to paragraph 3.1. 1.12 "PERMITTED LIENS" shall mean (a) current taxes not delinquent or taxes being contested in good faith by appropriate proceedings and for which appropriate reserves have been established as required by Lender, (b) the security interests and pledges to be granted by Borrower and the Guarantors under the Collateral Documents, and (c) liens, mortgages or security interests in favor of third parties which Borrower and the Guarantors have disclosed to Lender in writing and which Lender has approved in writing. 1.13 "PERSON" shall means any natural person, corporation, firm, joint venture or other unincorporated association, trust, government or governmental agency. 1.14 "PRIME RATE" shall mean the rate of interest announced from time to time by Bank of America, Illinois. 1.15 "SECURITY AGREEMENT" shall mean the security agreement furnished by Borrower pursuant to paragraph 3.2.. 1.16 "STORE" shall mean the drug store or stores owned by Borrower wherever located. 1.17 "UNMATURED EVENT OF DEFAULT" shall mean any event which if it continues uncured will, with lapse of time or note, or both, constitute an Event of Default. 2.0 LOAN 2.1 COMMITMENT. Subject to the terms and conditions of this Agreement, Lender hereby agrees to lend to Borrower and Borrower agrees to borrow from Lender the amount of One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00) of which $950,000 has been disbursed prior to the date of this Agreement, but which disbursements are subject to the terms and conditions of this Agreement. 2 2.2 PURPOSE. The purpose of the Loan is to provide funds to acquire inventory, furniture, fixtures and equipment of retail pharmacy, and the proceeds of the Loan shall be used for such purpose. 2.3 TERMS. Funds may be drawn under the loan beginning at such time as all conditions of lending described herein have been satisfied and all other terms of this agreement have been met. This commitment shall expire on May 17, 1997, if by that time the borrow has not satisfied the conditions of lending, accepted the Lender's commitment and drawn the Loan the Lender has made available. 2.4 PREPAYMENT PENALTY. There shall be no prepayment penalty if part of the entire balance of principal and interest under the Note is repaid sooner than the maturity date of the Note. 2.5 RENEWAL, EXTENSION AND REARRANGEMENT. All the provisions of this Agreement and the documents and the instruments delivered in connection herewith shall apply with equal force and effect to each and all promissory notes hereinafter executed which in whole or in part represent a renewal, extension for any period, increase or rearrangement of any part of the obligations originally represented by the Notes or of any part of such other obligations. 2.6 INTEREST RATE. The interest rate for the Loan shall be set at a rate per annum equal to the Prime Rate from time to time plus (two percent) 2% per annum calculated on the basis of a 365 day year actual days elapsed. The term "Prime Rate" shall mean the rate of interest most recently announced by Bank of America, Illinois ("Bank") at its principal office in Chicago, Illinois as its Prime Rate, with the understanding that the Prime Rate is one of its base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as the Bank may designate. Any change in the interest rate resulting from a change in the Prime Rate shall become effective at 12:00 a.m. on the date on which such change in such Prime Rate becomes effective. 2.7 GUARANTIES. The Loans shall be jointly and severally guaranteed without limitation by Ricky D. McCord, Sy S. Shahid and Charlie K. Herr and shall be on the Lender's standard form. 3.0 NOTE AND COLLATERAL DOCUMENTS 3.1 NOTE. The Loan shall be evidenced by a promissory note (the "Note") substantially in the form of Exhibit A and A-1, with appropriate insertions, payable to the order of Lender in the principal amount of the Loan. 3 3.2 SECURITY AGREEMENT. The obligations shall be secured by Security Agreements substantially in the form of Exhibit B, B-1 and B-2 (the "Security Agreement") from Borrower to Lender. 3.3 GUARANTY. The obligations shall be guaranteed by the Guarantors under a Guaranty substantially in the form of Exhibit C, C-1, C-2 (the "Guaranty"). 3.4 FINANCING STATEMENTS. Borrower has and shall execute and deliver to Lender such financing statements as may be required under the Collateral Documents to perfect Lender's security interest in the Collateral. 4.0 CONDITIONS OF LENDING 4.1 DOCUMENTS. The obligation of Lender to make each advance under the Loan is subject to the delivery by Borrower to Lender of all of the following, each duly executed by the appropriate parties and acknowledged, where required, all in form and substance satisfactory to Lender. (a) LOAN DOCUMENTS. The Loan Documents. (b) ORGANIZATIONAL DOCUMENTS. Certified copies of the organizational documents of Borrower, including the Certificate of Incorporation and Bylaws, and a Certificate of Good Standing from the Secretary of State or other appropriate authority of the state of Borrower's incorporation. (c) RESOLUTIONS. Certified copies of resolutions of the Board of Directors of Borrower authorizing the execution, delivery and performance of this Agreement, all of the Loan Documents, and all other agreements and documents required in this Agreement. (d) OTHER DOCUMENTS. Such other documents and instruments as Lender may reasonably require, including signed purchase agreements, equipment leases and license agreements, if required by Lender. 4.2 OTHER CONDITIONS. The obligation of Lender to make each advance under the Loan is further subject to all of the following conditions: (a) ACCURACY OF WARRANTIES. All of the representations and warranties of Borrower and the Guarantors made to Lender under this Agreement or otherwise in connection with the Loan shall have been true and correct at the time they were made, and they shall continue to be true and correct the time Lender advances the funds to Borrower under this Agreement. (b) FINANCIAL STATEMENTS. Borrower and each of the Guarantors shall have submitted to Lender current Financial Statements, for a fiscal period ended not more than ninety (90) days prior to the date such Financial Statements are submitted to Lender, certified in writing by Borrower and the Guarantors, respectively, as to 4 their accuracy and completeness as of the date thereof. Such financial statements must be satisfactory to Lender. (c) TITLE SEARCH. Lender shall have received such Uniform Commercial Code searches, tax and judgment lien searches and other information it may require in order to satisfy itself that the Collateral is free and clear of all liens and security interests other than the Permitted Liens. (d) INSURANCE. Lender shall have received evidence satisfactory to Lender that the insurance required to be obtained and maintained by Borrower hereunder or under any of the other Loan Documents has been obtained and is in full force and effect. (e) ADDITIONAL EQUITY INVESTMENT - Prior to the disbursement of any portion of the remaining $550,000 of the loan, Lender shall have received evidence that an additional equity investment of no less than $400,000 consisting of at least $200,000 in the form of cash with no increase in amounts due to or from Shareholders has been made. (f) TAX RETURN - Lender shall have received a copy of the 1995 Federal and State Tax Returns of Horizon Pharmacies, Inc. 5. REPRESENTATION OF WARRANTIES. To induce Lender to enter into this Agreement, Borrower represents and warrants to Lender that: 5.1 ORGANIZATION. Borrower is a corporation duly organized, validly existing in good standing under the laws of the state of its incorporation and is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction where, because of the nature of its activities or properties, such qualification is required. Borrower has no subsidiaries. 5.2 AUTHORIZATION; NO CONFLICT. The execution and delivery of the Loan Documents, the borrowings hereunder, and the performance by Borrower of its obligations under the Loan Documents, are within Borrower's corporate powers, have been duly authorized by all necessary corporate action, have received all necessary governmental approvals, if any are required, and do not and will not contravene or conflict with any provision of law or of the certificate of incorporation or bylaws of Borrower or of any agreement binding upon Borrower. 5.3 VALIDITY AND BINDING NATURE. The Loan Documents, when executed and delivered, are and will be legal and binding obligations of Borrower and the Guarantors, respectively, enforceable against Borrower and the Guarantors in accordance with their respective terms. 5.4 FINANCIAL INFORMATION. All Financial Statements and information furnished by Borrower and Guarantors to Lender fairly present the financial condition of Borrower and Guarantors as of the respective dates thereof. Neither Borrower nor any of the Guarantors has any contingent liability for taxes or other commitments which is not reflected therein. 5 5.5 NO ADVERSE CHANGES. Since the dates of the Financial Statements furnished to Lender by Borrower and Guarantors, there has been no change in the business, operations, properties or condition (financial or otherwise) of Borrower or Guarantors which has been materially adverse. 5.6 LITIGATION AND CONTINGENT LIABILITIES. No litigation, arbitration proceedings or governmental proceedings are pending or threatened against Borrower or any of the Guarantors, and Borrower and the Guarantors have no material contingent liabilities, other than as set forth in their Financial Statements furnished to Lender, except as follows: 5.7 TITLE TO PROPERTIES. Borrower and/or Guarantors own all the Collateral. 5.8 LIENS. None of the Collateral is subject to any mortgage, security interest, pledge, title retention lien or other encumbrance, except the Permitted Liens. 5.9 LEASES AND LICENSES. Each lease and each license to which Borrower is a party covering real or personal property, including any lease in which Borrower leases the premises of the Store and any equipment lease for personal property used in the Store, is a valid and binding lease or license, as the case may be, enforceable in accordance with its terms. There is no default by any part under any such lease or license, nor has any event occurred which, with notice or lapse of time, or both, could constitute a default. 5.10 STORE. Retailer owns all assets, including licenses and permits, necessary to operate the store. 5.11 PAYMENT OF TAXES. All tax returns and reports of Borrower and Guarantors required to be filed by any of them have been timely filed, and all taxes, assessments, fees and other governmental charges upon Borrower or Guarantors and upon their respective properties, assets and income which are due and payable have been paid. 5.12 EMPLOYEE BENEFIT PLANS. Borrower is in compliance with all applicable provisions of the Employee Retirement Income Security Act and the regulations and published interpretations thereunder with respect to all employee benefit plans maintained by Borrower. No event has occurred which would give rise to any unanticipated liability under such Act with respect to any such plan. 5.13 DISCLOSURE. No representation or warranty of Borrower or any of the Guarantors contained in this Agreement or in any other document, certificate or written statement furnished to Lender by or on behalf of Borrower or any of the Guarantors for use in connection with the Loan contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact know to Borrower or any of the Guarantors which materially, adversely affects or would affect the business, operations, property, assets or condition (financial or otherwise) of Borrower, or any of the Guarantors which has not been disclosed herein or in such other documents or certificates furnished to Lender for use in connection with the Loan. 6 6.0 BORROWER'S COVENANTS. Until all obligations of Borrower hereunder and under the Note and Collateral Documents are paid and satisfied in full, Bergen agrees that, unless at any time Lender shall otherwise expressly consent in writing, Borrower will: 6.1 FINANCIAL STATEMENTS, CERTIFICATES AND OTHER INFORMATION. Furnish to Lender: (a) ANNUAL FINANCIAL STATEMENTS. Within Ninety (90) calendar days after each fiscal year of Borrower, a copy of the Financial Statements of Borrower, which fairly present the financial condition of Borrower as of the date thereof. (b) INTERIM FINANCIAL STATEMENTS. Within Sixty (60) calendar days after each quarter (excluding the last quarter) of each fiscal year of Borrower, a copy of the unaudited Financial Statements of Borrower prepared in the same manner as the annual Financial Statements referred to in subparagraph (a), signed by the President of Horizon Pharmacies, Inc. (c) CERTIFICATES. Contemporaneously with the furnishing of the Financial Statements provided in subparagraphs (a) and (b), a certificate dated the date of such Financial Statements and signed by the Borrower to the effect that no Event of Default or Unmatured Event of Default has occurred and is continuing or, if there is any such event, describing it and the actions, if any, being taken to correct it, and that the Borrower is in compliance with all terms of the Loan Documents. (d) NOTICE OF DEFAULT, LITIGATION. Immediately upon learning of the occurrence of any of the following, written notice thereof, describing the same and the actions being taken by Borrower with respect thereto: (i) the occurrence of any Event of Default or any Unmatured Event of Default; or (ii) the institution of, or any adverse determination in, any litigation, arbitration or other proceeding, which is material to Borrower. (e) TAX RETURNS. Within 30 days of filing, a copy of the Federal and State Income Tax Returns. (f) OTHER INFORMATION. From time to time, such other information concerning Borrower as Lender may reasonably request, including Financial Statements of each of the Guarantors on an annual basis. 6.2 BOOKS, RECORDS AND INSPECTIONS. Maintain complete and accurate books and records of Borrower's operations. 6.3 INSPECTION. Permit any authorized representatives of Lender to visit and inspect the properties of Borrower, including financial and accounting records, and make copies and take extracts therefrom, and discuss Borrower's affairs, finances and accounts with its officers and accountants, all upon reasonable notice and at such reasonable times during normal business hours and as often as may be reasonably requested. 7 6.4 CONTINUOUS OPERATION. Continue to operate the Store throughout the term of the Loan and maintain all licenses and permits necessary for such operation. 6.5 SINGLE LINE OF BUSINESS. Not enter into or conduct any business or operation other than the operation of the Store and other than the making of investments specifically permitted herein. 6.6 LEASES AND LICENSES. Comply in all respects with all terms and provisions of the leases, subleases and licenses pertaining to the premises of the Store, equipment used in the Store and software and other property licensed to Borrower for use in the operation of the Store. 6.7 INVENTORY. Conduct a physical count of merchandise in the Store at the end of each quarter, by inventory crews acceptable to Lender and supervised by Borrower and in connection therewith, permit Lender to count Borrower's cash on hand, reconcile the actual cash to the amount of cash indicated to be on hand by the books and records, and make a detailed analysis of items counted as cash on hand; and to permit Lender to conduct at its expense such counting, reconciling and analyzing on an unannounced basis as requested by the Lender. 6.8 MAINTENANCE OF PROPERTIES. Maintain or cause to be maintained in good repair, working order and condition all properties used or useful in the operation of the Store, and from time to time make or cause to be made all appropriate repairs, renewals and replacements thereof. 6.9 COMPLIANCE WITH LAWS. Comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, including those relating to the environment. 6.10 INSURANCE. Maintain the following insurance coverage in such amounts and with such carriers as may be approved by Lender: (a) comprehensive general liability, (b) non-owned automobile, (c) all-risk insurance on the contents of the Store, (d) business interruption, (e) crime, including embezzlement, or theft by employees, (f) worker's compensation, and (g) umbrella liability; and furnish to Lender upon request evidence of such insurance coverage. Such insurance coverage shall designate Lender as the mortgagee under a standard mortgage clause. 6.11 TAXES AND LIABILITIES. Pay when due all taxes, assessments and other liabilities except as contested in good faith and by appropriate proceedings and for which appropriate reserves have been established if required in accordance with generally accepted accounting principles. 6.12 INDEBTEDNESS. Not incur or permit to exist any indebtedness for borrowed money or liability on account of property or services except (a) the Loan, and (b) current accounts payable arising in the ordinary course of business and indebtedness contemplated by this Agreement. 6.13 LIENS. Not create or permit to exist any mortgage, pledge, title retention line, or other line, encumbrance or security interest with respect to any assets now owned or hereafter acquired, except the Permitted Liens. 8 6.14 GUARANTEES, LOANS, ADVANCES OR INVESTMENTS. Not become or be a guarantor or surety of, or otherwise become or be responsible in any manner (whether by agreement to purchase any obligations, stock, assets, goods or services, or to supply or advance any funds, assets, goods or services, or otherwise) with respect to any undertaking of any Person or entity, or make or permit to exist any loans or advances to, or investment in, any other Person, except for (a) the endorsement, in the ordinary course of collection, of instruments payable to it or to its order, (b) investments in direct obligations for which the full faith and credit of the United States or any agency thereof is pledged to provide for the payment of principal and interest or certificates of deposit of any bank having its principal office in the United States. 6.15 COLLECTION OF ACCOUNTS RECEIVABLE. If an Event of Default or Unmatured Event of Default has occurred and is continuing, take or cause to be taken such action as Lender may direct so that immediately upon receipt by Borrower of cash, checks, drafts, chattel paper and other instruments or writings for the payment of money which may be received by Borrower at any time in full or partial payment or otherwise as proceeds of any of the Collateral, Borrower will transmit and deliver such items either (a) directly to Lender, or (b) to one or more depository accounts as may be designated by Lender, it being understood that all such items so transmitted and delivered and any such account shall be deposited and maintained for the benefit of Lender. The agreement contained herein shall be in addition to, and not a limitation on, any remedy available to Lender under the Collateral Documents. 6.17 ACCOUNTING. Not change the accounting methods or practices of Borrower. 6.18 DEBT TO WORTH RATIO. Maintain a ratio of total debt to tangible net worth not greater than 4.0 to 1. 