<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: JUNE 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 flied 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 AUGUST 11, 2000
<S> <C>
Common stock, par value $.01 per share 5,948,774
</TABLE>
================================================================================
1
<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.............................................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
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
---- ----
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 1,263 $ 422
Certificate of deposit ..................................................... 375 375
Accounts receivable, net:
Third-party providers ................................................... 8,828 9,199
Others .................................................................. 2,922 2,668
Inventories, at the lower of specific identification cost or market ........ 23,522 20,346
Other ...................................................................... 1,307 884
------------ ------------
Total current assets .......................................................... 38,217 33,894
Debt issue costs and other, net of accumulated amortization ................... 595 1,953
Property, equipment and capital lease assets:
Property and equipment:
Land, buildings and improvements ........................................ 1,498 1,598
Software and equipment .................................................. 5,509 7,320
------------ ------------
7,007 8,918
Less accumulated depreciation .............................................. 1,057 1,580
------------ ------------
Property and equipment, net ................................................ 5,950 7,338
Equipment under capital leases, net of accumulated amortization ............ 725 600
------------ ------------
Property, equipment and capital lease assets, net ............................. 6,675 7,938
Intangibles, at cost:
Noncompete covenants and customer lists .................................... 2,415 2,324
Goodwill ................................................................... 13,299 13,156
------------ ------------
15,714 15,480
Less accumulated amortization .............................................. 1,370 1,566
------------ ------------
Intangibles, net .............................................................. 14,344 13,914
------------ ------------
$ 59,831 $ 57,699
============ ============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
(AUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 12,615 $ 11,437
Accrued liabilities ................................................................... 1,420 1,241
Lease termination settlements and other exit costs .................................... 1,367 1,270
Notes payable ......................................................................... 5,566 7,000
Current portion of long-term debt ..................................................... 2,439 2,411
Current portion of obligations under capital leases ................................... 239 199
Long-term debt subject to acceleration ................................................ -- 10,678
------------ ------------
Total current liabilities ................................................................ 23,646 34,236
Noncurrent liabilities:
Lease termination settlements ......................................................... 1,250 673
Long-term debt ........................................................................ 19,204 10,195
Obligations under capital leases ...................................................... 481 329
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 26,456
Accumulated deficit ................................................................... (9,449) (14,179)
------------ ------------
15,320 12,336
Treasury Stock (6,081 shares), at cost ................................................ (70) (70)
------------ ------------
Total stockholders' equity ............................................................... 15,250 12,266
------------ ------------
$ 59,831 $ 57,699
============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 2000 1999 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues:
Prescription drugs sales .............................. $ 23,798 $ 27,139 $ 47,413 $ 54,094
Other sales and services .............................. 7,742 8,471 15,112 16,618
------------ ------------ ------------ ------------
Total net revenues ....................................... 31,540 35,610 62,525 70,712
Costs and expenses:
Cost of sales and services:
Prescription drugs ................................. 17,545 21,596 34,862 42,273
Other .............................................. 4,899 5,817 9,497 10,933
Depreciation and amortization ......................... 378 566 717 1,064
Provision for impairment .............................. -- 236 -- 250
Selling, general and administrative expenses .......... 8,120 9,872 16,137 19,634
------------ ------------ ------------ ------------
Total costs and expenses ................................. 30,942 38,087 61,213 74,154
Income (loss) from operations ............................ 598 (2,477) 1,312 (3,442)
Other income (expense):
Interest and other income ............................. 51 2 121 19
Interest expense ...................................... (410) (651) (807) (1,307)
------------ ------------ ------------ ------------
Total other income (expense) ............................. (359) (649) (686) (1,288)
------------ ------------ ------------ ------------
Net income (loss) ........................................ $ 239 $ (3,126) $ 626 $ (4,730)
============ ============ ============ ============
Basic earnings (loss) per share (Note 2) ................. $ .04 $ (0.53) $ 0.11 $ (0.80)
============ ============ ============ ============
Diluted earnings (loss) per share (Note 2) ............... $ .04 $ (0.53) $ 0.11 $ (0.80)
============ ============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
HORIZON PHARMACIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30,
----------------------------------
1999 2000
---------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ............................................................................... $ 626 $ (4,730)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization ............................................................. 717 1,064
Provision for impairment .................................................................. -- 250
Other ..................................................................................... 41 67
Changes in operating assets and liabilities, net of acquisitions of businesses:
