<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission File Number 333-25257
HORIZON Pharmacies, Inc.
(Exact name of small business issuer as specified in its charter)
TEXAS 75-2441557
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
275 W. Princeton Drive
Princeton, Texas 75407
(Address of principal executive offices)
(972) 736-2424
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [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 13, 1997
Common stock, par value $.01 per share 2,952,023
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 3
Balance Sheets - December 31, 1996 and September 30, 1997
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Income - Three months ended September 30, 1996
and 1997 (unaudited) and nine months ended September 30, 1996
and 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . 5
Statement of Shareholders' Equity - Nine months ended
September 30, 1997 (unaudited) . . . . . . . . . . . . . . . . 6
Statements of Cash Flows - Nine months ended September 30, 1996
and 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . 7
Notes to Financial Statements (unaudited) . . . . . . . . . . . . . 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . .13
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . .20
Other Information . . . . . . . . . . . . . . . . . . . . . . . . .20
Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . .20
SIGNATURES. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HORIZON PHARMACIES, INC.
BALANCE SHEETS
December 31, September 30,
1996 1997
-------------- -------------
ASSETS (Unaudited)
Current assets:
Cash $ 153,260 $ 1,271,910
Accounts receivable, net:
Third-party providers 1,047,348 2,266,155
Others 412,709 821,540
Inventories, at the lower of specific
identification cost or market 3,290,717 6,435,162
Prepaid expenses 31,071 93,231
------------- ------------
Total current assets 4,935,105 10,887,998
Property, equipment and capital lease assets:
Property and equipment, at cost:
Land and building 203,220 204,389
Equipment 410,162 763,843
------------- ------------
613,382 968,232
Less accumulated depreciation 67,253 131,296
------------- ------------
Property and equipment, net 546,129 836,936
Equipment under capital leases, net 124,455 231,623
------------- ------------
Property, equipment and capital lease assets, net 670,584 1,068,559
Intangibles, at cost:
Noncompete covenants 146,788 301,788
Customer lists 211,605 389,646
Goodwill 814,107 1,385,566
------------- ------------
1,172,500 2,077,000
Less accumulated amortization 189,417 295,250
------------- ------------
Intangibles, net 983,083 1,781,750
------------- ------------
$ 6,588,772 $ 13,738,307
------------- ------------
------------- ------------
(Continued on next page)
3
<PAGE>
HORIZON PHARMACIES, INC.
BALANCE SHEETS
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- -------------
(Unaudited)
Current liabilities:
Bank overdraft $ 247,759 $ --
Accounts payable 1,491,789 2,132,298
Accrued liabilities 161,365 490,319
Income taxes payable -- 59,291
Notes payable:
Supplier 1,215,000 --
Other -- 346,612
Current portion of long-term obligations 256,159 574,827
------------- ------------
Total current liabilities 3,372,072 3,603,347
Long-term debt 1,363,858 2,601,570
Obligations under capital leases 102,769 162,526
Deferred income taxes -- 149,000
Shareholders' equity:
Preferred stock, $.01 par value, authorized
1,000,000 shares; none issued
Common stock, $.01 par value, authorized
14,000,000 shares; issued 1,082,424 shares in
1996 and 2,472,580 shares in 1997 10,824 24,726
Additional paid-in capital 1,760,303 7,061,452
Retained earnings (accumulated deficit) (21,054) 135,686
------------- ------------
Total shareholders' equity 1,750,073 7,221,864
------------- ------------
$ 6,588,772 $ 13,738,307
------------- ------------
------------- ------------
See accompanying notes.
4
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Prescription drugs $ 2,924,802 $ 5,496,385 $ 7,295,741 $ 14,399,535
Other 630,622 1,383,301 1,446,316 3,540,210
------------ ------------ ------------ ------------
Total net sales 3,555,424 6,879,686 8,742,057 17,939,745
Cost of sales:
Prescription drugs 1,950,669 3,779,860 4,821,718 9,997,930
Other 426,355 814,829 1,062,759 2,179,343
------------ ------------ ------------ ------------
Total cost of sales 2,377,024 4,594,689 5,884,477 12,177,273
Depreciation and amortization 47,028 80,078 116,739 204,966
Selling, general and administrative expenses 991,613 1,978,932 2,314,815 4,868,718
------------ ------------ ------------ ------------
Total costs and expenses 1,038,641 2,059,010 2,431,554 5,073,684
------------ ------------ ------------ ------------
Income from operations 139,759 225,987 426,026 688,788
Other income (expense):
Interest and other income 783 26,825 3,722 25,393
Interest expense (71,079) (57,835) (167,203) (200,748)
------------ ------------ ------------ ------------
Total other income (expense) (70,296) (31,010) (163,481) (175,355)
------------ ------------ ------------ ------------
Income before provision
for income taxes 69,463 194,977 262,545 513,433
Provision for income taxes:
Current -- 59,291 -- 59,291
Deferred -- 149,000 -- 149,000
Pro forma 24,000 -- 92,000 111,000
------------ ------------ ------------ ------------
24,000 208,291 92,000 319,291
------------ ------------ ------------ ------------
Net income (loss) $ 45,463 $ (13,314) $ 170,545 $ 194,142
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) per share $ .04 $ (.01) $ .16 $ .13
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding 1,068,413 2,388,508 1,062,591 1,547,510
</TABLE>
See accompanying notes.