6.19 OTHER AGREEMENTS. Not enter into any agreement, containing any provision which would be violated or breached by the performance of its obligations hereunder or under any instrument or document delivered or to be delivered by Borrower hereunder or in connection herewith. 6.20 COMPLIANCE WITH OTHER AGREEMENTS. Comply in all respects with any and all other agreements with Lender, including equipment leases and software licenses. 6.21 CORPORATE EXISTENCE. Preserve and keep in full force and effect Borrower's corporate existence and the rights and franchises material to its business. 6.22 CERTIFICATE OF INCORPORATION, BYLAWS. Not amend, modify or in any manner change the organizational documents of Borrower, including the Certificate of Incorporation and Bylaws. 6.23 PURCHASE OR REDEMPTION OF SECURITIES; DIVIDEND RESTRICTIONS. Not (a) purchase or redeem any shares of the capital stock of Borrower, (b) declare or pay any dividends thereon, (c) make any distribution to holders of capital stock or set aside any funds for any such purpose, (d) issue any additional shares of any class of capital stock of Borrower or any warrants, options, rights or other commitments entitling any person to 9 purchase or otherwise acquire any shares of stock of Borrower, (e) permit any change in stock ownership of Borrower. 6.24 MERGERS, CONSOLIDATIONS, SALES. Not (a) be a party to any merger or consolidation, (b) purchase or otherwise acquire all or substantially all of the assets or stock of any class of, or any partnership or joint venture interest in, any other Person or entity or organize, own or maintain any subsidiary, (c) sell, transfer, convey or lease all or any substantial part of its assets, (d) sell or assign with or without recourse any receivables, other than to Lender under the Collateral Documents. 6.25 SALES OF COLLATERAL. Not sell any of the assets serving as Collateral, other than the sale of inventory in the ordinary course of business. 6.26 EMPLOYEES. Not pay any employee any compensation that is higher than the prevailing compensation for similar work in the vicinity of the Store. 6.27 RELATED PARTY TRANSACTIONS. Not enter into any other transaction including, without limitation, the purchase, sale or exchange of property or the rendering of any services, with any Affiliate, or any shareholder or employee of Borrower, except in the ordinary course of and pursuant to the reasonable requirements of its business upon fair and reasonable terms no less favorable than would exist in a comparable transaction with a Person who is not an Affiliate. 6.28 NOTIFICATION. Promptly after learning thereof, notify the Lender of (i) any material adverse change in the business, property, assets, operations or condition, financial or otherwise of Borrower, (ii) the details of any action, proceeding, investigation or claim against or affecting the Borrower instituted before any court, arbitrator or governmental authority or, to the Borrower's knowledge threatened to be instituted, which, if determined adversely to the Borrower would be likely to impair or defeat the lien of the Lender of any Collateral or any rights of the Borrower therein, or to have a material adverse effect on the financial condition or operations of the Borrower, or to result in a judgment or order against the Borrower, (iii) any substantial dispute between the Borrower and any governmental authority, (iv) any labor controversy which has resulted in or, to the Borrower's knowledge, threatens to result in a strike which would materially affect the business operations of the Borrower, and (v) the occurrence of any Event of Default (defined in Section 7 herein) or other event which with notice or lapse of time or both would constitute an Event of Default. 6.29 MANAGEMENT. Report any change in executive personnel or key management to the Lender immediately. 7.0 EVENTS OF DEFAULT AND THEIR EFFECT. 7.1 EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: (a) NON-PAYMENT OF NOTE. Default in the payment when due of any principal of, or interest on, the Note or any other monetary obligation. 10 (b) NON-PAYMENT OF OTHER INDEBTEDNESS. Demand for payment, default in payment, or acceleration of the maturity of any other indebtedness for borrowed money, of, or guaranteed by Borrower or Guarantors, whether to Lender or any other Person. (c) BANKRUPTCY, INSOLVENCY, ETC. Borrower or any Guarantor becomes insolvent or generally fails to pay, or admits in writing its inability to pay, debts as they become due; or Borrower or any Guarantor applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for Borrower or any Guarantor or any property of Borrower or any Guarantor, or makes a general assignment for the benefits of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for Borrower or any Guarantor or for a substantial part of the property of Borrower or any Guarantor and is not discharged within thirty (30) days; or any bankruptcy, reorganization, debt arrangement, or any case or proceeding under any bankruptcy or insolvency law or any dissolution or liquidation proceeding is commenced in respect of Borrower or any Guarantor, and if such case or proceeding is not commenced by Borrower or any guarantor, it is consented to or acquiesced in by Borrower or any Guarantor, or remains for thirty (30) days undismissed; or Borrower or any Guarantor takes any action to authorize, or in furtherance of, any of the foregoing. (d) BREACH OF AGREEMENT. Failure by Borrower or an Affiliate of Borrower to comply with or to perform any of the Obligations or default under any agreement to which Retailer or an Affiliate of Borrower is a party or by which it is bound covering the Store or any store operated by an Affiliate of Borrower or any equipment used in the Store or any store operated by any Affiliate of Borrower (and not constituting an Event of Default under any of the preceding provisions of this paragraph 7, and continuance of such failure for ten (10) days after notice thereof to Borrower from Lender. (e) EFFECTIVENESS OF GUARANTY. The failure of the Guaranty to become and remain effective in accordance with its terms until the Loan is paid in full. (f) WARRANTIES. Any warranty made by Borrower or any Guarantor herein or in any of the Collateral Documents is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice, or other writing furnished by Borrower to Lender is false or misleading in any material respect. (g) EMPLOYEE BENEFIT PLANS. With respect to any employee benefit plan of Borrower, (i) steps are undertaken to terminate such plan, (ii) such plan is terminated, or (iii) any Reportable Event, as defined in the Code, with respect to such plan shall occur, or any event shall occur with respect to such plan which in any such case would, in the judgment of the Lender, subject Borrower to any tax, penalty or other liability in the aggregate material in relation to the business, operations, property or financial or other condition of Borrower. (h) DEATH, ETC., OF GUARANTORS. Guarantor dies or becomes incapable of managing his own affairs; or serious illness of incapacity of Guarantor occurs for a period exceeding six (6) months; or a trustee, receiver, guardian, custodian or other legal representative is appointed for the person or any of the estate or assets of Guarantor. 11 (i) INSECURITY. Lender at any time in good faith deems itself insecure with respect to the performance by Borrower or any Guarantor under this Agreement, the Note, the Guaranty, or any of the Collateral Documents. 7.2 EFFECT OF EVENT OF DEFAULT. If any Event of Default described in paragraph 7.1 shall occur, Lender may declare the Note to be immediately due and payable in full, and in such event, the Note shall become immediately due and payable, without notice of any kind, and the Lender shall have the right to set off against the Obligations held by it any debt owing to the Borrower by Lender. 8. GENERAL 8.1 WAIVER, AMENDMENTS. No delay on the part of Lender in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right, power or remedy preclude other or further remedy. No amendment, modification or waiver of, or consent with respect to, any provision of any of the Loan Documents shall in any event be effective unless it is in writing and signed and delivered by Lender, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 8.2 NOTICES. Any notice, demand, consent or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when delivered personally, faxed or mailed, and if mailed, shall be deemed to have been given three (3) days after the date when deposited in the United States mails by registered or certified mail, postage prepaid, and addressed to Lender or Borrower at their respective addresses set forth below or at such other address as either of them may, by written notice, received by the other party, have designated as its address for such purpose. If to Lender: John T. Rasor, General Finance Manager Bergen Brunswig Drug Company 5080 Spectrum Drive Suite 715 West Dallas, TX 75248 By FAX: (972) 980-6914 With a Copy to: Stephen G. Mangold Director, Financial Services Bergen Brunswig Corporation 4000 Metropolitan Drive Orange, CA 92868 By FAX: (714) 485-4396 12 If to Borrower: Ricky D. McCord Horizon Pharmacies, Inc. 275 West Princeton Drive Princeton, TX 75407 By FAX: (972) 736-2588 8.3 COSTS, EXPENSES AND TAXES. Borrower agrees to pay on demand all costs and expenses of Lender in connection with the preparation, execution, delivery and administration of the Loan Documents, and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith, and all costs and expenses incurred by Lender in connection with the enforcement of the Loan Documents and such other instruments or documents or any collateral security, including reasonable attorney's fees. All obligations provided in this paragraph shall survive any termination of this Agreement. 8.4 CAPTIONS. Paragraph captions used in this Agreement are for convenient reference only, and shall not affect the interpretation of this Agreement. 8.5 GOVERNING LAW. This Agreement and all of the Loan Documents shall be governed by, and construed in accordance with, the internal laws of the State of California. All obligations of Borrower and rights of Lender expressed herein or in the Note or any of the Collateral Documents shall be in addition to, and not in limitation of, those provided by applicable law. 8.6 BINDING EFFECT. This Agreement shall be binding upon, and shall inure to the benefit of Lender and Borrower and their respective legal representatives, successors and assigns. 8.7 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement, expressed or implied, is intended to confer any rights upon any Person, other than Lender and Borrower. 8.8 SURVIVAL OF WARRANTIES. All agreements, representations and warranties made by Borrower and Guarantors herein shall survive the execution and delivery of this Agreement and the making of the Loan. 8.9 MAXIMUM INTEREST. lt is not the intention of Lender or Borrower to violate the laws of any applicable jurisdiction relating to usury or other restrictions on the maximum lawful interest rate. The Loan Documents and all other agreements between Lender and Borrower, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no event shall the interest paid or agreed to be paid to Lender for the use, forbearance or detention of money loaned, or for the payment or performance of any covenant or obligation contained herein or in any of the other Loan Documents, exceed the maximum amount permissible under applicable law. If, from any circumstances, fulfillment of any provision hereof or any of the other Loan Documents at the time the performance of such provision shall be due, shall involve exceeding the limit prescribed by law, then the obligation to be fulfilled shall automatically be reduced to the 13 limit prescribed by law, then the obligation shall automatically be reduced to the limit permitted by applicable law. If from any such circumstances, Lender shall ever receive anything of value deemed interest under applicable law which would exceed interest at the highest lawful rate, such excessive interest shall be applied to the reduction of the principal amount owing hereunder, and not to the payment of interest, or if such excessive interest exceeds any unpaid balance or principal, such excess shall be refunded to Borrower. All amounts paid or agreed to be paid to Lender for the Use, forbearance or detention of money shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate of interest on account of such indebtedness is uniform throughout the term hereof. This paragraph shall control every other provision of the Loan Documents and all other agreements between Lender and Borrower contemplated thereby. 8.10 SEVERABILITY. If any provision in or obligation of any of the Loan Documents shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 8.11 COUNTERPARTS. This Agreement and any amendments, waivers, consents or supplements may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same agreement. This Agreement shall become effective upon the execution of a counterpart by each of the parties. 8.12 FURTHER ASSURANCES. Borrower will, upon Lender's request, (a) promptly correct any defect, error or omission which may be discovered in the execution, acknowledgment or recordation of any of the Loan Documents, and (b) promptly do, executive, acknowledge and deliver any and all such further acts, deeds, conveyances, mortgages, deeds of trust, assignments, estoppel certificates, financing statements and continuations thereof, notices of assignment, transfers, certificates, assurances and other instruments as Lender may reasonably require from time to time in order to create and perfect its intended security interest or lien in any of the Collateral, and to convey, grant, assign, transfer and confirm the rights granted to Lender hereunder or under any of the other Loan Documents. 8.13 CUMULATIVE RIGHTS. Rights and remedies of the Lender under the Notes, this Agreement and the documents and instruments executed and delivered in connection herewith shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any right or remedy. 8.14 RIGHT TO ASSIGN. The Lender may assign, negotiate, pledge or otherwise hypothecate this Agreement, the Notes and the security and other related documents, or any of its rights and security hereunder or thereunder. In case of such assignment, Borrower will accord full recognition thereto and hereby agrees that all rights and remedies of the Lender in connection with the interest so assigned shall be enforceable against Borrower by the assignee thereof. Borrower specifically consents to sales of participations in the Loans by the Lender to any financial institutions of the Lender's choosing. 14 8.15 TIME OF THE ESSENCE. Time shall be of the essence with respect to the performance by the parties of their obligations under the Loan Documents. 8.16 ENTIRE AGREEMENT. This Agreement constitutes the entire understanding and agreement of the parties relative to the subject matter hereof, superseding all previous oral or written understandings and agreements concerning the Loan. 8.17 WAIVER OF JURY TRIAL AND OBJECTION TO VENUE. Borrower and Guarantors hereby knowingly, voluntarily and intentionally waive the right to a jury trial of any claim, demand, action, or cause of action arising under any of the Loan Documents, including the Guaranty or the conduct of Lender, Borrower or Guarantors with respect thereto, whether such action or cause of action is based on contract or tort. Borrower and Guarantors waive any right to assert the doctrine of forum non conveniens or to object to the venue in any action instituted by Lender in connection with the Loan. Dated as of the date and year first above written. LENDER: BERGEN BRUNSWIG DRUG COMPANY By: /s/ STEPHEN G. MANGOLD ------------------------------ Stephen G. Mangold Director, Financial Services BORROWER: HORIZON PHARMACIES INC. By: /s/ RICKY D. MCCORD ------------------------------ Ricky D. McCord, President 15 EXHIBIT A-1 BERGEN BRUNSWIG DRUG COMPANY PROMISSORY NOTE $800,000.00 For value received, the undersigned, jointly and severally, promises to pay on demand, or if no demand is made, then on May 17, 1997 to BERGEN BRUNSWIG DRUG COMPANY, a California corporation or order at Post Office Box 5910, Orange, California 92613-5910 the principal sum of Eight Hundred Thousand dollars ($800,000.00) in lawful money of the United States of America, in immediately available funds. The undersigned further agrees to pay interest, in like money, on the unpaid principal amount owing hereunder from the date hereof until such principal amount shall have become due and payable (whether by stated maturity, by acceleration or otherwise) at a rate per annum equal to the Prime Rate from time to time plus two percent (2.0%) per annum calculated on the basis of a 365 day year actual days elapsed. The term "Prime Rate" shall mean the rate of interest most recently announced by SunTrust Bank Atlanta at its principal office in Atlanta, Georgia as its Prime Rate, with the understanding that the Prime Rate is one of its base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as the bank may designate. Interest shall be payable on any overdue payment of principal or interest at (to the extent permitted by law) the greater of 12% per annum or a fluctuating rate per annum equal to 2.0% above the Prime Rate from time to time in effect, until such unpaid amount shall have been paid in full (whether before or after judgment). All overdue payments shall be payable on demand. Interest will be calculated in arrears and will accrue only on amounts disbursed from date of disbursement. Any change in the interest rate resulting from a change in the Prime Rate shall become effective at 12:01 a.m. on the date on which such change in such Prime Rate becomes effective. Interest accrued hereunder shall be payable monthly commencing June 17, 1996 and calculated in arrears. Principal shall be payable in full on demand, or if no demand is made on May 17, 1997. The following shall constitute Events of Default hereunder. 1. Failure to make any payment of principal or interest when due. 2. Failure to timely make any payment of principal or interest as and when due pursuant to any other promissory note, purchase account or other credit arrangement between the undersigned (which for the purpose of this provision includes any subsidiary, parent, sister company, guarantor, endorser or other affiliate of the undersigned) and BERGEN BRUNSWIG DRUG COMPANY. 