<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
/ / 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.
(Name of registrant in its charter)
DELAWARE 75-2441557
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
531 W. MAIN
DENISON, TEXAS 75020
(Address of principal executive offices) (Zip Code)
(903)465-2397
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
YES X NO
--- ---
There were 5,669,503 shares of HORIZON Pharmacies, Inc. common stock,
par value $.01 per share, outstanding as of April 12, 1999. The aggregate
market value of such common stock held by non-affiliates (based on the
closing transaction price on the American Stock Exchange) was approximately
$25,426,159.
DOCUMENTS INCORPORATED BY REFERENCE
The HORIZON Pharmacies, Inc. definitive proxy statement to be filed with the
Commission on or before April 30, 1999 is incorporated by reference into Part
III, Items 10, 11, 12 and 13 of this Form 10-K.
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<PAGE>
PART I
Item 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS.
HORIZON Pharmacies, Inc. ("HORIZON") owns and operates a chain of
retail pharmacies and related businesses located principally in the south
central United States. In fiscal 1998 we acquired 21 pharmacies and at December
31, 1998, we owned 45 pharmacies and related businesses.
In addition to our retail pharmacy business, we sell and lease home
medical equipment and offer home healthcare services under the name HORIZON
Home Care. We expect to acquire at least 15 new pharmacies and five home
medical equipment operations in fiscal 1999, and 40 new pharmacies and 10
home medical equipment stores in fiscal 2000, and to have at least 100
pharmacies and at least 25 home medical equipment operations by fiscal 2001.
Since December 31, 1998, we have acquired four pharmacies.
The primary source of our revenue is the sale of prescription
drugs. Prescription sales were 73.9% of net revenues for fiscal 1998 compared
to 75.6% in 1997 and 80.0% in 1996. We expect prescription sales to continue
to increase as we expand into new markets and increase our penetration in
existing markets, and because of the demographic trend toward an aging
population and the continued development of new pharmaceutical products.
However, we expect prescription sales to continue to decrease as a percentage
of our total net revenues and gross margins as we expand our home medical
equipment and other non-pharmaceutical sales and services which have
historically provided higher margins.
As of December 31, 1998, we had one freestanding home medical
equipment store and three pharmacies offering intravenous infusion services
and home oxygen therapy. We also operate two "institutional" pharmacies which
are located inside other facilities.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Our primary business is the operation of retail pharmacies.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
(i) PRINCIPAL PRODUCTS PRODUCED AND SERVICES RENDERED.
PRESCRIPTIONS. Our primary focus is the sale of
prescription and over-the-counter drugs. During 1998, we filled approximately
1,664,050 prescriptions, and sales of prescription drugs generated 73.9% of our
total net revenues. We believe the trend toward an older population and the
development of new prescription drugs and drug therapies may increase the demand
for prescription drugs. In addition, the FDA is approving an increasing number
of prescription products for sale over the counter which have historically shown
significantly increased sales.
NONPHARMACEUTICAL MERCHANDISE. In addition to
prescription drugs we sell a wide variety of gifts, over-the-counter drugs,
health and beauty care products, greeting cards and numerous other products.
Our stores also offer an assortment of convenience products including candy,
food, tobacco products, books and magazines, household products, seasonal
merchandise and toys. Certain stores also offer fresh floral arrangements,
veterinary supplies, camera and photo accessories, photo processing, sporting
goods, small electronics, batteries and audio and video tapes.
HOME HEALTHCARE SERVICES. Our Farmington, New Mexico
store offers certain home healthcare services under the name HORIZON Home
Care. Such services include: (i) respiratory therapy; (ii) patient services,
including nursing and para-professional services; and (iii) infusion therapy.
We are evaluating the possibility of converting additional stores into home
healthcare centers at such time as proposed changes to
<PAGE>
the regulations governing this industry are finalized, which is not expected
to occur in the immediate future.
WHOLESALE INJECTIBLES. Our Highland Ranch, Colorado
operation purchases injectable pharmaceuticals directly from the manufacturer
and resells them to physicians located in Colorado. We plan to apply for the
licenses necessary to distribute pharmaceuticals and non-pharmaceuticals in nine
additional states, which would enable us to expand our wholesale operations
beyond Colorado.
The estimated contributions of various product classes to sales
for each of the last three fiscal years are as follows:
<TABLE>
<CAPTION>
Percentage
-----------------------------
Product Class 1996 1997 1998
------------- ------ ------ ------
<S> <C> <C> <C>
Prescription Drugs 80.04 75.60 73.92
Health and Beauty Aids 9.97 10.21 10.32
Cards, Gifts & Jewelry 2.54 3.00 3.92
Home Medical Equipment 3.82 2.98 3.84
Home Health Care Services 0.00 4.61 2.42
Liquor & Tobacco 0.61 0.37 0.85
Restaurant, Candy & Beverages 1.78 1.43 1.56
Photo 0.34 0.56 0.61
School Supplies & Toys 0.37 0.44 1.00
Seasonal & Promotional 0.53 0.80 1.56
------ ------ ------
Total Revenues 100.00 100.00 100.00
</TABLE>
EXPANSION. We intend to continue to expand by acquiring
small retail pharmacy chains, independent retail pharmacies and other related
businesses primarily located in communities having populations of fewer than
50,000 persons, and in high income metropolitan markets where competition is
focused on service. Our goal for the next two years is to acquire between 15
and 40 new retail pharmacies and between five and 10 home medical equipment
operations in each of 1999 and 2000.
(ii) STATUS OF PRODUCT OR SEGMENT.
Not applicable.
(iii) SOURCES AND AVAILABILITY OF RAW MATERIALS.
We centrally purchase most of our inventory from McKesson
Corporation and other vendors, enabling us to benefit from promotional programs
and volume discounts offered by such companies. During 1998 McKesson supplied
approximately 55% of our inventory.
(iv) PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND
CONCESSIONS HELD.
We market products under various trademarks and trade names and
hold assorted business licenses (pharmacy, occupational, liquor, etc.) having
various lives, which are necessary for the normal operation of business. We also
own franchises for the sale of hardware and electronics in two of our stores.
We do not consider any patent, trademark, license, franchise or
concession to be of material importance to our business other than the trade
names HORIZON Pharmacies and HORIZON Home Care and any other trade names under
which we operate. In May 1997, we filed applications for Federal trademark
protection of such trade names, which applications are currently pending.
Additionally, we filed and received trademark protection for such trade names in
the states of Texas and Oklahoma, and plan to file for additional state
trademark protection in all states in which we operate.
<PAGE>
(v) SEASONAL VARIATIONS IN BUSINESS.
Our 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 typically occur during
the winter and spring. Accordingly, sales and profits are typically higher in
the first and fourth quarter of each year.
(vi) WORKING CAPITAL PRACTICES.
During 1998 we financed acquisitions primarily using the
proceeds of a private offering which closed in June 1998 (the "1998 Private
Placement"), seller financing, a credit facility provided by McKesson and the
issuance of common stock.
Retail pharmacy product sales are principally for cash.
However, a growing percentage of our prescription drug volume has been
accounted for by sales to customers covered by third-party payment programs.
Third-party reimbursement accounted for approximately 59% of our prescription
sales in 1998, 55% in 1997 and 52% in 1996, and we expect this trend to
continue. 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,
gross profit margins on sales of prescription drugs have been decreasing which
is expected to continue.
(vii) DEPENDENCE UPON LIMITED NUMBER OF CUSTOMERS.
We sell to numerous customers including various managed care
organizations. Accordingly, we believe that the loss of any one customer or
group of customers under common control would not have a material effect on our
business. No customer accounts for 10% or more of our consolidated revenue.
(viii) BACKLOG ORDERS.
Not applicable.
(ix) GOVERNMENT CONTRACTS.
We are not a party to any significant government contracts.
(x) COMPETITIVE CONDITIONS.
The retail pharmacy business is highly competitive. We compete
with other pharmacies primarily on the basis of customer service, convenience of
location and store design, price, and product mix and selection. We also
compete with mass merchants (including discounters and deep discounters),
supermarkets, combination food and retail pharmacies, mail order distributors,
hospitals and HMOs. These other formats have experienced significant growth in
their market share of the prescription and over-the-counter drug business. Our
home healthcare services compete with certain chain operations and independent
single unit stores. Many of our competitors have greater financial resources
than HORIZON.
(xi) RESEARCH AND DEVELOPMENT ACTIVITIES.
We do not engage in any material research activities.
(xii) ENVIRONMENTAL DISCLOSURES.
Federal, state and local environmental protection requirements
have no material effect upon our capital expenditures, earnings or competitive
position.
<PAGE>
(xiii) NUMBER OF EMPLOYEES.
At December 31, 1998, we employed approximately 825 persons,
about 340 of whom are part-time employees working less than 30 hours a week.
(xiv) STORE LOCATIONS.
The following table summarizes the number, location and year of
acquisition for each of our pharmacies, home medical equipment operations and
wholesale company through April 15, 1999.
