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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 31, 1999
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.
$769,757,812
Aggregate market value of the voting stock held by nonaffiliates of
the Registrant based on the last sale price for such stock on March 3, 2000
(assuming solely for the purposes of this calculation that all Directors and
executive officers of the Registrant are "affiliates").
4,870,708
Number of shares of Class A Common Stock, $.01 par value, outstanding at March
3, 2000.
17,175,754
Number of shares of Class B Common Stock, $.01 par value, outstanding at March
3, 2000.
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 15, 2000
PRIORITY HEALTHCARE CORPORATION
Lake Mary, Florida
Annual Report to Securities and Exchange Commission
December 31, 1999
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 seven 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 15,321,429 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.
The operations of Charise Charles, PRN, 3C, Grove Way Pharmacy and
Monitors Unlimited are now included in the Company's Priority Healthcare
Distribution division. 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 Pharmacy Plus are now included in the Company's Priority Healthcare Pharmacy
division.
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-injectable biopharmaceuticals and disease
treatment programs to individuals with chronic diseases. Through Priority
Healthcare Distribution, 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 Healthcare Distribution offers value-added services to meet the
specific needs of these markets by shipping refrigerated pharmaceuticals
overnight in special
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packaging to maintain appropriate temperatures, offering automated order entry
services and offering customized distribution for group accounts. From
distribution centers in Tustin, California and Grove City, Ohio, Priority
Healthcare Distribution services over 2,500 customers in all 50 states and
Puerto Rico, including approximately 600 office-based oncologists and 800 renal
dialysis clinics.
Through Priority Healthcare Pharmacy, the Company fills individual
patient prescriptions for self-injectable biopharmaceuticals. These
patient-specific prescriptions are filled at the licensed pharmacies in Lake
Mary, Florida and Philadelphia, Pennsylvania and are shipped directly to the
patient overnight in specialized packages. Priority Healthcare Pharmacy also
provides disease treatment programs for hepatitis, cancer, human growth
deficiency, rheumatoid arthritis, Crohn's disease, respiratory syncytial virus
(RSV), infertility, the complications of HIV and others.
Priority's net sales have increased from $107.4 million in 1994 to
$427.9 million in 1999. In the same period, operating income has increased from
$2.3 million in 1994 to $30.1 million in 1999. 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 by distributing new product categories and
patient-specific biopharmaceuticals; (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 patient 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 and chronic renal
dialysis. The Company also operates in certain segments 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 alternate site supply market is fragmented with
many public and 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-injecting 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. During the
1990s, 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 interferon,
ribavirin-Intron A combination therapy ("Rebetron"), erythropoietin ("EPO") and
cancer drugs.
The service needs of office-based physicians and patients
self-injecting 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 providing 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 care
delivery has created a significant opportunity, particularly in the oncology,
gastroenterology, rheumatology, pediatric, endocrinology, infertility, renal
dialysis, vaccine, oral surgery and homecare markets. The Company is focused
primarily on the oncology, renal dialysis, vaccine and gastroenterology markets,
but is developing its business in the other growing markets.
ONCOLOGY. Cancer continues to grow in the United States. According to
American Health Consultants, Inc. more than 1.2 million cases of cancer will be
diagnosed in the United States in 2000. 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
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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.
According to SunTrust Equitable Securities Research, the National
Institutes of Health ("NIH") stated that direct medical spending on oncology
services reached approximately $37 billion in 1998, and it should continue to
grow at 8-10% annually over the next several years. The Company believes that
the office-based segment of the cancer pharmaceutical market represents
approximately 25% of such market and has been growing faster than the cancer
pharmaceutical market. Growth in the cancer pharmaceutical market is expected to
be driven by the continued introduction of new pharmaceuticals and increases in
the incidence of cancer. Of 350 biotechnology medicines currently in
development, nearly one half are cancer related, according to a 1998 survey
conducted by Pharmaceutical Research and Manufacturers of America ("PhRMA"). 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.
