-----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, QPIO2JDpRaJEwhiCdrroQWUZ8sF/fTPPff/h2xNvmaIFkPK3cUr7cYaT5Hjt7NlL Jbz8h1KrE+lZcqWxjxX+Mw== 0001047469-98-020819.txt : 19980518 0001047469-98-020819.hdr.sgml : 19980518 ACCESSION NUMBER: 0001047469-98-020819 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-22403 FILM NUMBER: 98625954 BUSINESS ADDRESS: STREET 1: 275 W PRINCETON DR CITY: PRINCETON STATE: TX ZIP: 75407 BUSINESS PHONE: 9727362424 MAIL ADDRESS: STREET 1: 275 WEST PRINCETON DRIVE CITY: PRINCETON STATE: TX ZIP: 75407 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: March 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 0-22403 HORIZON Pharmacies, Inc. (Exact name of small business issuer as specified in its charter) TEXAS 75-2441557 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 275 W. Princeton Drive Princeton, Texas 75407 (Address of principal executive offices) (972) 736-2424 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Title of Each Class Outstanding at May 7, 1998 Common stock, par value $.01 per share 4,526,099
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] FORM 10-QSB TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . 3 Consolidated Balance Sheets - December 31, 1997 and March 31, 1998 (unaudited) . . . . . . . . . . . . 3 Consolidated Statements of Income - Three months ended March 31, 1997 and 1998 (unaudited). . . . . . . 4 Statement of Shareholders' Equity - Three months ended March 31, 1998 (unaudited) . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows - Three months ended March 31, 1997 and 1998 (unaudited). . . . . . . 6 Notes to Financial Statements (unaudited) . . . . . . . . . 8 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . 10 PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 16 Changes in Securities and Use of Proceeds . . . . . . . . . 16 Other Information . . . . . . . . . . . . . . . . . . . . . 16 Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 17 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. HORIZON PHARMACIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS December 31, March 31, 1997 1998 ----------- ----------- (audited) (unaudited) Current assets: Cash and cash equivalents . . . . . . . . . . . $4,084,088 $ 2,388,288 Accounts receivable, net: Third-party providers. . . . . . . . . . . . 2,763,481 3,622,865 Others . . . . . . . . . . . . . . . . . . . 1,477,953 1,406,161 Inventories . . . . . . . . . . . . . . . . . . 7,900,994 9,827,570 Prepaid expenses and deposits . . . . . . . . . 120,915 144,994 Deferred income taxes . . . . . . . . . . . . . 42,000 42,000 ----------- ----------- Total current assets . . . . . . . . . . . . . . . 16,389,431 17,431,878 Property, equipment and capital lease assets: Property and equipment: Land and building. . . . . . . . . . . . . . 204,389 204,389 Equipment. . . . . . . . . . . . . . . . . . 1,453,112 1,910,014 ----------- ----------- 1,657,501 2,114,403 Less accumulated depreciation . . . . . . . . . 200,855 262,725 ----------- ----------- Property and equipment, net . . . . . . . . . . 1,456,646 1,851,678 Equipment under capital leases. . . . . . . . . 374,209 373,509 Less accumulated amortization . . . . . . . . . 92,238 112,568 ----------- ----------- Equipment under capital leases, net . . . . . . 281,971 260,941 ----------- ----------- Property, equipment and capital lease assets, net. 1,738,617 2,112,619 Intangibles, at cost: Noncompete covenants. . . . . . . . . . . . . . 441,788 561,788 Customer lists. . . . . . . . . . . . . . . . . 531,147 688,747 Goodwill. . . . . . . . . . . . . . . . . . . . 1,879,782 3,015,818 ----------- ----------- 2,852,717 4,266,353 Less accumulated amortization . . . . . . . . . 327,058 395,369 ----------- ----------- Intangibles, net . . . . . . . . . . . . . . . . . 2,525,659 3,870,984 ----------- ----------- $20,653,707 $23,415,481 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable. . . . . . . . . . . . . . . . $ 3,670,123 $ 3,999,972 Accrued liabilities . . . . . . . . . . . . . . 394,526 497,486 Notes payable . . . . . . . . . . . . . . . . . 161,865 319,958 Income taxes payable. . . . . . . . . . . . . . 220,000 177,771 Current portion of long-term debt . . . . . . . 572,254 802,215 Current obligations under capital leases. . . . 83,824 76,801 ----------- ----------- Total current liabilities. . . . . . . . . . . . . 5,102,592 5,874,203 Long-term debt . . . . . . . . . . . . . . . . . . 3,332,682 4,507,285 Obligations under capital leases . . . . . . . . . 197,775 178,572 Deferred income taxes. . . . . . . . . . . . . . . 182,000 157,000 Shareholders' equity Preferred stock . . . . . . . . . . . . . . . . -- -- Common stock. . . . . . . . . . . . . . . . . . 44,365 45,261 Additional paid-in capital. . . . . . . . . . . 11,516,834 12,100,570 Retained earnings . . . . . . . . . . . . . . . 277,459 552,590 ----------- ----------- Total shareholders' equity . . . . . . . . . . . . 11,838,658 12,698,421 ----------- ----------- $20,653,707 $23,415,481 ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES. 3 HORIZON PHARMACIES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months ended March 31, ---------------------------- 1997 1998 ------------ ------------ Net revenues: Prescription drugs sales. . . . . . . . . . . . $ 4,060,266 $ 9,799,681 Other sales and services. . . . . . . . . . . . 1,052,981 3,022,568 ----------- ----------- Total net revenues . . . . . . . . . . . . . . . . 5,113,247 12,822,249 Costs and expenses: Cost of sales and services: Prescription drugs . . . . . . . . . . . . . 2,809,258 7,181,401 Other. . . . . . . . . . . . . . . . . . . . 649,246 1,668,992 Depreciation and amortization . . . . . . . . . 58,696 150,511 Selling, general and administrative expenses. . 1,322,381 3,310,284 ----------- ----------- Total costs and expenses . . . . . . . . . . . . . 4,839,581 12,311,188 ----------- ----------- Income from operations . . . . . . . . . . . . . . 273,666 511,061 Other income (expense): Interest and other income . . . . . . . . . . . 393 50,832 Interest expense. . . . . . . . . . . . . . . . (53,531) (103,762) ----------- ----------- Total other income (expense) . . . . . . . . . . . (53,138) (52,930) ----------- ----------- Income before provision for income taxes . . . . . 220,528 458,131 Provision for income taxes (Note 3). . . . . . . . 77,000 183,000 ----------- ----------- Net income . . . . . . . . . . . . . . . . . . . . $ 143,528 $ 275,131 ----------- ----------- ----------- ----------- Basic earnings per share (Note 2). . . . . . . . . $ 0.08 $ 0.06 ----------- ----------- ----------- ----------- Diluted earnings per share (Note 2). . . . . . . . $ 0.08 $ 0.06 ----------- ----------- ----------- -----------
See accompanying notes. 4 HORIZON PHARMACIES, INC. STATEMENT OF SHAREHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) COMMON STOCK --------------------- ADDITIONAL TOTAL SHARES AMOUNT PAID-IN CAPITAL RETAINED EARNINGS SHAREHOLDERS' EQUITY --------- -------- --------------- ----------------- -------------------- Balance at December 31, 1997 4,436,494 $44,365 $11,516,834 $277,459 $11,838,658 Exercise of stock options 56,101 561 223,843 -- 224,404 Tax benefit from exercise of stock options -- -- 50,228 -- 50,228 Issuance of stock to acquire stores 31,282 313 289,687 -- 290,000 Issuance of stock to reduce debt 2,222 22 19,978 -- 20,000 Net income -- -- -- 275,131 275,131 --------- ------- ----------- -------- ----------- Balance at March 31, 1998 4,526,099 $45,261 $12,100,570 $552,590 $12,698,421 --------- ------- ----------- -------- ----------- --------- ------- ----------- -------- -----------
See accompanying notes. 5 HORIZON PHARMACIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ---------------------------- 1997 1998 --------- ----------- OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . . $ 143,528 $ 275,131 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization of property, equipment and capital lease assets . . . . . 28,244 82,200 Amortization of intangibles . . . . . . . . . . 30,452 68,311 Provision for uncollectible accounts receivable 5,598 1,742 Pro forma provision for income taxes. . . . . . 77,000 -- Credit for deferred income taxes. . . . . . . . -- (25,000) Changes in operating assets and liabilities, net of acquisitions of businesses: Accounts receivable. . . . . . . . . . . . . (529,881) (775,930) Inventories. . . . . . . . . . . . . . . . . (212,899) (647,023) Prepaid expenses and deposits. . . . . . . . 3,989 (24,080) Bank overdraft . . . . . . . . . . . . . . . 482,480 -- Accounts payable . . . . . . . . . . . . . . 172,397 329,849 Accrued liabilities. . . . . . . . . . . . . 53,031 102,960 Income taxes payable . . . . . . . . . . . . -- 7,999 ------------------------ Total adjustments. . . . . . . . . . . . . . . . . 110,411 (878,972) ------------------------ Net cash used provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . 253,939 (603,841) INVESTING ACTIVITIES Purchases of property and equipment. . . . . . . . (7,819) (135,482) Assets acquired for cash in acquisitions of businesses . . . . . . . . . . . . . . . . . . . -- (951,023) ------------------------ Net cash used in investing activities. . . . . . . (7,819) (1,086,505) FINANCING ACTIVITIES Principal payments on notes payable. . . . . . . . (85,000) (56,984) Principal payments on long-term debt . . . . . . . (55,248) (146,648) Principal payments on obligations under capital leases . . . . . . . . . . . . . . . . . (10,583) (26,226) Proceeds from sales of stock . . . . . . . . . . . (63,850) 224,404 Distributions to shareholders. . . . . . . . . . . (75,000) -- ------------------------ Net cash used in financing activities. . . . . . . (289,681) (5,454) ------------------------ Net decrease in cash and cash equivalents. . . . . (43,561) (1,695,800) Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . 153,260 4,084,088 ------------------------ Cash and cash equivalents at end of period . . . . $ 109,699 $ 2,388,288 ------------------------ ------------------------ Supplemental disclosure of interest paid . . . . . $ 53,531 $ 103,762 NONCASH INVESTING AND FINANCING ACTIVITIES Equipment leased under capital leases. . . . . . . $ 59,694 $ -- Issuance of common stock to reduce long-term debt. -- 20,000 Acquisitions of businesses financed by debt and common stock: Accounts receivable and other . . . . . . . . $ 66,382 $ 12,703 Inventories . . . . . . . . . . . . . . . . . 482,260 1,279,553 Property and equipment. . . . . . . . . . . . 60,000 321,420 Intangibles . . . . . . . . . . . . . . . . . 390,000 1,413,635 ------------------------ 998,642 3,027,311 Less cash paid. . . . . . . . . . . . . . . . -- 951,023 ------------------------ Assets acquired . . . . . . . . . . . . . . . $ 998,642 $ 2,076,288 ------------------------ ------------------------