<TABLE>
<CAPTION>
STORE NO. LOCATION ACQUIRED STORE NO. LOCATION ACQUIRED
--------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
1 Winnsboro, TX(1) 1994 26 Highland Ranch, CO(1)(3)(4) 1998
2 Princeton, TX(1) 1994 Canon City, CO(1)(2)(5) 1998
3 Cuero, TX(1) 1994 27 Steelville, MO(1) 1998
4 Bonham, TX(1) 1995 28 Ennis, TX(1) 1998
5 Uvalde, TX(1) 1995 29 Belen, NM(1) 1998
6 Cleburne, TX(1)(3) 1995 30 St. John, AZ(1) 1998
7 McLoud, OK(1) 1995 31 Peralta, NM (1)(2) 1998
8 Farmington, NM(1)(2)(3) 1996 32 Las Vegas, NM(1)(2) 1998
9 Tomah, WI(1) 1996 32-b Espanola, NM(2) 1998
10 Marion, VA(1) 1996 33 Rosemount, MN(1) 1998
11 Covington, VA(1) 1996 34 Kansas City, MO(1) 1998
12 Mineola, TX(1) 1997 35 Houston, TX(1) 1998
13 Mt. Vernon, TX(1) 1997 36 Houston, TX(1) 1998
14 McKinney, TX(1)(2) 1997 37 Houston, TX (1) 1998
15 Moriarity, NM(1) 1997 38 Blair, NE (1)(2) 1998
16 Butte, MT(1) 1997 39 Douglas, WY(1) 1998
17 Mesquite, TX(1) 1997 40 Borger, TX(1)(2) 1998
18 Gering, NE(1) 1997 41 Naperville, IL(1) 1998
19 Trinidad, CO(1) 1997 42 Santa Fe, NM(1)(2) 1998
20 Canon City, CO(1) 1997 43 Denison, TX(1) 1998
21 Raton, NM(1) 1997 44 Yorkville, IL(1) 1998
22 Lockhart, TX(1) 1997 45 Sandwich, IL(1) 1998
Cleburne, TX(2) 1997 46 Pinetop, AZ(1) 1999
23 Dallas, TX(1) 1997 47 Warsaw, IN(1)(2) 1999
24 Brookfield, MO(1) 1997 48 Dodge City, KS(1) 1999
25 Floresville, TX(1) 1998 49 Columbia Heights, MN(1) 1999
</TABLE>
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(1) Free-standing pharmacy.
(2) Home medical equipment offered.
(3) Closed-door institutional pharmacy.
(4) Wholesale company.
(5) We also purchased the pharmacy files, inventory and equipment
of two other pharmacies located in Canon City, Colorado which
we consolidated into this pharmacy.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES.
Not applicable.
Item 2. PROPERTIES.
Our principal offices are currently located at 531 W. Main,
Denison,Texas, 75020, where we own a
<PAGE>
15,000 square foot building. We also own a 5,500 square foot building in
Princeton, Texas, the pharmacies located in Mt. Vernon and Mineola, Texas,
and the furniture and fixtures in each of our stores. Substantially all of
our retail stores operate under noncancellable leases, many of which expire
within the next five years. In the normal course of business, however, we
expect these leases will be renewed or replaced by leases on other
properties. No single lease is material to our operations.
Item 3. LEGAL PROCEEDINGS.
From time to time, we may be involved in litigation relating to claims
arising out of our normal business operation. No material legal proceedings were
pending against HORIZON, any of its subsidiaries or any of their properties as
of December 31, 1998.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our stockholders during the
fourth quarter of 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION. HORIZON's common stock trades on the American
Stock Exchange under the symbol "HZP." The following table shows the high and
low closing sales prices per share for the common stock from July 11, 1997, when
it was first listed on AmEx, through December 31, 1998. In November 1997, the
stock split and every two issued and outstanding shares of the common stock were
converted into three shares of common stock. All share and per share amounts
presented below have been retroactively adjusted to reflect the stock split.
<TABLE>
<CAPTION>
High Low
------ -------
<S> <C> <C>
FISCAL 1997
Third Quarter 8 3 1/2
Fourth Quarter 13 1/2 6 11/12
FISCAL 1998
First Quarter 11 1/2 8
Second Quarter 15 7/8 9 5/8
Third Quarter 16 1/4 7 3/8
Fourth Quarter 12 5 5/8
</TABLE>
STOCKHOLDERS. As of April 12, 1999, there were 110 holders of record
of the common stock according to the records maintained by our transfer agent.
As of March 18, 1999, we had approximately 2,094 stockholders, including
beneficial owners holding shares in street or nominee names.
DIVIDENDS. We did not pay any dividends on the common stock during
our two most recent fiscal years and we do not intend to pay any dividends in
the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES. Since the filing of our
latest Quarterly Report on Form 10-QSB on November 16, 1998, we issued 55,623
unregistered shares of common stock in connection with the acquisition of two
stores. All such shares were issued to the sellers of such stores and were
deemed exempt from registration pursuant to Rule 506 of Regulation D.
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(In thousands, except per share and store data)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 28,
1994 TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
1994 (1) 1995 1996 1997 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total net revenues $ 1,671 $ 6,270 $ 13,136 $ 28,429 $ 74,737
Gross profit 595 1,898 4,194 9,297 20,226
Income (loss) from operations 169 279 551 1,025 (1,933)
Interest expense 16 110 253 299 803
Income (loss) before provision
(credit) for income taxes 154 176 302 807 (2,539)
Provision (credit) for income taxes (2) 54 61 106 480 (360)
Net income (loss) 100 115 196 327 (2,179)
Basic earnings (loss) per share .12 .08 .13 .12 (.43)
Diluted earnings (loss) per share .12 .08 .13 .11 (.43)
Cash distributions per share (3) .14 .11 .19 .17 -
BALANCE SHEET DATA:
Working capital $ 600 $ 1,029 $ 1,563 $ 11,287 $ 20,438
Total assets 1,268 3,545 6,589 20,654 46,647
Long-term obligations 346 930 1,467 3,531 13,512
Total liabilities 576 2,266 4,839 8,815 26,219
Shareholders' equity 692 1,279 1,750 11,839 20,428
NUMBER OF STORES AT END OF PERIOD 3 7 11 24 45
</TABLE>
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(1) We had no operations until February 28, 1994.
(2) See Note 1 "Income Taxes" in the accompanying consolidated financial
statements regarding pro forma provisions for income taxes for periods
prior to July 1997.
(3) Cash distributions were paid to shareholders during periods of
S corporation status. No distributions or dividends have been made
since the initial public offering in July 1997.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS).
OVERVIEW. Certain information in this annual report, as well as in
other public filings, press releases and oral statements made by our
representatives, is forward-looking information based on current expectations
and plans that involve risks and uncertainties. Forward-looking information
includes statements concerning pharmacy sales trends, prescription margins,
number of new store openings, the level of capital expenditures and our success
in addressing Year 2000 issues; as well as those that include or are preceded by
the words "expects," "estimates," "believes" or similar language. For such
statements, we claim the protection of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.
The following factors, in addition to those discussed elsewhere in
this annual report for the fiscal year ended December 31, 1998, could cause
results to differ materially from management expectations as projected in such
forward-looking statements: changes in economic conditions generally or in the
markets served by HORIZON; consumer preferences and spending patterns;
competition from other retail pharmacy chains, supermarkets, other retailers and
mail order companies; changes in state or Federal legislation or regulations;
the efforts of third-party payors to reduce prescription drug costs; the success
of planned advertising and merchandising strategies; the availability and cost
of real estate and construction; accounting policies and practices; our ability
to hire and retain pharmacists and other store and management personnel; our
<PAGE>
relationships with our suppliers; the ability of HORIZON, its vendors and others
to manage Year 2000 issues; our ability to successfully implement new computer
systems and technology; and adverse determinations with respect to litigation or
other claims. We assume no obligation to update our forward-looking statements
to reflect subsequent events or circumstances.
HORIZON's principal business strategy since commencing operations in
1994 has been to establish a chain of retail pharmacies through the acquisition
of full-line retail pharmacies. In evaluating a retail pharmacy for potential
acquisition, we: (i) evaluate the target store's profits and losses for
preceding years; (ii) review the store's tax returns for preceding years; (iii)
review computer-generated prescription reports showing historical information
including prescriptions sold, average price of each prescription, gross margins
and trends in prescription sales; (iv) analyze the store's location and
competition in the immediate area; (v) review the store's lease agreement, if
any; and (vi) assess targeted areas for growth patterns and trends. Based on
our analysis of the foregoing items, we prepare an offer to purchase the
particular store. To assess the reasonableness of the purchase price offered by
a seller in connection with a potential acquisition, we consider the
availability and terms of owner financing of approximately one-third
of the purchase price, including such terms as rate of return and payback
period, with the balance split between cash and other consideration such as our
common stock.
