-----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, Wljf2+w3wCr+3ED9EZ3sH9x2aAileQUIp2ubrHnz3cTSWE4kQDO54QRuRFxDB+K/ QfFKOgXvd5w7puKweJCwsg== /in/edgar/work/0000912057-00-049808/0000912057-00-049808.txt : 20001115 0000912057-00-049808.hdr.sgml : 20001115 ACCESSION NUMBER: 0000912057-00-049808 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORIZON PHARMACIES INC CENTRAL INDEX KEY: 0001036260 STANDARD INDUSTRIAL CLASSIFICATION: [5912 ] IRS NUMBER: 752441557 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22403 FILM NUMBER: 765773 BUSINESS ADDRESS: STREET 1: 531 W MAIN STREET STREET 2: SUITE 100 CITY: DENISON STATE: TX ZIP: 75020 BUSINESS PHONE: 9034652397 MAIL ADDRESS: STREET 1: 531 W MAIN STREET STREET 2: SUITE 100 CITY: DENISON STATE: TX ZIP: 75020 10-Q 1 a2031076z10-q.txt 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000 / / 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 registrant as specified in its charter) DELAWARE 75-2441557 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 531 WEST MAIN STREET DENISON, TEXAS 75020 (Address of principal executive offices) (903) 465-2397 (Registrant's telephone number) ---------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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/ / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: TITLE OF EACH CLASS OUTSTANDING AT NOVEMBER 14, 2000 Common stock, par value $.01 per share 6,028,774 1 FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION.............................................. 3 Financial Statements............................................... 3 Condensed Consolidated Balance Sheets.............................. 3 Condensed Consolidated Statements of Operations (Unaudited)........ 5 Condensed Consolidated Statements of Cash Flows(Unaudited)......... 6 Notes to Condensed Consolidated Financial Statements (Unaudited)... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 9 Quantitative and Qualitative Disclosures about Market Risks........ 17 PART II. OTHER INFORMATION................................................. 18 Exhibits and Reports On Form 8-K................................... 18 SIGNATURES.................................................................. 19
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. HORIZON Pharmacies, Inc. Condensed Consolidated Balance Sheets
DECEMBER 31, SEPTEMBER 30, 1999 2000 ------------ ------------- (AUDITED) (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents .............................................. $ 1,263 $ 3,463 Certificate of deposit ................................................. 375 373 Accounts receivable, net: Third-party providers ............................................... 8,828 10,089 Others .............................................................. 2,922 2,217 Inventories, at the lower of specific identification cost or market .... 23,522 20,488 Other .................................................................. 1,307 1,477 ------- ------- Total current assets ...................................................... 38,217 38,107 Debt issue costs and other, net of accumulated amortization ............... 595 1,753 Property, equipment and capital lease assets: Property and equipment: Land, buildings and improvements .................................... 1,498 1,623 Software and equipment .............................................. 5,509 7,491 ------- ------- 7,007 9,114 Less accumulated depreciation .......................................... 1,057 1,873 ------- ------- Property and equipment, net ............................................ 5,950 7,241 Equipment under capital leases, net of accumulated amortization ........ 725 540 ------- ------- Property, equipment and capital lease assets, net ......................... 6,675 7,781 Intangibles, at cost: Noncompete covenants and customer lists ................................ 2,415 2,295 Goodwill ............................................................... 13,299 13,148 ------- ------- 15,714 15,443 Less accumulated amortization .......................................... 1,370 1,696 ------- ------- Intangibles, net .......................................................... 14,344 13,747 ------- ------- $59,831 $61,388 ======= =======
3 HORIZON PHARMACIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, SEPTEMBER 30, 1999 2000 ------------ ------------- (AUDITED) (UNAUDITED) (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ....................................................... $ 12,615 $ 18,571 Accrued liabilities .................................................... 1,420 684 Lease termination settlements and other exit costs ..................... 1,367 658 Notes payable .......................................................... 5,566 7,000 Current portion of long-term debt ...................................... 2,439 2,371 Current portion of obligations under capital leases .................... 239 201 Long-term debt subject to acceleration ................................. -- 13,178 -------- -------- Total current liabilities ................................................. 23,646 42,663 Noncurrent liabilities: Lease termination settlements .......................................... 1,250 995 Long-term debt ......................................................... 19,204 6,956 Obligations under capital leases ....................................... 481 278 Stockholders' equity: Preferred stock, $.01 par value, authorized 1,000,000 shares, none issued .......................................................... -- -- Common stock, $.01 par value, authorized 14,000,000 shares; issued 5,888,965 shares in 1999 and 6,034,855 in 2000 ................ 59 60 Additional paid-in capital ............................................. 24,710 26,605 Accumulated deficit .................................................... (9,449) (16,099) -------- -------- 15,320 10,566 Treasury Stock (6,081 shares), at cost ................................. (70) (70) -------- -------- Total stockholders' equity ................................................ 15,250 10,496 -------- -------- $ 59,831 $ 61,388 ======== ========
