-----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, Vek/uPGNcENe90lEC6VMjBKCwWz3gHgExoKq+CtwooBwdYYaw3iYNhYiWyc/9gy+ cOgxgBcmcxvNQevGvqQF4w== 0000912057-97-028890.txt : 19970825 0000912057-97-028890.hdr.sgml : 19970825 ACCESSION NUMBER: 0000912057-97-028890 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970822 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORIZON PHARMACIES INC CENTRAL INDEX KEY: 0001036260 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 752441557 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-22403 FILM NUMBER: 97668444 BUSINESS ADDRESS: STREET 1: 275 W PRINCETON DRIVE CITY: PRINCETON STATE: TX ZIP: 75407 BUSINESS PHONE: 9727362424 10QSB 1 FORM 10-QSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 333-25257 HORIZON Pharmacies, Inc. (Exact name of small business issuer as specified in its charter) TEXAS 75-2441557 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 275 W. Princeton Drive Princeton, Texas 75407 (Address of principal executive offices) (972) 736-2424 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Title of Each Class Outstanding at August 22, 1997 Common stock, par value $.01 per share 2,462,424 Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] FORM 10-QSB TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION ............................................. 3 Balance Sheets - December 31, 1996 and June 30, 1997 (unaudited) .. 3 Statements of Income - Three months ended June 30, 1996 and 1997 (unaudited) and six months ended June 30, 1996 and June 30, 1997 (unaudited) ................................................ 5 Statement of Stockholders' Equity - Six months ended June 30, 1997. 6 Statements of Cash Flows - Six months ended June 30, 1996 and 1997 (unaudited) ............................................ 7 Notes to Financial Statements (unaudited) ......................... 9 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................. 12 PART II. OTHER INFORMATION ................................................. 18 Submission of Matters to a Vote of Security Holders ............... 18 Other Information ................................................. 19 Exhibits and Reports on Form 8-K .................................. 20 SIGNATURES ................................................................. 21 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. HORIZON PHARMACIES, INC. BALANCE SHEETS DECEMBER 31, JUNE 30, 1996 1997 ----------- ----------- ASSETS (Unaudited) Current assets: Cash $ 153,260 $ 229,052 Accounts receivable, net of allowance for uncollectible accounts of $20,000 in 1996 and $25,000 in 1997: Third-party providers 1,047,348 1,794,024 Others 412,709 668,993 Inventories, at the lower of specific identification cost or market 3,290,717 3,893,381 Prepaid expenses 31,071 41,096 -------------------------- Total current assets 4,935,105 6,626,546 Deferred offering costs (Note 5) - 344,518 Property, equipment and capital lease assets: Property and equipment, at cost: Land 10,000 10,000 Building 193,220 194,389 Equipment 410,162 516,337 -------------------------- 613,382 720,726 Less accumulated depreciation 67,253 105,957 -------------------------- Property and equipment, net 546,129 614,769 Equipment under capital leases 158,339 252,953 Less accumulated amortization 33,884 55,060 -------------------------- Equipment under capital leases, net 124,455 197,893 -------------------------- Property, equipment and capital lease assets, net 670,584 812,662 Intangibles, at cost (Note 7): Noncompete covenants 146,788 146,788 Customer lists 211,605 279,996 Goodwill 814,107 1,135,716 -------------------------- 1,172,500 1,562,500 Less accumulated amortization 189,417 254,425 -------------------------- Intangibles, net 983,083 1,308,075 -------------------------- $6,588,772 $9,091,801 -------------------------- --------------------------
(Continued on next page) 3 HORIZON PHARMACIES, INC. BALANCE SHEETS (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, JUNE 30, 1996 1997 ------------ ----------- (Unaudited) Current liabilities: Bank overdraft $ 247,759 $ 206,272 Accounts payable 1,491,789 2,916,532 Accrued liabilities 161,365 256,830 Notes payable (Notes 5 and 7): Supplier 1,215,000 1,156,667 Other - 898,642 Stockholder - 50,000 Current portion of long-term debt (Note 5) 228,759 339,436 Current obligations under capital leases 27,400 57,859 ------------------------ Total current liabilities 3,372,072 5,882,238 Long-term debt 1,363,858 1,141,410 Obligations under capital leases 102,769 149,624 Stockholders' equity (Notes 5 and 6): Preferred stock, $.01 par value, authorized 1,000,000 shares; none issued Common stock, $.01 par value, authorized 14,000,000 shares; issued 1,082,424 shares 10,824 10,824 Additional paid-in capital 1,760,303 1,760,303 Retained earnings (accumulated deficit) (21,054) 147,402 ------------------------ Total stockholders' equity 1,750,073 1,918,529 ------------------------ $6,588,772 $9,091,801 ------------------------ ------------------------
See accompanying notes. 4 HORIZON PHARMACIES, INC. STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1996 1997 1996 1997 ---- ---- ---- ---- Net sales: Prescription drugs $2,382,505 $4,842,834 $4,370,939 $ 8,903,150 Other 437,548 1,103,978 815,694 2,156,909 ---------- ---------- ---------- ----------- Total net sales 2,820,053 5,946,812 5,186,633 11,060,059 Cost of sales: Prescription drugs 1,550,767 3,408,812 2,871,049 6,218,070 Other 353,174 715,268 636,404 1,364,514 ---------- ---------- ---------- ----------- Total cost of sales 1,903,941 4,124,080 3,507,453 7,582,584 ---------- ---------- ---------- ----------- Gross margin 916,112 1,822,732 1,679,180 3,477,475 Depreciation and amortization: Property, equipment and capital lease assets 14,552 31,636 23,914 59,880 Intangibles 23,140 34,556 45,797 65,008 Selling, general and administrative expenses 743,168 1,567,405 1,323,202 2,889,786 ---------- ---------- ---------- ----------- Total costs and expenses 780,860 1,633,597 1,392,913 3,014,674 ---------- ---------- ---------- ----------- Income from operations 135,252 189,135 286,267 462,801 ---------- ---------- ---------- ----------- Other income (expense): Interest and other income (expense) 1,779 (1,825) 2,939 (1,432) Interest expense (53,464) (89,382) (96,124) (142,913) ---------- ---------- ---------- ----------- Total other income (expense) (51,685) (91,207) (93,185) (144,345) ---------- ---------- ---------- ----------- Income before pro forma provision for income taxes 83,567 97,928 193,082 318,456 Pro forma provision for income taxes (Note 4) 29,000 34,000 68,000 111,000 ---------- ---------- ---------- ----------- Pro forma net income $ 54,567 $ 63,928 $ 125,082 $ 207,456 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- Pro forma net income per share (Note 3) $ 0.05 $ 0.06 $ 0.12 $ 0.18 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- Weighted average shares outstanding (Note 3) 1,058,000 1,142,424 1,058,000 1,142,424
See accompanying notes. 5 HORIZON PHARMACIES, INC. STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1997 COMMON STOCK --------------------- ADDITIONAL RETAINED EARNINGS TOTAL SHARES AMOUNT PAID-IN CAPITAL (ACCUMULATED DEFICIT) STOCKHOLDERS' EQUITY ------ ------ --------------- --------------------- -------------------- Balance at December 31, 1996 1,082,424 $ 10,824 $ 1,760,303 $ (21,054) $ 1,750,073 Net income (unaudited) - - - 318,456 318,456 Distributions to stockholders (unaudited) - - (150,000) (150,000) --------- --------- ------------ ---------- ------------ Balance at June 30, 1997 (unaudited) 1,082,424 $ 10,824 $ 1,760,303 $ 147,402 $ 1,918,529 --------- --------- ------------ ---------- ------------ --------- --------- ------------ ---------- ------------
See accompanying notes. 6 HORIZON PHARMACIES, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, ------------------------- 1996 1997 ---------- ---------- OPERATING ACTIVITIES Income before pro forma provision for income taxes $ 193,082 $ 318,456 Adjustments to reconcile income before pro forma provision for income taxes to net cash provided by operating activities: Depreciation and amortization of property, equipment and capital lease assets 23,914 59,880 Amortization of intangibles 45,797 65,008 Provision for uncollectible accounts receivable 5,940 7,193 Changes in operating assets and liabilities, net of acquisitions of businesses: Accounts receivable (170,484) (943,771) Inventories (350,360) (120,404) Prepaid expenses 1,477 (10,025) Bank overdraft 234,065 (41,487) Accounts payable 267,350 1,423,127 Accrued liabilities 51,320 97,081 ---------- ---------- Total adjustments 109,019 536,602 ---------- ---------- Net cash provided by operating activities 302,101 855,058 INVESTING ACTIVITIES Purchases of property and equipment (14,949) (47,344) Proceeds from sales of property and equipment 5,557 - ---------- ---------- Net cash used in investing activities (9,392) (47,344) FINANCING ACTIVITIES Borrowings on notes payable 350,000 - Principal payments on notes payable - (108,333) Principal payments on long-term debt (73,530) (111,771) Principal payments on obligations under capital leases (7,349) (17,300) Payments for deferred offering costs - (344,518)
(Continued on next page) 7 HORIZON PHARMACIES, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued) SIX MONTHS ENDED JUNE 30, ------------------------- 1996 1997 ---------- ---------- Distributions to stockholders $ (120,000) $ (150,000) ---------- ---------- Net cash provided by (used in) financing activities 149,121 (731,922) ---------- ---------- Net increase in cash 441,830 75,792 Cash at beginning of period 135,633 153,260 ---------- ---------- Cash at end of period $ 577,463 $ 229,052 ---------- ---------- ---------- ---------- Supplemental disclosure of interest paid $ 90,124 $ 152,913 NONCASH INVESTING AND FINANCING ACTIVITIES Additions to property and equipment for long-term debt $ 150,000 $ - Equipment leased under capital leases 14,308 94,614 Acquisitions of businesses financed by debt: Accounts receivable and other $ 1,176 $ 66,382 Inventories 460,327 482,260 Property and equipment 75,000 60,000 Intangibles 125,000 390,000 ---------- ---------- Assets acquired $ 661,503 $ 998,642 ---------- ---------- ---------- ---------- Financed by: Notes payable $ 200,000 $ 898,642 Advance by stockholder - 100,000 Long-term debt 461,503 - ---------- ---------- $ 661,503 $ 998,642 ---------- ---------- ---------- ----------
