<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2000
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-22403
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HORIZON PHARMACIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2441557
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
</TABLE>
531 WEST MAIN STREET
DENISON, TEXAS 75020
(Address of principal executive offices)
(903) 465-2397
(Registrant's telephone number)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OUTSTANDING AT MAY 12, 2000
------------------- ---------------------------
<S> <C>
Common stock, par value $.01 per share 5,948,774
</TABLE>
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<PAGE>
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I--FINANCIAL INFORMATION............................... 3
Financial Statements.................................... 3
Condensed Consolidated Balance Sheets................... 3
Condensed Consolidated Statements of Operations
(Unaudited)............................................ 5
Condensed Consolidated Statements of Cash Flows
(Unaudited)............................................ 6
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 9
Quantitative and Qualitative Disclosures about Market
Risks.................................................. 15
PART II. OTHER INFORMATION.................................. 16
Exhibits and Reports On Form 8-K........................ 16
SIGNATURES.................................................. 17
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,263 $ 402
Certificate of deposit.................................... 375 375
Accounts receivable, net:
Third-party providers................................... 8,828 9,028
Others.................................................. 2,922 2,727
Inventories, at the lower of specific identification cost
or market............................................... 23,522 22,342
Long-lived assets held for sale........................... 633 541
Other..................................................... 674 1,182
------- -------
Total current assets........................................ 38,217 36,597
Debt issue costs, net of accumulated amortization........... 595 1,341
Property, equipment and capital lease assets:
Property and equipment:
Land, buildings and improvements........................ 1,498 1,548
Software and equipment.................................. 5,509 6,632
------- -------
7,007 8,180
Less accumulated depreciation............................. 1,057 1,322
------- -------
Property and equipment, net............................... 5,950 6,858
Equipment under capital leases, net of accumulated
amortization............................................ 725 661
------- -------
Property, equipment and capital lease assets, net........... 6,675 7,519
Intangibles, at cost:
Noncompete covenants and customer lists................... 2,415 2,411
Goodwill.................................................. 13,299 13,480
------- -------
15,714 15,891
Less accumulated amortization........................... 1,370 1,469
------- -------
Intangibles, net............................................ 14,344 14,422
------- -------
$59,831 $59,879
======= =======
</TABLE>
3
<PAGE>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $12,615 $ 10,832
Accrued liabilities....................................... 1,420 1,064
Lease termination settlements and other exit costs........ 1,367 1,111
Notes payable............................................. 5,566 5,950
Current portion of long-term debt......................... 2,439 2,433
Current portion of obligations under capital leases....... 239 234
------- --------
Total current liabilities................................... 23,646 21,624
Noncurrent liabilities:
Lease termination settlements............................. 1,250 1,250
Long-term debt............................................ 19,204 21,461
Obligations under capital leases.......................... 481 423
------- --------
20,935 23,134
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000
shares, none issued..................................... -- --
Common stock, $.01 par value, authorized 14,000,000
shares; issued 5,888,965 shares in 1999 and 5,954,855 in
2000.................................................... 59 59
Additional paid-in capital................................ 24,710 26,185
Accumulated deficit....................................... (9,449) (11,053)
------- --------
15,320 15,191
Treasury Stock (6,081 shares), at cost.................... (70) (70)
------- --------
Total stockholders' equity.................................. 15,250 15,121
------- --------
$59,831 $ 59,879
======= ========
</TABLE>
See accompanying notes.
