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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ACT OF 1934
For the fiscal year ended December 29, 2001
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 (I.R.S. Employer Identification No.)
incorporation or organization)
250 Technology Park, Suite 124
Lake Mary, Florida 32746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 804-6700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $.01 PAR VALUE
CLASS B COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
$894,280,887
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the last sale price for such stock on March 4, 2002
(assuming solely for the purposes of this calculation that all Directors and
executive officers of the Registrant are "affiliates").
7,158,464
Number of shares of Class A Common Stock, $.01 par value,
outstanding at March 4, 2002.
36,584,715
Number of shares of Class B Common Stock, $.01 par value,
outstanding at March 4, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document have been incorporated by reference into this
Annual Report on Form 10-K:
PART OF FORM 10-K INTO WHICH
IDENTITY OF DOCUMENT DOCUMENT IS INCORPORATED
Definitive Proxy Statement for the Annual PART III
Meeting of Shareholders
to be held May 20, 2002
PRIORITY HEALTHCARE CORPORATION
Lake Mary, Florida
Annual Report to Securities and Exchange Commission
December 29, 2001
PART I
ITEM 1. BUSINESS.
Background
Priority Healthcare Corporation ("Priority" or the "Company") was
formed by Bindley Western Industries, Inc. ("BWI") on June 23, 1994 as an
Indiana corporation to focus on the distribution of products and provision of
services to the alternate site segment of the healthcare industry. The Company
conducts the business activities of alternate site healthcare companies acquired
by BWI or the Company in ten transactions since February 1993. The principal
executive offices of the Company are located at 250 Technology Park, Suite 124,
Lake Mary, Florida 32746 and its telephone number at that address is (407)
804-6700. On October 29, 1997, the Company consummated an initial public
offering of its Class B Common Stock (the "IPO"). On December 31, 1998, BWI
distributed to its common shareholders all of the 30,642,858 shares of the
Company's Class A Common Stock then owned by BWI in a spin-off transaction and
BWI no longer has any ownership interest in the Company. Unless otherwise
indicated, "Priority" and the "Company" refer to Priority Healthcare Corporation
and its subsidiaries, and "BWI" refers to Bindley Western Industries, Inc. and
its subsidiaries other than the Company.
Acquisition History
Effective as of February 28, 1993, BWI acquired substantially all of
the assets of Charise Charles, Ltd., Inc. ("Charise Charles"), a specialty
wholesale distributor of oncology and renal care biopharmaceuticals located in
Altamonte Springs, Florida. On October 6, 1993, BWI acquired substantially all
of the assets of PRN Medical, Inc. ("PRN"), a specialty wholesale distributor of
renal care supplies and dialysis equipment located in Orlando, Florida. In
August 1994, PRN was combined with Charise Charles as part of the formation of
the Company. On October 31, 1994, the Company acquired the stock of 3C Medical,
Inc. ("3C"), a specialty distributor of acute dialysis products located in Santa
Ana, California. Effective January 1, 1995, the Company acquired all of the
outstanding stock of IV-1, Inc., IV-One Services, Inc. and National Pharmacy
Providers, Inc., three related companies located in Altamonte Springs, Florida
that provided specialty pharmacy and other related healthcare services. On
August 6, 1997, the Company acquired substantially all of the assets of Grove
Way Pharmacy, Inc. ("Grove Way Pharmacy"), a specialty distributor of vaccines
located in Castro Valley, California. On April 12, 1999, the Company acquired
substantially all of the assets of Pharmacy Plus, Ltd. ("Pharmacy Plus"), a
specialty pharmacy located in Philadelphia, Pennsylvania. On September 2, 1999,
the Company acquired substantially all of the assets of Monitors Unlimited, Inc.
("Monitors Unlimited"), a distributor in the oral surgery market located in
Miamisburg, Ohio. On January 20, 2001, the Company acquired substantially all of
the assets of three related companies doing business as Freedom Drug ("Freedom
Drug"), the nation's leading infertility specialty pharmacy, located in
Lynnfield, Massachusetts and Stratham, New Hampshire. Effective March 31, 2001,
the Company acquired substantially all of the assets of Physicians Formulary
International, Inc. ("Physicians Formulary"), a distributor in the outpatient
surgery center market located in Phoenix, Arizona. Effective October 26, 2001,
the Company acquired substantially all of the assets of Chesapeake Infusion LLC,
doing business as InfuRx ("InfuRx"), a specialty pharmacy located in Wilmington,
Delaware and Memphis, Tennessee.
The operations of Charise Charles, PRN, 3C, Grove Way Pharmacy,
Monitors Unlimited and Physicians Formulary indirectly provide products to
patients through oncology practices, renal dialysis centers and other healthcare
providers. Effective December 31, 1998, IV-One Services, Inc. and National
Pharmacy Providers, Inc. were merged into IV-1, Inc. and the name of the
corporation was changed to Priority Healthcare Pharmacy, Inc. The operations of
Priority Healthcare Pharmacy, Inc., Pharmacy Plus, Freedom Drug and InfuRx
provide products and services directly to patients.
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General
Priority is a national distributor of specialty pharmaceuticals and
related medical supplies to the alternate site healthcare market and is a
provider of patient-specific, self-administered biopharmaceuticals and disease
treatment programs to individuals with chronic diseases. The Company sells over
3,500 SKUs of specialty pharmaceuticals and medical supplies to outpatient renal
care centers and office-based physicians in oncology and other physician
specialty markets. 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, Priority services
over 4,000 customers in all 50 states, including approximately 900 office-based
oncologists and 400 renal dialysis clinics.
The Company also fills individual patient prescriptions, primarily for
self-administered biopharmaceuticals. These patient-specific prescriptions are
filled at licensed pharmacies in Lake Mary, Florida, Byfield, Massachusetts,
Philadelphia, Pennsylvania, Wilmington, Delaware and Memphis, Tennessee and are
shipped directly to the patient overnight in specialized packages. Priority also
provides disease treatment programs for hepatitis, cancer, hemophilia, human
growth deficiency, rheumatoid arthritis, Crohn's disease, respiratory syncytial
virus (RSV), infertility, pulmonary hypertension, pain management, multiple
sclerosis and others. With the acquisition of Freedom Drug, Priority is the
nation's leading infertility specialty pharmacy.
Priority's net sales have increased from $107.4 million in 1994 to
$805.1 million in 2001. In the same period, operating income has increased from
$2.3 million in 1994 to $40.4 million in 2001. The Company's objective is to
continue to grow rapidly and enhance its market position as a leading healthcare
company by capitalizing on its business strengths and pursuing the following
strategy: (i) continue to focus on and further penetrate the alternate site
market; (ii) enter new markets through new manufacturer relationships that
provide access to new products; (iii) accelerate growth of its higher margin,
patient-specific pharmacy business by leveraging relationships with existing
distribution customers; (iv) maintain intense cost control while investing in
infrastructure; (v) pursue acquisitions to complement existing product offerings
and further penetrate markets; and (vi) continue to develop physician and payor
networks that enhance Priority's alliance capabilities with manufacturers.
Industry and Market Overview
Priority sells the majority of its products and services into large and
growing markets--oncology, gastroenterology, rheumatology, endocrinology,
pulmonology, neurology, infertility and chronic renal dialysis. The Company also
operates in certain areas of the vaccine, oral surgery and other chronic disease
markets. The common characteristics of these markets are that most products are
administered in an alternate site setting by physicians or the patients
themselves and require specialized shipping and support services.
Industry Overview. The specialty pharmacy and distribution market is
fragmented with several public and many small private companies focusing on
different product or customer niches. Few companies offer a wide range of
pharmaceuticals and related supplies targeted to multiple customer groups,
specifically office-based physicians and patients self-administering (injecting,
infusing, or receiving therapy) at home. Historically, cancer therapy, renal
dialysis and most other treatments for chronic and life-threatening medical
conditions were administered almost exclusively in a hospital inpatient setting.
In recent years, the frequency with which these treatments have been
administered outside the hospital has increased dramatically in response to cost
containment efforts and the introduction of new biopharmaceutical products, such
as interferons, ribavirin-Intron A combination therapy ("Rebetron"(TM)),
PEG-Intron(TM), Rebetol(TM), erythropoietin ("EPO") and many others.
The service needs of office-based physicians and patients
self-administering at home differ markedly from those of the hospital market,
creating logistical challenges and increasing administrative costs for those
offices. Office-based physicians and clinics generally order relatively small
quantities of drugs at irregular intervals and do not have inventory management
systems or sufficient pharmacy staffing. Challenges facing these caregivers
include having necessary administrative and financial resources, managing
relationships with multiple suppliers, managing inventories, billing patients
and third-party payors, and monitoring new clinical developments. The Company
believes that the shift from hospital-based to office-based or home-based
therapy administration has created a significant opportunity, particularly in
the oncology, gastroenterology, vaccine, infertility, rheumatology,
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pulmonary, neurology, respiratory, renal dialysis, pediatric, endocrinology, and
ambulatory surgery markets. The Company is focused primarily on these markets,
but is developing business in other growing markets as well.
Oncology. The occurrence of cancer continues to grow in the United
States. According to a 2002 Wachovia Securities Equity Research report, cancer
is the second leading cause of death in the United States and the American
Cancer Society estimates that half of all men and one-third of all women in the
United States will develop cancer during their lifetime. Also, according to the
report, if every patient developing cancer this year in the United States had a
therapy available for treatment, it could cost as much as $30 billion. The
principal treatments for cancer are surgery and a regimen of pharmaceutical
treatments. Surgery typically involves hospitalization, but radiation and
chemotherapy are increasingly being delivered in alternate site settings such as
the physician office and the home. According to USA Today, cancer drugs generate
in excess of $6 billion per year in sales worldwide, which is predicted to grow
to $62.7 billion by the year 2030.
Also, according to the 2002 Wachovia Securities Equity Research report,
the total number of patients living with cancer is estimated to be 8.3 million
in the United States and the number of new patients developing cancer each year
is estimated to be 3.0 million. According to a 2001 survey conducted by
Pharmaceutical Research and Manufacturers of America ("PhRMA"), there are
currently 402 medicines in development for cancer, which represents over half of
all the medicines in development. In addition, the overall incidence of cancer
is expected to increase as the average age of the U.S. population continues to
increase. According to the NIH, over 50% of all cancers are diagnosed in people
age 65 or over.
Gastroenterology. Priority operates in the gastroenterology market,
principally through the sale of interferons, Rebetron(TM), PEG-Intron(TM) and
Rebetol(TM) for the treatment of hepatitis C. NIH estimates that more than four
million Americans are infected with hepatitis C and that approximately 30,000
new acute hepatitis C infections occur each year. According to NIH, the
incidence of hepatitis C infection appears to be declining from its peak in
1989. However, because only 25% to 30% of new hepatitis C infections are
currently diagnosed, as estimated by NIH, the Company believes the treated
portion of this population is likely to increase as awareness of hepatitis
disease management programs increases. According to NIH, hepatitis C is
responsible for 8,000 to 10,000 deaths annually and is currently the leading
reason for liver transplantation in the United States.
Vaccine. The worldwide vaccine market is estimated to be $7 billion in
2000, and is expected to grow into a $13 billion market by 2005, according to
Baxter International, Inc., one of the country's leading medical products and
services companies. According to Aventis Pasteur, a world leader in vaccine
production, pediatric vaccines represented over 20% of the world market in 1999,
and hepatitis vaccines represented over 10% of the world market. Growth in the
vaccine market is expected to be driven by the growth of combination pediatric
vaccines, travelers' vaccines, vaccines for adolescent protection, vaccines for
the elderly and vaccines to treat chronic infectious disease and cancer.
Infertility. Infertility is an emotionally devastating disease that the
Company estimates adversely affects approximately 15% of the couples in the
United States that desire to have children. The Company believes pharmaceutical
innovations involving medications for ovulation induction treatment are enabling
thousands of couples to enjoy parenthood. Ovulation induction typically occurs
over a one month period of time involving specialty pharmaceuticals requiring
self administered injections and related medical supplies. According to the
Society for Assisted Reproductive Technology, there were 87,000 assisted
reproductive technology cycles performed in 370 clinics during 1999, up from
81,000 cycles performed in 360 clinics during 1998.
Rheumatology. Rheumatoid arthritis ("RA") is a chronic inflammatory
disease that predominantly affects the joints. According to a 1999 Bear Stearns
research report, RA occurs in all ethnic groups, with females two to three times
more likely to be affected than males. Also, according to a Thomas Weisel
research report, approximately 2.5 million people in the United States are
afflicted with RA. Enbrel(TM) and Remicade(TM) are the two leading drugs that
treat RA and the Company estimates that the market for Enbrel(TM) and
Remicade(TM) in the United States exceeds $1 billion.
Pulmonary Hypertension. Pulmonary hypertension is a disorder of the
blood vessels in the lungs that causes pressure in the pulmonary artery to rise
above normal levels and may become life threatening. According to United
Therapeutics Corporation, a pharmaceutical company focused on vascular and
chronic diseases,
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approximately 50,000 persons in North America and Europe are afflicted with
pulmonary hypertension. According to NIH, it is estimated that there are 300 new
cases diagnosed in the United States each year.
There are currently two drugs approved for pulmonary hypertension,
continuous intravenous Flolan(TM), a synthetic form of prostacyclin, and
Tracleer(TM), an oral medication. The Company has an agreement with United
Therapeutics Corporation to be one of two exclusive specialty distributors
during the final phase of clinical trials and following Food and Drug
Administration approval of Remodulin(TM), which has been developed as an
alternative to Flolan(TM). Remodulin(TM) is a prostacyclin analogue that is
administered as a continuous subcutaneous treatment and is a life long therapy.
Other Pulmonary Diseases. Idiopathic pulmonary fibrosis ("IPF") is a
disease characterized by acute inflammation in the lung and progressive scarring
that leads to a gradual loss of lung function. Actimmune(TM) has shown positive
results as a treatment for IPF. Actimmune(TM), manufactured by InterMune, is
self-administered by the IPF patient via subcutaneous injection three times a
week. According to a 2001 Adams, Harkness & Hill research report, there are
approximately 50,000 people in the United States suffering from IPF which
represents a market in the United States for the treatment of IPF that exceeds
$1 billion.
Neurology. Multiple sclerosis ("MS") is a progressive neurological
disease in which the body loses the ability to transmit messages among nerve
cells, leading to a loss of muscle control, paralysis and, in some cases, death.
According to a Thomas Weisel research report, MS affects 250,000 to 350,000
people in the United States. The Company estimates that the market for MS drugs
in the United States easily exceeds $1 billion.
Respiratory. Respiratory syncytial virus ("RSV") is a serious lower
respiratory tract disease that primarily attacks pediatric patients. RSV is the
most common cause of pneumonia and bronchitis in infants and children. According
to MedImmune, the manufacturer of Synagis(TM), a drug used to treat RSV, sales
of Synagis(TM) in the United States were approximately $500 million in 2001.
Renal Dialysis. End stage renal disease ("ESRD") is characterized by
the irreversible loss of kidney function and requires kidney transplantation or
routine dialysis treatment (either periodialysis or hemodialysis), which
involves removing waste products and excess fluids from the blood. According to
the federal Centers for Medicare and Medicaid Services ("CMS") (formerly the
Health Care Financing Administration ("HCFA")), as of December 31, 2000, over
89% of dialysis patients were receiving hemodialysis in outpatient treatment
centers. Hemodialysis typically utilizes various specialty pharmaceuticals and
related medical supplies as part of the treatment. Hemodialysis treatments
usually last three hours and are performed three times a week at over 3,000
outpatient facilities in the United States. According to CMS, ESRD enrollment
was 273,333 as of December 31, 2000 and is growing by approximately 5% per year.