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 Health Care Financing Administration ("HCFA"), as of December 31, 1997, over
85% 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 HCFA, ESRD enrollment
was 230,190 as of December 31, 1997 and is growing by approximately 6% per year.
The medication most frequently prescribed to hemodialysis patients is EPO, which
stimulates the production of red blood cells, as well as Calcijex (calcium),
INFeD (iron), hepatitis vaccine and other nutrient compounds. The Company
estimates that the United States market for EPO alone easily exceeds $1 billion.
VACCINE MARKET. The worldwide vaccine market exceeded $3 billion in
1997, and is expected to grow to $7 billion by 2001, according to SmithKline
Beecham, one of the leading vaccine manufacturers. The Company estimates that
pediatric vaccines represent 40% of the world market, and hepatitis vaccines
represent over 20% 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. According to the 1998 PhRMA survey, 77 vaccines are
currently in development.
GASTROENTEROLOGY. Priority operates in the gastroenterology market,
principally through the sale of interferon and Rebetron 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.
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 telemarketing and sales support staff of
approximately 70 full-time associates. The Company's sales support staff and
telemarketers are most experienced in the areas of oncology, gastroenterology,
rheumatology, renal care, vaccines and oral 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.
4
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 a licensed
pharmacy which has been accredited with commendation by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO").
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, renal dialysis clinics and patients
self-injecting 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 6 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 Healthcare Pharmacy 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.
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 distributor and specialty pharmacy
provider 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 BY DISTRIBUTING NEW PRODUCT CATEGORIES AND
PATIENT-SPECIFIC BIOPHARMACEUTICALS. By targeting chronic disease therapies that
require patient-specific, self-injectable biopharmaceuticals, the Company
continues to expand its markets. An example is the Uniprost therapy for patients
suffering from pulmonary hypertension which was added through an agreement with
United Therapeutics. This agreement is expected to have a significant positive
impact on Priority's revenues beginning in 2001, assuming the Uniprost therapy
is approved by the Food and Drug Administration.
ACCELERATE GROWTH OF ITS HIGHER MARGIN, PATIENT-SPECIFIC PHARMACY
BUSINESS BY LEVERAGING RELATIONSHIPS WITH EXISTING DISTRIBUTION CUSTOMERS. The
Company has over 2,500 customers, including physicians focusing on oncology,
gastroenterology, rheumatoloy, pediatrics, renal care, vaccines and oral
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-injectable 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 payers 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 shipping. The Company's selling, general and
administrative expense was only 5.0% of revenues in 1999 even as the Company
continued to invest in its infrastructure.
5
PURSUE ACQUISITIONS TO COMPLEMENT EXISTING PRODUCT OFFERINGS OR FURTHER
PENETRATE MARKETS. The Company believes that the highly fragmented specialty
distribution and pharmacy industries afford 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 are examples that fit this criteria.
CONTINUE TO DEVELOP PHYSICIAN AND PATIENT NETWORKS THAT ENHANCE THE
COMPANY'S ALLIANCE CAPABILITIES WITH MANUFACTURERS. The Company believes that
with strong physician and patient networks the relationships with its
manufacturers will be enhanced, thereby increasing the potential for alliances
which could expand its products, service and geographic scope.
PRODUCTS AND SERVICES
PRIORITY HEALTHCARE DISTRIBUTION. Priority Healthcare Distribution
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 the oral surgery market. Priority Healthcare Distribution 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 Healthcare Distribution
distributes its products from distribution centers in Tustin, California and
Grove City, Ohio. The Company sells over 3,500 SKUs of pharmaceuticals such as
EPO, Neupogen, Calcijex and INFeD and related medical supplies such as IV
solutions, IV sets, gloves, needles, syringes and sharps containers. During
1999, approximately 18% of the Company's revenues were attributable to sales of
EPO to the renal care market. EPO for the renal care market is available from
only one manufacturer, Amgen. Priority Healthcare Distribution services over
2,500 customers located in all 50 states and Puerto Rico, including
approximately 600 office-based oncologists and 800 renal dialysis clinics.