4
<PAGE>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
1999 2000
-------- --------
(IN THOUSANDS,
EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenues:
Prescription drugs sales.................................. $23,615 $26,954
Other sales and services.................................. 7,370 8,148
------- -------
Total net revenues.......................................... 30,985 35,102
Costs and expenses:
Cost of sales and services:
Prescription drugs...................................... 17,317 20,677
Other................................................... 4,598 5,116
Depreciation and amortization............................. 339 499
Selling, general and administrative expenses.............. 8,017 9,762
------- -------
Total costs and expenses.................................... 30,271 36,054
------- -------
Income (loss) from operations............................... 714 (952)
Other income (expense):
Interest and other income................................. 70 4
Interest expense.......................................... (397) (656)
------- -------
Total other income (expense)................................ (327) (652)
------- -------
Net income (loss)........................................... $ 387 $(1,604)
======= =======
Basic earnings (loss) per share (Note 2).................... $ 0.07 $ (0.27)
======= =======
Diluted earnings (loss) per share (Note 2).................. $ 0.07 $ (0.27)
======= =======
</TABLE>
See accompanying notes.
5
<PAGE>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 387 $(1,604)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 337 499
Other................................................... -- 41
Changes in operating assets and liabilities, net of
acquisitions of businesses:
Accounts receivable................................... (1,383) (78)
Inventories........................................... (815) 1,218
Other current assets.................................. (66) (244)
Accounts payable...................................... 1,356 (1,784)
Accrued liabilities................................... 61 (371)
------- -------
Total adjustments........................................... (510) (719)
------- -------
Net cash used in operating activities....................... (123) (2,323)
INVESTING ACTIVITIES
Proceeds from sales of assets............................... -- 92
Purchases of property and equipment......................... (383) (952)
Assets acquired for cash in acquisitions of businesses...... (1,280) (101)
------- -------
Net cash used in investing activities....................... (1,663) (961)
FINANCING ACTIVITIES
Borrowings.................................................. 51 3,100
Debt issue costs incurred................................... (3) --
Principal payments on debt.................................. (511) (615)
Principal payments on obligations under capital leases...... (46) (62)
------- -------
Net cash provided by (used in) financing activities......... (509) 2,423
------- -------
Net decrease in cash and cash equivalents................... (2,295) (861)
Cash and cash equivalents at beginning of period............ 6,617 1,263
------- -------
Cash and cash equivalents at end of period.................. $ 4,322 $ 402
======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment leased under capital leases....................... $ 213 $ --
Issuance of warrants to lenders and suppliers (350,000
shares)................................................... -- 895
Debt issue costs deducted from debt proceeds................ -- 150
Acquisitions of businesses financed by debt and common
stock:
Accounts receivable and other......................... $ 310 $ --
Inventories........................................... 1,730 39
Property and equipment................................ 164 169
Intangibles........................................... 1,852 177
------- -------
4,056 385
Less cash paid........................................ (1,280) (101)
------- -------
Assets acquired....................................... $ 2,776 $ 284
======= =======
Financed by:
Debt...................................................... $ 2,222 $ --
Common stock (52,006 shares in 1999 and 54,036 shares in
2000)................................................... 554 284
------- -------
TOTAL................................................. $ 2,776 $ 284
======= =======
</TABLE>
See accompanying notes.
6
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1
The unaudited condensed consolidated financial statements include all
adjustments, consisting of normal, recurring accruals, which HORIZON
Pharmacies, Inc. ("Horizon" or the "Company") considers necessary for a fair
presentation of the financial position and the results of operations for the
indicated periods. The notes to the financial statements should be read in
conjunction with the notes to the financial statements contained in our
Form 10-K, for the year ended December 31, 1999. The results of operations for
the three months ended March 31, 2000, are not necessarily indicative of the
results to be expected for the full year ending December 31, 2000. Horizon's net
revenues, costs and expenses are higher during peak holiday periods and from
Christmas through Easter (the first and fourth quarters of the calendar year).
Estimated gross profit rates were used to determine costs of sales for the three
months ended March 31, 1999 and 2000.
NOTE 2
Weighted average common shares outstanding used in the calculation of basic
earnings (loss) per share for the three months ended March 31, 1999 and 2000
totaled 5,658,025 and 5,886,069, respectively. Common shares used in the
calculation of diluted earnings (loss) per share for the three months ended
March 31, 1999 and 2000 were 5,900,464 and 5,886,069, respectively. The
difference in the number of shares for 1999 is attributable to dilutive stock
options and warrants of 242,439. Anti-dilutive employee stock options and
warrants excluded amounted to 101,200 shares for the three months ended
March 31, 1999 and 104,621 shares for the three months ended March 31, 2000.