The medication most frequently prescribed to hemodialysis patients is EPO, which
stimulates the production of red blood cells, as well as calcium, iron,
hepatitis vaccine and other nutrient compounds. The Company estimates that the
United States market for EPO alone easily exceeds $1 billion.
Business Strengths
Priority believes the following represent the Company's business
strengths and have been the principal factors in the Company's business success
to date.
Knowledgeable Sales, Marketing and Support Staff. The Company has a
well-trained, knowledgeable telesales, outside sales and sales support staff of
approximately 125 full-time associates. The Company's telesales, outside sales
and sales support staff are most experienced in the areas of oncology,
gastroenterology, vaccines, infertility, rheumatology, pulmonary, neurology,
respiratory, renal care, and ambulatory surgery. Priority holds frequent
meetings and training sessions with its suppliers to enable the sales and
support staff to be well-informed about current and new biopharmaceuticals. The
sales and support staff provides not only superior and knowledgeable customer
service, but also promotes the sale of new products.
Clinical Expertise. The Company provides disease treatment programs to
patients and physicians through its highly trained clinical staff of
pharmacists, nurses and patient care coordinators. These personnel are available
for ongoing consultation with the patient and the dispensing physician regarding
the patient's therapy and progress seven days a week, 24 hours a day. In order
to serve the specific needs of its customers, Priority operates licensed
5
pharmacies, one of which was the first to be accredited with commendation by
ACHC (Accreditation Commission for Health Care, Inc.), which is specific to
specialty pharmacies.
Broad Product Offerings to Targeted Markets. Priority sells over 3,500
SKUs of pharmaceuticals and medical supplies which enable the Company to provide
"one-stop shopping" to its customers. Priority targets its selling efforts of
this broad range of products and services to customers in alternate site
settings, such as physicians' offices, ambulatory surgery centers, renal
dialysis clinics and patients self-administering at home. The Company
continually evaluates new products that it can add to its offerings to continue
to meet the needs of these specialized markets.
Commitment to Customer Service. The Company is committed to providing
superior customer service that includes shipping products ordered before 7 p.m.
for delivery the next day and filling 99% of its orders within one day of being
ordered. Priority's software enables its salespeople to quickly determine
product availability, pricing, customer order history and billing information.
In addition, Priority provides patient education, counseling and follow-up with
24-hour on-call nurses to assist its patients in better understanding and
complying with their treatments.
Efficient Infrastructure. Priority has focused considerable time and
expense on building an infrastructure, including computer systems and training,
that would enable the Company to operate efficiently and manage rapid growth. In
addition, the Company's very centralized approach to the distribution of its
products and services maintains a low cost, very efficient model. Management
also focuses on tightly controlling expenses and is constantly re-evaluating the
efficiency of its operations, including purchasing and distribution.
Growth Strategy
The Company's objective is to continue to grow rapidly and enhance its
market position as a leading specialty pharmacy provider and specialty
distributor by capitalizing on its business strengths and pursuing the following
strategy.
Continue to focus on and further penetrate the alternate site market.
By focusing on the alternate site market, the Company has targeted growth
segments of the health care industry. The Company intends to increase its
alternate site market presence by expanding its product and service offerings,
increasing its sales and marketing personnel and focusing on group accounts.
Enter new markets through new manufacturer relationships that provide
access to new products. By targeting chronic disease therapies that require
patient-specific, self-administered biopharmaceuticals, the Company continues to
expand its markets. An example is the Remodulin(TM) therapy for patients
suffering from pulmonary hypertension which was added through an agreement with
United Therapeutics Corporation. This agreement is expected to have a positive
impact on Priority's revenues beginning in the third quarter of 2002, assuming
Remodulin(TM) therapy approval by the Food and Drug Administration ("FDA"),
which is expected to be in June, 2002. In February, 2002, United Therapeutics
received an approvable letter from the FDA. According to United Therapeutics, an
approvable letter usually represents the final step before a drug receives FDA
clearance for marketing in the United States. Priority is one of only two
companies that will distribute Remodulin(TM) and was the lead pharmacy in
handling the clinical trial patients.
Accelerate growth of its higher margin, patient-specific pharmacy
business by leveraging relationships with existing distribution customers. The
Company has over 4,000 customers, including physicians focusing on oncology,
gastroenterology, rheumatology, pediatrics, vaccines and ambulatory surgery. The
Company believes that a number of physicians that order pharmaceuticals and
supplies from the Company also treat patients who require patient-specific,
self-administered biopharmaceuticals. The Company's information database
identifies these cross-selling opportunities, and Priority believes it is
well-positioned to capture incremental revenue from these customers. Priority
also continues to expand its relationships with payors who often influence the
decision on which pharmacy service provider to use.
Maintain intense cost control while investing in infrastructure. The
Company's goal is to remain a low cost provider of specialty products and
services yet increase the value-added services it provides to customers such as
24-hour on-call nurse support, internet community care neighborhood web sites,
patient counseling and specialized
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shipping. The Company's selling, general and administrative expense was only
6.0% of net sales in 2001 even as the Company continued to invest in its
infrastructure.
Pursue acquisitions to complement existing product offerings and
further penetrate markets. The Company believes that the highly fragmented
specialty pharmacy distribution industry affords it an opportunity to grow
through selective acquisitions. By acquiring complementary businesses, the
Company can increase its customer base, expand its product and geographic scope
and leverage its existing infrastructure. The Pharmacy Plus and Monitors
Unlimited acquisitions during 1999 and the Freedom Drug, Physicians Formulary
and InfuRx acquisitions during 2001 are examples that fit this criteria.
Continue to develop physician and payor networks that enhance the
Company's alliance capabilities with manufacturers. The Company believes that
with strong physician and payor networks the relationships with its
manufacturers will be enhanced, thereby increasing the potential for alliances
which could expand its products, service and geographic scope. In addition,
contracts with payors, such as Aetna U.S. Healthcare, Inc., generate significant
new patient volumes and, therefore, revenue growth.
Products and Services
Priority provides a broad range of services and supplies to meet the
needs of the alternate site market, including the office-based oncology market,
outpatient renal care market, other physician office specialty markets that are
high users of vaccines and ambulatory surgery centers. Priority offers
value-added services to meet the specialized needs of these markets by shipping
refrigerated pharmaceuticals overnight in special packaging to maintain
appropriate temperatures and offering automated order entry services and
customized group account distribution. Priority distributes its products from
distribution centers in Sparks, Nevada and Grove City, Ohio. The Company sells
over 3,500 SKUs of pharmaceuticals such as EPO, Aranesp(TM) Procrit(TM),
Neupogen(TM), Calcijex(TM) and INFeD(TM) and related medical supplies such as IV
solutions, IV sets, gloves, needles, syringes and sharps containers. Priority's
distribution centers service over 4,000 customers located in all 50 states,
including approximately 900 office-based oncologists and 400 renal dialysis
clinics.
Priority believes its knowledgeable sales force provides a competitive
advantage when selling into the alternate site market. Since a majority of
customer orders are placed by telephone, the Company offers its customers a
toll-free telephone number, fax line and electronic data interchange ("EDI")
ordering capability and plans to offer internet ordering capabilities in the
near future. Orders typically are received by the Company's telesales and sales
service personnel who use PC-based computer systems to enter customer orders,
and to access product information, product availability, pricing, promotions and
the customer's buying history. As part of the Company's commitment to superior
customer service, the Company offers its customers ease of order placement. Once
an order is received, it is electronically sent to the appropriate distribution
center where it is filled and shipped. The Company estimates that approximately
98% of all items are shipped without back ordering, and that 99% of all orders
received before 7 p.m. are shipped on the same day that the order is received.
See "--Sales and Marketing."
Priority also provides patient-specific, self-administered
biopharmaceuticals and related disease treatment programs to individuals with
chronic diseases. In Lake Mary, Florida, Byfield, Massachusetts, Philadelphia,
Pennsylvania, Wilmington, Delaware, and Memphis, Tennessee, Priority fills
patient-specific prescriptions and ships them via overnight delivery in special
shipping containers to maintain appropriate temperatures. These services are
provided in combination with the Company's disease treatment programs, through
which the Company's pharmacist and nursing staff provide education, counseling
and other services to patients. Priority is a recognized national leader in the
specialty pharmacy market, as reported by Goldman Sachs, which called Priority
"the top choice in specialty pharmacy" in its January 20, 2000 research report
on United States Healthcare Distribution.
Priority has traditionally provided disease treatment programs for
hepatitis and cancer, with biopharmaceuticals that primarily consist of
Interferon, a synthetic biopharmaceutical used to treat hepatitis B and C,
Rebetron(TM), an oral antiviral and a synthetic biopharmaceutical used to treat
hepatitis C, PEG-Intron(TM), a pegulated interferon, Rebetol(TM), an oral
antiviral, Octreotide(TM), a synthetic hormone used to treat diarrhea associated
with intestinal peptide tumors, and Epoetin Alfa(TM), a synthetic
biopharmaceutical used to treat anemia. Priority has continually added many more
products, including Temodar(TM), an oral chemotherapy used to treat Anaplastic
astrocytoma (a brain malignancy), Thalomid(TM), an oral product with
antiangiogenesis properties used to treat a variety of cancers, Synagis(TM), an
injectable vaccine product used to treat RSV (Respiratory Syncytial Virus)
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in infants, Remicade(TM), an intravenous product used to treat Crohn's Disease
and rheumatoid arthritis patients, Betaseron(TM), an injectable product used to
treat patients with multiple sclerosis, Actimmune(TM), a product administered by
subcutaneous injection often used to treat patients with IPF (idiopathic
pulmonary fibrosis), and Enbrel(TM), an injectable product used to treat
patients suffering from rheumatoid arthritis.
The disease treatment programs provided by the Company offer a number
of advantages to patients, physicians, third-party payors and drug
manufacturers. The advantages include: (i) increasing patient compliance with
the recommended therapy, thereby avoiding more costly future treatments; (ii)
facilitating patient education required to prepare and administer the products;
(iii) reducing the potential for patient errors in dosing or wastage of product;
(iv) decreasing patient or caregiver anxiety; (v) reducing the overall cost of
delivery; and (vi) collecting better outcomes data.
In addition to outside selling efforts that focus on payors, the
Company's telesales efforts focus on marketing to physician offices where new
patient referrals occur. Upon referral, patients are contacted via telephone by
the Company's intake nurses who explain the program and provide education on
self-injection techniques, side effects and potential drug interactions.
Following the initial prescription delivery, patients are contacted by patient
care coordinators who assess patient compliance and progress, inquire regarding
any potential side effects, arrange the next scheduled prescription delivery,
verify the shipping address, listen to patient concerns and direct questions to
the Company's clinical staff. The Company's pharmacists and registered nurses
are available for ongoing consultation with the patient and the dispensing
physician regarding the patient's therapy and progress seven days a week, 24
hours a day.
Most parenteral, or injectable, prescriptions are prepared in sterile
conditions under class 100 laminar flow hoods. Licensed pharmacists verify the
prescription with the prescribing physician and recheck the prescription before
shipping. In order to ensure the safe delivery of prescriptions to the patient,
the Company telephones the patient several days before shipping to confirm that
the patient or another person will be at home to receive the package immediately
upon delivery. In addition, the Company requires the overnight delivery service
to obtain a signed receipt before leaving the drugs at a residence.
With the addition of Freedom Drug, a team of healthcare professionals
dedicated to women's reproductive health, the Company now offers unique and
comprehensive programs tailored to the individual needs of fertility centers and
their patients. Freedom Drug specializes in the delivery of fertility-related
pharmaceuticals and prescription compounding. Among Freedom Drug's unique
programs is the Freedom Advantage, which offers cost effective coordination of
fertility-related medications and fertility-related information to payors,
physicians and their patients.
Sales and Marketing
The Company employs approximately 125 full-time telesales, outside
sales and sales support staff personnel. The Company strives to generate new
customers and solidify existing customer relationships through frequent direct
marketing contact that emphasizes the Company's broad product lines in specialty
markets, competitive prices, responsive service and ease of order placement. The
Company telesells to oncology clinics, physician offices, ambulatory surgery
centers and dialysis centers. The Company targets larger customers with
customized approaches developed by management and its key account team. The
Company also links the distribution and pharmacy databases to facilitate
cross-selling efforts. The Company believes that there is a significant
opportunity to provide its specialty pharmacy services to patients of physicians
that currently order pharmaceuticals and supplies from Priority.
The Company's sales personnel service both in-bound and out-bound calls
and are responsible for assisting customers in purchasing decisions, answering
questions and placing orders. Sales personnel also initiate out-bound calls to
market the Company's services to those customer accounts identified by the
Company as being high volume accounts, high order frequency accounts or
cross-selling opportunity accounts. The Company's sales personnel use PC-based
computer systems to enter customer orders and to access information about
products, product availability, pricing, promotions and customer buying and
referral history. All sales personnel work to establish long-term relationships
with the Company's customers through regularly scheduled phone contact and
personalized service, including direct sales calls on key customers.
8
Training for sales personnel is provided on a regular basis through
in-service meetings, seminars and field training and is supported by print and
video materials. Initial and ongoing training focuses on industry and product
information, selling skills, ethics and compliance requirements and computer
software skills. The Company believes that its investment in training is
critical to establishing its competitive position in the marketplace.
Customers
Priority's distribution centers service over 4,000 customers located in
all 50 states, including approximately 900 office-based oncologists and 400
renal dialysis clinics. Priority's specialty pharmacies service individuals with
chronic diseases.
During 2001, the Company's largest 20 customers accounted for
approximately 13% of the Company's net sales. Significant declines in the level
of purchases by one or more of the Company's largest customers could have a
material adverse effect on the Company's business and results of operations. As
is customary in its industry, the Company generally does not have long-term
contracts with its customers. Management believes that the retention rate for
the Company's customers is very favorable. However, an adverse change in the
financial condition of any of these customers, including an adverse change as a
result of a change in governmental or private reimbursement programs, could have
a material adverse effect on the Company.
Purchasing
Management believes that effective purchasing is key to both
profitability and maintaining market share. In 1999, 2000 and 2001, one of the
Company's largest suppliers, Amgen, accounted for approximately 21%, 21% and
13%, respectively, of the Company's total net sales. Another large supplier,
Schering Corporation, accounted for approximately 11%, 13% and 15% of the
Company's total net sales in 1999, 2000 and 2001, respectively. Another large
supplier, Ortho Biotech, accounted for approximately 12%, 18% and 17% of the
Company's total net sales in 1999, 2000 and 2001, respectively. The Company
continually evaluates its purchase requirements and likely increases in
manufacturer prices in order to obtain products at the most advantageous cost.
It has negotiated several partnership relationships with manufacturers that
offer favorable pricing, volume-based incentives and opportunities to reduce
supply chain costs for both parties.
Competition
The alternate site specialty pharmaceutical and medical supply industry
is highly competitive and is experiencing both horizontal and vertical
consolidation. The industry is fragmented, with several public and many small
private companies focusing on different product or customer niches. Some of the
Company's current and potential competitors include regional and national
full-line, full-service medical supply distributors; independent specialty
distributors; national full-line, full-service wholesale drug distributors, such
as Bergen Brunswig Corporation and Cardinal Health, Inc., that operate their own
specialty distribution businesses; retail pharmacies; specialty pharmacy
divisions of prescription benefit managers ("PBMs"); institutional pharmacies;
hospital-based pharmacies; home healthcare agencies; mail order distributors
that distribute medical supplies on a regional or national basis; and certain
manufacturers, such as Bristol-Myers Squibb, that own distributors or that sell
their products both to distributors and directly to users, including clinics and
physician offices. Some of the Company's competitors have greater financial,
technical, marketing and managerial resources than the Company. While
competition is primarily price and service oriented, it can also be affected by
depth of product line, technical support systems, specific patient requirements
and reputation. There can be no assurance that competitive pressures will not
have a material adverse effect on the Company.
