April 14, 1999
Xx. Xxxx XxXxxx, CEO
Horizon Pharmacies, Inc.
000 Xxxx Xxxx Xx.
Xxxxxxx, XX 00000
Subject: New Supply and Technology Agreements
Dear Xxxx:
Pursuant to our discussions yesterday, McKesson HBOC, Inc. ("McKesson") and
Horizon Pharmacies, Inc. ("Horizon") agree to the following:
1) Supply Agreement
Horizon will execute a new five year wholesale supply agreement with
McKesson effective May 1, 1999 on terms substantially similar to the
current wholesale supply agreement, including exclusions therein from cost
of goods, subject to:
a) Cost of goods sold based on current 45 day terms:
(EXCEPT ITEMS THAT May 1, 1999 through April 30, 2000 - cost plus 0.2%
ARE NET BILLED May 1, 2000 through April 30, 2001 - cost plus 0.1%
PURSUANT TO THE May 1, 2001 through April 30, 2002 - cost plus 0.0%
CURRENT SUPPLY May 1, 2002 through April 30, 2003 - cost minus 0.2%
AGREEMENT) May 1, 2003 through April 30, 2004 - cost minus 0.2%
For purposes of this section, "cost of goods" and "cost" shall have the
same meaning as applicable under the current wholesale supply agreement.
b) The above cost of goods sold margins shall be firm, with no reopener
rights during the term of the five year wholesale supply agreement.
c) McKesson will pay to Horizon the conversion allowance specified in
Section 6 of the current wholesale supply agreement based on purchases
through April 30, 1999. It is expressly understood that the repayment
formula specified in Section 6.B. of the current wholesale supply
agreement in the event of early termination or Horizon's failure to
meet its purchase volume commitment shall continue in full force and
effect under the new agreement.
Xx. Xxxx XxXxxx, CEO
April 14, 1999
Page 2
d) Unlike the current contract, there will not be a 50 bp rebate for first
year purchases commencing May 1, 1999.
e) Current contract language with respect to waiver of return charges
during the annual clean-up period will be clarified as follows:
i) Horizon shall submit to McKesson, annually no later than May 31st
of each year, dates for which individual stores have been
scheduled for their annual clean-up of return merchandise.
ii) Each store's clean-up period shall be for five contiguous business
days only and shall commence on the dates scheduled, unless
another commencement date shall be approved by McKesson
iii) Accept during the annual clean-up period for which there shall be
no return item charges, each store will be billed 15% and 25% for
salable and non-salable merchandise (as defined in the current
supply agreement), respectively.
f) In consideration of the substantial pricing concessions made by
McKesson under the proposed new supply agreement Horizon agrees that
the following sums shall be payable to McKesson as liquidated damages
in the event of cancellation of the new supply contract by either party
for any reason whatsoever prior to its expiration on April 30, 2004,
regardless of cause:
If termination occurs during the first year - $800,000
If termination occurs during the second year - $600,000
If termination occurs during the third year - $400,000
If termination occurs during the fourth year - $200,000
If termination occurs during the fifth year
(other than by expiration on April 30, 2004) - $100,000
2) Financing Agreements
a) McKesson hereby grants Horizon upon execution of this letter by both
parties a waiver on all breaches of financial covenants and such other
defaults as to which Horizon has specifically requested a waiver under
the current credit facility for Horizon's fiscal year ending December
31, 1998 and quarter ending March 31, 1999.
b) Notwithstanding any waivers granted by McKesson, McKesson will
reinstate the original credit facility commitment of $15 million for
acquisitions and operating capital only upon McKesson's approval, which
shall be in McKesson's sole discretion, of Horizon's twelve month
profitable operating plan.
c) McKesson will provide a $7 million guarantee to Bank One to facilitate
the bank's offering an unsecured revolving credit facility to Horizon
designed to more efficiently accommodate Horizon's daily fluctuations
in cash flow. The amount of commitment under the original McKesson
credit facility will be reduced by the aggregate amount guaranteed
under the Bank One facility, should Horizon decide to accept the bank's
offer.