6 HORIZON PHARMACIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) CONTINUED... Financed by: Notes payable . . . . . . . . . . . . . . . . $898,642 $215,077 Long-term debt. . . . . . . . . . . . . . . . -- 1,571,211 Advance by shareholder. . . . . . . . . . . . 100,000 -- Common stock. . . . . . . . . . . . . . . . . -- 290,000 --------------------- $998,642 $2,076,288 --------------------- ---------------------
See accompanying notes. 7 HORIZON PHARMACIES, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 The unaudited financial statements include all adjustments, consisting of normal, recurring accruals, which HORIZON Pharmacies, Inc. (the "Company") considers necessary for a fair presentation of the financial position and the results of operations for the indicated periods. The notes to the financial statements should be read in conjunction with the notes to the financial statements contained in the Company's Form 10-KSB, for the year ended December 31, 1997. The results of operations for the three months ended March 31, 1998, are not necessarily indicative of the results to be expected for the full year ending December 31, 1998. The Company's sales and earnings are higher during peak holiday periods and from Christmas through Easter (the first and fourth quarters of the calendar year). Estimated gross profit rates were used to determine costs of sales for the three months ended March 31, 1997 and 1998. NOTE 2 Weighted average common shares outstanding used in the calculation of basic earnings per share of the three months ended March 31, 1997 and 1998 totaled 1,713,636 and 4,492,576, respectively. Common shares used in the calculation of diluted earnings per share for the three months ended March 31, 1997 and 1998 were 1,713,636 and 4,751,797, respectively. The difference in the number of shares for 1998 is attributable to dilutive stock options and warrants of 259,221. NOTE 3 Prior to completion of the Company's initial public offering (the "Offering") on July 11, 1997, no historical provisions for income taxes were included in the Company's financial statements as income taxes, if any, were payable by the shareholders under provisions of subchapter S of the Internal Revenue Code. Upon completion of the Offering, the S status of the Company was automatically terminated and the Company became subject to income taxes. The provision for income taxes included in the accompanying financial statements of income for the three months ended March 31, 1997 is a pro forma provision based on an estimated effective tax rate of 35% presented as if the Company was required to pay income taxes for the period. The income tax provision for the three months ended March 31, 1998 is based on an estimated actual tax rate of 40%. NOTE 4 At March 31, 1998, the Company operated 30 free-standing retail pharmacies, all of which were acquired from third parties in purchase transactions. Such acquisitions have each been structured as asset purchases and generally have included inventories, store fixtures and the assumption of store operating lease arrangements. The acquisitions generally have been financed by debt to the sellers and/or an inventory supplier. A summary of acquisitions for the three months ended March 31, 1997 and 1998 follows: ASSETS ACQUIRED -------------------------------------- ACCOUNTS THREE MONTHS RECEIVABLE ENDED STORES PURCHASE AND DEBT COMMON MARCH 31 ACQUIRED PRICE INVENTORIES INTANGIBLES EQUIPMENT INCURRED STOCK ISSUED -------- -------- ----- ----------- ----------- --------- -------- ------------ 1997 3 $ 998,642 $ 482,260 $ 390,000 $126,382 $ 998,642 -- 1998 6 3,027,311 1,279,553 1,413,635 334,123 1,786,288 $290,000
8 The following unaudited pro forma results of operations data gives effect to the acquisitions completed during the three months ended March 31, 1997 and 1998 as if the transactions had been consummated as of January 1, 1997. The unaudited pro forma results of operations data is presented for illustrative purposes and is not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated as of January 1, 1997, or of future results of operations. The data reflects adjustments for amortization of intangibles resulting from the purchases, incremental interest expense resulting from borrowings to fund the acquisitions, reductions in employee benefits and rent expense and income taxes. THREE MONTHS ENDED MARCH 31, ---------------------------- 1997 1998 ---- ---- Unaudited pro forma information: Net revenues $11,034,837 $11,802,915 Net income $ 269,606 $ 346,047 Basic earnings per share $ .10 $ .08 Diluted earnings per share $ .10 $ .07
In April and May 1998, the Company acquired from third parties in purchase transactions one home healthcare agency, and one intravenous operation and closed door institutional pharmacy. The total purchase price of $360,000 has been preliminarily allocated to inventories ($20,000), property and equipment ($235,000), intangibles ($60,000) and accounts receivable ($45,000). The purchases were financed by the issuance of shares of common stock (valued at $192,500) and cash of $167,500. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The following discussion and analysis reviews the operating results of the Company for the three months ended March 31, 1998 and compares those results to the comparable period of 1997. Certain statements contained in this discussion are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions which may ultimately prove to be inaccurate and actual events and results may materially differ from anticipated results described in such statements. The Company's ability to achieve such results is subject to certain risks and uncertainties, such as those inherent generally in the retail pharmacy industry and the impact of competition, pricing and changing market conditions. The Company disclaims, however, any intent or obligation to update these forward-looking statements. As a result, the reader is cautioned not to place reliance on these forward-looking statements. The Company's principal business strategy since commencing operations in 1994 has been to establish a chain of retail pharmacies through the acquisition of free standing full-line retail pharmacies and related businesses. In evaluating a retail pharmacy for potential acquisition, the Company (i) evaluates the target store's profits and losses for preceding years; (ii) reviews the store's income tax returns for preceding years; (iii) reviews computer-generated prescription reports showing historical information including prescriptions sold, average price of each prescription, gross margins and trends in prescription sales; (iv) analyzes the store's location and competition in the immediate area; (v) reviews the store's lease agreement, if any; and (vi) assesses targeted areas for growth patterns and trends. Based on the Company's analysis of the foregoing items, the Company prepares an offer to purchase the particular store. To assess the reasonableness of the seller's purchase price, the Company considers the anticipated rate of return, payback period and the availability and terms of seller financing, it being generally desired that 50% of the purchase price be seller-financed with the balance split between cash and other consideration such as Company stock. During the three months ended March 31, 1997 and 1998, the Company acquired three and six retail pharmacies, respectively. The primary measurement of the effect of acquisitions on the Company's operating performance is the number of store operating months, which is the number of months all stores were owned by the Company during the relevant measuring period. Acquisitions are expected to continue as the most significant factor in the Company's growth strategy. Since March 31, 1998, the Company has acquired a home healthcare agency in McKinney, Texas and an intravenous operation and closed door institutional pharmacy in Brookfield, Missouri. The financial information for these two operations is not included in the financial statements presented in this Quarterly Report on Form 10-QSB. Currently, the Company's primary source of revenue is the sale of prescription drugs. During the three months ended March 31, 1997, sales of prescription drugs generated 79.4% of the Company's net sales; during the three months ended March 31, 1998, prescription drugs generated 76.4% of net sales. Management expects the Company's prescription drug business to increase on an annual basis as a result of the demographic trends towards an aging population and the continued development of new pharmaceutical products. However, the Company anticipates that such sales will decrease as a percentage of the Company's overall sales and gross margins as the Company expands its home healthcare and other non-pharmaceutical sales and services which have historically generated higher margins. The Company's sales and profits are higher during peak holiday periods and from Christmas through Easter. Sales of health-related products peak during seasonal outbreaks of cough and cold/flu viruses, which typically occur during the winter and spring. Accordingly, sales and profits are typically highest in the fourth quarter and the first quarter of the ensuing year. 10 RESULTS OF OPERATIONS The following table sets forth the percentage relationship of certain income statement data for the periods indicated: THREE MONTHS ENDED MARCH 31, --------- 1997 1998 ---- ---- INCOME STATEMENT DATA NET REVENUES: Prescription drugs sales 79.4% 76.4% Other sales and services 20.6% 23.6% ----- ----- Total net revenues 100.0% 100.0% ----- ----- ----- ----- COSTS AND EXPENSES: Cost of sales -- prescription drugs(1) 69.2% 73.3% Cost of sales -- other(2) 61.7% 55.2% Selling, general and administrative expenses(3) 25.9% 25.8% Depreciation and amortization(3) 1.1% 1.2% Interest expense net(3) 1.0% .4% Income before provision for income taxes(3) 4.3% 3.6% Net Income (3) 2.8% 2.1%
