-----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, HjhE4xo+lmLgi5+NjjBPBypFsUf2TJA28kcckffvqUMb4zUmtGO7p9L1BqT8iZoV Hwt+1o6UItvv82cx7FO2/Q== 0001047469-98-041336.txt : 19981123 0001047469-98-041336.hdr.sgml : 19981123 ACCESSION NUMBER: 0001047469-98-041336 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-22403 FILM NUMBER: 98752967 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 10QSB - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- UNITED STATES 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: SEPTEMBER 30, 1998 OR / / 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) DELAWARE 75-2441557 (State or other jurisdiction of (IRS Employer Identification No.) 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 November 11, Common stock, par value $.01 per 1998 share 5,562,000
Transitional Small Business Disclosure Format Yes / / No /X/ - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- FORM 10-QSB TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION................................................. 3 Condensed Consolidated Balance Sheets--December 31, 1997 and September 30, 1998 (unaudited)................................................ 3 Condensed Consolidated Statements of Operations--Three months ended September 30, 1997 and 1998 (unaudited) and nine months ended September 30, 1997 and 1998 (unaudited)............................. 4 Consolidated Statement of Shareholders' Equity--Nine months ended September 30, 1998 (unaudited)...................................... 5 Condensed Consolidated Statements of Cash Flows--Nine months ended September 30, 1997 and 1998 (unaudited)............................. 6 Notes to Condensed Consolidated Financial Statements (unaudited)...... 8 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 11 PART OTHER INFORMATION..................................................... II. 19 Changes in Securities and Use of Proceeds............................. 19 Other Information..................................................... 19 Exhibits and Reports on Form 8-K...................................... 19 SIGNATURES..................................................................... 21
2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. HORIZON PHARMACIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 1997 ------------- SEPTEMBER 30, 1998 ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 4,084 $ 2,796 Accounts receivable, net: Third-party providers................................... 2,763 4,980 Others.................................................. 1,478 2,780 Inventories............................................... 7,901 17,164 Other..................................................... 163 515 ------------- ------------- Total current assets........................................ 16,389 28,235 Property, equipment and capital lease assets: Property and equipment: Land and building....................................... 205 677 Equipment............................................... 1,453 2,875 ------------- ------------- Total................................................. 1,658 3,552 Less accumulated depreciation............................. 201 427 ------------- ------------- Property and equipment, net............................... 1,457 3,125 Equipment under capital leases, net......................... 282 246 ------------- ------------- Total property, equipment and capital lease assets, net..... 1,739 3,371 Intangibles: Noncompete covenants and customer lists................... 973 1,772 Goodwill.................................................. 1,880 7,441 ------------- ------------- 2,853 9,213 Less accumulated amortization........................... 327 593 ------------- ------------- Intangibles, net............................................ 2,526 8,620 ------------- ------------- $ 20,654 $ 40,226 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 3,670 $ 6,840 Accrued liabilities....................................... 614 1,207 Notes payable (Note 6).................................... 162 1,632 Current portion of long-term debt......................... 572 1,106 Current portion of capital leases......................... 84 99 ------------- ------------- Total current liabilities................................... 5,102 10,884 Long-term debt.............................................. 3,333 5,945 Obligations under capital leases............................ 198 139 Deferred income taxes....................................... 182 156 Shareholders' equity (Note 5): Preferred stock........................................... -- -- Common stock.............................................. 44 56 Additional paid-in capital................................ 11,517 22,013 Retained earnings......................................... 278 1,103 ------------- ------------- 11,839 23,172 Treasury stock, at cost................................... -- (70) ------------- ------------- Total shareholders' equity.................................. 11,839 23,102 ------------- ------------- $ 20,654 $ 40,226 ------------- ------------- ------------- -------------
