UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
(Mark
One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2004
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-23249
PRIORITY HEALTHCARE
CORPORATION
(Exact name of
registrant as specified in its charter)
|
Indiana (State or other jurisdiction of incorporation or organization) 250 Technology Park Lake Mary, Florida (Address of principal executive offices) |
35-1927379 (I.R.S. Employer Identification No.) 32746 (Zip Code) |
Registrant’s telephone number, including area code: (407) 804-6700
| No Change | |
|
(Former name, former address and former fiscal year, if changed since last report) |
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 preceding 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 by check mark whether the
Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No __
As of April 26, 2004, the number of shares outstanding of each of the issuer’s classes of common stock were as follows:
Class A Common Stock – 6,642,984
Class B Common Stock – 36,754,141
Item 1. Financial Statements.
| PRIORITY HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (000's omitted, except share data) (unaudited) |
||||||||
|---|---|---|---|---|---|---|---|---|
| Three-month period ended April 3, 2004 |
Three-month period ended March 29, 2003 | |||||||
| Net sales | $ | 401,243 | $ | 351,529 | ||||
| Cost of products sold | 358,230 | 311,244 | ||||||
| Gross profit | 43,013 | 40,285 | ||||||
| Selling, general and administrative expense | 22,158 | 18,725 | ||||||
| Depreciation and amortization | 1,369 | 927 | ||||||
| Earnings from operations | 19,486 | 20,633 | ||||||
| Interest income | 206 | 461 | ||||||
| Interest expense | (32 | ) | -- | |||||
| Minority interest | (78 | ) | -- | |||||
| Earnings before income taxes | 19,582 | 21,094 | ||||||
| Provision for income taxes | 7,343 | 7,910 | ||||||
| Net earnings | $ | 12,239 | $ | 13,184 | ||||
| Earnings per share: | ||||||||
| Basic | $ | .28 | $ | .30 | ||||
| Diluted | $ | .28 | $ | .30 | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | 43,322,604 | 43,521,657 | ||||||
| Diluted | 44,056,295 | 44,010,503 | ||||||
See accompanying notes to consolidated financial statements.
2
| PRIORITY HEALTHCARE CORPORATION CONSOLIDATED BALANCE SHEETS (000's omitted, except share data) |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (unaudited) April 3, 2004 |
January 3, 2004 | |||||||||
| ASSETS: | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 53,945 | $ | 45,719 | ||||||
| Restricted cash | 2,000 | 2,000 | ||||||||
| Marketable securities | 10,006 | 15,317 | ||||||||
| Receivables, less allowance for doubtful accounts of | ||||||||||
| $5,978 and $5,480, respectively | 192,177 | 172,206 | ||||||||
| Finished goods inventory | 103,558 | 117,218 | ||||||||
| Deferred income taxes | 2,325 | 2,325 | ||||||||
| Other current assets | 19,305 | 18,317 | ||||||||
| 383,316 | 373,102 | |||||||||
| Fixed assets, net | 31,890 | 29,780 | ||||||||
| Investments | 4,582 | 4,000 | ||||||||
| Intangibles, net | 112,871 | 107,127 | ||||||||
| Total assets | $ | 532,659 | $ | 514,009 | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY: | ||||||||||
| Current liabilities: | ||||||||||
| Accounts payable | $ | 152,520 | $ | 151,539 | ||||||
| Other current liabilities | 18,696 | 13,124 | ||||||||
| 171,216 | 164,663 | |||||||||
| Deferred income taxes | 6,437 | 6,437 | ||||||||
| Total liabilities | 177,653 | 171,100 | ||||||||
| Minority interest | 78 | -- | ||||||||
| Commitments and contingencies (note 5) | ||||||||||
| Shareholders' equity: | ||||||||||
| Preferred stock, no par value, 5,000,000 shares authorized, none | ||||||||||
| issued and outstanding | -- | -- | ||||||||
| Common stock | ||||||||||
| Class A, $0.01 par value, 55,000,000 shares authorized, | ||||||||||
| 6,643,636 and 6,677,683 issued and outstanding, | ||||||||||
| respectively | 66 | 67 | ||||||||
| Class B, $0.01 par value, 180,000,000 shares authorized, | ||||||||||
| 38,753,682 and 38,719,635 issued, respectively | 388 | 387 | ||||||||
| Additional paid in capital | 189,372 | 189,309 | ||||||||
| Retained earnings | 199,912 | 187,673 | ||||||||
| 389,738 | 377,436 | |||||||||
| Less: Class B Common unearned restricted stock, 108,323 | ||||||||||
| and 108,323 shares, respectively | (1,597 | ) | (1,846 | ) | ||||||
| Class B Common stock in treasury (at cost), 2,009,662 | ||||||||||
| and 1,987,739 shares, respectively | (33,213 | ) | (32,681 | ) | ||||||
| Total shareholders' equity | 354,928 | 342,909 | ||||||||
| Total liabilities and shareholders' equity | $ | 532,659 | $ | 514,009 | ||||||
See accompanying notes to consolidated financial statements.
