-----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, FLfoqpfQ2YB25vPgnpus321f6A4ramHYsNpSAr9n3j+tY6Z2lgcJ4O9hOxtI3N8x f14OOQ7MdTIXN2/7X48+vw== 0000912057-97-013216.txt : 19970417 0000912057-97-013216.hdr.sgml : 19970417 ACCESSION NUMBER: 0000912057-97-013216 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970416 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORIZON PHARMACIES INC CENTRAL INDEX KEY: 0001036260 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-25257 FILM NUMBER: 97581840 BUSINESS ADDRESS: STREET 1: 275 W. PRINCETON DRIVE CITY: PRINCETON STATE: TX ZIP: 75407 BUSINESS PHONE: 9727362424 SB-2 1 SB-2 As filed with the Securities and Exchange Commission on April 16, 1997 Registration No. 333-_________ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- 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 (Primary Standard (I.R.S. Employer of Incorporation Industrial Classification Identification Number) or Organization) Code 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 & Murrah, P.C. Robertson & Williams, Inc. 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 PROPOSED MAXIMUM 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 1,035,000(2) $5.00 $5,175,000 $1,784.48 - -------------------------------------------------------------------------------------------------------------- Underwriters' Warrants(3) 90,000 .001 $ 90 (4) - -------------------------------------------------------------------------------------------------------------- Common Stock Issuable Upon Exercise of Underwriters' Warrants(5) 90,000 6.00 $ 540,000 $ 186.21 - -------------------------------------------------------------------------------------------------------------- TOTAL $5,715,090 $1,970.68 - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. (2) Includes 135,000 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. ---------------------- 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. 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. SUBJECT TO COMPLETION, DATED APRIL 16, 1997 PROSPECTUS 900,000 SHARES HORIZON PHARMACIES, INC. COMMON STOCK All of the 900,000 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 inclusion of the Common Stock on the Nasdaq Small Cap Market under the trading symbol "HRZN". 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 7. 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. - ------------------------------------------------------------------------------- PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO THE PUBLIC AND COMMISSIONS(1) COMPANY (2)(3) - ------------------------------------------------------------------------------- Per Share $5.00 $.50 $4.50 - ------------------------------------------------------------------------------- Total(3) $4,500,000 $450,000 $4,050,000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (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 $135,000 ($155,250 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 135,000 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 $5,175,000, $517,500 and $4,657,500, 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. -------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. -------------- 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 October 21, 1996 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 owned by True Quality Pharmacies, Inc. d/b/a Vista Pharmacy (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 81.5% 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 towards an aging population and the continued development of new pharmaceutical products. However, the Company anticipates that prescription sales will continue to decrease as a percentage of the Company's overall 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 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. 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. 4 THE OFFERING Common Stock offered by the Company . . . . . . . . . . . . . . . 900,000 shares Shares of Common Stock to be outstanding after the Offering. . . . 1,982,424 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 primarily to mitigate such shareholders' expected state and Federal income taxes associated with the Company's present S corporation status and for working capital and general corporate purposes. Nasdaq SmallCap Market Symbol . . . . . HRZN (proposed) - -------------------- (1) Excludes 200,000 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." 5 SUMMARY - FINANCIAL AND OPERATING DATA The following table sets forth historical and 1996 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 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, --------------------------------- PERIOD FROM HISTORICAL PRO FORMA FEBRUARY 28, 1994 ---------------- --------- TO DECEMBER 31, 1994(1) 1995 1996 1996(2) ----------------------- ------ ------- --------- (IN THOUSANDS, EXCEPT SHARE AND STORE DATA) STATEMENT OF INCOME DATA: Net Sales $1,671 $6,270 $13,136 $22,133 Gross Profit 595 1,898 4,194 6,686 Income from operations 169 279 551 1,024 Interest expense 16 110 253 227 Income before income taxes 154 176 302 801 Pro forma provision for taxes 54 62 106 278 Pro forma net income 100 114 196 523 Pro forma net income per common share 0.27 Shares used in computation 1,969,856 BALANCE SHEET DATA: Working capital $ 600 $1,029 $1,563 $4,518 Total assets 1,268 3,545 6,589 9,518 Long-term obligations 346 930 1,467 1,367 Total liabilities 576 2,266 4,839 4,412 Shareholders' equity 692 1,279 1,750 5,106 NUMBER OF STORES AT END OF YEAR 3 7 11 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.
6 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 eight to 12 stores and have in operation a total of approximately 24 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 health care is generally less costly to third-party payors than hospital-based care, alternate site health care 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 the total health care market, cost containment initiatives aimed at reducing the costs of delivering services 7 at non-hospital sites are increasing and may adversely affect the profitability of alternate site health care 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 health care companies, are affected by the continuing efforts of third-party payors to contain or reduce the costs of health care 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 health care 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 healthcare reform proposals have been introduced or proposed in Congress and in some state 8 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." REGULATION OF HOME HEALTH CARE 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 health care 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 health care industry in the United States to fundamental change. Although Congress has failed to pass comprehensive health care reform legislation, the Company anticipates that Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems and may in the future propose and adopt legislation effecting fundamental changes in the health care 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 health care reform. Any proposed Federal legislation, if adopted, could result in significant changes in the availability, delivery, pricing and payment for health care services and products, including alternate site health care. Various state agencies also have undertaken or are considering significant health care reform initiatives. Although it is not possible to predict whether any health care 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 health care 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 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 liability insurance coverage and is in the process of acquiring medical 9 malpractice liability insurance, 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 Revco), 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." SUBSTANTIAL INDEBTEDNESS. In connection with the Company's acquisition of retail pharmacies, the Company has incurred substantial debt. At December 31, 1996, the Company had long-term obligations (including current maturities) of $1,722,786, notes payable of $1,215,000 and accounts payable of $1,491,789, 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 all of its notes payable and $425,000 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 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 one of the covenants under a loan agreement; the outstanding amounts under such loan agreement 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 the foreseeable future, 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." 10 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; KEY MAN INSURANCE. 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. Although the Company has employment agreements with Messrs. McCord, Shahid and Frauhiger, the Company presently does not own any key man life insurance policies with respect to any of such individuals, and 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 is presently reviewing the desirability of obtaining key man life insurance policies with respect to Messrs. McCord, Shahid and Frauhiger. 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 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 37% of the Company's outstanding shares of Common Stock after the Offering (approximately 35% 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 11 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 a classified Board of Directors, 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. SUBSTANTIAL DILUTION. On the basis of an assumed offering price of $5.00 per share, this Offering involves an immediate dilution of approximately $3.12 per share of Common Stock (approximately 62% 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." 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." LIMITED UNDERWRITING EXPERIENCE. Capital West, one of the Underwriters, was first registered as a broker-dealer in May 1995 and has participated in only six public equity offerings as an underwriter. 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 Nasdaq SmallCap Market under the trading symbol "HRZN." 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." 12 Moreover, the trading price of the Company's Common Stock could be subject to fluctuations in response to quarterly variations in results of operations, announcements of new services or products by the Company or its competitors, changes in financial estimates by securities analysts and other events or factors. See "Business." Recent history relating to the market prices of other newly public companies indicates that the market price of the Company's Common Stock following the Offering may be highly volatile. At various times, the stock market has experienced volatility that has particularly affected the market prices for stock of particular industry groups, such as retail-oriented companies, often without regard to a particular company's operating results. POSSIBLE DELISTING FROM NASDAQ SMALLCAP MARKET; DISCLOSURE RELATING TO LOW PRICED STOCKS. Although the Company has applied for listing of the Common Stock on the Nasdaq SmallCap Market, there can be no assurance that a trading market will develop or, if developed, that it will be maintained. In addition, there can be no assurance that the Company will in the future meet the maintenance criteria for continued quotation of the securities on the Nasdaq SmallCap Market. The maintenance criteria for the Nasdaq SmallCap Market include, among other things, $2,000,000 in total assets, $1,000,000 in capital and surplus, a public float of 100,000 shares with a market value equal to $200,000, two market makers and a minimum bid price of $1.00 per share of common stock. If an issuer does not meet the $1.00 minimum bid price standard, it may, however, remain on the Nasdaq SmallCap Market if the market value of its public float is at least $1,000,000 and the issuer has at least $2,000,000 in equity. If the Company was removed from the Nasdaq SmallCap Market, trading, if any, in the Common Stock would thereafter have to be conducted in the over-the-counter market in the so-called "pink sheets" or, if then available, the NASD's OTC Electronic Bulletin Board. As a result, an investor would find it more difficult to dispose of, and to obtain accurate quotations as to the value of, such securities. In addition, if the Common Stock is delisted from trading on the Nasdaq SmallCap Market and the trading price of the Common Stock is less than $5.00 per share at a time when the net tangible assets of the Company are less than $5,000,000, trading in the Common Stock would