NOTE 3
No income taxes are provided due to the existence of net operating loss
carry forwards.
NOTE 4
At March 31, 2000, we operated 52 free-standing retail pharmacies, all of
which were acquired from third parties in purchase transactions. Such
acquisitions have generally been structured as asset purchases and generally
have included inventories, store fixtures and the assumption of store operating
lease arrangements. The acquisitions generally have been financed by debt to the
sellers and/or an inventory supplier. The number of pharmacies acquired during
the three months ended March 31, 1999 and 2000 were four and one, respectively.
Pro forma results of operations data giving effect to the acquisitions
completed during the three month periods ended March 31, 1999 and 2000 as if the
transactions had been consummated as of January 1, 1999 were not materially
different from historical operating results.
NOTE 5
In March 2000, we signed an agreement with Informed.com, Inc.
("Informed.com") to sell to Informed.com a newly organized subsidiary d/b/a
InformedScripts.com for $5,500 ($1,500 in cash and $4,000 in Informed.com's
common stock). At the same time, we entered into a fulfillment and guaranty
agreement with InformedScripts.com to be its exclusive fulfillment house for
prescription drugs and OTC drug needs, and in exchange for the exclusive
designation, we agreed to guarantee certain levels of gross
7
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5 (CONTINUED)
sales and pretax profits of InformedScripts.com during the three-year term of
the agreement. As additional consideration we issued warrants for the purchase
of 700,000 shares of our common stock to Informed.com which have an estimated
fair value of approximately $1,500 which will be amortized over the term of the
fulfillment agreement.
In lieu of receiving cash at closing, we accepted a short-term note subject
to the completion of a private placement by Informed.com. If the private
placement is not completed and the $1,500 note, plus accrued interest, is not
paid by June 12, 2000, we have the right to terminate all agreements.
We have not reflected the above transaction in the accompanying financial
statements because it is contingent on the collection of the $1,500 note.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (DOLLARS IN THOUSANDS)
OVERVIEW
The following discussion and analysis reviews the operating results of
Horizon for the three months ended March 31, 2000 and compares those results to
the comparable period of 1999. Certain statements contained in this discussion
are not based on historical facts; rather, they are forward-looking statements
that are based upon numerous assumptions about future conditions which may
ultimately prove to be inaccurate, and actual events and results may differ
materially from anticipated results described in such statements. Our ability to
achieve such results is subject to certain risks and uncertainties, such as
those inherent generally in the retail pharmacy industry and the impact of
competition, pricing and changing market conditions. We disclaim, however, any
intent or obligation to update these forward-looking statements. As a result,
you should not rely on these forward-looking statements.
Horizon's principal business strategy since commencing operations in 1994
has been to establish a chain of retail pharmacies through the acquisition of
free standing, full-line retail pharmacies and related businesses. In evaluating
a retail pharmacy for potential acquisition, we (i) evaluate the target store's
profits and losses for preceding years; (ii) review the store's income tax
returns for preceding years; (iii) review computer-generated prescription
reports showing historical information including prescriptions sold, average
price of each prescription, gross margins and trends in prescription sales;
(iv) analyze the store's location and competition in the immediate area;
(v) review the store's lease agreement, if any; and (vi) assess targeted areas
for growth patterns and trends. Based on our analysis of the foregoing items, we
may prepare an offer to purchase the particular store. To assess the
reasonableness of the seller's asking price, we consider the anticipated rate of
return, payback period and the availability and terms of seller financing, with
it being generally desired that one-third of the purchase price be
seller-financed and the balance split between cash and other consideration, such
as our common stock. See "--Liquidity and Capital Resources" for more
information.