Government Regulation
As a provider of healthcare services and products, the Company is
subject to extensive regulation by federal, state and local government agencies.
Licensing. The Company is required to register with the United States
Drug Enforcement Administration ("DEA"), the Food and Drug Administration
("FDA") and appropriate state agencies for various permits and/or licenses, and
it also must comply with the operating and security standards of such agencies.
The Company's Sparks and Grove City distribution centers are licensed to
distribute pharmaceuticals in accordance with the Prescription
9
Drug Marketing Act of 1987. The Sparks and Grove City locations are also
licensed to distribute or dispense certain controlled substances in accordance
with the requirements of the Controlled Substances Act of 1970. Similarly, the
Company's pharmacy program and provider businesses are subject to licensing by
the DEA as well as by the state boards of pharmacy, state health departments and
other state agencies where they operate.
The Company engages in certain mixing or reconstituting activities at
its Florida, Massachusetts and Delaware pharmacies. The State of Florida Board
of Pharmacy regulates the compounding activities of Florida pharmacies,
including certain activities of the Company. The Company has obtained a
Community/Special Parenteral/Enteral Compounding Pharmacy Permit. Over the past
several years, the Florida Board of Pharmacy has proposed certain changes to its
compounding requirements. The Massachusetts Board of Registration in Pharmacy
does not presently have any special requirements for compounding. The Delaware
Board of Pharmacy does not presently have any special requirements for
compounding. The Company believes that it is in compliance with the current
requirements, but there can be no assurance that other conditions or
requirements would not be imposed in the future that would have a material
adverse effect on the Company.
On November 21, 1997, the President signed into law the FDA
Modernization Act of 1997, which, among a number of other items, added a new
section on pharmacy compounding--section 503A--to the Federal Food, Drug and
Cosmetic Act. In this new provision, Congress sought to clarify a gray area by
identifying the circumstances in which pharmacies may compound drugs without the
need for filing a New Drug Approval ("NDA") application, observing the FDA's
Good Manufacturing Practice ("GMP") regulations or complying with certain other
specific Federal Food, Drug and Cosmetic Act requirements. In particular,
Congress provided that the term "compounding" does not include mixing or
reconstituting that is done in accordance with directions contained in approved
labeling provided by the manufacturer of the product. The Company believes that,
under this amendment, as long as it follows the manufacturer's approved labeling
in each case, and prepares drugs only for identified individual patients using
licensed pharmacy practitioners, the Company's activities should be regulated by
State Boards of Pharmacy and not be subjected by the FDA to a full NDA
requirement demonstrating the basic safety and effectiveness of the drugs. In a
September, 2001 Warning Letter sent to another health care company, the FDA
essentially affirmed that conclusion with regard to the NDA requirement, but
went on to suggest that the FDA may expect compliance with the FDA's GMP
regulations in such instances. If the FDA were to require the Company to comply
with the GMP regulations, management believes that the cost of compliance would
not be material to its results of operations.
In an opinion dated February 6, 2001, the United States Court of
Appeals for the Ninth Circuit held that section 503A was invalid in its
entirety. The Court held the provisions of section 503A that prohibited
advertising certain compounded drugs violated the First Amendment of the U.S.
Constitution, and that those provisions were not severable from the remainder of
section 503A. We cannot predict the effect, if any, this decision will have on
the FDA's future involvement in compounding activities by pharmacies. At the
government's request, the U.S. Supreme Court has agreed to review the decision
of the Court of Appeals, and heard oral argument in the case on February 26,
2002. We cannot predict how the Supreme Court will rule on its review, but the
FDA has indicated that it will continue to enforce section 503A outside of the
Ninth Circuit pending the Supreme Court's decision. Moreover, there can be no
assurance that future court decisions, legislation, rulemaking or other
regulatory activity by the FDA concerning compounding activities of pharmacies
will not have a material adverse effect on the Company's business or results of
operations.
Referral Restrictions. The Company is subject to federal and state laws
which govern financial and other arrangements between healthcare providers.
These laws include the federal anti-kickback statute, which prohibits, among
other things, knowingly and willfully soliciting, receiving, offering or paying
any remuneration directly or indirectly in return for or to induce the referral
of an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Many states
have enacted similar statutes which are not necessarily limited to items and
services for which payment is made by Medicare or Medicaid. Violations of these
laws may result in fines, imprisonment and exclusion from the Medicare and
Medicaid programs or other state-funded programs. Federal and state court
decisions interpreting these statutes are limited, but have generally construed
the statutes to apply if "one purpose" of remuneration is to induce referrals or
other conduct prohibited by the statute.
In part to address concerns regarding the anti-kickback statute, the
federal government has promulgated regulations that provide exceptions, or "safe
harbors", for transactions that will be deemed not to violate the anti-
10
kickback statute. In November, 1999, final regulations were adopted to clarify
these safe harbors and to provide additional safe harbors. Although the Company
believes that it is not in violation of the anti-kickback statute, its
operations do not fit within any of the existing safe harbors. Until 1997, there
were no procedures for obtaining binding interpretations or advisory opinions
from the Health and Human Services Office of the Inspector General ("OIG") on
the application of the federal anti-kickback statute to an arrangement or its
qualification for a safe harbor upon which the Company can rely. However, the
Social Security Act requires the Secretary of Health and Human Services to issue
written advisory opinions regarding the applicability of certain aspects of the
anti-kickback statute to specific existing or proposed arrangements. Advisory
opinions are binding as to the Secretary and the party requesting the opinion.
The Company does not intend to request any advisory opinion regarding the
Company's operations.
The OIG has issued "Fraud Alerts" identifying certain questionable
arrangements and practices which it believes may implicate the federal
anti-kickback statute. The OIG has issued a Fraud Alert providing its views on
certain joint venture and contractual arrangements between healthcare providers.
The OIG also has issued a Fraud Alert concerning prescription drug marketing
practices that could potentially violate the federal anti-kickback statute.
Pharmaceutical marketing activities may implicate the federal anti-kickback
statute because drugs are often reimbursed under the Medicaid program. According
to the Fraud Alert, examples of practices that may implicate the statute include
certain arrangements under which remuneration is made to pharmacists to
recommend the use of a particular pharmaceutical product. In addition, a number
of states have undertaken enforcement actions against pharmaceutical
manufacturers involving pharmaceutical marketing programs, including programs
containing incentives to pharmacists to dispense one particular product rather
than another. These enforcement actions arise under state consumer protection
laws which generally prohibit false advertising, deceptive trade practices and
the like. Further, a number of the states involved in these enforcement actions
have requested that the FDA exercise greater regulatory oversight in the area of
pharmaceutical promotional activities by pharmacists. It is not possible to
determine whether the FDA will act in this regard or what effect, if any, FDA
involvement would have on the Company's operations.
Significant prohibitions against physician referrals were enacted by
Congress in 1993. These prohibitions, commonly known as "Stark II," amended
prior physician self-referral legislation known as "Stark I" by dramatically
enlarging the field of physician-owned or physician-interested entities to which
the referral prohibitions apply. Effective on January 1, 1995, Stark II
prohibits a physician from referring Medicare or Medicaid patients to an entity
providing "designated health services" in which the physician has an ownership
or investment interest, or with which the physician has entered into a
compensation arrangement. Stark II also prohibits the entity from billing the
government for services rendered pursuant to a prohibited referral. The
designated health services include clinical laboratory services, radiology
services, radiation therapy services and supplies, physical and occupational
therapy services, durable medical equipment and supplies, parenteral and enteral
nutrients, equipment and supplies, prosthetic devices, orthotics and
prosthetics, outpatient prescription drugs, home health services, and inpatient
and outpatient hospital services. The penalties for violating Stark II include a
prohibition on payment by these government programs, civil penalties of as much
as $15,000 for each violative referral and $100,000 for participation in a
"circumvention scheme", and exclusion from further participation in Medicare or
Medicaid.
In January, 1998, the CMS published proposed regulations implementing
Stark II. On January 4, 2001, CMS issued an Interim Final Rule with comment
period implementing "Phase I" of the Stark II statute. Phase I addresses CMS's
interpretation of the basic self-referral prohibition, the statutory
definitions, selected compensation arrangement exceptions and certain global
exceptions to the prohibition, including the in-office ancillary services
exception and the prepaid health plan exception. The OIG is expected to issue
Phase II regulations addressing the remaining compensation arrangement
exceptions, the ownership and investment interest exceptions, reporting
requirements and sanctions. Until the Phase II regulations are promulgated, the
financial or other impact of the Stark II regulations on the Company cannot be
determined.
Since the mid-1990s, federal regulatory and law enforcement authorities
have increased enforcement activities with respect to Medicare and Medicaid
fraud and abuse regulations and other reimbursement laws and rules, including
laws and regulations that govern the activities of many of the Company's
customers. There can be no assurance that increased enforcement activities will
not indirectly have a material adverse effect on the Company.
11
Patient Confidentiality. Various federal and state laws establish
minimum standards for the maintenance of medical records and the protection of
patient health information. In the course of business, the Company maintains
medical records for each patient to whom it dispenses pharmaceuticals. As a
result, the Company is subject to one or more of these medical record and
patient confidentiality laws. Of particular significance are the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") security and
privacy regulations. The HIPAA security regulations, which establish certain
standards for assuring the physical security and integrity of electronically
maintained health information, were promulgated in 1998 as a proposed rule. The
final rule is expected to be published in 2002. The HIPAA privacy regulations,
which establish standards for protecting the confidentiality and privacy of
health information in any form, were issued as a final rule on December 28,
2000, with an April 14, 2001 effective date. "Covered Entities" as defined in
the final privacy rule, which includes the Company, must comply with the final
privacy rule as of April 14, 2003. The HIPAA regulations impose significant
civil and criminal sanctions for violations of the rules and improper use or
disclosure of patient information.
The HIPAA privacy regulations require that the Company makes
substantial changes to its policies, procedures, forms, employee training and
information handling practices. The HIPAA security regulations may require that
the Company invest significant capital in upgrading information systems
hardware, software and procedures. However, until the HIPAA security regulations
are finalized and effective, the Company is unable to determine the financial or
other impact.
Other Regulatory Issues. Certain states have adopted, or are
considering adopting, restrictions similar to those contained in the federal
anti-kickback and physician self-referral laws. Although the Company believes
that its operations do not violate applicable state laws, there can be no
assurance that state regulatory authorities will not challenge the Company's
activities under such laws or challenge the dispensing of patient-specific,
self-administered biopharmaceuticals by the Company as being subject to state
laws regulating out-of-state pharmacies.
The Company believes that its pharmacy practices and its contract
arrangements with other healthcare providers and pharmaceutical suppliers are in
compliance with these laws. To address the risks presented by such laws, the
Company has implemented an ethics and corporate compliance program. There can be
no assurance that such laws will not, however, be interpreted in the future in a
manner inconsistent with the Company's interpretation and application.
Reimbursement
A substantial portion of the sales of the Company is derived from
third-party payors, including private insurers and managed care organizations
such as HMOs and PPOs. Similar to other medical service providers, the Company
experiences lengthy reimbursement collection periods as a result of third-party
payment procedures. Consequently, management of accounts receivable through
effective patient registration, billing, collection and reimbursement procedures
is critical to financial success.
Private payors typically reimburse a higher amount for a given service
and provide a broader range of benefits than governmental payors, although net
revenue and gross profits from private payors have been affected by the
continuing efforts to contain or reduce the costs of healthcare. A portion of
the Company's revenue has been derived in recent years from agreements with
HMOs, PPOs and other managed care providers. Although these agreements often
provide for negotiated reimbursement at reduced rates, they generally result in
lower bad debts, provide for faster payment terms and provide opportunities to
generate greater volumes than traditional indemnity referrals.
In 2001, the Company's revenues from Medicare and Medicaid was minimal.
Nevertheless, due to the reliance of office-based oncologists and renal dialysis
clinics on Medicare and Medicaid reimbursement, changes in such governmental
programs could have a material effect on the Company's financial condition and
results of operations.
Because the Medicare program represents a substantial portion of the
federal budget, Congress takes action in almost every legislative session to
modify the Medicare program for the purpose of reducing the amounts otherwise
payable from the program to healthcare providers. Legislation or regulations may
be enacted in the future that may significantly modify the end stage renal
dialysis program or substantially reduce the amount paid for dialysis or
oncology treatments. Further, statutes or regulations may be adopted which
impose additional
12
requirements in order for the Company's customers to be eligible to participate
in the federal and state payment programs. Such new legislation or regulations
could adversely affect the Company's business operations.
Additionally, the Balanced Budget Act of 1997 (the "Budget Act"), which
was enacted in August 1997, contained numerous provisions related to Medicare
and Medicaid reimbursement. While very complicated, the general thrust of the
provisions dealing with Medicare and Medicaid contained in the Budget Act is
intended to significantly slow the growth in Medicare spending. The Budget Act
contains changes to reimbursement rates for certain Medicare and Medicaid
covered services, as well as certain limitations on the coverage of such
services. Although the Company's revenues in 2001 included minimal reimbursement
from Medicare and Medicaid, the Budget Act may affect the Company's suppliers
and customers, which in turn could have an adverse effect on the Company.
In addition, the Company expects that private payors will continue
their efforts to contain or reduce healthcare costs through reductions in
reimbursement rates or other cost-containment measures. The continuation of such
efforts could have a material adverse effect on the Company's financial
condition and results of operations.
Employees
At December 29, 2001, the Company had approximately 525 full-time
equivalent employees. None of the Company's employees is currently represented
by a labor union or other labor organization. Approximately 11% of the employees
are pharmacists or nurses. The Company believes that its relationship with its
employees is good.
13
ITEM 2. PROPERTIES.
The Company's headquarters and a specialty pharmacy facility are
located in Lake Mary, Florida, and consist of 46,500 square feet of space leased
through December 2004. Priority also has 8,500 square feet of administrative
office space located in Lake Mary, Florida leased through December 2005 and
5,000 square feet of administrative office space located in Scottsdale, Arizona
leased through June 2004.
Priority has a 17,000 square foot specialty pharmacy and administrative
office in Byfield, Massachusetts, which is leased through May 2006, a 1,500
square foot specialty pharmacy and administrative office in Philadelphia,
Pennsylvania, which is leased through April 2004, a 5,100 square foot specialty
pharmacy and administrative office in New Castle, Delaware, which is leased
through April 2003, and a 1,500 square foot specialty pharmacy and
administrative office in Bartlett, Tennessee, which is leased through June 2002.
Priority has a 32,000 square foot distribution center in Sparks,
Nevada, which is leased through November 2005 and a 36,000 square foot
distribution center in Grove City, Ohio, which is leased through July 2002. The
Company's distribution centers have been constructed or adapted to the Company's
specifications for climate control, alarm systems and, where required,
segregated security areas for controlled substances.
The Company has the ability to renew the leases which expire in 2002
and intends to renew those leases. Overall, the Company believes that its
facilities are suitable and adequate for its current needs, and for projected
internal growth through at least 2003.
ITEM 3. LEGAL PROCEEDINGS.