3
| PRIORITY HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (000's omitted) (unaudited) |
||||||||
|---|---|---|---|---|---|---|---|---|
| Three-month period ended April 3, 2004 |
Three-month period ended March 29, 2003 | |||||||
| Cash flow from operating activities: | ||||||||
| Net earnings | $ | 12,239 | $ | 13,184 | ||||
| Adjustments to reconcile net earnings to net cash provided by | ||||||||
| operating activities: | ||||||||
| Depreciation and amortization | 1,369 | 927 | ||||||
| Provision for doubtful accounts | 701 | 576 | ||||||
| Tax benefit from stock option exercises | 145 | 203 | ||||||
| Compensation expense on stock grants | 249 | 267 | ||||||
| Minority interest | 78 | -- | ||||||
| Change in assets and liabilities, net of acquisitions: | ||||||||
| Receivables | (20,672 | ) | (6,517 | ) | ||||
| Finished goods inventory | 13,905 | 4,606 | ||||||
| Accounts payable | 342 | 8,711 | ||||||
| Other current assets and liabilities | 4,319 | (20,370 | ) | |||||
| Net cash provided by operating activities | 12,675 | 1,587 | ||||||
| Cash flow from investing activities: | ||||||||
| Sales, net of purchases, of marketable securities | 5,311 | 18,090 | ||||||
| Purchases of fixed assets | (2,768 | ) | (2,454 | ) | ||||
| (Increase) decrease in investments | (582 | ) | 2,430 | |||||
| Acquisition of businesses | (5,796 | ) | -- | |||||
| Net cash (used) provided by investing activities | (3,835 | ) | 18,066 | |||||
| Cash flow from financing activities: | ||||||||
| Proceeds from stock option exercises | 468 | 741 | ||||||
| Proceeds from employee stock purchase plan | 75 | -- | ||||||
| Payments for purchase of treasury stock | (1,157 | ) | -- | |||||
| Net cash (used) provided by financing activities | (614 | ) | 741 | |||||
| Net increase in cash | 8,226 | 20,394 | ||||||
| Cash and cash equivalents at beginning of period | 45,719 | 37,031 | ||||||
| Cash and cash equivalents at end of period | $ | 53,945 | $ | 57,425 | ||||
| Supplemental non-cash investing and financing activities: | ||||||||
| Acquisition liabilities | $ | 287 | $ | -- | ||||
See accompanying notes to consolidated financial statements.