In 1996, 1997 and 1998 we acquired six, 14 and 21 retail pharmacies or
related businesses, respectively. These acquisitions are the principal influence
on our results of operations and financial condition. The primary measurement of
the effect of acquisitions on our operating performance is the number of store
operating months, which is the number of months we owned all of the stores
counted during the relevant measuring period. We expect that ongoing
acquisitions will be the most significant factor in our growth strategy.
Currently, our primary source of revenue is the sale of prescription
drugs. During 1996, sales of prescription drugs generated 80.0% of our net
revenues; during 1997, prescription drug sales generated 75.6% of revenues and
during 1998, such sales generated 73.9% of revenues. We expect our prescription
drug business to continue to increase on an annual basis as a result of the
demographic trends toward an aging population and the continued development of
new pharmaceutical products. However, we anticipate that such sales will
decrease as a percentage of our total net revenues and gross margins as we
expand our home healthcare and other non-pharmaceutical sales and services which
have historically generated higher margins.
Our 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 first and fourth quarters of each year.
RESULTS OF OPERATIONS. The following table sets forth the percentage
relationship of certain income statement data:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
INCOME STATEMENT DATA 1996 1997 1998
--------------------------
<S> <C> <C> <C>
Prescription drugs sales 80.0% 75.6% 73.9%
Other sales and services 20.0% 24.4% 26.1%
----- ----- -----
Total net revenues 100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
COSTS AND EXPENSES:
Cost of sales - prescription drugs(1) 69.5% 71.2% 77.6%
Cost of sales - other(2) 62.3% 55.3% 59.8%
Selling, general and administrative expenses(3) 26.4% 27.9% 28.5%
Depreciation and amortization(3) 1.3% 1.2% 1.2%
Interest expense(3) 1.9% 1.1% 1.1%
NET INCOME (loss)(3)(4)(5) 1.5% 1.1% (2.9%)
</TABLE>
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(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.
(4) After pro forma provisions for income taxes in 1996 and the first six
months of 1997.
(5) After a one-time provision for deferred income taxes in 1997 resulting
from a change in tax status.
<PAGE>
NET REVENUES. Our total net revenues increased $46,308 or 163%, to
$74,737 in 1998 compared to $28,429 in fiscal 1997 and $13,136 in fiscal 1996.
The increase was attributable primarily to the increase in store operating
months from 101 in fiscal 1996 and 193 in fiscal 1997 to 415 in fiscal 1998.
Prescription drug sales increased by $33,755 or 157% to $55,248 or
fiscal 1998 compared to $21,493 for fiscal 1997 and $10,515 for 1996.
Third-party reimbursed sales accounted for approximately 59% of our total
prescription sales in 1998, as compared to 55% in 1997 and 52% in 1996.
Higher reimbursement sales have typically resulted in a decrease in gross
margins due to the lower prices negotiated by third party payors. This
decrease was partially offset, however, by our management of inventory levels
and purchasing controls, which resulted in a slight margin percentage
increase in 1996 and 1997. In 1998, the gross margin on prescription drug
sales was down significantly due to unanticipated problems with our
communications technology which prevented us from receiving daily updates
of average wholesale pharmaceutical prices.
The following tables show our prescription drug gross margins and
total sales margins for 1996, 1997 and 1998:
<TABLE>
<CAPTION>
GROSS MARGINS
ON PRESCRIPTION DRUG SALES GROSS MARGINS ON TOTAL REVENUES
-------------------------- -------------------------------
YEAR AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---- ------ ---------- ------ ----------
<S> <C> <C> <C> <C>
1998 $12,398 22.4% $20,226 27.1%
1997 $ 6,200 28.8% $ 9,298 32.7%
1996 $ 3,206 30.5% $ 4,145 31.9%
</TABLE>
Sales of prescription drugs decreased from 80.0% of total revenues for
1996 to 75.6% of total revenues for 1997 and 73.9% of total revenues for 1998.
We expect that prescription drug sales will continue to decrease as a percentage
of total revenues as we expand our home healthcare and other non-pharmaceutical
sales and services, whose gross margins exceed those of pharmaceutical sales.
Same store sales for our first 11 stores increased from $12,928 in
1996 to $14,715 in 1997, an increase of 13.8%. Same store sales on our first 24
stores increased from $27,222 in 1997 to $31,000 in 1998, an increase of 13.9%.
Management believes that these increases are primarily the result of increased
advertising and promotions as well as an enhanced product mix. We currently
have non-compete agreements with the previous owners of all of the stores we
have acquired except for the Marion and Covington, Virginia stores, which were
acquired from the Federal Trade Commission, and three stores located in Mineola,
Mt. Vernon and McKinney, Texas, which we acquired from True Quality Pharmacies,
Inc.
COSTS AND EXPENSES. Cost of sales increased $35,379 or 185% to
$54,511 in 1998 as compared to $19,132 in 1997 and $8,942 in 1996. This
increase is primarily the result of increased sales volume due to the increased
number of store operating months for the respective periods. Total cost of
sales as a percentage of total revenues decreased 0.8% from 1996 to 1997 and
increased by 5.6% from 1997 to 1998. This increase in cost of goods was caused
by unexpected communications technology problems in receiving updated pricing
information from our primary supplier during the last quarter of 1998. As a
result our prescription prices to third party and cash customers were not
increased when our cost of those prescription products increased. The problem
was identified in February of 1999 and corrected in March of 1999 by switching
to another provider of updated pricing information. As a result our gross
margin on prescription drug sales declined from 30.5% in 1996 and 28.8% in 1997
to 22.4% in 1998, with a significant portion of the decline attributable to the
failure to receive updated pricing and the balance due to an increase in
prescriptions reimbursed through third party providers.
The increase of $13,349 in selling, general and administrative
expenses from $3,471 in 1996 and $7,943 in 1997 to $21,292 in 1998 is
principally due to increased store count and resulting increased store operating
months. Such expenses, expressed as a percentage of net revenues, were 28.5%
for 1998 and 27.9% and 26.4% for 1997 and 1996, respectively. These increases
in expenses as a percentage of net revenues were primarily due to an increase in
personnel.
Depreciation and amortization expense was $867 in 1998 compared to
$329 in 1997 and $172 in 1996. The increase primarily resulted from our
acquisition of stores in 1998 and 1997.
Intangible assets, including but not limited to goodwill, pharmacy
files and non-compete covenants, have historically represented a substantial
portion of our acquisition costs. Such assets are amortized over a
<PAGE>
period of not more than 40 years. Accordingly, intangible assets are not
expected to have a significant effect on our future results of operations.
Interest expense was $803 in 1998 compared to $299 in 1997 and $253
in 1996. The increase in interest expense resulted primarily from the increase
in our indebtedness associated with the acquisition of stores in 1998 and 1997.
EARNINGS. Income (loss) before provision (credit) for income taxes
decreased from $302 (2.3% of net revenues) in 1996 and $807 (2.8% of net
revenues) in 1997, to a loss of $2,539 (3.4% of net revenues) in 1998, an
increase of $505 (1.8% of net revenues) and a decrease of $3,346 (4.5% of net
revenues), respectively.
Because HORIZON operated as an S Corporation prior to its initial
public offering, it had not incurred any income taxes prior to such time. As a
result of the termination of its S Corporation election in connection with the
initial public offering, we became a taxpaying entity subject to the payment of
taxes on all non-exempt income at applicable Federal and state income tax rates.
In 1997, we incurred a noncash one-time charge for deferred income taxes of $170
as a result of the change in tax status.
In 1998 we incurred a net loss of $2,179 as compared to net income of
$327 (after the one-time noncash charge for deferred taxes of $170) in 1997 and
net income of $196 in 1996. The loss in 1998 resulted primarily from profits
which were lost when our computer system failed to receive and/or process daily
price updates on prescription drugs transmitted electronically from our
wholesale supplier.
LIQUIDITY AND CAPITAL RESOURCES. Net cash used in operating activities
was $2,072 in 1998 as compared to $126 in 1997 and $29 provided by operations in
1996. The net loss of $2,179 in 1998 was primarily responsible for the increase
in net cash used by operations. Typically, cash provided by operations is
adequate to supply working capital and external sources of cash are used mainly
to finance new store acquisitions. We believe that our working capital needs,
including growth in accounts receivable and inventory will be funded by cash
flow from operations. New store acquisitions and other capital expenditures
will be funded by the McKesson credit facility and capital leases.
The $6,717 net proceeds of a private placement closed June 16, 1998
was used to support an aggressive store acquisition program and for working
capital. We believe that based on prior acquisitions, the average acquisition
cost per store will be approximately $500 to $700 plus inventory based on such
variables as store sales and profits. Management believes it will be able to
obtain seller financing for approximately 30-40% of the cost of each such
acquisition.
McKesson currently provides us with a $18,000 credit facility,
subject to certain restrictive covenants (including financial ratio
requirements) which we must meet to maintain the credit facility. At
December 31, 1998 we were in default of several of these covenants, but
McKesson waived such defaults pursuant to an agreement executed April 15,
1999. At December 31, 1998, we had borrowed $8,500 under this credit
facility.