In 1999, we made a strategic decision to enter the mail order and e-commerce
business. In June 1999, we purchased a combination retail, mail order and
Internet pharmacy operation, and in the fourth quarter we started a new Internet
pharmacy operation, HorizonScripts.com, which will provide customers online
access to thousands of prescription and non-prescription items at competitive
prices. We believe this Internet pharmacy will enhance our traditional "brick
and mortar" operations, and that the "brick and click" strategy will offer our
customers and potential customers convenient sources for their health care
needs. By expanding our presence through e-commerce, we believe we will expand
our name recognition and revenue base, while also cementing our relationship
with our existing customers.
During the three months ended March 31, 1999, we acquired four retail
pharmacies. During the three months ended March 31, 2000, we acquired the
prescription files and inventory of one pharmacy and consolidated them into an
existing store, we sold the prescription files and pharmaceutical inventory of
our Cleburne, Texas store and we acquired an infusion pharmacy operation in
Corpus Christi, Texas. The primary measurement of the effect of acquisitions on
our operating performance is the number of store operating months, which is the
number of months we owned all of the stores during the relevant measuring
period. We expect that continuing acquisitions and expansion of our e-commerce
activities will be the most significant factors in our growth strategy.
Currently, our primary source of revenue is the sale of prescription drugs.
During the three months ended March 31, 1999 and 2000, sales of prescription
drugs generated 76.2% and 76.8% respectively of net revenues. We expect our
prescription drug business to increase on an annual basis as a result of the
demographic trends toward an aging population and the continued development of
new pharmaceutical products. However, we anticipate that such sales will
decrease as a percentage of our overall net revenues and gross margins as we
expand our home healthcare and other non-pharmaceutical sales and services which
have historically generated higher margins.
9
<PAGE>
Our net revenues and profits should be higher during holiday periods and
from Christmas through Easter. Sales of health-related products peak during
seasonal outbreaks of cough and cold/flu viruses, which typically occur during
the winter and spring. Accordingly, revenues and profits should be highest in
the fourth quarter and the first quarter of each year. However, we have been
making investments in the future of our e-commerce operations over the past two
quarters. Consequently, we experienced losses in the fourth quarter of 1999 and
the first quarter of 2000, which were attributable, in part, to such investments
and, in part, to certain underperforming stores. We expect to incur additional
losses in the near future while we continue to invest in our e-commerce
operations and the building of an infrastructure necessary for our growth.
We anticipate entering into strategic alliances with various e-commerce
companies, as well as pursuing e-commerce strategies through existing retail
centers, such as grocery stores. We recently entered into a relationship with
Informed.com, an e-commerce start-up that provides telemedicine services (e.g.,
counseling and virtual nursing). We will in essence serve as a wholesale
supplier to Informed.com for their online prescription drug and OTC drug orders,
and in this capacity, and in exchange for 2,000,000 shares of Informed.com
common stock and a one-time fee of $1,500, we have guaranteed Informed.com
certain levels of gross sales and pretax profits for its subsidiary,
InformedScripts.com, during the three-year term of the agreement. Additionally,
Informed.com will provide us their e-commerce expertise as we design and develop
electronic kiosks to conduct e-commerce in retail centers.
We also entered into a Cooperative Marketing Agreement with
eGrocery.com, Inc. ("eGrocery.com") pursuant to which eGrocery.com will, among
other things, link our web site to, and display promotional advertisements on,
certain web sites operated and maintained by eGrocery.com. eGrocery.com will
also endeavor to generate cooperative advertising dollars for us from general
merchandise, trade funds and display allowances at the retail stores we own and
manage. We will attempt to enter into additional alliances in fiscal 2000 in
order to provide us increased visibility in cyberspace and access to high
traffic retail centers for electronic kiosks.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain income
statement data for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 2000
-------- --------
<S> <C> <C>
INCOME STATEMENT DATA
REVENUES:
Net Revenues:
Prescription drugs sales................................. 76.2% 76.8 %
Other sales and services................................. 23.8% 23.2 %
Total net revenues..................................... 100.0% 100.0 %
COSTS AND EXPENSES:
Cost of sales--prescription drugs(1)..................... 73.3% 76.7 %
Cost of sales--other(2).................................. 62.4% 62.8 %
Selling, general and administrative expenses(3).......... 25.9% 27.8 %
Depreciation and amortization(3)......................... 1.1% 1.4 %
Interest expense net(3).................................. 1.1% 1.9 %
Net income (loss)(3)..................................... 1.2% (4.6)%
</TABLE>
- ------------------------
(1) As a percentage of prescription drugs sales.