4
| 1. | The accompanying consolidated financial statements have been prepared by the Company without audit. Certain information and footnote disclosures, including significant accounting policies, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The Company believes that the financial statements for the three-month periods ended April 3, 2004 and March 29, 2003 include all necessary adjustments for fair presentation. Results for any interim period may not be indicative of the results for the entire year. |
| For a summary of all of the Company’s accounting policies see Note 1 of the consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended January 3, 2004. The only such item that has changed, which had no significant impact on results of operations or financial position, since the description in the Company’s Form 10-K for the fiscal year ended January 3, 2004 is as follows: |
| Revenue Recognition — Revenues are recognized when products are delivered to unaffiliated customers with appropriate provisions recorded for estimated discounts and contractual allowances. Discounts and contractual allowances are estimated based on historical collections from all unaffiliated customers. Any differences between the estimates and actual collections are reflected in operations in the year payment is received. Differences may result in the amount and timing of revenue for any period if actual performance varies from the estimates. Financing charge revenue is recognized when received. |
| 2. | Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of common shares outstanding during the applicable period. Diluted EPS include the weighted average number of common shares outstanding and the effect of common stock equivalents. The following is a reconciliation between basic and diluted weighted average shares outstanding for the three-month periods ended April 3, 2004 and March 29, 2003: |
| (000's omitted) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Three-month period ended April 3, 2004 |
Three-month period ended March 29, 2003 | |||||||
| Weighted average number of Class A and Class B | ||||||||
| Common shares outstanding used as the denominator | ||||||||
| in the basic earnings per share calculation | 43,323 | 43,522 | ||||||
| Additional shares assuming exercise of dilutive stock options | 645 | 417 | ||||||
| Additional shares assuming unearned restricted stock is earned | 69 | 30 | ||||||
| Additional shares assuming contingently issuable shares related | ||||||||
| to acquisitions are issued | 19 | 42 | ||||||
| Weighted average number of Class A and Class B | ||||||||
| Common and equivalent shares used as the | ||||||||
| denominator in the diluted earnings per | ||||||||
| share calculation | 44,056 | 44,011 | ||||||
| Options to purchase 3.1 million and 3.6 million shares with exercise prices greater than the average market prices of common stock during the three-month periods ended April 3, 2004 and March 29, 2003 were outstanding at April 3, 2004 and March 29, 2003, respectively. These options were excluded from the respective computations of diluted earnings per share because their effect would be anti-dilutive. |
5
| 3. | In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for annual and interim periods beginning after December 15, 2002. The Company has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148. The adoption of SFAS No. 148 did not have a material impact on the Company’s consolidated financial position or results of operations. |
| The Company has elected to continue to measure compensation for stock options issued to its employees and outside directors pursuant to APB No. 25 under the intrinsic value method. All stock options are granted with an exercise price at or above fair market value at the date of grant. Accordingly, no compensation expense has been recognized in connection with the issuance of stock options. Had compensation cost been determined based upon the fair value of the stock options at grant date, consistent with the method under SFAS No. 123, the Company’s net earnings and earnings per share would have been reduced to the following pro forma amounts indicated: |
| (In Thousands, Except Share Data) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Three-month period ended April 3, 2004 |
Three-month period ended March 29, 2003 | |||||||
| Net earnings - as reported | $ | 12,239 | $ | 13,184 | ||||
| Deduct: Total stock-based employee compensation expense | ||||||||
| determined under fair value based method for all awards, net | ||||||||
| of related tax effects | (1,720 | ) | (2,826 | ) | ||||
| Pro forma net earnings | $ | 10,519 | $ | 10,358 | ||||
| Basic earnings per share: | ||||||||
| Basic - as reported | $ | 0.28 | $ | 0.30 | ||||
| Basic - pro forma | $ | 0.24 | $ | 0.24 | ||||
| Diluted earnings per share: | ||||||||
| Diluted - as reported | $ | 0.28 | $ | 0.30 | ||||
| Diluted - pro forma | $ | 0.24 | $ | 0.24 | ||||
| 4. | On April 2, 2004, the Company completed an acquisition of certain assets of Partners In Care Pharmacy, LLC (“Partners In Care”), an infertility specialty pharmacy. The acquisition was accounted for using the purchase method of accounting and the results of operations are included in the consolidated financial statements subsequent to the date of acquisition. The total purchase price for the Partners In Care assets was approximately $5.8 million, which included approximately $290,000 for inventory, deposits and fixed assets, and resulted in approximately $5.8 million of goodwill, which included other transaction costs. In addition, the former owners of Partners In Care are eligible to receive additional consideration based upon revenues received from new customers under a certain contract. The results of operations of Partners In Care prior to the date of acquisition were not material to the results of the Company for the periods presented in these financial statements. |
| 5. | The Company is subject to ordinary and routine lawsuits and governmental inspections, investigations and proceedings incidental to its business, none of which is expected to be material to the Company’s results of operations, financial condition or cash flows. |