also be subject to the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who recommend such low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock (generally, according to recent regulations adopted by the Commission, any equity security not traded on an exchange or quoted on the Nasdaq SmallCap Market that has a market price of less than $5.00 per share, subject to certain exceptions), including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith. Such requirements could severely limit the market liquidity of the Common Stock and the ability or purchasers in this Offering to sell their securities in the secondary market. There can be no assurance that the Common Stock will not be delisted or treated as a penny stock. SHARES ELIGIBLE FOR FUTURE SALE. Future sales of shares of Common Stock by the Company or its existing shareholders, or the perception that such sales may occur, could adversely affect the market price of the Common Stock. Upon completion of the Offering, 1,982,424 shares of Common Stock will be outstanding (2,117,424 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 900,000 shares (1,035,000 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 329,430 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 13 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 37%, of the outstanding shares of Common Stock after the Offering. Such individuals have agreed not to, directly or indirectly, offer, sell, assign, transfer, encumber, pledge, contract to sell, grant an option to purchase or otherwise dispose of any Common Stock for a period of 24 months after the date of this prospectus without the prior written consent of the Underwriters. Upon expiration of the 24-month lockup period, the Affiliate Shares will be eligible for immediate resale without restriction under the Securities Act, subject, in certain cases, to certain volume, timing and other requirements of Rule 144 promulgated under the Securities Act. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock. See "Shares Eligible for Future Sale" and "Underwriting." DIVIDEND POLICY. Although the Company has previously made cash distributions to its shareholders and intends to distribute $200,000 to its existing shareholders out of the proceeds of this Offering primarily 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, the Company does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. See "Dividend Policy." 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the 900,000 shares of Common Stock being offered hereby are estimated to be approximately $3,705,000 (approximately $4,292,500 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 Use Dollar Amount of Net Proceeds --- ------------- ---------------------- Repayment of certain existing indebtedness . . . . . . . . . . . $1,575,000 42.5% Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1,380,000 37.3% Working capital and general corporate purposes . . . . . . . . . 550,000 14.8% Distribution to existing shareholders. . . . . . . . . . . . . . 200,000 5.4% Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,705,000 100.0%
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 acquisition of stores. The Bergen Brunswig Loan bears interest at 2% above the prime rate announced from time to time by two banks. As of December 31, 1996, the effective interest rate on the Bergen Brunswig Loan was 10.25%. 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, 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 $1.4 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 agreement or commitments with respect to any potential acquisition. The Company will distribute $200,000 of the net proceeds to its existing shareholders primarily for the purpose of mitigating 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. Although a distribution of $200,000 will be made from the proceeds of this Offering primarily for the purpose of mitigating the state and Federal 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 15 the termination of such status, the Company does not anticipate that future dividends or distributions will be declared. 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. The Company does not expect to declare or pay any dividends on Common Stock in the foreseeable future. DILUTION At December 31, 1996, net tangible book value of the Company's Common Stock was approximately $767,000, or $.71 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 $1.88 per share which will represent an immediate dilution of $3.12 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 54.6% $1,771,127 28.2% $1.64 New investors 900,000 45.4% 4,500,000 71.8% 5.00 --------- ---------- Total 1,982,424 100.0% $6,271,127 100% $3.16 --------- ---------- --------- ----------
16 CAPITALIZATION The following table sets forth the capitalization of the Company at December 31, 1996 and as adjusted to give effect to the sale of the 900,000 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," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes appearing elsewhere in this prospectus. December 31, 1996 ----------------- Actual As Adjusted ------ ----------- Shareholders' Equity: Common Stock; $.01 par value, 14,000,000 shares authorized; 1,082,424 shares issued and outstanding; 1,982,424 shares as adjusted(1)(2)................................... $ 10,824 $ 19,824 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 5,456,303 Accumulated deficit.......................................... (21,054) (370,054) ---------- ---------- Total capitalization.......................................$1,750,073 $5,106,073 ---------- ---------- ---------- ----------
- -------------------- (1) Excludes 200,000 shares of Common Stock reserved for issuance pursuant to the Company's 1997 Stock Option Plan. See "Management - 1997 Stock Option Plan" and "Description of Securities." (2) Reflects a 2-for-1 stock split for shares of Common Stock. 17 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 FEBRUARY 28, 1994 TO DECEMBER 31, YEAR ENDED DECEMBER 31, 1994(1) 1995 1996 ----------------- ----------------------- INCOME STATEMENT DATA: NET SALES: (in thousands) Prescription drugs $1,387 $5,235 $10,710 Other 284 1,035 2,426 ------ ------- ------ Total net sales 1,671 6,270 13,136 COST OF SALES: Prescription drugs 902 3,735 7,588 Other 174 637 1,354 ------ ------- ------ Total cost of sales 1,076 4,372 8,942 ------ ------- ------ Gross profit 595 1,898 4,194 Selling, general and administrative expenses 396 1,519 3,471 Depreciation and amortization 30 100 172 ------ ------- ------ Income from operations 169 279 551 Interest expense and other, net 15 103 249 ------ ------- ------ Income before income taxes (2) 154 176 302 Pro forma provision for income taxes (2) 54 62 106 ------ ------- ------ Pro forma net income (2) $ 100 $ 114 $ 196 ------ ------- ------ ------ ------- ------ DECEMBER 31, 1994 1995 1996 ------ ------- ------ (in thousands) BALANCE SHEET DATA: Working capital $ 600 $1,029 $ 1,563 Total assets 1,268 3,545 6,589 Long-term obligations 346 930 1,467 Total liabilities 576 2,266 4,839 Shareholders' equity 692 1,279 1,750 - -------------------- (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 pro forma income before income tax in each of the periods presented. 18 PRO FORMA COMBINED FINANCIAL DATA The following unaudited Pro Forma Combined Condensed Statement of Income for the year ended December 31, 1996 reflects 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 December 31, 1996 reflects the historical financial position of the Company as of that date adjusted to give pro forma effect to the acquisition of the Vista Stores and the Offering as if they had occurred as of December 31, 1996. The pro forma adjustments are based upon available information and assumptions that management of the Company believes are reasonable. 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. 19 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME Year ended December 31, 1996 (Dollars in thousands, except per share data) HISTORICAL -------------------------------------------- PRO FORMA FARMINGTON OTHER PRO FORMA ADJUSTMENTS VISTA STORE STORES PRO FORMA FOR FOR THE COMPANY STORES (NOTE A) (NOTE A) ADJUSTMENTS ACQUISITIONS OFFERING PRO FORMA ------------------------------------------------------------------------------------------------ Net sales $13,136 $4,229 $1,247 $3,521 $22,133 $ 22,133 Costs and expenses: Cost of sales 8,942 3,021 826 2,658 15,447 15,447 Depreciation and amortization 172 -- -- -- $ 48(1) 220 220 Selling, general and administrative 3,471 785 299 790 5,345 $ 97(6) 5,442 ------------------------------------------------------------------------------------------------ Total costs and expenses 12,585 3,806 1,125 3,448 48 21,012 97 21,109 ------------------------------------------------------------------------------------------------ Income from operations 551 423 122 73 (48) 1,121 (97) 1,024 Interest expense and other, net 249 -- -- -- 142(2) 391 (168)(5) 223 ------------------------------------------------------------------------------------------------ Income before income taxes $ 302 $ 423 $ 122 $ 73 (190) 730 71 801 ----------------------------------------- ----------------------------------------- Pro forma provision for income taxes (Note B) 255(3) 255 23(7) 278 ------------------------------------------------- Pro forma net income (Note B) $ (445) $ 475 $ 48 $ 523 ------------------------------------------------- ------------------------------------------------- Pro forma net income per share (Note B) $ 0.27 ---------- ---------- Shares used in computation 1,969,856 ---------- ----------
- -------------- 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 $131,000 ($.07 per share) at January 1, 1996. 20 PRO FORMA COMBINED CONDENSED BALANCE SHEET December 31, 1996 (in thousands) PRO FORMA ADJUSTMENTS COMPANY VISTA FOR THE HISTORICAL STORES(NOTE) OFFERING PRO FORMA ---------------------------------------------------- ASSETS Current assets: Cash $ 153 $ 1,930(4) $2,083 Accounts receivable 1,460 $ 67 1,527 Inventories 3,291 482 3,773 Prepaid expenses 31 31 ---------------------------------------------------- Total current assets 4,935 549 1,930 7,414 Property and equipment, net 671 60 731 Intangibles, net 983 390 1,373 ---------------------------------------------------- Total assets $ 6,589 $ 999 $ 1,930 $9,518 ---------------------------------------------------- ---------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank overdraft $ 248 $ 248 Accounts payable 1,492 1,492 Accrued liabilities 161 161 Notes payable 1,215 $ 999 $ (1,475)(4) 739 Current portion of long-term obligations 256 256 ---------------------------------------------------- Total current liabilities 3,372 999 (1,475) 2,896 Deferred income taxes -- 149 (8) 149 Long-term obligations 1,467 (100)(4) 1,367 Shareholders' equity: Common stock 11 9 (4) 20 Additional paid-in capital 1,760 3,696 (4) 5,456 Accumulated deficit (21) (149)(8) (200)(4) (370) ---------------------------------------------------- Total shareholders' equity 1,750 3,356 5,106 ---------------------------------------------------- Total liabilities and shareholders' equity $ 6,589 $ 999 $ 1,930 $9,518 ---------------------------------------------------- ---------------------------------------------------- ______________ Note: The Vista Stores were acquired in March 1997 for a total consideration of $999 financed by notes payable and are included herein at the values allocated to assets acquired. 21 ADJUSTMENTS TO PRO FORMA FINANCIAL STATEMENTS ACQUISITIONS OF STORES: (1) Depreciation and amortization of acquired equipment and intangibles: Vista Stores $ 39,000 Farmington Store 4,000 Other stores 5,000 ---------- $ 48,000 ---------- ---------- (2) Provide for interest expense on debt issued in Acquisitions: Vista Stores $ 86,000 Farmington Store 17,000 Other stores 39,000 ---------- $ 142,000 ---------- ---------- (3) Provide for income taxes on the historical income of the Company and the Acquisitions, net of pro forma adjustments $ 255,000 ---------- ---------- THE OFFERING: (4) Record the issuance of 900,000 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 $4,500,000 Estimated expenses of Offering 795,000 ---------- Estimated net proceeds of Offering 3,705,000 Repayment of existing indebtedness 1,575,000 Distributions to existing shareholders 200,000 ---------- Estimated net cash proceeds $1,930,000 ---------- ---------- (5) Reduce interest expense related to repayment of debt $ 168,000 ---------- ---------- (6) Record incremental officer compensation in connection with new employment agreements $ 97,000 ---------- ---------- (7) Record income tax effects of adjustments $ 23,000 ---------- ---------- (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 December 31, 1996 $ 149,000 ---------- ---------- 22 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 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 81.5% 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 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. RESULTS OF OPERATIONS The following table sets forth the percentage relationship of certain income statement data: PERIOD FROM YEAR ENDED DECEMBER 31, FEBRUARY 28, 1994 TO -------------------------- INCOME STATEMENT DATA DECEMBER 31, 1994 1995 1996 -------------------- ------ ------ NET SALES: Prescription drugs 83.1% 83.5% 81.5% Other 16.9% 16.5% 18.5% ----- ----- ----- Total net sales 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- COSTS AND EXPENSES: Cost of sales - prescription drugs(1) 65.0% 71.3% 70.8% Cost of sales - other(2) 61.5% 61.5% 55.8% Selling, general and administrative expenses(3) 23.7% 24.2% 26.4% Depreciation and amortization(3) 1.7% 1.6% 1.3% Interest expense(3) 0.9% 1.8% 1.9% PRO FORMA NET INCOME(3)(4) 6.0% 1.8% 1.5%