See accompanying notes. 8 HORIZON PHARMACIES, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 The unaudited financial statements include all adjustments, consisting of normal, recurring accruals, which HORIZON Pharmacies, Inc. (the "Company") considers necessary for a fair presentation of the financial position and the results of operations for the indicated periods. The notes to the financial statements should be read in conjunction with the notes to the financial statements contained in the Company's Registration Statement on Form SB-2, as amended, for the year ended December 31, 1996 related to the Company's initial public offering (the "Offering") (Note 5). The results of operations for the six months ended June 30, 1997, are not necessarily indicative of the results to be expected for the full year ending December 31, 1997. The Company's sales and earnings are higher during peak holiday periods and from Christmas through Easter (the first and fourth quarters of the calendar year). Estimated gross profit rates were used to determine cost of sales for the three months and the six months ended June 30, 1997 and 1996. NOTE 2 In addition to the expansion capital available from the proceeds of the Offering, the Company has obtained a $2,000,000 credit facility with Bank One, Texas, N.A. Although the terms have not fully been approved, such terms will include restrictive covenants such as financial ratio requirements. Management believes operations will not be adversely impacted by these restrictive covenants. No funds have been borrowed under this credit facility. NOTE 3 Pro forma net income per share is based upon the weighted average number of shares of common stock and dilutive common stock equivalent shares outstanding during each period adjusted in all periods presented for the effect of the number of shares of stock used to pay a non-recurring distribution of $300,000 to stockholders from the proceeds of the Offering. The pro forma net income per share calculation has been rounded up to the next even number. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share", which is required to be adopted by the Company in the reporting period ending December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The Company has determined that the impact of SFAS 128 on the calculation of earnings per share for the three months and six months ended June 30, 1997 and 1996 would not be material. NOTE 4 No historical provisions for income taxes have been included in the accompanying financial statements as income taxes, if any, are payable by the stockholders under provisions of subchapter S of the Internal Revenue Code. At June 30, 1997, the net bases of assets and liabilities for financial reporting purposes exceeds such bases for income tax purposes by approximately $400,000. 9 The pro forma provisions for income taxes included in the accompanying statements of income are based on an estimated effective tax rate of 35% and are presented as though the Company was required to pay income taxes in the periods presented. The financial statements for the three months ending September 30, 1997 will include a provision (non-recurring) for deferred income taxes, resulting from a change in S corporation status as a result of the Offering in July 1997, related to the tax effect of cumulative differences in financial and tax bases of net assets of approximately $149,000. NOTE 5 In April 1997, the Board of Directors of the Company approved a two-for-one split of the Company's common stock. The split and an amendment to the Company's articles of incorporation to change the authorized capitalization from 1,000,000 shares of $1.00 par common stock to 14,000,000 shares of $.01 par common stock and 1,000,000 shares of $.01 par preferred stock were approved by the stockholders on May 31, 1997. The Board of Directors has the authority to issue preferred stock in one or more classes or series and to fix from time to time the number of shares to be included in each such class or series and the designations, preferences, qualifications, limitations, restrictions and rights of the shares of each such class or series. The effects of the stock split and recapitalization have been reflected retroactively in the accompanying financial statements. In July 1997, the Company completed the Offering pursuant to which 1,380,000 shares of common stock were sold at $5.00 per share. The proceeds of the Offering, after deducting the underwriting discount and offering expenses, were approximately $6,000,000. A portion of the proceeds (approximately $1,575,000) was used to repay certain notes payable and long-term debt. NOTE 6 In March 1997, the Board of Directors approved the 1997 Stock Option Plan (the "Plan"). The Plan was amended by the Board of Directors and was approved by the stockholders on May 31, 1997. Under the Plan, options for up to 246,243 shares of common stock may be granted until March 2007 to key employees and directors at prices as specified in the Plan on the dates the options are granted. Except as provided in the option agreements, options are exercisable at any time during a ten-year term. Options for 246,243 shares were granted by the Company in July 1997. NOTE 7 At June 30, 1997, the Company operates 14 conventional, free-standing retail pharmacies, all of which were acquired from third parties in purchase transactions beginning February 27, 1994. Such acquisitions have each been structured as asset purchases and generally have included inventories, store fixtures and the assumption of store operating lease arrangements. The acquisitions generally have been financed by debt to the sellers and/or an inventory supplier. A summary of acquisitions for the six months ended June 30, 1996 and 1997 follows: 10 ASSETS ACQUIRED SIX MONTHS STORE PURCHASE ------------------------------------ DEBT ENDED JUNE 30 OPERATIONS PRICE INVENTORIES INTANGIBLES OTHER INCURRED ------------- ---------- --------- ----------- ----------- ------- ---------- 1996 1 $661,503 $460,327 $125,000 $ 76,176 $661,503 1997 3 998,642 482,260 390,000 126,382 998,642
The following unaudited pro forma results of operations data gives effect to the acquisitions completed during the six months ended June 30, 1996 and 1997 as if the transactions had been consummated as of January 1, 1996 and 1997. The unaudited pro forma results of operations data is presented for illustrative purposes and is not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated as of January 1, 1996 or 1997, respectively, or of future results of operations. The data reflects adjustments for amortization of intangibles resulting from the purchases, incremental interest expense resulting from borrowings to fund the acquisitions and income taxes. SIX MONTHS ENDED JUNE 30, ---------------------------- 1996 1997 ---- ---- Unaudited pro forma information: Net sales $6,433,533 $11,839,059 Net income $ 190,914 $ 228,456 Net income per share $ .18 $ .20 In August 1997, the Company acquired from third parties three retail pharmacies in purchase transactions. The total purchase price of $1,504,262 has been preliminarily allocated to inventories ($1,047,787), property and equipment ($60,000), intangibles ($341,500) and other assets ($54,975). The purchases were financed by the issuance of 8% to 9% notes payable to the sellers for $966,850, cash of $475,000 and the assumption of certain trade payables to suppliers of $62,412. The notes to the sellers are secured by the assets acquired and are due in monthly installments from 60 to 84 months. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The following discussion and analysis reviews the operating results of the Company for the three months and the six months ended June 30, 1997 and compares those results to the comparable periods of 1996. Certain statements contained in this discussion are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions which may ultimately prove to be inaccurate and actual events and results may materially differ from anticipated results described in such statements. The Company's ability to achieve such results is subject to certain risks and uncertainties, such as those inherent generally in the retail pharmacy industry and the impact of competition, pricing and changing market conditions. The Company disclaims, however, any intent or obligation to update these forward-looking statements. As a result, the reader is cautioned not to place reliance on these forward-looking statements. The Company's principal business strategy since commencing operations in 1994 has been to establish a chain of retail pharmacies through the acquisition of free standing full-line retail pharmacies. In evaluating a retail pharmacy for potential acquisition, the Company (i) evaluates the target store's profits and losses for preceding years; (ii) reviews the store's income tax returns for preceding years; (iii) reviews computer-generated prescription reports showing historical information including prescriptions sold, average price of each prescription, gross margins and trends in prescription sales; (iv) analyzes the store's location and competition in the immediate area; (v) reviews the store's lease agreement, if any; and (vi) assesses targeted areas for growth patterns and trends. Based on the Company's analysis of the foregoing items, the Company prepares an offer to purchase the particular store. To assess the reasonableness of the purchase price offered by a seller, the Company considers the anticipated rate of return, payback period, and the availability and terms of seller financing, it being generally desired that 50% of the purchase price be seller-financed with the balance split between cash and other consideration such as Company stock. During the six months ended June 30, 1996 and 1997, the Company acquired one and three retail pharmacies, respectively. The primary measurement of the effect of acquisitions on the Company's operating performance is the number of store operating months, which is the number of months all stores were owned by the Company during the relevant measuring period. Acquisitions are expected to continue as the most significant factor in the Company's growth strategy. Since June 30, 1997 the Company has acquired three more retail pharmacies located in Butte, Montana, Moriarty, New Mexico and Mesquite, Texas, respectively. The financial information for these three stores is not included in the financial statements presented in this Quarterly Report on Form 10-QSB. Currently, the Company's primary source of revenue is the sale of prescription drugs. During the six months ended June 30, 1996, sales of prescription drugs generated 84.3% of the Company's net sales; during the six months ended June 30, 1997, prescription drugs generated 80.5% of net sales. Management expects the Company's prescription drug business to increase on an annual basis as a result of the demographic trends towards an aging population and the continued development of new pharmaceutical products. However, the Company anticipates that such sales will decrease as a percentage of the Company's overall sales and gross margins as the Company expands its home healthcare and other non-pharmaceutical sales and services which have historically generated higher margins. The Company's sales and profits are higher during peak holiday periods and from Christmas through Easter. Sales of health-related products peak during seasonal outbreaks of cough and cold/flu viruses, which typically occur during the winter and spring. Accordingly, sales and profits are typically highest in the fourth quarter and the first quarter of the ensuing year. 12 RESULTS OF OPERATIONS The following table sets forth the percentage relationship of certain income statement data for the periods indicated: THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, --------------- -------------- 1996 1997 1996 1997 ------ ------ ------ ------ INCOME STATEMENT DATA SALES: Prescription drugs 84.5% 81.4% 84.3% 80.5% Other 15.5% 18.6% 15.7% 19.5% ------ ------ ------ ------ Total net sales 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ ------ ------ ------ ------ COSTS AND EXPENSES: Cost of sales -- prescription drugs(1) 65.1% 70.4% 65.7% 69.8% Cost of sales -- other(2) 80.7% 64.8% 78.0% 63.3% Selling, general and administrative expenses(3) 26.4% 26.4% 25.5% 26.1% Depreciation and amortization(3) 1.3% 1.1% 1.3% 1.1% Interest expense(3) 1.9% 1.5% 1.9% 1.3% PRO FORMA NET INCOME(3)(4) 1.9% 1.1% 2.4% 1.9% - ------------------- (1) As a percentage of prescription drug sales. (2) As a percentage of other sales. (3) As a percentage of total net sales. (4) After pro forma provisions for income taxes. Intangible assets, including but not limited to goodwill, pharmacy files and non-compete covenants, have historically represented a substantial portion of the Company's acquisition costs. Such assets are generally amortized over a period of not more than 20 years. Accordingly, the amortization of intangible assets is not expected to have a significant effect on the Company's future results of operations. NET SALES The Company's total net sales increased $5,873,426 or 113.2%, to $11,060,059 for the six months ended June 30, 1997 compared to $5,186,633 for the six months ended June 30, 1996, and $3,126,759 or 110.9%, to $5,946,812 for the three months ended June 30, 1997 compared to $2,820,053 for the three months ended June 30, 1996. The increase was attributable primarily to the increase in store operating months from 44 in the first six months of 1996 to 78 in