(2) As a percentage of other sales and services.
10
<PAGE>
(3) As a percentage of total net revenues.
Intangible assets, including but not limited to goodwill, pharmacy files and
non-compete covenants, have historically represented a substantial portion of
our acquisition costs. Such assets are amortized over a period of not more than
40 years. Accordingly, the amortization of intangible assets is not expected to
have a significant effect on our future results of operations.
NET REVENUES
Our net revenues increased $4,117, or 13.3%, to $35,102 for the three months
ended March 31, 2000, compared to $30,985 for the three months ended March 31,
1999. The increase was attributable primarily to the increase in store operating
months from 144 in the first quarter of 1999 to 156 in the first quarter of
2000.
Sales of prescription drugs increased to 76.8% of total net revenues for the
three months ended March 31, 2000 from 76.2% of total net revenues for the three
months ended March 31, 1999. 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.
Same-store sales increased $1,071, or 3.9%, to $28,754 in the first three
months of 2000 from $27,683 in the first three months of 1999.
The following tables show our prescription drug gross margins and total
revenues margins for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
GROSS MARGINS
ON PRESCRIPTION GROSS MARGINS ON
DRUG SALES TOTAL REVENUES
--------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Three Months Ended March 31,
2000.................................. $6,277 23.3% $9,309 26.5%
1999.................................. $6,298 26.7% $9,070 29.3%
</TABLE>
The decrease in the gross margin on prescription drug sales from 1999 to
2000 was primarily due to a decrease in the margin on third-party insurance
plans and an increase in the percentage of third-party prescription sales.
COSTS AND EXPENSES
Cost of sales increased $3,878, or 17.7%, to $25,793 in the three months
ended March 31, 2000 from $21,915 in the three months ended March 31, 1999. This
increase is primarily the result of increased sales volume resulting from the
increased number of store operating months.
Our cost of sales as a percentage of total net revenues increased 2.8% to
73.5% in the three months ended March 31, 2000 from 70.7% in the three months
ended March 31, 1999. This increase is primarily due to an increase in the cost
of prescription drug sales.
Selling, general and administrative expenses increased $1,745, or 21.8%, to
$9,762 in the three months ended March 31, 2000 from $8,017 in the three months
ended March 31, 1999. Such expenses, expressed as a percentage of net revenues,
were 27.8% and 25.9% for the three months ended March 31, 2000 and 1999,
respectively. This increase is primarily due to costs associated with the
loading of inventory levels and reorder points in the new pharmacy systems
(which were installed in the third and fourth quarters of 1999), the additional
personnel added to monitor and manage the new pharmacy systems and the start-up
costs of
11
<PAGE>
HorizonScripts.com. Additionally, a portion of the increase is due to an
increased store count and the resulting increased store operating months.
Depreciation and amortization increased $160, or 47.2%, to $499, or 1.4% of
total net revenues, for the three months ended March 31, 2000 from $339, or 1.1%
of total net revenues, for the three months ended March 31, 1999. This increase
was due primarily to our purchase of new stores.
Interest expense increased $259, or 65.2%, to $656 in the first quarter of
2000 compared to $397 during the first quarter of 1999. The increase in interest
expense resulted primarily from the increase in debt associated with our
acquisitions.
Interest and other income decreased $66, or 94.3%, to $4 in the first
quarter of 2000 compared to $70 in the first quarter of 1999.