3. Filing of a petition by or against the maker hereof under the Bankruptcy Act, as amended from time to time, or similar law; appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of the maker, the maker becomes insolvent; the maker shall make a general assignment for the benefit of creditors or shall generally fail to pay debt as they become due. 4. Death or incapacity of any individual maker, or dissolution or liquidation of any maker which is a corporation, partnership or joint venture, or should the business of maker be sold or transferred, in whole or in part, or should any attachment be levied upon said business and not released within ten days thereafter, or should operations of said business be discontinued for a period of more than ten consecutive days. 5. Default by the maker under the terms of any agreement or instrument pursuant to which the maker has incurred debt from any person or entity. SINGLE MATURITY DISBURSEMENT/DAILY ?? [Copy not legible] Should any Event of Default in payment of principal or interest when due as provided in this note exceed fifteen days and the holder hereof does not elect to accelerate this note as provided below, the undersigned promises to pay a "collection charge" of five percent (5.0%) of each delinquent payment in addition to any interest which accrues thereon, for the purpose of defraying the expense of following up and handling the said delinquent payment. Should any Event of Default occur, the holder of this note, at holder's option may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand or notice of dishonor, all of which are expressly waived. The maker hereof agrees to pay all costs and expenses, including reasonable attorneys' fees, incurred by the holder in connection with the enforcement of this note or the protection or preservation of any rights of the holder hereunder. The holder hereof may grant the maker, any endorsers and any other persons obligated hereon, extensions of the time for payment of this note and/or the maturity of any installment of installments, in whole or in part, without limit as to the number of such extensions, or the period or periods thereof, but shall be under no obligation to do so. The makers, sureties, guarantors and endorsers of this note hereby waive diligence, presentment, protest, demand and notice of every kind and (to the full extent permitted by law) the right to plead any statute of limitations and hereby agree that no failure on the part of the holder of this note to exercise any power, right or privilege hereunder, or to insist upon prompt compliance with the terms hereof, shall constitute a waiver thereof. This note may be assigned or sold at the sole discretion of BERGEN BRUNSWIG DRUG COMPANY and shall bind the heirs, administrators, executors, successors and assigns of the maker and inure to the benefit of any successors or assigns of BERGEN BRUNSWIG DRUG COMPANY. All or any portion of the balance owing may be prepaid at any time without penalty. Disbursements on this loan shall not be made unless all the terms and conditions of this note have been met. No disbursements will be made subsequent to nine months from the date of this note. This note shall be construed in accordance with the internal laws of the State of California. HORIZON PHARMACIES, INC. HORIZON PHARMACY /s/ Rick McCord, President - ------------------------------------ Rick McCord, President /s/ Sy Shahid, Vice President - ------------------------------------ Sy Shahid, Vice President Dated: May 17, 1996 Business Address: 460 Stickhorse Lane McKinney, Texas 75069 EXHIBIT B SECURITY AGREEMENT This SECURITY AGREEMENT made as of this 15th day of February, 1996 by and between BERGEN BRUNSWIG DRUG COMPANY, a California corporation (hereinafter referred to as "Secured Party") and HORIZON PHARMACIES, INC., dba HORIZON PHARMACY (hereinafter referred to as "Debtor"). For value received, the receipt of which is hereby acknowledged, Debtor and Secured Party hereby agree as follows: 1. DEBT AND COLLATERAL. Debtor hereby grants Secured Party a continuing security interest in and to all of Debtor's presently owned and after acquired accounts receivable, accounts, chattel paper, documents, instruments, promissory notes, general intangibles and returned goods; all present and hereafter acquired inventory wherever located, including without limitation, work in process and finished goods; all present and hereafter acquired equipment wherever located; all present and future furniture, furnishings and fixtures not permanently affixed to or constituting a part of the realty and not paid for by Sublandlord or Prime Landlord pursuant to their advances, excepting those leased by Borrower; all of Debtor's contract rights as lessee under any and all real property leases pursuant to which Debtor occupies any of the premises from which debtor does business and any and all of Debtor's contract rights in any and all personal property leases pursuant to which Debtor is in possession of any personal property used in the conduct of Debtor's business; all proceeds and products of the forgoing, including but not limited to, money, deposit accounts, goods, insurance proceeds, and other tangible or intangible property received upon the sale or other disposition of the foregoing; all presently owned or hereafter acquired prescription files and records relating thereto (all of the foregoing being collectively referred to as the "Collateral") and all books and records of account identifying or relating to any of the Collateral. 2. OBLIGATIONS SECURED. The Collateral is and shall be security for Debtor's timely and full payment of any and all promissory notes executed by Debtor in favor of Secured Party, any existing obligation owned by Debtor to Secured Party, and any obligation or indebtedness arising subsequent to the date hereof, or acquired by Secured Party subsequent to the date hereof, including without limitation, any open account indebtedness between Debtor and Secured Party. Secured Party and Debtor expressly acknowledge and agree that they contemplate that Secured Party may extend credit and/or advance monies to the Debtor in the future, which may be in the form of direct loans to the Debtor or may be in the form of sales to the Debtor on credit, and any such future indebtedness created subsequent to the date of this Agreement shall be subject to the security interest created herein. The Collateral shall also secure the Debtor's prompt and faithful performance of all of the Debtor's obligations, covenants, representations and warranties contained in this Security Agreement or in any other agreement to which Debtor is a party (or by which Debtor is bound) and to which Secured Party is a party or of which Secured Party is a beneficiary. 3. INSURANCE. The Debtor shall insure the Collateral and keep the same insured against all loss, damage or destruction due to fire, theft and other casualty loss, in a sum and by policies adequate at all times to protect the interest of Secured Party hereunder and otherwise satisfactory to Secured Party. Debtor, upon request, shall furnish Secured Party evidence of such insurance. Upon Debtor's failure to provide such insurance, Secured Party may, but shall not be obligated, to procure such insurance, and in such event, the Debtor shall reimburse Secured Party for the premium therefore upon demand, and if Debtor fails to do so, Debtor shall be in default under this Security Agreement. 4. DEBTOR'S COVENANTS, REPRESENTATIONS AND WARRANTIES. To induce Secured Party to enter into this Security Agreement, Debtor covenants, represents and warrants as follows: a. Debtor is the lawful owner of all Collateral referred to in Paragraph 1 hereof, and Debtor has the right and power to grant a security interest in the Collateral to Secured Party. There are no other security interest liens, encumbrances, charges or claims against any of the Collateral, except as is specifically identified by Debtor in writing and attached to this Security Agreement. b. In the event that the Collateral referred to in Paragraph 1 hereof shall hereafter become subject to any lien, encumbrance, security interest or claim of any other person or entity (other than with the express written consent of Secured Party), 2 Debtor warrants that it will immediately undertake to secure the release of the Collateral from such lien, encumbrance, security interest or claim at Debtor's own cost and expense. Debtor will appear in and defend any action or proceeding which may affect the security interest of Secured Party. c. Debtor will maintain and repair Collateral; will use the collateral lawfully and only within insurance coverage; will not use the Collateral so as to cause or result in any waste, unreasonable deterioration or depreciation; will permit Secured Party to enter upon Debtor's property and to inspect the Collateral at any reasonable time. d. Debtor will not, without the written consent of Secured Party, sell, contract to sell, lease, encumber or dispose of the Collateral (with the exception of inventory sold in the ordinary course of business) until the indebtedness to Secured Party has been completely discharged, or written permission is obtained from Secured Party. e. Debtor will pay, when due, all taxes, assessments, charges, liens or encumbrances now or hereafter assessed against the Collateral by any governmental agency. f. Debtor shall execute and deliver to Secured Party concurrently with the execution of this Security Agreement, and at any time or times hereafter at the request of Secured Party, all financing statements, renewal financing statements, security agreements, assignments, statements, certificates of title, conveyances, affidavits, notices, and any other agreements, instruments and documents that Secured Party may request, in form satisfactory to Secured party to perfect and maintain the security interest granted herein by Debtor to Secured Party and in order to consummate fully all of the transactions contemplated herein. g. The making and performing of this Security Agreement is not in contravention of or prohibited by any indenture, agreement, or undertaking to which Debtor is a party or by which Debtor is bound or affected. h. All financial information (and all information relating to the collateral heretofore submitted to Secured Party by Debtor or at Debtor's request) is true and correct, and all financial information hereafter submitted to Secured Party by Debtor or at Debtor's request will be true and correct when given. 3 i. If Debtor is a corporation, Debtor is duly organized and valid existing in the state of its incorporation, and is authorized to do business in the place it is currently operating, and the execution, delivery and performance of this Security Agreement are within Debtor's corporate powers and have been duly authorized by the board of directors and shareholders, if necessary, and are not in conflict with any laws or terms of its Articles of Incorporation or its bylaws. k. Debtor shall furnish Secured Party annually, or at such more frequent intervals as Secured Party may request, a financial statement including a balance sheet and an income statement prepared in accordance with generally accepted accounting principles and such other financial information relating to Debtor's business affairs and Collateral which Secured Party may from time to time reasonably request. l. Debtor shall inform Secured Party immediately on the occurrence of any materially adverse change in Debtor's financial condition. m. Debtor shall not move the Collateral from the location shown on the signature page hereto without notifying Secured Party. n. Debtor shall not move its business operations without advance notice to Secured Party. o. Debtor shall not merge nor reorganize its business, nor change the form of its business (for example, from a sole proprietorship to a corporation) without advance notice to Secured Party. p. Debtor shall not change its name without advance notice to Secured Party. q. Debtor shall notify Secured Party promptly of: 4 i) any attachment or legal process levied against any of the Collateral or any other of Debtor's property; and ii) any information received by or known to Debtor which in any way may affect the value of the Collateral or the rights of Secured Party in the Collateral. r. Debtor shall promptly reimburse Secured Party for any and all legal and accounting expenses, including reasonable attorneys' and accountants' fees and court costs incurred in collecting any sums payable by Debtor in enforcing this Security Agreement or any obligations secured thereby or in verifying, handling, retrieving, repossessing, selling or otherwise disposing of the Collateral, all of which sums shall become part of the indebtedness secured hereby. s. Debtor shall not grant any security interest to anyone other than Secured Party in any of the Collateral without Secured Party's written consent. 5. DEFAULT. Any one of the following events shall constitute a default of Debtor's performance hereunder. a. Failure of Debtor to pay as and when due its obligations under the promissory note between Debtor and Secured Party dated February 15, 1996. b. Failure of Debtor to perform and observe any of the terms, conditions, covenants, representations or warranties contained in this Security Agreement. c. Failure of Debtor to pay when due any open account indebtedness, now existing or hereafter arising, owed to Secured Party; or any other obligation or indebtedness now existing or hereafter arising. d. The filing by or against Debtor of a petition under any section or chapter of Bankruptcy Code, 11 U.S.C. & 101 et seq.; the making by Debtor of an assignment for the benefit of creditors; the filing by or against Debtor or a proceeding for dissolution or liquidation; the appointment of or the application for the appointment of a receiver, trustee, controller or custodian for all or part of the assets of Debtor; the attempt of 5 Debtor to make an adjustment, settlement, or extension of its debts with its creditors generally. e. Debtor's becoming insolvent, becoming unable to meet its obligations as they come due, or the cessation of Debtor's business operations for a period of ten consecutive days. f. The issuance of a writ of attachment, garnishment, execution or similar legal process against Debtor or any of Debtor's property. g. The making of any assessment for taxes against the Debtor by the United States of America, any state or subdivision of either. h. Secured Party in its sole discretion determines that the market value of the Collateral is inadequate to protect its interests, is unsafe or in danger of misappropriation. 6. REMEDIES. In the event of a default, Secured Party shall have, in addition to any rights and remedies contained in this Security Agreement or in any other agreement, instrument or document now or hereafter executed by Debtor and delivered to Secured Party, all the rights and remedies of a Secured Party under the California Commercial Code, all of which shall be cumulative to the extent permitted by law. In addition to all such rights and remedies, the Secured Party shall have the right, upon Debtor's default, to demand possession of the Collateral, in which event, the Debtor shall immediately undertake to deliver the Collateral to Secured Party at Debtor's own cost and expense. If Debtor is unable or unwilling to so deliver the Collateral, Secured Party shall have the right to enter upon the Debtor's premises and obtain possession of the Collateral. Secured Party's rights hereunder shall include the right to remove the Collateral from any premises owned by persons other than Debtor in which the Collateral may be found. Debtor shall indemnify and hold Secured Party harmless for any costs, expenses or liabilities incurred by Secured Party in connection with the repossession of the Collateral, including the defense of Secured party in any action by any person relating to the removal of the Collateral from any building owned by persons other than Debtor in which it may be found. 6 Upon repossession of the Collateral, Secured Party shall have the right to sell, lease, or otherwise dispose of the Collateral in any commercially reasonable manner pursuant to the provisions of the California Commercial Code. In the event of a default, Secured Party shall have the right to enter and remain upon the various premises of Debtor without cost or charge to the Secured Party, and to use the same, together with materials, supplies, books and records of Debtor for the purpose of liquidating or collecting the Collateral, or for the conducting and preparing for the sale of the Collateral, whether by foreclosure, auction or otherwise. In addition, Secured Party may remove from such premises the Collateral to the premises of Secured Party or any agent of Secured Party for such time as Secured Party may desire, in order to collect effectively or liquidate the Collateral. It is further agreed that in the event of default, Secured Party shall have the right, in addition to any other and all other rights granted under this Security Agreement or under the applicable provisions of the Commercial Code, to seek and obtain the appointment of a Receiver, which Receiver shall be entitled to enter upon, take possession of and manage the Collateral. All net proceeds realized by the Receiver after paying all expenses incurred in connection with the operation of the Receivership Estate including the business conducted on Debtor's premises shall be applied to payment of the costs of management of the Collateral and collection thereof including but not limited to Receiver's fees, premiums on Receiver's bonds and reasonable attorney's fees, and then to the sums secured by this Security Agreement. Secured Party is granted the right to have a Receiver appointed in recognition of the fact that the value of a substantial portion of the Collateral, including but not limited to the prescription files, is based upon the maintenance of Debtor's business as a going concern, and that default in paying the obligations due Secured Party hereunder will create a danger that the Collateral will be materially injured in value. Notwithstanding any other provision of this Security Agreement, in the event Secured Party exercises any of its rights hereunder to obtain possession of any of the Collateral (including, without limitation, Debtor's contract rights under any real property or personal property leases), Debtor shall continue to be solely liable for any and all obligations and liabilities arising in connection with such Collateral. Debtor agrees that Secured Party shall not be liable for any acts, omissions, obligations or liabilities of Debtor under or in connection with any contracts relating to any of the Collateral and Debtor shall indemnify and hold Secured Party harmless for any costs, expenses or liabilities 7 incurred by Secured Party in connection with any such acts, omissions, obligations or liabilities. 7. ACCOUNTS RECEIVABLE. Debtor shall, at the written request of Secured Party, deliver to Secured Party schedules of accounts, contract rights, instruments, documents and chattel paper generated by Debtor in the course of its operations of its business and such other reports concerning the Collateral as Secured Party may from time to time hereafter request. Debtor shall, at the written request of Secured Party, deliver to Secured Party from time to time hereafter at such intervals as requested and determined by Secured Party copies of all invoices and other such documents relating to accounts, documents, chattel paper, contract rights and instruments. In the event of Debtor's default hereunder, Secured Party shall have the right at any time and from time to time thereafter, without notice to Debtor: To notify all account debtors and obligors of accounts, documents, chattel paper, contract rights, general intangibles, and instruments of Debtor that Secured Party has a security interest in such Collateral and to direct all such persons to make payment to Secured Party of all sums owned by them to Debtor; to settle, compromise, sell, assign, extend or renew any debt owing by any such account debtor or obligor; to sell or assign such Collateral upon such terms as Secured Party may deem advisable; and to discharge and release in the name of Debtor and Secured Party any such debt (all of which Secured Party may do in the exercise of sole and absolute discretion). Any and all disbursements for costs and expenses incurred or paid by Secured Party with respect to the enforcement, collection or protection of its interest in the Collateral, or against Debtor, whether by suit or otherwise, notification of account debtors and obligors, including reasonable attorneys' fees, court costs and similar expenses, if any, shall become part of the indebtedness secured by the Collateral, payable upon demand. 