Accounts receivable .................................................................... (988) (171)
Refundable income taxes ................................................................ 257 --
Inventories ............................................................................ (1,727) 2,850
Other current assets ................................................................... (202) 309
Accounts payable ....................................................................... 1,101 (1,178)
Accrued liabilities .................................................................... 17 (194)
------------ ------------
Total adjustments ............................................................................... (784) 2,997
------------ ------------
Net cash used in operating activities ........................................................... (158) (1,733)
INVESTING
Proceeds from sales of assets ................................................................... -- 701
Purchases of property and equipment ............................................................. (684) (2,094)
Purchases of other assets ....................................................................... -- (200)
Assets acquired for cash in acquisitions of businesses .......................................... (2,543) (101)
------------ ------------
Net cash used in investing activities ........................................................... (3,227) (1,694)
FINANCING ACTIVITIES
Borrowings ...................................................................................... 1,178 4,150
Debt issue costs incurred ....................................................................... -- (194)
Principal payments on debt ...................................................................... (1,298) (1,225)
Principal payments on obligations under capital leases .......................................... (114) (192)
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 ....................................................... 43 2,586
------------ ------------
Net decrease in cash and cash equivalents ....................................................... (3,342) (841)
Cash and cash equivalents at beginning of period ................................................ 6,617 1,263
------------ ------------
Cash and cash equivalents at end of period ...................................................... $ 3,275 $ 422
============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment leased under capital leases ........................................................... $ 445 $ --
Issuance of warrants to lenders and suppliers (555,000 shares) .................................. -- 1,418
Debt issue costs deducted from debt proceeds .................................................... -- 150
Acquisitions of businesses financed by debt and common stock:
Accounts receivable and other .......................................................... $ 380 $ --
Inventories ............................................................................ 2,114 39
Property and equipment ................................................................. 225 169
Intangibles ............................................................................ 4,989 177
------------ ------------
7,708 385
Less cash paid ......................................................................... (2,543) (101)
------------ ------------
Assets acquired ........................................................................ $ 5,165 $ 284
============ ============
Financed by:
Debt ......................................................................................... $ 3,611 $ --
Common stock (196,398 shares in 1999 and 54,036 shares in 2000) .............................. 1,554 284
------------ ------------
TOTAL ................................................................................. $ 5,165 $ 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
six months ended June 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 six months ended June 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 six month periods
ended June 30, 2000 totaled 5,948,774 and 5,917,421, respectively. Weighted
average common shares outstanding for the three and six month periods in 1999
were 5,729,803 and 5,693,914, respectively. Common shares used in the
calculation of diluted earnings per share for the three month and six month
periods ended June 30, 2000 totaled 5,948,774 and 5,917,421, respectively.
Common shares used for the calculation of fully diluted earnings per share for
the three and six month periods in 1999 were 5,882,358 and 5,891,411,
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 and warrants excluded amounted
to 101,200 shares and 432,350 shares for the three months and six months ended
June 30, 1999, respectively, and 81,763 shares and 80,985 shares for the three
months and six months ended June 30, 2000, respectively.
NOTE 3
No income taxes are provided due to the existence of net operating
loss carry forwards.
NOTE 4
At June 30, 2000, we operated 48 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 six months ended June 30, 1999 and 2000 were five and one,
respectively.
Proforma results of operations data giving effect to the acquisitions
completed during the six month periods ended June 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
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, Inc. ("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 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 and which will be amortized over
the term of the fulfillment and guaranty 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. Because
InformedScripts.com failed to remit to us the required payments under the
$1,500 note by August 15, 2000, we exercised our option to terminate the
fulfillment and guaranty agreement.
We have not reflected the above transaction in the accompanying
financial statements because it is contingent on the collection of the $1,500
note.
NOTE 6
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 June 30, 2000. Borrowings
outstanding at June 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 June 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 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 7
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 June
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 June 30, 2000, the credit agreements provided for borrowings up to $17,678
including the Company's $7,000 bank credit facility which expires on September
1, 2000. As of June 30, 2000, the Company had no availability for additional
borrowings under the lines and was in default on certain compliance covenants
of the lines.