EARNINGS
We had a net loss of $1,604 for the three months ended March 31, 2000 as
compared to net income of $387 in the same period of 1999. We incurred no income
tax expense in either period as a result of loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities increased $2,446 to $2,323 during the
three months ended March 31, 2000 as compared to $123 for the three months ended
March 31, 1999. The net loss and a decrease in accounts payable were the primary
reasons for the increased usage of cash.
Net cash used in investing activities was $961 for the three months ended
March 31, 2000 as compared to $1,663 for the comparable period in 1999.
Net cash provided by financing activities was $2,423 for the three months
ended March 31, 2000 as compared to net cash used of $509 in the three months
ended March 31, 1999.
Cash and cash equivalents decreased $861 to $402 during the three months
ended March 31, 2000 as compared to $1,263 as of December 31, 1999.
McKesson HBOC, Inc. ("McKesson") currently provides us with a $11,000 credit
facility, due in July 2003, and provides a guaranty for a $7,000 revolving
credit facility from Bank One, Texas, NA ("Bank One") due in July 2000. Both the
McKesson credit facility and the Bank One revolving credit facility are subject
to certain restrictive covenants, including financial ratio requirements, which
we must meet to maintain the credit facility and revolving line of credit. At
December 31, 1999 we were in default of several of these covenants, but McKesson
and Bank One waived such defaults pursuant to agreements executed March 30, 2000
and April 14, 2000, respectively. At May 10, 2000, we had borrowed $10,678 under
the credit facility and $4,950 under the revolving credit facility.
During February 2000, we acquired the prescription files and inventory of
one store in Gering, Nebraska and consolidated it with our existing store. On
March 31, 2000, we acquired (primarily for stock) the prescription files and
inventory of an infusion therapy operation in Corpus Christi, Texas.
As a result of the loss we incurred in 1999, we readjusted the formula we
use when analyzing possible acquisitions. Until we are able to raise additional
capital or secure additional credit lines for acquisitions, we will seek
acquisition opportunities that require less cash and rely more on seller
financing and the public or private offering of certain equity or long-term debt
securities.
Because of the federal moratorium on home healthcare licenses from
September 1997 until January 1998 and the uncertainty of the current
regulations, we do not plan to expand our home healthcare operations in 2000. We
do expect, however, to offer home medical equipment through stores which have
not heretofore offered such equipment.
12
<PAGE>
Our plan for 2000 is to improve our financial condition and operating
results through the sale or closure of several underperforming pharmacies (one
of which was sold in March 2000), increase retail prices when possible, reduce
our receivables, inventories levels, store operating hours and labor costs and
analyze various debt and equity alternatives. In March 2000, the Company issued
$2,500 in convertible debentures which provided $2,175. We used the $2,175 in
net proceeds for working capital needs.
As discussed above, the Company's $7,000 revolving credit facility from Bank
One matures July 31, 2000. We believe that in the event Bank One does not renew
or otherwise extend the credit facility, we will be able to secure replacement
financing through a financial institution or supplier at similar terms or
otherwise retire the debt with sales proceeds from underperforming stores. In
the event such proceeds are not sufficient or that alternative financing is not
arranged, we will sell the assets of certain performing stores (for which we
have previously received unsolicited purchase inquiries) to provide the
additional funds to retire the debt. While the sale of such additional stores
would reduce future revenues, we do not believe such reduction would have a
material adverse effect on the financial position or results of operations of
the Company.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation continues to cause increases in product, occupancy and operating
expenses, as well as the cost of acquiring capital assets. We attempt to
minimize the effect of higher operating costs by achieving operating
efficiencies through the use of technology.
FACTORS AFFECTING OPERATIONS
DEPENDENCE ON ACQUISITIONS FOR GROWTH.