IV-1, Inc. ("IV-1") and IV-One Services, Inc. ("IV-One Services")
(which was merged into IV-1 on December 31, 1998) have been named as defendants
in a second amended counterclaim filed by Amgen, Inc. ("Amgen") on May 14, 1996,
in the Circuit Court of the Eighteenth Judicial District of Seminole County,
Florida. Amgen has asserted that these entities tortiously interfered with a
license agreement (the "License Agreement") between Amgen and Ortho
Pharmaceutical Corporation ("Ortho"). Pursuant to this agreement, Amgen licensed
Ortho to sell EPO for use in the treatment of non-dialysis patients, while Amgen
reserved the exclusive right to sell EPO for use in the treatment of dialysis
patients. Amgen has asserted that, prior to the purchase of IV-1 and IV-One
Services by the Company, these entities induced Ortho to sell EPO to them for
resale in the dialysis market in contravention of the License Agreement. Amgen
has also alleged that IV-1 and IV-One Services were involved in a civil
conspiracy to circumvent the terms of the License Agreement to allow the resale
of EPO to the dialysis market. Furthermore, Amgen has asserted unfair
competition claims against IV-1, including that IV-1 manufactured and
distributed unapproved prefilled syringes of EPO and another product
manufactured by Amgen in container systems unapproved by Amgen. Amgen did not
specify a time frame for the acts complained of in the civil conspiracy and
unfair competition allegations. In each count, Amgen has demanded an unspecified
amount of compensatory damages, including costs and interest.
The Company believes that the sellers of IV-1, IV-One Services and
Charise Charles are contractually obligated to provide legal defense and to
indemnify the Company for losses and liabilities with respect to this
litigation, to the extent that the alleged acts occurred prior to the purchase
of such entities by the Company. To date, the sellers have provided the legal
defense for IV-1 and IV-One Services in the litigation. Indemnification from the
sellers of IV-1 and IV-One Services is limited to no more than $1.5 million and
indemnification from the sellers of Charise Charles is limited to no more than
$2.0 million. As of December 29, 2001, approximately $161,000 of charges have
been incurred on behalf of the sellers for claims for indemnification to be
submitted to the sellers. The Company does not expect the Amgen litigation to be
material to the Company's results of operations, financial condition or cash
flows; however, no assurance can be given that this litigation will not have a
material adverse effect on the Company. In addition, Amgen is one of the
Company's three largest suppliers. Consequently, this litigation presents the
risk of adversely affecting the Company's business relationship with Amgen,
which could have a material adverse effect on the Company.
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.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
during the fourth quarter of 2001.
Executive Officers of the Company
Name Age Position
---------------------- --- ----------------------------------------------------------
William E. Bindley 61 Chairman of the Board
Robert L. Myers 56 Vice Chairman of the Board and Chairman of the Executive
Committee
Steven D. Cosler 46 President, Chief Executive Officer and Director
Donald J. Perfetto 55 Executive Vice President, Chief Operating Officer,
and Director
Rebecca M. Shanahan 48 Executive Vice President of Administration, General
Counsel and Secretary
Guy F. Bryant 43 Executive Vice President and Chief Marketing Officer
Stephen M. Saft 31 Senior Vice President, Chief Financial Officer and
Treasurer
William M. Woodard 43 Vice President--Strategic Alliances
Melissa E. McIntyre 41 Vice President--Strategic Program Development
William E. Bindley is a part-time consultant to Cardinal Health, Inc.,
a health care service company. He was the Chairman of the Board, Chief Executive
Officer and President of BWI since founding BWI in 1968 until BWI was acquired
by Cardinal Health, Inc. in February 2001. He is also a director of Cardinal
Health, Inc. and Shoe Carnival, Inc., a shoe retailer. Mr. Bindley was the Chief
Executive Officer of the Company from July 1994 until May 1997 and the President
of the Company from May 1996 until July 1996. He has served as a director of the
Company since June 1994.
Robert L. Myers has been Vice Chairman of the Board and Chairman of the
Executive Committee since March 2001. Mr. Myers was the President of the Company
from July 1996 to March 2001 and the Chief Executive Officer of the Company from
May 1997 to January 2002. From July 1996 to May 1997, he was the Chief Operating
Officer of the Company. From June 1995 through June 1996, Mr. Myers was a
consultant to the healthcare industry. From 1971 to June 1995, he was employed
by Eckerd Corporation, a retail drug store chain, where he served as a corporate
officer from 1981 through 1995 and as senior vice president of pharmacy from
1990 to 1995. Mr. Myers has served as a director of the Company since May 1997.
Mr. Myers is a registered pharmacist.
Steven D. Cosler has been President since March 2001 and Chief
Executive Officer since January 2002. Mr. Cosler was Executive Vice President
from January 2000 to March 2001 and Chief Operating Officer from January 2000 to
January 2002. From August 1997 to January 2000 he was Executive Vice President--
Priority Pharmacy Services. Prior to that time and since July 1996, he was
Senior Vice President and General Manager of Priority Healthcare Services
Corporation, a subsidiary of BWI. Mr. Cosler has served as a director of the
Company since February 2000.
Donald J. Perfetto has been Chief Operating Officer since January 2002.
Mr. Perfetto became Executive Vice President in November 1998. Prior to that
time and since June 1997 he was a Vice President. Mr. Perfetto served as Chief
Financial Officer and Treasurer from June 1997 to January 2002. From 1986 to May
1997, he was
15
employed by Bimeco, Inc., a distributor of medical products. During such time,
Mr. Perfetto held the positions of vice president of finance and operations and
secretary/treasurer of Bimeco, Inc. Mr. Perfetto has served as a director of the
Company since February 1999.
Rebecca M. Shanahan has been Executive Vice President of
Administration, Secretary and General Counsel since January 2002. From September
1997 to December 2001, she was employed by the University of Chicago Hospitals
and Health Systems, an academic teaching health care system and practice plan.
During such time, Ms. Shanahan held the position of Vice President, Managed Care
and Business Development. From December 1996 to September 1997, Ms. Shanahan
performed legal and consulting services as an independent contractor for various
entities in the health care industry. From 1991 until December 1996, she held
executive officer positions with Methodist Medical Group and Beltway Services, a
600-member physician practice group affiliated with Methodist Hospital in
Indianapolis, Indiana, with her latest position being senior vice president and
chief operating officer. Ms. Shanahan served as a director of the Company from
May 1997 to February 2002.
Guy F. Bryant has been Executive Vice President and Chief Marketing
Officer since January 2000. From September 1995 to January 2000 he was Executive
Vice President--Priority Healthcare Distribution. Prior to joining the Company,
he was employed in sales and general management positions by Major
Pharmaceuticals, a distributor of generic pharmaceuticals, since September 1992
and was vice president of sales from August 1994 to August 1995.
Stephen M. Saft has been Senior Vice President, Chief Financial Officer
and Treasurer since January 2002. From August 2001 to January 2002, he was Vice
President of Finance. From February 2001 to August 2001, he was employed by
Deloitte & Touche, an international accounting firm. During such time, Mr. Saft
was a senior manager in the National Health Care and Life Science Practice. From
September 1994 to February 2001, he was employed by PricewaterhouseCoopers, an
international accounting firm, with his latest position being an assurance and
business advisory services manager. Mr. Saft is a Certified Public Accountant.
William M. Woodard has held the positions of Vice President--Strategic
Alliances or Vice President--Marketing of the Company since May 1997. Prior to
such time, Mr. Woodard held various positions with subsidiaries of the Company.
Melissa E. McIntyre, RN, OCN, has held the positions of Vice
President--Strategic Program Development or Vice President--Clinical Services of
the Company since August 1997. She has also held various positions with
subsidiaries of the Company since June 1994. Prior to joining the Company, and
since June 1991, she was employed by Intracare, an outpatient infusion center,
as clinical director of nursing.
The above information includes business experience during the past five
years for each of the Company's executive officers. Executive officers of the
Company serve at the discretion of the Board of Directors. There is no family
relationship between any of the Directors or executive officers of the Company.
(Pursuant to General Instruction G(3) of Form 10-K, the foregoing
information regarding executive officers is included as an unnumbered Item in
Part I of this Annual Report in lieu of being included in the Company's Proxy
Statement for its 2001 Annual Meeting of Shareholders.)
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Prices
The Company's Class B Common Stock trades on The Nasdaq Stock Market
("Nasdaq") under the symbol PHCC. On November 22, 2000, a 2-for-1 stock split of
the Company's Common Stock was effected in the form of a stock dividend to
shareholders of record at the close of business on November 8, 2000. The prices
set forth below, adjusted to reflect retroactively the November 2000 stock
split, reflect the high and low sales prices for the Company's Class B Common
Stock as reported by Nasdaq for the years ended December 30, 2000 and December
29, 2001. As of March 4, 2002, there were 84 holders of record of the Company's
Class B Common Stock.
High Low
---- ---
2000:
First Quarter $33.75 $12.22
Second Quarter 37.69 18.00
Third Quarter 38.50 25.00
Fourth Quarter 41.75 22.64
2001:
First Quarter 44.50 29.38
Second Quarter 40.83 26.93
Third Quarter 28.00 17.31
Fourth Quarter 35.96 23.77
The Company's Class A Common Stock is not listed for trading. However,
because the Class A Common Stock is automatically converted into Class B Common
Stock upon transfer (except in limited circumstances), the Class A Common Stock
is freely tradable except by affiliates of the Company. As of March 4, 2002,
there were 618 holders of record of the Company's Class A Common Stock.
Dividends
The Company does not intend to pay cash dividends on its Common Stock
in the foreseeable future, but rather intends to use future earnings principally
to support operations and to finance expansion and possible acquisitions. The
payment of cash dividends in the future will be at the discretion of the
Company's Board of Directors and will depend on a number of factors, including
the Company's financial condition, capital requirements, future business
prospects, the terms of any documents governing indebtedness of the Company, and
such other factors as the Board of Directors of the Company may deem relevant.
Subject to the terms of any preferred stock created by the Company's Board of
Directors, each outstanding share of Common Stock will be entitled equally to
such dividends as may be declared from time to time by the Board of Directors.
Sales of Unregistered Securities
The following information is furnished as to securities of the Company
sold during 2001 that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
(a) On October 17, 2001, the Company issued 1,076 shares of Class B
Common Stock to its four non-employee Directors as the stock
portion of their annual retainer.
(b) On October 26, 2001, the Company issued 67,636 shares of Class B
Common Stock to Chesapeake Infusion LLC.
The transactions described in paragraphs (a) and (b) above were exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
17
ITEM 6. SELECTED FINANCIAL DATA.
In 1993, BWI acquired substantially all of the assets of Charise
Charles, Ltd., Inc. Through December 29, 2001, nine additional acquisitions were
made by or on behalf of Priority Healthcare Corporation. See "Item 1.
Business--Acquisition History." These acquisitions were accounted for under the
purchase method of accounting and, accordingly, the results of operations of the
acquired entities are included in our financial statements from their respective
dates of acquisition. As a result, period-to-period comparisons of financial
position and results of operations are not necessarily meaningful. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Consolidated Financial
Statements and related notes included elsewhere in this report.
Year ended Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 30, December 29,
1997 1998 1999 2000 2001
-----------------------------------------------------------------
(000's omitted, except share data)
Statement of Earnings Data:
Net sales......................... $ 230,982 $ 275,626 $ 427,887 $ 584,657 $ 805,120
Cost of products sold............. 207,755 244,485 375,263 514,360 712,971
Gross profit...................... 23,227 31,141 52,624 70,297 92,149
Selling, general and
administrative expense.......... 10,620 13,989 21,228 31,313 48,349
Depreciation and
amortization.................... 1,161 1,234 1,290 1,335 3,400
Earnings from operations.......... 11,446 15,918 30,106 37,649 40,400
Stock option expense.............. 350 - - - -
Impairment of investment.......... - - - - 2,019
Interest expense (income), net.... 887 (916) (3,432) (6,920) (5,972)
Earnings before income taxes...... 10,209 16,834 33,538 44,569 44,353
Provision for income taxes........ 4,058 6,691 12,844 16,490 16,633
Net earnings...................... $ 6,151 $ 10,143 $ 20,694 $ 28,079 $ 27,720
Earning per share:
Basic............ $ .19 $ .27 $ .51 $ .66 $ .64
Diluted.......... $ .19 $ .27 $ .50 $ .65 $ .62
Weighted average
shares outstanding:
Basic............ 31,868,822 37,545,948 40,503,406 42,254,841 43,542,518
Diluted.......... 31,879,766 37,708,082 41,535,642 43,096,956 44,555,586
December 31, December 31, December 31, December 30, December 29,
1997 1998 1999 2000 2001
-----------------------------------------------------------------
Balance Sheet Data:
Working capital................... $ 57,488 $ 61,875 $ 145,770 $ 194,724 $ 188,680
Receivable from BWI .............. 5,290 16,517 - - -
Total assets...................... 91,728 107,519 217,704 297,101 396,016
Long-term obligations............. 272 - - - -
Note payable to BWI............... 6,000 - - - -
Total liabilities................. 31,845 37,478 59,097 86,498 141,676
Shareholders' equity.............. 59,883 70,041 158,607 210,603 254,340
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and related notes included elsewhere in this
report.
Introduction
We were formed in June 1994 to succeed to the business operations of
companies previously acquired by BWI, as described below. 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.
Accordingly, since the IPO we have incurred and will continue to incur
incremental recurring legal, audit, risk management and administrative costs
related to operating as a stand-alone entity that we did not experience as a
wholly owned subsidiary of BWI. The financial information included in this
Annual Report on Form 10-K prior to 1999 is not necessarily indicative of our
future results of operations, financial position and cash flows as a stand-alone
public company.
We provide specialty pharmaceuticals and related medical supplies, as
well as disease treatment services, to patients, office-based physicians,
outpatient renal dialysis centers and homecare markets. Our operations are
derived from the acquisition by BWI of substantially all of the assets of
Charise Charles, a specialty wholesale distributor of oncology and renal care
biopharmaceuticals, in February 1993 and of PRN, a specialty wholesale
distributor of renal care supplies and dialysis equipment, in October 1993. We
subsequently acquired 3C, a specialty distributor of acute dialysis products, in
October 1994 and IV-1, Inc., IV-One Services, Inc. and National Pharmacy
Providers, Inc., three related companies that provided specialty pharmacy and
related healthcare services, in January 1995. Subsequent to that, we acquired
substantially all of the assets of Grove Way Pharmacy, a vaccine and injectable
drug distributor, in August 1997, Pharmacy Plus, Ltd., a specialty pharmacy, in
April 1999, Monitors Unlimited, Inc., a distributor in the oral surgery market,
in September 1999, three related companies doing business as Freedom Drug, the
nation's leading infertility specialty pharmacy, in January 2001, Physicians
Formulary International, Inc., a distributor in the outpatient surgery center
market, in March 2001, and Chesapeake Infusion LLC, doing business as InfuRx, a
specialty pharmacy, in October 2001. These acquisitions were accounted for under
the purchase method of accounting and, accordingly, the results of operations of
the acquired companies are included in our financial statements from their
respective dates of acquisition. As a result, period-to-period comparisons of
financial position and results of operations are not necessarily meaningful.
The operations of Charise Charles, PRN, 3C, Grove Way Pharmacy,
Monitors Unlimited and Physicians Formulary indirectly provide products to
patients through oncology practices, renal dialysis centers and other healthcare
providers. Effective December 31, 1998, IV-One Services, Inc. and National
Pharmacy Providers, Inc. were merged into IV-1, Inc. and the name of the
corporation was changed to Priority Healthcare Pharmacy, Inc. The operations of
Priority Healthcare Pharmacy, Inc., Pharmacy Plus, Freedom Drug and InfuRx
provide products and services directly to patients. Historically, the operations
that provide products and services directly to patients have generated
substantially higher margins than the operations that indirectly provide
products to patients. We typically are reimbursed for products and services
provided directly to patients by third-party payors, primarily private insurers
and managed care organizations. Sales derived from agreements with managed care
organizations generally are made pursuant to established rates negotiated
periodically. We typically are reimbursed for products provided indirectly to
patients by oncology practices, renal dialysis centers and other healthcare
providers and pricing is negotiated directly with the providers.
