<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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:
<TABLE>
<S> <C>
Title of Each Class Outstanding at November 11,
Common stock, par value $.01 per 1998
share 5,562,000
</TABLE>
Transitional Small Business Disclosure Format Yes / / No /X/
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------- SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
3
<PAGE>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1997 1998 1997 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
(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
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
See accompanying notes.
4
<PAGE>
HORIZON PHARMACIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------ PAID-IN RETAINED ------------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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)
--
--
----- --- ----------- ----------- -----
----- --- ----------- ----------- -----
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
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
-------------
-------------
</TABLE>
See accompanying notes.
5
<PAGE>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1998
-------- --------
<S> <C> <C>
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
</TABLE>
6
<PAGE>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1998
-------- --------
<S> <C> <C>
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
-------- --------
-------- --------
</TABLE>
See accompanying notes.
7
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
ASSETS ACQUIRED
-------------------------------------------------
ACCOUNTS
RECEIVABLE
STORES PURCHASE AND DEBT COMMON STOCK
NINE MONTHS ENDED SEPTEMBER 30 ACQUIRED PRICE INVENTORIES INTANGIBLES EQUIPMENT INCURRED ISSUED
- - ----------------------------------- -------- --------- ------------ ------------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30,
----------------
1997 1998
------- -------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<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 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
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain income
statement data for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ---------------
1997 1998 1997 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
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%
</TABLE>
- - ------------------------
(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
<PAGE>
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:
<TABLE>
<CAPTION>
GROSS MARGINS ON GROSS MARGINS ON
PRESCRIPTION DRUG SALES TOTAL REVENUES
-------------------------- --------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DATE OF
ACQUISITION PHARMACY NAME STATE
- - ----------- ------------------------------------------------------------ --------
<S> <C> <C>
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
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
- - ------------- ---------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
18
<PAGE>
During the three months ended September 30, 1998, the Company filed the
following Current Reports on Form 8-K:
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
REPORT DATE DATE FILED ITEM REPORTED FILED
- - ----------- ----------- ---------------------------------------------------------------------------- -------------
<S> <C> <C> <C>
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)
</TABLE>
- - ------------------------
(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
<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 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-07-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,796
<SECURITIES> 0
<RECEIVABLES> 7,760
<ALLOWANCES> 0
<INVENTORY> 17,164
<CURRENT-ASSETS> 28,235
<PP&E> 3,552
<DEPRECIATION> 427
<TOTAL-ASSETS> 40,226
<CURRENT-LIABILITIES> 10,884
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 23,046
<TOTAL-LIABILITY-AND-EQUITY> 40,226
<SALES> 20,322
<TOTAL-REVENUES> 20,322
<CGS> 13,722
<TOTAL-COSTS> 13,722
<OTHER-EXPENSES> 5,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 157
<INCOME-PRETAX> 545
<INCOME-TAX> 212
<INCOME-CONTINUING> 333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