5
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK RETAINED EARNINGS
------------------------ ADDITIONAL (ACCUMULATED TOTAL
SHARES AMOUNT PAID-IN CAPITAL DEFICIT) SHAREHOLDERS' EQUITY
--------- ---------- --------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 1,082,424 $10,824 $1,760,303 $(21,054) $1,750,073
Sales of common stock (unaudited):
Initial public offering 1,380,000 13,800 5,521,601 -- 5,535,401
Acquisition 10,156 102 81,146 -- 81,248
Net income, exclusive of pro forma
provision for income taxes of
$111,000 (unaudited) -- -- -- 305,142 305,142
Distributions to shareholders
(unaudited) -- -- -- (450,000) (450,000)
Reclassification of net undistributed
losses as a result of termination
of S status (unaudited) -- -- (301,598) 301,598 --
--------- ---------- --------------- ----------------- --------------------
Balance at September 30, 1997
(unaudited) 2,472,580 $24,726 $7,061,452 $135,686 $7,221,864
--------- ---------- --------------- ----------------- --------------------
--------- ---------- --------------- ----------------- --------------------
</TABLE>
See accompanying notes.
6
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 170,545 $ 194,142
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of property,
equipment and capital lease assets 46,351 99,133
Amortization of intangibles 70,388 105,833
Provision for uncollectible accounts receivable -- 7,193
Provision for deferred income taxes -- 149,000
Pro forma provision for income taxes 92,000 111,000
Changes in operating assets and liabilities,
net of acquisitions of businesses:
Accounts receivable (489,441) (1,439,248)
Inventories (909,596) (769,163)
Prepaid expenses 8,068 (62,160)
Bank overdraft (130,830) (247,759)
Accounts payable 917,291 640,509
Accrued liabilities 59,992 328,954
Income taxes payable -- 59,291
------------- ---------------
Total adjustments (335,777) (1,017,417)
------------- ---------------
Net cash used in operating activities (165,232) (823,275)
INVESTING ACTIVITIES
Purchases of property and equipment (12,349) (122,326)
Proceeds from sales of property and equipment 5,557 --
Assets acquired for cash in acquisitions of businesses -- (806,250)
------------- ---------------
Net cash used in investing activities (6,792) (928,576)
FINANCING ACTIVITIES
Borrowings on notes payable 450,000 --
Principal payments on notes payable -- (1,415,000)
Principal payments on long-term obligations (345,128) (799,900)
Payments for deferred offering costs -- (512,599)
Proceeds from sales of stock 332,120 6,048,000
</TABLE>
(Continued on next page)
7
<PAGE>
HORIZON PHARMACIES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
Distributions to shareholders $ (180,500) $ (450,000)
------------- ---------------
Net cash provided by financing activities 256,492 2,870,501
------------- ---------------
Net increase in cash 84,468 1,118,650
Cash at beginning of period 135,633 153,260
------------- ---------------
Cash at end of period $ 220,101 $1,271,910
------------- ---------------
------------- ---------------
Supplemental disclosure of interest paid $ 182,203 $ 210,749
NONCASH INVESTING AND FINANCING ACTIVITIES
Additions to property and equipment for
long-term debt $ 150,000 $ 16,381
Equipment leased under capital leases 28,617 133,401
Acquisitions of businesses financed by debt:
Accounts receivable and other $ (59) $ 195,583
Inventories 823,049 2,375,282
Property and equipment 85,000 225,000
Intangibles 165,000 904,500
------------- ---------------
1,072,990 3,700,365
Less cash paid -- (806,250)
------------- ---------------
Assets acquired $1,072,990 $2,894,115
------------- ---------------
------------- ---------------
Financed by:
Notes payable $ 250,000 $2,650,454
Advance by shareholder -- 100,000
Long-term debt 822,990 62,413
Common stock -- 81,248
------------- ---------------
$1,072,990 $2,894,115
------------- ---------------
------------- ---------------
</TABLE>
See accompanying notes.