In June 2001, we entered into an agreement to form a joint venture
with AdvancePCS to provide specialty pharmacy services to AdvancePCS' clients
and their members. The joint venture is named AdvancePriority SpecialtyRx.
AdvancePCS owns 51% of the venture and we own 49%.
19
Critical Accounting Policies
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States 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. The items in our financial statements requiring
significant estimates and judgments are as follows:
Revenue Recognition - Revenues are recognized when products are shipped to
unaffiliated customers with appropriate provisions recorded for estimated
discounts and contractual allowances. Discounts and contractual allowances are
estimated based on historical collections. Any differences between our estimates
and actual collections are reflected in operations in the year payment is
received.
Receivables - Receivables are presented net of the allowance for doubtful
accounts and contractual allowances. Receivables include trade and patient
account receivables and the current portion of trade receivables that have been
converted to note receivables. We regularly review the adequacy of these
allowances after considering the age of each outstanding receivable and the
collection history.
Results of Operations
2001 Compared to 2000
Net Sales. Net sales increased to $805.1 million in 2001 from $584.7
million in 2000, an increase of 38%. The growth primarily reflected the addition
of new customers, new product introductions, additional sales to existing
customers, the acquisitions of Freedom Drug, Physicians Formulary and InfuRx and
inflationary price increases. The net sales attributed to the acquisitions of
Freedom Drug, Physicians Formulary and InfuRx in 2001 represented approximately
13% of the total net sales in 2001.
Gross Profit. Gross profit increased to $92.1 million in 2001 from
$70.3 million in 2000, an increase of 31%. The increase in gross profit
reflected increased sales and the acquisitions of Freedom Drug, Physicians
Formulary and InfuRx. Gross profit as a percentage of net sales decreased in
2001 to 11.4% from 12.0% in 2000. This decrease was primarily attributed to
changing payor reimbursement patterns, as the use of Prescription Benefit
Management ("PBM") Plans increased and reimbursement from Major Medical Plans
for certain prescribed drugs decreased, and the change in sales mix, as lower
margin products experienced increased sales. Competition continues to exert
pressure on margins.
Selling, General and Administrative Expense. Selling, general and
administrative, or SGA, expense increased to $48.3 million in 2001 from $31.3
million in 2000, an increase of 54%. SGA expense as a percentage of net sales
increased to 6.0% in 2001 from 5.4% in 2000. Management continually monitors SGA
expense and remains focused on controlling these increases through improved
technology and efficient asset management. The increase in SGA expense reflected
the growth in our business, bad debt charges, start up costs related to new
business relationships with drug manufacturers, and the acquisitions of Freedom
Drug, Physicians Formulary and InfuRx. The increase in SGA expense as a
percentage of net sales resulted from bad debt charges, start up costs related
to new business relationships with drug manufacturers and increased cost
attributable to providing more clinically oriented services.
Depreciation and Amortization. Depreciation and amortization, or D&A,
increased to $3.4 million in 2001 from $1.3 million in 2000, an increase of
155%. The increase in D&A was primarily the result of an increase in the
amortization of intangible assets due to the acquisitions of Freedom Drug and
Physicians Formulary of $1.4 million and incremental depreciation on new
computer hardware and software, furniture and equipment, transportation
equipment, telephone equipment and leasehold improvements.
Impairment of Investment. The impairment of investment charge of $2.0
million in 2001 resulted from writing off our external internet investment in
Cytura Corporation. Management considers continuing operating losses and
significant changes in the technology industry to be its primary indicators of
potential impairment. Fair market value was estimated based on valuations
derived from recent sales of equity interests in Cytura.
20
Interest Income. Interest income, decreased to $6.0 million in 2001
from $6.9 million in 2000, a decrease of 14%. In 2001 we earned 4.67% on an
average invested balance of $127.8 million. In 2000 we earned 6.58% on an
average invested balance of $105.1 million. The decrease was primarily due to
the eleven short term interest rate cuts during 2001. In 2001 and 2000 the
interest income was primarily related to amounts earned by investing cash and
funds received from operations, the secondary public offering of our Class B
Common Stock and stock option exercises in overnight repurchase agreements with
major financial institutions and in marketable securities.
Income Taxes. The provision for income taxes in 2001 and 2000
represented 37.5% and 37.0%, respectively, of earnings before income taxes.
During 2001, our state income taxes increased because of the acquisitions we
made during the year and our presence in additional states.
2000 Compared to 1999
Net Sales. Net sales increased to $584.7 million in 2000 from $427.9
million in 1999, an increase of 37%. The growth reflected primarily the addition
of new customers, new product introductions, additional sales to existing
customers, the acquisitions of Pharmacy Plus, Ltd. and Monitors Unlimited, Inc.
and inflationary price increases.
Gross Profit. Gross profit increased to $70.3 million in 2000 from
$52.6 million in 1999, an increase of 34%. The increase in gross profit
reflected increased sales and the acquisitions of Pharmacy Plus and Monitors
Unlimited. Gross profit as a percentage of net sales decreased in 2000 to 12.0%
from 12.3% in 1999. This decrease was primarily attributable to the change in
sales mix, as lower margin products experienced increased sales. Competition
continued to exert pressure on margins.
Selling, General and Administrative Expense. Selling, general and
administrative, or SGA, expense increased to $31.3 million in 2000 from $21.2
million in 1999, an increase of 48%. SGA expense as a percentage of net sales
increased to 5.4% in 2000 from 5.0% in 1999. Management continually monitors SGA
expense and remains focused on controlling these increases through improved
technology and efficient asset management. The increase in SGA expense reflected
the growth in our business, the acquisitions of Pharmacy Plus and Monitors
Unlimited and a charge for the write off of certain receivables. The increase in
SGA expense as a percentage of net sales resulted from the charge for the write
off of certain receivables.
Depreciation and Amortization. Depreciation and amortization, or D&A,
was $1.3 million in both 2000 and 1999.
Interest Income. Interest income, increased to $6.9 million in 2000
from $3.4 million in 1999, an increase of 102%. In 2000, the interest income was
primarily related to amounts earned by investing cash and funds received from
operations, the secondary public offering of our Class B Common Stock and stock
option exercises in overnight repurchase agreements with major financial
institutions and in marketable securities. In 1999, interest income of $2.8
million was primarily related to amounts earned by investing cash and funds
received from the secondary public offering of our Class B Common Stock in
overnight repurchase agreements with major financial institutions and in
marketable securities, and interest income of $662,000 was related to loaning
funds to BWI. The interest income on the loans to BWI was calculated by applying
BWI's average incremental borrowing rate, which was 5.4% for 1999, to the
average outstanding balances. During 1999 the average outstanding loans to BWI
were $12.3 million.
Income Taxes. The provision for income taxes in 2000 and 1999
represented 37.0% and 38.3%, respectively, of earnings before taxes. During
2000, we implemented selected tax strategies which reduced our effective tax
rate.
21
Liquidity and Capital Resources
Our principal capital requirements have been to fund working capital
needs to support internal growth, for acquisitions and for capital expenditures.
Our principal working capital needs are for inventory and accounts receivable.
Management controls inventory levels in order to minimize carrying costs and
maximize purchasing opportunities. We sell inventory to our customers on various
payment terms. This requires significant working capital to finance inventory
purchases and entails accounts receivable exposure in the event any of our major
customers encounter financial difficulties. Although we monitor closely the
creditworthiness of our major customers, there can be no assurance that we will
not incur some collection loss on major customer accounts receivable in the
future.
We had cash and cash equivalents of $32.8 million, marketable
securities of $94.2 million and working capital of $188.7 million at December
29, 2001. We believe that the cash and cash equivalents, marketable securities,
working capital and cash from operations will be sufficient to meet our working
capital needs for at least two years.
Net Cash Provided by Operating Activities. Our operations generated
$45.5 million in cash during 2001. Receivables, net of acquisitions, increased
$14.9 million, primarily to support the increase in sales and the extension of
credit terms to meet competitive conditions. Finished goods inventory, net of
acquisitions, increased $22.4 million, primarily due to new product
introductions, to support the increase in sales and to take advantage of some
purchasing opportunities. The $27.7 million increase in accounts payable, net of
acquisitions, partially reduced the cash requirements for receivables and
finished goods inventory; this increase was attributable to the increase in
inventory, the timing of payments and the credit terms negotiated with vendors.
Other current assets and liabilities, net of acquisitions, increased cash by
$5.6 million, primarily due to income taxes payable. We anticipate that our
operations may require cash to fund our growth. During 2001, D&A totaled $3.4
million, provision for doubtful accounts totaled $4.9 million and impairment of
investment totaled $2.0 million. We also increased cash by $9.6 million due to
the tax benefit related to stock option exercises during 2001.
Net Cash Used by Investing Activities. In 2001, we purchased $15.6
million of marketable securities in order to take advantage of higher interest
rates related to longer term investments. In 2001, we purchased $7.4 million of
fixed assets, primarily pharmacy system software, internet software, computer
hardware and software, furniture and equipment and leasehold improvements. The
leasehold improvements related to relocating our infertility specialty pharmacy
in Massachusetts and our sales office in Arizona. We expect that capital
expenditures during 2002 will be approximately $6.0 million. We anticipate that
these expenditures will relate primarily to the purchase of pharmacy system
software, computer hardware and software, telecommunications equipment and
furniture and equipment. In 2001, other assets increased $7.5 million due to a
deposit we made with a major supplier to generate better pricing. Also during
2001, we used $36.6 million to purchase Freedom Drug, an infertility specialty
pharmacy, Physicians Formulary, a national distributor of biopharmaceuticals
specializing in the outpatient surgery center market, and InfuRx, a specialty
pharmacy.
Net Cash Provided by Financing Activities. During 2001, we received
proceeds of $8.4 million from stock option exercises and we purchased treasury
stock for $4.0 million. We purchased the treasury stock because we thought it
was an attractive investment. We are authorized to purchase another 2,846,500
shares of treasury stock until July 2002.
Inflation
Our financial statements are prepared on the basis of historical costs
and are not intended to reflect changes in the relative purchasing power of the
dollar. Because of our ability to take advantage of forward purchasing
opportunities, we believe that our gross profits generally increase as a result
of manufacturers' price increases in the products we distribute. Gross profits
may decline if the rate of price increases by manufacturers declines.
Generally, price increases are passed through to customers as we
receive them and therefore they reduce the negative effect of inflation. Other
non-inventory cost increases, such as payroll, supplies and services, have been
partially offset during the past three years by increased volume and
productivity.
22
New Accounting Pronouncements
In July 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles will
be evaluated against this new criteria and may result in certain intangibles
being subsumed into goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill. SFAS
No. 142 requires the use of a nonamortization approach to account for purchased
goodwill and indefinite-lived intangibles. Under a nonamortization approach,
goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. The provisions
of each statement which apply to goodwill and intangible assets acquired prior
to June 30, 2001 were adopted by the Company on December 30, 2001. We expect the
adoption of these accounting standards will have the impact of reducing our
amortization of goodwill and intangibles expense by approximately $1.8 million
annually commencing December 30, 2001; however, impairment reviews may result in
future periodic write-downs.
Forward-Looking Statements
Certain statements included in this annual 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. You are cautioned not to place undue reliance on these forward-looking
statements that speak only as of the date herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary exposure to market risk consists of a decline in the market
value of our investments in marketable debt securities as a result of potential
changes in interest rates. Market risk was estimated as the potential decrease
in fair value resulting from a hypothetical 10% increase in interest rates on
securities included in our portfolio, and given the short term maturities of all
of our investments in interest-sensitive securities, this hypothetical fair
value was not materially different from the period end carrying value.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(000's omitted, except share data)
Year ended Year ended Year ended
December 31, December 30, December 29,
1999 2000 2001
---------------------------------------------------
Net sales.......................................... $ 427,887 $ 584,657 $ 805,120
Cost of products sold.............................. 375,263 514,360 712,971
------------ ----------- -----------
Gross profit....................................... 52,624 70,297 92,149
Selling, general and administrative expense........ 21,228 31,313 48,349
Depreciation and amortization...................... 1,290 1,335 3,400
------------ ----------- -----------
Earnings from operations........................... 30,106 37,649 40,400
Impairment of investment........................... -- -- 2,019
Interest income.................................... (3,432) (6,920) (5,972)
------------ ----------- -----------
Earnings before income taxes....................... 33,538 44,569 44,353
------------ ----------- -----------
Provision for income taxes:
Current.................................. 13,615 17,708 15,135
Deferred................................. (771) (1,218) 1,498
------------ ----------- -----------
12,844 16,490 16,633
------------ ----------- -----------
Net earnings....................................... $ 20,694 $ 28,079 $ 27,720
============ =========== ===========
Earnings per share:
Basic.................................... $ .51 $ .66 $ .64
Diluted.................................. $ .50 $ .65 $ .62
Weighted average shares outstanding:
Basic.................................... 40,503,406 42,254,841 43,542,518
Diluted.................................. 41,535,642 43,096,956 44,555,586
See accompanying notes to consolidated financial statements.
24
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(000's omitted, except share data)
December 30, December 29,
2000 2001
------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents............................................. $ 50,057 $ 32,758
Marketable securities................................................. 78,570 94,166
Receivables, less allowance for doubtful accounts of $2,954 and
$3,239, respectively............................................. 99,305 118,342
Finished goods inventory.............................................. 48,839 74,058
Deferred income taxes................................................. 2,668 2,165
Other current assets.................................................. 1,783 8,145
--------- ---------
281,222 329,634
Fixed assets, net.......................................................... 3,952 9,828
Deferred income taxes...................................................... 273 --
Other assets ........................................................... 2,019 --
Intangibles, net........................................................... 9,635 56,554
--------- ---------
Total assets................................................ $ 297,101 $ 396,016
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable...................................................... $ 77,257 $ 116,148
Other current liabilities............................................. 9,241 24,806
--------- ---------
86,498 140,954
--------- ---------
Deferred income taxes...................................................... -- 722
--------- ---------
Commitments and contingencies (notes 11 and 13)
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,
8,123,867 and 7,211,815 issued and outstanding,
respectively.................................................. 81 72
Class B, $0.01 par value, 180,000,000 shares authorized,
37,272,375 and 38,185,503 issued, respectively................ 373 382
Additional paid in capital....................................... 174,279 182,818
Retained earnings................................................ 65,767 93,487
--------- ---------
240,500 276,759
Less: Class B Common stock in treasury (at cost), 2,548,273
and 1,739,474 shares, respectively........................ (29,897) (22,419)
--------- ---------
Total shareholders' equity.................................. 210,603 254,340
--------- ---------
Total liabilities and shareholders' equity.................. $ 297,101 $ 396,016
========= =========
See accompanying notes to consolidated financial statements.