See accompanying notes. 4 HORIZON PHARMACIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 1999 2000 1999 2000 -------- -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues: Prescription drugs sales ........................ $ 25,248 $ 26,457 $ 72,661 $ 80,551 Other sales and services ........................ 7,482 6,867 22,594 23,485 -------- -------- -------- --------- Total net revenues ................................. 32,730 33,324 95,255 104,036 Costs and expenses: Cost of sales and services: Prescription drugs ........................... 19,298 20,578 54,159 62,851 Other ........................................ 4,417 3,809 13,915 14,742 Depreciation and amortization ................... 469 737 1,186 1,801 Selling, general and administrative expenses .... 8,584 9,378 24,722 29,262 -------- -------- -------- --------- Total costs and expenses ........................... 32,768 34,502 93,982 108,656 -------- -------- -------- --------- Income (loss) from operations ...................... (38) (1,178) 1,273 (4,620) Other income (expense): Interest and other income ....................... 50 7 170 26 Interest expense ................................ (489) (749) (1,295) (2,056) -------- -------- -------- --------- Total other income (expense) ....................... (439) (742) (1,125) (2,030) -------- -------- -------- --------- Net income (loss) .................................. $ (477) $ (1,920) $ 148 $ (6,650) ======== ======== ======== ========= Basic earnings (loss) per share (Note 2) ........... $ (.08) $ (0.32) $ 0.03 $ (1.12) ======== ======== ======== ========= Diluted earnings (loss) per share (Note 2) ......... $ (.08) $ (0.32) $ 0.03 $ (1.12) ======== ======== ======== =========
See accompanying notes. 5 HORIZON PHARMACIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1999 2000 ------- ------- (IN THOUSANDS) OPERATING ACTIVITIES Net income (loss) .................................................... $ 148 $(6,650) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization .................................... 1,186 1,801 Provision for impairment ......................................... -- 215 Other ............................................................ 105 84 Changes in operating assets and liabilities, net of acquisitions of businesses: Accounts receivable ............................................ (2,888) (628) Refundable income taxes ........................................ 257 -- Inventories .................................................... (2,919) 2,709 Other current assets ........................................... (212) (366) Accounts payable ............................................... 1,171 5,956 Accrued liabilities ............................................ 339 (804) ------- ------- Total adjustments .................................................... (2,961) 8,967 ------- ------- Net cash provided by (used in) operating activities .................. (2,813) 2,317 INVESTING (Purchase of) proceeds from certificate of deposit ................... (375) 2 Proceeds from sales of assets ........................................ -- 731 Purchases of property and equipment .................................. (937) (2,290) Purchases of other assets ............................................ (117) (200) Assets acquired for cash in acquisitions of businesses ............... (3,136) (117) ------- ------- Net cash used in investing activities ................................ (4,565) (1,874) FINANCING ACTIVITIES Borrowings ........................................................... 4,180 4,150 Debt issue costs incurred ............................................ -- (194) Principal payments on debt ........................................... (2,274) (2,005) Principal payments on obligations under capital leases ............... (180) (241) Issuance of common stock, net of offering costs (64,247 shares in 1999 and 11,854 shares in 2000) ................................. 277 47 ------- ------- Net cash provided by financing activities ............................ 2,003 1,757 ------- ------- Net increase (decrease) in cash and cash equivalents ................. (5,375) 2,200 Cash and cash equivalents at beginning of period ..................... 6,617 1,263 ------- ------- Cash and cash equivalents at end of period ........................... $ 1,242 $ 3,463 ======= ======= NONCASH INVESTING AND FINANCING ACTIVITIES Equipment leased under capital leases ................................ $ 445 $ -- Issuance of warrants to lenders and suppliers (251,500 shares in 1999 and 555,000 shares in 2000) ................................ 514 1,418 Issuance of common stock to vendors (80,000 shares) .................. -- 150 Debt issue costs deducted from debt proceeds ......................... -- 150 Acquisitions of businesses financed by debt and common stock: Accounts receivable and other .................................... $ 403 $ -- Inventories ...................................................... 2,275 39 Property and equipment ........................................... 279 169 Intangibles ...................................................... 5,369 193 ------- ------- 8,326 401 Less cash paid ................................................... (3,136) (117) ------- ------- Assets acquired .................................................. $ 5,190 $ 284 ======= ======= Financed by: Debt ............................................................... $ 3,611 $ -- Common stock (200,975 shares in 1999 and 54,036 shares in 2000) .... 1,579 284 ------- ------- TOTAL .......................................................... $ 5,190 $ 284 ======= =======