8. ATTORNEYS' FEES. If at any time hereafter Secured Party employs counsel for advice with respect to this Security Agreement or any other agreement, instrument or document now or hereinafter executed by Debtor and delivered to Secured Party; to intervene, file a petition, answer motion or otherwise plead in any suit or proceeding relating to this Security Agreement, or any other agreement, instrument or document now or hereafter executed by Debtor and delivered to Secured Party; to protect, take 8 possession of or to liquidate any of such Collateral; to attempt to enforce any security interest or lien in any Collateral; to represent Secured Party in any pending or threatened litigation with respect to the affairs of the Debtor in any way relating to the Collateral; or to enforce any rights of Secured Party of liabilities of Debtor hereunder. All reasonable attorneys' fees arising from such services, and any expenses, costs and charges relating thereto shall become part of the Debtor's obligation secured by the Collateral hereunder. 9. MISCELLANEOUS. a. Any notice required to be given by Secured Party to Debtor of a sale, lease or other disposition or intended action by Secured Party with respect to any of the Collateral shall be deposited in the United States Mails, postage prepaid and duly addressed to Debtor at 460 Stickhorse Lane, McKinney, Texas 75069 (or such other address as Debtor may from time to time designate in writing to Secured Party), at least five (5) calendar days prior to such proposed action. Such notification shall constitute fair and reasonable notice to Debtor of any such action. b. Secured Party's failure at any time or times hereunder to require strict performance by Debtor of any of the provisions, warranties, or terms and conditions contained in this Security Agreement shall not constitute a waiver of any other default, whether prior or subsequent thereto. c. Consent of Secured Party, as used in this Agreement, will be based upon that which, in the Secured Party's judgment, is consistent with sound business practice, and such consent will not be unreasonably withheld. d. This Agreement and all other agreements, instruments or documents executed and delivered pursuant hereto or in connection herewith, shall be binding upon and inure to the benefit of the successors and assignees of the parties hereto. e. The laws and judicial decisions of the State of California shall govern and control the construction, enforceability, validity and interpretation of this Security Agreement and all of the agreements, instruments, or documents now or at any time or times hereafter executed and delivered by Debtor to Secured Party. 9 f. If any action is brought in connection with the enforcement of this note, Debtor consents to jurisdiction of the Superior Court of the State of California, and waives any defense based upon lack of jurisdiction or venue to having the matter heard before the Superior Court of the State of California, in the County of Los Angeles. DEBTOR: SECURED PARTY: HORIZON PHARMACIES, INC. BERGEN BRUNSWIG DRUG COMPANY dba HORIZON PHARMACY BY: /s/ RICK McCORD, President BY: /s/ JOHN T. RASOR ------------------------------ ----------------------------------- Rick McCord, President John T. Rasor, General Finance Mgr. BY: /s/ SY SHAHID, Vice President ------------------------------- Sy Shahid, Vice President BILLING/CORRESPONDENCE ADDRESS - ------------------------------ P.O. Box 1869 McKinney, Texas 75070 10 EXHIBIT B-1 SECURITY AGREEMENT This SECURITY AGREEMENT made as of this 17th day of May 1996 by and between BERGEN BRUNSWIG DRUG COMPANY, a California corporation (hereinafter referred to as "Secured Party") and HORIZON PHARMACIES, INC., dba HORIZON PHARMACY (hereinafter referred to as "Debtor"). For value received, the receipt of which is hereby acknowledged, Debtor and Secured Party hereby agree as follows: 1. DEBT AND COLLATERAL. Debtor hereby grants Secured Party a continuing security interest in and to all of Debtor's presently owned and after acquired accounts receivable, accounts, chattel paper, documents, instruments, promissory notes, general intangibles and returned goods; all present and hereafter acquired inventory wherever located, including without limitation, work in process and finished goods; all present and hereafter acquired equipment wherever located; all present and future furniture, furnishings and fixtures not permanently affixed to or constituting a part of the realty and not paid for by Sublandlord or Prime Landlord pursuant to their advances, excepting those leased by Borrower; all of Debtor's contract rights as lessee under any and all real property leases pursuant to which Debtor occupies any of the premises from which debtor does business and any and all of Debtor's contract rights in any and all personal property leases pursuant to which Debtor is in possession of any personal property used in the conduct of Debtor's business; all proceeds and products of the foregoing, including but not limited to, money, deposit accounts, goods, insurance proceeds, and other tangible or intangible property received upon the sale or other disposition of the foregoing; all presently owned or hereafter acquired prescription files and records relating thereto (all of the foregoing being collectively referred to as the "Collateral") and all books and records of account identifying or relating to any of the Collateral. 2. OBLIGATIONS SECURED. The Collateral is and shall be security for Debtor's timely and full payment of any and all promissory notes executed by Debtor in favor of Secured Party, any existing obligation owed by Debtor to Secured Party, and any obligation or indebtedness arising subsequent to the date hereof, or acquired by Secured Party subsequent to the date hereof, including without limitation, any open account indebtedness between Debtor and Secured Party. Secured Party and Debtor expressly acknowledge and agree that they contemplate that Secured Party may extend credit and/or advance monies to the Debtor in the future, which may be in the form of direct loans to the Debtor or may be in the form of sales to the Debtor on credit, and any such future indebtedness created subsequent to the date of this Agreement shall be subject to the security interest created herein. The Collateral shall also secure the Debtor's prompt and faithful performance of all of the Debtor's obligations, covenants, representations and warranties contained in this Security Agreement or in any other agreement to which Debtor is a party (or by which Debtor is bound) and to which Secured Party is a party or of which Secured Party is a beneficiary. 3. INSURANCE. The Debtor shall insure the Collateral and keep the same insured against all loss, damage or destruction due to fire, theft and other casualty loss, in a sum and by policies adequate at all times to protect the interest of Secured Party hereunder and otherwise satisfactory to Secured Party. Debtor, upon request, shall furnish Secured Party evidence of such insurance. Upon Debtor's failure to provide such insurance, Secured Party may, but shall not be obligated, to procure such insurance, and in such event, the Debtor shall reimburse Secured Party for the premium therefore upon demand, and if Debtor fails to do so, Debtor shall be in default under this Security Agreement. 4. DEBTOR'S COVENANTS, REPRESENTATIONS AND WARRANTIES. To induce Secured Party to enter into this Security Agreement, Debtor covenants, represents and warrants as follows: a. Debtor is the lawful owner of all Collateral referred to in Paragraph 1 hereof, and Debtor has the right and power to grant a security interest in the Collateral to Secured Party. There are no other security interest liens, encumbrances, charges or claims against any of the Collateral, except as is specifically identified by Debtor in writing and attached to this Security Agreement. b. In the event that the Collateral referred to in Paragraph 1 hereof shall hereafter become subject to any lien, encumbrance, security interest or claim of any other person or entity (other than with the express written consent of Secured Party), 2 Debtor warrants that it will immediately undertake to secure the release of the Collateral from such lien, encumbrance, security interest or claim at Debtor's own cost and expense. Debtor will appear in and defend any action or proceeding which may affect the security interest of Secured Party. c. Debtor will maintain and repair the Collateral; will use the collateral lawfully and only within insurance coverage; will not use the Collateral so as to cause or result in any waste, unreasonable deterioration or depreciation; will permit Secured Party to enter upon Debtor's property and to inspect the Collateral at any reasonable time. d. Debtor will not, without the written consent of Secured Party, sell, contract to sell, lease, encumber or dispose of the Collateral (with the exception of inventory sold in the ordinary course of business) until the indebtedness to Secured Party has been completely discharged, or written permission is obtained from Secured Party. e. Debtor will pay, when due, all taxes, assessments, charges, liens or encumbrances now or hereafter assessed against the Collateral by any governmental agency. f. Debtor shall execute and deliver to Secured Party concurrently with the execution of this Security Agreement, and at any time or times hereafter at the request of Secured Party, all financing statements, renewal financing statements, security agreements, assignments, statements, certificates of title, conveyances, affidavits, notices, and any other agreements, instruments and documents that Secured Party may request, in form satisfactory to Secured Party to perfect and maintain the security interest granted herein by Debtor to Secured Party and in order to consummate fully all of the transactions contemplated herein. g. The making and performing of this Security Agreement is not in contravention of or prohibited by any indenture, agreement, or undertaking to which Debtor is a party or by which Debtor is bound or affected. h. All financial information (and all information relating to the collateral heretofore submitted to Secured Party by Debtor or at Debtor's request) is true and correct, and all financial information hereafter submitted to Secured Party by Debtor or at Debtor's request will be true and correct when given. 3 i. If Debtor is a corporation, Debtor is duly organized and valid existing in the state of its incorporation, and is authorized to do business in the place it is currently operating, and the execution, delivery and performance of this Security Agreement are within Debtor's corporate powers and have been duly authorized by the board of directors and shareholders, if necessary, and are not in conflict with any laws or terms of its Articles or Certificates of Incorporation or its bylaws. j. All insurance policies with respect to the Collateral shall contain a provision making the loss payable to Debtor and Secured Party jointly. k. Debtor shall furnish Secured Party quarterly, or at such more frequent intervals as Secured Party may request, a financial statement including a balance sheet and an income statement prepared in accordance with generally accepted accounting principles and such other financial information relating to Debtor's business affairs and Collateral which Secured Party may from time to time reasonably request. l. Debtor shall inform Secured Party immediately on the occurrence of any materially adverse change in Debtor's financial condition. m. Debtor shall not move the Collateral from the location shown on the signature page hereto without notifying Secured Party. n. Debtor shall not move its business operations without advance notice to Secured Party. o. Debtor shall not merge nor reorganize its business, nor change the form of its business (for example, from a sole proprietorship to a corporation) without advance notice to Secured Party. p. Debtor shall not change its name without advance notice to Secured Party. q. Debtor shall notify Secured Party promptly of: 4 i) any attachment or legal process levied against any of the Collateral or any other of Debtor's property; and ii) any information received by or known to Debtor which in any way may affect the value of the Collateral or the rights of Secured Party in the Collateral. r. Debtor shall promptly reimburse Secured Party for any and all legal and accounting expenses, including reasonable attorneys' and accountants' fees and court costs incurred in collecting any sums payable by Debtor in enforcing this Security Agreement or any obligations secured thereby or in verifying, handling, retrieving, repossessing, selling or otherwise disposing of the Collateral, all of which sums shall become part of the indebtedness secured hereby. s. Debtor shall not grant any security interest to anyone other than Secured Party in any of the Collateral without Secured Party's written consent. 5. DEFAULT. Any one of the following events shall constitute a default of Debtor's performance hereunder. a. Failure of Debtor to pay as and when due its obligations under the promissory note between Debtor and Secured Party dated May 17, 1996. b. Failure of Debtor to perform and observe any of the terms, conditions, covenants, representations or warranties contained in this Security Agreement. c. Failure of Debtor to pay when due any open account indebtedness, now existing or hereafter arising, owed to Secured Party; or any other obligation or indebtedness now existing or hereafter arising. d. The filing by or against Debtor of a petition under any section or chapter of Bankruptcy Code, 11 U.S.C. & 101 et seq.; the making by Debtor of an assignment for the benefit of creditors; the filing by or against Debtor or a proceeding for dissolution or liquidation; the appointment of or the application for the appointment of a receiver, trustee, controller or custodian for all or part of the assets of Debtor; the attempt of 5 Debtor to make an adjustment, settlement, or extension of its debts with its creditors generally. e. Debtor's becoming insolvent, becoming unable to meet its obligations as they come due, or the cessation of Debtor's business operations for a period of ten consecutive days. f. The issuance of a writ of attachment, garnishment, execution or similar legal process against Debtor or any of Debtor's property. g. The making of any assessment for taxes against the Debtor by the United States of America, any state or subdivision of either. h. Secured Party in its sole discretion determines that the market value of the Collateral is inadequate to protect its interests, is unsafe or in danger of misappropriation. 6. REMEDIES. In the event of a default, Secured Party shall have, in addition to any rights and remedies contained in this Security Agreement or in any other agreement, instrument or document now or hereafter executed by Debtor and delivered to Secured Party, all the rights and remedies of a Secured Party under the California Commercial Code, all of which shall be cumulative to the extent permitted by law. In addition to all such rights and remedies, the Secured Party shall have the right, upon Debtor's default, to demand possession of the Collateral, in which event, the Debtor shall immediately undertake to deliver the Collateral to Secured Party at Debtor's own cost and expense. If Debtor is unable or unwilling to so deliver the Collateral, Secured Party shall have the right to enter upon the Debtor's premises and obtain possession of the Collateral. Secured Party's rights hereunder shall include the right to remove the Collateral from any premises owned by persons other than Debtor in which the Collateral may be found. Debtor shall indemnify and hold Secured Party harmless for any costs, expenses or liabilities incurred by Secured Party in connection with the repossession of the Collateral, including the defense of Secured Party in any action by any person relating to the removal of the Collateral from any building owned by persons other than Debtor in which it may be found. 6 Upon repossession of the Collateral, Secured Party shall have the right to sell, lease, or otherwise dispose of the Collateral in any commercially reasonable manner pursuant to the provisions of the California Commercial Code. In the event of a default, Secured Party shall have the right to enter and remain upon the various premises of Debtor without cost or charge to the Secured Party, and to use the same, together with materials, supplies, books and records of Debtor for the purpose of liquidating or collecting the Collateral, or for the conducting and preparing for the sale of the Collateral, whether by foreclosure, auction or otherwise. In addition, Secured Party may remove from such premises the Collateral to the premises of Secured Party or any agent of Secured Party for such time as Secured Party may desire, in order to collect effectively or liquidate the Collateral. It is further agreed that in the event of default, Secured Party shall have the right, in addition to any other and all other rights granted under this Security Agreement or under the applicable provisions of the Commercial Code, to seek and obtain the appointment of a Receiver, which Receiver shall be entitled to enter upon, take possession of and manage the Collateral. All net proceeds realized by the Receiver after paying all expenses incurred in connection with the operation of the Receivership Estate including the business conducted on Debtor's premises shall be applied to payment of the costs of management of the Collateral and collection thereof including but not limited to Receiver's fees, premiums on Receiver's bonds and reasonable attorney's fees, and then to the sums secured by this Security Agreement. Secured Party is granted the right to have a Receiver appointed in recognition of the fact that the value of a substantial portion of the Collateral, including but not limited to the prescription files, is based upon the maintenance of Debtor's business as a going concern, and that default in paying the obligations due Secured Party hereunder will create a danger that the Collateral will be materially injured in value. Notwithstanding any other provision of this Security Agreement, in the event Secured Party exercises any of its rights hereunder to obtain possession of any of the Collateral (including, without limitation, Debtor's contract rights under any real property or personal property leases), Debtor shall continue to be solely liable for any and all obligations and liabilities arising in connection with such Collateral. Debtor agrees that Secured Party shall not be liable for any acts, omissions, obligations or liabilities of Debtor under or in connection with any contracts relating to any of the Collateral and Debtor shall indemnify and hold Secured Party harmless for any costs, expenses or liabilities 7 incurred by Secured Party in connection with any such acts, omissions, obligations or liabilities. 