25
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
Year ended Year ended Year ended
December 31, December 30, December 29,
1999 2000 2001
-----------------------------------------------
Cash flow from operating activities:
Net earnings...................................................... $ 20,694 $ 28,079 $ 27,720
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................ 1,290 1,335 3,400
Provision for doubtful accounts.............................. 1,655 5,610 4,920
Tax benefit from stock option exercises...................... 834 12,660 9,601
Impairment of investment..................................... -- -- 2,019
Loss on disposal of fixed assets............................. 280 38 208
Compensation expense on stock grants......................... 30 30 30
Deferred income taxes........................................ (771) (1,218) 1,498
Change in assets and liabilities, net of acquisitions:
Receivables.................................................. (33,499) (16,122) (14,900)
Finished goods inventory..................................... (6,004) (17,919) (22,350)
Accounts payable............................................. 19,944 23,360 27,677
Other current assets and liabilities......................... 196 4,118 5,645
-------- -------- --------
Net cash provided by operating activities.................... 4,649 39,971 45,468
-------- -------- --------
Cash flow from investing activities:
Purchases, net of sales, of marketable securities................. (56,795) (21,775) (15,596)
Purchases of fixed assets......................................... (1,609) (2,276) (7,446)
Proceeds from sale of fixed assets................................ 47 -- --
Increase in other assets.......................................... (469) (1,550) (7,500)
Acquisition of businesses, net of cash acquired................... (4,536) -- (36,611)
-------- -------- --------
Net cash used by investing activities........................ (63,362) (25,601) (67,153)
-------- -------- --------
Cash flow from financing activities:
Net change in amounts due to /from BWI............................ 16,517 -- --
Proceeds from stock option exercises.............................. 1,271 11,309 8,425
Payments for purchase of treasury stock........................... (30,336) (436) (4,039)
Proceeds from secondary stock offering, net....................... 96,073 -- --
-------- -------- --------
Net cash provided by financing activities.................... 83,525 10,873 4,386
-------- -------- --------
Net increase (decrease) in cash........................................ 24,812 25,243 (17,299)
Cash and cash equivalents at beginning of period....................... 2 24,814 50,057
-------- -------- --------
Cash and cash equivalents at end of period............................. $ 24,814 $ 50,057 $ 32,758
======== ======== ========
Supplemental cash flow information:
Income taxes paid................................................. $ 14,085 $ 754 $ 4,466
Supplemental non-cash investing and financing activities:
Acquisition liabilities........................................... $ -- $ -- $ 11,029
Stock issued in connection with acquisition....................... $ -- $ 354 $ 2,000
See accompanying notes to consolidated financial statements.
26
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(000's omitted, except share data)
Class A Common Stock Class B Common Stock Class B Common Stock
-------------------- -------------------- --------------------
Additional
Shares Shares Treasury Paid in
Outstanding Amount Outstanding Amount Shares Amount Capital
----------- ------ ----------- ------ ------ ------ -------
Balances at December 31, 1998............... 30,642,858 $ 307 6,904,428 $ 69 -- $ -- $ 52,671
Net earnings..............................
Issuance of Class B common stock:
Secondary public offering.............. 5,980,000 60 96,013
Stock option exercises and related
tax benefit....................... 261,120 3 2,102
Board of Directors' compensation....... 2,424 30
Repurchase of common stock............. (2,609,716) (30,336)
Conversions from Class A............... (20,160,014) (202) 20,136,896 201 1
----------- ------- ----------- ------ ---------- --------- --------
Balances at December 31, 1999............... 10,482,844 105 33,284,868 333 (2,609,716) (30,336) 150,817
Net earnings
Issuance of Class B common stock:
Stock option exercises and related
tax benefit....................... 1,627,610 16 65,368 766 23,187
Board of Directors' compensation....... 920 30
Issuance of common stock in
connection with acquisition....... 9,284 109 245
Repurchase of common stock............. (13,209) (436)
Conversions from Class A............... (2,358,977) (24) 2,358,977 24
----------- ------- ----------- ------ ---------- --------- --------
Balances at December 30, 2000............... 8,123,867 81 37,272,375 373 (2,548,273) (29,897) 174,279
Net earnings
Issuance of Class B common stock:
Stock option exercises and related
tax benefit....................... 903,776 10,645 7,381
Board of Directors' compensation....... 1,076 30
Issuance of common stock in
connection with acquisition....... 67,636 872 1,128
Repurchase of common stock............. (162,613) (4,039)
Conversions from Class A............... (912,052) (9) 912,052 9
----------- ------- ----------- ------ ---------- --------- --------
Balances at December 29, 2001............... 7,211,815 $ 72 38,185,503 $ 382 (1,739,474) $ (22,419) $182,818
=========== ======= =========== ====== ========== ========= ========
Retained Shareholders'
Earnings Equity
-------- ------
Balances at December 31, 1998............... $ 16,994 $ 70,041
Net earnings.............................. 20,694 20,694
Issuance of Class B common stock:
Secondary public offering.............. 96,073
Stock option exercises and related
tax benefit....................... 2,105
Board of Directors' compensation....... 30
Repurchase of common stock............. (30,336)
Conversions from Class A............... --
-------- ---------
Balances at December 31, 1999............... 37,688 158,607
Net earnings.............................. 28,079 28,079
Issuance of Class B common stock:
Stock option exercises and related
tax benefit....................... 23,969
Board of Directors' compensation....... 30
Issuance of common stock in
connection with acquisition....... 354
Repurchase of common stock............. (436)
Conversions from Class A............... --
-------- ---------
Balances at December 30, 2000............... 65,767 210,603
Net earnings.............................. 27,720 27,720
Issuance of Class B common stock:
Stock option exercises and related
tax benefit....................... 18,026
Board of Directors' compensation....... 30
Issuance of common stock in
connection with acquisition....... 2,000
Repurchase of common stock............. (4,039)
Conversions from Class A............... --
-------- ---------
Balances at December 29, 2001............... $ 93,487 $ 254,340
======== =========
See accompanying notes to consolidated financial statements.
27
PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Significant Accounting Policies
Basis of presentation. Priority Healthcare Corporation (the "Company") was
formed by Bindley Western Industries, Inc. ("BWI") on June 23, 1994, as an
Indiana corporation to focus on the distribution of products and provision of
services to the "alternate site" segment of the healthcare industry. On October
29, 1997, the Company consummated an initial public offering of its Class B
Common Stock (the "IPO"). On December 31, 1998, BWI distributed to its common
shareholders all of the 30,642,858 shares of the Company's Class A Common Stock
then owned by BWI in a spin-off transaction and BWI no longer has any ownership
interest in the Company. The Company now operates as a national specialty
pharmacy and distributor that provides biopharmaceuticals, complex therapies and
related disease treatment programs and services.
Principles of consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. On April 12, 2000,
the Company changed its reporting period for the fiscal year from a calendar
year ending December 31 to the 52 or 53 week period ending on the Saturday
closest to December 31. None of the periods presented represent a 53 week
period.
Revenue recognition. Revenues are recognized when products are shipped to
unaffiliated customers with appropriate provisions recorded for estimated
discounts and contractual allowances. Discounts and contractual allowances are
estimated based on historical collections. Any differences between the estimates
and actual collections are reflected in operations in the year payment is
received.
Cash and cash equivalents. The Company considers all investments with an
original maturity of less than 3 months to be a cash equivalent.
Marketable securities. In accordance with provisions of Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company has classified all of its investments
in marketable securities as available-for-sale. These investments are stated at
their market value, with any material unrealized holding gains or losses, net of
tax, included as a component of shareholders' equity until realized. The cost of
debt securities classified as available-for-sale is adjusted for amortization of
premiums and accretion of discounts to maturity. Interest income is included as
a component of current earnings.
Receivables. Receivables are presented net of the allowance for doubtful
accounts and contractual allowances. Receivables include trade and patient
account receivables and the current portion of trade receivables that have been
converted to note receivables. The Company regularly reviews the adequacy of
these allowances after considering the age of each outstanding receivable and
the collection history.
Inventories. Inventories are stated on the basis of lower of cost or market
using the first-in, first-out ("FIFO") method.
Fixed assets. Depreciation is computed on the straight-line method for
financial reporting purposes. Accelerated methods are primarily used for income
tax purposes. Assets, valued at cost, are generally being depreciated over their
estimated useful lives as follows:
Estimated
useful life
(years)
-------
Computer hardware and software........ 5
Furniture and equipment............... 5
Leasehold improvements................ 5
Transportation equipment.............. 5
28
In the event facts and circumstances indicate an asset could be impaired, an
evaluation of the undiscounted estimated future cash flows from operations is
compared to the asset's carrying amount to determine if a write-down is
required. At December 30, 2000 and December 29, 2001, management has determined
no impairments existed.
Intangibles. The Company continually monitors its cost in excess of net
assets acquired (goodwill), covenants not to compete and its other intangibles
(customer lists and consulting agreements) to determine whether any impairment
of these assets has occurred. In making such determination, the Company
evaluates the expected future cash flows from operations, on an undiscounted
basis, of the underlying businesses which gave rise to such amounts. Goodwill is
being amortized on the straight-line method, principally over 20 to 40 years.
Other intangibles are being amortized on the straight-line method over 4 to 15
years.
New Accounting Pronouncements. In July 2001 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard ("SFAS") No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against this new criteria and may
result in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and indefinite-lived
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of each statement which apply to goodwill
and intangible assets acquired prior to June 30, 2001 were adopted by the
Company on December 30, 2001. The Company expects that the adoption of these
accounting standards will have the impact of reducing amortization of goodwill
and intangibles expense by approximately $1.8 million annually commencing
December 30, 2001; however, impairment reviews may result in future periodic
write-downs.
Shipping and handling costs. Costs associated with shipping and handling
activities are comprised of outbound freight and are included in selling,
general and administrative expense. These costs were $2.5 million, $3.3 million
and $5.4 million in 1999, 2000 and 2001, respectively.
Earnings per share. Basic earnings per share is computed by dividing net
income by the weighted average of Class A and Class B shares outstanding for the
period. Diluted earnings per share computations assume outstanding stock options
with a dilutive effect on earnings were exercised. These common stock
equivalents are added to the weighted average number of shares outstanding in
the diluted calculation. A reconciliation of the basic and diluted weighted
average shares outstanding is as follows for the years ended December 31, 1999,
December 30, 2000 and December 29, 2001:
(In Thousands)
1999 2000 2001
---- ---- ----
Weighted average number of Class A and Class B
Common shares outstanding used as the denominator
in the basic earnings per share calculation................... 40,503 42,255 43,543
Additional shares assuming exercise of dilutive stock options...... 1,033 842 1,013
------ ------ ------
Weighted average number of Class A and Class B
Common and equivalent shares used as the denominator
in the diluted earnings per share calculation................. 41,536 43,097 44,556
====== ====== ======
Options to purchase 1.9 million, 0 and 458,000 shares with exercise prices
greater than the average market prices of common stock were outstanding at
December 31, 1999, December 30, 2000 and December 29, 2001, respectively. These
options were excluded from the respective computations of diluted earnings per
share because their effect would be anti-dilutive.
Income taxes. The Company accounts for income taxes using the asset and
liability method. The asset and liability method requires the recognition of
deferred tax assets and liabilities for expected future tax consequences of
29
temporary differences that currently exist between the tax bases and financial
reporting bases of the Company's assets and liabilities.
Use of estimates. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
requires the use of estimates made by management. Actual results could differ
from those estimates.
Fair value of financial instruments. The carrying values of cash and cash
equivalents, marketable securities, receivables, other current assets, accounts
payable and other current liabilities approximate their fair market values due
to the short-term maturity of these instruments.
Comprehensive Income. Comprehensive income is defined as all changes in
shareholders' equity during a period except those resulting from investments by
and distributions to shareholders. Comprehensive includes net earnings and other
comprehensive income. There were no material elements of other comprehensive
income for any of the periods presented.
Prior year reclassifications. Certain amounts in the prior year financial
statements have been reclassified to conform to the current year presentation.
Note 2--Related Party Transactions
At December 31, 1998, BWI owed the Company $16.5 million. This amount was
due on demand and represented loans of excess cash balances of the Company to
BWI on a short-term, interest-bearing basis. The amount was collected during
1999. Interest income attributable to the loans to BWI was $662,000 in 1999.
This amount was calculated by applying BWI's average incremental borrowing rate,
which was 5.4%, to the average outstanding balances. During 1999, the average
outstanding loans to BWI were $12.3 million.
During the year ended December 30, 2000, the Company made a $2.0 million
equity investment in an internet content management company, which was carried
at cost. During the year ended December 29, 2001, the Company wrote off the
investment. Management considers continuing operating losses and significant
changes in the technology industry to be its primary indicators of potential
impairment. Fair market value was estimated based on valuations derived from
recent sales of equity interests in Cytura. During the years ended December 30,
2000 and December 29, 2001, the Company purchased approximately $1.4 million and
$66,000 of services from this company, respectively.
Note 3--Acquisitions
On April 12, 1999, the Company completed an acquisition of the majority of
the operating assets of Pharmacy Plus, Ltd., a 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 Pharmacy
Plus, Ltd. assets was approximately $3.5 million, which included approximately
$450,000 for inventory and fixed assets and resulted in approximately $3.0
million of goodwill. No indebtedness was assumed. The results of operations of
Pharmacy Plus, Ltd. prior to the date of acquisition would not have been
material to the results of the Company for the year ended December 31, 1999.
On September 2, 1999, the Company completed an acquisition of the majority
of the operating assets of Monitors Unlimited, Inc., a distributor in the oral
surgery market. 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 Monitors Unlimited, Inc. assets was approximately $1.4 million,
which included approximately $245,000 for inventory and accounts receivable,
approximately $95,000 in assumed accounts payable debt, and resulted in
approximately $1.2 million of goodwill. The results of operations of Monitors
Unlimited, Inc. prior to the date of acquisition would not have been material to
the results of the Company for the year ended December 31, 1999.
On January 20, 2001, the Company completed an acquisition of the majority
of the operating assets of Freedom Drug, 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
30
acquisition. The total purchase price for the Freedom Drug assets was
approximately $30.5 million, which included approximately $8.9 million for cash,
inventory, accounts receivable, other current assets and fixed assets,
approximately $8.4 million in assumed accounts payable and other current
liabilities, and resulted in approximately $23.0 million of goodwill. The
results of operations of Freedom Drug prior to the date of acquisition would not
have been material to the results of the Company for the periods presented in
these financial statements. In addition, if Freedom Drug achieves certain
predetermined financial results during the fiscal year ending December 28, 2002,
the Company will make additional payments.
On April 2, 2001, the Company completed an acquisition of the majority of
the operating assets of Physicians Formulary International, Inc., a national
distributor of biopharmaceuticals specializing in the outpatient surgery center
market. 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 Physicians Formulary assets was approximately $19.3 million, which
included approximately $4.0 million for inventory, accounts receivable and fixed
assets, approximately $2.0 million in assumed accounts payable and other current
liabilities, and resulted in approximately $15.8 million of goodwill. The
results of operations of Physicians Formulary prior to the date of acquisition
would not have been material to the results of the Company for the periods
presented in these financial statements.
On October 26, 2001, the Company completed an acquisition of the majority
of the operating assets of InfuRx, a 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 InfuRx assets was
approximately $11.8 million, which included approximately $1.9 million for
inventory, accounts receivable and fixed assets, approximately $1.5 million in
assumed accounts payable debt, and resulted in approximately $10.0 million of
tax deductible goodwill. The results of operations of InfuRx prior to the date
of acquisition would not have been material to the results of the Company for
the periods presented in these financial statements. In addition, if InfuRx
achieves certain predetermined financial results during the fiscal years ending
December 28, 2002 and January 3, 2004, the Company will make additional
payments.
On June 18, 2001, the Company entered into an agreement to form a joint
venture with AdvancePCS to provide specialty pharmacy services to AdvancePCS'
clients and their members. The joint venture is named AdvancePriority
SpecialtyRx. AdvancePCS owns 51% of the venture and the Company owns 49%. During
the year ended December 29, 2001, the results of operations of the joint venture
were not material to the results of the Company.