See accompanying notes. 3 HORIZON PHARMACIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 1997 1998 1997 1998 ------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues: Prescription drugs sales.................................. $ 5,497 $ 15,329 $ 14,400 $ 37,334 Other sales and services.................................. 1,383 4,993 3,540 11,677 ------- -------- -------- -------- Total net revenues.......................................... 6,880 20,322 17,940 49,011 Costs and expenses: Cost of sales and services: Prescription drugs...................................... 3,780 10,896 9,998 26,886 Other................................................... 815 2,826 2,179 6,484 Depreciation and amortization............................. 80 230 205 560 Selling, general and administrative expenses.............. 1,979 5,732 4,869 13,476 ------- -------- -------- -------- Total costs and expenses.................................... 6,654 19,684 17,251 47,406 ------- -------- -------- -------- Income from operations...................................... 226 638 689 1,605 Other income (expense): Interest and other income................................. 27 64 25 149 Interest expense.......................................... (58) (157) (201) (395) ------- -------- -------- -------- Total other income (expense)................................ (31) (93) (176) (246) ------- -------- -------- -------- Income before provision for income taxes.................... 195 545 513 1,359 Provision for income taxes (Note 3)......................... 208 212 319 534 ------- -------- -------- -------- Net income (loss)........................................... $ (13) $ 333 $ 194 $ 825 ------- -------- -------- -------- ------- -------- -------- -------- Basic earnings per share (Note 2)........................... $ -- $ .06 $ .09 $ .17 ------- -------- -------- -------- ------- -------- -------- -------- Diluted earnings per share (Note 2)......................... $ -- $ .06 $ .09 $ .15 ------- -------- -------- -------- ------- -------- -------- --------
See accompanying notes. 4 HORIZON PHARMACIES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
COMMON STOCK ADDITIONAL TREASURY STOCK ------------------------ PAID-IN RETAINED ------------------------ SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) Balance at December 31, 1997................. 4,436 $ 44 $ 11,517 $ 278 -- $ -- Exercise of warrants......................... 33 1 130 -- -- -- Exercise of stock options.................... 116 1 463 -- -- -- Tax benefit from exercise of stock options... -- -- 50 -- -- -- Issuance of stock to acquire stores.......... 236 2 3,010 -- -- -- Issuance of stock to acquire land............ 6 -- 50 -- -- -- Issuance of stock to reduce debt............. 4 -- 45 -- -- -- Sales of common stock (net of offering costs)..................................... 737 8 6,748 -- -- -- Acquisition of treasury stock................ -- -- -- -- 6 (70) Net income................................... -- -- -- 825 -- -- -- ----- --- ----------- ----------- ----- Balance at September 30, 1998................ 5,568 $ 56 $ 22,013 $ 1,103 6 $ (70) -- -- ----- --- ----------- ----------- ----- ----- --- ----------- ----------- ----- TOTAL SHAREHOLDERS' EQUITY ------------- Balance at December 31, 1997................. $ 11,839 Exercise of warrants......................... 131 Exercise of stock options.................... 464 Tax benefit from exercise of stock options... 50 Issuance of stock to acquire stores.......... 3,012 Issuance of stock to acquire land............ 50 Issuance of stock to reduce debt............. 45 Sales of common stock (net of offering costs)..................................... 6,756 Acquisition of treasury stock................ (70) Net income................................... 825 ------------- Balance at September 30, 1998................ $ 23,102 ------------- -------------
See accompanying notes. 5 HORIZON PHARMACIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1997 1998 -------- -------- OPERATING ACTIVITIES Net income.................................................. $ 194 $ 825 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization............................. 205 560 Provision for uncollectible accounts receivable........... 7 70 Pro forma provision for income taxes...................... 111 -- Provision (credit) for deferred income taxes.............. 149 (26) Changes in operating assets and liabilities, net of acquisitions of businesses: Accounts receivable..................................... (1,439) (3,310) Inventories............................................. (769) (3,911) Other current assets.................................... (62) (352) Bank overdraft.......................................... (248) -- Accounts payable........................................ 641 3,170 Accrued liabilities..................................... 388 650 -------- -------- Total adjustments........................................... (1,017) (3,149) -------- -------- Net cash used in operating activities....................... (823) (2,324) INVESTING ACTIVITIES Purchases of property and equipment......................... (122) (810) Assets acquired for cash in acquisitions of businesses...... (806) (5,083) -------- -------- Net cash used in investing activities....................... (928) (5,893) FINANCING ACTIVITIES Borrowings (payments) on notes payable...................... (1,415) 604 Principal payments on long-term obligations................. (800) (955) Payments for deferred offering costs........................ (513) -- Issuance of common stock, net of offering costs of $345 and $192 in 1997 and 1998, respectively....................... 6,048 7,350 Purchase of treasury stock.................................. -- (70) Distributions to shareholders............................... (450) -- -------- -------- Net cash provided by financing activities................... 2,870 6,929 -------- -------- Net increase (decrease) in cash and cash equivalents........ 1,119 (1,288) Cash and cash equivalents at beginning of period............ 153 4,084 -------- -------- Cash and cash equivalents at end of period.................. $ 1,272 $ 2,796 -------- -------- -------- -------- Supplemental disclosure of interest paid.................... $ 211 $ 383
6 HORIZON PHARMACIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1997 1998 -------- -------- NONCASH INVESTING AND FINANCING ACTIVITIES Equipment leased under capital leases....................... $ 133 $ 31 Issuance of common stock to reduce long-term debt........... -- 45 Issuance of common stock to purchase land................... -- 50 Reduction of income taxes payable from exercise of stock options................................................... -- 50 Acquisitions of businesses financed by debt and common stock: Accounts receivable and other............................. 195 279 Inventories............................................... 2,375 5,353 Property and equipment.................................... 225 1,013 Intangibles............................................... 905 6,041 -------- -------- 3,700 12,686 Less cash paid............................................ (806) (5,083) -------- -------- Assets acquired........................................... $ 2,894 $ 7,603 -------- -------- -------- -------- Financed by: Notes payable............................................. $ 2,651 $ 719 Long-term debt............................................ 62 3,872 Advance by shareholder.................................... 100 -- Common stock.............................................. 81 3,012 -------- -------- $ 2,894 $ 7,603 -------- -------- -------- --------
See accompanying notes. 7 HORIZON PHARMACIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (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. (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 nine months ended September 30, 1998, are not necessarily indicative of the results to be expected for the full year ending December 31, 1998. The Company's revenues 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 and nine month periods ended September 30, 1997 and 1998. NOTE 2 Common shares used in the calculation of basic and diluted earnings per share for the three months and nine months ended September 30, 1997 totaled 3,515,789 and 2,261,285, respectively. Weighted average common shares outstanding used in the calculation of basic earnings per share for the three months and nine months ended September 30, 1998 totaled 5,491,023 and 4,888,251, respectively. Common shares used in the calculation of diluted earnings per share for the three months and nine months ended September 30, 1998 were 5,758,417 and 5,458,879, respectively. The difference in the number of shares for 1998 is attributable to dilutive stock options and warrants. 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 pro forma provisions for income taxes included in the accompanying statements of operations for periods prior to July 1997 are based on an estimated effective tax rate of 35% presented as if the Company was required to pay income taxes in the periods presented. The income tax provisions for the three and nine month periods ended September 30, 1998 are based on an estimated actual tax rate of 39%. The financial statements for the three months and nine months ended September 30, 1997 include a provision (non-recurring) for deferred income taxes, resulting from a change in S corporation status related to the tax effect of cumulative temporary differences in financial and tax bases of net assets of $149 as of the date of completion of the Offering. NOTE 4 At September 30, 1998, the Company operated 41 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 8 HORIZON PHARMACIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) NOTE 4 (CONTINUED) inventory supplier. A summary of acquisitions for the nine months ended September 30, 1997 and 1998 follows:
ASSETS ACQUIRED ------------------------------------------------- ACCOUNTS RECEIVABLE STORES PURCHASE AND DEBT COMMON STOCK NINE MONTHS ENDED SEPTEMBER 30 ACQUIRED PRICE INVENTORIES INTANGIBLES EQUIPMENT INCURRED ISSUED - - ----------------------------------- -------- --------- ------------ ------------ ---------- --------- ------------- 1997............................... 8 $ 3,700 $ 2,375 $ 905 $ 420 $ 2,813 $ 81 1998............................... 15 12,686 5,353 6,041 1,292 4,591 3,012
The following unaudited pro forma results of operations data give effect to the acquisitions completed during the nine month periods ended September 30, 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.