8
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1
The unaudited financial statements include all adjustments, consisting of
normal, recurring accruals, which HORIZON Pharmacies, Inc. (the "Company")
considers necessary for a fair presentation of the financial position and the
results of operations for the indicated periods. The notes to the financial
statements should be read in conjunction with the notes to the financial
statements contained in the Company's Registration Statement on Form SB-2, as
amended, for the year ended December 31, 1996 related to the Company's
initial public offering (the "Offering") (Note 5). The results of operations
for the nine months ended September 30, 1997, are not necessarily indicative
of the results to be expected for the full year ending December 31, 1997.
The Company's sales and earnings are higher during peak holiday periods and
from Christmas through Easter (the first and fourth quarters of the calendar
year). Estimated gross profit rates were used to determine costs of sales for
the three months and the nine months ended September 30, 1997 and 1996.
NOTE 2
In addition to the expansion capital available from the proceeds of the
Offering and the private placement (Note 5), the Company has obtained a
commitment for a $2,000,000 credit facility from Bank One, Texas, N.A. The
terms of the facility include restrictive covenants such as financial ratio
requirements. Management believes the Company's operations will not be
adversely impacted by these restrictive covenants. No funds have been
borrowed under this credit facility.
NOTE 3
Net income per share is based upon the weighted average number of shares
of common stock and dilutive common stock equivalent shares outstanding
during each period.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings Per Share", which is required to be adopted by the Company
in the reporting period ending December 31, 1997. At the time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options
will be excluded. The Company has determined that the impact of SFAS 128 on
the calculation of earnings per share for the three months and nine months
ended September 30, 1997 and 1996 would not be material.
NOTE 4
Prior to completion of 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.
9
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(continued)
The pro forma provisions for income taxes included in the accompanying
statements of income for periods prior to July 11, 1997 are based on an
estimated effective tax rate of 35% and are presented as though the Company
was required to pay income taxes in the periods presented.
The financial statements for the three months 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 $149,000 as of July 11, 1997.
NOTE 5
In April 1997, the Board of Directors of the Company approved a
two-for-one split of the Company's common stock. The split and an amendment
to the Company's articles of incorporation to change the authorized
capitalization from 1,000,000 shares of $1 par common stock to 14,000,000
shares of $.01 par common stock and 1,000,000 shares of $.01 par preferred
stock were approved by the shareholders on May 31, 1997. The Board of
Directors has the authority to issue preferred stock in one or more classes
or series and to fix from time to time the number of shares to be included in
each such class or series and the designations, preferences, qualifications,
limitations, restrictions and rights of the shares of each such class or
series. The effects of the stock split and recapitalization have been
reflected retroactively in the accompanying financial statements.
On July 11, 1997, the Company completed the Offering pursuant to which
1,380,000 shares of common stock were sold at $5.00 per share. The proceeds
of the Offering, after deducting the underwriting discount and offering
expenses, were $5,535,401. A portion of the proceeds (approximately
$1,575,000) was used to repay certain notes payable and long-term
debt (approximately $800,000) to acquire pharmacies (Note 7) and ($300,000)
to pay distributions to shareholders.
In October 1997, the Company completed a private placement of 465,000
shares of common stock at $10.08 per share. The proceeds of the private
placement, after deducting brokers' fees, were approximately $4,300,000. The
proceeds are expected to be used in connection with the acquisition of
additional pharmacies.
In connection with the Offering and the private placement, the Company
has agreed to sell warrants to purchase an aggregate 158,000 shares of common
stock (138,000 shares at $6 per share and 20,000 shares at $10.08 per share).
At September 30, 1997, 158,000 shares of common stock have been reserved for
issuance upon exercise of these warrants.
On November 6, 1997, the Board of Directors of the Company approved a
three-for-two stock split in the form of a stock dividend. Holders of record
of the Company's common stock, at the close of business on November 21, 1997
(the "Record Date"), will receive one additional share of common stock for
each two shares held on the Record Date. The stock dividend will be
distributed November 24, 1997. The stock split will increase the number of
shares of common stock outstanding from approximately 2.9 million to
approximately 4.4 million.
10
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 6
In March 1997, the Board of Directors approved the 1997 Stock Option Plan
(the "Plan"). The Plan was amended by the Board of Directors and was approved
by the shareholders on May 31, 1997. Under the Plan, options for up to
246,242 shares of common stock may be granted until March 2007 to key
employees and directors at prices as specified in the Plan on the dates the
options are granted. Except as provided in the option agreements, options are
exercisable at any time during a ten-year term. Options for 246,242 shares
were granted by the Company in July 1997 and became exercisable in October
1997.