- ---------------------- (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. 23 NET SALES 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 $5,475,340, or 105% to $10,710,586 for 1996 compared to $5,235,246 for 1995. Third-party reimbursed sales accounted for approximately 52% of 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. The following table shows the Company's prescription drug gross margins and total sales margins for 1996 and 1995: GROSS MARGINS ON PRESCRIPTION DRUG SALES GROSS MARGINS ON TOTAL SALES ---------------------------- ------------------------------ YEAR AMOUNT PERCENTAGE AMOUNT PERCENTAGE ---- ---------- ---------- ---------- ---------- 1996 $3,122,890 29.2% $4,194,614 31.9% 1995 1,499,954 28.7% 1,897,774 30.3% Sales of prescription drugs decreased from 83.5% of total sales for 1995 to 81.5% of total sales for 1996. 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. 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. This increase is primarily the result of increased sales volume due to the increased number of store operating months. Cost of total sales as a percentage of total sales decreased 1.6% from the previous year. This decrease is 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 is 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, respectively. The percentage increase in expense was 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. Interest expense was $252,767 in 1996 compared to $109,828 in 1995. 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. NET INCOME Net income for 1996 rose to $302,353 from $175,629 in 1995. Because the Company has maintained S corporation status since 1994, no income taxes have been included in the determination of historical net income. 24 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 inventory levels 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 $550,000 of the proceeds from the Offering designated for working capital. The Company will have available approximately $1,380,000 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, Plano Bank and Trust, Plano, Texas has tentatively agreed to provide the Company a $2,000,000 credit facility upon completion of the Offering. The credit facility will bear an interest rate equal to 1.00% over prime rate, adjusted semi-annually. No funds have been borrowed under this credit facility. Based on the foregoing and with the expected $1,380,000 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, combined with the credit facility, will be sufficient to support the ongoing activities of the business for the foreseeable future. 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. 25 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 October 21, 1996 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 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, advertising 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. 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. 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 26 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. 27 HORIZON PHARMACIES As of April 14, 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 is in the process of submitting 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, contraindications 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 3,600 to 12,000 square feet and are located primarily in neighborhood strip shopping centers or free standing locations in communities 28 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. 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 acquisitions of 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 certain 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. 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 81.5% 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. According to industry studies, persons over age 65 purchase twice as many prescription drugs and 50% more over-the-counter drugs than the national average. The Company also believes that it is capable of meeting the needs of the increasing volume of third-party prescription sales and is aggressively marketing itself to third-party payors. See "Government Regulation and Healthcare Reform" and "Third-Party Reimbursement." The Company believes that new prescription drugs and drug therapies provide an opportunity for increased demand for prescription drugs. In addition, the FDA is approving an increasing number of prescription products for sale over the counter. Prescription drugs which are approved for over-the-counter distribution have historically shown significantly increased sales. NONPHARMACEUTICAL MERCHANDISE. 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 brand over-the-counter 29 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. The Company is in the process of applying 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) patient services, including nursing and para-professional services; and (iii) infusion therapy. The Company provides patients with a variety of services and related products, many of which are essential to the proper 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 (the administration of pain controlling drugs such as morphine and Demerol to terminally or chronically ill patients); and other therapies. 30 STORE OPERATIONS The Company's current stores are generally located in free-standing stores or in 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 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 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 store 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 with a view to identifying possible allergies, drug interactions or therapeutic duplication, and to provide customers with a complete record of medication dispensed. The Company's computer software system also enables the Company to identify generic equivalents of brand name drugs, centrally control prescription prices, increase the speed of processing prescriptions and reduce the paperwork normally involved in, and thus expedite the collection of amounts due the Company under, third-party reimbursement programs. The Company sells certain private label products which enables the Company to sell products, comparable in quality to name brand products, at lower prices to its customers, but at higher gross margins for the Company. Most photo processing services offered at Company stores are provided by an independent contractor who provides the stores with a "drop box" into which the customer places its film for processing. The independent contractor collects the film, processes it and returns the printed photos to the respective stores for pick-up and payment by the customer. 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. 31 GOVERNMENTAL REGULATION AND HEALTHCARE REFORM 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 growing 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 health care system, either nationally or at the state level. The Company cannot predict whether any Federal or state health care 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 health care reform expands the number of persons receiving health care 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 health care reform legislation will not adversely affect the Company or the retail pharmacy industry generally. In 1990, Congress enacted the Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990"), which includes a requirement that states implement pharmaceutical drug use review programs for Medicaid beneficiaries receiving covered out-patient prescription drugs. The OBRA 1990 legislation states that pharmacists must offer to discuss with each Medicaid patient "common, severe side or adverse effects or interactions and therapeutic contraindications that may be encountered, including their avoidance and the action required if they occur." In order to ensure reimbursement of out-patient prescription drugs under Medicaid, states were required, pursuant to the OBRA 1990 legislation, to implement drug use review programs by January 1, 1993. In all states where the Company operates, the State Pharmacy Practices Acts have expanded the OBRA requirements to include all patients receiving prescriptions in a retail setting. Pharmacists now have a duty to warn the purchaser of a prescription drug if the warning could reduce or negate the adverse effects of the use of such drug. The Company's operations are also subject to Federal and state laws governing such matters as wages, working conditions and overtime. 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 32 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 is in the process of filing applications for Federal trademark protection of such tradenames. 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. 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. 33 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth certain information regarding the directors, executive officers and key employees of the Company. NAME AGE POSITION - ---- --- -------- Rick D. McCord, R.Ph. 42 Chairman of the Board of Directors, President, Chief Operating Officer Sy S. Shahid 46 Director, Executive Vice President, Secretary David W. Frauhiger 35 Director, Chief Financial Officer, Treasurer Charlie K. Herr, R.Ph. 57 Director, Southern Regional Manager Robert D. Mueller, R.Ph. 39 Director, Western Regional Manager 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 and as Chief Financial Officer since March 1997. Mr. Frauhiger served as the full-time controller for True Quality Pharmacies, Inc. from 1991 to February 1994, and as the part-time controller from February 1994 until January 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. 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 the present. 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. 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 34 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. 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 $66,000 $25,334 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 ON EXERCISE VALUE NAME (#) REALIZED ---- --------------- -------- Rick D. McCord 50,000 $225,000 DIRECTORS' COMPENSATION Directors who are not officers 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"). 35 Under the 1997 Stock Option Plan, the Company has reserved 200,000 shares of Common Stock 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 $5.00 per share. 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, both NQSO's and ISO's will be granted with an exercise price equal to the "Fair Market Value" (as defined in the 1997 Stock Option Plan) on the date of grant. In the case of ISO's, certain limitations will apply with respect to the aggregate value of option shares which can become exercisable for the first time during any one calendar year, and certain additional limitations will apply to ISO's granted to an employee who possesses more than 10% of the total combined voting power of all classes of stock of the Company. 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. 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 $101,757 and an annual bonus of $20,351; 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. 36 Each agreement contains a provision prohibiting the Employee subsequent to termination of employment from disclosing to third parties proprietary information relating to the Company. 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, 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 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. 37 PRINCIPAL SHAREHOLDERS The following table sets forth information as of April 14, 1997 assuming the proposed 2-for-1 stock split, and as adjusted to reflect the sale of the 900,000 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 of Beneficial Holder Number of Shares Before Offering After Offering -------------------- ---------------- --------------- -------------- Rick D. McCord, R.Ph.(2) 221,740 20.48% 11.19% Charlie K. Herr, R.Ph.(2) 211,426 19.53% 10.67% Sy S. Shahid(2) 209,748 19.38% 10.58% David W. Frauhiger(2) 70,000 6.47% 3.53% Robert D. Mueller, R.Ph.(2) 28,438 2.63% 1.43% Directors and executive officers as a group (five persons) 741,352 68.49% 37.40%