Priority believes its knowledgeable salesforce 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, 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 telemarketing sales
and 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 6 p.m. are shipped on the same day
that the order is received. See "--Sales and Marketing."
PRIORITY HEALTHCARE PHARMACY. Priority Healthcare Pharmacy provides
patient-specific, self-injectable biopharmaceuticals and related disease
treatment programs to individuals with chronic diseases. In Lake Mary, Florida,
and Philadelphia, Pennsylvania, Priority Healthcare Pharmacy 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 Healthcare Pharmacy 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 Healthcare Pharmacy 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, an oral antiviral and a synthetic biopharmaceutical
used to treat hepatitis C, Octreotide, a synthetic hormone used to treat
diarrhea associated with intestinal peptide tumors, and Epoetin Alfa, a
synthetic biopharmaceutical used to treat anemia. Priority Healthcare Pharmacy
has added many more products, including Temodar, an oral chemotherapy used to
treat Anaplastic astrocytoma (a brain malignancy), Thalomid, an oral product
with antiangiogenesis properties and is used to treat a variety of cancers,
Synagis, an injectable vaccine product used to treat RSV (Respiratory Syncytial
Virus) in premature infants, Remicade, an intravenous product
6
used to treat Crohn's Disease and rheumatoid arthritis patients, and Enbrel, 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 payers, the
Company's telemarketing 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.
SALES AND MARKETING
The Company employs approximately 70 full-time telemarketing 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
telemarkets to oncology clinics, physician offices and dialysis centers. The
Company targets larger customers with customized approaches developed by
management and its key account team. The Company also links the Priority
Healthcare Distribution and Priority Healthcare Pharmacy databases to facilitate
cross-selling efforts between the two divisions. 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 Healthcare Distribution.
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 telemarketing sales personnel work to establish long-term
relationships with the Company's customers through regularly scheduled phone
contact and personalized service.
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 Healthcare Distribution serves over 2,500 customers located in
all 50 states and Puerto Rico, including approximately 600 office-based
oncologists and 800 renal dialysis clinics.
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During 1999, the Company's largest 20 customers accounted for
approximately 26% of the Company's revenues and one customer, Everest Healthcare
Services Corporation, accounted for approximately 10% of the Company's revenues.
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.
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 1997, 1998 and 1999, the
Company's single largest supplier, Amgen, accounted for approximately 40%, 32%
and 21%, respectively, of the Company's revenues. 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 many public and 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 speciality
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; 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 Tustin and Grove City distribution centers are licensed to
distribute pharmaceuticals in accordance with the Prescription Drug Marketing
Act of 1987. The Grove City location is 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.
On November 14, 1995, an investigator for the FDA, accompanied by an
inspector from the State of Florida Board of Pharmacy, inspected the Company's
pharmacy in Florida. At the end of the inspection, the FDA investigator issued
an FDA Form-483, which is the form used by FDA investigators to identify any
observed or suspected noncompliance with the laws administered by the agency.
The FDA Form-483 identified the facility as a pharmacy/repackager and listed
three observations related to certain requirements that the FDA typically
imposes on manufacturers of sterile products. The Company advised the FDA in
December 1995 that the Company believes it is not, within the statutory or
regulatory meaning of these terms, a repackager or a manufacturer. A second
inspection of the same facility occurred on June 26, 1997, in which the FDA
investigator was again accompanied by
8
Florida pharmacy authorities. The FDA investigator issued a substantially
identical FDA Form-483 at the end of that inspection. The Florida State Board of
Pharmacy did not issue any deficiencies regarding the operations of this
pharmacy in either of these inspections.
On March 16, 1992, the FDA issued a Compliance Policy Guide (CPG
460.200), which explains the criteria the FDA uses to distinguish between
pharmacy operations that are properly regulated under state law and drug
manufacturing regulated by the FDA. The Company's response to the FDA in
December 1995 cited this CPG and explained the Company's contention that,
according to the FDA's own criteria, the facility is a pharmacy properly
regulated under state and local laws.