7. ACCOUNTS RECEIVABLE. Debtor shall, at the written request of Secured Party, deliver to Secured Party schedules of accounts, contract rights, instruments, documents and chattel paper generated by Debtor in the course of its operations of its business and such other reports concerning the Collateral as Secured Party may from time to time hereafter request. Debtor shall, at the written request of Secured Party, deliver to Secured Party from time to time hereafter at such intervals as requested and determined by Secured Party copies of all invoices and other such documents relating to accounts, documents, chattel paper, contract rights and instruments. In the event of Debtor's default hereunder, Secured Party shall have the right at any time and from time to time thereafter, without notice to Debtor: To notify all account debtors and obligors of accounts, documents, chattel paper, contract rights, general intangibles, and instruments of Debtor that Secured Party has a security interest in such Collateral and to direct all such persons to make payment to Secured Party of all sums owed by them to Debtor; to settle, compromise, sell, assign, extend or renew any debt owing by any such account debtor or obligor; to sell or assign such Collateral upon such terms as Secured Party may deem advisable; and to discharge and release in the name of Debtor and Secured Party any such debt (all of which Secured Party may do in the exercise of sole and absolute discretion). Any and all disbursements for costs and expenses incurred or paid by Secured Party with respect to the enforcement, collection or protection of its interest in the Collateral, or against Debtor, whether by suit or otherwise, notification of account debtors and obligors, including reasonable attorneys' fees, court costs and similar expenses, if any, shall become part of the indebtedness secured by the Collateral, payable upon demand. 8. ATTORNEYS' FEES. If at any time hereafter Secured Party employs counsel for advice with respect to this Security Agreement or any other agreement, instrument or document now or hereinafter executed by Debtor and delivered to Secured Party; to intervene, file a petition, answer motion or otherwise plead in any suit or proceeding relating to this Security Agreement, or any other agreement, instrument or document now or hereafter executed by Debtor and delivered to Secured Party; to protect, take 8 possession of or to liquidate any of such Collateral; to attempt to enforce any security interest or lien in any Collateral; to represent Secured Party in any pending or threatened litigation with respect to the affairs of the Debtor in any way relating to the Collateral; or to enforce any rights of Secured Party of liabilities of Debtor hereunder. All reasonable attorneys' fees arising from such services, and any expenses, costs and charges relating thereto shall become a part of the Debtor's obligation secured by the Collateral hereunder. 9. MISCELLANEOUS. a. Any notice required to be given by Secured Party to Debtor of a sale, lease or other disposition or intended action by Secured Party with respect to any of the Collateral shall be deposited in the United States Mails, postage prepaid and duly addressed to Debtor at 460 Stickhorse Lane, McKinney, Texas 75069 (or such other address as Debtor may from time to time designate in writing to Secured Party), at least five (5) calendar days prior to such proposed action. Such notification shall constitute fair and reasonable notice to Debtor of any such action. b. Secured Party's failure at any time or times hereunder to require strict performance by Debtor of any of the provisions, warranties, or terms and conditions contained in this Security Agreement shall not constitute a waiver of any other default, whether prior or subsequent thereto. c. Consent of Secured Party, as used in this Agreement, will be based upon that which, in the Secured Party's judgment, is consistent with sound business practice, and such consent will not be unreasonably withheld. d. This Agreement and all other agreements, instruments or documents executed and delivered pursuant hereto or in connection herewith, shall be binding upon and inure to the benefit of the successors and assignees of the parties hereto. e. The laws and judicial decisions of the State of California shall govern and control the construction, enforceability, validity and interpretation of this Security Agreement and all of the agreements, instruments, or documents now or at any time or times hereafter executed and delivered by Debtor to Secured Party. 9 f. If any action is brought in connection with the enforcement of this note, Debtor consents to jurisdiction of the Superior Court of the State of California, and waives any defense based upon lack of jurisdiction or venue to having the matter heard before the Superior Court of the State of California, in the County of Los Angeles. DEBTOR: SECURED PARTY: HORIZON PHARMACIES, INC. BERGEN BRUNSWIG DRUG COMPANY DBA HORIZON PHARMACY BY: /s/ Rick McCord, President BY: /s/ John T. Raser --------------------------------- ------------------------------------ Rick McCord, President Title: General Finance Mgr. BY: /s/ Sy Shahid, Vice President --------------------------------- Sy Shahid, Vice President Billing/Correspondence Address - ------------------------------ P.O. Box 1869 McKinney, Texas 75070 10 EXHIBIT B-2 SECURITY AGREEMENT This SECURITY AGREEMENT ("Agreement") is made and entered into as of August 26, 1996, between BERGEN BRUNSWIG DRUG COMPANY, a California corporation ("Secured Party"), with its headquarters located at 4000 Metropolitan Drive, Orange, California 92868 and HORIZON PHARMACIES, INC., having a chief executive office at and mailing address of 275 W. Princeton Drive, Princeton, Texas, ("Debtor"). For value received, the receipt of which is hereby acknowledged, Debtor and Secured Party hereby agree as follows: 1. CREATION OF SECURITY INTEREST. (a) DEBT AND COLLATERAL. Debtor hereby grants Secured Party a continuing security interest in and to all of Debtor's account receivables, accounts, chattel paper, documents, choses in action, instruments, promissory notes, general intangibles and returned goods, inventory ("Inventory"), wherever located, equipment ("Equipment"), wherever located; furniture, furnishings and fixtures not permanently affixed to or constituting a part of the realty, contract rights as lessee under any and all real property leases pursuant to which Debtor occupies any of the premises from which Debtor does business; and contract rights in any and all personal property leases pursuant to which Debtor is in possession of any personal property used in the conduct of Debtor's business all whether presently owned or hereafter acquired; and all proceeds of the foregoing, including but not limited to, money, deposit accounts, goods, insurance proceeds, and other tangible or intangible property received upon the sale or other disposition of any of the foregoing; and all presently owned or hereafter acquired prescription files and records relating to or used in the conduct of Debtor's business (all of the foregoing being collectively referred to as the "Collateral") and all books and records of account identifying or relating to any of the Collateral. (b) OBLIGATIONS SECURED. Secured Party and Debtor acknowledge and agree that: (i) The Collateral is and shall be security for Debtor's timely and full payment of any and all existing obligations owed by Debtor to Secured Party; and any obligation or indebtedness arising subsequent to the date hereof, or acquired by Secured Party subsequent to the date hereof, including without limitation any open account indebtedness between Debtor and Secured Party. Secured Party and Debtor expressly acknowledge and agree that they contemplate that Secured Party may extend credit to Debtor in the future, which may be in the form of sales to Debtor on credit, changes in credit terms or similar financial obligations, and any such future indebtedness created subsequent to the date of this Agreement shall be secured by the security interest granted and created under this Agreement. (ii) The Collateral shall also secure the Debtor's prompt and faithful performance of all of the Debtor's obligations, covenants, representations and warranties contained in this Agreement or in any other agreement to which Debtor is a party (or by which Debtor is bound) and to which Secured Party is a party or of which Secured Party is a beneficiary. CON\MVW\SECURITY.AGR Rev. 7/96 1 (c) PURCHASE MONEY SECURITY INTEREST. Debtor hereby grants to Secured Party and its assigns, and Secured Party retains, a purchase money security interest in and to the Collateral (as defined below), which security interest shall be superior to any other security interest granted or created by Debtor prior to the date Secured Party receives full payment of the purchase price of the Collateral and shall be a first lien on the Collateral. Debtor hereby agrees to execute and Secured Party may file in any appropriate public office such documents as may be necessary to perfect Secured Party's security interest, including, without limitation, any Uniform Commercial Code financing statements as may be required by Secured Party. For purposes of this Agreement, the term "Collateral" shall mean and include the following: (a) All pharmaceutical products, health and beauty aids and other similar goods sold by Secured Party or any affiliate or subsidiary of Secured Party to Debtor, whether delivered to Debtor or any affiliate or subsidiary of Debtor, wherever the same may be located (including, without limitation, the locations detailed in SCHEDULE A-1 attached hereto, as amended from time to time), and whether any of the foregoing has been sold prior to the date of this Agreement or is sold to Debtor hereafter; and (b) Any and all proceeds and products of any of the foregoing, including, without limitation, all money, accounts, general intangibles, documents, instruments, chattel paper, goods, insurance proceeds and any other tangible or intangible property received upon the sale or disposition of any of the foregoing. 2. INSURANCE. Debtor shall insure the Collateral and keep the same insured against all loss, damage or destruction due to fire, theft, and such other perils as are covered under the broadest form of "all risk" average available in those States where the Collateral is located, in a sum and by such policies adequate at all times to protect the interest of Secured Party hereunder and otherwise satisfactory to Secured Party. Secured Party shall be named as an additional insured under any such policy(ies). Debtor, upon request, shall furnish Secured Party evidence of such insurance. Any renewal certificate and proof of payment of premium for such insurance shall be delivered to Secured Party not less than fifteen (15) days prior to the renewal date of any such insurance policy. Any such insurance shall be cancelable only after thirty (30) days' prior written notice to Debtor and Secured Party. Upon Debtor's failure to provide such insurance, Secured Party may, but shall not be obligated, to procure such insurance, and in such event, the Debtor shall promptly reimburse Secured Party for the premium therefore upon demand, and if Debtor fails to do so, Debtor shall be in default under this Agreement. 3. DEBTOR'S COVENANTS, REPRESENTATIONS AND WARRANTIES. To induce Secured Party to enter into this Agreement, Debtor covenants, represents and warrants to Secured Party as follows: a. Debtor has the right and power to grant a security interest in the Collateral to Secured Party. There are no other security interest liens, encumbrances, charges or claims against any of the Collateral. CON\MVW\SECURITY.AGR Rev. 7/96 2 b. In the event that the Collateral shall hereafter become subject to any lien, encumbrance, security interest or claim of any other person or entity (other than with the express written consent of Secured Party or otherwise discussed in subsection 3(a) above), Debtor warrants that it will immediately undertake to secure the release of the Collateral from such lien, encumbrance, security interest or claim at Debtor's own cost and expense. Debtor will appear in and defend any action or proceeding which may adversely affect the security interest of Secured Party in the Collateral. c. Debtor shall: (i) properly maintain and repair the Collateral; (ii) use the Collateral lawfully and not in any manner that may cause a reduction or cancellation of the insurance required to be maintained under Section 2 above; (iii) not use the Collateral so as to cause or result in any waste, unreasonable deterioration or depreciation; and (iv) permit Secured Party to enter upon any of such Debtor's property and to inspect the Collateral at any reasonable time. d. Debtor shall not, sell, contract to sell, lease, encumber or dispose of the Collateral (with the exception of inventory sold in the ordinary course of business) until the indebtedness to Secured Party has been completely discharged, or the prior written consent of an officer of Secured Party is obtained. e. Debtor shall pay, prior to delinquency, all taxes, assessments, charges, liens or encumbrances now or hereafter assessed against the Collateral by any governmental agency. f. Debtor shall execute and deliver to Secured Party concurrently with the execution of this Agreement all financing statements, renewal financing statements, security agreements, assignments, statements, certificates of title, conveyances, affidavits, notices, and any other agreements, instruments and documents that Secured Party may request, in form satisfactory to Secured Party, to perfect and maintain the security interest and purchase money security interest of Debtor granted or created, whether now or in the future, under this Agreement. At any time upon the request of Secured Party, Debtor shall execute and deliver to Secured Party all financing statements, continuation financing statements, fixture filings, security agreements, chattel mortgages, pledges, assignments, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Secured Party may reasonably request, in form satisfactory to Secured Party, to perfect and continue perfected Secured Party's security interests in the Collateral and in order to fully consummate all of the transactions contemplated hereby, including perfecting and protecting the purchase money security interest in the Inventory (and proceeds and receivables of the Inventory) granted by Debtor hereunder to Secured Party. g. The making and performing of this Agreement is not in contravention of or prohibited by any indenture, agreement or undertaking to which Debtor is a party or by which Debtor is bound or affected. CON\MVW\SECURITY.AGR Rev. 7/96 3 h. All financial information (and all information relating to the Collateral heretofore submitted to Secured Party by Debtor) is true and correct, and all financial information hereafter submitted to Secured Party by Debtor or at Debtor's request will be true and correct when given. i. Debtor is duly organized and validly existing in the state of its incorporation, and is authorized to do business in the states it is currently operating, and the execution, delivery and performance of this Agreement are within Debtor's corporate powers and have been duly authorized by the board of directors, if necessary, and are not in conflict with any laws or terms of its Articles or Certificates of Incorporation or its bylaws. j. All insurance policies with respect to the Collateral shall contain a provision making the loss payable to Debtor and Secured Party jointly. k. Debtor shall furnish Secured Party quarterly, or at such more frequent intervals as Secured Party may request, financial statements, including balance sheets and income statements prepared in accordance with generally accepted accounting principles, and such other financial information relating to Debtor's business affairs and Collateral that Secured Party may from time to time reasonably request. l. Debtor shall inform Secured Party immediately in writing on the occurrence of any adverse change in Debtor's financial condition. m. Debtor shall keep the Inventory and Equipment only at the locations identified on SCHEDULE A-1; PROVIDED, HOWEVER, that Debtor may amend SCHEDULE A-1 so long as such amendment occurs by written notice to Secured Party not less than thirty (30) days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, Debtor provides any financing statements or fixture filings necessary to perfect and continue perfected Secured Party's security interests and purchase money security interests in such assets and Inventory, respectively, and also provides to Secured Party a landlord's waiver in form and substance satisfactory to Secured Party. n. Debtor shall not move its business operations without advance notice to Secured Party. o. Debtor shall not merge nor reorganize its business, nor change the form of its business without advance notice to Secured Party. p. Debtor shall not change its name without advance notice to Secured Party. q. Debtor shall notify Secured Party promptly of: (i) any attachment or legal process levied against any of the Collateral or any other of Debtor's property; and CON\MVW\SECURITY.AGR Rev. 7/96 4 (ii) any information received by or known to Debtor which in any way may affect the value of the Collateral or the rights of Secured Party in the Collateral. r. Debtor shall promptly reimburse Secured Party for any and all legal and accounting expenses, including reasonable attorneys' and accountants' fees, disbursements and court costs, incurred in collecting any sums payable by Debtor and/or in enforcing this Agreement or any obligations secured hereby, or in verifying, handling, retrieving, repossessing, selling or otherwise disposing of the Collateral, all of which sums shall become part of the indebtedness secured by this Agreement. s. Debtor shall not grant any further security interest to anyone other than Secured Party in any of the Collateral without Secured Party's prior written consent. t. Secured Party (through any of its officers, employees, or agents) shall have the right, from time to time hereafter to inspect Debtor's books and to check, test, and appraise the Collateral in order to verify Debtor's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. 