- -------------------- (1) As a percentage of prescription drugs sales. (2) As a percentage of other sales and services. (3) As a percentage of total net revenues. Intangible assets, including but not limited to goodwill, pharmacy files and non-compete covenants, have historically represented a substantial portion of the Company's acquisition costs. Such assets are generally amortized over a period of not more than 40 years. Accordingly, the amortization of intangible assets is not expected to have a significant effect on the Company's future results of operations. NET SALES The Company's total net revenues increased $7,709,002 or 151%, to $12,822,249 for the three months ended March 31, 1998 compared to $5,113,247 for the three months ended March 31, 1997. The increase was attributable primarily to the increase in store operating months from 36 in the first three months of 1997 to 81 in the first three months of 1998. The following tables show the Company's prescription drug gross margins and total sales margins for the three months ended March 31, 1997 and 1998: GROSS MARGINS ON GROSS MARGINS ON PRESCRIPTION DRUG SALES TOTAL SALES ----------------------- ---------------------- THREE MONTHS ENDED MARCH 31, AMOUNT PERCENTAGE AMOUNT PERCENTAGE - ---------------------------- ------ ---------- ------ ---------- 1998 $2,681,280 26.7% $3,971,856 31.0% 1997 $1,251,058 30.8% $1,654,743 32.4%
11 The decrease in the gross margin on prescription drug sales from 1997 to 1998 was primarily the result of an increase in third-party sales, which have lower margins and the acquisition of new stores which historically have had lower margins than those of the Company. Sales of prescription drugs decreased from 79.4% of total revenues for the three months ended March 31, 1997 to 76.4% of total revenues for three months ended March 31, 1998. The Company expects that prescription drug revenues will continue to decrease as a percentage of total revenues as the Company expands its home healthcare and other non-pharmaceutical sales and services, whose gross margins exceed those of pharmaceutical sales. Same store sales for the Company's first 11 stores increased from $4,799,200 in the first three months of 1997 to $5,447,200 in the first three months of 1998. Management believes that the increase of 13.5% is primarily the result of increased advertising and promotions as well as an enhanced product mix. COSTS AND EXPENSES Cost of sales increased $5,391,889 or 156%, from $3,458,504 in the three months ended March 31, 1997 as compared to $8,850,393 in the three months ended March 31, 1998. This increase is primarily the result of increased sales volume resulting from the increased number of store operating months. Cost of sales as a percentage of total net sales increased 1.4% from 67.6% in the three months ended March 31, 1997 to 69.0% in the three months ended March 31, 1998. This increase is primarily the result of an increase in third party prescriptions, offset by the effects of management's continual monitoring and adjustment of prices to the consumer and the addition of non-pharmaceutical sales and services with lower cost of sales. Selling, general and administrative expenses increased from $1,322,381 in the three months ended March 31, 1997 to $3,310,284 in the three months ended March 31, 1998. Such expenses, expressed as a percentage of net revenues, were 25.9% and 25.8% for the three months ended March 31, 1997 and 1998, respectively. The amount increased principally due to increased store count and resulting increased store operating months. The percentage decrease of 0.1% is primarily due to efficiencies achieved as revenues increase. Interest expense was $53,531 in the first three months of 1997 compared to $103,762 during the first three months of 1998. The increase in interest expense resulted primarily from the increase in the Company's indebtedness associated with the Company's acquisitions. Interest income was $393 in the first three months of 1997 compared to $50,832 in the first three months of 1998. EARNINGS Net income for the first three months of 1998 rose to $275,131 from $143,528 in the comparable period of 1997; an increase of 91.7%. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities for the three months ended March 31, 1998 was $603,841 as compared to net cash provided of $253,939 for the three months ended March 31, 1997. Increases in accounts receivable and inventories, which were partially offset by an increase in accounts payable, were the primary reasons for the increased usage of cash. 12 Net cash used in investing activities was $7,819 and $1,086,505 for the three months ended March 31, 1997 and 1998, respectively. The principal cause of this difference was the increase in the number of stores acquired by the Company during the three months ended March 31, 1998. Net cash decreased $1,695,800 during the three months ended March 31, 1998 from $4,084,088 at December 31, 1997 to $2,388,288 at March 31, 1998. On April 30, 1998, the Company obtained a commitment from McKesson Corporation ("McKesson") to provide certain credit facilities (the "Credit Facilities") aggregating up to $33 million for financing the Company's acquisitions, working capital and general corporate purposes. McKesson's obligation to provide the Credit Facilities, which will include a term loan, a factoring facility for eligible on-line adjudicated third-party receivables and a revolving credit facility, is subject to the parties execution of definitive credit agreements which, among other things, will require the Company to meet certain restrictive ratios and covenants and to provide adequate collateral. Management believes the Company's operations will not be adversely impacted by these restrictive ratios and covenants. In addition, the Credit Facilities are also contingent on the Company's use of McKesson as a primary supplier and, in accordance with such requirement, on April 30, 1998, the Company and McKesson entered into a Supply Agreement (the "McKesson Supply Agreement") which is described in Item 5, below. Management expects that the proceeds generated from income from operations, seller-financing of acquisitions, the Credit Facilities and possible future equity offerings will be sufficient to support the Company's current expansion schedule and ongoing acquisition activities for the next 12 months, although there can be no assurance that such proceeds will be adequate to support the Company's acquisitions during such period. In addition, management expects to convert, during the next 12 to 18 months, between two and three of its existing stores to "healthcare centers," although there can be no assurance that all or any part of such conversions will be effected. In the event such conversions are undertaken, management expects to incur a minimum of $20,000 to $40,000 in conversion costs per store converted. The costs of such conversion are expected to be funded from operations. YEAR 2000 The Company is in the process of conducting a Year 2000 compliance assessment of its information technology systems. The Year 2000 issue relates to the ability of date-sensitive software to properly recognize the year 2000 in calculating and processing computer system data. The Company has determined that some existing software will need to be modified. Modifications to existing software are expected to be completed well in advance of 2000. The Company anticipates that timely completion of these modifications will mitigate the Year 2000 issue internally. The Company has not determined the potential impact of the year 2000 issue on its significant vendors or suppliers at this time. Because third party failures could have a material impact on the Company's ability to conduct business, plans are being developed to address the Year 2000 issue with these third parties. The Company anticipates completing this assessment process during 1998. Based upon current expenditures and estimates, the costs of addressing the Year 2000 issue are not expected to have a material impact on future operating results or financial position. 13 IMPACT OF INFLATION AND CHANGING PRICES Though not significant, inflation continues to cause increases in product, occupancy and operating expenses, as well as the cost of acquiring capital assets. The effect of higher costs is minimized by achieving operating efficiencies and passing vendor price increases along to the consumers. FACTORS AFFECTING OPERATIONS DEPENDENCE ON ACQUISITIONS FOR GROWTH. The Company has grown rapidly in recent periods and intends to continue to pursue an aggressive growth strategy. The Company's growth strategy depends upon its ability to continue to acquire, consolidate and operate existing free-standing pharmacies and related businesses on a profitable basis. The Company continually reviews acquisition proposals and is currently engaged in discussions with third parties with respect to possible acquisitions. The Company will compete for acquisition candidates with buyers who have greater financial and other resources, and may be able to pay higher acquisition prices, than the Company. To the extent the Company is unable to acquire suitable retail pharmacies, or to integrate such acquisitions successfully, its ability to expand its business would be reduced significantly. SALES TO THIRD-PARTY PAYORS. A growing percentage of the Company's prescription drug sales has been accounted for by sales to customers who are covered by third-party payment programs. Although contracts with third-party payors may increase the volume of prescription sales and gross profits, third-party payors typically negotiate lower prescription prices than those of non third-party payors. Accordingly, there has been downward pressure on gross profit margins on sales of prescription drugs which is expected to continue in future periods. RELIANCE ON MEDICARE AND MEDICAID REIMBURSEMENTS. Substantially all of the Company's home healthcare revenues are attributable to third-party payors, including Medicare and Medicaid, private insurers, managed care plans and HMOs. The amounts received from government programs and private third-party payors are dependent upon the specific benefits included under the program or the patient's insurance policies. Any substantial delays in reimbursement or significant reductions in the coverage or payment rates of third-party payors, or from patients enrolled in the Medicare or Medicaid programs, would have a material adverse effect on the Company's revenues and profitability. EXPANSION. The Company's expansion will require the implementation and integration of enhanced operational and financial systems and additional management, operational and financial resources. Failure to implement and integrate these systems and add these resources could have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that the Company will be able to manage its expanding operations effectively or that it will be able to maintain or accelerate its growth. While the Company experienced growth in net revenues and net income in 1996 and 1997, there can be no assurance that the Company will continue to experience growth in, or maintain the present level of, net sales or net earnings. GOVERNMENT REGULATION AND HEALTHCARE REFORM. The Company's pharmacists and pharmacies are subject to a variety of state and Federal regulations, and may be adversely affected by certain changes in such regulations. In addition, the Company relies on prescription drug sales for a significant portion of its revenues and profits, and prescription drug sales represent a significant segment of the Company's business. These revenues are affected by regulatory changes within the healthcare industry, including changes in programs providing for reimbursement of the cost of prescription drugs by third-party payment plans, such as government and private plans, and regulatory changes relating to the approval process for prescription drugs. 