UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 28, 2003 |
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 | 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, 2003, the number of shares outstanding of each of the issuer’s classes of common stock were as follows:
Class A Common Stock – 6,760,712
Class B Common Stock – 36,684,711
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 June 28, 2003 |
Six-month period ended June 29, 2002 |
Three-month period ended June 28, 2003 |
Three-month period ended June 29, 2002 | |||||||||
| Net sales |
$ | 702,036 | $ | 557,456 | $ | 350,507 | $ | 290,999 | ||||
| Cost of products sold |
623,967 | 494,730 | 312,723 | 258,103 | ||||||||
| Gross profit |
78,069 | 62,726 | 37,784 | 32,896 | ||||||||
| Selling, general and administrative expense |
37,525 | 30,434 | 18,800 | 15,773 | ||||||||
| Depreciation and amortization |
2,010 | 1,303 | 1,083 | 657 | ||||||||
| Earnings from operations |
38,534 | 30,989 | 17,901 | 16,466 | ||||||||
| Interest income |
812 | 1,538 | 351 | 671 | ||||||||
| Earnings before income taxes |
39,346 | 32,527 | 18,252 | 17,137 | ||||||||
| Provision for income taxes |
14,755 | 12,198 | 6,845 | 6,427 | ||||||||
| Net earnings |
$ | 24,591 | $ | 20,329 | $ | 11,407 | $ | 10,710 | ||||
| Earnings per share: |
||||||||||||
| Basic |
$ | .56 | $ | .46 | $ | .26 | $ | .24 | ||||
| Diluted |
$ | .56 | $ | .46 | $ | .26 | $ | .24 | ||||
| Weighted average shares outstanding: |
||||||||||||
| Basic |
43,549,394 | 43,873,331 | 43,577,129 | 43,976,292 | ||||||||
| Diluted |
44,149,962 | 44,655,160 | 44,289,419 | 44,699,328 | ||||||||
See accompanying notes to consolidated financial statements.
2
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(000’s omitted, except share data)
| June 28, 2003 |
December 28, 2002 |
|||||||
| (unaudited) | ||||||||
| ASSETS: |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 58,237 | $ | 37,031 | ||||
| Marketable securities |
23,532 | 46,337 | ||||||
| Receivables, less allowance for doubtful accounts of $5,884 and $5,437, respectively |
171,737 | 163,688 | ||||||
| Finished goods inventory |
107,188 | 108,604 | ||||||
| Deferred income taxes |
3,221 | 3,221 | ||||||
| Other current assets |
16,364 | 14,667 | ||||||
| 380,279 | 373,548 | |||||||
| Fixed assets, net |
20,278 | 13,749 | ||||||
| Other assets |
— | 4,780 | ||||||
| Intangibles, net |
92,788 | 92,785 | ||||||
| Total assets |
$ | 493,345 | $ | 484,862 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY: |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 154,318 | $ | 142,666 | ||||
| Other current liabilities |
18,394 | 45,448 | ||||||
| 172,712 | 188,114 | |||||||
| Deferred income taxes |
2,321 | 2,321 | ||||||
| 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, 6,764,900 and 6,880,497 issued and outstanding, respectively |
68 | 69 | ||||||
| Class B, $0.01 par value, 180,000,000 shares authorized, 38,632,418 and 38,516,821 issued, respectively |
386 | 385 | ||||||
| Additional paid in capital |
187,762 | 187,158 | ||||||
| Retained earnings |
161,664 | 137,073 | ||||||
| 349,880 | 324,685 | |||||||
| Less: Class B Common unearned restricted stock, 53,000 and 53,000 shares, respectively |
(869 | ) | (1,291 | ) | ||||
| Class B Common stock in treasury (at cost), 1,952,495 and 1,884,078 shares, respectively |
(30,699 | ) | (28,967 | ) | ||||
| Total shareholders’ equity |
318,312 | 294,427 | ||||||
| Total liabilities and shareholders’ equity |
$ | 493,345 | $ | 484,862 | ||||
See accompanying notes to consolidated financial statements.