4. DEFAULT. Any one of the following events shall constitute a default ("Default") of Debtor's performance hereunder. a. Failure by Debtor to perform and observe any of the terms, conditions, covenants, representations or warranties contained in this Agreement. b. Failure by Debtor to pay when due any open account indebtedness, now existing or hereafter arising, owed to Secured Party, or any other obligation or indebtedness now existing or hereafter arising, or failure by Debtor to promptly and properly assist Secured Party in perfecting Securing Party's purchase money security interest in the inventory (and proceeds and receivable thereof). c. The filing by or against Debtor of a petition under any section or chapter of Title 11 of the United States Code, as amended; the making by Debtor of an assignment for the benefit of creditors (other than in favor of Secured Party under this Agreement); the filing by or against Debtor or a proceeding for dissolution or liquidation; the appointment of or the application for the appointment of a receiver, a trustee, controller or custodian for all or part of the assets of Debtor, and/or the attempt by Debtor to make an adjustment, settlement, or extension of its debts with its creditors generally. d. Debtor's becoming insolvent, becoming unable to meet its obligations as they come due, or the cessation of Debtor's business operations for a period of five (5) consecutive days. e. The issuance of a writ of attachment, writ of possession or similar legal process against Debtor or any of Debtor's property. f. The making of any assessment for taxes against the Debtor by the United States of America, any state or any subdivision of either. CON\MVW\SECURITY.AGR Rev. 7/96 5 g. Secured Party in its sole discretion determines that the value of the Collateral is inadequate to protect its interests, is unsafe or in danger of misappropriation. 5. REMEDIES. In the event of a Default, Secured Party, in addition to any rights and remedies contained in this Agreement or in any other agreement, instrument or document now or hereafter executed by Debtor and delivered to Secured Party, shall have all the rights and remedies of a Secured Party under the California Uniform Commercial Code, all of which shall be cumulative to the extent permitted by law. In addition to all the rights and remedies, Secured Party shall have the right, upon Debtor's default, to demand possession of the Collateral, in which event, the Debtor shall immediately undertake to deliver the Collateral to Secured Party at Debtor's own cost and expense. If Debtor is unable or unwilling to so deliver the Collateral, Secured Party shall have the right to enter upon the Debtor's various premises, wherever situate, and obtain possession of the Collateral. In the event of a Default by Debtor, Secured Party shall have the right to enter and remain upon the various premises of Debtor without cost or charge to Secured Party, and to use the same, together with materials, supplies, books and records of Debtor for the purpose of liquidating or collecting the Collateral or its proceeds, or for the conducting and preparing for sale of the Collateral, whether by foreclosure, auction or otherwise. In addition, Secured Party may remove from such premises the Collateral to the premises of Secured Party or any agent of Secured Party for such time as Secured Party may desire, in order to liquidate the Collateral. Debtor shall indemnify and hold Secured Party harmless for any costs, expenses or liabilities incurred by Secured Party in connection with the repossession and/or liquidation of the Collateral. Upon repossession of the Collateral, Secured Party shall have the right to sell, lease, or otherwise dispose of the Collateral in any commercially reasonable manner pursuant to the provisions of the California Uniform Commercial Code. It is further agreed that in the event of a Default by Debtor, Secured Party shall have the right, in addition to any other and all other rights granted under this Agreement or under the applicable provisions of the California Uniform Commercial Code, to seek and obtain the appointment of a receiver under Chapter 5, Title 7, Part II of the California Code of Civil Procedure, as amended or redesignated, which receiver shall be entitled to enter upon, take possession of and manage the Collateral. All net proceeds realized by the receiver after paying all expenses incurred in connection with the operation of the receivership estate including the business conducted on Debtor's premises shall be applied to payment of the costs of management of the Collateral and collection thereof, including but not limited to the receiver's fees, premiums on the receiver's bonds and reasonable attorney's fees, and then to the sums secured by this Agreement. Secured Party is granted the right to have a receiver appointed in recognition of the fact that the value of a substantial portion of the Collateral is based upon the maintenance of Debtor's business as a going concern, and that default in paying the obligations due Secured Party hereunder will create a danger that the value of the Collateral will be materially and adversely affected. Notwithstanding any other provision of this Agreement, in the event Secured Party exercises any of its rights hereunder to obtain possession of any of the Collateral (including, without limitation, Debtor's contract rights under any real property or personal property leases), Debtor shall continue to be solely liable for any and all obligations and liabilities arising in connection with such Collateral. Debtor agrees that Secured Party shall not be liable for any acts, omissions, obligations or liabilities of Debtor under or in connection with any contracts relating to any of the Collateral and Debtor shall CON\MVW\SECURITY.AGR Rev. 7/96 6 indemnify and hold Secured Party harmless for any costs, expenses or liabilities incurred by Secured Party in connection with any such acts, omissions, obligations or liabilities. Debtor hereby irrevocably makes, constitutes, and appoints Secured Party (and any of Secured Party's officers, employees, or agents designated by Secured Party) as Debtor's true and lawful attorney, with power to: (a) if Debtor refuses to, or fails timely to execute and deliver any of the documents described in SECTION 3(f) above, sign the name of Debtor on any of the documents described in SUBSECTION 3(f); (b) send requests for verification from other known creditors of Debtor; (c) endorse Debtor's name on any checks, notices, acceptances, money orders, drafts, or other item of payment or security that may come into Debtor's possession; (e) at any time that an event of a Default has occurred under this Agreement and is continuing or Secured Party deems itself insecure (in accordance with Section 1208 of the California Uniform Commercial Code), notify the post office authorities to change the address for delivery of Debtor's mail to an address designated by Secured Party, to receive and open mail addressed to Debtor, and to retain all mail relating to the Collateral and forward all other mail to Debtor; (f) at any time that an event of a Default has occurred and is continuing or Secured Party deems itself insecure (in accordance with Section 1208 of the California Uniform Commercial Code), make, settle, and adjust all claims under Debtor's policies of insurance and make all determinations and decisions with respect to such policies of insurance; and (g) at any time that an Event of Default has occurred and is continuing or Secured Party deems itself insecure (in accordance with Section 1208 of the California Uniform Commercial Code), settle and adjust disputes and claims of debtors of the Debtor, for amounts and upon terms which Secured Party determines to be reasonable, and Secured Party may cause to be executed and delivered any documents and releases which Secured Party determines to be necessary. The appointment of Secured Party as Debtor's attorney, and each and every one of Secured Party's rights and powers, being coupled with an interest, is irrevocable until all of the repayment obligations owing to Secured Party have been fully and finally repaid and performed. 6. ACCOUNTS RECEIVABLE. Debtor shall, at the written request of Secured Party, deliver to Secured Party schedules of accounts, contract rights, instruments, documents and chattel paper generated by Debtor in the course of the operation of its business and such other reports concerning the Collateral as Secured Party may from time to time hereafter request. At the written request of Secured Party or from time to time hereafter at such intervals as requested and determined by Secured Party, Debtor shall deliver to Secured Party copies of all invoices and other such documents relating to accounts, documents, chattel paper, contract rights and instruments. In the event of Debtor's default under the provisions of this Section 6, Secured Party shall have the right at any time and from time to time thereafter, without notice to Debtor: (i) to notify all accounts debtors and obligors of accounts, documents, chattel paper, contract rights, general intangibles, and instruments of Debtor that Secured Party has a security interest in such Collateral and to direct all such persons to make payments to Secured Party of all sums owed by them to Debtor; (ii) settle, compromise, sell, assign, extend or renew any debt owing by any such account debtor or obligor; (iii) sell or assign such Collateral upon such terms as Secured Party may deem advisable; and (iv) discharge and release in the name of Debtor and Secured Party any such debt (all of which Secured Party may do its sole and CON\MVW\SECURITY.AGR Rev. 7/96 7 absolute discretion). Any and all disbursements for costs and expenses incurred or paid by Secured Party with respect to the enforcement, collection or protection of its interest in the Collateral, or against Debtor, whether by suit or otherwise, notification of account debtors and obligors, including reasonable attorneys' fees, court costs and similar expenses, if any, shall become part of the indebtedness secured by the Collateral, payable upon demand. 7. ATTORNEYS' FEES. If at any time hereafter Secured Party employs counsel for advice (i) with respect to this Agreement or any other agreement, instrument or document now or hereafter executed by Debtor and delivered to Secured Party, (ii) to intervene, file a petition, answer motion or otherwise plead in any suit or proceeding relating to this Agreement or to the Collateral, or any other agreement, instrument or document now or hereafter executed by Debtor and delivered to Secured Party; (iii) to protect, take possession of or liquidate any of the Collateral; (iv) to attempt to enforce any security interest or lien in any Collateral; (v) to represent Secured Party in any pending or threatened litigation with respect to the affairs of the Debtor in any way relating to the Collateral; or (vi) to enforce any rights of Secured Party of liabilities of Debtor hereunder, then all reasonable attorneys' fees arising from such services, and any expenses, costs and charges relating thereto shall become part of the Debtor's obligation secured by the Collateral hereunder. 8. MISCELLANEOUS. a. Any notice required to be given by Secured Party to Debtor of a sale, lease or other disposition or intended action by Secured Party with respect to any of the Collateral shall be deposited in the United States Mails, postage prepaid and duly addressed to Debtor at 275 W. Princeton Drive, Princeton, Texas 75407 (or such other address as Debtor may from time to time designate in writing to Secured Party), at least five (5) calendar days prior to such proposed action. Such notification shall constitute fair and reasonable notice to Debtor of any such action. b. Secured Party's failure at any time or times hereunder to require strict performance by Debtor of any of the provisions, warranties, or terms and conditions contained in this Agreement shall not constitute a waiver of any other default, whether prior or subsequent thereto. c. This Agreement and all other agreements, instruments or documents executed and delivered pursuant hereto or in connection herewith, shall be binding upon and inure to the benefit of the successors and assignees of the parties hereto. d. The internal laws and judicial decisions of the State of California, without regard to conflict of law provisions, shall govern and control the construction, enforceability, validity and interpretation of this Agreement and all of the agreements, instruments, or documents now or at any time or times hereafter executed and delivered by Debtor to Secured Party. CON\MVW\SECURITY.AGR Rev. 7/96 8 e. If action is brought in connection with the enforcement of this Agreement, Debtor consents to jurisdiction of the Superior Court of the State of California, and waives any defense based upon lack of jurisdiction or venue to having the matter heard before the Superior Court of the State of California in the County of Orange. SECURED PARTY: DEBTOR: BERGEN BRUNSWIG DRUG COMPANY, HORIZON PHARMACIES INC., a California corporation a Texas corporation By: /s/ JOHN T. RASOR By: /s/ RICK McCORD ---------------------------- ----------------------------- Rick McCord, President CON\MVW\SECURITY.AGR Rev. 7/96 9 SCHEDULE A-1 PREMISES WITH INVENTORY AND EQUIPMENT LOCATIONS Horizon Pharmacies, Inc. (Corporate Office) 275 W. Princeton Drive Princeton, Texas 75407 Horizon Pharmacy #1 Horizon Pharmacy #2 604 S. Main Street 218 W. Hwy. 380 Winnsboro, Texas 75494 Princeton, Texas 75077 Horizon Pharmacy #3 Horizon Pharmacy #4 101 E. Main Street 100 E. Sam Rayburn Drive Cuero, Texas 77954 Bonham, Texas 75418 Horizon Pharmacy #5 Horizon Pharmacy #6 125 E. Main Street 211 N. Anglin Street Uvalde, Texas 78801 Cleburne, Texas 76031 Horizon Pharmacy #7 Horizon Pharmacy #8 408 W. Broadway 1024 N. Butler Avenue McLoud, Oklahoma 74851 Farmington, New Mexico 87401 Horizon Pharmacies, Inc. Horizon Pharmacy #9 dba Option Care 1009 Superior Avenue 725 E. Ute Tomah, Wisconsin 54660 Farmington, New Mexico 87401 CON\MVW\SECURITY.AGR Rev. 7/96 10 EXHIBIT C GUARANTEE AGREEMENT 1. In consideration of any financial accommodations given, or to be given, or continued, by BERGEN BRUNSWIG DRUG COMPANY (hereinafter referred to as "Beneficiary") to HORIZON PHARMACIES, INC. dba HORIZON PHARMACY (hereinafter referred to as "Debtor") the undersigned hereby unconditionally guarantees the prompt payment of all indebtedness or liabilities according to the terms thereof as agreed in any financial statement, application or other instrument, including but not limited to that certain promissory note dated May 17, 1996 executed by Debtor, which debtor may now or at any time hereafter owe to Beneficiary, whether arising from dealings between Debtor and Beneficiary or from other dealings by which Beneficiary may be or become in any manner whatever a creditor of Debtor with such interest as may be due thereon. 2. The undersigned agrees that Beneficiary may in its absolute discretion and without prejudice to or in any way limiting or lessening the liability of the undersigned under this guarantee: (a) extend credit to Debtor, in such amount and at such times as Beneficiary may determine, whether for a greater or lesser amount than is hereby guaranteed and whether Beneficiary has any knowledge of facts with respect to Debtor which might be construed as materially prejudicial to the interests of the undersigned, Beneficiary being hereby relieved of any duty to disclose any such facts to the undersigned; (b) grant extensions of time or other indulgences; (c) change the interest rate; (d) take or give up or modify, vary, exchange, renew or abstain from perfecting or taking advantage of any security; (e) accept or make compositions or other arrangements or file or refrain from filing a claim in any bankruptcy proceeding or Debtor or other guarantor; (f) discharge or release any party or parties; (g) realize on any security; and (h) otherwise deal with Debtor and co-guarantors and other parties and security as Beneficiary may deem expedient. 3. This shall be a continuing guarantee and shall cover all indebtedness and liabilities of Debtor and ??? more than one, the several obligations of each as well as their joint obligations, including those ??? up to such time as Beneficiary shall have actually received written notice of revocation of this guarantee by the undersigned. Such revocation shall not affect the undersigned's obligations to Beneficiary with respect to indebtedness or liabilities of Debtor to Beneficiary arising prior to actual receipt by Beneficiary of such revocation. 4. This guarantee shall secure any balance due or owing from time to time and at any time from Debtor to Beneficiary, notwithstanding any payments from time to time made to Beneficiary or any settlement of account or any other thing whatsoever; and no payment made by or on behalf of the undersigned to Beneficiary shall be held to discharge or diminish the continuing liability of the undersigned hereunder unless written notice is given to Beneficiary at the time of making such payments that the same are being made for the purpose of liquidating such liability and until full payment of all indebtedness and liabilities (including interest), present and future and whether or not payment thereof is guaranteed hereby of Debtor to Beneficiary, the undersigned waives all right of subrogation and all benefit of or right to participate in any security now or hereafter held by Debtor. 5. All demands, presentments, notices of protest and of dishonor and notices of every kind or nature, including those of any action or non-action on the part of Debtor, Beneficiary, any co-guarantor, or any creditor of Debtor, Beneficiary, or any co-guarantor, or any other person whomsoever, are expressly waived by the undersigned. The undersigned hereby waives the right to require Beneficiary to proceed against Debtor, any co-guarantor or any other party or to proceed against or apply any security it may hold, and waives the right to require Beneficiary to pursue any other remedy for the benefit of the undersigned, and agrees that Beneficiary may proceed against the undersigned for the amount hereby guaranteed without taking any action against Debtor, any co-guarantor or any other party and without proceeding against or ???ing any security it may hold. The undersigned waives the right to plead any and all statutes of limitations as a defense to this guarantee and to any indebtedness or liability hereby guaranteed, and agrees that any partial payments by or on behalf of Debtor on any indebtedness or liability hereby guaranteed, REV 9/92 GENERAL GTEEHOR.DOC including interest, shall, as of the time each such payment is made, stop the running of the time within which an action may be commenced upon this guarantee and shall constitute a further waiver by the undersigned of the right to plead any and all statutes of limitations as a defense to this guarantee and to any indebtedness or liability hereby guaranteed. 6. All debts and liabilities, present and future, of Debtor to the undersigned, or any of them, are hereby postponed to the liabilities of Debtor to Beneficiary and all moneys received by any of the undersigned or their representatives, successors or assigns thereon, shall be received as trustees for Debtor and shall be paid over to Beneficiary and the undersigned and each of them further agree, upon any liquidation or distribution of the assets of Debtor, to assign to Beneficiary upon its request all claims on account of all such debts and liabilities, to the end that Beneficiary shall receive all dividends and payments on such debts and liabilities until payment in full of all liabilities of Debtor to Beneficiary; and this agreement shall constitute such assignment in the event the undersigned shall fail or refuse to execute and deliver such other or further assignment of such claims as Beneficiary may request. 