See accompanying notes. 6 HORIZON PHARMACIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) NOTE 1 The unaudited condensed consolidated financial statements include all adjustments, consisting of normal, recurring accruals, which HORIZON Pharmacies, Inc. ("Horizon" or 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 our Form 10-K for the year ended December 31, 1999. The results of operations for the nine months ended September 30, 2000, are not necessarily indicative of the results to be expected for the full year ending December 31, 2000. Horizon's net revenues, costs and expenses 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 and nine months ended September 30, 1999 and 2000. NOTE 2 Weighted average common shares outstanding used in the calculation of basic earnings (loss) per share for the three month and nine month periods ended September 30, 2000 totaled 6,028,774 and 5,954,539, respectively. Weighted average common shares outstanding for the three and nine month periods in 1999 were 5,881,392 and 5,756,407, respectively. Common shares used in the calculation of diluted earnings per share for the three month and nine month periods ended September 30, 2000 totaled 6,028,774 and 5,954,539, respectively. Common shares used for the calculation of fully diluted earnings per share for the three and nine month periods in 1999 were 5,881,392 and 5,888,073, respectively. The differences between weighted average shares outstanding and fully diluted shares outstanding is attributable to dilutive stock options and warrants. Anti-dilutive employee stock options, warrants and convertible debentures excluded amounted to 1,212,567 shares and 825,106 shares for the three months and nine months ended September 30, 1999, respectively, and 2,481,036 shares and 2,222,012 shares for the three months and nine months ended September 30, 2000, respectively. NOTE 3 No income taxes are provided due to the existence of net operating loss carry forwards. NOTE 4 At September 30, 2000, we operated 47 free-standing retail pharmacies, all of which were acquired from third parties in purchase transactions. Such acquisitions have generally 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. The number of pharmacies acquired during the nine months ended September 30, 1999 and 2000 were five and one, respectively. Proforma results of operations data giving effect to the acquisitions completed during the nine month periods ended September 30, 1999 and 2000, as if the transactions had been consummated as of January 1, 1999, were not materially different from historical operating results. 7 NOTE 5 The Company has a credit arrangement with its primary supplier which provides for borrowings up to $8,000 under a revolver and $3,000 under a term loan. Availability of the revolver is subject to a borrowing base determined by the supplier and amounted to $7,678 as of September 30, 2000. Borrowings outstanding at September 30, 2000 consist of $7,678 under the revolver and $3,000 under the term loan. The agreement requires the Company to maintain at least a specified amount of net worth and satisfy certain financial ratios. At September 30, 2000, the Company had not complied with several covenants of the credit agreement. These covenant violations have not been cured or waived, and the supplier has the right to demand payment of outstanding borrowings. Accordingly, amounts payable under the credit agreement are classified as current in the accompanying September 30, 2000 financial statements. If the violations are not waived or the compliance covenants are not revised, the Company may be required to liquidate additional stores or inventories in order to pay the debt. NOTE 6 The Company is dependent on existing credit agreements with lenders, including the largest supplier, and proceeds from potential debt and equity offerings in order to fund its operations and pay its obligations. As of September 30, 2000, the Company has working capital lines of credit with two lenders. These lines of credit are the primary sources of liquidity for the Company. As of September 30, 2000, the credit agreements provided for borrowings up to $17,678 including the Company's $7,000 bank credit facility which was scheduled to expire on September 1, 2000, but which has been extended to November 15, 2000. As of September 30, 2000, the Company had no availability for additional borrowings under the lines and was in default on certain compliance covenants of the lines. Because of these defaults, the Company is also in default of its $2,500 convertible debentures. Accordingly, these debentures are classified as current in the accompanying September 30, 2000 financial statements. As of September 30, accounts payable includes $15,488 to the Company's largest supplier. Management's plan for the remainder of 2000 provides for the Company to improve its financial condition and operating results through increased selling prices, a reduction of selling, general and administrative expenses, the reduction of receivables and inventories levels, reduction in store operating hours and labor costs and the sale or closure of underperforming pharmacies (if necessary) and various debt and equity alternatives. As discussed above, the Company is in default on its working capital lines of credit. The Company believes that in the event that the lenders do not waive the defaults and renew or otherwise extend the credit facilities, it will be able to secure replacement financing at similar terms or otherwise retire the debt with sales proceeds from the stores identified as held for disposal. In the event such sales proceeds are not sufficient or that alternative financing is not arranged, the Company may have to sell the assets of certain performing stores (which have previously received unsolicited purchase inquiries) to provide the additional funds to retire the debt. Such additional store sales would reduce future revenues and could have a material adverse effect on the financial position and results of operations of the Company. NOTE 7 During the fourth quarter of 1999, the Company identified several underperforming pharmacies with long-lived asset (primarily intangibles) carrying amounts of $1,001 and committed to a plan to sell them. Accordingly, the Company began marketing these pharmacies to potential buyers and sold four of these pharmacies plus two other pharmacies during the nine months ended September 30, 2000. In October 2000, we sold one underperforming pharmacy. The Company estimates the fair value (based primarily on bids received from potential buyers or previous sales proceeds) less costs to sell the pharmacies. During the nine months ended September 30, 2000, the Company revised its estimates of fair values and recorded additional impairment of $29. 