Management's plan for the remainder of 2000 provides for the Company
to improve its financial condition and operating results through the sale or
closure of several underperforming pharmacies, increased selling prices, the
reduction of receivables and inventories levels, reduction in store operating
hours and labor costs 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
8
<PAGE>
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 8
During the fourth quarter of 1999, the Company identified several
underperforming pharmacies with long-lived assets (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
several of these pharmacies during the six months ended June 30, 2000. 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 six months ended June 30, 2000, the Company revised its
estimates of fair values and recorded additional impairment of $64.
As of June 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 December 31, 1999 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 9
Under the 2000 stock option plan approved by stockholders in June
2000, options for up to 250,000 shares of common stock may be granted to
employees and directors at prices as specified in the plan on the dates the
options are granted. No options under the 2000 plan have been granted to date.
NOTE 10
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 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 six months ended June 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
9
<PAGE>
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.
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 six months ended June 30, 1999, we acquired five retail
pharmacies. During the six months ended June 30, 2000, we acquired the
prescription files and inventory of one pharmacy and consolidated them into an
existing 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 June 30, 1999 and 2000, sales of
prescription drugs generated 75.5% and 76.2%, respectively, of net revenues;
during the six month period ended June 30, 1999 and 2000, sales of
prescription drugs generated 75.8% and 76.5%, 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
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 three quarters. Consequently, we experienced losses
in the fourth quarter of 1999 and the first and second quarters of 2000, which
were attributable, in part, to such investments and, in part,
10
<PAGE>
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. During the first quarter of
2000, we entered into a relationship with Informed.com, an e-commerce start-up
that provides telemedicine services (e.g., counseling and virtual nursing).
Informed.com will provide us their e-commerce expertise as we design and
develop electronic kiosks to conduct e-commerce in retail centers. We agreed
to guaranty certain levels of gross sales and pretax profits for
Informed.com's subsidiary, InformedScripts.com, Inc., and to serve, in
essence, as its exclusive wholesale supplier for its prescription drug and OTC
drug orders; however, because of InformedScripts.com, Inc.'s failure to remit
certain payments to us under the terms of a promissory note, we exercised our
option to terminate the fulfillment and guaranty agreement.
During the second quarter, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
REVENUES:
Net Revenues:
Prescription drugs sales........................... 75.5% 76.2% 75.8% 76.5%
Other sales and services........................... 24.5% 23.8% 24.2% 23.5%
------ ------ ------ ------
Total net revenues.............................. 100.0% 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Cost of sales-prescription drugs(1)................ 73.7% 79.6% 73.5% 78.1%
Cost of sales-other(2)............................. 63.3% 68.7% 62.8% 65.8%
Selling, general and administrative expenses(3).... 25.7% 27.7% 25.8% 27.8%
Depreciation and amortization(3)................... 1.2% 1.6% 1.1% 1.5%
Provision for impairment(3)........................ -- .7% -- .4%
Interest expense, net(3) .......................... 1.1% 1.8% 1.1% 1.8%
Net income (loss) (3).............................. .8% (8.8%) 1.0% (6.7%)
</TABLE>
-----------
(1) As a percentage of prescription drugs sales.
(2) As a percentage of other sales and services.
(3) As a percentage of total net revenues.
Intangible assets, including but not limited to goodwill, pharmacy
files and non-compete covenants, have historically represented a substantial
portion of 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.
11
<PAGE>
NET REVENUES
Our net revenues increased $4,070, or 12.9%, to $35,610 for the three
months ended June 20, 2000, compared to $31,540 for the three months ended
June 30, 1999. The increase was attributable to an increase in same store
sales and an increase in store operating months from 148 in the second quarter
of 1999 to 152 in the second quarter of 2000. Our net revenues increased
$8,187, or 13.1%, to $70,712 for the six months ended June 30, 2000, compared
to $62,525 for the six months ended June 30, 1999. The increase was primarily
attributable to the increase in store operating months from 292 in the six
months ended June 30, 1999 to 308 for the six months ended June 30, 2000.