Xx. Xxxx XxXxxx, CEO
April 14, 1999
Page 3
As a condition to providing the guarantee to the bank McKesson will
require the same protections available to McKesson under the original
credit facility, which among other conditions will include a
requirement that Horizon indemnify McKesson for any payment that
McKesson shall be obligated to pay Bank One pursuant to the guarantee.
Such indemnity shall be secured pursuant to the terms of the existing
security agreement.
d) In consideration of the proposed December 31, 1998 and March 31, 1999
waivers under the current credit facility, Horizon agrees to provide
McKesson warrants under substantially the same terms and conditions as
the original warrants granted to McKesson to purchase common stock of
Horizon, as follows:
- 100,000 new warrants priced at the average closing price of
Horizon stock for the five days ending April 16, 1999.
- Cancellation of the original 101,500 warrants and reissuance of an
additional $101,500 of new warrants priced at the average closing
price of Horizon stock for the five days ending April 16, 1999.
- 50,000 new warrants priced at the average closing price of Horizon
stock for the five day period commencing on the date McKesson
advises Horizon that it has reinstated the original credit
facility commitment.
3) Technology Agreement
Horizon agrees to enter into a five year Technology Agreement no later than
30 days following McKesson Pharmacy Systems ("MPS") delivery of a fully
operational Multi-Site Back Office System ("Host System"), in which
Horizon commits to installing MPS point of sales systems ("POS") in all of
its current and future store locations and further agrees to installing a
minimum of 100 POS systems, including existing installations, in its
stores by April 30, 2004. The cost of the new POS systems, training,
scheduling and other applicable services and conditions relevant to the
POS services, shall be the same as afforded by MPS to Horizon for the
current 23 installations, after adjusting for specific system
configurations pursuant to price quotations that MPS has previously
provided Horizon. McKesson acknowledges that this commitment is contingent
upon MPS delivering a fully operational Host System by October 15, 1999.
McKesson agrees to pay Horizon as compensation for its increased costs, a
penalty of $500 per day for each day the Host System is delayed beyond
October 31, 1999. Should McKesson determine that it is unable or unwilling
to provide the Host System, McKesson will give notice to Horizon of its
intent not to deliver the system in which case McKesson's obligation to
pay the penalty shall cease 30 days after giving notice. In the event
McKesson provides a Host System and Horizon fails to purchase a minimum of
77 new POS systems then Horizon shall pay McKesson on April 30, 2004 the
sum of $2,000 multiplied times the difference between 77 and the actual
number of new POS system Purchased during term of the Technology Agreement.
Xx. Xxxx XxXxxx, CEO
April 14, 1999
Page 4
4) Reimbursement for and Release of Disputes
In exchange for the payment by McKesson of $1 million, and for undertaking
the other obligations of McKesson set forth in this letter, as full and
final consideration for unresolved disputes arising in 1998 and the first
calendar quarter of 1999, Horizon agrees to the release of claims set forth
below, which shall be effective upon execution and delivery of this letter,
and to undertake the other obligations of Horizon that are set forth in
this letter.
RELEASE OF CLAIMS
For the consideration set forth above, Horizon on behalf of itself,
its employees, successors, predecessors, officers, directors,
stockholders, subsidiaries, insurers, and each and all of them
(collectively, the "Horizon"), hereby forever releases and
discharges, McKesson and its employees, attorneys, successors,
predecessors, officers, directors, stockholders, subsidiaries,
insurers, assigns, representatives and agents (collectively, the
"Releasees"), and hereby indemnifies the Releasees and holds them
harmless from and against any and all losses or costs of any kind
(including without limitation reasonable attorneys' fees and costs)
arising from Claims (as defined below) by its stockholders, in each
case from any and all manner of actions, claims, demands, damages,
liabilities, costs, or causes of action of any kind or nature
whatever, liquidated or unliquidated, known or unknown, matured or
unmatured, asserted or unasserted, fixed or contingent (collectively,
"Claims"), whether based in tort, contract or any other theory of
recovery, including without limitation court costs, expenses and
attorney fees, which they may have against Releasees based on facts
occurring on or before April 15, 1999 arising out of the relationship
(contractual or otherwise) between any Horizon and any Releasee,
including but not limited to the Credit Agreement and the Supply
Agreement (collectively the "Released Claims").