8 During the nine months ended September 30, 2000, the Company had identified one underperforming pharmacy whose operating results indicated that long-lived assets of this pharmacy might be impaired. The long-lived assets of this pharmacy had combined carrying amounts of $186. As a result of analyses performed, the Company determined that the pharmacy was impaired and recorded a $186 impairment loss. Management's estimate of undiscounted future cash flows indicates that the remaining carrying amounts as of September 30, 2000 are expected to be recovered. However, it is reasonably possible that the estimate of undiscounted cash flows may change in the near future resulting in the need to write-down one or more of the identified assets to fair value. NOTE 8 In June 2000, the Company issued a total of 80,000 shares of restricted common stock (valued at $150) to two public relations firms for investor relations and marketing services. In August 2000, options for 10,000 shares of common stock were granted to an outside consultant at an option price of $1.69 per share which represented the market value of the Company's common stock at the date of grant. The options are fully vested and expire in August 2010. In October 2000, options for 295,150 shares of common stock were granted to directors and employees at an option price of $1.13 per share which represented the market value of the Company's common stock at the date of grant. The options are fully vested and expire in October 2010. NOTE 9 The Company and certain present and former officers or directors were named as defendants in an action that was filed seeking to certify a class of persons who purchased shares of the Company's common stock during the period between August 14, 1998 and March 3, 1999, inclusive, alleging that defendants failed to timely disclose complications with the Company's prescription pricing communications technology. The Company has contingent liabilities for other lawsuits and various other matters with certain vendors occurring in the ordinary course of business. Management of the Company believes that the ultimate resolution of these contingencies will not have a material adverse effect on the Company's financial position or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (DOLLARS IN THOUSANDS) OVERVIEW The following discussion and analysis reviews the operating results of Horizon for the three and nine months ended September 30, 2000 and compares those results to the comparable periods of 1999. Certain statements contained in this discussion are not based on historical facts; rather, they 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 differ materially from anticipated results described in such statements. Our 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. We disclaim, however, any intent or obligation to update these forward-looking statements. As a result, you should not rely on these forward-looking statements. Horizon'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. 9 In evaluating a retail pharmacy for potential acquisition, we (i) evaluate the target store's profits and losses for preceding years; (ii) review the store's income tax returns for preceding years; (iii) review computer-generated prescription reports showing historical information including prescriptions sold, average price of each prescription, gross margins and trends in prescription sales; (iv) analyze the store's location and competition in the immediate area; (v) review the store's lease agreement, if any; and (vi) assess targeted areas for growth patterns and trends. Based on our analysis of the foregoing items, we may prepare an offer to purchase the particular store. To assess the reasonableness of the seller's asking price, we consider the anticipated rate of return, payback period and the availability and terms of seller financing, with it being generally desired that one-third of the purchase price be seller-financed and the balance split between cash and other consideration, such as our common stock. In 1999, we made a strategic decision to enter the mail order and e-commerce business. In June 1999, we purchased a combination retail, mail order and Internet pharmacy operation, and in the fourth quarter of 1999 we started a new Internet pharmacy operation, HorizonScripts.com, which provides customers online access to thousands of prescription and non-prescription items at competitive prices. We believe this Internet pharmacy will enhance our traditional "brick and mortar" operations, and that the "brick and click" strategy will offer our existing and potential customers convenient sources for their health care needs. By expanding our presence through e-commerce, we believe we will expand our name recognition and revenue base, while also cementing our relationship with our existing customers. During the nine months ended September 30, 1999, we acquired five retail pharmacies. During the nine months ended September 30, 2000, we acquired the prescription files and inventory of two pharmacies and consolidated them into existing stores, and we acquired an infusion pharmacy operation in Corpus Christi, Texas. The primary measurement of the effect of acquisitions on our operating performance is the number of store operating months, which is the number of months we owned all of the stores during the relevant measuring period. We expect that continuing acquisitions and expansion of our e-commerce activities will be the most significant factors in our growth strategy. However, at September 30, 2000, we had not complied with several covenants of the credit agreements with our primary lender. These covenant violations have not been cured or waived, and the lenders have the right to demand payment of outstanding borrowings. As a result of these covenant violations and the limited availability under the revolver portion of such credit facility, we currently are not able to obtain funds under such credit facility to finance additional acquisitions. Currently, our primary source of revenue is the sale of prescription drugs. During the three months ended September 30, 1999 and 2000, sales of prescription drugs generated 77.1% and 79.4%, respectively, of net revenues; during the nine month period ended