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 to the Federal Food, Drug and Cosmetic Act. In
this provision, Congress clarified a gray area by explicitly identifying the
circumstances in which pharmacies may compound drugs without the need for filing
a New Drug Application, observing the FDA's Good Manufacturing Practice
regulations or complying with certain other specific Federal Food, Drug and
Cosmetic Act requirements. 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, as a result of this amendment, so long as it follows the
manufacturer's approved labeling in each case, and prepares drugs only for
identified individual patients using licensed practitioners, the Company's
activities should be regulated by the Florida State Board of Pharmacy and not be
subjected by the FDA to a full New Drug Application requirement demonstrating
the basic safety and effectiveness of the drugs.
If the Company is correct and its operations are limited to those
engaged in by pharmacies, there should be no material adverse effect from the
FDA Form-483s because the Company believes it is currently in compliance in all
material respects with applicable state and local laws. If the Company is deemed
to be a sterile product manufacturer or a sterile product repackager, it would
be subject to additional regulatory requirements. If for some reason the FDA or
other legal authorities decide that the Company must file for approval of a New
Drug Application, such an event could have a material adverse effect on the
Company.
There can be no assurance that future legislation, future rulemaking or
active enforcement by the FDA of a determination that the Company is a drug
manufacturer will not have a material adverse effect on the business of the
Company.
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 Company believes
that it is in compliance with such 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.
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 within 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-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
9
("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 Health Insurance Portability and Accountability Act of 1996
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 arrangements or proposed arrangements. Advisory opinions are
binding as to the Secretary and the party requesting the opinion.
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 recently 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 HCFA published proposed regulations implementing
Stark II. The proposed rules provide interpretations of the Stark II provisions,
some of which are more restrictive than previously assumed. As of the date
hereof, it is impossible to predict when the proposed rules will be published in
final form or what changes may be made to the rules before they are finalized.
The financial or other impact of the anti-referral provisions of Stark II 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.
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-injectable 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 appointed an employee trained as a lawyer as Vice President of
Administration, arranged for
10
compliance reviews conducted by outside advisors and 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 Priority Healthcare Pharmacy 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 1999, the Company's revenues included no reimbursement from Medicare
and Medicaid. 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 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 1999 included no 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 31, 1999, the Company had approximately 225 full-time
equivalent employees. None of the Company's employees is currently represented
by a labor union or other labor organization. Approximately 8% of the employees
are pharmacists or nurses. The Company believes that its relationship with its
employees is good.
11
ITEM 2. PROPERTIES.
The Company's headquarters and a specialty pharmacy facility are
located in Lake Mary, Florida, and consist of approximately 46,500 square feet
of space leased through December 2004. Priority Healthcare Distribution has a
19,300 square foot distribution center in Tustin, California, which is leased
through November 2000 and a 36,000 square foot distribution center in Grove
City, Ohio, which is leased through July 2002. Priority Healthcare Distribution
also has a 1,200 square foot sales office in San Ramon, California, which is
leased through April 2001. Priority Healthcare Pharmacy has a 1,500 square foot
specialty pharmacy and administrative office in Philadelphia, Pennsylvania,
which is leased through April 2004.
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.
Overall, the Company believes that its facilities are suitable and
adequate for its current needs, and for projected internal growth through at
least 2001.
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 31, 1999, 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 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.
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.
12
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 1999.
EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION
------------------ --- ------------------------------------------
William E. Bindley 59 Chairman of the Board
Robert L. Myers 54 President, Chief Executive Officer and
Director
Steven D. Cosler 44 Executive Vice President and Chief
Operating Officer and Director
Donald J. Perfetto 53 Executive Vice President, Chief Financial
Officer, Treasurer and Director
Guy F. Bryant 41 Executive Vice President and Chief
Marketing Officer
Melissa E. McIntyre 39 Vice President--Clinical Services
Barbara J. Luttrell 59 Vice President--Administration
William M. Woodard 41 Vice President--Strategic Alliances
WILLIAM E. BINDLEY is the Chairman of the Board, Chief Executive
Officer and President of BWI, positions he has held since founding BWI in 1968.