the first six months of 1997, and from 23 in the first three months of 1996 to 42 in the first three months of 1997. The following tables show the Company's prescription drug gross margins and total sales margins for six months and the three months ended June 30, 1996 and 1997: 13 GROSS MARGINS ON GROSS MARGINS ON PRESCRIPTION DRUG SALES TOTAL SALES ----------------------- ------------------------ SIX MONTHS ENDED JUNE 30, AMOUNT PERCENTAGE AMOUNT PERCENTAGE - ------------------------- ---------- ---------- ---------- ---------- 1997 $2,685,080 30.2% $3,477,475 31.4% 1996 $1,499,890 34.3% $1,679,180 32.4% GROSS MARGINS ON GROSS MARGINS ON PRESCRIPTION DRUG SALES TOTAL SALES ----------------------- ------------------------ THREE MONTHS ENDED JUNE 30, AMOUNT PERCENTAGE AMOUNT PERCENTAGE - --------------------------- ---------- ---------- ---------- ---------- 1997 $1,434,022 29.6% $1,822,732 30.7% 1996 $ 831,738 34.9% $ 916,112 32.5% The decrease in the gross margin on prescription drug sales from 1996 to 1997 was primarily the result of an increase in third-party sales, which have lower margins, and the cost of sales during such period. Sales of prescription drugs decreased from 84.3% of total sales for the six months ended June 30, 1996 to 80.5% of total sales for six months ended June 30, 1997 and from 84.5% of total sales for the three months ended June 30, 1996 to 81.4% for the three months ended June 30, 1997. The Company expects that prescription drug sales will continue to decrease as a percentage of total sales as the Company expands its home healthcare and other non-pharmaceutical sales and services, whose gross margins exceed those of pharmaceutical sales. Same store sales for the Company's first seven stores increased from $4,585,125 in the first six months of 1996 to $5,093,220 in the first six months of 1997, and from $2,218,545 in the three months ended June 30, 1996 to $2,534,465 in the three months ended June 30, 1997. Management believes that these respective increases of 11.1% and 14.2% are primarily the result of increased advertising and promotions as well as an enhanced product mix. COSTS AND EXPENSES Cost of sales increased $4,075,131 or 116.2%, to $7,582,584 in the six months ended June 30, 1997 as compared to $3,507,453 in the six months ended June 30, 1996. For the three months ended June 30, 1997, the cost of sales increased $2,220,139, or 116.6%, to $4,124,080 as compared to $1,903,941 in the three months ended June 30, 1996. These increases are primarily the result of increased sales volume resulting from the increased number of store operating months. Cost of sales as a percentage of total sales increased 1.0% and 1.8% during the respective periods. These increases are primarily the result of increased drug prices from the wholesaler, offset by the effects of management's continual monitoring and adjustment of prices to the consumer. Selling, general and administrative expenses increased from $1,323,202 in the six months ended June 30, 1996 to $2,889,786 in the six months ended June 30, 1997 and from $743,168 in the three months ended June 30, 1996 to $1,567,405 in the three months ended June 30, 1997. Such expenses, expressed as a percentage of net sales, were 26.1% and 25.5% for the six months ended June 30, 1997 and 1996, respectively, and 26.4% for the three months ended June 30 in each of 1997 and 1996. This increase is principally due to increased store count and resulting increased store operating months, as well as the 14 employment of additional executive personnel and an increase in salaries payable to the Company's executive officers in connection with the execution of employment agreement with such persons. Interest expense was $142,913 in the first six months of 1997 compared to $96,124 during the first six months of 1996, and $89,382 in the three months ended June 30, 1997 compared to $53,464 in the three months ended June 30, 1996. The increase in interest expense resulted primarily from the increase in the Company's indebtedness associated with the Company's acquisition of six stores and its corporate office building. EARNINGS Pro forma net income for the first six months of 1997 rose to $207,456 from $125,082 in the comparable period of 1996; an increase of 65.9%. Pro forma net income for the first three months of 1997 rose to $63,928 from $54,567 in the comparable period of 1996, an increase of 17.2%. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the six months ended June 30, 1997 and 1996 was $855,058 and $302,101, respectively. Typically, cash provided by operations is adequate to supply working capital, and contribute to investing activities. External sources of cash are used mainly to help finance store acquisitions. The Company believes that the operating needs to be incurred in connection with its capital expansion program, including growth in accounts receivable and inventory, will be funded by cash flow from operations supplemented by the approximately $750,000 of the proceeds designated for working capital in the Offering. Net cash used in financing activities was $731,922 for the six months ended June 30, 1997 compared to net cash provided by financing activities of $149,121 in the six months ended June 30, 1996. The principal cause of this difference was deferred offering costs of $344,518 and an increase in distributions to stockholders for the six months ended June 30, 1997. Net cash used in financing activities was the principal factor in the $75,792 net increase in cash for the six months ended June 30, 1997. The Company has available approximately $2,375,000 from the proceeds of the Offering which will be used to support an aggressive store acquisition program. Historically, the average acquisition price paid by the Company per store has been approximately $500,000 to $700,000; however, because the acquisition price is based on variables such as store sales and profits, there can be no assurance that future acquisition prices will fall within the referenced range. Management believes it will be able to obtain seller financing for approximately 50% of the cost of each such acquisition. In addition to the expansion capital provided by the proceeds of the Offering, the Company has available a $2,000,000 credit facility provided by Bank One, Texas, N.A. Although all of the terms of such credit facility have not received final approval, the Company believes that such terms will include restrictive covenants such as financial ratio requirements with which the Company will have to comply to maintain the facility. Management believes the Company's operations will not be adversely impacted by these restrictive covenants. No funds have been borrowed under this credit facility. Management expects that the proceeds generated from the Offering combined with the above-described credit facility will be sufficient to support the Company's current expansion schedule and ongoing 15 acquisition activities for the next 12 months, although there can be no assurance that such proceeds will be adequate to support the Company's acquisitions during such period. The Company expects to fund ongoing acquisitions after 1997 with proceeds from the Offering, income from current operations, seller financing of acquisitions and possible future equity offerings. In addition, management expects to convert, during the next 12 to 18 months, between two and three of its existing stores to "healthcare centers," although there can be no assurance that all or any part of such conversions will be effected. In the event such conversions are undertaken, management expects to incur a minimum of $20,000 to $40,000 in conversion costs per store. The costs of such conversion are expected to be funded from operations. IMPACT OF INFLATION AND CHANGING PRICES Though not significant, inflation continues to cause increases in product, occupancy and operating expenses, as well as the cost of acquiring capital assets. The effect of higher costs is minimized by achieving operating efficiencies and passing vendor price increases along to the consumers. FACTORS AFFECTING OPERATIONS DEPENDENCE ON ACQUISITIONS FOR GROWTH. The Company has grown rapidly in recent periods and intends to continue to pursue an aggressive growth strategy. The Company's growth strategy depends upon its ability to continue to acquire, consolidate and operate existing free-standing pharmacies on a profitable basis. The Company continually reviews acquisition proposals and is currently engaged in discussions with third parties with respect to possible acquisitions. The Company will compete for acquisition candidates with buyers who have greater financial and other resources than the Company and may be able to pay higher acquisition prices than the Company. To the extent the Company is unable to acquire suitable retail pharmacies, or to integrate such acquisitions successfully, its ability to expand its business would be reduced significantly. SALES TO THIRD-PARTY PAYORS. A growing percentage of the Company's prescription drug sales has been accounted for by sales to customers who are covered by third-party payment programs. Although contracts with third-party payors may increase the volume of prescription sales and gross profits, third-party payors typically negotiate lower prescription prices than those of non third-party payors. Accordingly, there has been downward pressure on gross profit margins on sales of prescription drugs which is expected to continue in future periods. RELIANCE ON MEDICARE AND MEDICAID REIMBURSEMENTS. Substantially all of the Company's home healthcare revenues are attributable to third-party payors, including Medicare and Medicaid, private insurers, managed care plans and HMOs. The amounts received from government programs and private third-party payors are dependent upon the specific benefits included under the program or the patient's insurance policies. Any substantial delays in reimbursement or significant reductions in the coverage or payment rates of third-party payors, or from patients enrolled in the Medicare or Medicaid programs, would have a material adverse effect on the Company's revenues and profitability. EXPANSION. The Company's expansion will require the implementation and integration of enhanced operational and financial systems and additional management, operational and financial resources. Failure to implement and integrate these systems and add these resources could have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that the Company will be able to manage its expanding operations effectively or that it will be able to maintain or accelerate its growth. While the Company experienced growth in net sales and net income in 1995 and 1996, there can 16 be no assurance that the Company will continue to experience growth in, or maintain the present level of, net sales or net earnings. GOVERNMENT REGULATION AND HEALTHCARE REFORM. The Company's pharmacists and pharmacies are subject to a variety of state and Federal regulations, and may be adversely affected by certain changes in such regulations. In addition, the Company relies on prescription drug sales for a significant portion of its revenues and profits, and prescription drug sales represent a significant segment of the Company's business. These revenues are affected by regulatory changes within the healthcare industry, including changes in programs providing for reimbursement of the cost of prescription drugs by third-party payment plans, such as government and private plans, and regulatory changes relating to the approval process for prescription drugs. REGULATION OF HOME HEALTHCARE SERVICES. The Company's home healthcare business is subject to extensive Federal and state regulation. In addition, the requirements that the Company must satisfy to conduct its businesses vary from state to state. Changes in the law or new interpretations of existing laws could have a material effect on permissible activities of the Company, the relative costs associated with doing business and the