September 30, 1999 and 2000, sales of prescription drugs generated 76.3% and 77.4%, respectively. We expect our prescription drug business to increase on an annual basis as a result of the demographic trends toward an aging population and the continued development of new pharmaceutical products. However, we anticipate that such sales will decrease as a percentage of our overall net revenues and gross margins as we expand our home healthcare and other non-pharmaceutical sales and services which have historically generated higher margins. Our net revenues and operating results should be improved during 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, revenues and expenses should be highest in the fourth quarter and the first quarter of each year. However, we have been making investments in the future of our e-commerce operations over the past three quarters. Consequently, we experienced losses in the fourth quarter of 1999 and the first, second and third quarters of 2000, which were attributable, in part, to such investments and, in part, to certain underperforming stores. We expect to incur additional losses in the near future while we continue to invest in our e-commerce operations and in the building of an infrastructure necessary for our growth. 10 We anticipate entering into strategic alliances with various e-commerce companies, as well as pursuing e-commerce strategies through existing retail centers, such as grocery stores. During the second quarter of 2000, we entered into a Cooperative Marketing Agreement with eGrocery.com, Inc. ("eGrocery.com") pursuant to which eGrocery.com will, among other things, link our Web site to, and display promotional advertisements on, certain Web sites operated and maintained by eGrocery.com. eGrocery.com will also endeavor to generate cooperative advertising dollars for us from general merchandise, trade funds and display allowances at the retail stores we own and manage. We will attempt to enter into additional alliances in 2000 in order to provide us increased visibility in cyberspace and access to high traffic retail centers for electronic kiosks. RESULTS OF OPERATIONS The following table sets forth the percentage relationship of certain income statement data for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1999 2000 1999 2000 ------ ------ ------ ------ INCOME STATEMENT DATA REVENUES: Net Revenues: Prescription drugs sales........................... 77.1% 79.4% 76.3% 77.4% Other sales and services........................... 22.9% 20.6% 23.7% 22.6% ----- ----- ----- ----- Total net revenues.............................. 100.0% 100.0% 100.0% 100.0% COSTS AND EXPENSES: Cost of sales prescription drugs (1)............... 76.4% 77.8% 74.5% 78.0% Cost of sales other (2)............................ 59.0% 55.5% 61.6% 62.8% Selling, general and administrative expenses (3)... 26.2% 28.1% 26.0% 28.1% Depreciation and amortization (3).................. 1.4% 2.2% 1.2% 1.7% Interest expense (3) .............................. 1.5% 2.2% 1.4% 2.0% Net income (loss) (3).............................. (1.5%) (5.8%) .2% (6.4%)
- ----------- (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 our acquisition costs. Such assets are 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 our future results of operations. NET REVENUES Our net revenues increased $594, or 1.8%, to $33,324 for the three months ended September 30, 2000, compared to $32,730 for the three months ended September 30, 1999. The increase was attributable to an increase in same store sales although there was a decrease in store operating months from 150 in the third quarter of 1999 to 143 in the third quarter of 2000 as a result of the sale of certain under-performing stores. Our net revenues increased $8,781, or 9.2%, to $104,036 for the nine months ended September 30, 2000, compared to $95,255 for the nine months ended September 30, 1999. The increase was primarily attributable to the increase in store operating months from 442 in the nine months ended September 30, 1999 to 451 for the nine months ended September 30, 2000. Sales of prescription drugs increased from 77.1% of total net revenues for the three months ended September 30, 1999 to 79.4% of total net revenues for the three months ended September 30, 2000. Sales of 11 prescription drugs increased from 76.3% of total net revenues for the nine months ended September 30, 1999 to 77.4% of total net revenues for the nine months ended September 30, 2000. We expect our prescription drug business to continue to increase on an annual basis as a result of the demographic trends toward an aging population and the continued development of new pharmaceutical products. Same store sales increased from $23,313 in the third quarter of 1999 to $24,153 in the third quarter of 2000, an increase of 3.6%. Same store sales for the nine month period increased from $79,754 in 1999 to $83,179 in 2000, an increase of 4.3%. The following tables show our prescription drug gross margins and total revenues margins for the three months and nine months ended September 30, 1999 and 2000:
GROSS MARGINS ON GROSS MARGINS ON PRESCRIPTION DRUG SALES TOTAL REVENUES ----------------------- -------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE ------ ---------- ------ ---------- Three Months Ended September 30, 2000........................ $ 5,879 22.2% $ 8,937 26.8% 1999........................ $ 5,950 23.6% $ 9,015 27.5% Nine Months Ended September 30, 2000........................ $ 17,700 22.0% $26,443 25.4% 1999........................ $ 18,502 25.5% $27,181 28.5%