Sales of prescription drugs increased from 75.5% of total net
revenues for the three months ended June 30, 1999 to 76.2% of total net
revenues for the three months ended June 30, 2000. Sales of prescription drugs
increased from 75.8% of total net revenues for the six months ended June 30,
1999 to 76.5% of total net revenues for the six months ended June 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 $26,760 in the second quarter of 1999
to $28,031 in the second quarter of 2000, an increase of 4.7%. Same store
sales for the six month period increased from $56,825 in 1999 to $58,941 in
2000, an increased of 3.7%.
The following tables show our prescription drug gross margins and
total revenues margins for the three months and six months ended June 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 June 30,
2000........................... $ 5,543 20.4% $ 8,197 23.0%
1999........................... $ 6,253 26.3% $ 9,096 28.8%
Six Months Ended June 30,
2000........................... $11,821 21.9% $17,506 24.8%
1999........................... $12,551 26.6% $18,166 29.1%
</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 $4,969, or 22.1%, from $22,444 in the three
months ended June 30, 1999 to $27,413 in the three months ended June 30, 2000.
For the six month period cost of sales increased $8,847, or 19.9%, from
$44,359 in 1999 to $53,206 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
5.8% from 71.2% in the three months ended June 30, 1999 to 77.0% in the three
months ended June 30, 2000. For the six month period cost of sales as a
percentage of revenues increased 4.2% from 70.9% in 1999 to 75.2% 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 $8,120 in
the three months ended June 30, 1999 to $9,872 in the three months ended June
30, 2000. Such expenses, expressed as a percentage of net
12
<PAGE>
revenues, were 25.7% and 27.7% for the three months ended June 30, 1999 and
2000, respectively. For the six month period selling, general and
administrative expenses increased from $16,137 in 1999 to $19,634 in 2000.
Such expenses, expressed as a percentage of total net revenue were 25.8% and
27.8% for the six months ended June 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 four 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 $378, or 1.2% of total
net revenues, for the three months ended June 30, 1999 to $566, or 1.6% of net
revenues, for the three months ended June 30, 2000. For the six month period,
depreciation increased from $717, or 1.1% of total net revenues, in 1999 to
$1,064 or 1.5% of total net revenues of 1999. These increases were due
primarily to our purchase of new stores.
Interest expense was $410 in the second quarter of 1999 compared to
$651 during the second quarter of 2000. For the six month period interest
expense was $807 in 1999 compared to $1,307 in 2000. The increases in interest
expense for the three and six month periods resulted primarily from the
increase in debt associated with our acquisitions.
Interest and other income was $51 in the second quarter of 1999
compared to $2 in the second quarter of 2000. For the six month period
interest and other income was $121 in 1999 compared to $19 in 2000.
EARNINGS
We had a net loss of $3,126 for the three months ended June 30, 2000
as compared to net income of $239 in the same period of 1999. We had a net
loss of $4,730 for the six month period ended June 30, 2000 as compared to net
income of $626 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 $1,575 to $1,733
during the six months ended June 30, 2000 as compared to $158 for the six
months ended June 30, 1999. The net loss was the primary reason for the
increased usage of cash.
Net cash used in investing activities was $1,694 for the six months
ended June 30, 2000 as compared to $3,227 for the comparable period in 1999.
Net cash provided by financing activities was $2,586 for the six
months ended June 30, 2000 as compared to $43 in the six months ended June 30,
1999.
Cash and cash equivalents decreased $841 to $422 during the six
months ended June 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") due on September 1, 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 June 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 August
15, 2000, we had borrowed $10,678 under the credit facility and $7,000 under
the revolving credit facility.
13
<PAGE>
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.
Our plan for 2000 is to improve our financial condition and operating
results through the sale or closure of several underperforming pharmacies
(four of which were sold in the second quarter of 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 netted the Company $2,175, which was used for working capital
needs.
As discussed above, the Company is in default on its working capital
lines of credit. 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
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.
14
<PAGE>
SALES TO THIRD-PARTY PAYORS
We sell a growing percentage of our prescription drugs to customers
who are covered by third-party payment programs. Although contracts with
third-party payors may increase the volume of prescription sales and gross
profits, third-party payors typically negotiate lower prescription prices than
non third-party payors. Accordingly, gross profit margins on sales of
prescription drugs have been decreasing and are expected to continue to
decrease in future periods.