14 REGULATION OF HOME HEALTHCARE SERVICES. The Company's home healthcare business is subject to extensive Federal and state regulation. In addition, the requirements that the Company must satisfy to conduct its businesses vary from state to state. Changes in the law or new interpretations of existing laws could have a material effect on permissible activities of the Company, the relative costs associated with doing business and the amount of reimbursement for the Company's products and services paid by government and other third-party payors. MALPRACTICE LIABILITY. The provision of home healthcare services entails an inherent risk of claims of medical and professional malpractice liability. The Company may be named as a defendant in such malpractice lawsuits, and is subject to the attendant risk of substantial damage awards. While the Company believes it has adequate professional and medical malpractice liability insurance coverage, there can be no assurance that a future claim or claims will not be successful or if successful will not exceed the limits of available insurance coverage or that such coverage will continue to be available at acceptable costs and on favorable terms. COMPETITION. The retail pharmacy and home healthcare businesses are highly competitive. In each of its markets, the Company competes with one or more national, regional and local retail pharmacy chains, independent retail pharmacies, deep discount retail pharmacies, supermarkets, discount department stores, mass merchandisers and other retail stores and mail order operations. Similarly, the Company's stores offering home healthcare services will compete with other larger providers of home healthcare services including chain operations and independent single unit stores which are more established in that market and which offer more extensive home healthcare services than the Company. Most of the Company's competitors in the retail pharmacy and home healthcare markets have financial resources that are substantially greater than those of the Company. There can be no assurance the Company will be able to successfully compete with its competitors in the retail pharmacy and/or home healthcare industry. GEOGRAPHIC CONCENTRATION. Currently, 14 of the Company's 30 retail pharmacies are located in Texas, and other retail pharmacies located in Texas may be acquired by the Company. Consequently, the Company's results of operations and financial condition are dependent upon general trends in the Texas economy and any significant healthcare legislative proposals enacted in the state of Texas. SUBSTANTIAL INDEBTEDNESS. In connection with the Company's acquisition of retail pharmacies, the Company has incurred substantial debt and may incur additional indebtedness in the future in connection with its planned acquisition of additional stores. The Company's ability to make cash payments to satisfy its substantial indebtedness will depend upon its future operating performance, which is subject to a number of factors including prevailing economic conditions and financial, business and other factors beyond the Company's control. If the Company is unable to generate sufficient earnings and cash flow to meet its obligations with respect to its outstanding indebtedness, refinancing of certain of these debt obligations or disposition of certain assets may be required. In the event debt refinancing is required, there can be no assurance that the Company can effect such refinancing on satisfactory terms. POSSIBLE NEED FOR ADDITIONAL CAPITAL. Although the Company believes that the proceeds from the Company's initial public offering of the Company's common stock, par value $.01 per share (the "Common Stock") which closed July 11, 1997 (the "Offering") and the private placement of the Common Stock which closed October 23, 1997, combined with operating revenues and the Credit Facilities will be adequate to satisfy its capital requirements for the next 12 months, circumstances, including the acquisition of additional stores, may require the Company to obtain long or short-term financing to realize certain business opportunities. No assurance can be made that such financing will be obtained. RELIANCE ON SINGLE SUPPLIER. During the three months ended March 31, 1998, the Company purchased approximately 90% of its inventory from Bergen Brunswig Drug Co. ("Bergen Brunswig"). 15 Bergen Brunswig also provided the Company with order entry machines, shelf labels and other supplies used in connection with the Company's purchase and sale of such inventory. On April 30, 1998, the Company entered into the McKesson Supply Agreement pursuant to which McKesson will replace Bergen Brunswig as the Company's primary supplier. The Company believes that the wholesale pharmaceutical and non-pharmaceutical distribution industry is highly competitive because of the consolidation of the retail pharmacy industry and the practice of certain large retail pharmacy chains to purchase directly from product manufacturers. Although the Company believes that it could obtain its inventory through another similar distributor at competitive prices and upon competitive payment terms in the event its relationship with McKesson was terminated, there can be no assurance that the termination of such relationship would not adversely affect the Company's business. See Item 5. Other Information - Change in Primary Supplier. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company's results of operations depend significantly upon the net sales generated during the first and fourth quarters, and any decrease in net sales for such periods could have a material adverse effect upon the Company's profitability. As a result, the Company believes that period-to-period comparisons of its results of operations are not and will not necessarily be meaningful, and should not be relied upon as an indication of future performance. PART II -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS RECENT SALES OF UNREGISTERED SECURITIES. On February 1, 1998, the Company issued to a corporation 13,206 unregistered shares of Common Stock in partial consideration of its acquisition of a store located in Colorado. On February 28, 1998, the Company issued to a corporation 5,252 unregistered shares of Common Stock in partial consideration of its acquisition of a store located in Missouri. On March 7, 1998, the Company issued to a corporation 4,115 unregistered shares of Common Stock in partial consideration of its acquisition of a store located in Texas. On March 30, 1998, the Company issued to a corporation 8,709 unregistered shares of Common Stock in partial consideration of its acquisition of a store located in Arizona. The Company claimed exemption from registration of such shares under Section 4(2) of the Securities Act of 1933 on the basis that such issuances did not involve any public offering. On February 11, 1998, the Company issued to an individual 2,222 unregistered shares of Common Stock in connection with the conversion of $20,000 of long-term debt owed by the Company in connection with the acquisition of substantially all of the assets of Mart Super Drugs, a Missouri partnership. The Company claimed exemption from registration of such shares under Section 4(2) of the Securities Act of 1933 on the basis that such issuance did not involve any public offering. ITEM 5. OTHER INFORMATION. CHANGE IN PRIMARY SUPPLIER. On April 30, 1998, the Company entered into the McKesson Supply Agreement pursuant to which McKesson will supply the Company with prescription drugs, health and beauty care products and durable medical products for a term of five years beginning June 1, 1998. Management believes that the McKesson Supply Agreement which among other things, provides a declining cost of sales based on volume, will enable the Company to remain competitive. ACQUISITIONS. As indicated in the table below, during the period from January 1, 1998 to the date of filing of this Quarterly Report on Form 10-QSB, the Company acquired substantially all of the assets of seven separate pharmacies located throughout Arizona, Colorado, Missouri and Texas, a HME operation located in Colorado, a home healthcare agency located in Texas, and an intravenous operation and closed door pharmacy located in Missouri. None of the referenced acquisitions exceeded 10% of the Company's total 16 assets or involved a "significant" business; accordingly, the financial statements of such businesses have not been filed herein or on any Current Report on Form 8-K. DATE OF ACQUISITION PHARMACY NAME STATE - ------------------- ------------- ----- 1/1/98 Health Call Equipment Rental Canon City, Colorado 1/12/98 Conoly-Herry Drugs, Inc. Floresville, Texas 1/31/98 Tom and Jim Pharmacy, Inc. d/b/a Canon Pharmacy Canon City, Colorado 2/1/98 Lemtko, Inc. d/b/a Highlands Ranch Pharmacy and Southside Medical, Inc. Highlands Ranch, Colorado 2/28/98 Steelville Drugs, Inc. Steelville, Missouri 3/7/98 Hesser Drug Co. d/b/a Towne Pharmacy Ennis, Texas 3/28/98 Belen Sav-On Drug, Inc. Belen, New Mexico 3/30/98 St. Johns Drug Co. St. Johns, Arizona 4/13/98 Community Home Care McKinney, Texas 5/1/98 Gardner Pharmacy Services, Inc. Brookfield, Missouri
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits EXHIBIT NO. NAME OF EXHIBIT ----------- --------------- 10.1 Supply Agreement dated April 30, 1998 by and between HORIZON Pharmacies, Inc. and McKesson Corporation (filed electronically herewith). 10.2 Term Sheet dated April 30, 1998 by and between HORIZON Pharmacies, Inc. and McKesson Corporation (filed electronically herewith). Omitted from this agreement, as filed, are the exhibits thereto. The Company will furnish supplementally a copy of any such omitted exhibits to the Commission upon request. 27.1 Financial Data Schedule (filed electronically herewith).