The decrease in the gross margin on prescription drug sales from 1999 to 2000 was primarily due to a decrease in margin on third party insurance plans and an increase in the percentage of third party prescription drug sales, which have lower margins. COSTS AND EXPENSES Cost of sales increased $672, or 2.8%, from $23,715 in the three months ended September 30, 1999 to $24,387 in the three months ended September 30, 2000. For the nine month period cost of sales increased $9,519, or 14.0%, from $68,074 in 1999 to $77,593 in 2000. This increase is primarily the result of increased sales volume resulting from the increased number of store operating months. Our cost of sales as a percentage of total net revenues increased 0.7% from 72.5% in the three months ended September 30, 1999 to 73.2% in the three months ended September 30, 2000. For the nine month period cost of sales as a percentage of revenues increased 3.1% from 71.5% in 1999 to 74.6% in 2000. This increase in total cost of sales is primarily due to an increase in third party prescriptions. Selling, general and administrative expenses increased from $8,584 in the three months ended September 30, 1999 to $9,378 in the three months ended September 30, 2000. Such expenses, expressed as a percentage of net revenues, were 26.2% and 28.1% for the three months ended September 30, 1999 and 2000, respectively. For the nine month period selling, general and administrative expenses increased from $24,722 in 1999 to $29,262 in 2000. Such expenses, expressed as a percentage of total net revenue were 26.0% and 28.1% for the nine months ended September 30, 1999 and 2000, respectively. This increase is primarily due to costs associated with the loading of inventory levels and reorder points in the new pharmacy systems (which were installed in the third and fourth quarters of 1999), the additional personnel added to monitor and manage the new pharmacy systems, the start-up costs of HorizonScripts.com and the costs associated with the sale of the six stores. Additionally, a portion of the increase is due to an increased store count and the resulting increased store operating months. Depreciation and amortization increased from $469, or 1.4% of total net revenues, for the three months ended September 30, 1999 to $737, or 2.2% of net revenues, for the three months ended September 30, 2000. For 12 the nine month period, depreciation and amortization increased from $1,186, or 1.2% of total net revenues, in 1999 to $1,801 or 1.7% of total net revenues in 2000. These increases were due primarily to our purchase of new stores and the amortization of debt issue costs and other. Interest expense was $489 in the third quarter of 1999 compared to $749 during the third quarter of 2000. For the nine month period interest expense was $1,295 in 1999 compared to $2,056 in 2000. The increases in interest expense for the three and nine month periods resulted primarily from the increase in debt associated with our acquisitions and operating losses over the last several quarters. Interest and other income was $50 in the third quarter of 1999 compared to $7 in the third quarter of 2000. For the nine month period interest and other income was $170 in 1999 compared to $26 in 2000. EARNINGS We had a net loss of $1,920 for the three months ended September 30, 2000 as compared to a net loss of $477 in the same period of 1999. We had a net loss of $6,650 for the nine month period ended September 30, 2000 as compared to net income of $148 in the same period of 1999. We incurred no income tax expense in either period as a result of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities increased by $5,130 to $2,317 during the nine months ended September 30, 2000 as compared to $2,813 net cash used in operating activities for the nine months ended September 30, 1999. The primary reasons for the increase in cash provided by operations were the due to an increase in accounts payable and a reduction in inventories which more than offset the net loss. Net cash used in investing activities was $1,874 for the nine months ended September 30, 2000 as compared to $4,565 for the comparable period in 1999. Net cash provided by financing activities was $1,757 for the nine months ended September 30, 2000 as compared to $2,003 in the nine months ended September 30, 1999. Cash and cash equivalents increased $2,200 to $3,463 during the nine months ended September 30, 2000 as compared to $1,263 as of December 31, 1999. McKesson HBOC, Inc. ("McKesson") currently provides us with a $10,678 credit facility and provides a guaranty for a $7,000 revolving credit facility from Bank One, Texas, NA ("Bank One") originally due on September 1, 2000, but which has been extended until November 15, 2000. Both the McKesson credit facility and the Bank One revolving credit facility are subject to certain restrictive covenants, including financial ratio requirements, which we must meet to maintain the credit facility and revolving line of credit. At September 30, 2000 we were in default of several of these covenants. These covenant violations have not been cured or waived, and the lenders have the right to demand payment of outstanding borrowings. At November 14, 2000, we had borrowed $10,678 under the McKesson credit facility and $7,000 under the Bank One revolving credit facility. Because of these defaults the Company is also in default of its $2,500 convertible debenture. We are currently engaged in discussions with McKesson with respect to, among other things, obtaining waivers from McKesson of the existing covenant violations. We are also engaged in discussions with several potential sources of additional financing to refinance our debt with McKesson and Bank One. We have entered into a letter of agreement dated November 1, 2000 with Congress Financial Corporation ("Congress Financial") to provide us with a secured credit facility of up to $35,000, including a $10,000 acquisition line of credit. We anticipate that the proceeds for such financing, if obtained, will be used to refinance our existing debt, pay certain transaction expenses, fund future acquisitions and provide us with future working capital. The proposed Congress Financial credit facility is subject to certain conditions, including a satisfactory due diligence review, field examinations and 13 credit committee final approval. Accordingly, there can be no assurance that we will consummate the proposed financing transaction with Congress Financial or any other potential financing source. Moreover, there can be no assurance that we will be able to obtain from McKesson or the debenture holders any waivers with regard to our existing covenant violations or further extend our credit facility with Bank One. During February 2000, we acquired the prescription files and inventory of one store in Gering, Nebraska and consolidated it