- ----------------- (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. 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 no shares of Preferred Stock were issued and outstanding. A total of 200,000 shares of Common Stock has been reserved for grants of options under the 1997 Stock Option Plan. COMMON STOCK The holders of Common Stock are entitled to one vote for each share on all matters submitted to a vote of shareholders. There is no cumulative voting with respect to the election of directors. Accordingly, holders of a majority of the shares entitled to vote in any election of directors may elect all of the directors standing for election. Subject to preferences that may be applicable to any then outstanding class of Preferred Stock, the holders of Common Stock are entitled to receive such dividends, if any, as may be declared by the Board of Directors from time to time out of legally available funds. Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets of the Company that are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of holders of any class of Preferred Stock then outstanding. The holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The rights, 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. 38 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. 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 By-laws provide that (i) the Board of Directors is divided into three classes of as equal size as possible, (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. 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, Inc. 39 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 1,982,424 shares of Common Stock. Of these shares all of the 900,000 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 become 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 228,424 Restricted Shares will be eligible for sale without restriction or further registration on various dates in the fourth quarter of 1997, subject to the volume limitations of Rule 144. In general, under amendments to Rule 144 which become 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. As of the date of this prospectus, the Company had reserved an aggregate of 200,000 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. 40 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 900,000 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 only six public equity offerings as an underwriter, 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 135,000 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 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 41 of the Underwriters' Warrants, one demand registration right during the Exercise Period, as well as piggyback registration rights at any time. 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. 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. 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. 42 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 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. 43 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 Sheet at December 31, 1996................................... F-5 Statements of Income for the years ended December 31, 1995 and 1996.. F-7 Statements of Shareholders'Equity for the years ended December 31, 1995 and 1996...................................................... F-8 Statements of Cash Flows for the years ended December 31, 1995 and 1996........................................................... F-9 Notes to Financial Statements........................................ F-11 FINANCIAL STATEMENTS OF MESA DRUG, INC. -- FARMINGTON STORE............... F-16 Report of Independent Auditors....................................... F-17 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-18 Notes to Financial Statements........................................ F-19 FINANCIAL STATEMENTS OF TRUE QUALITY PHARMACIES, INC. -- VISTAS........... F-20 Report of Independent Auditors....................................... F-21 Statements of Operating Revenues and Direct Operating Expenses for the years ended December 31, 1995 and 1996..................... F-22 Combined Statement of Net Assets Sold as of March 6, 1997............ F-23 Notes to Financial Statements........................................ F-24 F-1 FINANCIAL STATEMENTS HORIZON PHARMACIES, INC. YEARS ENDED DECEMBER 31, 1995 AND 1996 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 fourth paragraph of Note 6, as to which the date is April __, 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 April 15, 1997 F-3 To the Board of Directors and Shareholders HORIZON Pharmacies, Inc. INDEPENDENT AUDITOR'S REPORT 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 April __, 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 April 15, 1997 F-4 HORIZON Pharmacies, Inc. Balance Sheet DECEMBER 31, 1996 ------------ ASSETS (NOTES 3 AND 4) Current assets: Cash $ 153,260 Accounts receivable, net of allowance for uncollectible accounts of $20,000: Third-party providers 1,047,348 Others 412,709 Inventories, at the lower of specific identification cost or market 3,290,717 Prepaid expenses 31,071 ---------- Total current assets 4,935,105 Property, equipment and capital lease assets: Property and equipment, at cost: Land 10,000 Building 193,220 Equipment 410,162 ---------- 613,382 Less accumulated depreciation 67,253 ---------- Property and equipment, net 546,129 Equipment under capital leases 158,339 Less accumulated amortization 33,884 ---------- Equipment under capital leases, net 124,455 ---------- Property, equipment and capital lease assets, net 670,584 Intangibles, at cost (Note 2): Noncompete covenants 146,788 Customer lists 211,605 Goodwill 814,107 ---------- 1,172,500 Less accumulated amortization 189,417 ---------- Intangibles, net 983,083 ---------- $6,588,772 ---------- ----------
(CONTINUED ON FOLLOWING PAGE) F-5 HORIZON Pharmacies, Inc. Balance Sheet (continued) DECEMBER 31, 1996 ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank overdraft $ 247,759 Accounts payable 1,491,789 Accrued liabilities 161,365 Notes payable (NOTE 3) 1,215,000 Current portion of long-term debt (NOTE 4) 228,759 Current obligations under capital leases (NOTE 5) 27,400 ---------- Total current liabilities 3,372,072 Long-term debt (NOTE 4) 1,363,858 Obligations under capital leases (NOTE 5) 102,769 Commitments (NOTES 5 AND 7) 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 Additional paid-in capital 1,760,303 Accumulated deficit (21,054) ---------- Total shareholders' equity 1,750,073 ---------- $6,588,772 ---------- ----------
SEE ACCOMPANYING NOTES. F-6 HORIZON Pharmacies, Inc. Statements of Income YEAR ENDED DECEMBER 31, 1995 1996 ------------------------ Net sales: Prescription drugs $5,235,246 $ 10,710,586 Other 1,034,335 2,425,733 ------------------------ Total net sales 6,269,581 13,136,319 Costs and expenses: Cost of sales: Prescription drugs 3,735,292 7,587,696 Other 636,515 1,354,009 Depreciation and amortization: Property, equipment and capital lease assets 32,305 64,058 Intangibles 67,412 107,749 Selling, general and administrative expenses 1,519,439 3,471,370 ------------------------ Total costs and expenses 5,990,963 12,584,882 ------------------------ Income from operations 278,618 551,437 Other income (expense): Interest and other income 6,839 3,683 Interest expense (109,828) (252,767) ------------------------ Total other income (expense) (102,989) (249,084) ------------------------ Net income $ 175,629 $ 302,353 ------------------------ ------------------------ SEE ACCOMPANYING NOTES. F-7 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 ---------------------------------------------------------- ----------------------------------------------------------
SEE ACCOMPANYING NOTES. F-8 HORIZON Pharmacies, Inc. Statements of Cash Flows YEAR ENDED DECEMBER 31, 1995 1996 --------------------------- OPERATING ACTIVITIES Net income $ 175,629 $ 302,353 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, equipment and capital lease assets 32,305 64,058 Amortization of intangibles 67,412 107,749 Provision for uncollectible accounts receivable 19,876 21,241 Changes in operating assets and liabilities, net of acquisitions of businesses: Accounts receivable (415,094) (847,494) Inventories (199,330) (716,553) Prepaid expenses (27,495) 4,302 Bank overdraft 130,830 116,929 Accounts payable 477,990 888,348 Accrued liabilities 25,396 108,523 --------------------------- Total adjustments 111,890 (252,897) --------------------------- Net cash provided by operating activities 287,519 49,456 INVESTING ACTIVITIES Purchases of property and equipment (33,129) (156,625) Acquisitions of businesses: Accounts receivable and other (24,967) 1,793 Inventories (801,000) (1,014,247) Property and equipment (140,000) (85,000) Intangibles (638,000) (165,000) --------------------------- (1,603,967) (1,262,454) Less portion financed with debt: Notes payable 400,000 639,465 Long-term debt 658,967 622,989 --------------------------- 1,058,967 1,262,454 --------------------------- (545,000) - --------------------------- Net cash used in investing activities (578,129) (156,625) (CONTINUED ON FOLLOWING PAGE) F-9 HORIZON Pharmacies, Inc. Statements of Cash Flows (continued) YEAR ENDED DECEMBER 31, 1995 1996 --------------------------- FINANCING ACTIVITIES Borrowings on notes payable $ - $ 210,535 Borrowings on long-term debt 24,120 - Principal payments on notes payable - (35,000) Principal payments on long-term debt (128,869) (180,643) Principal payments on obligations under capital leases (5,562) (18,716) Proceeds from sale of stock 747,164 402,120 Distributions to shareholders (260,000) (253,500) --------------------------- Net cash provided by financing activities 376,853 124,796 --------------------------- Net increase in cash 86,243 17,627 Cash at beginning of year 49,390 135,633 --------------------------- Cash at end of year $ 135,633 $ 153,260 --------------------------- --------------------------- SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 106,828 $ 240,767 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 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 - SEE ACCOMPANYING NOTES. F-10 HORIZON Pharmacies, Inc. Notes to Financial Statements December 31, 1995 and 1996 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 The Company owns and operates eleven retail pharmacies located in five states (NOTE 2). 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 (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. Certain of these receivables are recorded net of any allowances provided under the respective plans. Since payments due from certain third-party payers are sensitive to payment criteria changes and legislative actions, the allowance is reviewed continually and adjusted for accounts deemed uncollectible by management. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. 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 of intangibles annually, based upon expectations of undiscounted future cash flows. F-11 HORIZON Pharmacies, Inc. Notes to Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNT 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 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. 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 and incremental interest expense resulting from borrowings to fund the acquisitions. F-12 HORIZON Pharmacies, Inc. Notes to Financial Statements (continued) 2. ACQUISITIONS (CONTINUED) YEAR ENDED DECEMBER 31, 1995 1996 ----------------------------- Unaudited pro forma information: Net sales $16,177,000 $17,904,000 ----------------------------- ----------------------------- Net income $ 186,000 $ 432,000 ----------------------------- ----------------------------- In March 1997, the Company acquired 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 advance by a shareholder of $100,000 and the issuance of a 8.5% note payable to the seller for $898,642. The note is secured by the assets acquired and guarantees by certain shareholders and is due in varying installments until December 25, 1997. 3. NOTES PAYABLE 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 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 consist of the following at December 31, 1996: Note A due on demand or on May 17, 1997, plus interest at a specified bank's prime rate plus 2% (10.25% at December 31, 1996) $ 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 ---------- $1,215,000 ---------- ----------