(b) Reports on Form 8-K During the three months ended March 31, 1998, the Company filed the following Current Reports on Form 8-K: REPORT DATE DATE FILED ITEM REPORTED FINANCIAL STATEMENTS ----------- ---------- -------------- -------------------- 1/1/98 1/7/98 Item 2 - Acquisition or Disposition of Assets No 1/29/98 2/12/98 Item 2 - Acquisition or Disposition of Assets No 12/19/97 2/19/98 Item 7 - Financial Statements and Exhibits Yes 2/28/98 3/13/98 Item 2 - Acquisition or Disposition of Assets No
17 SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused the report to be signed on its behalf by the undersigned, thereunto duly authorized. HORIZON PHARMACIES, INC., a Texas corporation Date: May 14, 1998 /s/ Ricky D. McCord --------------------------------------- Ricky D. McCord President, Chief Executive Officer Date: May 14, 1998 /s/ John N. Stogner --------------------------------------- John N. Stogner Chief Financial Officer 18 EX-10.1 2 EXHIBIT 10.1 SUPPLY AGREEMENT EXHIBIT 10.1 CONFIDENTIAL SUPPLY AGREEMENT This Supply Agreement dated this 30th day of April, 1998, between McKesson U.S. Health Care, a division of McKesson Corporation ("McKesson") and Horizon Pharmacies Inc. ("Horizon") shall be to establish a five (5) year program for the supply of prescription drugs and other health and beauty care products by McKesson to retail pharmacies owned or operated by Horizon (referred to herein as "Pharmacies" or "Stores"). The parties hereto agree as follows: 1. MERCHANDISE For purposes hereof, "Merchandise" shall comprise all items normally stocked or drop-shipped by McKesson Drug Distribution Centers servicing the 48 contiguous states, including prescription drugs, OTC drugs, health and beauty aids and sundries. This Agreement does not apply to merchandise sold to Horizon by McKesson Corporation divisions or subsidiaries other than McKesson Drug Company. 2. TERM The term of this Agreement shall be for the five year period commencing on April 30, 1998, and during such period Horizon agrees to designate McKesson as its primary supplier of prescription drugs and to purchase from McKesson substantially all of the requirements of its retail pharmacies for prescription drugs and other items covered hereunder. 3. ORDERING AND DELIVERY A. Prescription products will be delivered to Horizon pharmacies up to five (5) times per week, on mutually agreed upon days. Orders transmitted by 8:00 p.m. local time Sunday through Thursday will be delivered the next day, with every reasonable attempt to deliver by noon (of next day). Currently Horizon has three stores requiring a Saturday (Rx only and limited items) delivery (Store #21, #23, and #29). In order to receive a Saturday delivery, orders for Stores #21 and #29 will be transmitted by no later than noon on Friday. Store #23 will transmit no later than 2:00 p.m., Friday. Although Saturday delivery is not a common practice, both parties mutually agree to discuss future needs as Horizon acquires new stores. McKesson agrees to maintain a [redacted - Confidential Treatment] service level to Horizon Pharmacies chainwide on an aggregate basis for prescription Merchandise, tested on a monthly basis. Service level is defined as total lines ordered (partial lines included) less total omit lines (ordered but not filled). Items that manufacturers are unable to supply, manufacturer back-orders, product recalls, same item ordered again within 72 hours, items the manufacturer has discontinued, and new items with no inventory demand shall be excluded from the service level calculation. -1- CONFIDENTIAL B. Non-prescription Merchandise will be delivered to Horizon Pharmacies up to 5 days per week. McKesson agrees to maintain a [redacted - Confidential Treatment] service level to Horizon Pharmacies chainwide on an aggregate basis for non-prescription Merchandise. Service level is defined as total lines ordered (partial lines included) less total omit lines (ordered but not filled). Items that manufacturers are unable to supply, manufacturer back-orders, product recalls, same item ordered again within 72 hours, items the manufacturer has discontinued, and new items with no inventory demand shall be excluded from the service level calculation. C. McKesson will provide daily updates of AWP and acquisition cost to the National Data Corporation pharmacy system for pharmaceutical Merchandise. In addition, McKesson will provide retail and acquisition cost fields for non-pharmaceutical Merchandise to the Horizon system no less often than weekly. 4. PAYMENT TERMS A. The payment terms options for the Merchandise covered by this Agreement are as follows: Horizon Pharmacies may elect one of the following options for payment terms for the Merchandise covered by this Agreement, and shall have the right to elect to switch to the other options during the term of this Agreement after giving a 30 day written notice. Any changes to payment terms will be made at the beginning of a payment cycle. STANDARD SEMI-MONTHLY PAYMENT TERMS Payment for Merchandise delivered to Horizon retail pharmacies shall be paid by Horizon as follows: Invoices dated from the 1st to the 15th of the month are due and payable on the 25th day of the same month. Invoices dated from the 16th to the end of the month are due and payable on the 10th of the following month. 30-DAY EXTENDED PAYMENT TERMS Invoices dated from the 1st to the end of the month are due and payable on the 10th day of the following month. 45 DAY EXTENDED PAYMENT TERMS Invoices dated from the 1st of the month to the end of same month are due and payable on the 25th day of the following month. -2- CONFIDENTIAL PREPAYMENT INCENTIVES Prepayment Terms (30 day, 15 day and 7 day): The prepayment is a one-time payment equivalent to thirty (30) or fifteen (15) or seven (7) days worth of purchases (based on the most recent three-month purchase history) which is held as a deposit by McKesson. The amount of the required deposit will be adjusted quarterly, and may be adjusted as often as monthly, to cover increases or decreases in purchase volume. Following such one-time payment, all purchases are payable under the Standard Semi-Monthly Payment Terms as described above. Horizon shall be entitled to a reduction in the markup set forth in the cost of goods schedule for prepayment if Horizon elects this prepayment option. The prepay incentive shall be as follows: PREPAY INCENTIVE MARKUP REDUCTION 30 Days [redacted - Confidential Treatment] 15 Days [redacted - Confidential Treatment] 7 Days [redacted - Confidential Treatment] B. Any payments made after the due date indicated herein shall result in a [redacted - Confidential Treatment] (or the maximum amount permissible under applicable law, if lower) increase in the purchase price of the Merchandise. A [redacted - Confidential Treatment] percent ([redacted Confidential Treatment]%) service charge (or the maximum amount permissible under applicable law, if lower) will be imposed semi-monthly on all balances delinquent more than [redacted - Confidential Treatment] days. If payment is due on a Saturday or Sunday, the payment due date will be the Monday immediately following any such Saturday or Sunday. C. Horizon hereby grants to McKesson a purchase money security interest covering all Merchandise sold and shipped to Horizon by McKesson to secure repayment of amounts due McKesson under this Agreement. Such security interest shall be subject and inferior to security interests covering inventory of specific pharmacies granted by Horizon in favor of prior owners of such pharmacies who have provided Horizon with secured seller financing in the past or who provide such secured seller financing in the future for new pharmacies acquired by Horizon. The security interest of McKesson shall be subordinate to seller financing security interests notwithstanding the filing dates of financing statements or any rights under applicable law which McKesson may otherwise have as the holder of a purchase money security interest. Horizon agrees to execute from time to time such financing statements as McKesson may request for the purpose of perfecting McKesson's security interest. -3- CONFIDENTIAL D. This Agreement is conditioned upon Horizon not being in default under the terms of the Credit Agreement throughout the term hereof and to that end, Horizon agrees to promptly substantiate in writing, at McKesson's request, the existence of such condition with annual audited and quarterly unaudited financial statements and any other supporting information required by McKesson. E. McKesson reserves the right, in its sole discretion, to change a payment term (including imposing the requirement of cash payment upon delivery) or limit total credit, if (i) McKesson concludes there has been a material adverse change in Horizon's financial condition or an unsatisfactory payment performance; or (ii) Horizon is in default under the terms of the Credit Agreement. Upon the occurrence of any of the events of default specified above in (i) or (ii) of this Section, McKesson shall allow a five (5) day period from receipt of written notice of default to cure the default before changing the payment terms. During that period, Horizon must adhere to its normal buying patterns. If the default is not cured after five days, McKesson will change the payment term to limit its risk, but will continue to ship product for thirty (30) days before suspending or discontinuing shipment of any additional orders to Horizon pharmacies. 5. COST OF GOODS A. In consideration for the Cost of Goods specified herein, Horizon expressly commits to purchase throughout the term of this Agreement (i) no less than [redacted - Confidential Treatment] percent (redacted %) of its pharmaceutical Merchandise from McKesson, (ii) no less than [redacted - Confidential Treatment] percent (redacted %) of its OTC drug, HBA, and DME Merchandise from McKesson, and (iii) not less than a monthly average of [redacted - Confidential Treatment] percent (redacted %) (net of returns, allowances and rebates) during any three month period of this Agreement in Direct Store Pharmacy Delivery ("D.S.D.") volume of Merchandise from McKesson ("Volume Purchase Commitment"). Unless otherwise indicated, Horizon shall at the time of implementation of service under this Agreement ("Implementation Date") be charged, in accordance with its designated payment terms, the applicable markup specified below for such Purchase Volume Commitment amount. Horizon's Cost of Goods thereafter shall be subject to quarterly review by McKesson and will be adjusted, if and to the extent necessary, to reflect Horizon's actual chain-wide monthly average purchase volume. If at any time after the first year of this Agreement Horizon has not achieved the appropriate pro rata purchase volume based on its Volume Purchase Commitment, McKesson, in addition to the other rights and remedies available to it hereunder, reserves the right in its sole discretion to redetermine the Cost of Goods pricing specified below. B. Horizon hereby further agrees to maintain a minimum chain-wide monthly average volume per retail pharmacy operation location of [redacted - Confidential Treatment] in D.S.D. prescription and OTC product purchases (net of returns, allowances and rebates) from McKesson throughout the term of this Agreement. In the event that Horizon -4- CONFIDENTIAL fails to maintain this minimum chainwide average volume of $ [redacted-Confidential Treatment] in net D.S.D. prescription drug and OTC product purchases per retail pharmacy operation location per month from McKesson during any three month period of this Agreement [excluding the first three (3) months of this Agreement], all Cost of Goods mark-ups hereunder shall be increased by [redacted - Confidential Treatment] during each subsequent three (3) month period until such time as the minimum chainwide net D.S.D. prescription drug and OTC product purchases volume requirement of $ [redacted-Confidential Treatment] is met for three (3) consecutive months. C. Subject to the terms and conditions of this Section, the Cost of Goods for Merchandise delivered to Horizon shall be Cost plus the applicable markup as specified below. [redacted - Confidential Treatment] D. Subject to the terms and conditions herein, the Cost of Goods hereunder shall be in accordance with the pricing schedule set forth below.
