<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-22403
HORIZON PHARMACIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2441557
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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:
TITLE OF EACH CLASS OUTSTANDING AT NOVEMBER 14, 2000
Common stock, par value $.01 per share 6,028,774
1
<PAGE>
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<S> <C> <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........ 17
PART II. OTHER INFORMATION................................................. 18
Exhibits and Reports On Form 8-K................................... 18
SIGNATURES.................................................................. 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HORIZON Pharmacies, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 1,263 $ 3,463
Certificate of deposit ................................................. 375 373
Accounts receivable, net:
Third-party providers ............................................... 8,828 10,089
Others .............................................................. 2,922 2,217
Inventories, at the lower of specific identification cost or market .... 23,522 20,488
Other .................................................................. 1,307 1,477
------- -------
Total current assets ...................................................... 38,217 38,107
Debt issue costs and other, net of accumulated amortization ............... 595 1,753
Property, equipment and capital lease assets:
Property and equipment:
Land, buildings and improvements .................................... 1,498 1,623
Software and equipment .............................................. 5,509 7,491
------- -------
7,007 9,114
Less accumulated depreciation .......................................... 1,057 1,873
------- -------
Property and equipment, net ............................................ 5,950 7,241
Equipment under capital leases, net of accumulated amortization ........ 725 540
------- -------
Property, equipment and capital lease assets, net ......................... 6,675 7,781
Intangibles, at cost:
Noncompete covenants and customer lists ................................ 2,415 2,295
Goodwill ............................................................... 13,299 13,148
------- -------
15,714 15,443
Less accumulated amortization .......................................... 1,370 1,696
------- -------
Intangibles, net .......................................................... 14,344 13,747
------- -------
$59,831 $61,388
======= =======
</TABLE>
3
<PAGE>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 12,615 $ 18,571
Accrued liabilities .................................................... 1,420 684
Lease termination settlements and other exit costs ..................... 1,367 658
Notes payable .......................................................... 5,566 7,000
Current portion of long-term debt ...................................... 2,439 2,371
Current portion of obligations under capital leases .................... 239 201
Long-term debt subject to acceleration ................................. -- 13,178
-------- --------
Total current liabilities ................................................. 23,646 42,663
Noncurrent liabilities:
Lease termination settlements .......................................... 1,250 995
Long-term debt ......................................................... 19,204 6,956
Obligations under capital leases ....................................... 481 278
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 6,034,855 in 2000 ................ 59 60
Additional paid-in capital ............................................. 24,710 26,605
Accumulated deficit .................................................... (9,449) (16,099)
-------- --------
15,320 10,566
Treasury Stock (6,081 shares), at cost ................................. (70) (70)
-------- --------
Total stockholders' equity ................................................ 15,250 10,496
-------- --------
$ 59,831 $ 61,388
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 2000 1999 2000
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues:
Prescription drugs sales ........................ $ 25,248 $ 26,457 $ 72,661 $ 80,551
Other sales and services ........................ 7,482 6,867 22,594 23,485
-------- -------- -------- ---------
Total net revenues ................................. 32,730 33,324 95,255 104,036
Costs and expenses:
Cost of sales and services:
Prescription drugs ........................... 19,298 20,578 54,159 62,851
Other ........................................ 4,417 3,809 13,915 14,742
Depreciation and amortization ................... 469 737 1,186 1,801
Selling, general and administrative expenses .... 8,584 9,378 24,722 29,262
-------- -------- -------- ---------
Total costs and expenses ........................... 32,768 34,502 93,982 108,656
-------- -------- -------- ---------
Income (loss) from operations ...................... (38) (1,178) 1,273 (4,620)
Other income (expense):
Interest and other income ....................... 50 7 170 26
Interest expense ................................ (489) (749) (1,295) (2,056)
-------- -------- -------- ---------
Total other income (expense) ....................... (439) (742) (1,125) (2,030)
-------- -------- -------- ---------
Net income (loss) .................................. $ (477) $ (1,920) $ 148 $ (6,650)
======== ======== ======== =========
Basic earnings (loss) per share (Note 2) ........... $ (.08) $ (0.32) $ 0.03 $ (1.12)
======== ======== ======== =========
Diluted earnings (loss) per share (Note 2) ......... $ (.08) $ (0.32) $ 0.03 $ (1.12)
======== ======== ======== =========
</TABLE>
See accompanying notes.