NOTE 7
At September 30, 1997, the Company operates 19 free-standing retail
pharmacies, all of which were acquired from third parties in purchase
transactions beginning February 27, 1994. Such acquisitions have each been
structured as asset purchases and generally have included inventories, store
fixtures and the assumption of store operating lease arrangements. The
acquisitions generally have been financed by debt to the sellers and/or an
inventory supplier. A summary of acquisitions for the nine months ended
September 30, 1996 and 1997 follows:
<TABLE>
<CAPTION>
Assets Acquired
---------------------------------------
Accounts
Nine Months Receivable
ended Stores Purchase and Debt
September 30 Operations Price Inventories Intangibles Equipment Incurred
- ------------ ---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996 2 $1,072,990 $ 823,049 $165,000 $ 84,941 $1,072,990
1997 8 3,700,365 2,378,928 904,500 416,937 2,812,867
</TABLE>
The following unaudited pro forma results of operations data gives
effect to the acquisitions completed during the nine months ended September
30, 1996 and 1997 as if the transactions had been consummated as of January
1, 1996 and 1997. The unaudited pro forma results of operations data is
presented for illustrative purposes and is not necessarily indicative of the
actual results that would have occurred had the acquisitions been consummated
as of January 1, 1996 or 1997, respectively, or of future results of
operations. The data reflects adjustments for amortization of intangibles
resulting from the purchases, incremental interest expense resulting from
borrowings to fund the acquisitions, reductions in employee benefits and rent
expense and income taxes.
Nine Months ended September 30,
-------------------------------
1996 1997
---- ----
Unaudited pro forma information:
Net sales $ 10,988,476 $24,532,455
Net income $ 279,703 $ 284,765
Net income per share $ .26 $ .18
11
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(continued)
In October and November 1997, the Company acquired from third parties
three retail pharmacies in purchase transactions. The total purchase price of
$967,106 has been preliminarily allocated to inventories ($502,553), property
and equipment ($72,900), intangibles ($300,000) and accounts receivable and
equipment ($91,653). The purchases were financed by the issuance of 8.0% to
8.5% notes payable to the sellers for $ 467,092, an aggregate 14,443 shares
of common stock (valued at $185,014) and cash of $315,000. The notes to the
sellers are secured by the assets acquired and are due in monthly
installments from 12 to 84 months.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion and analysis reviews the operating results of the
Company for the three months and the nine months ended September 30, 1997 and
compares those results to the comparable periods of 1996. Certain statements
contained in this discussion are not based on historical facts, but are
forward-looking statements that are based upon numerous assumptions about future
conditions which may ultimately prove to be inaccurate and actual events and
results may materially differ from anticipated results described in such
statements. The Company's ability to achieve such results is subject to certain
risks and uncertainties, such as those inherent generally in the retail pharmacy
industry and the impact of competition, pricing and changing market conditions.
The Company disclaims, however, any intent or obligation to update these
forward-looking statements. As a result, the reader is cautioned not to place
reliance on these forward-looking statements.
The Company's principal business strategy since commencing operations in
1994 has been to establish a chain of retail pharmacies through the acquisition
of free standing full-line retail pharmacies. In evaluating a retail pharmacy
for potential acquisition, the Company (i) evaluates the target store's profits
and losses for preceding years; (ii) reviews the store's income tax returns for
preceding years; (iii) reviews computer-generated prescription reports showing
historical information including prescriptions sold, average price of each
prescription, gross margins and trends in prescription sales; (iv) analyzes the
store's location and competition in the immediate area; (v) reviews the store's
lease agreement, if any; and (vi) assesses targeted areas for growth patterns
and trends. Based on the Company's analysis of the foregoing items, the Company
prepares an offer to purchase the particular store. To assess the reasonableness
of the purchase price offered by a seller, the Company considers the anticipated
rate of return, payback period and the availability and terms of seller
financing, it being generally desired that 50% of the purchase price be
seller-financed with the balance split between cash and other consideration such
as Company stock.
During the nine months ended September 30, 1996 and 1997, the Company
acquired two and eight 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, 1997, the Company has acquired three more retail
pharmacies located in Canon City, Colorado, Raton, New Mexico, and Lockhart,
Texas, respectively. The financial information for these three stores is not
included in the financial statements presented in this Quarterly Report on Form
10-QSB.
Currently, the Company's primary source of revenue is the sale of
prescription drugs. During the nine months ended September 30, 1996, sales of
prescription drugs generated 83.5% of the Company's net sales; during the nine
months ended September 30, 1997, prescription drugs generated 80.3% of net
sales. Management expects the Company's prescription drug business to increase
on an annual basis as a result of the demographic trends towards an aging
population and the continued development of new pharmaceutical products.
However, the Company anticipates that such sales will decrease as a percentage
of the Company's overall sales and gross margins as the Company expands its home
healthcare and other non-pharmaceutical sales and services which have
historically generated higher margins.