Our growth strategy is two-fold. First, we will continue to seek to acquire,
consolidate and operate existing free-standing pharmacies and related businesses
on a profitable basis. We continually review acquisition proposals and are
currently engaged in discussions with third parties with respect to possible
acquisitions. However, we compete for acquisition candidates with buyers who
have greater financial and other resources than us and, consequently, may be
able to pay higher acquisition prices. To the extent we are unable to acquire
suitable retail pharmacies or to integrate such stores successfully into our
operations, our ability to expand our business may be reduced significantly.
Second, we are expanding our operations into, and attempting to redirect
revenues through, e-commerce by entering into strategic alliances with
e-commerce partners. We believe this e-commerce strategy will allow us to
increase our customer and prescription bases as well as our revenues.
SALES TO THIRD-PARTY PAYORS
We sell a growing percentage of our prescription drugs to customers who are
covered by third-party payment programs. Although contracts with third-party
payors may increase the volume of prescription sales and gross profits,
third-party payors typically negotiate lower prescription prices than non
third-party payors. Accordingly, gross profit margins on sales of prescription
drugs have been decreasing and are expected to continue to decrease in future
periods.
RELIANCE ON MEDICARE AND MEDICAID REIMBURSEMENTS
Substantially all of our home healthcare revenues are attributable to
third-party payors, including Medicare and Medicaid, private insurers, managed
care plans and HMOs. The amounts we receive from government programs and private
third-party payors are dependent upon the specific benefits included under the
program or the patient's insurance policies. Any substantial delays in
reimbursement or significant reductions in the coverage or payment rates of
third-party payors, or from patients enrolled in the Medicare or Medicaid
programs, would have a material adverse effect on our revenues and
profitability.
13
<PAGE>
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 that we will be
able to manage our expanding operations effectively or maintain or accelerate
our growth. Although we experienced growth in net revenues in 1999, we sustained
a substantial loss (as a result of the decline in gross margins in the fourth
quarter related to price conversion difficulties encountered during the pharmacy
computer system conversions, the expenses associated with such conversions, the
installation of the home office computer system, the installation of the frame
relay telecommunication network, and the start-up expenses associated with new
pharmacy web site, HorizonScripts.com). We also incurred a loss in 1998 (as a
result of the malfunction of our computerized pricing system which failed to
receive and integrate average wholesale price updates that were electronically
transmitted from our primary supplier). We cannot assure you that we will not
experience similar problems to those encountered in 1998 and 1999 related to
expansion or that we will be able to maintain or increase net revenues.
GOVERNMENT REGULATION AND HEALTHCARE REFORM
Pharmacists and pharmacies are subject to a variety of state and Federal
regulations and may be adversely affected by certain changes in such
regulations. In addition, prescription drug sales represent a significant
portion of our revenues and profits, and are a significant segment of our
business. These revenues are affected by regulatory changes, including changes
in programs providing for reimbursement of the cost of prescription drugs by
third-party payment plans, such as government and private plans, and regulatory
changes relating to the approval process for prescription drugs.
REGULATION OF HOME HEALTHCARE SERVICES
Our home healthcare business is subject to extensive Federal and state
regulation. Changes in the law or new interpretations of existing laws could
have a material adverse effect on permissible activities, the relative costs
associated with doing business and the amount of reimbursement for our products
and services paid by government and other third-party payors.
MALPRACTICE LIABILITY
The provision of retail pharmacy and home healthcare services entails an
inherent risk of claims of medical and professional malpractice liability. We
may be named as a defendant in such malpractice lawsuits and subject to the
attendant risk of substantial damage awards. While we believe we have adequate
professional and medical malpractice liability insurance coverage, there can be
no assurance that we will not be sued, that any such lawsuit will not exceed our
insurance coverage or that we will be able to maintain such coverage at
acceptable costs and on favorable terms.
COMPETITION
The retail pharmacy and home healthcare businesses are highly competitive.
We compete with national, regional and local retail pharmacy chains, independent
retail pharmacies, deep discount retail pharmacies, supermarkets, discount
department stores, mass merchandisers and other retail stores and mail order
operations. Similarly, our home healthcare operations compete with larger
providers of home healthcare services, including chain operations and
independent single unit stores, which may have a more established presence in
our markets and which may offer more extensive home healthcare services than us.