7. If the debtor is a corporation, Beneficiary is not be concerned to see or inquire into the powers of Debtor or its directors, officers, partners, associates or other agents acting or purporting to act on its behalf, the undersigned hereby representing that such powers exist, and moneys in fact borrowed from Debtor in the professed exercise of such powers shall be deemed to form part of the liabilities guaranteed, even though the borrowing or obtaining of such moneys be in excess of the powers of Debtor or of the directors, partners, officers, associates or other agents thereof, or shall be in any way irregular or defective or informal. 8. The undersigned agrees to pay a reasonable attorneys' fee and all other costs and expenses which may be incurred by Beneficiary in connection with this Guarantee or in collection of any of said indebtedness or liabilities from Debtor or the undersigned. 9. This Guarantee is assignable with any one and/or several and/or all of the indebtedness or liabilities which it guarantees, and when so assigned the guarantor shall be bound as above to the assignees without in any manner affecting guarantor's liability hereunder on any part of said obligations retained by Beneficiary. 10. This Guarantee shall inure to the benefit of and bind the heirs, administrators, executors, assigns of Beneficiary and each of the undersigned, and shall be construed as the joint and several obligation of each of the undersigned where there is more than one. 11. This Guarantee is in addition to and exclusive of the guarantee of any other guarantor and of any and all prior guarantees of any of the undersigned of indebtedness or liabilities of Debtor to Beneficiary; and this Guarantee shall in no way limit or lessen any other liability howsoever arising of any of the undersigned for payment of indebtedness or liabilities which are hereby guaranteed. By /s/ RICK McCORD --------------------------------- Rick McCord, an individual By --------------------------------- Dated: May 17, 1996 Index # 2014 EXHIBIT C-1 GUARANTEE AGREEMENT 1. In consideration of any financial accommodations given, or to be given, or continued, by BERGEN BRUNSWIG DRUG COMPANY (hereinafter referred to as "Beneficiary") to HORIZON PHARMACIES, INC. dba HORIZON PHARMACY (hereinafter referred to as "Debtor") the undersigned hereby unconditionally guarantees the prompt payment of all indebtedness or liabilities according to the terms thereof as agreed in any financial statement, application or other instrument, including but not limited to that certain promissory note dated May 17, 1996 executed by Debtor, which debtor may now or at any time hereafter owe to Beneficiary, whether arising from dealings between Debtor and Beneficiary or from other dealings by which Beneficiary may be or become in any manner whatever a creditor of Debtor with such interest as may be due thereon. 2. The undersigned agrees that Beneficiary may in its absolute discretion and without prejudice to or in any way limiting or lessening the liability of the undersigned under this guarantee: (a) extend credit to Debtor, in such amount and at such times as Beneficiary may determine, whether for a greater or lesser amount than is hereby guaranteed and whether Beneficiary has any knowledge of facts with respect to Debtor which might be construed as materially prejudicial to the interests of the undersigned, Beneficiary being hereby relieved of any duty to disclose any such facts to the undersigned; (b) grant extensions of time or other indulgences; (c) change the interest rate; (d) take or give up or modify, vary, exchange, renew or abstain from perfecting or taking advantage of any security; (e) accept or make compositions or other arrangements or file or refrain from filing a claim in any bankruptcy proceeding of Debtor or other guarantor; (f) discharge or release any party or parties; (g) realize on any security; and (h) otherwise deal with Debtor and co-guarantors and other parties and security as Beneficiary may deem expedient. 3. This shall be a continuing guarantee and shall cover all indebtedness and liabilities of Debtor and where more than one, the several obligations of each as well as their joint obligations, including those in???ed up to such time as Beneficiary shall have actually received written notice of revocation of this guarantee by the undersigned. Such revocation shall not affect the undersigned's obligations to Beneficiary with respect to indebtedness or liabilities of Debtor to Beneficiary arising prior to actual receipt by Beneficiary of such revocation. 4. This guarantee shall secure any balance due or owing from time to time and at any time from Debtor to Beneficiary, notwithstanding any payments from time to time made to Beneficiary or any settlement of account or any other thing whatsoever; and no payment made by or on behalf of the undersigned to Beneficiary shall be held to discharge or diminish the continuing liability of the undersigned hereunder unless written notice is given to Beneficiary at the time of making such payments that the same are being made for the purpose of liquidating such liability and until full payment of all indebtedness and liabilities (including interest), present and future and whether or not payment thereof is guaranteed hereby of Debtor to Beneficiary, the undersigned waives all right of subrogation and all benefit of or right to participate in any security now or hereafter held by Debtor. 5. All demands, presentments, notices of protest and of dishonor and notices of every kind or nature, including those of any action or non-action on the part of Debtor, Beneficiary, any co-guarantor, or any creditor of Debtor, Beneficiary, or any co-guarantor, or any other person whatsoever, are expressly waived by the undersigned. The undersigned hereby waives the right to require Beneficiary to proceed against Debtor, any co-guarantor or any other party or to proceed against or apply any security it may hold, and waives the right to require Beneficiary to pursue any other remedy for the benefit of the undersigned, and agrees that Beneficiary may proceed against the undersigned for the amount hereby guaranteed without taking any action against Debtor, any co-guarantor or any other party and without proceeding against or ???ing any security it may hold. The undersigned waives the right to plead any and all statutes of limitations as a defense to this guarantee and to any indebtedness or liability hereby guaranteed, and agrees that any partial payments by or on behalf of Debtor on any indebtedness or liability hereby guaranteed, REV 9/92 GENERAL GTEEHOR.DOC including interest, shall, as of the time each such payment is made, stop the running of the time, within which an action may be commenced upon this guarantee and shall constitute a further waiver by the undersigned of the right to plead any and all statutes of limitations as a defense to this guarantee and to any indebtedness or liability hereby guaranteed. 6. All debts and liabilities, present and future, of Debtor to the undersigned, or any of them, are hereby postponed to the liabilities of Debtor to Beneficiary and all moneys received by any of the undersigned or their representatives, successors or assigns thereon, shall be received as trustees for Debtor and shall be paid over to Beneficiary and the undersigned and each of them further agree, upon any liquidation or distribution of the assets of Debtor, to assign to Beneficiary upon its request all claims on account of all such debts and liabilities, to the end that Beneficiary shall receive all dividends and payments on such debts and liabilities until payment in full of all liabilities of Debtor to Beneficiary; and this agreement shall constitute such assignment in the event the undersigned shall fail or refuse to execute and deliver such other or further assignment of such claims as Beneficiary may request. 7. If the debtor is a corporation, Beneficiary is not to be concerned to see or inquire into the powers of Debtor or its directors, officers, partners, associates or other agents acting or purporting to act on its behalf, the undersigned hereby representing that such powers exist, and moneys in fact borrowed from Debtor in the professed exercise of such powers shall be deemed to form part of the liabilities guaranteed, even though the borrowing or obtaining of such moneys be in excess of the powers of Debtor or of the directors, partners, officers, associates or other agents thereof, or shall be in any way irregular or defective or informal. 8. The undersigned agrees to pay a reasonable attorneys' fee and all other costs and expenses which may be incurred by Beneficiary in connection with this Guarantee or in the collection of any of said indebtedness or liabilities from Debtor or the undersigned. 9. This Guarantee is assignable with any one and/or several and/or all of the indebtedness or liabilities which it guarantees, and when so assigned the guarantor shall be bound as above to the assignees without in any manner affecting guarantor's liability hereunder on any part of said obligations retained by Beneficiary. 10. This Guarantee shall inure to the benefit of and bind the heirs, administrators, executors, assigns of Beneficiary and each of the undersigned, and shall be construed as the joint and several obligation of each of the undersigned where there is more than one. 11. This Guarantee is in addition to and exclusive of the guarantee of any other guarantor and of any and all prior guarantees of any of the undersigned of indebtedness or liabilities of Debtor to Beneficiary; and this Guarantee shall in no way limit or lessen any other liability howsoever arising of any of the undersigned for payment of indebtedness or liabilities which are hereby guaranteed. By /s/ SY SHAHID --------------------------------- Sy Shahid, an Individual By --------------------------------- Dated: May 17, 1996 Index # 2014 EXHIBIT C-2 GUARANTEE AGREEMENT 1. In consideration of any financial accommodations given, or to be given, or continued, by BERGEN BRUNSWIG DRUG COMPANY (hereinafter referred to as "Beneficiary") to HORIZON PHARMACIES,INC. dba HORIZON PHARMACY (hereinafter referred to as "Debtor") the undersigned hereby unconditionally guarantees the prompt payment of all indebtedness or liabilities according to the terms thereof as agreed in any financial statement, application or other instrument, including but not limited to that certain promissory note dated May 17, 1996 executed by Debtor, which debtor may now or at any time hereafter owe to Beneficiary, whether arising from dealings between Debtor and Beneficiary or from other dealings by which Beneficiary may be or become in any manner whatever a creditor of Debtor with such interest as may be due thereon. 2. The undersigned agrees that Beneficiary may in its absolute discretion and without prejudice to or in any way limiting or lessening the liability of the undersigned under this guarantee: (a) extend credit to Debtor, in such amount and at such times as Beneficiary may determine, whether for a greater or lesser amount than is hereby guaranteed and whether Beneficiary has any knowledge of facts with respect to Debtor which might be construed as materially prejudicial to the interests of the undersigned, Beneficiary being hereby relieved of any duty to disclose any such facts to the undersigned; (b) grant extensions of time or other indulgences; (c) change the interest rate; (d) take or give up or modify, vary, exchange, renew or abstain from perfecting or taking advantage of any security; (e) accept or make compositions or other arrangements or file or refrain from filing a claim in any bankruptcy proceeding of Debtor or other guarantor; (f) discharge or release any party or parties; (g) realize on any security; and (h) otherwise deal with Debtor and co-guarantors and other parties and security as Beneficiary may deem expedient. 3. This shall be a continuing guarantee and shall cover all indebtedness and liabilities of Debtor and (??????) more than one, the several obligations of each as well as their joint obligations, including those in????? up to such time as Beneficiary shall have actually received written notice of revocation of this guarantee by the undersigned. Such revocation shall not affect the undersigned's obligations to Beneficiary with respect to indebtedness or liabilities of Debtor to Beneficiary arising prior to actual receipt by Beneficiary of such revocation. 4. This guarantee shall secure any balance due or owing from time to time and at any time from Debtor to Beneficiary, notwithstanding any payments from time to time made to Beneficiary or any settlement of account or any other thing whatsoever, and no payment made by or on behalf of the undersigned to Beneficiary shall be held to discharge or diminish the continuing liability of the undersigned hereunder unless written notice is given to Beneficiary at the time of making such payments that the same are being made for the purpose of liquidating such liability and until full payment of all indebtedness and liabilities (including interest), present and future and whether or not payment thereof is guaranteed hereby of Debtor to Beneficiary, present and future and whether or not payment thereof is guaranteed hereby of Debtor to Beneficiary, the undersigned waives all right of subrogation and all benefit of or right to participate in any security now or hereafter held by Debtor. 5. All demands, presentments, notices of protest and of dishonor and notices of every kind or nature, including those of any action or non-action on the part of Debtor, Beneficiary, any co-guarantor, or any creditor of Debtor, Beneficiary, or any co-guarantor, or any other person whomsoever, are expressly waived by the undersigned. The undersigned hereby waives the right to require Beneficiary to proceed against Debtor, any co-guarantor or any other party or to proceed against or apply any security it may hold, and waives the right to require Beneficiary to pursue any other remedy for the benefit of the undersigned, and agrees that Beneficiary may proceed against the undersigned for the amount hereby guaranteed without taking any action against Debtor, any co-guarantor or any other party and without proceeding against or ????ying any security it may hold. The undersigned waives the right to plead any and all statutes of limitations as a defense to this guarantee and to any indebtedness or liability hereby guaranteed, and agrees that any partial payments by or on behalf of Debtor on any indebtedness or liability hereby guaranteed, REV 9/92 GENERAL GTEEHOR.DOC including interest, shall, as of the time each such payment is made, stop the running of the time within which an action may be commenced upon this guarantee and shall constitute a further waiver by the undersigned of the right to plead any and all statutes of limitations as a defense to this guarantee and to any indebtedness or liability hereby guaranteed. 6. All debts and liabilities, present and future, of Debtor to the undersigned, or any of them, are hereby postponed to the liabilities of Debtor to Beneficiary and all moneys received by any of the undersigned or their representatives, successors or assigns thereon, shall be received as trustees for Debtor and shall be paid over to Beneficiary and the undersigned and each of them further agree, upon any liquidation or distribution of the assets of Debtor, to assign to Beneficiary upon its request all claims on account of all such debts and liabilities, to the end that Beneficiary shall receive all dividends and payments on such debts and liabilities until payment in full of all liabilities of Debtor to Beneficiary; and this agreement shall constitute such assignment in the event the undersigned shall fail or refuse to execute and deliver such other or further assignment of such claims as Beneficiary may request. 7. If the debtor is a corporation, Beneficiary is not to be concerned to see or inquire into the powers of Debtor or its directors, officers, partners, associates or other agents acting or purporting to act on its behalf, the undersigned hereby representing that such powers exist, and moneys in fact borrowed from Debtor in the professed exercise of such powers shall be deemed to form part of the liabilities guaranteed, even though the borrowing or obtaining of such moneys be in excess of the powers of Debtor or of the directors, partners, officers, associates or other agents thereof, or shall be in any way irregular or defective or informal. 8. The undersigned agrees to pay a reasonable attorneys' fee and all other costs and expenses which may be incurred by Beneficiary in connection with this Guarantee or in the collection of any of said indebtedness or liabilities from Debtor or the undersigned. 9. This Guarantee is assignable with any one and/or several and/or all of the indebtedness or liabilities which it guarantees, and when so assigned the guarantor shall be bound as above to the assignees without in any manner affecting guarantor's liability hereunder on any part of said obligations retained by Beneficiary. 10. This Guarantee shall inure to the benefit of and bind the heirs, administrators, executors, assigns of Beneficiary and each of the undersigned, and shall be construed as the joint and the several obligation of each of the undersigned where there is more than one. 11. This Guarantee is in addition to and exclusive of the guarantee of any other guarantor and of any and all prior guarantees of any of the undersigned of indebtedness or liabilities of Debtor to Beneficiary; and this Guarantee shall in no way limit or lessen any other liability howsoever arising of any of the undersigned for payment of indebtedness or liabilities which are hereby guaranteed. By /s/ CHARLIE HERR --------------------------------- Charlie Herr, an individual By --------------------------------- Dated: May 17, 1996 Index # 2014 EX-10.4 10 EXHIBIT 10.4 - FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10.4 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of __________________, 1997, by and between HORIZON Pharmacies, Inc., a Texas corporation (the "Company"), and _________________________ ("Employee"). W I T N E S S E T H: WHEREAS, Employee has been serving as an officer of the Company; and WHEREAS, the Company desires to obtain the services of Employee on a full time basis in order to preserve the continuation of the businesses of the Company and Employee is desirous of rendering such services to same; and WHEREAS, Employee has agreed to enter into this Agreement; NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained, and other good and valuable consideration, the adequacy of which is hereby acknowledged, the parties hereby agree as follows: 1. EMPLOYMENT; DUTIES AND ACCEPTANCE. 1.1. EMPLOYMENT BY THE COMPANY. During the Term of this Agreement, as hereinafter defined, the Company hereby agrees to employ Employee as _____________________ - of the Company or such other executive position as the Company's Board of Directors may designate. During said period, Employee shall render services to the Company on a full-time basis (serving approximately the same total number of hours per week as Employee has previously worked for the Company). 1.2. DUTIES. As the __________________ of the Company, Employee shall be involved in all executive activities of the Company, and perform the function of his office and other duties as directed by the Board of Directors. 