amount of reimbursement for the Company's products and services paid by government and other third-party payors. MALPRACTICE LIABILITY. The provision of home healthcare services entails an inherent risk of claims of medical and professional malpractice liability. The Company may be named as a defendant in such malpractice lawsuits, and is subject to the attendant risk of substantial damage awards. While the Company believes it has adequate professional and medical malpractice liability insurance coverage, there can be no assurance that a future claim or claims will not be successful or if successful will not exceed the limits of available insurance coverage or that such coverage will continue to be available at acceptable costs and on favorable terms. COMPETITION. The retail pharmacy and home healthcare businesses are highly competitive. In each of its markets, the Company competes with one or more national, regional and local retail pharmacy chains, independent retail pharmacies, deep discount retail pharmacies, supermarkets, discount department stores, mass merchandisers and other retail stores and mail order operations. Similarly, the Company's stores offering home healthcare services will compete with other larger providers of home healthcare services including chain operations and independent single unit stores which are more established in that market and which offer more extensive home healthcare services than the Company. Most of the Company's competitors in the retail pharmacy and home healthcare markets have financial resources that are substantially greater than those of the Company. There can be no assurance the Company will be able to successfully compete with its competitors in the retail pharmacy and/or home healthcare industry. GEOGRAPHIC CONCENTRATION. Currently, 10 of the Company's 17 retail pharmacies are located in Texas, and other retail pharmacies located in Texas may be acquired by the Company. Consequently, the Company's results of operations and financial condition are dependent upon general trends in the Texas economy and any significant healthcare legislative proposals enacted in the state of Texas. SUBSTANTIAL INDEBTEDNESS. In connection with the Company's acquisition of retail pharmacies, the Company has incurred substantial debt and may incur additional indebtedness in the future in connection with its planned acquisition of additional stores. The Company's ability to make cash payments to satisfy its substantial indebtedness will depend upon its future operating performance, which is subject to a number of factors including prevailing economic conditions and financial, business and other factors beyond the Company's control. If the Company is unable to generate sufficient earnings and cash flow to meet its obligations with respect to its outstanding indebtedness, refinancing of certain of these debt obligations or 17 disposition of certain assets may be required. In the event debt refinancing is required, there can be no assurance that the Company can effect such refinancing on satisfactory terms. POSSIBLE NEED FOR ADDITIONAL CAPITAL. Although the Company believes that the proceeds from the Offering combined with operating revenues will be adequate to satisfy its capital requirements for the next 12 months, circumstances, including the acquisition of additional stores, may require the Company to obtain long or short-term financing to realize certain business opportunities. No assurance can be made that such financing will be obtained. RELIANCE ON SINGLE SUPPLIER. The Company currently purchases approximately 84% of its inventory from Bergen Brunswig Drug Co. ("Bergen Brunswig"). Bergen Brunswig also provides the Company with order entry machines, shelf labels and other supplies used in connection with the Company's purchase and sale of such inventory. The Company believes that the wholesale pharmaceutical and non-pharmaceutical distribution industry is highly competitive because of the consolidation of the retail pharmacy industry and the practice of certain large retail pharmacy chains to purchase directly from product manufacturers. Although the Company believes that it could obtain its inventory through another similar distributor at competitive prices and upon competitive payment terms in the event its relationship with Bergen Brunswig was terminated, there can be no assurance that the termination of such relationship would not adversely affect the Company's business. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company's results of operations depend significantly upon the net sales generated during the first and fourth quarters, and any decrease in net sales for such periods could have a material adverse effect upon the Company's profitability. As a result, the Company believes that period-to-period comparisons of its results of operations are not and will not necessarily be meaningful, and should not be relied upon as an indication of future performance. PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its annual meeting of stockholders on May 31, 1997. The following matters were voted upon at the annual meeting: 1. The stockholders approved the Company's Amended and Restated Articles of Incorporation with 467,903 votes in favor, no votes against and no abstentions. 2. The stockholders approved the Company's Amended and Restated Bylaws with 467,903 votes in favor, no votes against and no abstentions. 3. The stockholders ratified the appointment of Ernst & Young LLP as the independent auditors of the Company with 467,903 votes in favor, no votes against and no abstentions. 4. The stockholders approved the HORIZON Pharmacies, Inc. 1997 Stock Option Plan with 467,903 votes in favor, no votes against and no abstentions. 5. The stockholders ratified all prior acts of the Company's officers and directors with 467,903 votes in favor, no votes against and no abstentions. 18 6. Following are the directors elected at the annual meeting and the tabulation of votes related to each nominee: Affirmative Votes Withheld ----------- -------------- Carson A. McDonald (Class I) 467,903 -0- Philip H. Yeilding (Class I) 467,903 -0- David W. Frauhiger (Class II) 467,903 -0- Robert D. Mueller, R.Ph. (Class II) 467,903 -0- Sy S. Shahid (Class II) 467,903 -0- Rick D. McCord, R.Ph. (Class III) 467,903 -0- Charlie K. Herr, R.Ph. (Class III) 467,903 -0- ITEM 5. OTHER INFORMATION ACQUISITION OF MORIARTY, NEW MEXICO STORE. On August 2, 1997, the Company acquired substantially all of the assets of Sun Country Drug, Inc. ("Sun Country Drug") comprising primarily pharmacy files, equipment, inventory and supplies. The Company acquired the assets through arm's-length negotiations with Sun Country and Sun Country's sole shareholder, Dale Kemper. Prior to this transaction, no material relationships existed between Sun Country and the Company or any of its affiliates, any director or officer of the Company, or any associate of such director or officer, except to the extent that Carson A. McDonald, a director of the Company, is employed by Bergen Brunswig Drug Co. ("Bergen Brunswig"), a creditor of Sun Country. The consideration for the acquisition consisted of $175,000 cash, assumption of an aggregate $62,412.48 of trade accounts owing to Bergen Brunswig and one other creditor, and a promissory note in the amount of $197,406.28 payable over 60 months in equal monthly installments bearing interest at 9% per annum. The cash portion of the purchase price was derived from proceeds of the Company's initial public offering which closed July 11, 1997 (the "Offering"). The Company intends to continue Sun Country's retail pharmacy operations under the HORIZON Pharmacies, Inc. name. In connection therewith, the Company has secured a real estate lease covering Sun Country's current retail location and has secured a valid New Mexico license to do business at that location under the HORIZON Pharmacies, Inc. name. ACQUISITION OF MESQUITE, TEXAS STORE. On August 12, 1997, the Company acquired substantially all of the assets utilized in connection with and as a part of certain retail drug store operations of Revco, Inc. d/b/a Northridge Pharmacy ("Northridge") located in Mesquite, Texas, comprising primarily pharmacy files, equipment, inventory and supplies. The Company acquired the assets through arm's-length negotiations with Northridge. Prior to this transaction, no material relationships existed between Northridge and the Company or any of its affiliates, any director or officer of the Company, or any associate of such director or officer. The consideration for the acquisition consisted of $150,000 cash and a promissory note in the amount of $154,931.65 payable over 72 months in equal monthly installments bearing interest at 8.5% per annum. The cash portion of the purchase price was derived from proceeds of the Offering. The Company intends to continue the retail pharmacy operations of Northridge Pharmacy under the HORIZON Pharmacies, Inc. name. In connection therewith, the Company secured a real estate lease 19 covering the current retail location of Northridge Pharmacy and secured a valid Texas license to conduct business as a retail pharmacy at that location under the HORIZON Pharmacies, Inc. name. ACQUISITION OF BUTTE, MONTANA STORE. On August 16, 1997, the Company acquired substantially all of the assets of Downey Drug, Inc. ("Downey Drug") comprising primarily pharmacy files, equipment, inventory and supplies. The Company acquired the assets through arm's-length negotiations with Downey Drug and its sole shareholders, James and Tim Downey. Prior to this transaction, no material relationships existed between Downey Drug and the Company or any of its affiliates, any director or officer of the Company, or any associate of such director or officer. The consideration for the acquisition consisted of $150,000 cash and three promissory notes in the aggregate amount of $614,511.79. The first note executed in favor of Downey Drug in the amount of $344,511.79 is payable over 84 months in equal monthly installments bearing interest at 8% per annum. The other two notes, each in the amount of $135,000, are executed in favor of James Downey and Tim Downey, respectively and are payable over 60 months in equal monthly installments bearing interest at 8% per annum. The cash portion of the purchase price was derived from proceeds of the Offering. The Company intends to continue Downey Drug's retail pharmacy operations under the HORIZON Pharmacies, Inc. name. In connection therewith, the Company secured a real estate lease covering Downey Drug's current retail location and secured a valid Montana license to conduct business as a retail pharmacy at that location under the HORIZON Pharmacies, Inc. name. FINANCIAL STATEMENTS. It is impracticable at this time to provide the required financial statements of the acquired businesses described in Item 5 and the required pro forma financial information. This information will be provided within 60 days by an amendment to this report. 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Exhibit No. Name of Exhibit 2.1 Purchase Agreement dated August 2, 1997 by and between Sun Country Drug, Inc. and the Company (incorporated by reference to the Company's Current Report on Form 8-K filed electronically on August 18, 1997). 2.2 Purchase Agreement dated August 12, 1997 by and between Revco Inc. d/b/a Northridge Pharmacy and the Company (filed electronically herewith). 2.3 Purchase Agreement dated August 16, 1997 by and between Downey Drug, Inc. and the Company (filed electronically herewith). 27.1 Financial Data Schedule (filed electronically herewith). (b) Reports on Form 8-K The Company was not required to file and did not file any report on Form 8-K during the three months ended June 30, 1997. 