5
<PAGE>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------
1999 2000
------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................................... $ 148 $(6,650)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization .................................... 1,186 1,801
Provision for impairment ......................................... -- 215
Other ............................................................ 105 84
Changes in operating assets and liabilities, net of acquisitions
of businesses:
Accounts receivable ............................................ (2,888) (628)
Refundable income taxes ........................................ 257 --
Inventories .................................................... (2,919) 2,709
Other current assets ........................................... (212) (366)
Accounts payable ............................................... 1,171 5,956
Accrued liabilities ............................................ 339 (804)
------- -------
Total adjustments .................................................... (2,961) 8,967
------- -------
Net cash provided by (used in) operating activities .................. (2,813) 2,317
INVESTING
(Purchase of) proceeds from certificate of deposit ................... (375) 2
Proceeds from sales of assets ........................................ -- 731
Purchases of property and equipment .................................. (937) (2,290)
Purchases of other assets ............................................ (117) (200)
Assets acquired for cash in acquisitions of businesses ............... (3,136) (117)
------- -------
Net cash used in investing activities ................................ (4,565) (1,874)
FINANCING ACTIVITIES
Borrowings ........................................................... 4,180 4,150
Debt issue costs incurred ............................................ -- (194)
Principal payments on debt ........................................... (2,274) (2,005)
Principal payments on obligations under capital leases ............... (180) (241)
Issuance of common stock, net of offering costs (64,247 shares
in 1999 and 11,854 shares in 2000) ................................. 277 47
------- -------
Net cash provided by financing activities ............................ 2,003 1,757
------- -------
Net increase (decrease) in cash and cash equivalents ................. (5,375) 2,200
Cash and cash equivalents at beginning of period ..................... 6,617 1,263
------- -------
Cash and cash equivalents at end of period ........................... $ 1,242 $ 3,463
======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment leased under capital leases ................................ $ 445 $ --
Issuance of warrants to lenders and suppliers (251,500 shares
in 1999 and 555,000 shares in 2000) ................................ 514 1,418
Issuance of common stock to vendors (80,000 shares) .................. -- 150
Debt issue costs deducted from debt proceeds ......................... -- 150
Acquisitions of businesses financed by debt and common stock:
Accounts receivable and other .................................... $ 403 $ --
Inventories ...................................................... 2,275 39
Property and equipment ........................................... 279 169
Intangibles ...................................................... 5,369 193
------- -------
8,326 401
Less cash paid ................................................... (3,136) (117)
------- -------
Assets acquired .................................................. $ 5,190 $ 284
======= =======
Financed by:
Debt ............................................................... $ 3,611 $ --
Common stock (200,975 shares in 1999 and 54,036 shares in 2000) .... 1,579 284
------- -------
TOTAL .......................................................... $ 5,190 $ 284
======= =======
</TABLE>
See accompanying notes.
6
<PAGE>
HORIZON PHARMACIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS 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 nine months ended September
30, 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 and nine months ended
September 30, 1999 and 2000.
NOTE 2
Weighted average common shares outstanding used in the calculation of
basic earnings (loss) per share for the three month and nine month periods ended
September 30, 2000 totaled 6,028,774 and 5,954,539, respectively. Weighted
average common shares outstanding for the three and nine month periods in 1999
were 5,881,392 and 5,756,407, respectively. Common shares used in the
calculation of diluted earnings per share for the three month and nine month
periods ended September 30, 2000 totaled 6,028,774 and 5,954,539, respectively.
Common shares used for the calculation of fully diluted earnings per share for
the three and nine month periods in 1999 were 5,881,392 and 5,888,073,
respectively. The differences between weighted average shares outstanding and
fully diluted shares outstanding is attributable to dilutive stock options and
warrants. Anti-dilutive employee stock options, warrants and convertible
debentures excluded amounted to 1,212,567 shares and 825,106 shares for the
three months and nine months ended September 30, 1999, respectively, and
2,481,036 shares and 2,222,012 shares for the three months and nine months ended
September 30, 2000, respectively.
NOTE 3
No income taxes are provided due to the existence of net operating loss
carry forwards.
NOTE 4
At September 30, 2000, we operated 47 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 nine months ended September 30, 1999 and 2000 were five and one,
respectively.