1.3. ACCEPTANCE OF EMPLOYMENT BY EMPLOYEE. Employee hereby accepts such employment and shall render the services described above. Employee agrees to devote his full attention, skill and best efforts to the performance of said duties for the Company. 1.4. TERMINATION OF EXISTING CONTRACTS. Employee agrees that all agreements and contracts, whether written or oral, relating to the current employment of Employee by the Company will be terminated as of the commencement of the Term of this Agreement, as defined below. 2. TERM OF EMPLOYMENT. The term of Employee's employment under this Agreement (the "Term") shall commence as of June 1, 1997 (the "Commencement Date"), and shall continue through and expire on the third anniversary of the Commencement Date, unless earlier terminated as herein provided. The date at which Employee's employment is terminated under this Agreement shall be referred to herein as the "Termination Date." The agreement shall be renewed for consecutive three year period(s) unless either party no later than thirty (30) days prior to the termination date elects in writing to not renew. 3. PARTICIPATION IN EMPLOYEE BENEFIT PLANS. During the Term, Employee shall be permitted to participate in any group life, hospitalization or disability insurance plan, health program, pension plan, similar benefit plan or other so-called "fringe benefits" of the Company, which may be EMPLOYMENT AGREEMENT/HORIZON- 1 available to other employees of the Company generally on the same terms as such other employees. 4. COMPENSATION. In consideration of the observance by Employee of the terms of this Agreement and the performance of his duties as set forth herein, the Company shall pay to Employee the sum of ______________ Thousand Dollars ($___________) per year during the Term, which payments shall be payable in accordance with the payroll policies of the Company as such are from time to time in effect. At the end of each fiscal year of the Company, the Board of Directors of the Company shall review the Company's performance for such year and consider other compensation for Employee, such as a bonus payment, stock options, stock grants or an increase in the annual salary payable during the Term, which, in the sole judgment of the Board, may be appropriate compensatory recognition for Employee's performance of his duties hereunder. 5. TERMINATION. The Company has the right, at any time during the Term, subject to all of the provisions hereof, exercisable by serving notice, effective no earlier than ninety (90) days from the date of notification, to terminate the Employee's employment under this Agreement and to discharge the Employee without cause and with no advance notice with cause. If such right is exercised, the Company's obligation to the Employee shall be limited to the payment of unpaid Annual Salary accrued up to the effective date specified in the Company's notice of termination. If, however such termination is without cause the Company shall be liable to the employee for a lump sum severance payment of one (1) year anticipated compensation in accordance with the employee's current annualized salary, benefit package, and anticipated bonus. Notwithstanding termination of this Agreement, whether by expiration of the Term or otherwise, the obligations of Section 7 hereof shall survive such termination. 6. SOLE EMPLOYMENT; NON COMPETITION. 6.1. SOLE EMPLOYMENT. During the Term of this Agreement, Employee shall not, except as set forth herein, be engaged in any other business activity whether or not such business activity is pursued for gain, profit, or other pecuniary advantage. Employee may, however, invest his assets in such form or manner as will not require his services in the operation of the affairs of the companies in which such investments are made. 6.2. NON-COMPETITION. During the period expiring one (1) year from the Commencement Date (the "Noncompetition Period"), Employee will not (a) within any area in the continental United States where the Employee provided any services to the Company, directly or indirectly, acquire, own, manage, operate, join, control, by employed with, or participate in the acquisition, ownership, management, operation, or control of, or be connected in any manner with, any business engaged in the retail pharmacy industry without the prior written consent of the Company, (b) contact or attempt to contact, directly or indirectly, any of the Company's employees as of the Termination Date, in connection with the formation or operation of any other entity whose purpose is to acquire, manage or operate retail pharmacies for the profit of anyone other than the Company or provide services of a type similar to those provided by the Company as of the Termination Date, nor will Employee dissuade or attempt to dissuade any customer of the Company as of the Termination Date from purchasing products from the Company or using services provided by the Company at the Termination Date. 7. CONFIDENTIALITY. It is contemplated that Employee will learn of the Company's confidential information or confidential information entrusted to the Company by other persons corporations or firms (collectively, Third Parties). The Company's confidential information includes matters not generally known outside the Company, such as developments relating to existing and future products and services marketed or used by the Company and also data relating to the general business operations of the Company (e.g., concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.). During the Term and continuing thereafter, Employee agrees not to disclose any confidential information of the Company or of such other persons, corporations or firms to others or to EMPLOYMENT AGREEMENT/HORIZON- 2 make use of its, except on the Company's behalf, whether or not such information is produced by Employee's own efforts. Also, Employee may learn of developments, ways of business, etc., which in themselves are generally known but whose use by the Company is not generally known, and during the Term and continuing thereafter, Employee agrees not to disclose to others such use, whether or not such use is due to Employee's own efforts. All records of the Company, including the names and addresses of its customers, are and shall remain the property of the Company at all times during the Term and after termination of Employee's employment for any reason with the Company. None of such records, nor any part of them, is to be removed by Employee from the premises of the Company either in original form or in computerized, duplicated, or copied form, and the names, addresses, and other facts in such records are not to be transmitted verbally, in writing, or in computerized form by Employee except in the ordinary course of conducting business for the Company. 8. OTHER PROVISIONS. 8.1. NOTICES. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally or, if mailed, five days after the date of deposit in the United States mail, as follows: (i) IF TO THE COMPANY, TO: HORIZON Pharmacies, Inc. 275 W. Princeton Drive Princeton, TX 75407 (ii) IF TO EMPLOYEE, TO: Any party may change its address for notice hereunder by notice to the other parties hereto. 8.2 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof, and supersedes all prior agreements, written or oral, with respect thereto. 8.3. WAIVERS AND AMENDMENTS. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 8.4. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Texas applicable to agreements made and to be performed entirely within such state. 8.5. ASSIGNMENT. Employee may not delegate the performance of any of his duties hereunder. Neither party hereto may assign any rights hereunder without the written consent of the other party hereto. 8.6. COUNTERPARTS. This Agreement may be executed in two or more counterparts, EMPLOYMENT AGREEMENT/HORIZON- 3 each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8.7. HEADINGS. The headings in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: HORIZON Pharmacies, Inc. By: --------------------------------- EMPLOYEE: ------------------------------------ EMPLOYMENT AGREEMENT/HORIZON- 4 EX-10.5 11 EXHIBIT 10.5 - LOCKUP AGREEMENT EXHIBIT 10.5 , 1997 Capital West Securities, Inc. 16th Floor, One Leadership Square 211 N. Robinson Oklahoma City, OK 73102 Re: Public Offering of Common Stock Par Value $.01 Per Share (the "Common Stock"), of Horizon Pharmacies, Inc. (the "Company") Gentlemen: Pursuant to Section 2(t) of the Underwriting Agreement, dated , 1997 (the "Underwriting Agreement"), by and among you and the Company, the undersigned (a holder of Common Stock) hereby agrees not to sell, contract to sell, transfer or otherwise dispose of any shares of Common Stock without the prior written consent of Capital West Securities, Inc. for a period of 24 months after the date of the initial public offering of the Common Stock. All communications to you hereunder shall be sent to the address set forth above, attention: Gregory M. Jones. Sincerely, ------------------------------------ [Name] EX-10.6 12 EXHIBIT 10.6 - PRIMARY SOURCE PROPOSAL PRIMARY SOURCE PROPOSAL FOR HORIZON PHARMACIES, INC. BY CARSON MCDONALD BERGEN BRUNSWIG DRUG CO. JANUARY 19, 1995 AGREEMENT PERIOD ---------------------- A. THIS CONTRACT BECOMES EFFECTIVE JANUARY 1, 1995 AND WILL CONTINUE EACH YEAR THEREAFTER. UPON THE MUTUAL AGREEMENT OF BOTH HORIZON PHARMACIES. INC. AND BBDC. B. IN THE EVENT BBDC'S PRODUCTION OR DELIVERIES OF GOODS ARE PREVENTED, IMPAIRED, REDUCED OR RESTRICTED BY REASON OF FORCE MAJEURE, LABOR DISPUTES, FIRE, ACTS OF GOD, OR ANY OTHER SIMILAR OR DISSIMILAR CAUSE BEYOND ITS CONTROL, INCLUDING BUT NOT LIMITED TO THE UNAVAILABILITY OF SUCH GOODS, TRANSPORTATION, SHORTAGES OF MATERIALS OR FUEL, DELAY IN DELIVERY OR FAILURE TO DELIVER BY BBDC'S SUPPLIERS, LOSS OF FACILITIES OF DISTRIBUTION, THE VOLUNTARY FOREGOING OF THE RIGHT TO ACQUIRE OR TO USE ANY MATERIALS IN ORDER TO ACCOMMODATE OR COMPLY WITH THE ORDERS, REQUESTS, REGULATIONS, RECOMMENDATIONS OR INSTRUCTIONS OF ANY GOVERNMENTAL AUTHORITY (WHETHER IN FURTHERANCE OF NATIONAL DEFENSE OF WAR ACTIVITIES OR TO MEET ANY OTHER EMERGENCY), OR THE COMPLIANCE WITH ANY LAW, ORDER, RULING, REGULATION, INSTRUCTION OR REQUIREMENTS OF ANY GOVERNMENTAL AUTHORITY OR ANY POLITICAL SUBDIVISION OR AGENCY THEREOF, OR FOR ANY OTHER CAUSE WHETHER OF THE SAME OR DIFFERENT CHARACTER HEREIN SPECIFIED BEYOND THE REASONABLE CONTROL OF THE PARTY AFFECTED THEREBY, BBDC, WITHOUT LIABILITY OR OBLIGATION, MAY REDUCE OR ELIMINATE THE QUANTITIES HEREIN SPECIFIED IN PROPORTION TO THE PREVENTION, IMPAIRMENT, REDUCTION OR RESTRICTION UPON BBDC'S PRODUCTION OR DELIVERY, ON A PRO RATA BASIS AMONG ALL USERS OF ITS GOODS DURING THE PERIOD OF SUCH DISABILITY. IN ANY SUCH CASE, THE GOODS WHICH BBDC IS UNABLE TO SUPPLY SHALL BE ELIMINATED FROM THIS CONTRACT BY WRITTEN NOTICE DESCRIBING THE AMOUNTS ELIMINATED AND THE ESTIMATED TIME PERIOD DURING WHICH DELIVERIES ARE TO BE SUSPENDED; AND BBDC SHALL BE RELIEVED OF ANY LIABILITY WITH RESPECT THERETO DURING SUCH TIME BBDC MAY NOT BE ABLE TO DELIVER THE GOODS IN QUESTION. C. IT IS UNDERSTOOD THAT THIS AGREEMENT MAY BE TERMINATED BY EITHER PARTY FOR JUST AND REASONABLE CAUSE WITH A 30 (THIRTY) DAY WRITTEN NOTICE. D. THIS PROPOSAL IS VALID AS WRITTEN IF SIGNED AND RECEIVED BY BERGEN BRUNSWIG DRUG COMPANY ON OR BEFORE JANUARY 31, 1995. COST OF GOODS - ------------- ALL PRODUCTS WILL BE INVOICED WITH AN UPCHARGE RATE OF 5% FROM WHOLESALE COST. HORIZON PHARMACIES, INC. COST THEN WILL BE REBATED TO AN UPCHARGE RATE OF 0.8% ON A MONTHLY BASIS. WHOLESALE COST IS DEFINED AS MANUFACTURER INVOICED COST BEFORE ALLOWANCES, DISCOUNTS, AND REBATES. PRODUCTS THAT DO NOT QUALIFY FOR THIS PROGRAM ARE ITEMS THAT ARE INVOICED AT SUPERNET (ITEMS THAT DO NOT HAVE AN APPLIED UPCHARGE.) TRUE QUALITY ITEMS ARE INVOICED AT A SUPERNET RATE BUT DO QUALIFY FOR THE REBATE. INVOICE PAYMENT TERMS - --------------------- INVOICES DATED THE 1ST THROUGH THE 15TH OF THE MONTH ARE DUE AND PAYABLE BY THE 25TH OF THE SAME MONTH. INVOICES DATED THE 16TH THROUGH THE END OF THE MONTH ARE DUE AND PAYABLE BY THE 10TH OF THE FOLLOWING MONTH. ALL OUTSTANDING BALANCES ARE SUBJECT TO A 1.5% COST OF GOODS ADJUSTMENT. ADDITIONALLY ALL REBATES AND UPCHARGE RATES ARE BASED ON THE STATED PAY TERMS AND ARE SUBJECT TO CHANGE UPON NOTICE. DELIVERY AND ORDER TIMES - ------------------------ DELIVERY WILL BE PROVIDED 5 DAYS A WEEK, MONDAY THROUGH FRIDAY, IF AN ORDER HAS BEEN ELECTRONICALLY PLACED BEFORE 7:00 P.M. THE PREVIOUS DAY. NARCOTIC ORDERS REQUIRE AN ADDITIONAL 24 HOURS TO PROCESS AND CANNOT BE PROCESSED UNTIL THE APPROPRIATE FORM HAS BEEN RECEIVED BY BERGEN BRUNSWIG. AVAILABLE PROGRAMS AND SERVICES - ------------------------------- ORDER ENTRY DEVICE NO CHARGE PRICE STICKERS NO CHARGE USAGE REPORT (STORE SPECIFIC) NO CHARGE USAGE REPORT (CONSOLIDATED) NO CHARGE OTC/HABA ZONE PRICING $10.00/MO./STORE DAILY RX PRICE UPDATES $50.00/MO./STORE GOOD NEIGHBOR PHARMACY $65.00/MO./STORE GROUP PURCHASING ORGANIZATION NO CHARGE *CURRENT COMMITMENT BY STORE SERVICE PRINCETON WINNSBORO CUERO ORDER ENTRY DEVICE X X X PRICE STICKERS X X X USAGE REPORTS - ALL X X X OTC ZONE PRICING X X X DAILY RX PRICE UPDATES X X X GOOD NEIGHBOR PHARMACY X X N/A GROUP PURCHASING X X X RETURNS, BILLING ERRORS, EXCHANGES AND SHORTAGES - ----------------------------------------------- ALL RETURNS SHALL BE INITIATED THROUGH THE ORDER ENTRY MACHINE BY STORE ASSOCIATES. CREDITS WILL BE ISSUED IN ACCORDANCE WITH MANUFACTURERS POLICIES AND THOSE ESTABLISHED BY THE NATIONAL ASSOCIATION OF WHOLESALE DRUGGISTS. BERGEN BRUNSWIG DRUG COMPANY COMMITMENT - --------------------------------------- BERGEN BRUNSWIG IS COMMITTED TO THE CONTINUED GROWTH AND PROFITABILITY OF HORIZON PHARMACIES, INC. AND LOOKS UPON THIS AGREEMENT AS A PARTNERSHIP. IT IS BBDC GOAL TO ENSURE THAT HORIZON PHARMACIES, INC., AND ALL OF ITS ASSOCIATES, UNDERSTAND THE CONCEPTS, APPLICATIONS, AND IMPLEMENTATION PROCEDURES OF ALL AVAILABLE PROGRAMS AND SERVICES. CONFIDENTIALITY - --------------- HORIZON PHARMACIES, INC. AND BERGEN BRUNSWIG DRUG CO. SHALL HOLD ALL INFORMATION AS CONFIDENTIAL AND AGREE NOT TO SHARE ANY DOCUMENTS OR TRADE SECRETS WITH ANY OTHER PARTY. T.Q. PRODUCTS ON ONE PASS TO DIV. 30 SHIPPED FROM 30 - DIV. 2 TIMES A WEEK. NEW TERMS - --------- 1ST - EOM DUE BY 25TH OF NEXT MONTH PER T. RASOR. ALL REPORTS TO BE SENT TO CARSON MCDONALD AT DIV. 30. THE TERMS OF THIS AGREEMENT HAVE BEEN APPROVED AND ACCEPTED. /s/ Rick McCord, President /s/ Jim Brown - ----------------------------- ----------------------------- RICK MCCORD - PRESIDENT JIM BROWN /s/ Sy Shahid, Vice President /s/ Carson McDonald - ----------------------------- ----------------------------- SY SHAHID - VICE PRESIDENT CARSON MCDONALD DATE 1/25/95 DATE 2/10/95 - ----------------------------- ----------------------------- HORIZON PHARMACIES, INC. BERGEN BRUNSWIG DRUG CO. EX-16.1 13 EXHIBIT 16.1 - REPORT OF HEROLD, HOWARD & MADSEN [LETTERHEAD] We have been the Company's independent accounting firm since April 16, 1996. In March 1997, the Company retained Ernst & Young LLP to perform the audit for the year ended December 31, 1996. We will still perform various store audits, tax and financial planning for the Company. The change was not the result of any disagreement relating to any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures. No reports issued by us contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principle. At no time during our engagement were there any disagreements on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. HEROLD, HOWARD & MADSEN, PC - -------------------------------- Herold, Howard & Madsen, PC Dallas, Texas May 29, 1997 EX-23.1 14 EXHIBIT 23.1- CONSENT OF HEROLD, HOWARD & MADSEN EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts," to the use of our report on the financial statements for the year ended December 31, 1995 of HORIZON Pharmacies, Inc. dated April 24, 1996 and to the use of our reports on the financial statements of the Farmington Store Acquisition and the Vista Store Acquisition dated March 28, 1997, in the Amendment No. 1 to Registration Statement (Form SB-2 No. 333-25257) and related Prospectus of HORIZON Pharmacies, Inc. for the registration of 1,200,000 shares of its common stock. Dallas, Texas May , 1997 The foregoing consent is in the form that will be signed upon completion of the reorganization of the capital accounts of the Company as described in the fourth paragraph of Note 6 to the accompanying financial statements. HEROLD, HOWARD & MADSEN P.C. Dallas, Texas May 30, 1997 EX-23.2 15 EXHIBIT 23.2 - CONSENT OF ERNST & YOUNG EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated April 4, 1997, except for the third and fourth paragraphs of Note 6, as to which the date is May , 1997, in Amendment No. 1 to the Registration Statement (Form SB-2 No. 333-25257) and related Prospectus of HORIZON Pharmacies, Inc. for the registration of 1,200,000 shares of its common stock. Oklahoma City, Oklahoma May , 1997 The foregoing consent is in the form that will be signed upon completion of the reorganization of the capital accounts of the Company as described in the fourth paragraph of Note 6 to the accompanying financial statements. ERNST & YOUNG LLP Oklahoma City, Oklahoma May 30, 1997 EX-24.2 16 EXHIBIT 24.2 - POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Rick D. McCord, R.Ph. and David W. Frauhiger as his true and lawful attorney-in-fact and agent, with full power of substitution, for him, and in his name, place and stead, in any and all capacities to sign Amendment No. 1 to the Registration Statement on Form SB-2 (No. 333-25257) (the "Registration Statement") and any or all amendments or post-effective amendment to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto the said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed this ____ day of May, 1997. ------------------------------ Philip H. Yielding POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Rick D. McCord, R.Ph. and David W. Frauhiger as his true and lawful attorney-in-fact and agent, with full power of substitution, for him, and in his name, place and stead, in any and all capacities to sign Amendment No. 1 to the Registration Statement on Form SB-2 (No. 333-25257) (the "Registration Statement") and any or all amendments or post-effective amendment to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto the said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed this ____ day of May, 1997. ------------------------------ Carson A. McDonald EX-27 17 EXHIBIT 27 -- FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED BALANCE SHEET AT 12/31/96 AND THE AUDITED STATEMENT OF INCOME FOR THE YEAR ENDED 12/31/96 AND THE UNAUDITED BALANCE SHEET AT 3/31/97 AND THE UNAUDITED STATEMENT OF INCOME FOR THE 3 MOS. ENDING 3/31/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR 3-MOS DEC-31-1996 DEC-31-1997 DEC-31-1996 MAR-31-1997 153,260 109,699 0 0 1,067,348 1,464,493 20,000 25,000 3,290,717 3,985,876 4,935,105 6,173,379 613,382 681,200 67,253 85,222 6,588,772 8,349,713 3,372,072 5,116,411 1,466,627 1,337,701 0 0 0 0 10,824 10,824 1,760,303 1,760,303 6,588,772 8,349,713 13,136,319 5,113,247 13,140,002 5,113,640 8,941,705 3,458,504 12,584,882 4,839,581 252,767 53,531 0 0 252,767 53,531 302,353 220,528 106,000 77,000 196,353 143,528 0 0 0 0 0 0 196,353 143,528 .18 .13 0 0
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