21 SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused the report to be signed on its behalf by the undersigned, thereunto duly authorized. HORIZON PHARMACIES, INC., a Texas corporation Date: August 21, 1997 /s/ Ricky D. McCord ------------------------------------- Ricky D. McCord Chief Executive Officer Date: August 21, 1997 /s/ David W. Frauhiger ------------------------------------- David W. Frauhiger Chief Financial Officer 22 EX-2.2 2 EXHIBIT 2.2 PURCHASE AGREEMENT AGREEMENT made the 12th day of August, 1997 between Revco, Inc. d/b/a Northridge Pharmacy having an office at 1819 N. Galloway, Mesquite, Texas (hereinafter referred to as the "seller"), and HORIZON PHARMACIES, INC., a Texas Corporation, having offices located at 275 W. Princeton Drive, Princeton Texas, 75407 (hereinafter referred to as the "Buyer"). W I T N E S S E T H WHEREAS, the Seller and the Buyer have reached an agreement, in accordance with the terms and conditions hereinbelow set forth, with respect to the sale by the Seller and the purchase by the Buyer of certain of the assets of the Seller utilized in connection with and as part of the retail drug store operations of the Seller known as Revco, Inc. d/b/a Northridge Pharmacy (hereinafter referred to as the "DRUG STORE") and desire to reduce said agreement in writing; NOW, THEREFORE, THE PARTIES AGREE: 1. SALE OF ASSETS. 1.1 For the purpose of this Agreement, Seller agrees to sell to Buyer AS IS certain assets of the Drug Store (hereinafter referred to as the "Drug Store Assets"), which the Buyer hereby agrees to purchase. Such assets include and are hereby limited to: A. INVENTORY. All of the marketable inventory (as defined in Exhibit A attached hereto) held for retail sale by the Seller and located at the Drug Store; and B. PRESCRIPTION FILES INCLUDING ALL CUSTOMER AND PATIENT LISTS AND PATIENT PROFILES. All prescription files and patient profiles of Seller located at and pertaining to prescription customers of the Drug Store. C. ALL FIXTURES AND EQUIPMENT. All Rx, OTC, and DME fixtures and equipment owned by Seller (computer/peripherals, registers, refrigerator, typewriter, Microfiche, etc.) located at the Drug Store,; and all telephone equipment, and all miscellaneous shelving, counters and supplies belonging to Seller as listed on Exhibit B attached hereto and made a part hereof. D. STORE TELEPHONE NUMBER(S). All telephone numbers of the Drug Store location shall be transferred to Buyer. E. SUPPLIES. All bottles, vials, ointment jars, and other usable supplies of Seller located at the Drug Store location and at Seller cost. F. ASSETS NOT PURCHASED. Buyer shall not purchase any consigned merchandise or layaway items. 1 2. PURCHASE PRICE. 2.1 The total purchase price to be paid by the Buyer for the Drug Stores Assets shall be computed, but not allocated, as follows: Furniture, Fixtures and Equipment, Prescription Files, Patient Profiles, Customer List, Telephone System/Numbers, $120,000.00 1988 S-10 Blazer, NDC Computer hardware/software, and Non-compete Covenant, Store's name "Northridge Pharmacy" 2.2 An amount equal to the aggregate value of the marketable inventory (as defined in Exhibit A attached hereto) as determined in the physical inventory described in paragraph 5 below and as valued in accordance with Exhibit A attached hereto and made a part hereof. 2.3 Buyer will purchase active accounts receivable for the individual Charge Accounts (as determined on 7/25/97) based on the following evaluation: 0-30 days balances at 100% 31-60 days balances at 80% 61-90 days balances at 60% > 90 days balances at 0% ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated and reflected on the Closing Statement PAYMENT OF PURCHASE PRICE. 4.1 Subject to the following provisions, the purchase price hereafter shall be paid as follows: 4.1 (a) Cash at the closing equal to $150,000.00 less $1,000 escrow deposit. 4.1 (b) A note at the closing equal to the purchase price less cash in Sections 4.1(a) bearing interest at the rate of eight and half (8 1/2) percent. The note is due and payable in seventy two (72) equal consecutive monthly installments, the first installment will be 1st of the following month. The Note will be executed by Buyer and payable to the order of Seller. It will be secured by the inventory of the said DRUG STORE. INVENTORY. A physical inventory shall be taken at the Drug Store by RGIS INVENTORY SPECIALISTS on the closing date. Each party shall pay one-half of the inventory expense. Seller portion will be deducted from Closing Statement. 2 REPRESENTATIONS AND WARRANTIES BY SELLER. 6.1 The Seller does hereby represent and warrant as follows: A. AUTHORITY. The execution, delivery and performance of this Agreement by Seller has been duly authorized by all necessary entity action and constitutes a legal, valid, and binding obligation on Seller enforceable in accordance with its terms. B. TITLE TO PROPERTIES. The Seller has good and marketable title to all of the Drug Store assets to be transferred hereunder, free and clear of all mortgages, liens, encumbrances, pledges, or security interests of any nature whatsoever, except for secured debts, if any, listed on Exhibit C attached hereto which shall be satisfied and released at or prior to closing. The Seller has received no notice of violation of any applicable law, regulation or requirement relating to the retail Drug Store business operation or Drug Store assets to be transferred hereunder; and as far as known to the Seller, no such violation exists. C. CONTRACTS. Seller is not party to any contract, understanding or commitment whether in the ordinary course of business or not, relating to the conduct of business by Seller from the Drug Store which contract, understanding or commitment shall extend beyond the Closing Date for the Pharmacy Location except the contracts identified in Exhibit "C." Seller is not party to any contractual agreement or commitment to individual employees which may not be terminated at the will of Seller. D. LITIGATION. To the best of Seller's current actual knowledge there is no suit, action, proceeding, investigation, claim, complaint or accusation pending or, threatened against or affecting Seller or the Assets or to which Seller is a party, in any court or before any arbitration panel of any kind or before or by any federal, state, local, foreign, or other governmental agency, department, commission, board, bureau, instrumentality or body which would have a materially adverse affect on the financial condition of Seller, and to the best knowledge and belief of Seller, there is no basis for any such suit, action, litigation, proceeding, investigation, claim, complaint or accusation. There is no outstanding order, writ, injunction, decree, judgment or award by any court, arbitration panel or governmental body against or affecting Seller with which Seller is not currently in compliance. E. EMPLOYEES. (a) To the best of Seller's actual knowledge, the Seller is in full compliance with all wage and hour laws, and is not engaged in any unfair labor practice or discriminatory employment practice and no complaint of any such practice against Seller is filed or threatened to be filed with or by the National Labor Relations Board, the Equal Employment Opportunity Commission or any other administrative agency, federal or state, that regulates labor or employment practices, nor is any grievance filed or threatened to be filed against Seller by any employee pursuant to any collective bargaining or other employment agreement to which Seller is a party. To the best of Seller's current actual knowledge and belief it is in compliance with all applicable federal and state laws and regulations regarding occupational safety and health standards and has received no material complaints from any federal or state agency or regulatory body alleging violations of any such laws and regulations. 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 and reflected in the accounting records of Seller. All benefits such as vacation accrued and earned by employees up to the Closing Date is responsibility of the Seller. All benefits accrued and earned after the Closing Date will become the financial responsibilities of the Buyer. To the Seller's best actual knowledge, all employees of Seller are either United States citizens or resident aliens specifically authorized to engage in employment in the United States in accordance with all applicable laws. F. TAXES. (a) Seller has duly filed all required federal, state, local, foreign and other tax returns, notices, and reports (including, but not limited to, income, property, sales, use, franchise, capital, stock, excise, added value, employees' income withholding, social security and unemployment tax returns) heretofore due; and to Seller's best actual knowledge all such returns, notices, and reports are correct, accurate, and complete. (b) All deposits required to be made by Seller with respect to any tax (including but not limited to, estimated income, franchise, sales, use, and employee withholding taxes) have been duly made. (c) All taxes, assessments, fees, penalties, interest and other governmental charges which have become due and payable have been paid in full by Seller or adequately reserved against on its books of account and the amounts reflected on such books are to the best belief and knowledge of Seller sufficient for the payment of all unpaid federal, state, local, foreign, and other taxes, fees, and assessments, and all interest and penalties thereon with respect to the periods then ended and or all periods prior thereto. Seller hereby agrees to indemnify and hold harmless Buyer from and against any and all liability, claims, or causes of action for any unpaid taxes, or other assessments due and owing to any federal, state, or local governmental entity arising out of the business of Seller prior to the Closing Date. (d) Buyer shall pay any and all Sales, Use, and Transfer Taxes, if any, arising out of the sale and transfer of assets which are the subject of this transaction. (e) Seller shall pay any and all personal property taxes for prior years attributable to the property being transferred hereby prior to Closing Date. (f) The parties shall pro rate at Closing anticipated personal property taxes as of the date of Closing based upon last year's tax renditions, and personal property tax bills and rent and will be deducted from Seller at closing. 4 CONDITIONS PRECEDENT. 7.1 All obligations of Seller under this Agreement are subject to the fulfillment, prior to or at the closing, of each of the following conditions (unless waived in writing by Buyer). A. REPRESENTATIONS. The representations and warranties of Seller contained in this Agreement shall not only have been true and complete as of date of this Agreement, but shall also be true and complete as though again made as of the Closing Date. B. COMPLIANCE. The Seller shall have performed and complied with all terms and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date. C. CONSENTS. All necessary consents to the transfer of the Drug Store assets have been obtained from vendors and partners if any. LIABILITIES NOT ASSUMED BY BUYER. 8.1 It is expressly understood and agreed that Buyer shall not, by virtue of this Agreement, the consummation of the transactions contemplated herein or otherwise, assume any liabilities or obligations of the Seller or any liabilities or obligations constituting a charge, lien, encumbrance or security interest upon the Drug Store assets to be transferred hereunder, regardless of whether such liabilities or obligations are absolute or contingent, liquidated or unliquidated or otherwise except the Security interest securing Buyer's Note to Seller. 8.2 Seller hereby indemnifies the Buyer, its officers, directors, and controlling persons against any liability for any fee or commission payable to any broker, agent or finder retained by Seller with respect to any transaction contemplated by this Agreement. 9. CLOSING. 