F-13 HORIZON Pharmacies, Inc. Notes to Financial Statements (continued) 4. LONG-TERM DEBT Long-term debt consists of the following at December 31, 1996: 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 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 ---------- 1,592,617 Less current portion of long-term debt 228,759 ---------- Long-term debt $1,363,858 ---------- ---------- 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. 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 -------- -------- F-14 HORIZON Pharmacies, Inc. Notes to Financial Statements (continued) 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 and shareholders approved The 1997 Stock Option Plan (the "Plan"). Options for up to 200,000 shares of common stock may be granted until March 2007 to key employees and directors at prices equal to the fair market values (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 April __, 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. 7. COMMITMENTS The Company has employment agreements with certain store managers. In addition to base salaries, the agreements provide for bonuses based on specified earnings goals. Bonuses charged to expense were $23,879 in 1995 and $61,265 in 1996. The Company has entered into employment agreements with six officers and key employees of the Company, effective June 1, 1997. These agreements are for three-year terms with renewal options of three years and provide for annual base salaries, totaling approximately $624,000 annually, as well as incentive bonuses totaling approximately $117,000 annually. 8. 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-15 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-16 The Board of Directors and Shareholders HORIZON Pharmacies, Inc. Report of Independent Auditors 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-17 MESA DRUG, INC. - FARMINGTON STORE STATEMENTS OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES YEAR ENDED PERIOD FROM JANUARY 1, 1996 DECEMBER 31, 1995 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 -- 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 998,596 298,805 ---------- ---------- Operating profit $ 251,914 $ 122,132 ---------- ---------- ---------- ---------- See accompanying notes. F-18 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 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. 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-19 FINANCIAL STATEMENTS TRUE QUALITY PHARMACIES, INC. - VISTAS YEARS ENDED DECEMBER 31, 1995 AND 1996 WITH REPORT OF INDEPENDENT AUDITORS F-20 The Board of Directors and Shareholders HORIZON Pharmacies, Inc. Report of Independent Auditors 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, 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, 1997. Herold, Howard & Madsen, P.C. Dallas, Texas March 28, 1997 F-21 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 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 766,189 784,299 ---------- ---------- Operating profit $ 485,057 $ 423,802 ---------- ---------- ---------- ---------- SEE ACCOMPANYING NOTES. F-22 TRUE QUALITY PHARMACIES, INC. - VISTAS COMBINED STATEMENT OF NET ASSETS SOLD MARCH 6, 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-23 True Quality Pharmacies, Inc. - Vistas Notes to the Financial Statements As of March 6, 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 retail pharmacies located in Texas, Oklahoma and Kansas. The financial statements presented include 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. 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-24 ======================================================================== 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 . . . . . . . . . . . . . . . . . . . . . . . . . .7 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . 15 Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . 15 Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 17 Selected Financial Information . . . . . . . . . . . . . . . . 18 Pro Forma Combined Financial Data. . . . . . . . . . . . . . . 19 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . 23 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Management . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Certain Transactions . . . . . . . . . . . . . . . . . . . . . 37 Principal Shareholders . . . . . . . . . . . . . . . . . . . . 38 Description of Securities. . . . . . . . . . . . . . . . . . . 38 Shares Eligible for Future Sale. . . . . . . . . . . . . . . . 40 Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . 41 Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . 42 Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Additional Information . . . . . . . . . . . . . . . . . . . . 44 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. ======================================================================== ======================================================================== 900,000 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. . . $ 1,970.68 NASD fees. . . . . . . . . . . . . . . . . . . . . . . . 1,300.00 Underwriters' non-accountable expense allowance. . . . . 155,250.00 Blue Sky Fees. . . . . . . . . . . . . . . . . . . . . . 20,000.00 Legal fees and expenses. . . . . . . . . . . . . . . . . 80,000.00 Accounting fees and expenses . . . . . . . . . . . . . . 65,000.00 Printing and engraving expenses. . . . . . . . . . . . . 35,000.00 Nasdaq application fees. . . . . . . . . . . . . . . . . 6,780.00 ----------- TOTAL EXPENSES . . . . . . . . . . . . . . . . . . $362,030.00 ----------- -----------
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. II-2 ITEM 27. EXHIBITS. Exhibit Number Name of Exhibit ------- --------------- * 1.1 Underwriting Agreement between the Company and Capital West Securities, Inc. 3.1 Restated Articles of Incorporation (filed electronically herewith). * 3.2 Amended and Restated Articles of Incorporation. * 3.3 Amended and Restated Bylaws. * 4.1 Specimen Certificate of the Common Stock. * 4.3 Form of Warrant Agreement between the Company and the Underwriters. * 4.4 Stock Option Plan. * 5.1 Opinion of Phillips McFall McCaffrey McVay & Murrah, P.C. as to the legality of the securities being registered. 10.1 Loan Agreement dated October 16, 1996, by and between the Company and Bergen Brunswig Drug Company (filed electronically herewith). 10.2 Purchase Agreement dated March 8, 1997 by and between Mesa Drug, Inc. And Horizon Pharmacies, Inc. (filed electronically herewith). 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. (filed electronically herewith). *10.4 Form of Employment Agreement by and between the Company and each of Rick D. McCord, R.Ph., Sy S. Shahid and David W. Frauhiger. *10.5 Form of Lockup Agreement. 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. (filed electronically herewith). 24 Power of Attorney (included on Signature Page filed herein). - ----------------- * To be filed by amendment. 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. II-3 (b) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective. (c) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (i) include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) include any additional or changed material information on the plan of distribution. (d) That, for the purpose of determining liability under the Securities Act, each post-effective amendment shall be deemed to be a new registration statement of the securities offered, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. (e) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the termination or end of the offering. 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 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 April 15, 1997. HORIZON PHARMACIES, INC. a Texas corporation By: /s/ RICK D. MCCORD, R.Ph. --------------------------------------- Rick D. McCord, R.Ph. President and Chief Operating Officer Know all men by these presents, that each 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 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. Pursuant to the requirements of the Securities Act of 1933, as amended, this 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 April 15, 1997 - ----------------------------- Directors, President and Rick D. McCord, R.Ph. Chief Operating Officer PRINCIPAL EXECUTIVE OFFICER /s/ Sy S. Shahid Executive Vice President, April 15, 1997 - ----------------------------- Secretary, Director Sy S. Shahid /s/ David W. Frauhiger - ----------------------------- Chief Financial Officer, April 15, 1997 David W. Frauhiger Treasurer, Director PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER /s/ Charlie K. Herr Director April 15, 1997 - ----------------------------- Charlie K. Herr, R.Ph. /s/ Robert D. Mueller Director April 15, 1997 - ----------------------------- Robert D. Mueller, R.Ph. INDEX TO EXHIBITS Exhibit Number Name of Exhibit - ------- --------------- * 1.1 Underwriting Agreement between the Company and Capital West Securities, Inc. 3.1 Restated Articles of Incorporation (filed electronically herewith). * 3.2 Amended and Restated Articles of Incorporation. * 3.3 Amended and Restated Bylaws. * 4.1 Specimen Certificate of the Common Stock. * 4.3 Form of Warrant Agreement between the Company and the Underwriters (filed electronically herewith). * 4.4 Stock Option Plan. * 5.1 Opinion of Phillips McFall McCaffrey McVay & Murrah, P.C. as to the legality of the securities being registered. 10.1 Loan Agreement dated October 21, 1996 by and between Bergen-Brunswig Drug Co. and Horizon Pharmacies, Inc. (filed electronically herewith). 10.2 Purchase Agreement dated March 8, 1997 by and between Mesa Drug, Inc. and Horizon Pharmacies, Inc. (filed electronically herewith). 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. (filed electronically herewith). *10.4 Form of Employment Agreement by and between the Company and each of Rick D. McCord, R.Ph., Sy S. Shahid and David W. Frauhiger. *10.5 Form of Lockup Agreement. 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. (filed electronically herewith). 24 Power of Attorney (included on Signature Page filed herein).
- ------------------- * To be filed by amendment. EX-3.1 2 EXHIBIT 3.1 Exhibit 3.1 RESTATED ARTICLES OF INCORPORATION OF HORIZON PHARMACIES, INC. ARTICLE ONE HORIZON Pharmacies, Inc. (the "Corporation"), pursuant to the provisions of Section 4.07 of the Texas Business Corporation Act does hereby adopt these Restated Articles of Incorporation which accurately copy the Articles of Incorporation and all amendments thereto that are in effect to date and such Restated Articles of Incorporation contain no change in any provision thereof. ARTICLE TWO The Restated Articles of Incorporation were adopted by resolution of the Board of Directors of the Corporation on the 14th day of April, 1997. ARTICLE THREE The Articles of Incorporation and all amendments and supplements thereto are hereby superseded by the following Restated Articles of Incorporation which accurately copy the entire text thereof: RESTATED ARTICLES OF INCORPORATION OF HORIZON PHARMACIES, INC. ARTICLE I The name of corporation is: HORIZON Pharmacies, Inc. ARTICLE II The period of the Corporation's duration is perpetual. ARTICLE III The purposes for which the Corporation is organized are as follows: 1) To engage in the retail pharmacy business 2) Also to engage in any and all lawful business transactions for which corporations may be incorporated under the Texas Business Corporation Act. ARTICLE IV The aggregate number of shares which the Corporation shall have authority to issue is one million (1,000,000) shares. The par value of each share shall be one dollar ($1.00). 