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 April 2, 2005

¨	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 April 29, 2005, the number of shares outstanding of each of the issuer’s classes of common stock were as follows:

Class A Common Stock – 6,567,839

Class B Common Stock – 37,265,073

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS

(000’s omitted, except share data)

(unaudited)


	Three-month period ended April 2, 2005			Three-month period ended April 3, 2004
Net sales	$	486,741		$	401,243
Cost of products sold		433,394			358,230

Gross profit		53,347			43,013

Selling, general and administrative expense		36,196			22,158
Depreciation and amortization		2,615			1,369

Earnings from operations		14,536			19,486

Interest income		122			206
Interest expense		(637	)		(32	)
Minority interest		1,500			(78	)

Earnings before income taxes		15,521			19,582

Provision for income taxes		5,898			7,343

Net earnings	$	9,623		$	12,239

Earnings per share:
Basic	$	.22		$	.28
Diluted	$	.22		$	.28
Weighted average shares outstanding:
Basic		43,780,334			43,322,604
Diluted		44,443,342			44,056,295

See accompanying notes to consolidated financial statements.

PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED BALANCE SHEETS

(000’s omitted, except share data)


	(unaudited) April 2, 2005			January 1, 2005
ASSETS:
Current assets:
Cash and cash equivalents	$	33,592		$	43,465
Restricted cash		—			2,000
Marketable securities		11,739			17,289
Receivables, less allowance for doubtful accounts of $7,654 and $6,903, respectively		287,855			244,730
Finished goods inventory		117,440			112,616
Deferred income taxes		3,075			3,075
Other current assets		34,324			33,382

		488,025			456,557
Fixed assets, net		60,650			48,209
Other assets		6,004			5,886
Goodwill and other intangibles		159,259			158,741

Total assets	$	713,938		$	669,393

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	199,686		$	173,969
Line of credit		45,369			40,290
Other current liabilities		29,716			26,906

		274,771			241,165
Deferred income taxes		9,714			9,714

Total liabilities		284,485			250,879

Minority interest		21,712			23,212

Commitments and contingencies (note 6)

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, 6,570,462 and 6,590,305 issued and outstanding, respectively		66			66
Class B, $0.01 par value, 180,000,000 shares authorized, 38,826,856 and 38,807,013 issued, respectively		388			388
Additional paid in capital		190,652			190,524
Retained earnings		241,922			232,299

		433,028			423,277
Less: Class B Common unearned restricted stock, 151,451 and 156,201 shares, respectively		(1,800	)		(2,108	)
Class B Common stock in treasury (at cost), 1,419,809 and 1,563,651 shares, respectively		(23,487	)		(25,867	)

Total shareholders’ equity		407,741			395,302

Total liabilities and shareholders’ equity	$	713,938		$	669,393

See accompanying notes to consolidated financial statements.

PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000’s omitted)

(unaudited)


	Three-month period ended April 2, 2005			Three-month period ended April 3, 2004
Cash flow from operating activities:
Net earnings	$	9,623		$	12,239
Adjustments to reconcile net earnings to net cash (used) provided by operating activities:
Depreciation and amortization		2,615			1,369
Provision for doubtful accounts		1,044			701
Tax benefit from stock option exercises		472			145
Compensation expense on stock grants		258			249
Minority interest		(1,500	)		78
Change in assets and liabilities:
Receivables		(44,168	)		(20,672	)
Finished goods inventory		(4,824	)		13,905
Accounts payable		30,599			342
Other current assets and liabilities		3,868			4,319

Net cash (used) provided by operating activities		(2,013	)		12,675

Cash flow from investing activities:
Sales, net of purchases, of marketable securities		5,550			5,311
Restricted cash for acquisition of business		2,000			—
Purchases of fixed assets		(19,857	)		(2,768	)
Increase in other assets		(118	)		(582	)
Acquisition of businesses		(2,600	)		(5,796	)

Net cash used by investing activities		(15,025	)		(3,835	)

Cash flow from financing activities:
Proceeds from line of credit		20,079			—
Repayments on line of credit		(15,000	)		—
Proceeds from stock option exercises		1,932			468
Proceeds from employee stock purchase plan		154			75
Payments for purchase of treasury stock		—			(1,157	)

Net cash provided (used) by financing activities		7,165			(614	)

Net (decrease) increase in cash		(9,873	)		8,226
Cash and cash equivalents at beginning of period		43,465			45,719

Cash and cash equivalents at end of period	$	33,592		$	53,945

Supplemental non-cash investing and financing activities:
Acquisition liabilities	$	—		$	287

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 Priority Healthcare Corporation (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 2, 2005 and April 3, 2004 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 1, 2005.