9.1 The closing shall take place on or before August 12, 1997 at Buyer's discretion, but in no event later than August 31, 1997, at the Drug Store location. A. TO BE DELIVERED TO BUYER. The Seller shall deliver to Buyer a Bill of Sale, which shall be effective to vest in Buyer good and marketable title to the Drug Store Assets, free and clear of all mortgages, security interest, liens, encumbrances, pledges and hypothecation of every nature and description, except the Security interest securing Buyer's Note to the Seller. B. TO BE DELIVERED TO SELLER. The Buyer shall deliver to the Seller a Cashier's check for the cash portion of the purchase price less $1,000 Escrow amount, and Buyer's promissory note described in Paragraph 4.1 hereof, and the Security instruments required by section 4.1(b). INDEMNITY BY SELLER. 10.1 The Seller hereby agrees to indemnify and hold harmless Buyer against and in respect of: A. LIABILITY OF THE SELLER. With the exception of liabilities expressly assumed, all liabilities and obligations of the Seller, of every kind and description, regardless of whether such liabilities or obligations are absolute or contingent, liquidated or unliquidated, accrued or otherwise, and regardless of now and when the same may have arisen, which are asserted against Buyer as a result of this Agreement or the 5 consummation of the transaction contemplated herein. B. CLAIMS UPON ASSETS. All claims against, or claims of any interest in, or of a lien or encumbrance or the like upon any or all of the Drug Store assets to be transferred hereunder by the Seller to Buyer which are caused or created by indemnifying party, with the exception of Seller's interest, lien, or encumbrance resulting from Seller's security interest. 11. INDEMNITY BY BUYER. The buyer will indemnify the Seller for all claims against the Assets for any period after the Closing Date. The Buyer further indemnifies the Seller for break or leases and dissatisfied customer claims caused by HORIZON for any period after the Closing Date. 12. SURVIVAL OF REPRESENTATIONS, WARRANTIES & INDEMNIFICATIONS. 12.1 All of the covenants, representations, warranties and indemnification of the parties set forth in this Agreement shall survive the Closing Date hereof. All outstanding business transactions prior to the closing date are credited to the Seller. All business acquired on or after the Closing Date belong to the HORIZON Pharmacies, Inc. Including any insurance payments made to the existing NABP, State Welfare number(s), and/or contract(s) as long as the date of service is on or after the Closing Date. Sellers gives Buyer & Buyer's accountants access to financial records to conduct an audit for 1996 & through August 12, 1997 at Buyer's expense. 13. RISK OF LOSS. 13.1 The risk of loss of damage of Drug Store assets to be conveyed hereunder shall be upon Seller until the closing hereof. 14. NON-COMPETE COVENANT OF SELLER. 14.1 In consideration of the Purchase Price hereinabove stated in paragraph 2 of which $50,000.00 (for each individual) is allocated to this covenant not to compete BOB NORDEEN hereby agrees that for a period of six (6) years after the Closing Date hereunder will not, directly or indirectly, through a subsidiary, joint venture arrangement or otherwise, conduct or assist another party other than the Buyer in conducting or managing any operation which has as its purpose what is generally known as a retail pharmacy, or Nursing Home or IV operation or DME operation within the city limits of Mesquite, Texas, or have any equity investment in such operation. This non-compete entitles BOB NORDEEN to perform work as an employee of HORIZON Pharmacies, Inc. Furthermore, this non-compete clause does not prohibit BOB NORDEEN from performing duties such as relief pharmacist at other pharmacies within or without Mesquite. The parties hereby recognize and acknowledge that the territorial and time limitations contained in this paragraph are reasonable and properly required for the adequate protection of the business to be conducted by Buyer with the assets and properties to be transferred hereunder and cannot be changed except by written permission of Buyer. 6 14.2 The parties recognize that, in the event of a breach by Seller of any of the provisions of this paragraph, the remedy of law alone would be inadequate and, accordingly, Buyer, (in addition to damages), shall be entitled to an injunction restraining Seller from violating the covenants herein contained. 14.3 It is the intention of the Seller and the Buyer that the execution of these covenants not to compete be considered as materially significant and essential to the closing of this Agreement, and that such covenants are a material portion of the purchase price set forth herein above. 15. GOVERNING LAW. 15.1 This agreement shall be governed and construed in accordance with the laws of the State of Texas. 16. ENTIRE AGREEMENT. 16.1 This Agreement contains the entire agreement between the parties, and no representations, warranties or promises, unless contained herein, shall be binding upon the parties hereto. This document is null and void if the Purchase Agreement is not signed by both parties within 10 days from date the Buyer has received the Purchase Agreement document and the deposit of the $1,000.00 escrow. 16.2 It is stipulated that this agreement is null and void if HORIZON Pharmacies, Inc: (a) can not secure a valid Texas License under its own merit for the said DRUG STORE location to conduct business as a retail pharmacy operation. HORIZON Pharmacies, Inc. commits that it will exercise due diligent effort to secure the Texas License. (b) can not secure a lease for: $2,650.00 per month for 1st year 17. EARNEST MONEY. 17.1 To bind this Agreement, Buyer herewith deposits with RICHARD DOBBYN as Escrow Agent, the sum of $1,000 (One Thousand Dollars), which sum shall be applied to the cash portion of the Purchase Price upon the closing of the transaction contemplated herein. However, in the event Seller fails to perform each and every covenant and condition required hereunder, Buyer may cancel this Agreement and have the Earnest Money returned to it. If the Buyer fails to perform each and every obligation hereunder, Seller shall retain the Earnest Money as liquidated damages. each party's remedy provided in this Section is that party's exclusive remedy. 7 IN WITNESS WHEREOF, the parties hereto have set their hands the day and year first above written. BUYER: HORIZON PHARMACIES, INC. --------------------------------------- Rick McCord, President THE STATE OF ) COUNTY OF ) THIS INSTRUMENT was acknowledged before me on this the __________ day of __________ , 19_____, by RICK MCCORD, who holds the office of President of HORIZON PHARMACIES, INC., a Texas Corporation on behalf of such corporation. --------------------------------------- SEAL Notary Public, State of Texas My commission Expires: ----------------- SELLER: Revco, Inc. d/b/a Northridge Pharmacy --------------------------------------- Bob Nordeen, President THE STATE OF ) COUNTY OF ) THIS INSTRUMENT was acknowledged before me on this the _________day of __________, 19___ by _________________, who holds the office of President of Revco, Inc. --------------------------------------- SEAL Notary Public, State of Texas My commission Expires: ----------------- 8 EXHIBIT A 1. DEFINITION OF MARKETABLE INVENTORY. For purposes of this Agreement, marketable inventory is all of Seller's inventory except the following: (a) DAMAGED MERCHANDISE. Damaged merchandise, including but not limited to, items which are shopworn, faded (including faded labels) or subject to visible deterioration; and (b) UNSALABLE MERCHANDISE. Unsalable merchandise, that is items which are obsolete, or which have an expired expiration date or which have been discontinued by the manufacturer; and (c) PRESCRIPTION MERCHANDISE AND OVER-THE COUNTER DRUGS. The following exclusions, in addition to the exclusions set forth above, shall be applicable to prescription merchandise and over-the-counter drugs: (i) Any partial container with expired dating within thirty (30) days; (ii) Any full, sealed containers (aa) with expired dating, (iii) Filled prescriptions over one month old; (d) The buyer has the right of refusal to exclude seasonal merchandise from the evaluation of inventory other than Halloween, Thanksgiving, and Christmas. VALUATION OF INVENTORY. The marketable inventory shall be valued, for purposes of this Agreement, as follows (a) The marketable prescription inventory will be taken at acquisition cost OR AWP less 16%. Special deal prescription items and/or generic items will be at acquisition cost. (b) Non-prescription merchandise will be taken at acquisition cost. If no acquisition cost exists, then the following formula will apply to the merchandise. CATEGORY COST (% OF RETAIL) HBA Retail price less 25% OTC( Health aids) Retail price less 25% Gifts Retail price less 50% Cards Retail price less 50% Cosmetics Retail price less 40% Watches/Cameras Retail price less 50% Fragrances Retail price less 25% Candy (box) Retail price less 40% Candy (loose) Retail price less 30% Jewelry Retail price less 50% Miscellaneous Retail price less 50% 9 Seasonal Merchandise Retail price less 50% 10 EXHIBIT B 1. LIST OF ASSETS (FURNITURE, FIXTURES, AND EQUIPMENT, ETC.). Radionic Security System and equipment Proscar/Teleco 6 station telephone system Diebold safe 2 NDC scanning register TEC IBM pentium 330 Rx computer/4 work stations 2 Okidata 320 printers 1 IBM printer 3 Backup batteries Rx balance and weights Assorted compounding utensils 2 Rheen 5ton A/C & Heating units 1 A/C window unit (new compressor as of 10/96) 1 S-10 Chevy Blazer 1988 20 ft Pharmacy counter unit 16ft Rx counter, cupboard/sink Rx bays & wall unit 5 metal Rx file cabinets 1 Sears coldspot 12.66 cu ft refrigerator Remington elec. typewriter 24ft check-in counter & base cupboards 1 impulse sign machine 1 coke machine 28ft stock room shelving 1 orbiter floor scrub machine 108ft gondolas with shelves 5ft high 40ft wall shelving 5ft high 52ft wall fixtures with shelves 7ft high 8 end stand units 3ft wide 1 glass showcase 8ft 2 glass shelf gift fixture 5ft 2 glass shelf gift fixture 7ft 2 check-out counters 1 neon "open" sign 1 power-mate answering machine 4 ceiling security mirrors 1 blood pressure machine floor model assorted wood display fixtures 1 wood desk and chair 1 TV/VCR combo for training 1 Toshiba microwave 1 Kirby lester pill counter 1 fax machine 1 unit dose heat seal w/ blister cards 1 metal dolly 2 wheel 2 metal drawer file cabinets 1 metal file cabinet with shelves/Rx dept c-2