Proforma results of operations data giving effect to the acquisitions
completed during the nine month periods ended September 30, 1999 and 2000, as if
the transactions had been consummated as of January 1, 1999, were not materially
different from historical operating results.
7
<PAGE>
NOTE 5
The Company has a credit arrangement with its primary supplier which
provides for borrowings up to $8,000 under a revolver and $3,000 under a term
loan. Availability of the revolver is subject to a borrowing base determined by
the supplier and amounted to $7,678 as of September 30, 2000. Borrowings
outstanding at September 30, 2000 consist of $7,678 under the revolver and
$3,000 under the term loan. The agreement requires the Company to maintain at
least a specified amount of net worth and satisfy certain financial ratios.
At September 30, 2000, the Company had not complied with several
covenants of the credit agreement. These covenant violations have not been cured
or waived, and the supplier has the right to demand payment of outstanding
borrowings. Accordingly, amounts payable under the credit agreement are
classified as current in the accompanying September 30, 2000 financial
statements. If the violations are not waived or the compliance covenants are not
revised, the Company may be required to liquidate additional stores or
inventories in order to pay the debt.
NOTE 6
The Company is dependent on existing credit agreements with lenders,
including the largest supplier, and proceeds from potential debt and equity
offerings in order to fund its operations and pay its obligations. As of
September 30, 2000, the Company has working capital lines of credit with two
lenders. These lines of credit are the primary sources of liquidity for the
Company. As of September 30, 2000, the credit agreements provided for borrowings
up to $17,678 including the Company's $7,000 bank credit facility which was
scheduled to expire on September 1, 2000, but which has been extended to
November 15, 2000. As of September 30, 2000, the Company had no availability for
additional borrowings under the lines and was in default on certain compliance
covenants of the lines. Because of these defaults, the Company is also in
default of its $2,500 convertible debentures. Accordingly, these debentures are
classified as current in the accompanying September 30, 2000 financial
statements. As of September 30, accounts payable includes $15,488 to the
Company's largest supplier.
Management's plan for the remainder of 2000 provides for the Company
to improve its financial condition and operating results through increased
selling prices, a reduction of selling, general and administrative expenses,
the reduction of receivables and inventories levels, reduction in store
operating hours and labor costs and the sale or closure of underperforming
pharmacies (if necessary) and various debt and equity alternatives.
As discussed above, the Company is in default on its working capital
lines of credit. The Company believes that in the event that the lenders do not
waive the defaults and renew or otherwise extend the credit facilities, it will
be able to secure replacement financing at similar terms or otherwise retire the
debt with sales proceeds from the stores identified as held for disposal. In the
event such sales proceeds are not sufficient or that alternative financing is
not arranged, the Company may have to sell the assets of certain performing
stores (which have previously received unsolicited purchase inquiries) to
provide the additional funds to retire the debt. Such additional store sales
would reduce future revenues and could have a material adverse effect on the
financial position and results of operations of the Company.
NOTE 7
During the fourth quarter of 1999, the Company identified several
underperforming pharmacies with long-lived asset (primarily intangibles)
carrying amounts of $1,001 and committed to a plan to sell them. Accordingly,
the Company began marketing these pharmacies to potential buyers and sold
four of these pharmacies plus two other pharmacies during the nine months
ended September 30, 2000. In October 2000, we sold one underperforming
pharmacy. The Company estimates the fair value (based primarily on bids
received from potential buyers or previous sales proceeds) less costs to sell
the pharmacies. During the nine months ended September 30, 2000, the Company
revised its estimates of fair values and recorded additional impairment of
$29.
8
<PAGE>
During the nine months ended September 30, 2000, the Company had
identified one underperforming pharmacy whose operating results indicated that
long-lived assets of this pharmacy might be impaired. The long-lived assets of
this pharmacy had combined carrying amounts of $186. As a result of analyses
performed, the Company determined that the pharmacy was impaired and recorded a
$186 impairment loss. Management's estimate of undiscounted future cash flows
indicates that the remaining carrying amounts as of September 30, 2000 are
expected to be recovered. However, it is reasonably possible that the estimate
of undiscounted cash flows may change in the near future resulting in the need
to write-down one or more of the identified assets to fair value.
NOTE 8
In June 2000, the Company issued a total of 80,000 shares of restricted
common stock (valued at $150) to two public relations firms for investor
relations and marketing services.