The Company's sales and profits are higher during peak holiday periods and
from Christmas through Easter. Sales of health-related products peak during
seasonal outbreaks of cough and cold/flu viruses, which
13
<PAGE>
typically occur during the winter and spring. Accordingly, sales and profits
are typically highest in the fourth quarter and the first quarter of the
ensuing year.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
income statement data for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
1996 1997 1996 1997
------- ------- ------- ------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
SALES:
Prescription drugs 82.3% 79.9% 83.5% 80.3%
Other 17.7% 20.1% 16.5% 19.7%
------- ------- ------- ------
Total net sales 100.0% 100.0% 100.0% 100.0%
------- ------- ------- ------
------- ------- ------- ------
COSTS AND EXPENSES:
Cost of sales -- prescription drugs(1) 66.7% 68.8% 66.1% 69.4%
Cost of sales -- other(2) 67.6% 58.9% 73.5% 61.6%
Selling, general and administrative expenses(3) 27.9% 28.8% 26.5% 27.1%
Depreciation and amortization(3) 1.3% 1.2% 1.3% 1.1%
Interest expense(3) 2.0% 0.8% 1.9% 1.1%
Income before provision for income taxes(3) 2.0% 2.8% 3.0% 2.9%
Net Income (3)(4) 1.3% 2.0% 2.0% 1.9%
</TABLE>
- ---------------------
(1) As a percentage of prescription drug sales.
(2) As a percentage of other sales.
(3) As a percentage of total net sales.
(4) Exclusive of provision (nonrecurring) for deferred income taxes
resulting from change in S corporation status.
Intangible assets, including but not limited to goodwill, pharmacy files
and non-compete covenants, have historically represented a substantial portion
of the Company's acquisition costs. Such assets are generally amortized over a
period of not more than 20 years. Accordingly, the amortization of intangible
assets is not expected to have a significant effect on the Company's future
results of operations.
NET SALES
The Company's total net sales increased $9,197,688 or 105.2%, to
$17,939,745 for the nine months ended September 30, 1997 compared to $8,742,057
for the nine months ended September 30, 1996, and $3,324,262 or 93.5%, to
$6,879,686 for the three months ended September 30, 1997 compared to $3,555,424
for the three months ended September 30, 1996. The increase was attributable
primarily to the increase in store operating months from 70 in the first nine
months of 1996 to 126 in the first nine months of 1997, and from 26 in the
three months ended September 30, 1996 to 48 during the same three-month period
of 1997.
The following tables show the Company's prescription drug gross margins and
total sales margins for nine months and the three months ended September 30,
1996 and 1997:
14
<PAGE>
<TABLE>
<CAPTION>
Gross Margins on Gross Margins on
Prescription Drug Sales Total Sales
------------------------- -------------------------
Nine Months Ended September 30, Amount Percentage Amount Percentage
- ------------------------------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
1997 $ 4,401,605 30.6% $ 5,762,472 32.1%
1996 $ 2,474,023 33.9% $ 2,857,580 32.7%
</TABLE>
<TABLE>
<CAPTION>
Gross Margins on Gross Margins on
Prescription Drug Sales Total Sales
------------------------- -------------------------
Three Months Ended September 30, Amount Percentage Amount Percentage
- ------------------------------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
1997 $ 1,716,525 31.2% $ 2,284,997 33.2%
1996 $ 974,133 33.3% $ 1,178,400 33.1%
</TABLE>
The decrease in the gross margin on prescription drug sales from 1996 to
1997 was primarily the result of an increase in third-party sales, which have
lower margins, and the cost of sales during such period.
Sales of prescription drugs decreased from 83.5% of total sales for the
nine months ended September 30, 1996 to 80.3% of total sales for nine months
ended September 30, 1997 and from 82.3% of total sales for the three months
ended September 30, 1996 to 79.9% for the three months ended September 30,
1997. The Company expects that prescription drug sales will continue to
decrease as a percentage of total sales as the Company expands its home
healthcare and other non-pharmaceutical sales and services, whose gross
margins exceed those of pharmaceutical sales.
Same store sales for the Company's first eight stores increased from
$6,820,584 in the first nine months of 1996 to $7,610,016 in the first nine
months of 1997, and from $3,214,020 in the three months ended September 30,
1996 to $3,637,999 in the three months ended September 30, 1997. Management
believes that these respective increases of 11.6% and 13.2% are primarily the
result of increased advertising and promotions as well as an enhanced product
mix.
COSTS AND EXPENSES
Cost of sales increased $6,292,796 or 106.9%, to $12,177,273 in the nine
months ended September 30, 1997 as compared to $5,884,477 in the nine months
ended September 30, 1996. For the three months ended September 30, 1997, the
cost of sales increased $2,217,665, or 93.3%, to $4,594,689 as compared to
$2,377,024 in the three months ended September 30, 1996. These increases are
primarily the result of increased sales volume resulting from the increased
number of store operating months.