11 EXHIBIT C 1. LIST OF SECURED DEBTS. 1. Advertising. Southwestern Bell Yellow Pages from September 1, 1997 to December 31, 1997. $94.00 per month x 4 months = $376.00 2. Real Estate lease. Real property lease for the store located at 1819 N. Galloway Mesquite, TX 75149 from 91/97 to 12/31/97. $2,650.00 per month x 4 months = $10,600.00 3. Equipment Leases Lessor Monthly Pmt Remaining Months Total Due NDC $297.47 11 $ 3,569.64 NDC-POS $305.57 12 $ 3,972.41 AT & T computer $162.37 45 $ 7,306.65 Total $14,848.70 Buyer and Seller will pay for and be obligated to pay for one-half of each month's rental payment until the equipment leases are paid in full or otherwise terminated. If and when Seller and Robert Nordeen are released from any obligations which they may have on the leases, Seller will convey fifty percent (50%) of the remaining balance on the equipment leases to Buyer. Until such leases are obtained, each party obligates itself to pay 50% of each month's payment. EXHIBIT D 1. ALL COLLECTIBLES & ANTIQUES ARE EXCLUDED: Which include the following: 1 Alchemy clock 1 antique wood wheelchair 1 show globe / ceiling hanging 1 wood desk in office 2 wood show cases filled with pharmacy memorabilia all items on top of Rx department shelves and cupboards all tile plaques hanging in Rx department Pharmacist Bear (hand carved) redwood 12 EX-2.3 3 EXHIBIT 2.3 PURCHASE AGREEMENT AGREEMENT made the 16 day of August, 1997 between Downey Drug, Inc. having an office at 1839 Harrison Avenue, Butte, MT 59701 (hereinafter referred to as the "seller"), and HORIZON PHARMACIES, INC., a Texas Corporation, having offices located at 275 W. Princeton Drive, Princeton Texas, 75407 (hereinafter referred to as the "Buyer"). W I T N E S S E T H WHEREAS, the Seller and the Buyer have reached an agreement, in accordance with the terms and conditions hereinbelow set forth, with respect to the sale by the Seller and the purchase by the Buyer of certain of the assets of the Seller utilized in connection with and as part of the retail drug store operations of the Seller known as Downey Drug (hereinafter referred to as the "DRUG STORE") and desire to reduce said agreement in writing; NOW, THEREFORE, THE PARTIES AGREE: 1. SALE OF ASSETS. 1.1 For the purpose of this Agreement, Seller agrees to sell to Buyer certain assets of the Drug Store (hereinafter referred to as the "Drug Store Assets"), which the Buyer hereby agrees to purchase. Such assets include and are hereby limited to: A. INVENTORY. All of the marketable inventory (as defined in Exhibit A attached hereto) held for retail sale by the Seller and located at the Drug Store; and B. PRESCRIPTION FILES INCLUDING ALL CUSTOMER AND PATIENT LISTS AND PATIENT PROFILES. All prescription files and patient profiles of Seller located at and pertaining to prescription customers of the Drug Store. C. ALL FIXTURES AND EQUIPMENT. All Rx, OTC, and DME fixtures and equipment owned and leased by Seller (computer/peripherals, registers, refrigerator, typewriter, Microfiche, fax, copier, Pitney Bowes, sound of music and alarm system, etc.) located at the Drug Store,; and all telephone equipment, and all miscellaneous shelving, counters and supplies belonging to Seller as listed on Exhibit B attached hereto and made a part hereof. D. STORE TELEPHONE NUMBER(S). All telephone numbers of the Drug Store location shall be transferred to Buyer. E. SUPPLIES. All bottles, vials, ointment jars, and other usable supplies of Seller located at the Drug Store location and at Seller cost. F. ASSETS NOT PURCHASED. Buyer shall not purchase any consigned merchandise or layaway items. G. All outstanding business transactions prior to the closing date are credited to the Buyer. All the business acquired after the closing date belong to the HORIZON 1 Pharmacies, Inc. including any insurance payments made to the existing NABP, State Welfare number(s), and/or contract(s) as long as the date of service is on or after the closing date. 2. PURCHASE PRICE. 2.1 The total purchase price to be paid by the Buyer for the Drug Stores Assets shall be computed, but not allocated, as follows: Furniture, Fixtures and Equipment, Prescription Files, Patient Profiles, Customer List, Telephone System/Numbers, $130,000.00 2.2 An amount equal to the aggregate value of the marketable inventory (as defined in Exhibit A attached hereto) as determined in the physical inventory described in paragraph 5 below and as valued in accordance with Exhibit A attached hereto and made a part hereof. For the purpose of the purchase Buyer will pay 100% of the inventory evaluation on the first $550,000 and 80% thereafter. 2.3 Buyer will purchase accounts receivable based on the following evaluation: (a) Third Party Insurance Receivable All at 100% (b) Individual Charge Accounts 0-30 days balances at 100% 31-60 days balances at 80% 61-90 days balances at 60% >90 days balances at 0% ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated based on the attached closing statement, signed by both buyer and seller. PAYMENT OF PURCHASE PRICE. 4.1 Subject to the following provisions, the purchase price hereafter shall be paid as follows: 4.1 (a) Cash at the closing equal to $150,000.00 less $5,000 escrow deposit. 4.1 (b) A note payable at closing to James Downey at 1355 West Porphyry, Butte, MT 59701, for $135,000 which will bear interest at the rate of eight (8) percent per annum for 60 months starting September 1, 1997. (c) A note payable at closing to Tim Downey at 111 View, Butte, MT 59701, for $135,000 which will bear interest at the rate of eight (8) percent per annum for 60 months starting September 1, 1997. (d) A note at closing equal to the purchase price less section 4.1 (a, b, & c) above. The note will bear interest at the rate of eight (8) percent per annum for 84 months starting September 1, 1997. The note will be executed by buyer and payable to the order of Downey Drug, Inc. It will be secured by the inventory, furniture, fixtures, and equipment of said Drug Store. 4.2 Security Instruments including Security Agreement and Financing Statements covering the property being purchased by this Agreement. 2 INVENTORY. A physical inventory shall be taken at the Drug Store by RGIS INVENTORY SPECIALISTS on the closing date. Each party shall pay one-half of the inventory expense. Seller portion will be deducted from Closing Statement. REPRESENTATIONS AND WARRANTIES BY SELLER. 6.1 The Seller does hereby represent and warrant as follows: A. AUTHORITY. The execution, delivery and performance of this Agreement by Sellerhas been duly authorized by all necessary entity action and constitutes a legal, valid, and binding obligation on Seller enforceable in accordance with its terms. B. TITLE TO PROPERTIES. The Seller has good and marketable title to all of the Drug Store assets to be transferred hereunder, free and clear of all mortgages, liens,encumbrances, pledges, or security interests of any nature whatsoever, except for secured debts, if any, listed on Exhibit C attached hereto which shall be satisfied and released at or prior to closing. The Seller has received no notice of violation of any applicable law, regulation or requirement relating to the retail Drug Store business operation or Drug Store assets to be transferred hereunder; and as far as known to the Seller, no such violation exists. C. CONTRACTS. Seller is not party to any contract, understanding or commitment whether in the ordinary course of business or not, relating to the conduct ofbusiness by Seller from the Drug Store which contract, understanding or commitment shall extend beyond the Closing Date for the Pharmacy Location except the contracts the real estate lease Seller is not party to any contractual agreement or commitment to individual employees which may not be terminated at the will of Seller. D. LITIGATION. To the best of Seller's current actual knowledge there is no suit, action, proceeding, investigation, claim, complaint or accusation pending or, threatened against or affecting Seller or the Assets or to which Seller is a party, in any court or before any arbitration panel of any kind or before or by any federal, state, local, foreign, or other governmental agency, department, commission, board, bureau, instrumentality or body which would have a materially adverse affect on the financial condition of Seller, and to the best knowledge and belief of Seller, there is no basis for any such suit, action, litigation, proceeding, investigation, claim, complaint or accusation. There is no outstanding order, writ, injunction, decree, judgment or award by any court, arbitration panel or governmental body against or affecting Seller with which Seller is not currently in compliance. E. EMPLOYEES. (a) To the best of Seller's actual knowledge, the Seller is in full compliance with all wage and hour laws, and is not engaged in any unfair labor practice or discriminatory employment practice and no complaint of any such practice against Seller is filed or threatened to be filed with or by the National Labor Relations Board, the Equal Employment Opportunity Commission or any other administrative agency, federal or state, that regulates labor or employment practices, nor is any grievance filed or 3 threatened to be filed against Seller by any employee pursuant to any collect bargaining or other employment agreement to which Seller is a party. To the Seller's best knowledge and belief it is in compliance with all applicable federal and state laws and regulations regarding occupational safety and health standards and has received no material complaints from any federal or state agency or regulatory body alleging violations of any such laws and regulations. (b) The employment of all persons and officers employed by Seller is terminable at will without any penalty or severance obligation of any kind on the part of the employer. All sums due for employee compensation and benefits and all vacation time owing to any employees of Seller have been duly and adequately accrued and reflected in the accounting records of Seller. All benefits such as vacation accrued and earned by employees up to the Closing Date is responsibility of the Seller. All benefits accrued and earned after the Closing Date will become the financial responsibilities of the Buyer. To the Seller's best knowledge, all employees of Seller are either United States citizens or resident aliens specifically authorized to engage in employment in the United States in accordance with all applicable laws. F. TAXES. (a) Seller has duly filed all required federal, state, local, foreign and other tax returns, notices, and reports (including, but not limited to, income, property, sales, use, franchise, capital, stock, excise, added value, employees' income withholding, social security and unemployment tax returns) heretofore due; and to Seller's best knowledge all such returns, notices, and reports are correct, accurate, and complete. (b) All deposits required to be made by Seller with respect to any tax (including but not limited to, estimated income, franchise, sales, use, and employee withholding taxes) have been duly made. (c) All taxes, assessments, fees, penalties, interest and other governmental charges which have become due and payable have been paid in full by Seller or adequately reserved against on its books of account and the amounts reflected on such books are to the best belief and knowledge of Seller sufficient for the payment of all unpaid federal, state, local, foreign, and other taxes, fees, and assessments, and all interest and penalties thereon with respect to the periods then ended and or all periods prior thereto. Seller hereby agrees to indemnify and hold harmless Buyer from and against any and all liability, claims, or causes of action for any unpaid taxes, or other assessments due and owing to any federal, state, or local governmental entity arising out of the business of Seller prior to the Closing Date. (d) Buyer shall pay any and all Sales, Use, and Transfer Taxes, if any, arising out of the assets which are the subject of this sale. (e) Seller shall pay any and all personal property taxes for prior years attributable to the property being transferred hereby prior to Closing Date. (f) The parties shall pro rate at Closing anticipated personal property taxes as of the date of Closing based upon last year's tax renditions, and personal property tax bills and rent. 4 CONDITIONS PRECEDENT. 7.1 All obligations of Seller under this Agreement are subject to the fulfillment, prior to or at the closing, of each of the following conditions (unless waived in writing by Buyer). A. REPRESENTATIONS. The representations and warranties of Seller contained in this Agreement shall not only have been true and complete as of date of this Agreement, but shall also be true and complete as though again made as of the Closing Date. B. COMPLIANCE. The Seller shall have performed and complied with all terms and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date. C. CONSENTS. All necessary consents to the transfer of the Drug Store assets have been obtained from vendors and partners if any. D. UNION CONTRACT. Buyer acknowledges Seller has a union contract covering a portion of its employees. As a condition to closing, Buyer needs to evaluate said contract and Seller's status as a union employer. It is Buyer's intent to separately hire all its own employees for operations starting August 18, 1997, and not be bound by Sellers prior employment practices or union obligations. As a result, on or before May 30, 1997, Buyer will notify Seller of its intent to close on or before August 30, 1997. Seller will then terminate all its employees with two (2) weeks notice on July 30, 1997. Buyer shall hire its own work force for its start of business on August 18, 1997. Seller will fully cooperate with Buyer in this transition. Failure by Buyer to notify Seller by August 30, 1997 of its intent to close, shall terminate all obligations of Seller to sell as provided hereunder. Once Buyer notifies Seller of its intent to close on August 30,1997, it will be obligated to close in conformity with this agreement. LIABILITIES NOT ASSUMED BY BUYER. 