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 275 W. Princeton Drive, Princeton, Collin County, Texas 75407. The name of its registered agent at such address is Sy S. Shahid. ARTICLE VII The number of directors constituting the Board of Directors of the Corporation on the date hereof is five (5) and the following sets forth the names and addresses of the persons serving as directors on the date hereof: Rick D. McCord 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 275 W. Princeton Drive, Princeton, Texas 75407 Robert D. Mueller 275 W. Princeton Drive, Princeton, Texas 75407 2 Dated this 14th day of April, 1997. HORIZON PHARMACIES, INC. By: /s/ RICK D. MCCORD ----------------------------------- 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 of office this ___ day of April, A.D. 1997. (Notarial Seal) - ---------------------------------- Notary Public, State of Texas My commission expires: , -------------------- ------ 3 EX-10.1 3 EXXHIBIT 10.1 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 EX-10.2 4 EXHIBIT 10.2 PURCHASE AGREEMENT AGREEMENT made the 8th day of March, 1996 between Mesa Drug, Inc. having an office at 1024 North Butler Ave, Farmington, New Mexico 87401 (hereinafter referred to as the "seller"), and HORIZON PHARMACIES, INC., a Texas Corporation, having offices located at 460 Stickhorse Lane, McKinney, Texas, 75069 (hereinafter referred to as the "Buyer"). WITNESSETH WHEREAS, the Seller and the Buyer have reached an agreement, in accordance with the terms and conditions hereinbelow set forth, with respect to the sale by the Seller and the purchase by the Buyer of certain of the assets of the Seller utilized in connection with and as part of the retail drug store operations of the Seller known as Mesa Drug, Inc. and Four States Pharmacies, Inc. (hereinafter referred to as the "DRUG STORE") and desire to reduce said agreement in writing; NOW, THEREFORE, THE PARTIES AGREE: 1. SALE OF ASSETS. 1.1 For the purpose of this Agreement, Seller agrees to sell to Buyer as is certain assets of the Drug Store (hereinafter referred to as the "Drug Store Assets"), which the Buyer hereby agrees to purchase. Such assets include and are hereby limited to: A. INVENTORY, All of the marketable inventory (as defined in Exhibit A attached hereto) held for retail sale by the Seller and located at the Drug Store; and B. PRESCRIPTION FILES INCLUDING ALL CUSTOMER AND PATIENT LISTS AND PATIENT PROFILES. All prescription files and patient profiles of Seller located at and pertaining to prescription customers of the Drug Store. C. ALL FIXTURES AND EQUIPMENT. All Rx, OTC, and DME fixtures and equipment owned by Seller (computer/peripherals, registers, refrigerator, typewriter, Microfiche, etc.) located at the Drug Store, I.V. Operation, Hospital pharmacy; and all telephone equipment, and all miscellaneous shelving, counters and supplies belonging to Seller as listed on Exhibit B attached hereto and made a part hereof. D. STORE TELEPHONE NUMBER(S), All telephone numbers of the Drug Store location shall be transferred to Buyer. E. SUPPLIES. All bottles, vials, ointment jars, and other usable supplies of Seller located at the Drug Store location and at Seller cost. F. ASSETS NOT PURCHASED. Buyer shall not purchase any consigned merchandise or layaway items. 1 G. All business transactions prior to the closing date are credited to the Seller. All business acquired after the closing date belong to the HORIZON Pharmacies, Inc. including any insurance payments made to the existing NABP, State Welfare number(s), and/or contract(s) as long as the date of service is on or after the closing date. 2. PURCHASE PRICE. 2.1 The total purchase price to be paid by the Buyer for the Drug Stores Assets shall be computed, but not allocated, as follows: Furniture, Fixtures and Equipment Prescription Files, $200,000 Patient Profiles, Customer List, Patient Telephone Numbers, 3 Automobiles Includes $50,000 non-compete for JIM ROGERS. 2.2 Plus an amount equal to the aggregate value of marketable inventory (as defined in Exhibit A attached hereto) as determined in the physical inventory described in paragraph 5 below and as valued in accordance with Exhibit A attached hereto and made a part hereof. 2.3 Seller will keep 100% of the third party insurance receivables and individual charge accounts. 3. ALLOCATION OF PURCHASE PRICE. The purchase price shall be allocated in the following manner: 3.1 Item 2.2 (inventory) in the amount of five (5%) under retail cost; 3.2 Item 2.1 (furniture, fixtures, and equipment) per attached list at the assigned asset values on the list. 3.3 Non-compete covenant at the value of $50,000.00 3.4 Items 1.1 B and 1.1 D in the amount of $725,000.00 less items 3.1, 3.2, and 3.3. 4. PAYMENT OF PURCHASE PRICE. 4.1 Subject to the following provisions, the purchase price hereafter shall be paid as follows: 4.1(a) Cash at the closing equal to $200,000.00 less $1,000 escrow deposit. 4.1(b) A note at the closing equal to the purchase price less cash in Section 4.1(a) bearing interest at the rate of eight (8) percent. The note is due and payable in eighty four (84) equal consecutive monthly installments, the first installment due on May 1, 1996. The Note will be executed by Buyer and payable to the order of Seller. It will be secured by the inventory at the DRUG STORE. 5. INVENTORY. 5.1 A physical inventory shall be taken at the Drug Store by RGIS Inventory Specialists on the closing date. Each party shall pay one-half of the inventory expense. 2 6. REPRESENTATIONS AND WARRANTIES BY SELLER. 6.1 The Seller does hereby represent and warrant as follows: A. AUTHORITY. The execution, delivery and performance of this agreement by Seller has been duly authorized by all necessary entity action and constitutes a legal, valid, and binding obligation on Seller enforceable in accordance with its terms. B. TITLE TO PROPERTIES. The Seller has good and marketable title to all of the Drug Store assets to be transferred hereunder, free and clear of all mortgages, liens, encumbrances, pledges, or security interests of any nature whatsoever, except for secured debts, if any, listed on Exhibit C attached hereto which shall be satisfied and released at or prior to closing. The Seller has received no notice of violation of any applicable law, regulation or requirement relating to the retail Drug Store business operation or Drug Store assets to be transferred hereunder; and as far as known to the Seller, no such violation exists. C. CONTRACTS. Seller is not party to any contract, understanding or commitment whether in the ordinary course of business or not, relating to the conduct of business by Seller from the Drug Store which contract, understanding or commitment shall extend beyond the closing date for the Pharmacy Location except the real estate lease. Seller is not party to any contractual agreement or commitment to individual employees which may not be terminated at the will of Seller. D. LITIGATION. To the best of Seller's current actual knowledge there is no suit, action, proceeding, investigation, claim, complaint or accusation pending or, threatened against or affecting Seller or the Assets or to which Seller is a party, in any court or before any arbitration panel of any kind or before or by any federal, state, local, foreign, or other governmental agency, department, commission, board, bureau, instrumentality or body which would have a materially adverse affect on the financial condition of Seller, and to the best knowledge and belief of Seller, there is no basis for any such suit, action, litigation, proceeding, investigation, claim, complaint or accusation. There is no outstanding order, writ, injunction, decree, judgment or award by any court, arbitration panel or governmental body against or affecting Seller with which Seller is not currently in compliance. E. EMPLOYEES. (a) To the best of Seller's actual knowledge, the Seller is in full compliance with all wage and hour laws, and is not engaged in any unfair labor practice or discriminatory employment practice and no complaint of any such practice against Seller is filed or threatened to be filed with or by the National Labor Relations Board, the Equal Employment Opportunity Commission or any other administrative agency, federal or state, that regulates labor or employment practices, nor is any grievance filed or threatened to be filed against Seller by any employee pursuant to any collective bargaining or other employment agreement to which Seller is a party. To the Seller's best knowledge and belief is in compliance with all applicable federal and state laws and regulations regarding occupational safety and health standards and has received no material complaints from any federal or state agency or regulatory body alleging violations of any such laws and regulations. 3 (b) The employment of all persons and officers employed by Seller is terminable at will without any penalty or severance obligation of any kind on the part of the employer. All sums due for employee compensation and benefits and all vacation time owing to any employees of Seller have been duly and adequately accrued on the accounting records of Seller. To the Seller's best knowledge, all employees of Seller are either United States citizens or resident aliens specifically authorized to engage in employment in the United States in accordance with all applicable laws. F. TAXES. (a) Seller has duly filed all required federal, state, local, foreign and other tax returns, notices, and reports (including, but not limited to, income, property, sales, use, franchise, capital, stock, excise, added value, employees' income withholding, social security and unemployment tax returns) heretofore due; and to Seller's best knowledge all such returns, notices, and reports are correct, accurate, and complete. (b) All deposits required to be made by Seller with respect to any tax (including but not limited to, estimated income, franchise, sales, use, and employee withholding taxes) have been duly made. (c) All taxes, assessments, fees, penalties, interest and other governmental charges which have become due and payable have been paid in full by Seller or adequately reserved against on its books of account and the amounts reflected on such books are to the best belief and knowledge of Seller sufficient for the payment of all unpaid federal, state, local, foreign, and other taxes, fees, and assessments, and all interest and penalties thereon with respect to the periods then ended and or all periods prior thereto. Seller hereby agrees to indemnify and hold harmless Buyer from and against any and all liability, claims, or causes of action for any unpaid taxes, or other assessments due and owing to any federal, state, or local governmental entity arising out of the business of Seller prior to the closing date. (d) Buyer shall pay any and all Sales, Use, and Transfer Taxes, if any, arising out of the assets which are the subject of this sale. (e) Seller shall pay any and all personal property taxes for prior years attributable to the property being transferred hereby prior to closing (f) The parties shall pro rate at Closing anticipated personal property taxes as of the date of Closing based upon last year's tax renditions, and personal property tax bills and rent. 7. CONDITIONS PRECEDENT. 7.1 All obligations of Seller under this Agreement are subject to the fulfillment, prior to or at the closing, of each of the following conditions (unless waived in writing by Buyer). A. REPRESENTATIONS. The representations and warranties of Seller contained in this Agreement shall not only have been true and complete as of date of this Agreement, but shall also be true and complete as though again made as of the date of closing. 4 B. COMPLIANCE. The Seller shall have performed and complied with all terms and conditions required by this Agreement to be performed or complied with by it prior to or at the closing. C. CONSENTS. All necessary consents to the transfer of the Drug Store assets have been obtained. 8. LIABILITIES NOT ASSUMED BY BUYER. 8.1 It is expressly understood and agreed that Buyer shall not, by virtue of this Agreement, the consummation of the transactions contemplated herein or otherwise, assume any liabilities or obligations of the Seller or any liabilities or obligations constituting a charge, lien, encumbrance or security interest upon the Drug Store assets to be transferred hereunder, regardless of whether such liabilities or obligations are absolute or contingent, liquidated or unliquidated or otherwise. 8.2 Seller hereby indemnifies the Buyer, its officers, directors, and controlling persons against any liability for any fee or commission payable to any broker, agent or finder retained by Seller with respect to any transaction contemplated by this agreement. 9. CLOSING. 9.1 The closing shall take place on or before April 20, 1996 at Buyer's discretion, but in no event later than May 4, 1996, at the Drug Store location. A. TO BE DELIVERED TO BUYER. The Seller shall deliver to Buyer a Bill of Sale, which shall be effective to vest in Buyer good and marketable title to the Drug Store Assets, free and clear of all mortgages, security interest, liens, encumbrances, pledges and hypothecation of every nature and description, except the Security interest securing Buyer's Note to the Seller. B. TO BE DELIVERED TO SELLER. The Buyer shall deliver to the Seller a Cashier's check for the cash portion of the purchase price less $1,000.00 Escrow amount and Buyer's promissory note described in Paragraph 4.1 hereof, and the Security instruments required by section 4.1(b). 