THIS RELEASE EXTENDS TO CLAIMS RELEASED TO AND INCLUDED AMONG THE
RELEASED CLAIMS WHICH HORIZON DOES NOT KNOW OR SUSPECT TO EXIST IN ITS
FAVOR, WHICH IF KNOWN BY HORIZON WOULD HAVE MATERIALLY AFFECTED ITS
DECISION TO ENTER INTO THIS RELEASE. HORIZON EXPRESSLY WAIVES AND
RELINQUISHES, WITH RESPECT TO THE RELEASED CLAIMS, ANY RIGHTS OR
BENEFIT WHICH IT HAS OR MAY HAVE UNDER ANY STATUTE OR LEGAL PRINCIPLE
WITH THE EFFECT THAT A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
THE RELEASOR DOES NOT KNOW OR SUSPECT TO EXIST IN ITS FAVOR AT THE
TIME OF EXECUTING THE RELEASE, WITHOUT LIMITING THE FOREGOING, HORIZON
EXPRESSLY WAIVES AND RELINQUISHES ANY RIGHTS OR BENEFIT WHICH HAS OR
MAY HAVE UNDER PARAGRAPH 1542 OF THE CIVIL CODE OF THE STATE OF
CALIFORNIA, WHICH PROVIDES AS FOLLOWS:
Xx. Xxxx XxXxxx, CEO
April 14, 1999
Page 5
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Horizon acknowledges that after executing this Release it may discover
Claims in addition to or different from those which it now has or
believes to exist with respect to the Released Claims, but that it is
Horizon's intention hereby to fully settle and release all of the
Released Claims, known or unknown, which now exist, may exist, or
heretofore may have existed. In furtherance of this intention, the
release herein given shall be and will remain in effect as full and
complete release of the Released Claims and Claims arising out of the
Released Claims notwithstanding the discovery or existence of any such
additional or different Claim or fact.
This release shall become effective upon the execution and delivery of
this letter. Horizon hereby represents and warrants that (i) it has
exclusive authority to execute this Release, (ii) none of the Released
Claims has been assigned to any person not a party bound by this
Release, and (iii) all of the Released Claims are owned by Horizon and
by no other Person(s).
This Release constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all
prior negotiations and agreements, whether written or oral, relating
to its subject matter, and is binding upon and inures to the benefit
of the parties' respective successors, assigns and representatives.
This Release may not be altered, amended, or modified, except by
another written agreement that specifically refers to this Release,
duly executed by another written agreement that specifically refers
to Release, duly executed by authorized representatives of each of
Horizon and McKesson.
This Release shall be governed by the laws of the State of California,
and by executing this Release each party hereby waives any claim of
inconvenient forum, lack of jurisdiction or similar claim contesting
the ability of the courts of the State of California to decide any
disputes arising hereunder.
5) Public Disclosures
Horizon agrees to provide McKesson drafts of all press releases and other
forms of written public disclosure regarding the above agreements for
review and approval by McKesson prior to release. Furthermore, Horizon
agrees to refrain from any verbal discussion regarding the agreements other
than to reiterate information contained in written disclosures that have
been approved by McKesson. The draft press release dated April 14, 1999
entitled "HORIZON Pharmacies, Inc. Negotiates New Technology and Supply
Agreement with Primary Supplier" is satisfactory to McKesson.
Xx. Xxxx XxXxxx, CEO
April 14, 1999
Page 6
The following signatures authorize approval by both companies of all criteria
as stated above.
Xxxx Xxxxx, XxXxxxxx HBOC, Inc. /s/ Xxxx Xxxxx Date: April 14, 1999
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Xxxx XxXxxx, Horizon Pharmacies, Inc. /s/ Xxxxx X. XxXxxx Date: April 14, 1999
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