8.1 It is expressly understood and agreed that Buyer shall not, by virtue of this Agreement, the consummation of the transactions contemplated herein or otherwise, assume any liabilities or obligations of the Seller or any liabilities or obligations constituting a charge, lien, encumbrance or security interest upon the Drug Store assets to be transferred hereunder, regardless of whether such liabilities or obligations are absolute or contingent, liquidated or unliquidated or otherwise except the Security interest securing Buyer's Note to Seller. 8.2 Seller hereby indemnifies the Buyer, its officers, directors, and controlling persons against any liability for any fee or commission payable to any broker, agent or finder retained by Seller with respect to any transaction contemplated by this Agreement. 9. CLOSING. 9.1 The closing shall take place on or before August 30, 1997 at Buyer's discretion, but in no event later than August 30, 1997, at the Drug Store location. A. TO BE DELIVERED TO BUYER. The Seller shall deliver to Buyer a Bill of Sale, which shall be effective to vest in Buyer good and marketable title to the Drug Store Assets, free and clear of all mortgages, security interest, liens, encumbrances, pledges and hypothecation of every nature and description, except the Security interest securing Buyer's Note to the Seller. 5 B. TO BE DELIVERED TO SELLER. The Buyer shall deliver to the Seller a Cashier's check for the cash portion of the purchase price less $1,000 Escrow amount, and Buyer's promissory note described in Paragraph 4.1 hereof, and the Security instruments required by section 4.1 (b). INDEMNITY BY SELLER. 10.1 The Seller hereby agrees to indemnify and hold harmless Buyer against and in respect of: A. LIABILITY OF THE SELLER. With the exception of liabilities expressly assumed, all liabilities and obligations of the Seller, of every kind and description, regardless of whether such liabilities or obligations are absolute or contingent, liquidated or unliquidated, accrued or otherwise, and regardless of now and when the same may have arisen, which are asserted against Buyer as a result of this Agreement or the consummation of the transaction contemplated herein. B. CLAIMS UPON ASSETS. All claims against, or claims of any interest in, or of a lien or encumbrance or the like upon any or all of the Drug Store assets to be transferred hereunder by the Seller to Buyer which are caused or created by indemnifying party, with the exception of Seller's interest, lien, or encumbrance resulting from Seller's security interest. C. The Buyer will indemnify the Seller for all claims against the Assets for any period after the closing date. The Buyer further indemnifies the Seller for break of leases and dissatisfied customer claims caused by HORIZON for any period after the closing date. 11. SURVIVAL OF REPRESENTATIONS, WARRANTIES & INDEMNIFICATIONS. 11.1 All of the covenants, representations, warranties and indemnification of the parties set forth in this Agreement shall survive the Closing Date hereof. 12. RISK OF LOSS. 12.1 The risk of loss of damage of Drug Store assets to be conveyed hereunder shall be upon Seller until the closing hereof. 13. NON-COMPETE COVENANT OF SELLER. 13.1 In partial consideration of the Purchase Price hereinabove stated in paragraph 2 and other consideration $270,000 ($135,000 for each individual, includes 8% interest) will be paid to this covenant not to compete. Jim Downey and Tim Downey hereby agree that for a period of five (5) years after the date of closing hereunder will not directly or indirectly, through a subsidiary, joint venture arrangement or otherwise, conduct or assist another party other than the Buyer in conducting or managing any operation which has its own purpose what is generally known as a retail pharmacy, or Nursing Home or IV operation or DME operation within Butte-Silver Bow County, Montana, or have any equity investment in such operation. This non-compete entitles Jim Downey and Tim Downey to perform work at 40 hours a week as employees of HORIZON Pharmacies, Inc. Furthermore, this non-compete clause does not prohibit Jim Downey and Tim Downey from performing duties such as relief pharmacist at other pharmacies. Any additional relief work days in a month will require written approval of the Buyer. The parties hereby 6 recognize and acknowledge that the territorial and time limitations contained in this paragraph are reasonable and properly required for the adequate protection of the business to be conducted by Buyer with the assets and properties to be transferred hereunder and cannot be changed except by written permission of Buyer. Said $135,000 to each Jim and Tim Downey shall be paid monthly at $2,250.00 each over a period of five (5) years starting one month after closing. Seller will allow Buyer and Buyers accountant access to financial information to prepare and audit for 1996, and up to closing date in 1997 to be paid at Buyers expense. 13.2 The parties recognize that, in the event of a breach by Seller of any of the provisions of this paragraph, the remedy of law alone would be inadequate and, accordingly, Buyer,(in addition to damages), shall be entitled to an injunction restraining Seller from violating the covenants herein contained. 13.3 It is the intention of the Seller and the Buyer that the execution of these covenants not to compete be considered as materially significant and essential to the closing of this Agreement, and that such covenants are a material portion of the purchase price set forth herein above. 14. GOVERNING LAW. 14.1 This agreement shall be governed and construed in accordance with the laws of the State of Montana. 15. ENTIRE AGREEMENT. 15.1 This Agreement contains the entire agreement between the parties, and no representations, warranties or promises, unless contained herein, shall be binding upon the parties hereto, their successors and assigns. 15.2 It is stipulated that this agreement is null and void if HORIZON Pharmacies, Inc: (a) can not secure a valid Montana License under its own merit for the said DRUG STORE location to conduct business as a retail pharmacy operation. HORIZON Pharmacies, Inc. commits that it will exercise due diligent effort to secure the Montana License. (b) can not secure a lease for $4,000.00 per month for three (3) years with one (1) three (3) year option @ $4,300.00 per month and one (1) four (4) year option @ $4,500.00 per month. 16. EARNEST MONEY. 16.1 To bind this Agreement, Buyer herewith deposits with James F. Duffy as Escrow Agent, the sum of $5,000 (Five Thousand Dollars), which sum shall be applied to the cash portion of the Purchase Price upon the closing of the transaction contemplated herein. However, in the event Seller fails to perform each and every covenant and condition required hereunder, Buyer may cancel this Agreement and have the Earnest Money returned to it. If the Buyer fails to perform each and every obligation hereunder, Seller shall retain the Earnest Money as liquidated damages each party's remedy provided in 7 this Section is that party's exclusive remedy. 17. ASSIGNMENT 17.1 This agreement may not be assigned by Buyer without written consent of Seller. Consent will not be unreasonably withheld. 8 IN WITNESS WHEREOF, the parties hereto have set their hands the day and year first above written. BUYER: HORIZON PHARMACIES, INC. ----------------------------------------- Rick McCord, President THE STATE OF ) COUNTY OF ) THIS INSTRUMENT was acknowledged before me on this the __________ day of __________ , 19_____, by RICK MCCORD, who holds the office of President of HORIZON PHARMACIES, INC., a Texas Corporation on behalf of such corporation. ----------------------------------------- SEAL Notary Public, State of Texas My commission Expires: ------------------- SELLER: Downey Drug, Inc. ----------------------------------------- Tim Downey, President ----------------------------------------- Jim Downey, Vice-President THE STATE OF ) COUNTY OF ) THIS INSTRUMENT was acknowledged before me on this the _________day of __________, 19___ by Tim Downey, who holds the office of President of Downey Drug, Inc. and by Jim Downey who holds the office of Vice-President of Downey Drug, Inc. on behalf of such corporation. ----------------------------------------- SEAL Notary Public, State of Texas My commission Expires: ------------------- 9 EXHIBIT A 1. DEFINITION OF MARKETABLE INVENTORY. For purposes of this Agreement, marketable inventory is all of Seller's inventory except the following: (a) DAMAGED MERCHANDISE. Damaged merchandise, including but not limited to, items which are shopworn, faded (including faded labels) or subject to visible deterioration; and (b) UNSALABLE MERCHANDISE. Unsalable merchandise, that is items which are obsolete, or which have an expired expiration date or which have been discontinued by the manufacturer; and (c) PRESCRIPTION MERCHANDISE AND OVER-THE COUNTER DRUGS. The following exclusions, in addition to the exclusions set forth above, shall be applicable to prescription merchandise and over-the-counter drugs: (i) Any partial container with expired dating within thirty (30) days; (ii) Any full, sealed containers (aa) with expired dating, (iii) Filled prescriptions over one month old; (d) The buyer has the right of refusal to exclude seasonal merchandise from the evaluation of inventory other than Halloween, Thanksgiving, and Christmas. VALUATION OF INVENTORY. The marketable inventory shall be valued, for purposes of this Agreement, as follows (a) The marketable prescription inventory will be taken at acquisition cost OR AWP less 16%. Special deal prescription items and/or generic items will be at acquisition cost. (b) Non-prescription merchandise will be taken at acquisition cost. If no acquisition cost exists, then the following formula will apply to the merchandise. CATEGORY COST (% OF RETAIL) HBA Retail price less 25% OTC( Health aids) Retail price less 25% Gifts Retail price less 50% Cards Retail price less 50% Cosmetics Retail price less 40% Watches/Cameras Retail price less 50% Fragrances Retail price less 25% Candy (box) Retail price less 40% Candy (loose) Retail price less 30% Jewelry Retail price less 50% Miscellaneous Retail price less 50% Seasonal Merchandise Retail price less 50% 10 EXHIBIT B 1. LIST OF ASSETS (FURNITURE, FIXTURES, AND EQUIPMENT, ETC.). STORE: 1-7 ft. GONDOLA/SHELVES 1-15 ft GONDOLA/SHELVES 1-21 ft GONDOLA/SHELVES 1-30 ft GONDOLA/SHELVES 2-36 ft GONDOLA/SHELVES 10-40 ft GONDOLA/SHELVES 9-4 ft GLASS CASES 9-6 ft GLASS CASES 9-8 ft GLASS CASES 19-ENDCAPS 75-OTC WALL SHELVES 5-GIFT DISPLAYS 5-COSMETIC DISPLAYS 2-GLASS DISPLAYS 1-GIFT WRAP DISPLAY-HOLDER 5-GLASS OAK WALL DISPLAY (32 FT) 20-RX WALL SHELVES (3 ft SECTIONS) 1-RX COUNTER 36 ft W/DRAWS ETC. 1-AUTOMATIC PILL COUNTER 1-RX REFRIGERATOR 1-CIGAR CASE 1-REF. CANDY CASE 3-CHECK OUT COUNTERS 1-COOLER VET. SECTIONS 5-REGISTERS 4-DESKS 5-LOCKERS 4-FILE CABINETS 3-VACUUMS 1-COPIER 1-FAX MACHINE 13-SHELVES (8 ft) STORE ROOM/UPSTAIRS WOOD SHELVES (STORE ROOMS) 2-SAFES-NOT FOR SALE, BUT MAY BE USED WITH LEASE ON BLDG. 1-RX BALANCE-NOT FOR SALE, MAY BE USED UNTIL REPLACED. EXHIBIT C 1. LIST OF SECURED DEBTS. 11 EX-27.1 4 EXHIBIT 27.1
5 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 229,052 0 2,463,017 0 3,893,381 6,626,546 720,726 105,957 9,091,801 5,882,238 1,291,034 0 0 10,824 1,907,705 9,091,801 11,060,059 11,060,059 7,582,584 7,582,584 3,013,242 0 142,913 318,456 111,000 207,456 0 0 0 207,456 .18 0
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