During January 1999, we acquired four additional stores; however, as a
result of the loss incurred in 1998, we temporarily suspended acquisitions. We
plan to resume acquisitions in the latter part of the second quarter or the
third quarter. During 1999 we expect to fund such acquisitions with the
existing credit facility, seller financing, cash flow from operations, the
issuance of a limited number of restricted shares of common stock, and possibly
another acquisition line of credit or equity offering. Thereafter we expect to
fund acquisitions with cash flow from current operations, seller financing, and
the public or private offering of certain equity or long-term debt securities.
Because of the Federal moratorium on home healthcare licenses from
September 1997 to January 1998, and the uncertainty of the current regulations,
we do not plan to expand our home healthcare operations in 1999. We expect,
however, to offer home medical equipment through stores which have not
heretofore offered such equipment.
IMPACT OF INFLATION AND CHANGING PRICES. Inflation continues to cause
increases in product, occupancy and operating expenses, as well as the cost of
acquiring capital assets. The effect of higher operating costs is
<PAGE>
minimized by achieving operating efficiencies.
FACTORS AFFECTING OPERATIONS.
DEPENDENCE ON ACQUISITIONS FOR GROWTH. Our growth strategy depends
upon our ability to continue to acquire, consolidate and operate existing
free-standing pharmacies and related businesses on a profitable basis. We
continually review acquisition proposals and are currently engaged in
discussions with third parties with respect to possible acquisitions. We
compete for acquisition candidates with buyers who have greater financial and
other resources and may be able to pay higher acquisition prices than we are
able to pay. To the extent we are unable to acquire suitable retail
pharmacies, or to successfully integrate such stores into our operations, our
ability to expand our business will be reduced significantly.
SALES TO THIRD-PARTY PAYORS. We sell a growing percentage of our
prescription drugs to customers who are covered by third-party payment
programs. Although contracts with third-party payors may increase the volume
of prescription sales and gross profits, third-party payors typically
negotiate lower prescription prices than non third-party payors.
Accordingly, gross profit margins on sales of prescription drugs have been
decreasing and are expected to continue to decrease in future periods.
RELIANCE ON MEDICARE AND MEDICAID REIMBURSEMENTS. Substantially all
of our home healthcare revenues are attributable to third-party payors,
including Medicare and Medicaid, private insurers, managed care plans and HMOs.
The amounts we receive from government programs and private third-party payors
are dependent upon the specific benefits included under the program or the
patient's insurance policies. Any substantial delays in reimbursement or
significant reductions in the coverage or payment rates of third-party payors,
or from patients enrolled in the Medicare or Medicaid programs, would have a
material adverse effect on our revenues and profitability.
EXPANSION. Our ongoing expansion will require us to implement and
integrate enhanced operational and financial systems, and additional management,
operational and financial resources. Our inability to implement and integrate
these systems and/or add these resources could have a material adverse effect on
our results of operations and financial condition. There can be no assurance we
will be able to manage our expanding operations effectively or maintain or
accelerate our growth. Although we experienced growth in net sales in 1996, 1997
and 1998, and increased profits in 1996 and 1997, we sustained a substantial
loss in 1998 as a result of the malfunction of our computerized pricing system
which failed to receive and/or integrate average wholesale price updates
electronically transmitted from our primary supplier. While such malfunction
has been corrected, there can be no assurance we will not experience other such
problems related to expansion or that we will be able to maintain or increase
net revenues.
GOVERNMENT REGULATION AND HEALTHCARE REFORM. Pharmacists and
pharmacies are subject to a variety of state and Federal regulations, and may be
adversely affected by certain changes in such regulations. In addition,
prescription drug sales represent a significant portion of our revenues and
profits, and are a significant segment of our business. These revenues are
affected by regulatory changes, including changes in programs providing for
reimbursement of the cost of prescription drugs by third-party payment plans,
such as government and private plans, and regulatory changes relating to the
approval process for prescription drugs.
REGULATION OF HOME HEALTHCARE SERVICES. Our home healthcare business
is subject to extensive Federal and state regulation. Changes in the law or new
interpretations of existing laws could have a material effect on permissible
activities, the relative costs associated with doing business and the amount of
reimbursement for our products and services paid by government and other
third-party payors.
MALPRACTICE LIABILITY. The provision of retail pharmacy and home
healthcare services entails an inherent risk of claims of medical and
professional malpractice liability. We may be named as a defendant in such
malpractice lawsuits and subject to the attendant risk of substantial damage
awards. While we believe we have adequate professional and medical malpractice
liability insurance coverage, there can be no assurance that we will not be
sued, that any such lawsuit will not exceed our insurance coverage, or that we
will be able to maintain such coverage at acceptable costs and on favorable
terms.
COMPETITION. The retail pharmacy and home healthcare businesses are
highly competitive. We compete with national, regional and local retail
pharmacy chains, independent retail pharmacies, deep discount retail pharmacies,
supermarkets, discount department stores, mass merchandisers and other retail
stores and
<PAGE>
mail order operations. Similarly, our home healthcare operations 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 we
offer. Most of our competitors have financial resources that are
substantially greater than ours, and we cannot assure that we will be able to
continue to successfully compete with such competitors.
GEOGRAPHIC CONCENTRATION. Currently, 19 and 7 of our 49 retail
pharmacies are located in Texas and New Mexico, respectively, and we plan to
acquire other retail pharmacies located in such states. Consequently, our
results of operations and financial condition are dependent upon general trends
in the Texas and New Mexico economies and any significant healthcare legislative
proposals enacted in those states.
SUBSTANTIAL INDEBTEDNESS. We have incurred substantial debt and may
incur additional indebtedness in the future in connection with our plan of
acquisitions. Our ability to make cash payments to satisfy our debt will depend
upon our future operating performance, which is subject to a number of factors
including prevailing economic conditions and financial, business and other
factors beyond our control. If we are unable to generate sufficient earnings and
cash flow to service such debt we may have to refinance certain of these
obligations or dispose of certain assets. In the event we are required to
refinance all or any part of such debt, there can be no assurance that we will
be able to effect such refinancing on satisfactory terms.
POSSIBLE NEED FOR ADDITIONAL CAPITAL. We believe the proceeds from
the 1998 Private Placement, operating revenues and the McKesson credit facility
will be adequate to satisfy our capital requirements for the next 12 months,
although circumstances, including the acquisition of additional stores, may
require that we obtain additional long or short-term financing to realize
certain business opportunities. No assurance can be made that we will be able
to obtain such financing.
RELIANCE ON SINGLE SUPPLIER. We currently purchase approximately 70%
of our inventory from McKesson, which also provides us with order entry
machines, shelf labels and other supplies. We believe that the wholesale
pharmaceutical and non-pharmaceutical distribution industry is highly
competitive because of the consolidation of the retail pharmacy industry and the
practice of certain large retail pharmacy chains to purchase directly from
product manufacturers. Although we believe we could obtain our inventory
through another distributor at competitive prices and upon competitive payment
terms if our relationship with McKesson was terminated, there can be no
assurance that the termination of such relationship would not adversely affect
our business.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. Our results
of operations depend significantly upon the net sales generated during the first
and fourth quarters, and any decrease in net sales for such periods could have a
material adverse effect upon our profitability. As a result, we believe that
period-to-period comparisons of our results of operations are not and will not
necessarily be meaningful, and should not be relied upon as an indication of
future performance.
YEAR 2000. 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 our computer programs or hardware that have date-sensitive software or
embedded computer 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 our normal business activities.
We have established a plan to prepare our systems for the Year 2000
issue and to reasonably assure that our critical business partners are prepared.
We have completed our assessment of all internal systems that could be
significantly affected by the Year 2000 issue and have determined that we will
be required to modify or replace portions of our software primarily related to
our accounting and pharmacy systems. We believe that with modifications or
replacements of the identified software programs, the Year 2000 issue can be
mitigated. However, if all additional phases of the Year 2000 plan are not
completed timely, the Year 2000 issue could have a material impact on our
operations as discussed under "Risks and Contingency Plans." In addition, we are
in the process of gathering information about the Year 2000 compliance status of
our key third-party business partners.
STATUS. Our internal information technology exposures are primarily
related to four areas: (i) our financial accounting system; (ii) our management
information systems comprising primarily
<PAGE>
stand-alone PCs; (iii) our pharmacy system used in connection with the
dispensation of pharmaceuticals; and (iv) our point of sale system for our
automated cash registers. As of December 31, 1998, we had completed upgrading
our accounting and management informations systems, and we expect to complete
software reprogramming and replacement for the pharmacy and point of sale
systems no later than June 30, 1999. Once the software is reprogrammed or
replaced with a Year 2000 compliant version, we will test and implement the
software. As of December 31, 1998, we had completed 35% of our testing and
had implemented 90% of our remediated applications. Completion of the testing
phase for all significant systems is expected by June 1, 1999 with all
remediated systems fully tested and implemented by June 30, 1999.