with our existing store. On March 31, 2000, we acquired (primarily for stock) the prescription files and inventory of an infusion therapy operation in Corpus Christi, Texas. In September 2000 we acquired the prescription files and inventory of a store in Dodge City, Kansas and consolidated it with our existing store. As a result of the net loss we incurred in 1999, we readjusted the formula we use when analyzing possible acquisitions. Until we are able to raise additional capital or secure additional credit lines for acquisitions, we will seek acquisition opportunities that require less cash and rely more on seller financing and the public or private offering of certain equity or long-term debt securities. Because of the federal moratorium on home healthcare licenses from September 1997 until January 1998 and the uncertainty of the current regulations, we do not plan to expand our home healthcare operations in 2000. We do expect, however, to offer home medical equipment through stores which have not heretofore offered such equipment. Our plan for the remainder of 2000 is to improve our financial condition and operating results through increased retail prices when possible, reduce our selling, general and administrative expenses, reduce receivables, inventories levels, store operating hours and labor costs and to analyze various debt and equity alternatives. If necessary, we will sell or close underperforming pharmacies. In October 2000, we sold one underperforming pharmacy. As discussed above, the Company is in default on its working capital lines of credit and its debentures. We believe that in the event the lenders do not waive the defaults and renew or otherwise extend the credit facilities, we will be able to secure replacement financing through a financial institution or supplier at similar terms or otherwise retire the debt with sales proceeds from underperforming stores. In the event such proceeds are not sufficient or that alternative financing is not arranged, we will sell the assets of certain performing stores (for which we have previously received unsolicited purchase inquiries) to provide the additional funds to retire the debt. The sale of such additional stores would reduce future revenues, and could have a material adverse effect on the financial position and results of operations of the Company. IMPACT OF INFLATION AND CHANGING PRICES Inflation continues to cause increases in product, occupancy and operating expenses, as well as the cost of acquiring capital assets. We attempt to minimize the effect of higher operating costs by achieving operating efficiencies through the use of technology. FACTORS AFFECTING OPERATIONS SUBSTANTIAL INDEBTEDNESS We have incurred substantial debt and may incur additional indebtedness in the future in connection with our plan of acquisitions. Our ability to make cash payments to satisfy our debt will depend upon our future operating performance, which is subject to a number of factors, including prevailing economic conditions and financial, business and other factors beyond our control. If we are unable to generate sufficient earnings and cash flow to service our debt, we may have to refinance certain of these obligations or dispose of certain assets. In the 14 event we are required to refinance all or any part of our debt, there can be no assurance that we will be able to effect such refinancing on satisfactory terms. As discussed above, we are in default on our working lines of credit and our debentures. We are currently actively pursuing financing from other potential sources to refinance our existing lines of credit as well as engaging in discussions with our lenders to waive the existing covenant violations and/or extend our lines of credit. There can be no assurance that we will be successful in either refinancing our existing debt or obtaining satisfactory waivers or extensions from our lenders. DEPENDENCE ON ACQUISITIONS FOR GROWTH. Our growth strategy is two-fold. First, we will continue to seek to acquire, consolidate and operate existing free-standing pharmacies and related businesses on a profitable basis subject to the availability of capital. We continually review acquisition proposals and are currently engaged in discussions with third parties with respect to possible acquisitions. However, we compete for acquisition candidates with buyers who have greater financial and other resources than us and, consequently, may be able to pay higher acquisition prices. To the extent we are unable to acquire suitable retail pharmacies or to integrate such stores successfully into our operations, our ability to expand our business may be reduced significantly. Second, we are expanding our operations into, and attempting to redirect revenues through, e-commerce by entering into strategic alliances with e-commerce partners. We believe this e-commerce strategy will allow us to increase our customer and prescription bases as well as our revenues. SALES TO THIRD-PARTY PAYORS We sell a growing percentage of our prescription drugs 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 non third-party payors. Accordingly, gross profit margins on sales of prescription drugs have been decreasing and are expected to continue to decrease in future periods. RELIANCE ON MEDICARE AND MEDICAID REIMBURSEMENTS Substantially all of our home healthcare revenues are attributable to third-party payors, including Medicare and Medicaid, private insurers, managed care plans and HMOs. The amounts we receive 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 our revenues and profitability. EXPANSION Our future expansion will require us to implement and integrate enhanced operational and financial systems, and additional management, operational and financial resources. Our inability to implement and integrate these systems and/or add these resources could have a material adverse effect on our results of operations and financial condition. There can be no assurance that we will be able to manage our future expanding operations effectively or maintain or accelerate our growth. Although we experienced growth in net revenues in 1999 and 2000, we sustained a substantial losses (as a result of the decline in gross margins related to price conversion difficulties encountered during the pharmacy computer system conversions, the expenses associated with such conversions, the installation of the home office computer system, the installation of the frame relay telecommunication network, and the start-up expenses associated with new pharmacy Web site, HorizonScripts.com). 