He is also a director of BWI 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 the President of the Company since July 1996
and the Chief Executive Officer of the Company since May 1997. 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 became Executive Vice President and Chief Operating
Officer in January 2000. 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. From April 1992 to October 1995, he was senior
vice president of Coresource, a managed care and third party administrator. From
November 1995 to June 1996, Mr. Cosler performed independent consulting
services. Mr. Cosler has served as a director of the Company since February
2000.
DONALD J. PERFETTO became Executive Vice President in November 1998.
Prior to that time and since June 1997 he was a Vice President. Mr. Perfetto
also has served as Chief Financial Officer and Treasurer of the Company since
June 1997. From 1986 to May 1997, he was 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.
GUY F. BRYANT serves as the Executive Vice President and Chief
Marketing Officer, a position that he has held 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.
13
MELISSA E. MCINTYRE, RN, OCN, is the Vice President--Clinical Services
of the Company, a position that she has held 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.
BARBARA J. LUTTRELL is the Vice President--Administration of the
Company, a position she has held since May 1997. Prior to joining the Company in
January 1997, she was employed by Physician's Alliance, a physician group, as
director of human resources since September 1996. She attended law school from
May 1993 to December 1995 and practiced as an attorney from May 1996 to
September 1996. From December 1995 to May 1996, Ms. Luttrell prepared for the
bar examination. Ms. Luttrell has 16 years of experience in human resource
management.
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.
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 2000 Annual Meeting of Shareholders.)
14
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 May 4, 1999, a 3-for-2 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 April 20, 1999. The prices
set forth below, adjusted to reflect retroactively the May 1999 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 31, 1998 and December 31, 1999.
As of March 3, 2000, there were 87 holders of record of the Company's Class B
Common Stock.
HIGH LOW
----- -----
1998:
First Quarter 12.17 8.83
Second Quarter 13.50 11.33
Third Quarter 16.17 10.83
Fourth Quarter 35.96 13.17
1999:
First Quarter 33.58 18.17
Second Quarter 42.75 29.58
Third Quarter 48.75 22.63
Fourth Quarter 30.75 19.13
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 3, 2000,
there were 715 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 1999 that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
(a) On October 13, 1999, the Company issued 1,212 shares of Class B
Common Stock to its four non-employee Directors as the stock
portion of their annual retainer.
(b) On September 10, 1999, the Company issued 6,530 shares of Class B
Common Stock to Monitors Unlimited, Inc.
(c) On May 4, 1999, all of the 12,578,973 shares of the Company's
Common Stock outstanding on the record date of April 20, 1999 were
split on a 3-for-2 basis, paid as a stock dividend.
The transactions described in paragraphs (a) and (b) above are exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
15
The transaction described in paragraph (c) above was exempt from the
registration requirements of the Securities Act because it did not involve a
"sale" of a security within the meaning of Section 2(3) of the Securities Act.
USE OF PROCEEDS
The Company's Registration Statement on Form S-1 (File No. 333-34463)
was declared effective on October 23, 1997. The Company registered 3,450,000
shares of Class B Common Stock, all of which were sold in a firm commitment
underwriting at an aggregate offering price to the public of $33,350,000. After
the underwriters' discount of $2,334,500, the Company received proceeds
aggregating $31,015,500 before expenses of the Offering.
Through December 31, 1999, the aggregate amount of expenses incurred
for the Company's account in connection with the issuance and distribution of
its Class B Common Stock was $1,048,000. Included in the offering expenses is
$156,000 that was paid to BWI for services provided by BWI to facilitate the
marketing and sale of the Offering. None of the other expenses were direct or
indirect payments to affiliates.
The net offering proceeds to the Company, after deducting the
underwriters' discount and offering expenses, was $30.0 million. As of December
31, 1999, $16.7 million of the net offering proceeds have been used to repay
indebtedness to BWI, and the balance was used in the Company's stock repurchase
program.
16
ITEM 6. SELECTED FINANCIAL DATA.