Our non-Information Technology systems consist primarily of
miscellaneous office equipment which is not material to our business. The
initial assessment of these systems has indicated that modification or
replacement will not be necessary as a result of the Year 2000 issue. As such,
we are not currently remediating this operating equipment. However, the
existence of embedded technology is by nature more difficult to identify. While
we believe that all significant non-Information Technology systems are Year 2000
compliant, we plan to continue testing our operating equipment and expect to
complete the testing by September 30, 1999.
SIGNIFICANT THIRD PARTIES. Our significant third-party business
partners consist of our suppliers, banks and third party insurance carriers. An
initial inventory of significant suppliers and banks has been completed and
letters mailed requesting information regarding each parties' Year 2000
compliance status. We intend to develop contingency plans by July 31, 1999 for
suppliers that appear to have substantial Year 2000 operational risks which may
include the change of suppliers to minimize such risks. We will continue our
efforts to raise awareness and inform store managers of the risks posed by the
Year 2000 throughout fiscal year 1999.
COSTS. Our Year 2000 plan encompasses the use of both
internal and external resources to identify, remediate, test, and implement
systems for Year 2000 readiness. External resources include contract
resources which will be used to supplement available internal resources. The
total cost of the Year 2000 project, excluding internal personnel costs, is
estimated at $1,500 and is being funded by operating cash flows. As of
December 31, 1998, we had incurred expenses of $300 related to the Year 2000
project. Of the total remaining project costs, approximately $1,000 is
attributable to the purchase and implementation of new hardware and software
and will be capitalized. The remaining $200 relates to remediation and
testing of software and will be expensed as incurred.
RISKS AND CONTINGENCY PLANS. We believe we have an effective
plan in place to resolve the Year 2000 issue in a timely manner. However, due to
the forward-looking nature and lack of historical experience with Year 2000
issues, it is difficult to predict with certainty what will happen after
December 31, 1999. Despite the Year 2000 remediation efforts being made, it is
likely that there will be disruptions and unexpected business problems during
the early months of 2000. We plan to make diligent efforts to assess the Year
2000 readiness of our significant business partners and will develop contingency
plans for critical areas where we believe our exposure to Year 2000 risk is the
greatest. However, despite our efforts, we may encounter unanticipated third
party failures, more general public infrastructure failures or a failure to
successfully conclude our remediation efforts as planned. If the remaining Year
2000 plan is not completed timely, in addition to the implications noted above,
we may be required to utilize manual processing of certain otherwise automated
processes primarily related to partner compensation and cash management. Any one
of these unforeseen events could have a material adverse impact on our results
of operations, financial condition, or cash flows in 1999 and beyond.
Item 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. We are
exposed to market risk from changes in interest rates on debt. Our exposure to
interest rate risk currently consists of our outstanding line of credit. The
balance outstanding under the line of credit was $8,500 at December 31, 1998.
The impact on our results of operations of a one-point interest rate change on
balances outstanding under the line of credit would be immaterial. This market
risk discussion contains forward-looking statements. Actual results may differ
materially from this discussion based upon general market conditions and changes
in financial markets.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this Item are set forth beginning
on page F-1 hereof.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On March 17, 1997, the Board of Directors approved the appointment of
Ernst & Young LLP to replace Herold, Howard & Madsen P.C. as our independent
auditors. In our view, this change was not the result of any disagreement
relating to any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedures. The reports issued by
Herold, Howard & Madsen P.C. did not contain an adverse opinion or a disclaimer
of opinion, nor were such reports qualified or modified as to uncertainty, audit
scope, or accounting principles. At no time during the engagement of Herold,
Howard & Madsen P.C. were there any disagreements on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of Herold,
Howard & Madsen P.C., would have caused it to make a reference to the subject
matter of the disagreement in connection with its report. Notwithstanding the
engagement of Ernst & Young LLP as our independent auditors, Herold, Howard &
Madsen P.C. continues to perform individual audits of certain acquired stores
and to perform tax and other financial planning services.
PART III
In accordance with General Instruction E(3), a presentation of
information required in response to Items 10, 11, 12 and 13 shall appear in our
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days of the year end covered hereby, and shall be incorporated herein by
reference when filed.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS. A list of financial statements is
contained in "Index to Financial Statements" on page F-1 hereof.
(b) REPORTS ON FORM 8-K. During the last quarter of fiscal 1998 we
filed the following Current Reports on Form 8-K:
<TABLE>
<CAPTION>
REPORT REPORT DATE
TYPE DATE FILLED ITEMS REPORTED FINANCIAL STATEMENTS FILED
------ ------ ------ -------------- --------------------------
<S> <C> <C> <C> <C>
8-K 11/8/98 11/18/98 Item 2 - Acquisition of Holland's Drug 8-K(A) filed 1/25/99
Store, Inc. in Sandwich and Yorkville, IL
</TABLE>
(c) EXHIBITS. The exhibits listed below are included with this
report. All employment contracts and compensatory plans or arrangements are
marked with an asterisk (*).
Exhibit No. Name of Exhibit
- ----------- ---------------
3.1. Articles of Incorporation of HORIZON Pharmacies, Inc.,
incorporated by reference to Exhibit 3.1 of our Quarterly
Report on Form 10-QSB filed electronically on August 14, 1998.
3.2. Bylaws of HORIZON Pharmacies, Inc., incorporated by reference
to Exhibit 3.2 of our Quarterly Report on Form 10-QSB filed
electronically on August 14, 1998.
4.1. HORIZON Pharmacies, Inc. 1998 Stock Option Plan incorporated by
reference to Exhibit 4.2 of our Registration Statement on Form
S-8 (File No. 333-62805).
4.2. HORIZON Pharmacies, Inc. 1997 Stock Option Plan incorporated
herein by reference to Exhibit 4.4 to our Registration
Statement on Form SB-2, as amended (File No. 333-25257).
4.3. Specimen Certificate of the common stock of HORIZON Pharmacies,
Inc. incorporated by reference to Exhibit 4.1 of our
Registration Statement on Form S-3 (File 333-61987).
4.4. Form of Warrant dated July 11, 1997 between HORIZON Pharmacies,
Inc. and Capital West Securities, Inc. and ComVest Partners,
Inc., incorporated herein by reference to Exhibit 4.2 of our
<PAGE>
Registration Statement on Form S-3 (File 333-61987).
4.5. Warrant Agreement dated November 7, 1997 by and between HORIZON
Pharmacies, Inc. and ComVest Partners, Inc. incorporated by
reference to Exhibit 4.3 of our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 filed electronically
on April 15, 1998.
10.1. Credit Agreement dated July 2, 1998 by and between the HORIZON
Pharmacies, Inc. and McKesson Corporation, incorporated by
reference to Exhibit 10.2 to our Current Report on Form 8-K
filed electronically on August 4, 1998.
10.2. First Amendment to the Credit Agreement dated as of July 20,
1998 incorporated herein by referenced to Exhibit 10.2 of our
Current Report on Form 8-K filed electronically on August 4,
1998.
10.3. Supply Agreement dated effective April 30, 1998 by and between
HORIZON Pharmacies, Inc. and McKesson Corporation, incorporated
herein by reference to Exhibit 10.1 of our Form 10-Q filed
electronically on May 15, 1998.
10.4. Form of Employment Agreement by and between HORIZON Pharmacies,
Inc. and each of Rick D. McCord, R.Ph., Sy S. Shahid, Charlie
K. Herr, R.Ph., Robert D. Mueller, R.Ph., and Nancy Papaneri,
R.Ph., incorporated herein by reference to Exhibit 10.4 to the
Registration Statement on Form SB-2 (File No. 333-25257).
10.5 Form of Lockup Agreement incorporated by reference to Exhibit
10.5 to our Registration Statement on Form SB-2, as amended
(File No. 333-25257).
10.6. Purchase Agreement dated November 8, 1998 by and between
HORIZON Pharmacies, Inc. and Holland's Drug Store, Inc.,
incorporated herein by reference to Exhibit 2.1 to our Current
Report on Form 8-K filed electronically on November 18, 1998.
10.7. HORIZON Pharmacies, Inc. 401(k) Plan incorporated herein by
reference to Exhibit 4.2 to our Registration Statement on Form
S-8 (File No. 333-43604).
16.1. Letter of Herold, Howard & Madsen, P.C., Independent Auditors,
relating to change in auditors incorporated herein by reference
to Exhibit 16.1 to the Registration Statement on Form SB-2, as
amended (File No. 333-61987).
21.1. Subsidiaries of HORIZON Pharmacies, Inc., incorporated by
reference to Exhibit 21.1 to our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 filed
electronically on April 15, 1997.
23.1. Consent of Ernst & Young LLP, Independent Auditors (filed
electronically herewith).
27.1. Financial data schedule (filed electronically herewith).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
HORIZON PHARMACIES, INC.