6
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. |
| Forward-Looking Statements |
| Certain statements included in this quarterly report, which are not historical facts, are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our expectations or beliefs and involve certain risks and uncertainties including, but not limited to, changes in interest rates, competitive pressures, changes in customer mix, changes in third party reimbursement rates, financial stability of major customers, changes in government regulations or the interpretation of these regulations, changes in supplier relationships, growth opportunities, cost savings, revenue enhancements, synergies and other benefits anticipated from acquisition transactions, difficulties related to integrating acquired businesses, the accounting and tax treatment of acquisitions, and asserted and unasserted claims, which could cause actual results to differ from those in the forward-looking statements. The forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date herein. |
Overview
| We were formed in June 1994 to succeed to the business operations of companies previously acquired by Bindley Western Industries, Inc. (“BWI”). From our formation through our initial public offering, or IPO, on October 24, 1997, we operated as a wholly owned subsidiary of BWI, and procured a number of services from, and engaged in a number of financial and other transactions with, BWI. After the IPO, we continued to be controlled by BWI, but operated on a stand-alone basis. On December 31, 1998, BWI distributed to the holders of BWI common stock on December 15, 1998 all of the shares of our Class A Common Stock owned by BWI, making Priority Healthcare Corporation a stand-alone public company. |
| Priority is a national specialty pharmacy and distributor that provides biopharmaceuticals, complex therapies and related disease treatment programs and services to individuals with chronic diseases. Priority fills individual patient prescriptions, primarily for self-administered biopharmaceuticals. These patient-specific prescriptions are filled at licensed pharmacies in Lake Mary, Florida, Byfield, Massachusetts, New Castle, Delaware, Memphis, Tennessee, Oldsmar, Florida, New York, New York, Carpinteria, California and Monrovia, California and are shipped directly to the patient overnight in specialized packages. We also provide disease treatment programs for hepatitis, cancer, infertility, hemophilia, human growth hormone deficiency, rheumatoid arthritis, Crohn’s disease, infertility, pulmonary hypertension, pain management, multiple sclerosis, sinusitis, age-related macular degeneration and others. |
| We also sell over 5,000 SKUs of specialty pharmaceuticals and medical supplies to office-based physicians in oncology and other specialty markets and to outpatient renal care centers. Priority offers value-added services to meet the specific needs of these markets by shipping refrigerated pharmaceuticals overnight in special packaging to maintain appropriate temperatures, offering automated order entry services and offering customized distribution for group accounts. From distribution centers in Sparks, Nevada and Grove City, Ohio, we service over 5,000 customers in all 50 states, including office-based oncologists, renal dialysis clinics, ambulatory surgery centers and primary care physicians. |
| Our objective is to continue to grow rapidly and enhance our market position as a leading healthcare company by capitalizing on our business strengths and pursuing the following strategy: (i) continue to focus on further penetrating the core specialty distribution and pharmacy market; (ii) develop new manufacturer relationships that provide access to new products and services; (iii) continue to develop group purchasing organization and payor networks; (iv) enter new specialty markets; and (v) pursue acquisitions to complement existing product offerings and further penetrate markets. |
| Over the past three years, we have continued to grow as we have executed on our growth strategy. Due to the nature of healthcare and the pharmaceutical industry, there is constant pressure on profit margins. Competition has resulted in some margin reduction on our products. However, as we have done in the past, we expect to be able to partially offset this impact through the continuing benefits of scale, as well as cost containment measures. |
7
Critical Accounting Policies
| The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. For a summary of all of our accounting policies see Note 1 of the consolidated financial statements contained in our Form 10-K for the fiscal year ended January 3, 2004. For the items in our financial statements that we believe are the most dependent on the applications of significant estimates and judgments see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” contained in our Form 10-K for the fiscal year ended January 3, 2004. The only such item that has changed, which had no significant impact on results of operations or financial position, since the description in our Form 10-K for the fiscal year ended January 3, 2004 is as follows: |
| Revenue Recognition — Revenues are recognized when products are delivered to unaffiliated customers with appropriate provisions recorded for estimated discounts and contractual allowances. Discounts and contractual allowances are estimated based on historical collections from all unaffiliated customers. Any differences between our estimates and actual collections are reflected in operations in the year payment is received. Differences may result in the amount and timing of our revenue for any period if actual performance varies from our estimates. Financing charge revenue is recognized when received. |
Results of Operations
| The following table sets forth for the periods indicated, the percentages of net sales represented by the respective financial items: |
| Three-month period ended April 3, 2004 |
Three-month period ended March 29, 2003 | ||||
|---|---|---|---|---|---|
| Net sales | 100 | .0% | 100 | .0% | |
| Cost of products sold | 89 | ||||