In 1993, BWI acquired substantially all of the assets of Charise
Charles, Ltd., Inc. Since that time six 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 DECEMBER 31,
1995 1996 1997 1998 1999
------------------------------------------------------------------
(000'S OMITTED, EXCEPT SHARE DATA)
STATEMENT OF EARNINGS DATA:
Net sales......................... $ 123,990 $ 158,247 $ 230,982 $ 275,626 $ 427,887
Cost of products sold............. 111,448 141,074 207,755 244,485 375,263
Gross profit...................... 12,542 17,173 23,227 31,141 52,624
Selling, general and
administrative expense.......... 7,836 8,443 10,620 13,989 21,228
Depreciation and
amortization.................... 998 1,009 1,161 1,234 1,290
Earnings from operations.......... 3,708 7,721 11,446 15,918 30,106
Stock option expense.............. -- -- 350 -- --
Interest expense (income), net.... 511 437 887 (916) (3,432)
Earnings before income taxes...... 3,197 7,284 10,209 16,834 33,538
Provision for income taxes........ 1,311 2,915 4,058 6,691 12,844
Net earnings...................... $ 1,886 $ 4,369 $ 6,151 $10,143 $20,694
Earning per share :.... ..........
Basic............ $ .12 $ .29 $ .39 $ .54 $1.02
Diluted.......... $ .12 $ .29 $ .39 $ .54 $1.00
Weighted average
shares outstanding :..........
Basic............ 15,321,429 15,321,429 15,934,411 18,772,974 20,251,703
Diluted.......... 15,321,429 15,321,429 15,939,883 18,854,041 20,767,821
DECEMBER 31,
1995 1996 1997 1998 1999
--------------------------------------------------------------
BALANCE SHEET DATA:
Working capital.................. $16,000 $20,792 $57,488 $61,875 $145,770
Receivable from BWI ............. -- -- 5,290 16,517 --
Total assets..................... 41,584 57,220 91,728 107,519 217,704
Payable to BWI................... 3,873 9,290 -- -- --
Long-term obligations............ 751 560 272 -- --
Note payable to BWI.............. -- -- 6,000 -- --
Total liabilities................ 16,553 27,820 31,845 37,478 59,097
Shareholders' equity............. 25,031 29,400 59,883 70,041 158,607
17
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
Priority Healthcare Corporation was 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 ("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.
Priority Healthcare Corporation provides specialty pharmaceuticals and
related medical supplies as well as disease treatment services to the
office-based physician, outpatient renal dialysis 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, 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, Grove Way Pharmacy, a
vaccine and injectable drug distributor, in August 1997, Pharmacy Plus, Ltd., a
specialty pharmacy, in April 1999, and Monitors Unlimited, Inc., a distributor
in the oral surgery market, in September 1999. 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 and
Monitors Unlimited are now included in our Priority Healthcare Distribution
division, and IV-1, Inc. (which now is named Priority Healthcare Pharmacy, Inc.
and includes the operations of IV-One Services, Inc. and National Pharmacy
Providers, Inc., which merged into IV-1, Inc. on December 31, 1998) and Pharmacy
Plus comprise the Priority Healthcare Pharmacy division. During 1997, 1998 and
1999, Priority Healthcare Distribution represented 92%, 88% and 77% of net
sales, respectively, and Priority Healthcare Pharmacy represented the balance.