Date: April 15, 1999 By: /s/ Ricky D. McCord
----------------------------------------
Ricky D. McCord, President and Chief
Operating Officer
Date: April 15, 1999 By: /s/ John N. Stogner
----------------------------------------
John N. Stogner, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ricky D. McCord Chairman of the Board of Directors, April 15, 1999
- ------------------------------- President and Chief Executive Officer
Ricky D. McCord, R.Ph. Principal Executive Officer
/s/ Sy S. Shahid Executive Vice President, April 15, 1999
- ------------------------------- Secretary, Director
Sy S. Shahid
/s/ John N. Stogner Chief Financial Officer, Treasurer, April 15, 1999
- ------------------------------- Director Principal Financial and
John N. Stogner Accounting Officer
/s/ Charlie K. Herr Director April 15, 1999
- -------------------------------
Charlie K. Herr, R.Ph.
/s/ Michael F. Loy Director April 15, 1999
- -------------------------------
Michael F. Loy
/s/ Robert D. Mueller Chief Operating Officer, Director April 15, 1999
- -------------------------------
Robert D. Mueller, R.Ph.
/s/ Philip H. Yeilding Director April 15, 1999
- -------------------------------
Philip H. Yeilding
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
The following consolidated financial statements of the Company appear
immediately following this Item 14:
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Auditors................................................................................ F- 1
Consolidated Balance Sheets at December 31, 1997 and 1998..................................................... F- 2
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1998.......................................................................................... F- 4
Consolidated Statements of Shareholders' Equity for each of the three years in the
period ended December 31, 1998............................................................................. F- 5
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1998.......................................................................................... F- 6
Notes to Consolidated Financial Statements.................................................................... F- 8
FINANCIAL STATEMENT SCHEDULES
The Company has included the following schedule immediately following this Item
14:
Schedule II -Valuation and Qualifying Accounts................................................................ F-20
</TABLE>
The Company has omitted all other schedules because the conditions requiring
their filing do not exist or because the required information appears in the
Company's Consolidated Financial Statements, including the notes to those
financial statements.
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
HORIZON Pharmacies, Inc.
We have audited the accompanying consolidated balance sheets of HORIZON
Pharmacies, Inc. as of December 31, 1997 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedule listed in the Index at Item
14. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HORIZON
Pharmacies, Inc. at December 31, 1997 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
April 8, 1999, except for the second
paragraph of note 4(A) as to which
the date is April 15, 1999
F-1
<PAGE>
HORIZON Pharmacies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,084 $ 6,617
Accounts receivable, less allowance of $112,000 in 1997 and $217,000 in
1998:
Third-party providers 2,763 5,040
Others 1,478 2,590
Refundable income taxes - 503
Inventories, at the lower of specific identification cost or market 7,901 18,084
Other 163 311
------------------------------------
Total current assets 16,389 33,145
Debt issue costs, net of accumulated amortization of $66,591 - 69
Property, equipment and capital lease assets:
Property and equipment, at cost:
Land and buildings 205 867
Equipment 1,453 3,177
------------------------------------
1,658 4,044
Less accumulated depreciation 201 531
------------------------------------
Property and equipment, net 1,457 3,513
Equipment under capital leases, net of accumulated amortization of
$92,238 in 1997 and $184,975 in 1998 282 530
------------------------------------
Property, equipment and capital lease assets, net 1,739 4,043
Intangibles, at cost:
Noncompete covenants and customer lists 973 1,981
Goodwill 1,880 8,145
------------------------------------
2,853 10,126
Less accumulated amortization 327 736
------------------------------------
Intangibles, net 2,526 9,390
------------------------------------
$20,654 $46,647
------------------------------------
------------------------------------
</TABLE>
F-2
<PAGE>
HORIZON Pharmacies, Inc.
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
------------------------------------
(In Thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,670 $ 7,889
Accrued liabilities 614 1,438
Notes payable 162 109
Current portion of long-term debt 572 3,104
Current obligations under capital leases 84 167
------------------------------------
Total current liabilities 5,102 12,707
Long-term debt 3,333 13,159
Obligations under capital leases 198 353
Deferred income taxes 182 -
Commitments and contingencies
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 4,436,494 shares in 1997 and 5,623,743 shares in 1998 44 56
Additional paid-in capital 11,517 22,343
Retained earnings (accumulated deficit) 278 (1,901)
------------------------------------
11,839 20,498
Treasury stock, at cost; 6,081 shares in 1998 - 70
------------------------------------
Total shareholders' equity 11,839 20,428
------------------------------------
$20,654 $46,647
------------------------------------
------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
HORIZON Pharmacies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Net revenues:
Prescription drugs sales $10,515 $21,493 $55,248
Other sales and services 2,621 6,936 19,489
------------------------------------------------------
Total net revenues 13,136 28,429 74,737
Costs and expenses:
Cost of sales and services:
Prescription drugs 7,310 15,293 42,850
Other 1,632 3,839 11,661
Depreciation and amortization 172 329 867
Selling, general and administrative expenses 3,471 7,943 21,292
------------------------------------------------------
Total costs and expenses 12,585 27,404 76,670
------------------------------------------------------
Income (loss) from operations 551 1,025 (1,933)
Other income (expense):
Interest and other income 4 81 197
Interest expense (253) (299) (803)
------------------------------------------------------
Total other income (expense) (249) (218) (606)
------------------------------------------------------
Income (loss) before provision (credit) for
income taxes 302 807 (2,539)
Provision (credit) for income taxes 106 480 (360)
------------------------------------------------------
Net income (loss) $ 196 $ 327 $ (2,179)
------------------------------------------------------
------------------------------------------------------
Basic earnings (loss) per share $.13 $.12 $(.43)
------------------------------------------------------
------------------------------------------------------
Diluted earnings (loss) per share $.13 $.11 $(.43)
------------------------------------------------------
------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
HORIZON Pharmacies, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TREASURY STOCK TOTAL
-------------------- PAID-IN (ACCUMULATED ------------------------ SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT EQUITY
-----------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 854 $ 9 $ 1,340 $ (70) - $ - $ 1,279
Exercise of stock options 160 1 79 - - - 80
Sales of stock 64 1 321 - - - 322
Issuance of stock to reduce debt 4 - 20 - - - 20
Net income, exclusive of pro forma
provision for income taxes
of $106,000 - - - 302 - - 302
Distributions to shareholders
($.19 per share) - - - (253) - - (253)
-----------------------------------------------------------------------------------------
Balance at December 31, 1996 1,082 11 1,760 (21) - - 1,750
Sales of stock:
Initial public offering 1,380 14 5,522 - - - 5,536
Private placement 465 4 4,201 - - - 4,205
Issuance of stock in acquisitions 28 - 321 - - - 321
Issuance of stock to reduce debt 2 - 30 - - - 30
Net income, exclusive of pro forma
provision for income taxes
of $120,000 - - - 447 - - 447
Distributions to shareholders
($.17 per share) - - - (450) - - (450)
Reclassification of accumulated
deficit as a result of
termination of S corporation
status - - (302) 302 - - -
Three-for-two stock split effected in
the form of a dividend 1,479 15 (15) - - - -
-----------------------------------------------------------------------------------------
Balance at December 31, 1997 4,436 44 11,517 278 - - 11,839
Exercise of warrants 33 - 131 - - - 131
Exercise of stock options 116 1 463 - - - 464
Issuance of stock in acquisitions 291 3 3,420 - - - 3,423
Issuance of stock to purchase land 6 - 50 - - - 50
Issuance of stock to reduce debt 5 - 45 - - - 45
Sales of stock 737 8 6,717 - - - 6,725
Purchase of treasury stock - - - - 6 (70) (70)
Net loss - - - (2,179) - - (2,179)
-----------------------------------------------------------------------------------------
Balance at December 31, 1998 5,624 $56 $22,343 $(1,901) 6 $(70) $20,428
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
HORIZON Pharmacies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
-------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 196 $ 327 $ (2,179)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property, equipment
and capital lease assets 64 192 391
Amortization of intangibles 108 137 409
Amortization of debt issue costs - - 67
Loss on disposal of assets and other - - 24
Provision for uncollectible accounts receivable 21 103 147
Provision (credit) for deferred income taxes - 140 (140)
Pro forma provision for income taxes 106 120 -
Changes in operating assets and liabilities, net of
acquisitions of businesses:
Accounts receivable (847) (2,425) (3,094)
Refundable income taxes - - (503)
Inventories (717) (1,014) (2,089)
Other current assets 4 (90) (148)
Bank overdraft 117 (247) -
Accounts payable 888 2,178 4,219
Accrued liabilities 109 453 824
--------------------------------
Total adjustments (147) (453) 107
--------------------------------
Net cash provided by (used in) operating activities 49 (126) (2,072)
INVESTING ACTIVITIES
Purchases of property and equipment (157) (656) (1,060)
Assets acquired for cash in acquisitions of businesses - (1,696) (7,448)
--------------------------------
Net cash used in investing activities (157) (2,352) (8,508)
FINANCING ACTIVITIES
Borrowings 211 - 8,811
Debt issue costs incurred - - (136)
Principal payments on debt (216) (2,817) (2,693)
Principal payments on obligations under capital leases (19) (64) (119)
Issuances of stock, net of offering costs of none in 1996,
$699,498 in 1997 and $275,344 in 1998 402 9,740 7,320
Distributions to shareholders (253) (450) -
Purchase of treasury stock - - (70)
--------------------------------
Net cash provided by financing activities 125 6,409 13,113
--------------------------------
Net increase in cash and cash equivalents 17 3,931 2,533
Cash and cash equivalents at beginning of year 136 153 4,084
--------------------------------
Cash and cash equivalents at end of year $ 153 $ 4,084 $ 6,617
--------------------------------
--------------------------------
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
F-6
<PAGE>
HORIZON Pharmacies, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
---------------------------
(In Thousands)
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 241 $ 309 $ 693
Income taxes - - 503
NONCASH INVESTING AND FINANCING ACTIVITIES
Additions to property and equipment financed by debt $ 150 $ 15 $ -
Equipment leased under capital leases 88 216 357
Issuance of stock to reduce debt 20 30 45
Issuance of stock to purchase land - - 50
Issuance of warrants to lender - - 553
Acquisitions of businesses financed by debt and
common stock:
Accounts receivable and other $ (2) $ 459 $ 442
Inventories 1,014 3,596 8,094
Property and equipment 85 373 1,322
Intangibles 165 1,680 7,286
---------------------------
1,262 6,108 17,144
Less cash paid - 1,696 7,448
---------------------------
Assets acquired $1,262 $4,412 $ 9,696
---------------------------
---------------------------
Financed by:
Advance by shareholder $ - $ 100 $ -
Debt 1,262 3,991 6,273
Common stock - 321 3,423
---------------------------
$1,262 $4,412 $ 9,696
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(In Thousands, Except Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
HORIZON Pharmacies, Inc. (the "Company") owns and operates forty-five retail
pharmacies located in thirteen states, including nineteen pharmacies located
in Texas. Purchases from the Company's primary supplier were $8,077 in 1996,
$18,344 in 1997 and $51,991 in 1998. Accounts payable to the primary supplier
were $2,823 at December 31, 1997 and $6,013 at December 31, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and a
wholly-owned subsidiary. Significant intercompany accounts and transactions have
been eliminated.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of accounts receivable.