CHAIN-WIDE MONTHLY VOLUME FOR [REDACTED - CONFIDENTIAL TREATMENT] PAYMENT COST PLUS MARKUP TERMS (NET OF RETURNS, ALLOWANCES AND REBATES) RX OTC ---------------------------------------------- ------- ------------------- [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
CHAIN-WIDE MONTHLY VOLUME FOR [REDACTED - CONFIDENTIAL TREATMENT] PAYMENT COST PLUS MARKUP TERMS (NET OF RETURNS, ALLOWANCES AND REBATES) RX OTC ----------------------------------------------------- ------- ------------------- [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% -5- CONFIDENTIAL [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
CHAIN-WIDE MONTHLY VOLUME FOR [REDACTED - CONFIDENTIAL TREATMENT] PAYMENT COST PLUS MARKUP TERMS (NET OF RETURNS, ALLOWANCES AND REBATES) RX OTC ---------------------------------------------- ------- ------------------- [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]% [redacted - Confidential Treatment] [redacted - Confidential Treatment]% [redacted - Confidential Treatment]%
NET BILLED ITEMS: The purchase price for selected Merchandise, including but not limited to the following product lines, will be net-billed and not covered by the above-specified Cost of Goods pricing: [redacted - Confidential Treatment] E. All Horizon pharmacies will be invoiced at Cost plus [redacted - Confidential Treatment] for all Merchandise except net-billed items. A rebate will be calculated based on the difference between such invoiced amount and the then applicable Cost of Goods pricing as determined by the Horizon's respective chainwide monthly Volume Level and current payment terms. Said rebate amount will be issued monthly via check to Horizon's headquarters by the eighteenth (18th) of the following month. F. If Horizon Pharmacies elects not to participate in the McKesson Select Generic Program as specified in Section 10 of this Agreement or discontinues its participation in the McKesson Select Generics Program at any time during the term of this Agreement, an -6- CONFIDENTIAL increase in the Cost of Goods markups set forth in Section 5.D. above will apply in accordance with the following schedule:
Applicable Payment Terms Markup Increase ------------------------ --------------- 45 Days [redacted - Confidential Treatment]% 30 Days [redacted - Confidential Treatment]% 15 Days [redacted - Confidential Treatment]%
Such increase will become effective immediately upon the occurrence of either the above-referenced events regarding participation in the McKesson Select Generics Program. G. It is further understood and agreed by the parties that if: i) Horizon fails to maintain a minimum chain-wide average volume of [redacted - Confidential Treatment] in D.S.D. prescription drug and OTC product purchases (net of returns, allowances and rebates) per month from McKesson during any consecutive three (3) months of this Agreement (excluding the first three (3) month period of this Agreement); or ii) Horizon fails to maintain a minimum average volume per Store per month of [redacted - Confidential Treatment] in D.S.D. prescription drug and OTC product purchases (net of returns, allowances and rebates) from McKesson during any consecutive three (3) months of this Agreement (excluding the first (3) month period of this Agreement), either such failure shall constitute a non-monetary default under this Agreement by Horizon as contemplated in Section 13.A. H. Prior to making any adjustments to amounts payable by Horizon pursuant to Section 5.D. as a result of different volumes of Merchandise purchased, McKesson will first give written notice to Horizon of the proposed change and provide sufficiently detailed backup information to Horizon to substantiate the proposed change. Horizon will have an opportunity to review the information provided by McKesson to verify the accuracy of the calculations, to request additional information and to discuss the matter with McKesson personnel responsible for such information, and in any event, shall have no less than thirty (30) days to complete such verification. 6. CONVERSION ALLOWANCE In consideration for Horizon's Volume Purchase Commitment specified above, McKesson agrees to pay to Horizon a conversion allowance ("Conversion Allowance") based on the following terms and conditions: -7- CONFIDENTIAL A. The Conversion Allowance to be paid under this Agreement shall be [redacted - Confidential Treatment]% of the [redacted - Confidential Treatment] as hereinafter defined. Such Run Rate shall equal the amount of Horizon's [redacted - Confidential Treatment] purchases, net of returns, allowances, rebates and any net-billed items, from McKesson following the Implementation Date of this Agreement. The [redacted - Confidential Treatment] shall be defined as those purchases hereunder beginning [redacted - Confidential Treatment]. This one-time payment will occur thirty (30) days following expiration of the [redacted - Confidential Treatment] set forth above. B. If Horizon has not met its Purchase Volume Commitment as specified in Section 5.A. above at the time of either expiration of this Agreement or termination of this Agreement by either party, Horizon shall repay to McKesson in accordance with the following formula a pro-rata portion of the Conversion Allowance previously paid hereunder to Horizon pursuant to Section 6.A. above: [redacted - Confidential Treatment] Such repayment amount shall be paid in full by Horizon within five (5) days of the effective date of such expiration or termination of this Agreement in immediately available funds, without making any deductions, offsets, short payments or other unauthorized accounts payable adjustments. Notwithstanding anything in this Section 6 to the contrary, Horizon shall have no repayment obligation hereunder in the event of termination of this Agreement by Horizon due to a default by McKesson resulting from a material breach of its obligations that is not cured in accordance with the terms and conditions set forth in Section 13.A. below. 7. RETURNED GOODS A. Credits for returned goods from McKesson are divided into four categories, depending on the reason for the claim. Credits will be issued for any of the following reasons: 1) Non-merchandise problems, such as shortages and pricing errors; 2) McKesson merchandise received in error; 3) Recalls; and 4) Outdated merchandise (defined as items with less than 6 months dating) -8- CONFIDENTIAL B. The amount of credit allowed by McKesson will vary as follows: 1) [redacted - Confidential Treatment] credit will be given for: a) Pricing errors, shipping errors and billing errors; b) Shortages (required to be phoned into the Customer Service Center within 48 hours of receipt of Merchandise); c) Ordering errors (must be returned within 30 days of receipt); d) Manufacturer recalls; e) Items received from McKesson with less than six (6) months dating; and f) Merchandise that had concealed damage. Invoice number is required in each of the above-specified instances, except recalls, for full credit. 2) [redacted - Confidential Treatment] credit will be given for: Clean, salable merchandise with at least nine (9) months dating returned more than 30 days after store receipt. 3) [redacted - Confidential Treatment] credit will be given for: a) Unsalable merchandise which can be returned to manufacturer, b) Outdated items (subject to the approved vendor list); and c) Salable merchandise with price tickets NOT removed. 4) [redacted - Confidential Treatment] credit will be given for: a) Merchandise damaged in store pharmacies; b) Merchandise from manufacturers not listed on the approved vendor list; and c) Merchandise not purchased from McKesson. These items will be sent back to the store which initiated the return. C. [redacted - Confidential Treatment] -9- CONFIDENTIAL 8. CUSTOMER SUPPORT CENTER A. Customer Service Support personnel will be available at the McKesson Premier Service Center from 8:00 a.m. EST to 8:00 p.m. EST Monday through Friday. Technical and emergency support is available 24 hours a day, seven (7) days a week. A Customer Service POD will be assigned to the Horizon chain of Stores with a key National Account contact as well. B. Horizon will be provided the names and telephone numbers of its key contacts at McKesson as well as the names and telephone numbers of McKesson's designated support personnel. C. McKesson will provide the necessary training for Horizons employees on all programs and services described in this Agreement and provide personnel to complete the initial store conversion at no charge. Additionally McKesson will provide assistance for a one-time reset to coincide with POS installation (this may or may not occur at the same time as conversion). 9. CONTRACT MANAGEMENT A. McKesson agrees to service all manufacturers' contracts negotiated by Horizon, provided such manufacturers are approved suppliers of McKesson. Merchandise will be supplied at Horizon's negotiated bid price plus McKesson's applicable markup as described above in the Cost of Goods section. B. Horizon's eligibility for participation under a vendor contract must be authorized by the vendor, before the contract is loaded by McKesson. Horizon shall be liable for unpaid charge backs resulting from eligibility issues. C. In the event that a manufacturer in the case of a Horizon negotiated contract (i) makes an assignment for the benefit of creditors, files a petition in bankruptcy, is adjudicated insolvent or bankrupt, or if a receiver of trustee is appointed with respect to a substantial part of the vendor's property or a proceeding is commenced against it which will substantially impair its ability to pay on charge backs or (ii) otherwise defaults in the payment of charge backs to McKesson, Horizon shall be invoiced and become liable for the unpaid charge backs allocable to its purchases from such vendor. 10. GENERIC PHARMACEUTICALS Horizon agrees that upon commencement of the term of this Agreement to participate in McKesson's Select Generics Program through its auto-substitution feature and to thereby designate this program as Horizon's primary source of generic pharmaceuticals. A -10- CONFIDENTIAL quarterly rebate shall be paid to Horizon in accordance with the following matrix based on such participation:
CHAIN-WIDE QUARTERLY SELECT GENERICS VOLUME (NET OF RETURNS, QUARTERLY REBATE % ON ALLOWANCES AND REBATES) SELECT GENERICS PURCHASES ------------------------------- ------------------------- REBATE UNDER [REDACTED - CONFIDENTIAL REBATE UNDER [REDACTED - CONFIDENTIAL TREATMENT] PAYMENT TERMS TREATMENT] PAYMENT TERMS [redacted - Confidential Treatment] [redacted - Confidential Treatment]00% [redacted - Confidential Treatment]00% [redacted - Confidential Treatment] [redacted - Confidential Treatment]00% [redacted - Confidential Treatment]00% [redacted - Confidential Treatment] [redacted - Confidential Treatment]00% [redacted - Confidential Treatment]00% [redacted - Confidential Treatment] [redacted - Confidential Treatment]00% [redacted - Confidential Treatment]00% [redacted - Confidential Treatment] [redacted - Confidential Treatment]00% [redacted - Confidential Treatment]00%