Note 4--Marketable Securities
Marketable securities are carried on the balance sheet at their market
value. Marketable securities at December 30, 2000 and December 29, 2001 consist
of the following:
(In Thousands)
2000 2001
---- ----
Mutual funds....................... $ -- $ 2,079
Corporate bonds.................... 56,282 89,945
Commercial paper................... 22,288 2,142
-------- --------
$ 78,570 $ 94,166
======== ========
These investments had a fair value of approximately $125.8 million (which
includes approximately $47.2 million classified as cash equivalents) and $122.3
million (which includes approximately $28.1 million classified as cash
equivalents) at December 30, 2000 and December 29, 2001, respectively. At
December 30, 2000 and December 29, 2001, the amortized cost of these investments
approximated their market value. There were no gross realized gains or losses on
sales of available-for-sale securities in 2000 or 2001. All available-for-sale
securities are due in one year or less.
31
Note 5--Fixed Assets
Fixed assets at December 30, 2000 and December 29, 2001 consist of the
following:
(In Thousands)
2000 2001
---- ----
Computer hardware and software............ $ 2,696 $ 5,012
Furniture and equipment................... 2,134 3,359
Leasehold improvements.................... 331 1,093
Transportation equipment.................. 550 647
-------- --------
5,711 10,111
Less: accumulated depreciation............ (1,759) (2,334)
-------- --------
3,952 7,777
Construction in progress.................. -- 2,051
-------- --------
$ 3,952 $ 9,828
======== ========
Depreciation expense was $587,000, $848,000 and $1.5 million for the years ended
December 31, 1999, December 30, 2000 and December 29, 2001, respectively.
Note 6--Intangibles
Intangibles at December 30, 2000 and December 29, 2001 consist of the
following:
(In Thousands)
2000 2001
---- ----
Goodwill.................................. $ 10,265 $ 59,081
Accumulated amortization.................. (1,401) (3,179)
-------- --------
Goodwill, net............................. 8,864 55,902
-------- --------
Other..................................... 1,639 1,539
Accumulated amortization.................. (868) (887)
-------- --------
Other, net................................ 771 652
-------- --------
Intangibles, net.......................... $ 9,635 $ 56,554
======== ========
Amortization expense was $703,000, $487,000 and $1.9 million for the years ended
December 31, 1999, December 30, 2000 and December 29, 2001, respectively.
Note 7--Income Taxes
The provision for income taxes includes state income taxes of $1.5 million,
$1.4 million and $1.7 million for the years ended December 31, 1999, December
30, 2000 and December 29, 2001, respectively.
The following table indicates the significant elements contributing to the
difference between the U.S. federal statutory tax rate and the effective tax
rate:
1999 2000 2001
----- ----- -----
Percentage of earnings before taxes:
U.S. federal statutory rate............................. 35.0% 35.0% 35.0%
State and local taxes on income, net of federal income
tax benefit.......................................... 3.2% 2.0% 2.5%
Other................................................... 0.1% 0.0% 0.0%
----- ----- -----
Effective rate............................................... 38.3% 37.0% 37.5%
===== ===== =====
32
Presented below are the significant elements of the net deferred tax balance
sheet accounts at December 30, 2000 and December 29, 2001:
(In Thousands)
2000 2001
---- ----
Deferred tax asset:
Receivables............................... $ 1,056 $ 1,215
Finished goods inventories................ 647 51
Investments............................... -- 757
Deferred compensation..................... 671 517
State taxes .............................. 549 289
Accrued expenses ......................... 415 611
------- -------
Total deferred tax assets.......... 3,338 3,440
------- -------
Deferred tax liabilities:
Fixed assets.............................. (210) (1,545)
Intangibles............................... (187) (452)
------- -------
Total deferred tax liabilities..... (397) (1,997)
------- -------
Total net deferred income taxes.................... 2,941 1,443
Less current deferred tax assets................... (2,668) (2,165)
------- -------
Non current deferred income taxes.................. $ 273 $ (722)
======= =======
Note 8--Profit Sharing Plan
All employees are generally eligible to participate in the Profit Sharing
Plan as of the first January 1, April 1, July 1 or October 1 after having
completed at least three months of service (as defined in the Profit Sharing
Plan) and having reached age 18 ("Participant"). Participants are generally
eligible to receive an annual contribution from the Company after having
completed at least one year of service (as defined in the Profit Sharing Plan)
and having reached age 18. The annual contribution of the Company to the Profit
Sharing Plan is at the discretion of the Board of Directors of the Company and
has historically been 6.5% to 8.0% of the Participant's compensation for the
year. The employer contribution for a year is allocated among the Participants
employed on the last day of the year in proportion to their relative
compensation for the year. The contributions to the Profit Sharing Plan which
are included as expense in the statement of earnings for 1999, 2000 and 2001
were $350,000, $653,000 and $1.0 million, respectively.
Subject to limitations imposed by the Internal Revenue Code of 1986, as
amended, a Participant may have a percentage of his or her compensation withheld
from pay and contributed to the Profit Sharing Plan and make "rollover"
contributions to the Profit Sharing Plan of qualifying distributions from other
employers' qualified plans.
A Participant's interest in amounts withheld from his or her pay and
contributed to the Profit Sharing Plan or in rollover contributions and in the
earnings on those amounts are fully vested at all times. A Participant's
interest in employer contributions made on his or her behalf and the earnings on
those contributions become 20% vested after one year of service and an
additional 20% vested during each of the next four years. A Participant's
interest in employer contributions made on his or her behalf and the earnings on
those contributions also become fully vested when the employee retires at age 65
or older, dies or becomes totally disabled.
All contributions to the Profit Sharing Plan are paid in cash to a bank, as
trustee, and are invested by the trustee until distributed to Participants or
their beneficiaries. Participants are permitted to direct the trustee as to the
investment of their accounts by choosing among several investment funds that are
offered. A Participant may also elect to invest in the Company's Class B Common
Stock. Participants may elect to invest in one fund or a combination of the
available funds according to their investment goals. If a Participant does not
make an investment election, his or her Profit Sharing Plan accounts will be
invested in a fund designated by the Company.
33
Except in certain cases of financial hardship, a Participant (or his or her
beneficiary) receives his or her interest in the Profit Sharing Plan only at
death, retirement or termination of employment.
Note 9--Capital Stock
The two classes of Common Stock entitle holders to the same rights and
privileges, except that holders of shares of Class A Common Stock are entitled
to three votes per share on all matters submitted to a vote of holders of Common
Stock and holders of Class B Common Stock are entitled to one vote per share on
such matters. The Class A Common Stock will automatically be converted into
shares of Class B Common Stock on a share-for-share basis upon any transfer or
purported transfer to any person other than: (i) a dividend or other
distribution of the shares of Class A Common Stock to the shareholders of BWI;
or (ii) family members of the holder of Class A Common Stock, or trusts for the
benefit of or entities controlled by the holder of Class A Common Stock or
family members of the holder.
Shares of restricted stock as to which restrictions have not lapsed are not
transferable other than pursuant to the laws of descent and distribution.
On June 15, 1999, the Company consummated a secondary public offering of
5,200,000 shares of Class B Common Stock. An additional 780,000 shares of Class
B Common Stock were sold on July 7, 1999 pursuant to the exercise of the
underwriters' overallotment option. All shares were issued at a price of $17.00
per share. Net proceeds to the Company, after deducting underwriting discounts
and commissions and other expenses of the offering, was $96.1 million.
On August 24, 1999, the Board of Directors approved the purchase of up to
4,000,000 shares of the Company's outstanding shares of Class B Common Stock.
This purchase was approved through August 23, 2000. In 1999, 2,609,716 shares
were purchased at an average price of $11.62 and were included in treasury
stock. The Company purchased the treasury stock because management felt the
market undervalued the stock. In 2000, the Company did not purchase shares under
this plan.
On July 19, 2001, the Board of Directors approved the purchase of up to
3,000,000 shares of the Company's outstanding shares of Class B Common Stock.
This purchase was approved through July 18, 2002. In 2001, 153,500 shares were
purchased at an average price of $23.93 and were included in treasury stock. The
Company purchased the treasury stock because management felt the market
undervalued the stock.
On April 7, 1999, the Company announced that the Board of Directors
authorized a 3-for-2 stock split of the Company's Common Stock to be effected as
a stock dividend to all shareholders of record at the close of business on April
20, 1999, the Record Date. Shareholders on the Record Date received a stock
dividend of one share for each two shares held. The stock dividend was paid on
May 4, 1999. Holders of the Class A Common Stock received Class A shares in the
split and holders of Class B Common Stock received Class B shares. Cash was paid
in lieu of fractional shares. The amounts presented herein give effect to the
stock split as if it had occurred at the beginning of all periods presented.
On October 19, 2000, the Company announced that the Board of Directors
authorized a 2-for-1 stock split of the Company's Common Stock to be effected as
a stock dividend to all shareholders of record at the close of business on
November 8, 2000, the Record Date. Shareholders on the Record Date received a
stock dividend of one share for each one share held. The stock dividend was paid
on November 22, 2000. Holders of the Class A Common Stock received Class A
shares in the split and holders of Class B Common Stock received Class B shares.
The amounts presented herein give effect to the stock split as if it had
occurred at the beginning of all periods presented.
Note 10--Stock Option Plans
On August 25, 1997, the Board of Directors and BWI, as sole shareholder of
the Company, adopted the 1997 Stock Option and Incentive Plan (the "1997 Stock
Option Plan"). Under the 1997 Stock Option Plan, the Company may award stock
options and shares of restricted stock to officers, key employees and
consultants of the Company. The aggregate number of shares of Class B Common
Stock that may be awarded under the 1997 Stock Option Plan is 6,400,000, subject
to adjustment in certain events. No individual participant may receive awards
for more than
34
300,000 shares in any calendar year. Under the 1997 Stock Option Plan, awards of
restricted shares may be made, in which case the grantee would be granted shares
of Class B Common Stock, subject to any determined forfeiture or transfer
restrictions.
The Compensation Committee of the Board of Directors administers the 1997
Stock Option Plan and has the authority to select those officers and key
employees to whom awards will be made, to designate the number of shares to be
covered by each award, to establish vesting schedules, and to specify all other
terms of the awards. With respect to stock options that are intended to qualify
as "incentive stock options" under Section 422 of the Internal Revenue Code, the
option price must be at least 100% (or, in the case of a holder of more than 10%
of the total combined voting power of the Company's stock, 110%) of the fair
market value of a share of Class B Common Stock on the date of the grant of the
stock option. The Compensation Committee will establish the exercise price of
options that do not qualify as incentive stock options ("non-qualified stock
options"). No options may be exercised more than 10 years from the date of
grant, or for such shorter period as the Compensation Committee may determine at
the date of grant. Awards of options are not transferable other than pursuant to
the laws of descent and distribution.
On August 25, 1997, the Board of Directors and BWI, as sole shareholder of
the Company, approved the adoption of the Outside Directors Stock Option Plan
(the "Directors Plan"). The Directors Plan reserves for issuance 75,000 shares
of the Company's Class B Common Stock, subject to adjustment in certain events.
Pursuant to the Directors Plan, each non-employee director will be automatically
granted an option to purchase 3,000 shares of Class B Common Stock on June 1 of
each year beginning June 1, 1998. The option exercise price per share will be
the fair market value of one share of Class B Common Stock on the date of grant.
Each option becomes exercisable six months following the date of grant and
expires 10 years following the date of grant.
On September 15, 1998, the Board of Directors of the Company approved the
adoption of the Broad Based Stock Option Plan (the "Broad Based Plan"). The
Broad Based Plan reserves for issuance 1,837,323 shares of the Company's Class B
Common Stock, subject to adjustment in certain events. The number of shares
which may be granted under the Broad Based Plan during any calendar year shall
not exceed 50,000 shares to any one person. The Compensation Committee of the
Board of Directors administers the Broad Based Plan and establishes vesting
schedules. Each option expires 10 years following the date of grant.
In accordance with the provision of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), the Company has elected to follow
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related Interpretations in accounting for its stock
option plans, and accordingly, generally does not recognize compensation expense
related to options granted to employees. 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:
Year ended Year ended Year ended
December 31, December 30, December 29,
1999 2000 2001
-------- -------- --------
(In Thousands, Except Share Data)
Net earnings - as reported..................................... $ 20,694 $ 28,079 $ 27,720
Pro forma impact of
Company option grants............................. (4,049) (5,531) (11,580)
-------- -------- --------
Pro forma net earnings......................................... $ 16,645 $ 22,548 $ 16,140
======== ======== ========
Pro forma earnings per share:
Basic................................................. $ 0.41 $ 0.53 $ 0.37
Diluted............................................... $ 0.40 $ 0.52 $ 0.36
35
The fair values of the Company's 1999, 2000 and 2001 option grants were
estimated on the date of grant using the Black-Scholes option pricing model,
with the following weighted average assumptions:
1999 2000 2001
---- ---- ----
Risk free interest rate....................... 5.67% 5.80% 3.64%
Expected dividend yield....................... .00% .00% .00%
Expected life of options...................... 4.87 4.23 2.50
Volatility of stock price..................... 57.09% 63.13% 79.02%
Weighted average fair value of options........ $16.80 $14.22 $15.37
Changes in stock options under all of the Company's plans are shown below:
Number of Weighted average
shares price per share
------------ ---------------
Options outstanding at December 31, 1998
(0 shares exercisable).................................... 3,096,248 $ 5.53
Forfeited during 1999..................................... (153,980) $ 9.76
Granted during 1999....................................... 1,967,170 $15.44
Exercised during 1999..................................... (261,120) $ 4.86
------------
Options outstanding at December 31, 1999
(640,986 shares exercisable).............................. 4,648,318 $ 9.62
Forfeited during 2000..................................... (141,380) $17.77
Granted during 2000....................................... 2,055,740 $26.39
Exercised during 2000..................................... (1,692,978) $ 6.68
------------
Options outstanding at December 30, 2000
(460,210 shares exercisable).............................. 4,869,700 $17.52
Forfeited during 2001..................................... (282,952) $25.99
Granted during 2001....................................... 1,472,260 $31.22
Exercised during 2001..................................... (903,776) $ 9.32
------------
Options outstanding at December 29, 2001
(756,435 shares exercisable).............................. 5,155,232 $22.40
------------
Available for grant at December 29, 2001.................. 1,279,000
============
Additional information regarding the Company's options outstanding at
December 29, 2001 is shown below:
Weighted Average
Number Outstanding Remaining Weighted Average
Range of Exercise Prices At December 29, 2001 Contractual Life Exercise Price
- ------------------------ -------------------- ---------------- --------------
$ 4.63 to $ 6.67 688,962 6.30 Years $ 5.68
$12.79 to $17.99 1,302,193 7.42 Years $15.49
$21.88 to $27.66 1,805,777 8.74 Years $26.93
$30.15 to $38.38 1,358,300 9.58 Years $31.48
Note 11--Commitments
The Company leases warehouse and office space under noncancelable operating
leases expiring at various dates through 2006, with options to renew for various
periods. Minimum commitments under leases aggregate $1.5 million for 2002, $1.5
million for 2003, $1.2 million for 2004, $467,000 for 2005 and $71,000 for 2006.
36
The consolidated rent expense for 1999, 2000 and 2001 was $674,000,
$874,000 and $1.3 million, respectively, of which approximately $370,000 in
1999, $135,000 in 2000 and $79,000 in 2001 pertained to leases with terms of one
year or less.
Note 12--Major Customers and Other Concentrations
The Company services customers in all 50 states. During 1999, 2000 and 2001
the Company had one customer which accounted for 10%, 7% and 0%, respectively,
of the Company's net sales. During 1999, 2000 and 2001 the Company also had one
third party payor which accounted for 6%, 11% and 13%, respectively, of the
Company's net sales. The Company sells goods and services to its customers on
various payment terms which entail accounts receivable exposure. Although the
Company monitors closely the creditworthiness of its customers, there can be no
assurance that the Company will not incur a write-off or writedown of a
significant account in the future.