Cost of sales as a percentage of total net sales increased 0.6% and
decreased 0.1% during the respective periods. These changes are primarily the
result of increased drug prices from the wholesaler, offset by the effects of
management's continual monitoring and adjustment of prices to the consumer.
Selling, general and administrative expenses increased from $2,314,815 in
the nine months ended September 30, 1996 to $4,868,718 in the nine months ended
September 30, 1997 and from $991,613 in the three months ended September 30,
1996 to $1,978,932 in the three months ended September 30, 1997. Such expenses,
expressed as a percentage of net sales, were 27.1% and 26.5% for the nine months
ended September 30, 1997 and 1996, respectively, and 28.8% and 27.9% for the
three months ended September 30 in each of 1997 and 1996. This increase is
principally due to increased store count and resulting increased store operating
months, as well as the employment of additional personnel and an increase in
salaries payable
15
<PAGE>
to the Company's executive officers in connection with the execution of
employment agreements with such persons.
Interest expense was $200,748 in the first nine months of 1997 compared
to $167,203 during the first nine months of 1996, and $57,835 in the three
months ended September 30, 1997 compared to $71,079 in the three months ended
September 30, 1996. The increase in interest expense resulted primarily from
the increase in the Company's indebtedness associated with the Company's
acquisition of six stores and its corporate office building.
EARNINGS
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 as a result of the
Offering related to the tax effect of cumulative differences in financial and
tax bases of net assets of $149,000. Net income before the one time charge
for income taxes for the first nine months of 1997 rose to $343,142 from
$170,545 in the comparable period of 1996; an increase of 101.2%. Net income
before the one time charge for income taxes for the three months ended
September 30, 1997 rose to $135,686 compared to pro forma net income of
$45,463 in the comparable period of 1996, an increase of 198.5%.
The following unaudited pro forma results of operations data compared to
historical information gives effect to the acquisitions completed during the
nine months ended September 30, 1997 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.
Nine Months Ended
September 30, 1997
---------------------------
Actual Pro Forma
------------- ------------
Income Statement Data:
Net sales $17,939,745 $24,532,455
Income before provision for income taxes 513,433 654,622
Net income(1) 343,142 433,765
Net income per share(1) $ 0.22 $ 0.28
- ----------
(1) Exclusive of effect of provision (non-recurring) for deferred income taxes
resulting from change in S corporation status.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended September
30, 1997 and 1996 was $823,275 and $165,232, respectively. Typically, cash
provided by operations is adequate to supply working capital, and contribute to
investing activities. External sources of cash are used mainly to help finance
store acquisitions. The Company believes that the operating needs to be incurred
in connection with its capital expansion program, including growth in accounts
receivable and inventory, will be funded by cash flow from operations
supplemented by the approximately $750,000 designated for working capital of the
proceeds from the Company's initial public offering (the "Offering") which
closed July 11, 1997.
Net cash provided by financing activities was $2,870,501 and $256,492 for
the nine months ended September 30, 1997 and 1996, respectively. The principal
cause of this difference was proceeds from the
16
<PAGE>
Offering offset by the decrease in debt. Net cash provided by financing
activities was the principal factor in the $1,118,650 net increase in cash
for the nine months ended September 30, 1997.
The Company has earmarked approximately $2,375,000 from the proceeds of
the Offering which will be used to support an aggressive store acquisition
program. Historically, the average acquisition price paid by the Company per
store has been approximately $500,000 to $700,000; however, because the
acquisition price is based on variables such as store sales and profits,
there can be no assurance that future acquisition prices will fall within the
referenced range. Management believes it will be able to obtain seller
financing for approximately 50% of the cost of each such acquisition.
In addition to the expansion capital provided by the proceeds of the
Offering, the Company has obtained a commitment for a $2,000,000 credit facility
from Bank One, Texas, N.A. The terms of this credit facility include
restrictive covenants such as financial ratio requirements with which the
Company will have to comply to maintain the facility. Management believes the
Company's operations will not be adversely impacted by these restrictive
covenants. No funds have been borrowed under this credit facility.
In October 1997, the Company completed a private placement (the "Private
Placement") of 465,000 shares of its common stock, par value $.01 per share
(the "Common Stock") with net proceeds of approximately $4.3 million. These
proceeds will be used primarily for future store acquisitions.
Management expects that the proceeds generated from the Offering and the
Private Placement combined with income from operations, seller-financing of
acquisitions, the above-described credit facility and possible future equity
offerings will be sufficient to support the Company's current expansion
schedule and ongoing acquisition activities for the next 12 months, although
there can be no assurance that such proceeds will be adequate to support the
Company's acquisitions during such period.
In addition, management expects to convert, during the next 12 to 18
months, between two and three of its existing stores to "healthcare
centers,'' although there can be no assurance that all or any part of such
conversions will be effected. In the event such conversions are undertaken,
management expects to incur a minimum of $20,000 to $40,000 in conversion
costs per store converted. The costs of such conversion are expected to be
funded from operations.