NINE MONTHS ENDED SEPTEMBER 30, ---------------- 1997 1998 ------- ------- Unaudited pro forma information: Net revenues.................................... $60,077 $64,857 Net income...................................... 1,150 1,167 Basic earnings per share........................ .28 .24 Diluted earnings per share...................... .28 .21
In October and November 1998, the Company acquired from third parties in purchase transactions four retail pharmacies and one home medical equipment operation. The total purchase price of $4,008 has been preliminarily allocated to inventories ($2,219), property and equipment ($287), intangibles ($1,309) and accounts receivable and other ($193). The purchases were financed by the issuance of shares of common stock (valued at $410), notes payable ($1,033) and cash ($2,565). NOTE 5 On June 16, 1998, the Company closed a private placement of 736,838 shares of Common Stock and warrants to purchase 41,000 shares of Common Stock. In connection with the private placement, the Company paid a finder's fee of $150 and other expenses of approximately $42. In October 1998, the Company registered these shares (as well as 32,750 additional shares of Common Stock) pursuant to two Registration Statements on Form S-3. 9 HORIZON PHARMACIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) NOTE 6 On July 2, 1998 the Company entered into a Credit Agreement with its primary supplier pursuant to which the supplier will provide the Company with a revolving loan facility up to $15,000 and a term loan of $3,000 for general corporate purposes and acquisitions. Availability of the revolving loan facility is subject to borrowing base requirements and compliance with loan covenants. As of September 30, 1998, the Company had borrowed $1,500 under the revolver. 10 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 and nine months ended September 30, 1998 and compares those results to the comparable periods 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 shares of the Company's common stock, par value $.01 per share (the "Common Stock"). During the nine months ended September 30, 1997 and 1998, the Company acquired eight and 15 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 September 30, 1998, the Company has acquired four retail pharmacies located in Denison, Texas; Santa Fe, New Mexico; Sandwich, Illinois and Yorkville, Illinois. In addition the Company acquired a home medical equipment operation in Mineola, Texas. Currently, the Company's primary source of revenue is the sale of prescription drugs. During the three months ended September 30, 1997 and September 30, 1998, sales of prescription drugs generated 79.9% and 75.4% respectively of the Company's net revenues; during the nine months ended September 30, 1997 and 1998, prescription drugs generated 80.3% and 76.2% respectively of net revenues. Management expects the Company's 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, the Company anticipates that such sales will decrease as a percentage of the Company's total revenues 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 revenues 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, revenues and profits are typically highest in the fourth quarter and the first quarter of the ensuing year. 11 RESULTS OF OPERATIONS The following table sets forth the percentage relationship of certain income statement data for the periods indicated:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- --------------- 1997 1998 1997 1998 ------- ------ ------ ------ INCOME STATEMENT DATA NET REVENUES: Prescription drugs sales................... 79.9% 75.4% 80.3% 76.2% Other sales and services................... 20.1% 24.6% 19.7% 23.8% ------- ------ ------ ------ Total net revenues....................... 100.0% 100.0% 100.0% 100.0% COSTS AND EXPENSES: Cost of sales--prescription drugs(1)....... 68.8% 71.1% 69.4% 72.0% Cost of sales--other(2).................... 58.9% 56.6% 61.6% 55.5% Selling, general and administrative expenses(3).............................. 28.8% 28.2% 27.1% 27.5% Depreciation and amortization(3)........... 1.2% 1.1% 1.1% 1.1% Interest expense net(3).................... .5% .5% 1.0% .5% Income before provision for income taxes(3)................................. 2.8% 2.7% 2.9% 2.8% Net income (loss) (3)...................... (.2)% 1.6% 1.1% 1.7%
- - ------------------------ (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 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 REVENUES The Company's total net revenues increased $13,442,442 or 195% to $20,322,128 for the three months ended September 30, 1998 compared to $6,879,686 for the three months ended September 30, 1997. The increase was attributable primarily to the increase of 138% in store operating months from 48 in the third quarter of 1997 to 114 in the third quarter of 1998. For the nine months ended September 30, 1998, the Company's total net revenue increased $31,071,575 or 173% to $49,011,320 compared to $17,939,745 for the nine months ended September 30, 1997. Operating store months increased 125% to 284 in the nine months ended September 30, 1998 as compared to 126 in the nine months ended September 30, 1997. 12 The following tables show the Company's prescription drug gross margins and total revenues margins for the three and nine months ended September 30, 1997 and 1998:
GROSS MARGINS ON GROSS MARGINS ON PRESCRIPTION DRUG SALES TOTAL REVENUES -------------------------- -------------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE ------------- ----------- ------------- ----------- THREE MONTHS ENDED SEPTEMBER 30, 1998..................................... $ 4,433,132 28.9% $ 6,599,705 32.5% 1997..................................... $ 1,716,525 31.2% $ 2,284,997 33.2% NINE MONTHS ENDED SEPTEMBER 30, 1998..................................... $ 10,448,179 28.0% $ 15,640,928 31.9% 1997..................................... $ 4,401,605 30.6% $ 5,762,472 32.1%
The decrease in the gross margin on prescription drug sales and on total revenues 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 79.9% of total revenues for the three months ended September 30, 1997 to 75.4% of total revenues for three months ended September 30, 1998. For the nine months ended September 30, 1998, sales of prescription drugs decreased to 76.2% of total revenues as compared to 80.3% for the nine months ended September 30, 1997. The Company expects that prescription drug sales 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 increased from $6,507,451 in the third quarter of 1997 to $7,411,288 in the third quarter of 1998, an increase of 13.9%. Same store sales for the nine month period increased from $17,253,463 in 1997 to $19,610,071 in 1998, an increase of 13.7%. Management believes that the increases are primarily the result of increased advertising and promotions as well as an enhanced product mix. COSTS AND EXPENSES Cost of sales increased $9,127,734 or 199%, from $4,594,689 in the three months ended September 30, 1997 compared to $13,722,423 in the three months ended September 30, 1998. For the nine month period cost of sales increased $21,193,119 or 174% from $12,177,273 in 1997 to $33,370,392 in 1998. These increases are primarily the result of increased sales volume resulting from the increased number of store operating months. Cost of sales as a percentage of total net revenues increased 0.7% from 66.8% in the three months ended September 30, 1997 to 67.5% in the three months ended September 30, 1998. For the nine month period cost of sales as a percentage of net revenues increased 0.2% from 67.9% in 1997 to 68.1% in 1998. These increases are primarily the result of increases in third party prescriptions, partially 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 $1,978,932 in the three months ended September 30, 1997 to $5,731,517 in the three months ended September 30, 1998. Such expenses, expressed as a percentage of net revenues, were 28.8% and 28.2% for the three months ended September 30, 1997 and 1998, respectively. For the nine month period selling, general and administrative expenses increased from $4,868,718 in 1997 to $13,475,575 in 1998. Such expenses expressed as a percentage of net revenues, were 27.1% and 27.5% for the nine months ended September 30, 1997 and 1998, respectively. The amount of selling, general and administrative expenses in both the three and nine month periods increased primarily from the increase in the number of stores and store operating months. The percentage decrease of 0.6% in the three months ended September 30, 1998 as compared to the same period in 1997 is 13 primarily the result of certain operating efficiencies attained through higher revenues generated by acquisitions and increased same store sales. The increase of 0.4% in the nine month period ended September 30, 1998 as compared to the same period in 1997 is primarily the result of costs incurred in connection with an increase in personnel costs to handle additional acquisitions and higher personnel costs associated with non-pharmaceutical sales and services. Interest expense was $57,835 in the third quarter of 1997 compared to $157,272 during the third quarter of 1998. For the nine month period interest expense increased from $200,748 in 1997 to $394,513 in 1998. The increase in interest expense resulted primarily from the increase in the Company's indebtedness associated with the Company's acquisitions. Interest and other income was $26,825 in the third quarter of 1997 compared to $64,433 in the third quarter of 1998. For the nine month period interest and other income increased from $25,393 in 1997 to $148,531 in 1998. EARNINGS Net income for the three months ended September 30, increased $346,093 from a loss of ($13,314) in 1997 to a profit of $332,779 in 1998. For the nine months ended September 30, net income increased $630,837 or 325% from $194,142 in 1997 to $824,979 in 1998. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities for the nine months ended September 30, 1998 was $2,324,874 as compared to net cash used of $823,275 for the nine months ended September 30, 1997. Increases in accounts receivable and inventories, due principally to the increase in number of stores owned which were partially offset by an increase in accounts payable and net income, were the primary reasons for the increased usage of cash. Net cash used in investing activities was $928,576 and $5,893,144 for the nine months ended September 30, 1997 and 1998, respectively. The principal cause of this difference was the increase in the number of stores acquired by the Company during the nine months ended September 30, 1998. Management expects that seller-financing of acquisitions, the proceeds of the private placement which closed June 16, 1998 and the Company's credit facilities 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. Additionally, management is in the process of testing and evaluating point-of-sale ("POS") systems which will be installed in all the Company's retail locations during the next six to nine months. It is estimated that the POS system will enable the Company to more closely monitor pricing, inventory turns and promotions of nonpharmaceutical merchandise in the stores. The POS system will cost between $25,000 and $30,000 per location depending on the number of terminals installed. The Company expects to finance the POS system with capital leases. YEAR 2000 DESCRIPTION. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that 14 have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations which could disrupt the Company's normal business activities. The Company has completed its assessment of its software and hardware systems and has identified which of its information technology ("IT") systems, both operational and financial, could be significantly affected by the Year 2000 issue. The Company has determined that some existing software applications will need to be modified or replaced. Modifications to and/or replacement of certain existing software and systems are expected to be completed well in advance of 2000, although the Company has not yet begun its remediation efforts nor incurred any costs to make its IT systems Year 2000 compliant. At the present time, the Company is also continuing its assessment of its non-information technology ("Non-IT") systems which it expects to complete before June 30, 1999. In addition, the Company is in the process of gathering information and assurances from its key third party business partners with whom it has significant systems interfaces including but not limited to its primary supplier, the vendor of its pharmacy computers and the vendor of its accounting software system, regarding the status of their compliance with the Year 2000 issue. To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity or capital resources. The Company expects the cost to make such systems Year 2000 compliant to be between $20,000 and $50,000. The Company intends to develop a more detailed contingency plan during 1999 as more information is obtained from its key third party business partners. The failure to identify and correct material Year 2000 issues by the Company and/or certain key third party business partners could result in the interruption and/or failure of certain critical business operations. Such interruption and/or failure could materially and adversely affect the Company's results of operation, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the readiness of key third party distributors, IT suppliers, third party insurance plans, state and Federal insurance programs and financial institutions, the Company is unable to determine, at this time, whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Company does expect that its Year 2000 compliance audit of key third party business partners and its development of a contingency plan will significantly reduce the Company's level of uncertainty. The Company expects to complete its evaluation of the Year 2000 compliance and readiness of its key third party business partners with whom it has significant system interfaces early in 1999 and with all key third party business partners by June 30, 1999. 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 15 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. 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, 16 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, 19 of the Company's 45 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 and other related businesses, 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 private placement which closed in June 1998, combined with operating revenues and the Company's credit facilities available through McKesson Corporation ("McKesson") will be adequate to satisfy its capital requirements for the next 12 months, circumstances, including the acquisition of additional stores, may require the Company to obtain long or short-term financing to realize certain business opportunities. No assurance can be made that such financing will be obtained. RELIANCE ON SINGLE SUPPLIER. The Company has entered into a Supply Agreement with McKesson pursuant to which the Company agreed to purchase a substantial portion of its pharmaceutical and non-pharmaceutical inventory from McKesson. McKesson also provides the Company with order entry machines, shelf labels and other supplies used in connection with the Company's purchase and sale of such inventory. The Company believes that the wholesale pharmaceutical and non-pharmaceutical distribution industry is highly competitive because of the consolidation of the retail pharmacy industry and the practice of certain large retail pharmacy chains to purchase directly from product manufacturers. Although the Company believes that it could obtain its inventory through another similar distributor at competitive prices and upon competitive payment terms in the event its relationship with McKesson was terminated, there can be no assurance that the termination of such relationship would not adversely affect the Company's business. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company's results of operations depend significantly upon the net sales generated during the first and fourth quarters, and any decrease in net sales for such periods could have a material adverse effect upon the Company's profitability. As a result, the Company believes that period-to-period comparisons of its results of operations are not and will not necessarily be meaningful, and should not be relied upon as an indication of future performance. 17 PART II--OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS RECENT SALES OF UNREGISTERED SECURITIES. On July 18, 1998 the Company issued to a corporation 37,623 unregistered shares of Common Stock in partial consideration of its acquisition of a retail pharmacy in Kansas City Missouri. On July 26, 1998 the Company issued to three corporations 11,388, 18,061 and 55321 unregistered shares of Common Stock in partial consideration of three pharmacies acquired in Houston, Texas. On July 31, 1998 the Company issued 12,682 unregistered shares of its Common Stock in partial consideration of its acquisition of a retail pharmacy in Blair, Nebraska. On August 6, 1998 the Company issued to two corporations 13,019 and 3,297 unregistered shares of Common Stock in partial consideration of its acquisition of a retail pharmacy and home medical equipment operation in Borger, Texas. On August 15, 1998 the Company issued to a corporation 8,854 unregistered shares of common stock in partial consideration of its acquisition of a retail pharmacy in Douglas, Wyoming. On October 31, 1998 the Company issued to a corporation 13,913 unregistered shares of Common Stock in partial consideration of its acquisition of a retail pharmacy in Santa Fe, New Mexico. On November 8, 1998 the Company issued 41,710 shares of unregistered Common Stock in partial consideration of its acquisition of two retail pharmacies in Sandwich and Yorkville, Illinois. 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. ITEM 5. OTHER INFORMATION. ACQUISITIONS. During the period from June 30, 1998 to the date of filing of this Report, the Company acquired twelve retail pharmacies, one closed door pharmacy and three home medical equipment operations as described below:
DATE OF ACQUISITION PHARMACY NAME STATE - - ----------- ------------------------------------------------------------ -------- 7/12/98 Frederich Hallmark Pharmacy Company d/b/a Good Neighbor Pharmacy Missouri 7/24/98 Martin Drug Corporation d/b/a Interurban Pharmacy Texas 7/25/98 Carlen Corporation d/b/a Briargrove Pharmacy Texas 7/26/98 Stirniminn, Inc. d/b/a Kirkwood Pharmacy Texas 7/31/98 CCB Consulting, Inc. d/b/a Barr Pharmacy, Blair Medical Supply, Barr Long Term Care Pharmacy Nebraska 8/6/98 Borger Pharmacy, Inc. d/b/a Moore's Pharmacy and Moore's Home Health Care, Inc. Texas 8/15/98 Randolph A. and Diane M. Harrop d/b/a R-D Pharmacy & Books Wyoming 9/1/98 R.E. Drugs, Inc. d/b/a Alton Drugs Illinois 9/29/98 John F. Jackson d/b/a Jackson Medical Equipment Texas 10/29/98 Barrett Grocery Company, Inc. d/b/a Barrett Drug Texas 10/31/98 R & R Professional Pharmacy, Inc. New Mexico 11/8/98 Holland's Drug Store, Inc. d/b/a Holland's Drug-Yorkville Illinois 11/8/98 Holland's Drug Store, Inc. d/b/a Holland's Drug- Sandwich Illinois
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits
EXHIBIT NO. NAME OF EXHIBIT - - ------------- --------------------------- 27.1 Financial Data Schedule
(b) Reports on Form 8-K 18 During the three months ended September 30, 1998, the Company filed the following Current Reports on Form 8-K:
FINANCIAL STATEMENTS REPORT DATE DATE FILED ITEM REPORTED FILED - - ----------- ----------- ---------------------------------------------------------------------------- ------------- 7/2/98 8/4/98 Item 5. Other Events--Credit Agreement entered into between the Company and McKesson Corporation N/A 7/24/98 8/7/98 Item 2. Acquisition of Assets of Martin Drug Corporation d/b/a Interurban Pharmacy, Carlen Corporation d/b/a Briargrove Pharmacy and Stirniminn, Inc. d/b/a Kirkwood Pharmacy (1) 7/31/98 8/6/98 Item 2. Acquisition of Assets of CCB Consulting, Inc. d/b/a Barr Pharmacy, Barr Medical Supply and Barr Long Term Care Pharmacy (2) 5/30/98 8/14/98 Item 7. Financial Statements for Graham's Pharmacy and Home Health Center, Inc. filed on Form 8-K/A 8/6/98 8/21/98 Item 2. Acquisition of Assets of Borger Pharmacy, Inc. d/b/a Moore's Pharmacy and Moore's Home Health Center, Inc. (3) 7/2/98 8/31/98 Item 5. Other Events--Second Amendment to Credit Agreement N/A 8/15/98 9/9/98 Item 2. Acquisition of Assets of Randolph A. Harrop and Diane M. Harrop d/b/a R-D Pharmacy & Books (4)
- - ------------------------ (1) Filed by amendment on October 7, 1998. (2) Filed by amendment on October 14, 1998. (3) Filed by amendment on October 20, 1998. (4) Filed by amendment on October 28, 1998. 19 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 13, 1998 By: /s/ RICKY D. MCCORD ----------------------------------------- Ricky D. McCord PRESIDENT, CHIEF EXECUTIVE OFFICER Date: November 13, 1998 By: /s/ JOHN N. STOGNER ----------------------------------------- John N. Stogner CHIEF FINANCIAL OFFICER 20 EX-27 2 EXHIBIT 27 FDS
5 1,000 3-MOS DEC-31-1998 JUL-07-1998 SEP-30-1998 2,796 0 7,760 0 17,164 28,235 3,552 427 40,226 10,884 0 0 0 56 23,046 40,226 20,322 20,322 13,722 13,722 5,962 0 157 545 212 333 0 0 0 333 .06 .06
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