11. REPACKAGED PHARMACEUTICALS A competitive and comprehensive program will be made available to Horizon to participate in, at its option, for repackaged pharmaceutical products. Stores shall be net-billed on McKesson's RxPak line of repackaged branded pharmaceutical products. 12. SYSTEM SERVICES, EQUIPMENT AND PROGRAMS The following systems and services will be made available to Horizon Pharmacy as specified: REQUIRED: A. ECONOMOST order system offers the following: 1) Telxon order entry device 2) Customized retail price capabilities 3) Scannable shelf identification labels 4) Item price stickers for pharmaceutical and H.B.C. merchandise 5) Controlled substance report (A detailed listing of all controlled substances purchased from the servicing McKesson DC. 6) Manufacturer off invoice allowances automatically applied upon ordering 7) McKesson Advantage. (Monthly publication that lists manufacturer off invoice allowances, new Rx and OTC merchandise, advertising allowances, etc.) Fee is $ [redacted - Confidential Treatment] per month per location. -11- CONFIDENTIAL OPTIONAL: A. Valu-Rite offers the following: 1) National identification 2) Extensive line of Valu-Rite private label merchandise 3) Circular advertising (Promotions unlimited) 4) Chain class a contract pricing on Owens Brockway prescription ware 5) No charge Yellow Page ad under Valu-Rite Pharmacies 6) 1-800 Valu-Rite locator number. 7) Quarterly rebate program ([redacted - Confidential Treatment] McKesson Select Generics, [redacted - Confidential Treatment] Private Label Products) 8) National advertising program 9) New neighbor program, and marketing services 10) Prefer Rx-Contract pricing on select branded name pharmaceuticals 11) MAP Zone pricing for each retail pharmacy location. Fee is $[redacted - Confidential Treatment] per month per location. B. Microfiche Microfiche Updated twice per month Fee is $[redacted - Confidential Treatment] per mo. per location. C. EconoLink* offers the following: 1) Includes IBM compatible windows based system with color monitor, printer and modem. Hardware and software maintenance are included in monthly charge. 2) Customized data base and reports. 3) Contract compliance and best price search 4) Daily automatic price and product updates. 5) On line listing of product availability 6) Order submission via electronic data interchange 7) Quantity acknowledgments (instant purchase order confirmation with a detailed listing of merchandise filled and out of stock Fee is $ [redacted - Confidential Treatment] per mo. per location- Optional. * One (1) Econolink Host system shall be provided to Horizon's headquarters, at [redacted - Confidential Treatment]. EconoLink shall be subject to a separate license agreement between the parties governing use and maintenance. D. OmniLink: Terms and conditions for utilization of McKesson's OmniLink program will be agreed to under separate contract. -12- CONFIDENTIAL 13. DEFAULT AND REMEDIES A. Failure of either party to make any payments within five (5) days of when due in accordance with the terms of this Agreement shall constitute a default. Any breach by either party of a material non-monetary provision of the Agreement or any other agreement between Horizon and McKesson (i.e. a provision not requiring the payment of money), which is capable of being cured and has not been caused by any action or omission of the other party, shall constitute a default if not cured to the reasonable satisfaction of the other party within sixty (60) days after the giving of written notice of such breach by the non-breaching party. Such written notice shall specify the nature of the breach and be accompanied by calculations and other appropriate materials to substantiate the allegation of breach in order for the alleged breach to be verified if necessary. Upon default by either party the non-breaching party may, at its option, terminate the Agreement immediately without further notice and pursue any remedy available to it under this Agreement, at law or in equity or any combination thereof. B. Either party may, on ten (10) days notice, terminate this Agreement: 1) If the other party shall file any petition under any bankruptcy, reorganization, insolvency or moratorium laws, or any other law or laws for the relief of or in relation to the relief of debtors; or 2) If the other party shall file any involuntary petition under any bankruptcy statute or a receiver or trustee shall be appointed to take possession of all or substantial part of the assets of the party which has not been dismissed or terminated within sixty (60) days of the date of such filing or appointment, or 3) If the other party shall make a general assignment for the benefit of creditors or shall become unable or admit in writing its inability to meet its obligations as they mature; or 4) If the other party shall institute any proceedings for liquidation or the winding up of its business other than for purposes of reorganization, consolidation or merger. C. In the event of a termination hereunder the following continuing obligations and liabilities shall survive termination and remain in full force and effect: 1) Liability for accounts receivable balances or any other payment due hereunder to the other party at the date of or upon the occurrence of such termination; and -13- CONFIDENTIAL 2) Obligations imposed on each party under the Proprietary and Confidentiality Information section set forth below. 14. PROPRIETARY AND CONFIDENTIAL INFORMATION A. Any and all accounts, records, books, files, and lists regarding any transaction provided for or contemplated hereunder, shall be confidential and proprietary to the party creating or generating such information. This Agreement, and the terms and conditions hereof, are confidential. The parties expressly agree to maintain such terms and conditions in confidence, and shall take every precaution to disclose the contents of this Agreement only to those employees of each of the parties who have a reasonable need to know such information. B. Horizon and McKesson each acknowledge that, in connection with their respective businesses, they have developed certain operating manuals, symbols, trademarks, trade names, service marks, trade secrets, customer lists, procedures, formulas, and other patented, copyrighted, or legally protected materials which are confidential and proprietary to each of them. C. Neither party may disclose the terms of this Agreement during the term hereof and for an additional period of twenty-four (24) months following the effective date of expiration or other termination of this Agreement. Furthermore, except upon the prior written consent of the other party, neither party may divulge, disclose, communicate, or use any of the other party's confidential or proprietary information generally described in Subsection A and B above, in any manner or for any purpose, including, without limitation, use in advertising or for promotional materials, except upon the prior written consent of the other party. A party hereto may refuse consent to the use of its confidential or proprietary information for any or no reason. In the event that any such confidential or proprietary information is used during the course of this Agreement it shall retain its confidential and proprietary nature and shall be returned immediately to its owner or destroyed upon termination of this Agreement. Notwithstanding anything herein to the contrary, nothing in this subsection shall require either party to maintain in confidence any information, materials, or data which is in the public domain, enters the public domain through no fault of such party, was in possession of the party prior to being furnished to it by the other, was supplied to the party by a third party or parties lawfully in possession thereof, which is required to be disclosed to the Securities and Exchange Commission or other commission or agency regulating the activities of either party or which the party is required to divulge pursuant to process of any judicial or governmental body of competent jurisdiction, provided that notice of receipt of such process is given to the other. -14- CONFIDENTIAL 15. FORCE MAJEURE If service from any McKesson distribution center to any Horizon store(s) is interrupted or delayed because of strike, lockout, labor dispute, fire or other casualty, or any other reasons beyond the reasonable control of McKesson, McKesson will take such action as may be reasonably necessary, without additional cost or expense to Horizon, to maintain service as mutually agreed upon to affected stores from an alternate McKesson Distribution Center. Any adverse effects upon Horizon's performance of this Agreement occurring as a result of the events described in this section shall not in any way be considered a breach of this Agreement. 16. NOTICES All notices pertaining to this Agreement shall be delivered in person, sent by certified mail, delivered by air courier, or transmitted by facsimile and confirmed in writing (sent by air courier or certified mail) to a party at the address or facsimile number shown in this Section, or such other address or facsimile number as a party may notify the other party from time to time. Notices delivered in person, and notices dispatched by facsimile prior to 4:00 p.m. and confirmed, shall be deemed to be received on the day sent. All other facsimiles and notices shall be deemed to have been received on the business day following receipt; provided, however, if such day falls on a weekend or legal holiday, receipt shall be deemed to occur on the next business day. Notices may also be transmitted electronically between the parties, provided that proper arrangements are made in advance to facilitate such communications and provide for their security and verification. IF TO MCKESSON: IF TO HORIZON: McKesson Corporation Horizon Pharmacies Inc. 809 110th St. 275 W. Princeton Dr. Arlington, TX 76011 Princeton, TX 75407 ATTENTION: Dennis Milsow ATTENTION: Rick McCord Vice President Sales President FAX: (817) 652-7699 FAX: (972) 736-2424 17. MISCELLANEOUS A. This Agreement embodies the entire agreement between the parties with regard to the subject matter hereof and supersedes all prior agreements, understandings and representations with the exception of any promissory note, security agreement or other credit or financial related document(s) executed by Horizon or between Horizon and McKesson. This Agreement may not be modified, supplemented or extended except by a writing signed by both parties. -15- CONFIDENTIAL B. This Agreement supersedes any and all prior McKesson agreements and discount plans in which any Horizon pharmacy may currently be participating. C. Except as provided above in Section 15, neither party shall have any obligation hereunder for failure or delay of performance due to fire, shortage of materials or transportation, government acts, or any other cause beyond its control. D. Neither party shall have the right to assign this Agreement or any interest therein without the prior written consent of the other party, and any such attempted assignment shall be without