In August 2000, options for 10,000 shares of common stock were granted
to an outside consultant at an option price of $1.69 per share which represented
the market value of the Company's common stock at the date of grant. The options
are fully vested and expire in August 2010. In October 2000, options for 295,150
shares of common stock were granted to directors and employees at an option
price of $1.13 per share which represented the market value of the Company's
common stock at the date of grant. The options are fully vested and expire in
October 2010.
NOTE 9
The Company and certain present and former officers or directors
were named as defendants in an action that was filed seeking to certify a
class of persons who purchased shares of the Company's common stock during
the period between August 14, 1998 and March 3, 1999, inclusive, alleging
that defendants failed to timely disclose complications with the Company's
prescription pricing communications technology. The Company has contingent
liabilities for other lawsuits and various other matters with certain vendors
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.
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 and nine months ended September 30, 2000 and compares
those results to the comparable periods 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.
9
<PAGE>
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.
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 of 1999 we started a
new Internet pharmacy operation, HorizonScripts.com, which provides 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 existing 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 nine months ended September 30, 1999, we acquired five
retail pharmacies. During the nine months ended September 30, 2000, we
acquired the prescription files and inventory of two pharmacies and
consolidated them into existing stores, 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. However, at September 30, 2000, we had not complied
with several covenants of the credit agreements with our primary lender.
These covenant violations have not been cured or waived, and the lenders have
the right to demand payment of outstanding borrowings. As a result of these
covenant violations and the limited availability under the revolver portion
of such credit facility, we currently are not able to obtain funds under such
credit facility to finance additional acquisitions.
Currently, our primary source of revenue is the sale of prescription
drugs. During the three months ended September 30, 1999 and 2000, sales of
prescription drugs generated 77.1% and 79.4%, respectively, of net revenues;
during the nine month period ended September 30, 1999 and 2000, sales of
prescription drugs generated 76.3% and 77.4%, respectively. 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.
Our net revenues and operating results should be improved 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
expenses 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 three quarters. Consequently, we
experienced losses in the fourth quarter of 1999 and the first, second and
third quarters 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 in the building of an infrastructure necessary for
our growth.
10
<PAGE>
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. During the second quarter of 2000, we 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 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
REVENUES:
Net Revenues:
Prescription drugs sales........................... 77.1% 79.4% 76.3% 77.4%
Other sales and services........................... 22.9% 20.6% 23.7% 22.6%
----- ----- ----- -----
Total net revenues.............................. 100.0% 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Cost of sales prescription drugs (1)............... 76.4% 77.8% 74.5% 78.0%
Cost of sales other (2)............................ 59.0% 55.5% 61.6% 62.8%
Selling, general and administrative expenses (3)... 26.2% 28.1% 26.0% 28.1%
Depreciation and amortization (3).................. 1.4% 2.2% 1.2% 1.7%
Interest expense (3) .............................. 1.5% 2.2% 1.4% 2.0%
Net income (loss) (3).............................. (1.5%) (5.8%) .2% (6.4%)
</TABLE>
-----------
(1) As a percentage of prescription drugs sales.
(2) As a percentage of other sales and services.
(3) As a percentage of total net revenues.
Intangible assets, including but not limited to goodwill, pharmacy
files and non-compete covenants, have historically represented a substantial
portion of 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 $594, or 1.8%, to $33,324 for the three
months ended September 30, 2000, compared to $32,730 for the three months ended
September 30, 1999. The increase was attributable to an increase in same store
sales although there was a decrease in store operating months from 150 in the
third quarter of 1999 to 143 in the third quarter of 2000 as a result of the
sale of certain under-performing stores. Our net revenues increased $8,781, or
9.2%, to $104,036 for the nine months ended September 30, 2000, compared to
$95,255 for the nine months ended September 30, 1999. The increase was primarily
attributable to the increase in store operating months from 442 in the nine
months ended September 30, 1999 to 451 for the nine months ended September 30,
2000.
Sales of prescription drugs increased from 77.1% of total net revenues
for the three months ended September 30, 1999 to 79.4% of total net revenues for
the three months ended September 30, 2000. Sales of
11
<PAGE>
prescription drugs increased from 76.3% of total net revenues for the nine
months ended September 30, 1999 to 77.4% of total net revenues for the nine
months ended September 30, 2000. 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.