10. INDEMNITY BY SELLER. 10.1 The Seller hereby agrees to indemnify and hold harmless Buyer against and in respect of: A. LIABILITY OF THE SELLER. All liabilities and obligations of the Seller, of every kind and description, regardless of whether such liabilities or obligations are absolute or contingent, liquidated or unliquidated, accrued or otherwise, and regardless of how and when the same may have arisen, which are asserted against Buyer as a result of this Agreement or the consummation of the transaction contemplated herein. B. CLAIMS UPON ASSETS. All claims against, or claims of any interest in, or of a lien or encumbrance or the like upon any or all of the Drug Store assets to be transferred hereunder by the Seller to Buyer which are caused or created by indemnifying party. C. LITIGATION. Claim filed by Norma Thorpe with EEOC and claims filed in bankruptcy court arising from contractual dispute with Recomm. 5 D. The buyer will indemnify the Seller for all claims against the Assets for any period after the closing date. The Buyer further indemnifies the Seller for break or leases and dissatisfied customer claims caused by HORIZON for any period after the closing date. 11. SURVIVAL OF REPRESENTATIONS WARRANTIES & INDEMNIFICATIONS. 11.1 All of the covenants, representations, warranties and indemnification of the parties set forth in this Agreement shall survive the closing date hereof. 12. RISK OF LOSS. 12.1 The risk of loss of damage of Drug Store assets to be conveyed hereunder shall be upon Seller until the closing hereof. 13. NON-COMPETE COVENANT OF SELLER. 13.1 In consideration of the purchase price hereinabove stated in paragraph 2 of which $50,000.00 is allocated to this covenant not to compete, Jim Rogers hereby agrees that for a period of seven (7) years after the date of closing hereunder, Jim Rogers will not, directly or indirectly, through a subsidiary, joint venture arrangement or otherwise, conduct or assist another party other than the Buyer in conducting or managing any operation which has as its purpose what is generally known as a retail pharmacy, or Nursing Home or IV operation within the city limits of Farmington, New Mexico and five (5) miles radius of the said above city limits, or have any equity investment in such operation. This non-compete clause does not prohibit Jim Rogers from performing duties such as relief pharmacist at other pharmacies. The parties hereby recognize and acknowledge that the territorial and time limitations contained in this paragraph are reasonable and properly required for the adequate protection of the business to be conducted by Buyer with the assets and properties to be transferred hereunder and cannot be changed except by written permission of Buyer. Jim Rogers will work a minimum of 2 days a week for 1 year. 13.2 The parties recognize that, in the event of a breach by Seller of any of the provisions of this paragraph, the remedy of law alone would be inadequate and, accordingly, Buyer, (in addition to damages), shall be entitled to an injunction restraining Seller from violating the covenants herein contained. 13.3 It is the intention of the Seller and the Buyer that the execution of these covenants not to compete be considered as materially significant and essential to the closing of this Agreement, and that such covenants are a material portion of the purchase price set forth herein above. 14. GOVERNING LAW. 14.1 This agreement shall be governed and construed in accordance with the laws of the State of Texas or New Mexico. 15. ENTIRE AGREEMENT. 15.1 This agreement contains the entire agreement between the parties, and no representations, warranties or promises, unless contained herein, shall be binding upon the parties hereto. This document is null and void if the Purchase Agreement is not signed by both parties within 10 days from date the Buyer has received the Purchase Agreement document. 6 15.2 It is stipulated that this agreement is null and void if HORIZON Pharmacies, Inc. can not secure a real estate lease for DRUG STORE location. Furthermore, this agreement is null and void in its entirety if HORIZON Pharmacies, Inc. can not secure a valid New Mexico License under its own merit for the said DRUG STORE location to conduct business as a retail pharmacy operation. 15.3 The Seller will perform duties as relief pharmacist for the DRUG STORE for up to period of one (1) year after the closing date. 16. EARNEST MONEY. 16.1 To bind this Agreement, Buyer herewith deposits with Mesa Drug, as Escrow Agent, the sum of $1,000 (one thousand dollars), which sum shall be applied to the cash portion of the purchase price upon the closing of the transaction contemplated herein. However, in the event Seller fails to perform each and every covenant and condition required hereunder, Buyer may cancel this Agreement and have the Earnest Money returned to it. If the Buyer fails to perform each and every obligation hereunder, Seller shall retain the Earnest Money as liquidated damages. Each party's remedy provided in this Section is that party's exclusive remedy. 7 IN WITNESS WHEREOF, the parties hereto have set their hands the day and year first above written. BUYER: HORIZON PHARMACIES, INC. /s/ RICK McCORD ------------------------------- Rick McCord, President THE STATE OF NEW MEXICO ) COUNTY OF SAN JUAN ) THIS INSTRUMENT was acknowledged before me on this the 8th day of March, 1996, by RICK MCCORD, who holds the office of President of HORIZON PHARMACIES, INC., a Texas Corporation on behalf of such corporation. /s/ PAM HYDER ---------------------------------- SEAL Pam Hyder Notary Public, State of New Mexico My commission Expires: 7-3-99 SELLER: Mesa Drug /s/ JIM ROGERS ---------------------------------- Jim Rogers, President THE STATE OF NEW MEXICO ) COUNTY OF SAN JUAN ) THIS INSTRUMENT was acknowledged before me on this the 8th day of March, 1996, by JIM ROGERS, who holds the office of PRESIDENT of MESA DRUG. /s/ PAM HYDER ---------------------------------- SEAL Pam Hyder Notary Public, State of New Mexico My commission Expires: 7-3-99 8 EX-10.3 5 EXHIBIT 10.3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AGREEMENT made the 4 day of March 1997 between True Quality Pharmacies, Inc., having an office at 222 E. Virginia, McKinney, Texas 75069 (hereinafter referred to as the "Seller"), and HORIZON PHARMACIES, INC., a Texas Corporation, having offices located at 275 W. Princeton Drive, Princeton, Texas, 75407 (hereinafter referred to as the "Buyer"). WITNESSETH WHEREAS, the Seller and the Buyer have reached an agreement. In accordance with the terms and conditions hereinbelow set forth, with respect to the sale by the Seller and the purchase by the Buyer of certain assets of the Seller utilized in connection with and as part of the retail drug store operations of the Seller known as VISTA Pharmacy in MT. VERNON, MINEOLA, and MCKINNEY, Texas (hereinafter referred to as the "DRUG STORE") and desire to reduce said agreement in writing: NOW, THEREFORE, THE PARTIES AGREE: 1. SALE OF ASSETS. 1.1 For the purpose of this Agreement, Seller agrees to sell to Buyer as is certain assets of the Drug Store (hereinafter referred to as the "Drug Store Assets"), which the Buyer hereby agrees to purchase. Such assets include and are hereby limited to: A. INVENTORY. All of the marketable inventory (as defined in Exhibit A attached hereto) held for retail sale by the Seller and located at the Drug Store; and B. PRESCRIPTION FILES INCLUDING ALL CUSTOMER AND PATIENT LISTS AND PATIENT PROFILES. All prescription files and patient profiles of Seller located at and pertaining to prescription customers of the Drug Store. C. ALL FIXTURES AND EQUIPMENT. All Rx, OTC and DME fixtures and equipment owned by Seller (computer/peripherals, registers, refrigerator, typewriter, Microfiche, etc.) located at the Drug Store,; and all telephone equipment, and all miscellaneous shelving, counters and supplies belonging to Seller as listed on Exhibit B attached hereto and made a part hereof. D. STORE TELEPHONE NUMBER(S). All telephone numbers of the Drug Store location shall be transferred to Buyer. E. SUPPLIES. All bottles, vials, ointment jars; and other usable supplies of Seller located at the Drug Store location and at Seller cost. F. ACCOUNTS RECEIVABLE. Buyer shall purchase individual charge accounts (per evaluation in Section 2.4 (a)) and the Mineola MHMR accounts. Buyer shall not purchase any third party receivable. G. ASSETS NOT PURCHASED. Buyer shall not purchase any consigned merchandise or layaway items. H. All outstanding cash and pending transactions (excluding receipts on Accounts Receivable accounts) prior to the closing date are credited to the Seller. All business acquired after the closing date belong to the HORIZON Pharmacies, Inc. including any insurance payments made to the existing NABP. State Welfare number(s), and/or contract(s) as long as the date of service is on or after the closing date. 2. PURCHASE PRICE. 2.1 The total purchase price to be paid by the Buyer for the Drug Stores Assets 1 shall be computed, but not allocated, as follows: Furniture, Fixtures and Equipment, 1978 FORD VAN $ 60,000.00 2.2 Prescription Files. Patient Profiles, Customer List, Telephone Numbers $390,000.00 2.3 An amount equal to the aggregate value of the marketable inventory (as defined in Exhibit A attached hereto) as determined in the physical inventory described in paragraph 5 below and as valued in accordance with Exhibit A attached hereto and made a part hereof. 2.4 Buyer will purchase accounts receivable based on the following evaluation: (a) Individual Charge Accounts 0-30 days from date of first statement balances at 100% 31-60 days from date of first statement balances at 80% 61-90 days from date of first statement balances at 60% GREATER THAN 90 days from date of first statement balances at 0% (b) Mineola MHMR at 100% 3. ALLOCATION OF PURCHASE PRICE. *See Closing Statement 4. PAYMENT OF PURCHASE PRICE. Subject to the following provisions, the purchase price hereafter shall be paid as follows: 4.1 Cash in the amount of $100,000.00 on March 5 & 6, 1997 after inventory of all locations 4.2 Balance in the form of a note at 8 1/2% interest payable monthly, with a principal reduction of $325,000.00 on the earliest of September 1, 1997 or 10 days following the funding of the initial public offering, and the balance in equal monthly installment on the 25th day of each month thereafter through December 25th, 1997, when all outstanding principal and accrued and unpaid interest shall be due in full. 4.3 The note shall be secured by the assets purchased and shall be personally guaranteed by Rick McCord, Sy Shahid, Charlie Herr, Dave Frauhiger, and Robert Mueller. 5. INVENTORY. 5.1 A physical inventory shall be taken at the Drug Store by RGIS Inventory Specialists on the closing date. Each party shall pay one-half of the inventory expense. 6. REPRESENTATIONS AND WARRANTIES BY SELLER. 