Historically, Priority Healthcare Pharmacy has generated substantially higher
margins than Priority Healthcare Distribution and has contributed a significant
portion of our earnings.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
NET SALES. Net sales increased to $427.9 million in 1999 from $275.6
million in 1998, an increase of 55%. 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 $52.6 million in 1999 from
$31.1 million in 1998, an increase of 69%. The increase in gross profit
reflected increased sales by both Priority Healthcare Distribution and Priority
Healthcare Pharmacy and the acquisitions of Pharmacy Plus and Monitors
Unlimited. Gross profit as a percentage of net sales increased in 1999 to 12.3%
from 11.3% in 1998. This increase was primarily attributable to the change
18
in sales mix resulting from the significant increase in sales by Priority
Healthcare Pharmacy which generated higher gross margins than those of Priority
Healthcare Distribution sales. Competition continues to exert pressure on
margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative ("SGA") expense increased to $21.2 million in 1999 from $14.0
million in 1998, an increase of 52%. SGA expense as a percentage of net sales
decreased to 5.0% in 1999 from 5.1% in 1998. 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 and the acquisitions of Pharmacy Plus and Monitors
Unlimited. The decrease in SGA expense as a percentage of net sales resulted
from the spreading of fixed costs over a larger sales base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization ("D&A)
increased to $1.3 million in 1999 from $1.2 million in 1998, an increase of 5%.
The increase in D&A was primarily the result of depreciation of new equipment,
particularly management information systems, offset, in part, by a decrease in
amortization of intangible assets that became fully amortized.
INTEREST INCOME, NET. Interest income, net, increased to $3.4 million
in 1999 from $916,000 in 1998, an increase of 275%. In 1999, interest income of
$2.8 million was primarily related to amounts earned by investing cash and funds
received from the June and July 1999 secondary public offering of our Class B
Common Stock (the "Secondary Offering") 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. In 1998, interest income of
$348,000 and $1.1 million was primarily related to amounts earned by investing
funds received from the IPO in overnight repurchase agreements with a major
financial institution and loaning funds to BWI, respectively. This interest
income was partially offset by interest expense of $326,000 on the subordinated
note issued to BWI on March 31, 1997 (which was paid September 30, 1998) and
interest expense of $155,000 on the deferred compensation of one of our
executives. The interest income or expense on the loans to or borrowings from
BWI is calculated by applying BWI's average incremental borrowing rate, which
was 5.4% and 6.3% for 1999 and 1998, respectively, to the average outstanding
balances. During 1999 and 1998 the average outstanding loans to BWI were $12.3
million and $16.9 million, respectively.
INCOME TAXES. For the year ended December 31, 1999, we will separately
file consolidated federal and state income tax returns. Through December 31,
1998, we participated in the consolidated federal and state income tax returns
filed by BWI. BWI charged federal and state income tax expense to us as if we
filed our own separate federal and state income tax returns. The provision for
income taxes in 1999 and 1998 represented 38.3% and 39.7%, respectively, of
earnings before taxes. During 1999, we implemented selected tax strategies which
reduced our effective tax rate.
1998 COMPARED TO 1997
NET SALES. Net sales increased to $275.6 million in 1998 from $231.0
million in 1997, an increase of 19%. The growth reflected primarily the addition
of new customers, new product introductions (including Rebetron), additional
sales to existing customers and, to a lesser extent, the acquisition of Grove
Way Pharmacy and inflationary price increases.
GROSS PROFIT. Gross profit increased to $31.1 million in 1998 from
$23.2 million in 1997, an increase of 34%. The increase in gross profit
reflected increased sales by both Priority Healthcare Distribution and Priority
Healthcare Pharmacy. Gross profit as a percentage of net sales increased in 1998
to 11.3% from 10.1% in 1997. This increase was primarily attributable to the
change in sales mix resulting from the significant increase in sales by Priority
Healthcare Pharmacy which generated higher gross margins than those of Priority
Healthcare Distribution. Competition continues to exert pressure on margins,
particularly those of Priority Healthcare Distribution.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. SGA expense increased to
$14.0 million in 1998 from $10.6 million in 1997, an increase of 32%. SGA
expense as a percentage of net sales increased to 5.1% in 1998 from 4.6% in
1997. 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 increase in SGA expense as a percentage of net sales resulted from incurring
expenses associated
19
with our Grove City, Ohio facility, which opened in November 1997, training and
payroll costs from hiring additional sales personnel at Priority Healthcare
Pharmacy, and increased overall costs of being a publicly traded company.
DEPRECIATION AND AMORTIZATION. D&A was $1.2 million in both 1998 and
1997.