RELIANCE ON MEDICARE AND MEDICAID REIMBURSEMENTS
Substantially all of our home healthcare revenues are attributable to
third-party payors, including Medicare and Medicaid, private insurers, managed
care plans and HMOs. The amounts we receive from government programs and
private third-party payors are dependent upon the specific benefits included
under the program or the patient's insurance policies. Any substantial delays
in reimbursement or significant reductions in the coverage or payment rates of
third-party payors, or from patients enrolled in the Medicare or Medicaid
programs, would have a material adverse effect on our revenues and
profitability.
EXPANSION
Our ongoing expansion will require us to implement and integrate
enhanced operational and financial systems, and additional management,
operational and financial resources. Our inability to implement and integrate
these systems and/or add these resources could have a material adverse effect
on our results of operations and financial condition. There can be no
assurance 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.
15
<PAGE>
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 48 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
16
<PAGE>
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 June 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.
17
<PAGE>
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------
<S> <C>
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.
10.1* Employment Agreement by and between HORIZON Pharmacies, Inc. and John
N. Stogner, dated July 31, 1999 (filed electronically herewith)
10.2* Employment Agreement by and between HORIZON Pharmacies, Inc. and
Phillip Douglas Stone, dated March 7, 2000 and effective April 1, 2000
(filed electronically herewith)
10.3 Loan Agreement, dated July 31, 1999, between Bank One, Texas, National
Association and HORIZON Pharmacies, Inc. (filed electronically herewith)
10.4 Promissory Note, dated July 31, 1999, from HORIZON Pharmacies, Inc. to
Bank One, Texas, National Association (filed electronically herewith)
10.5 Modification of Promissory Note, dated July 31, 2000, between Bank One,
Texas National Association and HORIZON Pharmacies, Inc. (filed
electronically herewith) to the Promissory Note, dated July 31, 1999,
between Bank One, Texas National Association and HORIZON Pharmacies,
Inc.
10.6 Letter Agreement dated August 3, 2000 (filed electronically herewith)
amending the Fulfillment and Guaranty Agreement, dated March 14, 2000
by and between HORIZON Pharmacies, Inc. and InformedScripts.com,
incorporated herein by reference to Exhibit 10.1 of our Current Report
on Form 8-K filed electronically on April 6, 2000
10.7* HORIZON Pharmacies, Inc. 2000 Stock Option Plan (filed electronically
herewith)
27.1 Financial Data Schedule
</TABLE>
-----------------------------------------------------
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
During the six months ended June 30, 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.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HORIZON Pharmacies, Inc.,
a Delaware corporation
Date: August 18, 2000 /s/ Ricky D. Mccord
------------------------------------------
Ricky D. McCord
President, Chief Executive Officer
Date: August 18, 2000 /s/ John N. Stogner
------------------------------------------
John N. Stogner
Chief Financial Officer
19
<PAGE>
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------
<S> <C>
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.
10.1* Employment Agreement by and between HORIZON Pharmacies, Inc. and John
N. Stogner, dated July 31, 1999 (filed electronically herewith)
10.2* Employment Agreement by and between HORIZON Pharmacies, Inc. and
Phillip Douglas Stone, dated March 7, 2000 and effective April 1, 2000
(filed electronically herewith)
10.3 Loan Agreement, dated July 31, 1999, between Bank One, Texas, National
Association and HORIZON Pharmacies, Inc. (filed electronically herewith)
10.4 Promissory Note, dated July 31, 1999, from HORIZON Pharmacies, Inc. to
Bank One, Texas, National Association (filed electronically herewith)
10.5 Modification of Promissory Note, dated July 31, 2000, between Bank One,
Texas National Association and HORIZON Pharmacies, Inc. (filed
electronically herewith) to the Promissory Note, dated July 31, 1999,
between Bank One, Texas National Association and HORIZON Pharmacies,
Inc.
10.6 Letter Agreement dated August 3, 2000 (filed electronically herewith)
amending the Fulfillment and Guaranty Agreement, dated March 14, 2000
by and between HORIZON Pharmacies, Inc. and InformedScripts.com,
incorporated herein by reference to Exhibit 10.1 of our Current Report
on Form 8-K filed electronically on April 6, 2000
10.7* HORIZON Pharmacies, Inc. 2000 Stock Option Plan (filed electronically
herewith)
27.1 Financial Data Schedule
</TABLE>
20