6.1 The Seller does hereby represent and warrant as follows: A. AUTHORITY. The execution, delivery and performance of this agreement by Seller has been duly authorized by all necessary entity action and constitutes a legal, valid, and binding obligation on Seller enforceable in accordance with its terms. B. TITLE TO PROPERTIES. The Seller has good and marketable title to all of the Drug Store assets to be transferred hereunder, free and clear of all mortgages, liens, encumbrances, pledges, or security interests of any nature whatsoever, except for secured debts, if any, listed on Exhibit C attached hereto which shall be satisfied and 2 released at or prior to closing. The Seller has received no notice of violation of any applicable law, regulation or requirement relating to the retail Drug Store business operation or Drug Store assets to be transferred hereunder, and as far as known to the Seller, no such violation exists. C. CONTRACTS. Seller is not party to any contract, understanding or commitment whether in the ordinary course of business or not, relating to the conduct of business by Seller from the Drug Store which contract, understanding or commitment shall extend beyond the closing date for the Pharmacy Location except the real estate lease. Seller is not party to any contractual agreement or commitment to individual employees which may not be terminated at the will of Seller. D. LITIGATION. To the best of Seller's current actual knowledge there is no suit, action, proceeding, investigation, claim, complaint or accusation pending or, threatened against or affecting Seller or the Assets or to which Seller is a party, in any court or before any arbitration panel of any kind or before or by any federal, state, local, foreign, or other governmental agency, department, commission, board, bureau, instrumentality or body which would have a materially adverse affect on the financial condition of Seller, and to the best knowledge and belief of Seller, there is no basis for any such suit, action, litigation, proceeding, investigation, claim, complaint or accusation. There is no outstanding order, writ, injunction, decree, judgment or award by any court, arbitration panel or governmental body against or affecting Seller with which Seller is not currently in compliance. Notwithstanding the foregoing, Seller is a plaintiff in a multiple party lawsuit against certain pharmaceutical manufacturers; and all recoveries in any way related thereto shall remain the property of Seller and all costs and expenses related thereto shall be for the account of Seller. E. EMPLOYEES. (a) To the best of Seller's actual knowledge, the Seller is in full compliance with all wage and hour laws, and is not engaged in any unfair labor practice or discriminatory employment practice and no complaint of any such practice against Seller is filed or threatened to be filed with or by the National Labor Relations Board, the Equal Employment Opportunity Commission or any other administrative agency, federal or state, that regulates labor or employment practices, nor is any grievance filed or threatened to be filed against Seller by any employee pursuant to any collective bargaining or other employment agreement to which Seller is a party. To the Seller's best knowledge and belief is in compliance with all applicable federal and state laws and regulations regarding occupational safety and health standards and has received no material complaints from any federal or state agency or regulatory body alleging violations of any such laws and regulations. (b) The employment of all persons and officers employed by Seller is terminable at will without any penalty or severance obligation of any kind on the part of the employer. All sums due for employee compensation and benefits and all vacation time owing to any employees of Seller have been duly and adequately accrued the accounting records of Seller. All benefits such as vacation accrued and earned by employees up to the closing date is the responsibility of the Seller. All benefits accrued and earned after the closing date will become the financial responsibilities of the Buyer. To the Seller's best knowledge, all employees of Seller are either United States citizens or resident aliens specifically authorized to engage in employment in the United States in accordance with all applicable laws. F. TAXES. (a) Seller has duly filed all required federal, state, local, foreign and other tax returns, notices, and reports (including, but not limited to, income, property, 3 sales, use, franchise, capital, stock, excise, added value, employees' income withholding, social security and unemployment tax returns) heretofore due; and to Seller's best knowledge all such returns, notices, and reports are correct, accurate, and complete. (b) All deposits required to be made by Seller with respect to any tax (including but not limited to, estimated income, franchise, sales, use, and employee withholding taxes) have been duly made. (c) All taxes, assessments, fees, penalties, interest and other governmental charges which have become due and payable have been paid in full by Seller or adequately reserved against on its books of account and the amounts reflected on such books are to the best belief and knowledge of Seller sufficient for the payment of all unpaid federal, state, local, foreign, and other taxes, fees, and assessments, and all interest and penalties thereon with respect to the periods then ended and or all periods prior thereto. Seller hereby agrees to indemnify and hold harmless Buyer from and against any and all liability, claims, or causes of action for any unpaid taxes, or other assessments due and owing to any federal, state, or local governmental entity arising out of the business of Seller prior to the closing date. (d) Buyer shall pay any and all Sales, Use, and Transfer Taxes, if any, arising out of the assets which are the subject of this sale. (e) Seller shall pay any and all personal property taxes for prior years attributable to the property being transferred hereby prior to closing (f) The parties shall pro rate at Closing anticipated personal property taxes as of the date of Closing based upon last year's tax renditions, and personal property tax bills and rent. 7. CONDITIONS PRECEDENT. 7.1 All obligations of Seller under this Agreement are subject to the fulfillment, prior to or at the closing, of each of the following conditions (unless waived in writing by Buyer). A. REPRESENTATIONS. The representations and warranties of Seller contained in this Agreement shall not only have been true and complete as of the date of this Agreement, but shall also be true and complete as though again made as of the date of closing. B. COMPLIANCE. The Seller shall have performed and complied with all terms and conditions required by this Agreement to be performed or complied with by it prior to or at the closing. C. CONSENTS. All necessary consents to the transfer of the Drug Store assets have been obtained from vendors and partners if any. 8. LIABILITIES NOT ASSUMED BY BUYER. 8.1 It is expressly understood and agreed that Buyer shall not, by virtue of this Agreement, the consummation of the transactions contemplated herein or otherwise, assume any liabilities or obligations of the Seller or any liabilities or obligations constituting a charge, lien, encumbrance or security interest upon the Drug Store assets to be transferred hereunder, regardless of whether such liabilities or obligations are absolute or contingent, liquidated or unliquidated or otherwise, unless expressly stated herein. 8.2 Seller hereby indemnifies the Buyer, its officers, directors, and controlling persons against any liability for any fee or commission payable to any broker, agent or finder retained by Seller with respect to any transaction contemplated by this agreement. 4 9. CLOSING. 9.1 The closing shall take place on or before March 5 and 6, 1997 the parties mutual agreement at the Drug Store location. A. TO BE DELIVERED TO BUYER. The Seller shall deliver to Buyer a Bill of Sale, which shall be effective to vest in Buyer good and marketable title to the Drug Store Assets, free and clear of all mortgages, security interest, liens, encumbrances, pledges and hypothecation of every nature and description, except the Security interest securing Buyer's Note to the Seller. B. TO BE DELIVERED TO SELLER. The Buyer shall deliver to the Seller a promissory note described in Paragraph 4.2 and the security document reasonably required by Seller and personal guarantees. 10. INDEMNITY BY SELLER. 10.1 The Seller hereby agrees to indemnify and hold harmless Buyer against and in respect of: A. CONTINGENT & UNDISCLOSED CLAIMS. Seller will indemnify and hold Buyer harmless for any contingent and/or undisclosed claims including but not limited to costs, expenses, and attorney fees relating to Seller's ownership of the purchased assets and/or Seller's conduct of the business prior to the closing. B. CLAIMS UPON ASSETS. All claims against, or claims of any interest in, or of a lien or encumbrance or the like upon any or all of the Drug Store assets to be transferred hereunder by the Seller to Buyer which are caused or created by indemnifying party. C. The buyer will indemnify the Seller for all claims against the Assets for any period after the closing date. The Buyer further indemnifies the Seller for break of leases and operation of business by HORIZON for any period after the closing date. 11. SURVIVAL OF REPRESENTATIONS, WARRANTIES & INDEMNIFICATIONS. 11.1 All of the covenants, representations, warranties and indemnification of the parties set forth in this Agreement shall survive the closing date hereof. 12. RISK OF LOSS. 12.1 The risk of loss of damage of Drug Store assets to be conveyed hereunder shall be upon Seller until the closing hereof. 13. GOVERNING LAW. 13.1 This agreement shall be governed and construed in accordance with the laws of the State of Texas and venue for purposes hereof shall be in Collin County, Texas. 14. ENTIRE AGREEMENT. 14.1 This agreement contains the entire agreement between the parties, and no representations, warranties or promises, unless contained herein, shall be binding upon the parties hereto. This document is null and void if: a) the Purchase Agreement is not signed by both parties within 10 days from date the Buyer has received the Purchase Agreement document. 5 b) can not secure the following leases: Mineola AT 1,500.00 per month for five (5) years plus two (2) five 5 years options MT Vernon AT 1,800.00 per month for five (5) years plus two (2) five 5 years options McKinney AT 1,250.00 per month for one (1) year plus three (3) three 3 years options All option years for Mineola and Mt Vernon will be based on CPI increases. Mckinney location option years will be based on: 1st 3 years option will be based on $10.00 per sq ft 2nd 3 years option will be based on $12.00 per sq ft 3rd 3 years option will be based on $14.00 per sq ft 15. EARNEST MONEY. 15.1 To bind this Agreement, Buyer herewith deposits with _____________________________ as Escrow Agent, the sum of $1,000 (one thousand dollars), which sum shall be applied to the cash portion of the purchase price upon the closing of the transaction contemplated herein. However, in the event Seller fails to perform each and every covenant and condition required hereunder, Buyer may cancel this Agreement and have the Earnest Money returned to it. If the Buyer fails to perform each and every obligation hereunder, Seller shall retain the Earnest Money as liquidated damages, each party's remedy provided in this Section is that party's exclusive remedy. 6 IN WITNESS WHEREOF, the parties hereto have set their hands the day and year first above written. BUYER: HORIZON PHARMACIES, INC. /s/ RICK MCCORD ------------------------------------ Rick McCord, President THE STATE OF ) COUNTY OF ) THIS INSTRUMENT was acknowledged before me on the 4th day of March, 1997 by RICK MCCORD, who holds the office of President of HORIZON PHARMACIES, INC., a Texas Corporation on behalf of such corporation. /s/ JEAN PLACHE ------------------------------------ SEAL Jean Plache Notary Public, State of Texas My commission Expires: June 23, 1999 SELLER: True Quality Pharmacies, Inc. /s/ RICHARD DILL ------------------------------------ Richard Dill, President THE STATE OF ) COUNTY OF ) THIS INSTRUMENT was acknowledged before me on the 4th day of March, 1997 by RICHARD DILL, who holds the office of President of True Quality Pharmacies, Inc. /s/ JEAN PLACHE ------------------------------------ SEAL Jean Plache Notary Public, State of Texas My commission Expires: June 23, 1999 7 EX-23.1 6 EXHIBIT 23.1 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 Registration Statement (Form SB-2 No. 333-_______) and related Prospectus of HORIZON Pharmacies, Inc. for the registration of 900,000 shares of its common stock. Dallas, Texas April ___, 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 April 15, 1997 EX-23.2 7 EXHIBIT 23.2 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 fourth paragraph of Note 6, as to which the date is April __, 1997, in the Registration Statement (Form SB-2 No. 333-________) and related Prospectus of HORIZON Pharmacies, Inc. for the registration of 900,000 shares of its common stock. Oklahoma City, Oklahoma April __, 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 April 15, 1997 EX-23.3 8 EXHIBIT 23.3 Exhibit 23.3 Consent of Counsel Phillips McFall McCaffrey McVay & Murrah, P.C. hereby consents to the use of its name under the heading "Legal Opinions" in the Prospectus constituting a part of the Form SB-2 Registration Statement of Horizon Pharmacies, Inc. ("Horizon") for the registration of 900,000 shares of Horizon common stock (1,035,000 assuming the exercise in full of the overallotment option), and further consents to the filing of its opinion of counsel as an exhibit to such Registration Statement. Phillips McFall McCaffrey McVay & Murrah, P.C. Oklahoma City, Oklahoma April 15, 1997 -----END PRIVACY-ENHANCED MESSAGE-----