15 We cannot assure you that we will not experience similar problems to those encountered in 1999 and 2000 related to expansion or that we will be able to maintain or increase net revenues. GOVERNMENT REGULATION AND HEALTHCARE REFORM 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, prescription drug sales represent a significant portion of our revenues and profits, and are a significant segment of our business. These revenues are affected by regulatory changes, including changes in programs providing for reimbursement of the cost of prescription drugs by third-party payment plans, such as government and private plans, and regulatory changes relating to the approval process for prescription drugs. REGULATION OF HOME HEALTHCARE SERVICES Our home healthcare business is subject to extensive Federal and state regulation. Changes in the law or new interpretations of existing laws could have a material adverse effect on permissible activities, the relative costs associated with doing business and the amount of reimbursement for our products and services paid by government and other third-party payors. MALPRACTICE LIABILITY The provision of retail pharmacy and home healthcare services entails an inherent risk of claims of medical and professional malpractice liability. We may be named as a defendant in such malpractice lawsuits and subject to the attendant risk of substantial damage awards. While we believe we have adequate professional and medical malpractice liability insurance coverage, there can be no assurance that we will not be sued, that any such lawsuit will not exceed our insurance coverage or that we will be able to maintain such coverage at acceptable costs and on favorable terms. COMPETITION The retail pharmacy and home healthcare businesses are highly competitive. We compete with 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, our home healthcare operations compete with larger providers of home healthcare services, including chain operations and independent single unit stores, which may have a more established presence in our markets and which may offer more extensive home healthcare services than us. Most of our competitors have financial resources that are substantially greater than ours, and we cannot assure you that we will be able to compete successfully with our competitors. GEOGRAPHIC CONCENTRATION Currently, 16 and 7 of our 47 retail pharmacies are located in Texas and New Mexico, respectively, and we plan to acquire other retail pharmacies located in such states. Consequently, our results of operations and financial condition are dependent upon general trends in the Texas and New Mexico economies and any significant healthcare legislative proposals enacted in those states. NEED FOR ADDITIONAL CAPITAL We believe that a planned reduction in our inventory and accounts receivable levels, the sale of certain underperforming stores and the refinancing or extension of our existing credit facilities will be adequate to satisfy our working capital 16 requirements for the next twelve months, although circumstances, including the acquisition of additional stores and certain alliances and/or joint ventures in e-commerce, will require that we obtain additional equity and/or long or short-term financing to realize certain business opportunities. No assurance can be made that we will be able to obtain such financing. RELIANCE ON SINGLE SUPPLIER We currently purchase approximately 80% of our inventory from McKesson, which also provides us with point-of-sale equipment, order-entry machines, shelf labels and other supplies. We believe 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 we believe we could obtain our inventory through another distributor at competitive prices and upon competitive payment terms if our relationship with McKesson were terminated, there can be no assurance that the termination of such relationship would not adversely affect our business. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY Our 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 our profitability. As a result, we believe that period-to-period comparisons of our results of operations are not and will not necessarily be meaningful and should not be relied upon as an indication of future performance. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. We are exposed to market risk from changes in interest rates on debt. Our exposure to interest rate risk currently consists of our outstanding lines of credit. The aggregate balance outstanding under the lines of credit was $17,678 at September 30, 2000. The impact on our results of operations of a one-point interest rate change on balances outstanding under the line of credit would be immaterial. This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in financial markets. 17 PART II. OTHER INFORMATION. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits
EXHIBIT NO. NAME OF EXHIBIT ----------- --------------- 27.1 Financial Data Schedule (filed electronically herewith)
(b) Reports on Form 8-K None 18 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 Delaware corporation Date: November 14, 2000 /S/Ricky D. McCord ---------------------------------- Ricky D. McCord President, Chief Executive Officer Date: November 14, 2000 /S/John N. Stogner ---------------------------------- John N. Stogner Chief Financial Officer 19 EXHIBIT LIST
EXHIBIT NO. NAME OF EXHIBIT ----------- --------------- 27.1 Financial Data Schedule (filed electronically herewith)
20 EX-27 2 a2031076zex-27.txt EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HORIZON PHARMACIES, INC. - 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 3,836 0 13,002 (696) 20,488 38,107 10,277 (2,496) 61,388 42,663 8,229 0 0 60 10,436 61,388 104,036 104,036 77,593 108,656 0 0 2,030 (6,650) 0 (6,650) 0 0 0 (6,650) (1.12) (1.12)
-----END PRIVACY-ENHANCED MESSAGE-----