PRIORITY HEALTHCARE CORP - 10-Q Quarterly Report

FORM 10-Q

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 July 3, 2004

¨	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

35-1927379

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

250 Technology Park

Lake Mary, Florida

32746

(Address of principal executive offices)

(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 July 23, 2004, the number of shares outstanding of each of the issuer’s classes of common stock were as follows:

Class A Common Stock – 6,628,942

Class B Common Stock – 37,005,759

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS

(000’s omitted, except share data)

(unaudited)


	Six-month period ended July 3, 2004			Six-month period ended June 28, 2003		Three-month period ended July 3, 2004			Three-month period ended June 28, 2003
Net sales	$	839,695		$	702,036	$	438,452		$	350,507
Cost of products sold		750,815			623,967		392,585			312,723

Gross profit		88,880			78,069		45,867			37,784

Selling, general and administrative expense		45,572			37,525		23,414			18,800
Restructuring charge		1,317			—		1,317			—
Depreciation and amortization		2,799			2,010		1,430			1,083

Earnings from operations		39,192			38,534		19,706			17,901

Interest income		369			812		163			351
Interest expense		(196	)		—		(164	)		—
Minority interest		(163	)		—		(85	)		—

Earnings before income taxes		39,202			39,346		19,620			18,252

Provision for income taxes		14,799			14,755		7,456			6,845

Net earnings	$	24,403		$	24,591	$	12,164		$	11,407

Earnings per share:
Basic	$	.56		$	.56	$	.28		$	.26
Diluted	$	.56		$	.56	$	.28		$	.26
Weighted average shares outstanding:
Basic		43,305,603			43,549,394		43,288,606			43,577,129
Diluted		43,926,991			44,149,962		43,797,690			44,289,419

See accompanying notes to consolidated financial statements.

PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED BALANCE SHEETS

(000’s omitted, except share data)


	(unaudited) July 3, 2004			January 3, 2004
ASSETS:
Current assets:
Cash and cash equivalents	$	41,101		$	45,719
Restricted cash		2,000			2,000
Marketable securities		7,721			15,317
Receivables, less allowance for doubtful accounts of $6,315 and $5,480, respectively		213,789			172,206
Finished goods inventory		104,759			117,218
Deferred income taxes		2,325			2,325
Other current assets		33,361			18,317

		405,056			373,102
Fixed assets, net		33,418			29,780
Investments		4,582			4,000
Intangibles, net		120,564			107,127

Total assets	$	563,620		$	514,009

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	164,195		$	151,539
Line of credit		5,006			—
Other current liabilities		20,030			13,124

		189,231			164,663
Deferred income taxes		6,490			6,437

Total liabilities		195,721			171,100

Minority interest		163			—

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, 6,629,726 and 6,677,683 issued and outstanding, respectively		66			67
Class B, $0.01 par value, 180,000,000 shares authorized, 38,767,592 and 38,719,635 issued, respectively		388			387
Additional paid in capital		189,508			189,309
Retained earnings		212,076			187,673

		402,038			377,436
Less: Class B Common unearned restricted stock, 117,323 and 108,323 shares, respectively		(1,514	)		(1,846	)
Class B Common stock in treasury (at cost), 1,983,975 and 1,987,739 shares, respectively		(32,788	)		(32,681	)

Total shareholders’ equity		367,736			342,909

Total liabilities and shareholders’ equity	$	563,620		$	514,009

See accompanying notes to consolidated financial statements.

PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000’s omitted)

(unaudited)


	Six-month period ended July 3, 2004			Six-month period ended June 28, 2003
Cash flow from operating activities:
Net earnings	$	24,403		$	24,591
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		2,799			2,010
Provision for doubtful accounts		1,479			1,085
Tax benefit from stock option exercises		149			246
Compensation expense on stock grants		561			464
Minority interest		163			—
Change in assets and liabilities, net of acquisitions:
Receivables		(41,929	)		(9,134	)
Finished goods inventory		12,704			1,416
Accounts payable		12,645			11,652
Other current assets and liabilities		6,498			(19,461	)

Net cash provided by operating activities		19,472			12,869

Cash flow from investing activities:
Sales, net of purchases, of marketable securities		7,596			22,805
Purchases of fixed assets		(5,928	)		(8,489	)
(Increase) decrease in other assets		(15,000	)		4,465
Increase in investments		(582	)		—
Acquisition of businesses, net of cash acquired		(14,666	)		(8,028	)

Net cash (used) provided by investing activities		(28,580	)		10,753

Cash flow from financing activities:
Proceeds from stock option exercises		485			1,018
Proceeds from employee stock purchase plan		156			—
Proceeds from line of credit		5,006			—
Payments for purchase of treasury stock		(1,157	)		(3,434	)

Net cash provided (used) by financing activities		4,490			(2,416	)

Net (decrease) increase in cash		(4,618	)		21,206
Cash and cash equivalents at beginning of period		45,719			37,031

Cash and cash equivalents at end of period	$	41,101		$	58,237

Supplemental non-cash investing and financing activities:
Acquisition liabilities	$	255		$	—
Stock issued in connection with acquisition	$	230		$	1,000

See accompanying notes to consolidated financial statements.

PRIORITY HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 and six-month periods ended July 3, 2004 and June 28, 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 revenues for any period if actual performance varies from the estimates. Financing charge revenues are recognized when received.

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 and six-month periods ended July 3, 2004 and June 28, 2003:


	(000’s omitted)
	Six-month period ended July 3, 2004	Six-month period ended June 28, 2003	Three-month period ended July 3, 2004	Three-month period ended June 28, 2003
Weighted average number of Class A and Class B Common shares outstanding used as the denominator in the basic earnings per share calculation	43,306	43,549	43,289	43,577

Additional shares assuming exercise of dilutive stock options	542	537	439	656
Additional shares assuming unearned restricted stock is earned	70	33	70	36
Additional shares assuming contingently issuable shares related to acquisitions are issued	9	31	—	20

Weighted average number of Class A and Class B Common and equivalent shares used as the denominator in the diluted earnings per share calculation	43,927	44,150	43,798	44,289

Options to purchase 3.2 million and 3.5 million shares with exercise prices greater than the average market prices of common stock during the three-month periods ended July 3, 2004 and June 28, 2003 were outstanding at July 3, 2004 and June 28, 2003, respectively. These options were excluded from the respective computations of diluted earnings per share because their effect would be anti-dilutive.

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:


	(000’s omitted, except share data)
	Six-month period ended July 3, 2004		Six-month period ended June 28, 2003		Three-month period ended July 3, 2004		Three-month period ended June 28, 2003
Net earnings – as reported	$	24,403	$	24,591	$	12,164	$	11,407
Dedu