IMPACT OF INFLATION AND CHANGING PRICES
Though not significant, inflation continues to cause increases in
product, occupancy and operating expenses, as well as the cost of acquiring
capital assets. The effect of higher costs is minimized by achieving
operating efficiencies and passing vendor price increases along to the
consumers.
FACTORS AFFECTING OPERATIONS
DEPENDENCE ON ACQUISITIONS FOR GROWTH. The Company has grown rapidly in
recent periods and intends to continue to pursue an aggressive growth
strategy. The Company's growth strategy depends upon its ability to continue
to acquire, consolidate and operate existing free-standing pharmacies on a
profitable basis. The Company continually reviews acquisition proposals and
is currently engaged in discussions with third parties with respect to
possible acquisitions. The Company will compete for acquisition candidates
with buyers who have greater financial and other resources than the Company
and may be able to pay higher acquisition prices than the Company. To the
extent the Company is unable to acquire suitable retail
17
<PAGE>
pharmacies, or to integrate such acquisitions successfully, its ability to
expand its business would be reduced significantly.
SALES TO THIRD-PARTY PAYORS. A growing percentage of the Company's
prescription drug sales has been accounted for by sales to customers who are
covered by third-party payment programs. Although contracts with third-party
payors may increase the volume of prescription sales and gross profits,
third-party payors typically negotiate lower prescription prices than those
of non third-party payors. Accordingly, there has been downward pressure on
gross profit margins on sales of prescription drugs which is expected to
continue in future periods.
RELIANCE ON MEDICARE AND MEDICAID REIMBURSEMENTS. Substantially all of
the Company's home healthcare revenues are attributable to third-party
payors, including Medicare and Medicaid, private insurers, managed care plans
and HMOs. The amounts received from government programs and private
third-party payors are dependent upon the specific benefits included under
the program or the patient's insurance policies. Any substantial delays in
reimbursement or significant reductions in the coverage or payment rates of
third-party payors, or from patients enrolled in the Medicare or Medicaid
programs, would have a material adverse effect on the Company's revenues and
profitability.
EXPANSION. The Company's expansion will require the implementation and
integration of enhanced operational and financial systems and additional
management, operational and financial resources. Failure to implement and
integrate these systems and add these resources could have a material adverse
effect on the Company's results of operations and financial condition. There
can be no assurance that the Company will be able to manage its expanding
operations effectively or that it will be able to maintain or accelerate its
growth. While the Company experienced growth in net sales and net income in
1995 and 1996, there can 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
18
<PAGE>
available insurance coverage or that such coverage will continue to be
available at acceptable costs and on favorable terms.
COMPETITION. The retail pharmacy and home healthcare businesses are
highly competitive. In each of its markets, the Company competes with one or
more national, regional and local retail pharmacy chains, independent retail
pharmacies, deep discount retail pharmacies, supermarkets, discount
department stores, mass merchandisers and other retail stores and mail order
operations. Similarly, the Company's stores offering home healthcare services
will compete with other larger providers of home healthcare services
including chain operations and independent single unit stores which are more
established in that market and which offer more extensive home healthcare
services than the Company. Most of the Company's competitors in the retail
pharmacy and home healthcare markets have financial resources that are
substantially greater than those of the Company. There can be no assurance
the Company will be able to successfully compete with its competitors in the
retail pharmacy and/or home healthcare industry.
GEOGRAPHIC CONCENTRATION. Currently, 10 of the Company's 19 retail
pharmacies are located in Texas, and other retail pharmacies located in Texas
may be acquired by the Company. Consequently, the Company's results of
operations and financial condition are dependent upon general trends in the
Texas economy and any significant healthcare legislative proposals enacted in
the state of Texas.
SUBSTANTIAL INDEBTEDNESS. In connection with the Company's acquisition of
retail pharmacies, the Company has incurred substantial debt and may incur
additional indebtedness in the future in connection with its planned
acquisition of additional stores. The Company's ability to make cash
payments to satisfy its substantial indebtedness will depend upon its future
operating performance, which is subject to a number of factors including
prevailing economic conditions and financial, business and other factors
beyond the Company's control. If the Company is unable to generate sufficient
earnings and cash flow to meet its obligations with respect to its
outstanding indebtedness, refinancing of certain of these debt obligations or
disposition of certain assets may be required. In the event debt refinancing
is required, there can be no assurance that the Company can effect such
refinancing on satisfactory terms.
POSSIBLE NEED FOR ADDITIONAL CAPITAL. Although the Company believes
that the proceeds from the Offering and the Private Placement combined with
operating revenues and the Bank One credit facility will be adequate to
satisfy its capital requirements for the next 12 months, circumstances,
including the acquisition of additional stores, may require the Company to
obtain long or short-term financing to realize certain business
opportunities. No assurance can be made that such financing will be obtained.