Product provided by one of the Company's largest vendors accounted for
approximately 21%, 21% and 13% of net sales in 1999, 2000 and 2001,
respectively. In addition, the sale of one product supplied by this vendor
accounted for approximately 18%, 15% and 7% of net sales in 1999, 2000 and 2001,
respectively. This product is available from only one manufacturer, with which
the Company must maintain a good working relationship. The Company is a party in
a lawsuit involving this vendor. See Note 13--Legal Proceedings. The Company has
another vendor whose products accounted for approximately 11%, 13% and 15% of
net sales in 1999, 2000 and 2001, respectively. The Company has another vendor
whose one product accounted for approximately 12%, 18% and 17% of net sales in
1999, 2000 and 2001, respectively.
Note 13--Legal Proceedings
IV-1, Inc. ("IV-1") and IV-One Services, Inc. ("IV-One Services") have been
named as defendants in a second amended counterclaim filed by Amgen, Inc.
("Amgen") on May 14, 1996, in the Circuit Court of the Eighteenth Judicial
District of Seminole County, Florida. Amgen has asserted that these entities
tortiously interfered with a license agreement (the "License Agreement") between
Amgen and Ortho Pharmaceutical Corporation ("Ortho"). Pursuant to this
agreement, Amgen licensed Ortho to sell EPO for use in the treatment of
non-dialysis patients, while Amgen reserved the exclusive right to sell EPO for
use in the treatment of dialysis patients. Amgen has asserted that, prior to the
purchase of IV-1 and IV-One Services by the Company, these entities induced
Ortho to sell EPO to them for resale in the dialysis market in contravention of
the License Agreement. Amgen has also alleged that IV-1 and IV-One Services were
involved in a civil conspiracy to circumvent the terms of the License Agreement
to allow the resale of EPO to the dialysis market. Furthermore, Amgen has
asserted unfair competition claims against IV-1, including that IV-1
manufactured and distributed unapproved prefilled syringes of EPO and another
product manufactured by Amgen in container systems unapproved by Amgen. Amgen
did not specify a time frame for the acts complained of in the civil conspiracy
and unfair competition allegations. In each count, Amgen has demanded an
unspecified amount of compensatory damages, including costs and interest.
The Company believes that the sellers of IV-1, IV-One Services and Charise
Charles, Ltd., Inc. ("Charise Charles") are contractually obligated to provide
legal defense and to indemnify the Company for losses and liabilities with
respect to this litigation, to the extent that the alleged acts occurred prior
to the purchase of such entities by the Company. To date, the sellers have
provided the legal defense for IV-1 and IV-One Services in the litigation.
Indemnification from the sellers of IV-1 and IV-One Services is limited to no
more than $1.5 million and indemnification from the sellers of Charise Charles
is limited to no more than $2.0 million. The Company does not expect the Amgen
litigation to be material to the Company's results of operations, financial
condition or cash flows; however, no assurance can be given that this litigation
will not have a material adverse effect on the Company's business, financial
condition and results of operations. As of December 29, 2001, approximately
$161,000 of charges have been incurred on behalf of the sellers for claims for
indemnification. In addition, Amgen is the Company's largest supplier.
Consequently, this litigation presents the risk of adversely affecting the
Company's business relationship with Amgen, which could have a material adverse
effect on the Company. See Note 12--Major Customers and Other Concentrations.
The Company is also subject to ordinary and routine litigation incidental
to its business, none of which is expected to be material to the Company's
results of operations, financial condition, or cash flows.
37
Note 14 Selected Quarterly Financial Data (Unaudited)
Quarter ended Quarter ended Quarter ended Quarter ended
April 1, July 1, September 30, December 30,
2000 2000 2000 2000
-----------------------------------------------------------------------
(000's omitted, except share data)
Net sales................................. $ 136,553 $ 146,186 $ 147,725 $ 154,193
Gross profit.............................. 16,892 17,181 17,397 18,827
Net earnings.............................. 6,761 7,097 7,654 6,567
Earnings per share:
Basic........................... $ .16 $ .17 $ .18 $ .15
Diluted......................... $ .16 $ .17 $ .18 $ .15
Weighted average shares outstanding:
Basic........................... 41,430,432 42,051,068 42,762,098 42,784,807
Diluted......................... 42,330,276 42,932,150 43,677,006 43,457,432
Quarter ended Quarter ended Quarter ended Quarter ended
March 31, June 30, September 29, December 29,
2001 2001 2001 2001
-----------------------------------------------------------------------
(000's omitted, except share data)
Net sales................................. $ 168,346 $ 200,578 $ 209,724 $ 226,472
Gross profit.............................. 21,610 21,966 23,182 25,391
Net earnings.............................. 8,733 3,067 7,704 8,216
Earnings per share:
Basic........................... $ .20 $ .07 $ .18 $ .19
Diluted......................... $ .20 $ .07 $ .17 $ .19
Weighted average shares outstanding:
Basic........................... 43,179,651 43,666,335 43,695,832 43,628,251
Diluted......................... 44,598,467 45,050,207 44,307,367 44,266,299
During the fourth quarter of 2000, the Company recorded a charge of
approximately $3.5 million predominantly related to the write off of certain
receivables that were determined to be uncollectible in the fourth quarter.
Also, during the fourth quarter of 2000, the Company reduced its provision for
income taxes by approximately $450,000 due to implementing selected tax planning
strategies.
During the second quarter of 2001, the Company recorded a charge of
approximately $6.3 million predominantly related to the write off of certain
receivables that were determined to be uncollectible in the second quarter and
the write off of an investment in an internet content management company.
Note 15--Subsequent Event
On March 11, 2002, the Company completed an acquisition of the majority of
the operating assets of Hemophilia of the Sunshine State ("HOSS"), the leading
provider of hemophilia products and services in the State of Florida. HOSS had
revenues of approximately $30 million for the year ended December 2001.
38
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Priority Healthcare Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Priority
Healthcare Corporation and its subsidiaries (the "Company") at December 30, 2000
and December 29, 2001, and the results of their operations and their cash flows
for each of the three years in the period ended December 29, 2001, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion.
PricewaterhouseCoopers LLP
Orlando, Florida
February 15, 2002
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's
independent certified public accountants on accounting or financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item concerning the Directors and nominees
for Director of the Company and concerning disclosure of delinquent filers under
Section 16(a) of the Exchange Act is incorporated herein by reference from the
Company's definitive Proxy Statement for its 2002 Annual Meeting of
Shareholders, which will be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of the Company's last fiscal year. Information
concerning the executive officers of the Company is included under the caption
"Executive Officers of the Company" at the end of Part I of this Annual Report.
Such information is incorporated herein by reference, in accordance with General
Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation
S-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item concerning remuneration of the
Company's officers and Directors and information concerning material
transactions involving such officers and Directors is incorporated herein by
reference from the Company's definitive Proxy Statement for its 2002 Annual
Meeting of Shareholders which will be filed with the Commission pursuant to
Regulation 14A within 120 days after the end of the Company's last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item concerning the stock ownership of
management and five percent beneficial owners is incorporated herein by
reference from the Company's definitive Proxy Statement for its 2002 Annual
Meeting of Shareholders which will be filed with the Commission pursuant to
Regulation 14A within 120 days after the end of the Company's last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item concerning certain relationships and
related transactions is incorporated herein by reference from the Company's
definitive Proxy Statement for its 2002 Annual Meeting of Shareholders which
will be filed with the Commission pursuant to Regulation 14A within 120 days
after the end of the Company's last fiscal year.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
The following consolidated financial statements of the Company
and its subsidiaries are set forth in Part II, Item 8.
Consolidated Statements of Earnings for the years ended
December 31, 1999, December 30, 2000 and December 29, 2001
Consolidated Balance Sheets as of December 30, 2000 and
December 29, 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, December 30, 2000 and December 29, 2001
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, December 30, 2000 and December 29,
2001
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
2. Financial Statement Schedules:
Financial Statement Schedule II, Valuation and Qualifying
Accounts and Reserves is included. All other schedules are
omitted because they are not applicable or the required
information is shown in the financial statements or notes
thereto.
3. Exhibits:
A list of exhibits required to be filed as part of this report
is set forth in the Index to Exhibits, which immediately
precedes such exhibits, and is incorporated herein by
reference.
(b) Reports on Form 8-K
None
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Priority Healthcare Corporation
By: /s/ Steven D. Cosler
--------------------------------------
Dated: March 20, 2002 Steven D. Cosler
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William E. Bindley Chairman of the Board March 20, 2002
------------------------------
William E. Bindley
/s/ Robert L. Myers Vice Chairman and Chairman of the March 20, 2002
------------------------------ Executive Committee
Robert L. Myers
/s/ Steven D. Cosler President, Chief Executive Officer and March 20, 2002
------------------------------ Director (Principal Executive Officer)
Steven D. Cosler
/s/ Donald J. Perfetto Chief Operating Officer and Director March 20, 2002
------------------------------
Donald J. Perfetto
/s/ Stephen M. Saft Chief Financial Officer and Treasurer March 20, 2002
------------------------------ (Principal Financial and Accounting
Stephen M. Saft Officer)
/s/ Michael D. McCormick Director March 20, 2002
------------------------------
Michael D. McCormick
/s/ Richard W. Roberson Director March 20, 2002
------------------------------
Richard W. Roberson
/s/ Thomas J. Salentine Director March 20, 2002
------------------------------
Thomas J. Salentine
42
PRIORITY HEALTHCARE CORPORATION
FINANCIAL STATEMENT SCHEDULE II -
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(000's omitted)
Accounts
Balances at Charged To Charged To Written Off Balances at
Beginning Costs And Other Net Of End
Of Year Expenses Accounts Recoveries Of Year
--------------------------------------------------------------------------------
Allowances for doubtful accounts:
Year ended December 31, 1999.............. $ 778 $ 1,655 -- $ (669) $ 1,764
Year ended December 30, 2000.............. 1,764 5,610 -- (4,420) 2,954
Year ended December 29, 2001.............. 2,954 4,920 -- (4,635) 3,239
43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and
Shareholders of Priority Healthcare Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 15, 2002, appearing in the Annual Report to Shareholders of
Priority Healthcare Corporation on Form 10-K also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Orlando, Florida
February 15, 2002
44
INDEX TO EXHIBITS
Sequential
----------
Exhibit Page
------- ----
Number Document Description Number
------ --------------------------------------------------------------------- ------
3-A (7) (i) Restated Articles of Incorporation of the Registrant.
(10) (ii) Articles of Amendment to the Restated Articles of
Incorporation of the Registrant.
3-B (11) By-Laws of the Registrant, as amended to date.
4 (8) Loan Agreement By and Between the Registrant (the "Borrower") and
Suntrust Bank, Central Florida, National Association (the "Bank") dated
November 24, 1998.
10-A (1) Administrative Services Agreement between the Registrant and BWI.
10-B (1) Tax Sharing Agreement between the Registrant and BWI.
10-C (1) (i)*1997 Stock Option and Incentive Plan of the Registrant.
(2) (ii)*First Amendment to the 1997 Stock Option and Incentive Plan of
the Registrant.
(9) (iii)*Second Amendment to the 1997 Stock Option and Incentive Plan
of the Registrant.
(15) (iv)*Third Amendment to the 1997 Stock Option and Incentive Plan of
the Registrant.
10-D (1) *Outside Directors Stock Option Plan of the Registrant.
10-E (1) *Termination Benefits Agreement between the Registrant and Robert L.
Myers dated July 1, 1996.
10-H (12) * Form of Termination Benefits Agreement between the Registrant and
each of Messrs. Bryant, Cosler and Perfetto and Ms. Shanahan.
10-I (12) *Form of Noncompete Agreement, dated January 1, 2000, between the
Registrant and each of Messrs. Bryant, Cosler and Perfetto.
10-J *Employee Confidentiality/Noncompetition Agreement, dated August 31,
2001, between the Registrant and Stephen M. Saft.
10-K *Noncompete Agreement, dated January 2, 2002, between the Registrant and
Rebecca M. Shanahan.
10-L (1) Indemnification and Hold Harmless Agreement between the Registrant
and BWI.
10-M (1) *Consulting Agreement dated as of January 1, 1995, by and among the
Registrant, BWI and Martin A. Nassif.
10-O (3) Revolving Credit Promissory Note by BWI in favor of the Registrant.
10-P (4) *(i)Broad Based Stock Option Plan of the Registrant.
(8) *(ii)First Amendment to the Broad Based Stock Option Plan of the
Registrant.
(14) *(iii)Second Amendment to the Broad Based Stock Option Plan of the
Registrant.
45
10-Q (5) *Profit Sharing Plan of Priority Healthcare Corporation and
Subsidiaries.
(12) *(i)First Amendment to the Profit Sharing Plan of Priority
Healthcare Corporation and Affiliates.
(12) *(ii)Second Amendment to the Profit Sharing Plan of Priority
Healthcare Corporation and Affiliates.
(13) *(iii)Third Amendment to the Profit Sharing Plan of Priority
Healthcare Corporation and Affiliates.
*(iv)Fourth Amendment to the Profit Sharing Plan of Priority
Healthcare Corporation and Affiliates.
*(v)Fifth Amendment to the Profit Sharing Plan of Priority
Healthcare Corporation and Affiliates.
10-R (8) *Priority Healthcare Corporation 401(k) Excess Plan.
10-V (6) Distribution Agreement, dated as of October 23, 1998, between the
Registrant and Bindley Western Industries, Inc.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation S-K.
(1) The copy of this exhibit filed as the same exhibit number to the
Company's Registration Statement on Form S-1 (Registration No. 333-34463)
is incorporated herein by reference.
(2) The copy of this exhibit filed as the same exhibit number to the
Company's Quarterly Report on Form 10- Q for the quarter ended September
30, 1998 is incorporated herein by reference.
(3) The copy of this exhibit filed as the same exhibit number to the
Company's Quarterly Report on Form 10- Q for the quarter ended June 30,
1998 is incorporated herein by reference.
(4) The copy of this exhibit filed as Exhibit 4.4 to the Company's
Registration Statement on Form S-8 (Registration No. 333-65927) is
incorporated herein by reference.
(5) The copy of this exhibit filed as Exhibit 4.4 to the Company's
Registration Statement on Form S-8 (Registration No. 333-69921) is
incorporated herein by reference.
(6) The copy of this exhibit filed as Exhibit 10 to the Company's Current
Report on Form 8-K, as filed with the Commission on January 4, 1999, is
incorporated herein by reference.
(7) The copy of this exhibit filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Registration No. 333-82481) is
incorporated herein by reference.
(8) The copy of this exhibit filed as the same exhibit number to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998
is incorporated herein by reference.
(9) The copy of this exhibit filed as Exhibit 4.3(iii) to the Company's
Registration Statement on Form S-8 (Registration No. 333-82481) is
incorporated herein by reference.
(10) The copy of this exhibit filed as the same exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarter ended July 1,
2000 is incorporated herein by reference.
(11) The copy of this exhibit filed as the same exhibit number to the
Company's Current Report on Form 8-K, as filed with the Commission on
April 26, 2000, is incorporated herein by reference.
46
(12) The copy of this exhibit filed as the same exhibit number to the
Company's Annual Report on Form 10-K for the year ended December 31, 1999
is incorporated herein by reference.
(13) The copy of this exhibit filed as the same exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarter ended April 1,
2000 is incorporated herein by reference.
(14) The copy of this exhibit filed as Exhibit 4.3(iii) to the Company's
Registration Statement on Form S-8 (Registration No. 333-56882) is
incorporated herein by reference.
(15) The copy of this exhibit filed as the same exhibit number to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001 is incorporated herein by reference.
47