3
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000’s omitted)
(unaudited)
| Six-month period ended June 28, 2003 |
Six-month period ended June 29, 2002 |
|||||||
| Cash flow from operating activities: |
||||||||
| Net earnings |
$ | 24,591 | $ | 20,329 | ||||
| Adjustments to reconcile net earnings to net cash provided (used) by operating activities: |
||||||||
| Depreciation and amortization |
2,010 | 1,303 | ||||||
| Provision for doubtful accounts |
1,085 | 1,350 | ||||||
| Tax benefit from stock option exercises |
246 | 521 | ||||||
| Compensation expense on restricted stock grants |
464 | — | ||||||
| Change in assets and liabilities, net of acquisitions: |
||||||||
| Receivables |
(9,134 | ) | (27,380 | ) | ||||
| Finished goods inventory |
1,416 | (14,421 | ) | |||||
| Accounts payable |
11,652 | 23,411 | ||||||
| Other current assets and liabilities |
(19,461 | ) | (6,612 | ) | ||||
| Net cash provided (used) by operating activities |
12,869 | (1,499 | ) | |||||
| Cash flow from investing activities: |
||||||||
| Sales, net of purchases, of marketable securities |
22,805 | 32,576 | ||||||
| Purchases of fixed assets |
(8,489 | ) | (3,763 | ) | ||||
| Decrease (increase) in other assets |
4,465 | (1,225 | ) | |||||
| Acquisition of businesses |
(8,028 | ) | (26,327 | ) | ||||
| Net cash provided by investing activities |
10,753 | 1,261 | ||||||
| Cash flow from financing activities: |
||||||||
| Purchases of treasury stock |
(3,434 | ) | — | |||||
| Proceeds from stock option exercises |
1,018 | 2,428 | ||||||
| Net cash (used) provided by financing activities |
(2,416 | ) | 2,428 | |||||
| Net increase in cash |
21,206 | 2,190 | ||||||
| Cash and cash equivalents at beginning of period |
37,031 | 32,758 | ||||||
| Cash and cash equivalents at end of period |
$ | 58,237 | $ | 34,948 | ||||
| Supplemental non-cash investing and financing activities: |
||||||||
| Acquisition liabilities |
$ | — | $ | 6,470 | ||||
| Stock issued in connection with acquisition |
$ | 1,000 | $ | 5,000 | ||||
See accompanying notes to consolidated financial statements.
4
PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| 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 and six-month periods ended June 28, 2003 and June 29, 2002 include all necessary adjustments for fair presentation. Results for any interim period may not be indicative of the results for the entire year. |
| 2. | A reconciliation of the basic and diluted weighted average shares outstanding is as follows for the three-month and six-month periods ended June 28, 2003 and June 29, 2002: |
| Six-month June 28, 2003 |
Six-month June 29, 2002 |
Three-month period ended June 28, 2003 |
Three-month period ended June 29, 2002 | |||||
| (000’s omitted) | ||||||||
| Weighted average number of Class A and Class B Common shares outstanding used as the denominator in the basic earnings per share calculation |
43,549 | 43,873 | 43,577 | 43,976 | ||||
| Additional shares assuming exercise of dilutive stock options |
537 | 782 | 656 | 723 | ||||
| Additional shares assuming unearned restricted stock is earned |
33 | — | 36 | — | ||||
| Additional shares assuming contingently issuable shares related to acquisitions are issued |
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 |
44,150 | 44,655 | 44,289 | 44,699 | ||||
Options to purchase 3.5 million and 2.9 million shares with exercise prices greater than the average market prices of common stock during the three-month periods ended June 28, 2003 and June 29, 2002 were outstanding at June 28, 2003 and June 29, 2002, respectively. These options were excluded from the respective computations of diluted earnings per share because their effect would be anti-dilutive.
| 3. | In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” was issued. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” to require prominent disclosures about the method of accounting for stock-based compensation and the effect of the method used on reported results. Finally, this statement amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. As required, the Company adopted this statement effective in 2002. The adoption did not have a material impact on the Company’s consolidated results of operations or financial position. |
In accordance with the provision of SFAS No. 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting
5
for its stock option plans. Accordingly, the Company uses the intrinsic-value method of accounting for stock options granted to employees and does not currently recognize compensation expense for its stock option awards to employees in the consolidated statements of earnings. If the Company had elected to recognize compensation expense based on the fair value of the options at the grant date as prescribed by SFAS No. 123, pro forma net income and earnings would have been:
| Six-month period ended June 28, 2003 |
Six-month period ended June 29, 2002 |
Three-month period ended June 28, 2003 |
Three-month period ended June 29, 2002 |
|||||||||||||
| (000’s omitted, except share data) | ||||||||||||||||
| Net earnings—as reported |
$ | 24,591 | $ | 20,329 | $ | 11,407 | $ | 10,710 | ||||||||
| Pro forma impact of Company option grants |
(5,663 | ) | (5,413 | ) | (2,834 | ) | (2,719 | ) | ||||||||
| Pro forma net earnings |
$ | 18,928 | $ | 14,916 | $ | 8,573 | $ | 7,991 | ||||||||
| Pro forma earnings per share: |
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