Accounts receivable are unsecured and consist principally of receivables from
third-party providers (insurance companies and government agencies) under
third-party payment plans. Certain of these receivables are recorded net of any
allowances provided under the respective plans. Since payments due from certain
third-party payers are sensitive to payment criteria changes and legislative
actions, the allowance is reviewed continually and adjusted for accounts deemed
uncollectible by management.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents include highly liquid investments with maturities of three
months or less when purchased.
F-8
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Advertising costs are charged to expense as incurred and were $84 in 1996, $174
in 1997 and $649 in 1998.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed by the straight-line method
over the estimated useful lives of thirty years for buildings and three to
fifteen years for equipment. Amortization of equipment under capital leases is
provided on a straight-line basis over the estimated useful lives of the
equipment or over the terms of the leases, whichever is shorter. Intangibles are
being amortized using the straight-line method over the terms of the noncompete
covenants of two to seven years and estimated useful lives of customer lists and
goodwill of five years and forty years, respectively. Debt issue costs are being
amortized on a straight-line basis over the terms of the respective debt
agreements.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company reviews long-lived assets, identifiable intangibles and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amounts of assets might not be recoverable. The Company's
primary test for an indicator of potential impairment is operating losses.
The Company reviews each store for impairment quarterly, based upon
expectations of undiscounted future cash flows.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating its fair value
disclosures for financial instruments:
The carrying amounts reported for cash and cash equivalents, accounts
receivable, accounts payable and variable-rate debt approximate their
fair value. The fair values of fixed-rate debt are estimated using
discounted cash flow analyses, based on current incremental borrowing
rates for similar types of borrowing arrangements. The fair values of
debt were approximately $4,145 and $16,400 at December 31, 1997 and
1998, respectively.
F-9
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Prior to completion of an initial public offering (the "Offering") in July 1997,
no income taxes were included in the Company's financial statements under
provisions of subchapter S of the Internal Revenue Code. Upon completion of the
Offering, the S status was automatically terminated and the Company became
subject to income taxes. The pro forma provisions for income taxes for periods
prior to July 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 1997 financial statements include a provision for deferred income
taxes of $170, 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 as of the date of completion of the Offering.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees and
directors with exercise prices equal to the fair values of the shares at the
dates of grants. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. No compensation expense is recognized
with respect to stock options granted at exercise prices equal to the market
prices of the Company's common stock at the dates of grants.
EARNINGS PER SHARE
Weighted average common shares outstanding used in the calculation of basic
earnings (loss) per share for 1996, 1997 and 1998 were 1,521,301, 2,769,236
and 5,065,545, respectively. Common shares used in the calculation of diluted
earnings per share for 1996, 1997 and 1998 were 1,521,301, 2,864,804 and
5,065,545, respectively. The difference in the number of shares for 1997 is
attributable to dilutive stock options of 56,844 and warrants of 38,724.
Anti-dilutive employee stock options and warrants excluded for 1998 were
244,307 and 115,651, respectively. See Note 6 for a description of
potentially dilutive securities of the Company.
F-10
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
2. ACQUISITIONS
All of the Company's retail pharmacies have been acquired from third parties in
purchase transactions. Such acquisitions have been structured as asset purchases
and have included inventories, accounts receivable, store equipment and the
assumption of store operating lease arrangements. The acquisitions generally
have been financed by debt to the sellers and/or an inventory supplier. The
number of pharmacies acquired amounted to four in 1996, thirteen in 1997, and
twenty-one in 1998.
The following unaudited pro forma results of operations data gives effect to
the acquisitions completed in 1996 and 1997 as if the acquisitions had been
consummated as of January 1, 1996 and the acquisitions completed in 1998 as
if the acquisitions 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, 1996 and
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 finance the
acquisitions, adjustments to employee benefits and rent expense and income
tax effects.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
---------------------------------
<S> <C> <C> <C>
Unaudited pro forma information:
Net revenues $41,758 $99,742 $105,210
---------------------------------
---------------------------------
Net income (loss) $ 886 $ 2,018 $ (1,649)
---------------------------------
---------------------------------
Basic earnings (loss) per share $ .40 $ .73 $ (.32)
---------------------------------
---------------------------------
Diluted earnings (loss) per share $ .40 $ .70 $ (.32)
---------------------------------
---------------------------------
</TABLE>
During the period from January 1, 1999 to April 8, 1999, the Company acquired
from third parties four retail pharmacies in purchase transactions. The total of
the purchase prices of $4,002 has been preliminarily allocated to accounts
receivable ($310), inventories ($1,731), property and equipment ($164) and
intangibles ($1,797). The purchases were financed by assumption of debt of $184
and issuance of 8% notes payable to the sellers for $2,038, an aggregate 51,841
shares of common stock (valued at $554) and cash of $1,226.
F-11
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
3. INCOME TAXES
The provision (credit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
---------------------------
<S> <C> <C> <C>
Current:
Federal $ - $185 $(185)
State - 35 (35)
---------------------------
- 220 (220)
Deferred:
Federal - (25) (120)
State - (5) (20)
---------------------------
- (30) (140)
Deferred resulting from change in tax status - 170 -
Pro forma 106 120 -
---------------------------
Provision (credit) for income taxes $106 $480 $(360)
---------------------------
---------------------------
</TABLE>
The reconciliation of income tax computed at the federal statutory tax rate to
provision (credit) for income taxes is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
---------------------------
<S> <C> <C> <C>
Tax at statutory rate $106 $282 $(889)
State income taxes, net of federal tax
benefit - 20 (36)
Effect of change in tax status - 170 -
Increase in deferred tax asset valuation
allowance - - 602
Other - 8 (37)
---------------------------
Provision (credit) for income taxes $106 $480 $(360)
---------------------------
---------------------------
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards ("NOLs")
of $1,840 for income tax purposes that expire in 2013. For financial reporting
purposes, a valuation
F-12
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
3. INCOME TAXES (CONTINUED)
allowance of $602 has been recognized to offset the deferred tax asset
related to this carryforward. If realized, the tax benefit for the NOLs will
be credited to income taxes.
Deferred tax assets and liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------------
<S> <C> <C>
Deferred tax liabilities:
Property, equipment and capital lease assets $ 50 $112
Intangibles 132 194
-------------
Deferred tax liabilities 182 306
Less deferred tax assets:
Accounts receivable 42 82
Inventories - 105
Debt issue costs - 22
Net operating loss carryforward - 699
-------------
42 908
Less valuation allowance - 602
-------------
Net deferred tax assets 42 306
-------------
Net deferred tax liabilities $140 $ -
-------------
-------------
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-----------------
<S> <C> <C>
Borrowings under credit agreement (A) $ - $ 8,500
Installment notes due in varying installments
(totaling $304 per month as of December 31,
1998), including interest at rates ranging from
4.75% to 11.5% and maturing on various dates from
August 2000 to June 2011 3,905 7,763
-----------------
3,905 16,263
Less current portion of long-term debt 572 3,104
-----------------
Long-term debt $3,333 $13,159
-----------------
-----------------
</TABLE>
F-13
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
4. LONG-TERM DEBT (CONTINUED)
(A) In July 1998, the Company entered into a credit agreement with its
primary supplier which provides for borrowings up to $15,000 under
a revolver and $3,000 under a term loan. Borrowings are to be used
for acquisitions and working capital purposes and bear interest at
prime plus 1% (effective rate of 8.75% at December 31, 1998).