Most of our competitors have financial resources that are substantially greater
than ours, and we cannot assure you that we will be able to compete successfully
with our competitors.
14
<PAGE>
GEOGRAPHIC CONCENTRATION
Currently, 19 and 7 of our 52 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 our 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 our debt, there can
be no assurance that we will be able to effect such refinancing on satisfactory
terms.
NEED FOR ADDITIONAL CAPITAL
We believe that a planned reduction in our inventory and accounts receivable
levels, the sale of certain underperforming stores and our existing credit
facilities will be adequate to satisfy our working capital requirements for the
next twelve months, although circumstances, including the acquisition of
additional stores and certain alliances and/or joint ventures in e-commerce,
will require that we obtain additional equity and/or long or short-term
financing to realize certain business opportunities. No assurance can be made
that we will be able to obtain such financing.
RELIANCE ON SINGLE SUPPLIER
We currently purchase approximately 80% of our inventory from McKesson,
which also provides us with order-entry machines, shelf labels and other
supplies. We believe that the wholesale pharmaceutical and non-pharmaceutical
distribution industry is highly competitive because of the consolidation of the
retail pharmacy industry and the practice of certain large retail pharmacy
chains to purchase directly from product manufacturers. Although we believe we
could obtain our inventory through another distributor at competitive prices and
upon competitive payment terms if our relationship with McKesson were
terminated, there can be no assurance that the termination of such relationship
would not adversely affect our business.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
Our results of operations depend significantly upon the net sales generated
during the first and fourth quarters, and any decrease in net sales for such
periods could have a material adverse effect upon our profitability. As a
result, we believe that period-to-period comparisons of our results of
operations are not and will not necessarily be meaningful and should not be
relied upon as an indication of future performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
We are exposed to market risk from changes in interest rates on debt. Our
exposure to interest rate risk currently consists of our outstanding lines of
credit. The aggregate balance outstanding under the lines of credit was $16,628
at March 31, 2000. The impact on our results of operations of a one-point
interest rate change on balances outstanding under the line of credit would be
immaterial. This market risk discussion contains forward-looking statements.
Actual results may differ materially from this discussion based upon general
market conditions and changes in financial markets.
15
<PAGE>
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
- ----------- ---------------
<C> <S>
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 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 on August 14, 1998.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
During the three months ended March 31, 2000, the Company filed the
following Current Reports on Form 8-K:
(1) Current Report on Form 8-K filed with the Commission on March 9, 2000.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused
the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C>
HORIZON PHARMACIES, INC.,
a Delaware corporation
Date: May 15, 2000 /s/ RICKY D. MCCORD
--------------------------------------------
Ricky D. McCord
PRESIDENT, CHIEF EXECUTIVE OFFICER
Date: May 15, 2000 /s/ JOHN N. STOGNER
--------------------------------------------
John N. Stogner
CHIEF FINANCIAL OFFICER
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HORIZON
PHARMACIES, INC. 10Q FOR THE THREE MONTHS ENDED MATCH 31, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 402
<SECURITIES> 0
<RECEIVABLES> 11,755
<ALLOWANCES> 0
<INVENTORY> 22,342
<CURRENT-ASSETS> 35,597
<PP&E> 8,481
<DEPRECIATION> 1,322
<TOTAL-ASSETS> 59,879
<CURRENT-LIABILITIES> 21,624
<BONDS> 23,134
0
0
<COMMON> 59
<OTHER-SE> 15,062
<TOTAL-LIABILITY-AND-EQUITY> 59,879
<SALES> 35,102
<TOTAL-REVENUES> 35,102
<CGS> 25,793
<TOTAL-COSTS> 36,706
<OTHER-EXPENSES> 652
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 656
<INCOME-PRETAX> (1,604)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,604)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