Same store sales increased from $23,313 in the third quarter of 1999 to
$24,153 in the third quarter of 2000, an increase of 3.6%. Same store sales for
the nine month period increased from $79,754 in 1999 to $83,179 in 2000, an
increase of 4.3%.
The following tables show our prescription drug gross margins and total
revenues margins for the three months and nine months ended September 30, 1999
and 2000:
<TABLE>
<CAPTION>
GROSS MARGINS ON GROSS MARGINS ON
PRESCRIPTION DRUG SALES TOTAL REVENUES
----------------------- --------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Three Months Ended September 30,
2000........................ $ 5,879 22.2% $ 8,937 26.8%
1999........................ $ 5,950 23.6% $ 9,015 27.5%
Nine Months Ended September 30,
2000........................ $ 17,700 22.0% $26,443 25.4%
1999........................ $ 18,502 25.5% $27,181 28.5%
</TABLE>
The decrease in the gross margin on prescription drug sales from 1999
to 2000 was primarily due to a decrease in margin on third party insurance plans
and an increase in the percentage of third party prescription drug sales, which
have lower margins.
COSTS AND EXPENSES
Cost of sales increased $672, or 2.8%, from $23,715 in the three months
ended September 30, 1999 to $24,387 in the three months ended September 30,
2000. For the nine month period cost of sales increased $9,519, or 14.0%, from
$68,074 in 1999 to $77,593 in 2000. 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 0.7%
from 72.5% in the three months ended September 30, 1999 to 73.2% in the three
months ended September 30, 2000. For the nine month period cost of sales as a
percentage of revenues increased 3.1% from 71.5% in 1999 to 74.6% in 2000. This
increase in total cost of sales is primarily due to an increase in third party
prescriptions.
Selling, general and administrative expenses increased from $8,584 in
the three months ended September 30, 1999 to $9,378 in the three months ended
September 30, 2000. Such expenses, expressed as a percentage of net revenues,
were 26.2% and 28.1% for the three months ended September 30, 1999 and 2000,
respectively. For the nine month period selling, general and administrative
expenses increased from $24,722 in 1999 to $29,262 in 2000. Such expenses,
expressed as a percentage of total net revenue were 26.0% and 28.1% for the nine
months ended September 30, 1999 and 2000, 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, the start-up costs of HorizonScripts.com and
the costs associated with the sale of the six stores. Additionally, a portion
of the increase is due to an increased store count and the resulting increased
store operating months.
Depreciation and amortization increased from $469, or 1.4% of total net
revenues, for the three months ended September 30, 1999 to $737, or 2.2% of net
revenues, for the three months ended September 30, 2000. For
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the nine month period, depreciation and amortization increased from $1,186,
or 1.2% of total net revenues, in 1999 to $1,801 or 1.7% of total net
revenues in 2000. These increases were due primarily to our purchase of new
stores and the amortization of debt issue costs and other.
Interest expense was $489 in the third quarter of 1999 compared to $749
during the third quarter of 2000. For the nine month period interest expense was
$1,295 in 1999 compared to $2,056 in 2000. The increases in interest expense for
the three and nine month periods resulted primarily from the increase in debt
associated with our acquisitions and operating losses over the last several
quarters.
Interest and other income was $50 in the third quarter of 1999 compared
to $7 in the third quarter of 2000. For the nine month period interest and other
income was $170 in 1999 compared to $26 in 2000.
EARNINGS
We had a net loss of $1,920 for the three months ended September 30,
2000 as compared to a net loss of $477 in the same period of 1999. We had a
net loss of $6,650 for the nine month period ended September 30, 2000 as
compared to net income of $148 in the same period of 1999. We incurred no
income tax expense in either period as a result of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased by $5,130 to
$2,317 during the nine months ended September 30, 2000 as compared to $2,813
net cash used in operating activities for the nine months ended September 30,
1999. The primary reasons for the increase in cash provided by operations
were the due to an increase in accounts payable and a reduction in
inventories which more than offset the net loss.
Net cash used in investing activities was $1,874 for the nine months
ended September 30, 2000 as compared to $4,565 for the comparable period in
1999.
Net cash provided by financing activities was $1,757 for the nine
months ended September 30, 2000 as compared to $2,003 in the nine months ended
September 30, 1999.