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 2, 2005 and April 3, 2004:


	(000’s omitted)
	Three-month period ended April 2, 2005	Three-month period ended April 3, 2004
Weighted average number of Class A and Class B common shares outstanding used as the denominator in the basic earnings per share calculation	43,780	43,323
Additional shares assuming exercise of dilutive stock options	564	645
Additional shares assuming unearned restricted stock is earned	99	69
Additional shares assuming contingently issuable shares related to acquisitions are issued	—	19

Weighted average number of Class A and Class B common and equivalent shares used as the denominator in the diluted earnings per share calculation	44,443	44,056

Options to purchase 2.9 million and 3.1 million shares with exercise prices greater than the average market prices of common stock during the three-month periods ended April 2, 2005 and April 3, 2004, respectively, were outstanding at April 2, 2005 and April 3, 2004, 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 Statement of Financial Accounting Standards (“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 amended 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 Opinion 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 for the three-month periods ended April 2, 2005 and April 3, 2004 would have been reduced to the following pro forma amounts indicated:


	(000’s omitted, except share data)
	Three-month period ended April 2, 2005			Three-month period ended April 3, 2004
Net earnings – as reported	$	9,623		$	12,239
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,193	)		(1,843	)

Pro forma net earnings	$	8,430		$	10,396

Basic earnings per share:
Basic – as reported	$	0.22		$	0.28
Basic – pro forma	$	0.19		$	0.24
Diluted earnings per share:
Diluted – as reported	$	0.22		$	0.28
Diluted – pro forma	$	0.19		$	0.24

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or FAS 123R. FAS 123R requires the Company to recognize compensation cost relating to all share-based payments to employees based on their fair values beginning the first quarter of 2006. The Company is evaluating the requirements of FAS 123R and expects that the adoption of FAS 123R may have a material impact on selling, general and administrative expenses. The Company has not determined the method of adoption and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under FAS 123 shown above.

4.	During the first three months of 2005, the Company paid the final $2 million contractual obligation due to the former owners of SinusPharmacy Corporation related to its 2003 acquisition.

On March 4, 2005, the Company acquired Matrix Oncology LP’s 40% share of the stock of Matrix Oncology, LLC (“Matrix”), a service provider within the oncology treatment industry. The Company already owned 60% of the stock of Matrix and was consolidating Matrix in its consolidated financial statements. The purchase price was $600,000 in cash and was allocated to goodwill. The fair value assigned to the goodwill acquired was based upon estimates and assumptions provided and compiled by management. The acquisition was financed by cash from operations. In addition, the former owner of Matrix is eligible to receive additional consideration up to a maximum of $3 million if certain predetermined events occur.

During the first three months of 2005, the Company contributed approximately $650,000 of out-of-pocket expenses and its rights in the concept to Centric Health LLC, a newly formed entity that will engage in the business of financing biopharmaceutical receivables, in exchange for a warrant to purchase limited liability company interests in Centric. Additional funding has been provided to Centric by Bindley Capital Partners I, LLC, which is controlled by the Company’s Chairman of the Board and two other directors of the Company. The investments of the Company and Bindley Capital Partners were on economically equivalent terms. It is contemplated that the ultimate aggregate ownership of Bindley Capital Partners and the Company will be less than 50% to satisfy regulatory requirements.

5.	The following is a reconciliation of the beginning and ending liability balances showing the changes during the three-month period ended April 2, 2005 attributable to restructuring costs. The lease termination costs end in 2007 and all employee termination costs have been paid.


	(000’s omitted)
	Lease Termination Costs
January 1, 2005 liability balance	$	300
Costs paid		(42	)

April 2, 2005 liability balance	$	258

In November 2004, the Company received a subpoena from the U.S. Department of Justice (the “DOJ”) requiring the Company to provide the DOJ with certain information regarding the promotion and marketing of Actimmune, a product manufactured by InterMune, Inc. The Company believes that the materials sought by the DOJ are part of an ongoing investigation being conducted by the United States Attorney’s Office for the Northern District of California. The Company is fully cooperating with the DOJ, however should the DOJ find that the Company acted improperly, it could subject the Company to fines and/or sanctions, which could have a material adverse effect on the Company’s business or financial condition.

The Company is also 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.

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 that are beyond our control. Factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the effect of our internal growth and future acquisitions, changes in our supplier relationships, changes in third party reimbursement rates, changes in our customer mix and the financial stability of major customers, competitive pressures, our ability to successfully integrate acquired businesses, including the achievement of cost savings and revenue enhancements, changes in government regulations or the interpretation of these regulations and changes in interest rates. You are also directed to other risks and uncertainties discussed in other documents we file with the Securities and Exchange Commission, including without limitation those discussed in “Risk Factors” in our Form 10-K for the fiscal year ended January 1, 2005. You are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date herein.