RELIANCE ON SINGLE SUPPLIER. The Company currently purchases
approximately 70% of its inventory from Bergen Brunswig Drug Co. ("Bergen
Brunswig"). Bergen Brunswig also provides the Company with order entry
machines, shelf labels and other supplies used in connection with the
Company's purchase and sale of such inventory. The Company believes that the
wholesale pharmaceutical and non-pharmaceutical distribution industry is
highly competitive because of the consolidation of the retail pharmacy
industry and the practice of certain large retail pharmacy chains to purchase
directly from product manufacturers. Although the Company believes that it
could obtain its inventory through another similar distributor at competitive
prices and upon competitive payment terms in the event its relationship with
Bergen Brunswig was terminated, there can be no assurance that the
termination of such relationship would not adversely affect the Company's
business.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company's
results of operations depend significantly upon the net sales generated
during the first and fourth quarters, and any decrease in
19
<PAGE>
net sales for such periods could have a material adverse effect upon the
Company's profitability. As a result, the Company believes that
period-to-period comparisons of its results of operations are not and will
not necessarily be meaningful, and should not be relied upon as an indication
of future performance.
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
ACQUISITIONS. During the period from June 30, 1997 to the date this
Report was filed, the Company acquired substantially all of the assets of
eight separate pharmacies located in Colorado, Montana, Nebraska, New Mexico
and Texas. The acquisitions on August 12, 1997 of Revco, Inc. d/b/a
Northridge Pharmacy located in Mesquite, Texas, and on August 16, 1996 of
Downey Drug, Inc., located in Butte, Montana, were previously reported in the
Company's Quarterly Report on Form 10-QSB for the period ended June 30,
1997. The acquisitions on August 2, 1997 of Sun Country Drug, Inc., located
in Moriarty, New Mexico, on August 30, 1997 of McCosh Drug, Inc. located in
Gering, Nebraska, and on September 18, 1997 of Marty's Pharmacy, Inc. located
in Trinidad, Colorado, were reported on Form 8-K's as described in Item 6,
below. The acquisitions on October 10, 1997 of Helm's Drug Store, Inc.
located in Canon City, Colorado, and on November 8, 1997 of Scott's Pharmacy
and Florist located in Lockhart, Texas were not "significant" as such term is
defined in Form 8-K and were not previously reported. The acquisition on
October 11, 1997 of Kenn's Pharmacy, Inc. located in Raton, New Mexico was
reported on a Form 8-K filed after September 30, 1997 (and is not, therefore,
listed in Item 6, below).
PRIVATE PLACEMENT. On October 21 and 23, 1997, the Company closed a
private placement of an aggregate 465,000 shares (the "Shares") of its Common
Stock. The Shares were sold to certain accredited investors in reliance on
Rule 505 of Regulation D and to certain non-U.S. persons in reliance on
Regulation S for a purchase price of $10.08 per share (the average closing
price for the 15 trading days immediately preceding October 10, 1997, which
is the date the parties entered into a letter of intent with regard to the
private placement). In connection with the Offering, the Company paid
ComVest Partners, Inc. ("ComVest") a broker's fee of 6.3% of the gross
proceeds and issued to ComVest 20,000 common stock purchase warrants. Neither
the Company or any of its affiliates, directors or officers have any
material relationship with any of the investors in the private placement.
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
During the three months ended September 30, 1997, the Company filed the
following Current Reports on Form 8-K:
<TABLE>
<CAPTION>
Report Date Item Reported Financial Statements Filed
- ----------- ------------------------------------- -----------------------------
<S> <C> <C>
8/2/97 Acquisition of Sun Country Drug, Inc. via Form 8-K/A's dated
in Moriarty, NM 10/16/97 & 10/24/97
8/30/97 Acquisition of McCosh Drug, Inc. in via Form 8-K/A dated 11/13/97
Gering, NE
9/18/97 Acquisition of Marty's Pharmacy, Inc. pro forma and other financial
in Trinidad, CO information not required by
Form 8-K
</TABLE>
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused
the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HORIZON PHARMACIES, INC.,
a Texas corporation
Date: November 13, 1997 /s/ Ricky D. McCord
------------------------------
Ricky D. McCord
Chief Executive Officer
Date: November 13, 1997 /s/ David W. Frauhiger
-------------------------------
David W. Frauhiger
Chief Financial Officer
21
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,271,290
<SECURITIES> 0
<RECEIVABLES> 3,087,695
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<INVENTORY> 6,435,162
<CURRENT-ASSETS> 10,887,998
<PP&E> 968,232
<DEPRECIATION> 131,296
<TOTAL-ASSETS> 13,738,307
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