Cash and cash equivalents increased $2,200 to $3,463 during the nine
months ended September 30, 2000 as compared to $1,263 as of December 31, 1999.
McKesson HBOC, Inc. ("McKesson") currently provides us with a
$10,678 credit facility and provides a guaranty for a $7,000 revolving credit
facility from Bank One, Texas, NA ("Bank One") originally due on September 1,
2000, but which has been extended until November 15, 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
September 30, 2000 we were in default of several of these covenants. These
covenant violations have not been cured or waived, and the lenders have the
right to demand payment of outstanding borrowings. At November 14, 2000, we
had borrowed $10,678 under the McKesson credit facility and $7,000 under the
Bank One revolving credit facility. Because of these defaults the Company is
also in default of its $2,500 convertible debenture.
We are currently engaged in discussions with McKesson with respect
to, among other things, obtaining waivers from McKesson of the existing
covenant violations. We are also engaged in discussions with several
potential sources of additional financing to refinance our debt with McKesson
and Bank One. We have entered into a letter of agreement dated November 1,
2000 with Congress Financial Corporation ("Congress Financial") to provide us
with a secured credit facility of up to $35,000, including a $10,000
acquisition line of credit. We anticipate that the proceeds for such
financing, if obtained, will be used to refinance our existing debt, pay
certain transaction expenses, fund future acquisitions and provide us with
future working capital. The proposed Congress Financial credit facility is
subject to certain conditions, including a satisfactory due diligence review,
field examinations and
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credit committee final approval. Accordingly, there can be no assurance that
we will consummate the proposed financing transaction with Congress Financial
or any other potential financing source. Moreover, there can be no assurance
that we will be able to obtain from McKesson or the debenture holders any
waivers with regard to our existing covenant violations or further extend our
credit facility with Bank One.
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. In
September 2000 we acquired the prescription files and inventory of a store in
Dodge City, Kansas and consolidated it with our existing store.
As a result of the net 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.
Our plan for the remainder of 2000 is to improve our financial
condition and operating results through increased retail prices when
possible, reduce our selling, general and administrative expenses, reduce
receivables, inventories levels, store operating hours and labor costs and to
analyze various debt and equity alternatives. If necessary, we will sell or
close underperforming pharmacies. In October 2000, we sold one
underperforming pharmacy.
As discussed above, the Company is in default on its working capital
lines of credit and its debentures. We believe that in the event the lenders
do not waive the defaults and renew or otherwise extend the credit
facilities, 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. The sale of such additional stores would reduce
future revenues, and could have a material adverse effect on the financial
position and 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
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
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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.
As discussed above, we are in default on our working lines of credit
and our debentures. We are currently actively pursuing financing from other
potential sources to refinance our existing lines of credit as well as
engaging in discussions with our lenders to waive the existing covenant
violations and/or extend our lines of credit. There can be no assurance that
we will be successful in either refinancing our existing debt or obtaining
satisfactory waivers or extensions from our lenders.
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 subject to the availability of capital. 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.
EXPANSION
Our future 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 future expanding operations
effectively or maintain or accelerate our growth. Although we experienced
growth in net revenues in 1999 and 2000, we sustained a substantial losses
(as a result of the decline in gross margins 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).
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We cannot assure you that we will not experience similar problems to those
encountered in 1999 and 2000 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.
GEOGRAPHIC CONCENTRATION
Currently, 16 and 7 of our 47 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.
NEED FOR ADDITIONAL CAPITAL
We believe that a planned reduction in our inventory and accounts
receivable levels, the sale of certain underperforming stores and the
refinancing or extension of our existing credit facilities will be adequate
to satisfy our working capital
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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 point-of-sale equipment, 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
$17,678 at September 30, 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.
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PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------
<S> <C>
27.1 Financial Data Schedule (filed electronically herewith)
</TABLE>
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HORIZON Pharmacies, Inc.,
a Delaware corporation
Date: November 14, 2000 /S/Ricky D. McCord
----------------------------------
Ricky D. McCord
President, Chief Executive Officer
Date: November 14, 2000 /S/John N. Stogner
----------------------------------
John N. Stogner
Chief Financial Officer
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<PAGE>
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------
<S> <C>
27.1 Financial Data Schedule (filed electronically herewith)
</TABLE>
20