effect, except that either party may, without the consent of the other, assign this Agreement to an affiliate of such party and except that this provision shall not be applicable to any corporate reorganization of either party, including but not limited to any merger, reincorporation or sale of a significant portion of either party's assets. E. This Agreement shall be construed in accordance with the State of California without regard to the provisions of Section 1654 of the California Civil Code or the rules regarding conflict of laws. F. If any provisions of this Agreement shall be held invalid under any applicable law, such invalidity shall not affect any other provision of this Agreement. G. The failure of either party to enforce at any time or for any period of time any one or more of the provisions thereof shall not be construed to be a waiver of such provisions or of the right of such party thereafter to enforce each such provision. H. If any federal, state, or local tax currently or in the future (e.g. Minnesota Care Tax) is levied upon McKesson in a jurisdiction where either McKesson or Horizon does business and such tax relates or applies to the Merchandise and or any applicable service fees covered by this Agreement (excluding taxes imposed on McKesson's net income), the Cost of Goods to those Horizon pharmacies involved will be increased a corresponding percentage amount. I. Horizon represents and warrants that similar conditions, including prices, rebates, terms and delivery, have been made available to Horizon by wholesale drug competitors of McKesson in the areas covered by this Agreement. J. If and to the extent any product discounts, rebates or other purchasing incentives are earned by or granted to Horizon and paid by McKesson under this Agreement, then applicable provisions of the Medicare/Medicaid and state health care fraud and abuse/antikickback laws and regulations (collectively, "fraud and abuse laws") may require disclosure of the applicable price reduction on Horizon's claims or cost reports for reimbursement from governmental or other third party health care programs or provider plans. Horizon agrees to comply with all -16- CONFIDENTIAL applicable provisions of the fraud and abuse laws and to indemnify and hold McKesson harmless for any failure on its part to do so. K. Participation hereunder by any of Horizon's pharmacies in McKesson's Preferred Provider Network may be terminated by McKesson if such pharmacy fails to comply with the terms and conditions of this Agreement or the M.P.P.N. Agreement. Membership to these two Networks are granted as members of McKesson's Valu Rite program and at Horizon's discretion pharmacies can opt out of individual managed care plans it so designates. Such membership shall be discontinued for any Horizon Pharmacy not using McKesson as its primary wholesaler as defined herein. L. McKesson shall be entitled to set off any delinquent amount owing from Horizon to McKesson after either of the five day cure periods referenced in Sections 4.E. and 13.A. against any amount payable at such time by McKesson to Horizon, whether arising under this Agreement or otherwise. For purposes of this Section, Horizon and McKesson in each case shall include its subsidiaries and affiliates. M. Whenever possible, each provision of this Agreement shall be interpreted so as to be effective and valid under applicable law, but if any provision of this Agreement should be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the other of such provision or the remaining provisions of this Agreement. The parties agree to replace any such invalid provision with a new provision which has the most nearly similar permissible economic effect. N. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. O. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed an original instrument, but all such counterparts together shall constitute one agreement. P. In the event Horizon decides to develop its own private label (OTC) line, McKesson, based on its current understanding of the contemplated distribution requirements posed by such an arrangement, agrees to establish a service fee of [redacted - Confidential Treatment] percent ([redacted - Confidential Treatment]%) [separate from any amounts due under this Agreement] for stocking and shipping products covered by the designated Horizon private label. It is understood and agreed by the parties that this fee would be subject to an increase adjustment in the event of a material change in the distribution requirements actually applicable at the time of implementation of such services. All inventory of such private label products stored at McKesson Distribution Centers will be under the complete ownership of Horizon Pharmacies, Inc. -17- CONFIDENTIAL Q. McKesson and Horizon agree to conduct an annual business review of the supply arrangement created by this Agreement ("Annual Review") which shall occur throughout the term hereof during the month immediately preceding the anniversary of the commencement date of this Agreement. The purpose of this Annual Review shall be to allow the parties to discuss then current market conditions or other competitive considerations which are directly related to the parties' existing business relationship. IN WITNESS WHEREOF the parties have caused this Agreement to be duly executed as of the date and year written below and the persons signing warrant that they are duly authorized to sign for and on behalf of the respective parties. This Agreement shall be deemed accepted by McKesson only upon execution by a designated signatory of McKesson. HORIZON PHARMACIES INC. McKESSON U.S. HEALTH CARE, A DIVISION OF McKESSON CORPORATION By: /s/ Rick McCord By: /s/ William G. Hamik ------------------------------- ------------------------------- Name: Rick McCord Name: William G. Hamik ----------------------------- ----------------------------- (Print or Type) (Print or Type) Senior Vice President, Title: President Title: Customer Operations ----------------------------- ----------------------------- Date: 4/30/98 Date: 4/30/98 ----------------------------- ----------------------------- -18- EX-10.2 3 EXHIBIT 10.2 TERM SHEET MCKESSON CORPORATION One Post Street, 34th Floor San Francisco, CA 94104 April 30, 1998 Mr. John Stogner Horizon Pharmacies, Inc. 275 W. Princeton Drive Princeton, TX 75407 RE: LOAN FACILITIES Dear John: Pursuant to our recent discussion, McKesson Corporation ("McKesson") is pleased to offer to Horizon Pharmacies, Inc. ("Horizon") the various loan facilities described in Exhibit A attached hereto (the "Facilities") upon the terms and subject to the conditions set forth herein and therein. Exhibit A is hereby incorporated herein, and all references to this letter shall be deemed to include Exhibit A hereto. In submitting this letter, McKesson is relying on Horizon's assurances that Horizon has obtained any necessary consent of its current lenders and/or suppliers to negotiate and entertain the terms of this letter. Horizon's execution and acceptance of this letter will constitute a representation by Horizon that it has obtained all necessary consents from its current lenders and/or suppliers to accept the terms of this letter. This letter is not meant to encompass all of the terms and conditions of the Facilities. This letter is intended to outline the principal points of business understandings concerning the Facilities. McKesson's commitment hereunder is subject to (a) the execution of a definitive credit agreement (the "Credit Agreement") and other documentation, including financial and other covenant definitions, all in form and substance satisfactory to the McKesson, and (b) no material adverse change in the operations, business, financial condition, properties or prospects of Horizon or its subsidiaries having occurred since December 31, 1997. In consideration of the commitment provided hereunder, Horizon agrees to indemnify and hold harmless McKesson and its affiliates and officers, directors, employees, agents, attorneys and advisors for all claims, damages, liabilities and expenses (including, without limitation, reasonable fees and disbursements of counsel) incurred by any of them in connection with this letter, the Facilities, the use by Horizon of the Facilities or the Mr. John Stogner April 30, 1998 Page 2 proceeds thereof, the credit documents or any related documents, instruments or agreements or any transaction contemplated hereby or thereby, whether or not such transactions are consummated, except to the extent such claims, damages, losses, liabilities and expenses are caused by such party's gross negligence or willful misconduct. The commitment set forth herein with respect to the Facilities is personal to Horizon and may not be transferred or assigned to any other party without the prior written consent of McKesson. Neither this letter nor any part hereof may, without our prior written consent, be disclosed or exhibited to any other party, unless required by law, except to Horizon's accountants, attorneys and other advisors, and then, in each case, only on a confidential basis. If the commitment offered herein is satisfactory, please indicate Horizon's acceptance by signing and dating the enclosed copy of this letter and returning it to the undersigned. Unless so accepted or otherwise terminated by Horizon on or prior to May 5, 1998, the offer set forth herein will expire on that date. Upon Horizon's acceptance of the commitment offer set forth herein, McKesson will commence its due diligence and instruct counsel to commence documentation. By accepting this offer, Horizon agrees to reimburse McKesson for all costs and expenses (including, without limitation, fees and disbursement of counsel for McKesson but subject to any cap on legal fees set forth in Exhibit A) incurred by McKesson in connection with due diligence for the Facilities and the negotiation, preparation, execution, delivery and enforcement of the credit documents, whether or not any loan is made under the Facilities, any of the transactions contemplated hereby are consummated or any credit documents are executed and delivered. If Horizon accepts this offer, the commitment hereunder shall continue until July 15, 1998, on which date McKesson's commitment shall expire unless final credit documents have been executed by the parties thereto on or prior to such date. We look forward to working with you on this transaction. Please let us know if you have any questions. Very truly yours, McKESSON CORPORATION By: Alan Pearce ------------------------------------ Title: Senior Vice President Financial Services Mr. John Stogner April 30, 1998 Page 3 ACCEPTED: HORIZON PHARMACIES, INC. By: John Stogner ----------------------------- Title: CFO --------------------------- 4-30-98 EX-27.1 4 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 2,388,288 0 5,029,026 0 9,827,570 17,431,878 2,487,912 375,293 23,415,481 5,874,203 0 0 0 45,261 12,653,160 23,415,481 12,822,249 12,822,249 8,850,393 8,850,393 3,460,795 0 103,762 458,131 183,000 275,131 0 0 0 275,131 0.06 0.06
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