Availability of the revolver is subject to a borrowing base
determined by the supplier. Borrowings available and outstanding at
December 31, 1998 consist of $5,500 under the revolver and $3,000
under the term loan and are payable in July 2003. Mandatory
prepayment of borrowings under the revolver are required if the
amount of cash and cash equivalents exceeds $5 million. At December
31, 1998, $1,617 of the revolver was classified as current. The
agreement contains provisions which, among other things, limit the
Company's ability to sell assets, incur additional debt and enter
into transactions with related parties. The agreement also requires
the Company to maintain at least a specified amount of tangible net
worth and satisfy certain financial ratios.
At December 31, 1998, the Company had not complied with several
covenants of the credit agreement for which the Company received
waivers from the supplier on April 15, 1999.
Long-term debt is collateralized by certain accounts receivable, inventories
and property and equipment. Certain debt is collateralized by guarantees of
certain shareholders.
Long-term debt maturing during the five years subsequent to 1998 is as follows:
1999--$3,104; 2000--$1,347; 2001--$1,409; 2002--$1,421; 2003--$7,995 and
2004--$956.
5. LEASES
The Company leases most of its retail store facilities under noncancelable
operating leases, many of which expire within seven years. These leases require
the Company to pay for taxes, maintenance and insurance and contain renewal
options, certain of which involve rent increases. Rent expense was $196 in 1996,
$418 in 1997 and $1,138 in 1998.
F-14
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, Except Share Data)
5. LEASES (CONTINUED)
Components of obligations under capital leases for pharmacy computer equipment
are as follows at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------------------
<S> <C> <C>
Total minimum lease payments $352 $884
Less amount representing interest 70 364
---------------------
Present value of net minimum lease payments 282 520
Less amount due within one year 84 167
---------------------
Amount due after one year $198 $353
---------------------
---------------------
</TABLE>
At December 31, 1998, the future minimum payments under operating and capital
leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
-------------------------------------------------------------------
<S> <C> <C>
1999 $1,793 $270
2000 1,545 232
2001 1,435 202
2002 1,125 167
2003 888 13
Thereafter 1,155 -
------------------
Total 7,941 884
Less amount representing interest - 364
------------------
$7,941 $520
------------------
------------------
</TABLE>
6. SHAREHOLDERS' EQUITY
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.
F-15
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
6. SHAREHOLDERS' EQUITY (CONTINUED)
In July 1997, the Company completed the Offering pursuant to which 1,380,000
shares of common stock and warrants to purchase 180,000 shares of common stock
(exercisable until July 2002 at $4 per share) were sold. The proceeds of the
Offering, net of expenses, amounted to $5,536 and were used to repay certain
debt, acquire pharmacies, purchase property and equipment, and pay distributions
to shareholders.
In October 1997, the Company completed a private placement of 465,000 shares of
stock and warrants to purchase 30,000 shares of common stock (exercisable until
November 2002 at $6.72 per share). The proceeds, net of expenses, amounted to
$4,205 and were used to acquire pharmacies.
In May 1997, the shareholders of the Company approved a two-for-one split of the
Company's common stock. In November 1997, the Board of Directors of the Company
approved a three-for-two split of the Company's common stock in the form of a
stock dividend. Shareholders received one additional share of common stock for
each two shares held. In connection therewith, 1,478,834 shares of stock were
issued and $15 was transferred from additional paid-in capital to common stock.
The effects of the splits have been reflected retroactively in the accompanying
financial statements.
In June 1998, the Company completed a private placement of 736,838 shares of
stock and warrants to purchase 41,000 shares of common stock (exercisable
until June 2003 at $9.50 per share). The proceeds, net of expenses, amounted
to $6,725 and were used to acquire pharmacies.
During 1998, 32,750 shares of stock were issued upon exercise of warrants sold
in the Offering. At December 31, 1998, 218,250 shares of common stock have been
reserved for issuance upon exercise of the remaining warrants at prices ranging
from $4 to $9.50 per share.
STOCK OPTIONS
In March 1997, the Board of Directors approved a stock option plan whereby
options for up to 369,366 shares of common stock may be granted to key employees
and directors. Options for 369,366 shares were granted by the Company in July
1997 at an option price equal to the market value of the Company's common stock
at the date of grant. These options became exercisable in October 1997 and
expire in July 2007.
F-16
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
6. SHAREHOLDERS' EQUITY (CONTINUED)
In February 1998 and March 1999, the Board of Directors approved additional
stock option plans whereby options for up to 1,050,000 shares of common stock
may be granted to employees and directors at prices as specified in the plans
on the dates the options are granted. Options granted in 1998 are generally
exercisable in three equal annual installments commencing one year from the
dates of grants and expire ten years from the dates of grants. Options for
430,000 shares were granted by the Company in 1998 at option prices equal to
the market value of the Company's common stock at the dates of grant.
The following pro forma information presents net loss and diluted loss per
share information as if the Company had accounted for stock options granted
using the fair value method. The fair values of issued stock options were
estimated at the dates of grants using a Black-Scholes option pricing model
with the following assumptions for 1997 and 1998, respectively: weighted
average risk-free interest rates of 6% and 5.75%; no dividends over the
option terms; stock price volatility factors of 83.2 and 23, and weighted
average expected option lives of two and one-half years and five years. The
estimated fair value as determined by the model is amortized to expense over
the respective vesting period. The pro forma information presented below is
not necessarily indicative of the pro forma effects to be presented in future
periods.
The pro forma information is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998
-------------------
<S> <C> <C>
Net loss $(263) $(2,489)
Diluted loss per share $(.09) $ (.49)
</TABLE>
F-17
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
6. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1998
--------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------------------- ----------------------
<S> <C> <C> <C> <C>
Outstanding--beginning of year - $ - 369,366 $4.00
Granted 369,366 4.00 430,000 8.38
Exercised - - (116,101) 4.00
-------- --------
Outstanding--end of year 369,366 $4.00 683,265 $6.75
-------- --------
-------- --------
Exercisable at end of year 369,366 $4.00 253,265 $4.00
-------- --------
-------- --------
Weighted average fair value of options
granted during the year $ 6.11 $ 11.10
</TABLE>
A summary of the Company's options as of December 31, 1998 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- --------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
OF LIFE EXERCISE OF EXERCISE
RANGE OF EXERCISE PRICES OPTIONS (YEARS) PRICE OPTIONS PRICE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.00 253,265 8.5 $ 4.00 253,265 $4.00
$8.25 to $8.88 427,000 9.2 8.33 - -
$14.38 3,000 9.5 14.38 - -
------------------------------------------------------------
683,265 8.9 $ 6.75 253,265 $4.00
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
F-18
<PAGE>
HORIZON Pharmacies, Inc.
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
7. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan for eligible employees whereby each
participant in the plan may contribute by payroll deduction up to 15% of their
compensation. The Company may make matching contributions of a portion of each
participant's contribution. The Company may also make a profit sharing
contribution. Profit sharing contributions were none in 1996, none in 1997 and
$67 in 1998.
8. CONTINGENCIES
The Company has contingent liabilities for taxes, lawsuits and various other
matters occurring in the ordinary course of business. Management of the Company
believes that the ultimate resolution of these contingencies will not have a
material adverse effect on the Company's financial position or results of
operations.
F-19
<PAGE>
HORIZON Pharmacies, Inc.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
ADDITIONS AMOUNTS
BALANCE AT CHARGED TO WRITTEN OFF BALANCE
BEGINNING COSTS AND AGAINST THE AT END
DESCRIPTION OF YEAR EXPENSES ALLOWANCE RECOVERIES OF YEAR
- ------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable:
Year ended:
December 31, 1996 $ 8 $ 21 $ 9 $ - $ 20
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 1997 $ 20 $103 $11 $ - $112
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 1998 $112 $147 $42 $ - $217
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-40533) pertaining to the HORIZON Pharmacies, Inc. 1997
Stock Option Plan, the Registration Statement (Form S-8 No. 333-43607)
pertaining to the HORIZON Pharmacies, Inc. 401(k) Plan, the Registration
Statement (Form S-8 No. 333-62805) pertaining to the HORIZON Pharmacies, Inc.
1998 Stock Option Plan, and the Registration Statements (Forms S-3 No.
333-61987 and 333-65419) and related Prospectuses for the registration of an
aggregate of 769,588 shares of common stock of our report dated April 8,
1999, except for the second paragraph of note 4(A) as to which the date is
April 15th, 1999, with respect to the consolidated financial statements of
HORIZON Pharmacies, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1998.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
April 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
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0
0
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