INTEREST INCOME, NET. Interest income, net, equaled $916,000 in 1998 as
opposed to interest expense, net, which equaled $887,000 in 1997. In 1998,
interest income of $348,000 and $1.1 million was primarily related to amounts
earned by investing funds received from the IPO in overnight repurchase
agreements with a major financial institution and loaning funds to BWI,
respectively. This interest income was partially offset by interest expense of
$326,000 on the subordinated note issued to BWI on March 31, 1997 (which was
paid September 30, 1998) and interest expense of $155,000 on the deferred
compensation of one of our executives. During 1997 the interest expense was
primarily related to borrowings from BWI and $324,000 of interest expense on the
subordinated note issued to BWI. The interest income or expense on the loans to
or borrowings from BWI is calculated by applying BWI's average incremental
borrowing rate, which was 6.3% and 6.4% for 1998 and 1997, respectively, to the
average outstanding balances. During 1998 the average outstanding loans to BWI
were $16.9 million, while in 1997 the average outstanding borrowings from BWI
were $10.3 million.
INCOME TAXES. Through December 31, 1998, we participated in the
consolidated federal and state income tax returns filed by BWI. BWI charged
federal and state income tax expense to us as if we filed our own separate
federal and state income tax returns. The provision for income taxes in 1998 and
1997 represented 39.7% and 39.8%, respectively, of earnings before taxes.
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 $24.8 million, marketable
securities of $56.8 million and working capital of $145.8 million at December
31, 1999. In addition, we have a $10.0 million unsecured line of credit which
has not been used during the two years ended December 31, 1999.
NET CASH PROVIDED BY OPERATING ACTIVITIES. Our operations generated
$3.8 million in cash during 1999. Accounts receivable, net of acquisitions,
increased $31.8 million, primarily to support the increase in sales and the
extension of credit terms to meet competitive conditions. Inventory, net of
acquisitions, increased $6.0 million in 1999 primarily to support the increase
in sales. The $19.9 million increase in accounts payable partially reduced the
cash requirements for accounts receivable; this increase was attributable to the
increase in inventory, the timing of payments and the credit terms negotiated
with vendors. We anticipate that our operations may require cash to fund our
growth. D&A totaled $1.3 million in 1999.
NET CASH USED BY INVESTING ACTIVITIES. In 1999 we purchased $56.8
million of marketable securities with a portion of the funds received from the
Secondary Offering. Effective April 12, 1999, we acquired the majority of the
operating assets of Pharmacy Plus, Ltd., a specialty pharmacy in Philadelphia,
Pennsylvania, for $3.5 million and effective September 2, 1999, we acquired the
majority of the operating assets of Monitors Unlimited, Inc., a distributor in
the oral surgery market, for $1.0 million. In 1999 we purchased $1.6 million in
fixed assets, primarily computer hardware and software, furniture and equipment
for the new corporate facility and transportation equipment. We expect that
capital expenditures during 2000 will be approximately $1.5 million. We
anticipate that these expenditures will relate primarily to the purchase of
computer hardware and software and telecommunications equipment.
20
NET CASH PROVIDED BY FINANCING ACTIVITIES. In June and July 1999 we
received $96.1 million from our Secondary Offering. We also had advanced excess
cash to BWI on an interest-bearing basis under the terms of a $25.0 million
Revolving Credit Promissory Note which was effective through December 31, 1999.
On December 30, 1999 all outstanding amounts were paid in full on such Note.
During 1999 our receivable from BWI decreased by $16.5 million. Also during 1999
we received proceeds of $2.1 million, including the income tax benefit, from
stock option exercises. From August to December 1999, we purchased treasury
stock for $30.3 million because our management team felt the market undervalued
our stock.
We believe that the net proceeds from the Secondary Offering, cash from
operations and availability under our line of credit will be sufficient to meet
our working capital needs for at least two years.
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.
YEAR 2000 ISSUES
During the past three years, we replaced our hardware and software
systems for reasons other than year 2000 compliance. One software package was
upgraded during 1999 to be year 2000 compliant. The total cumulative costs
relating to the upgrade of our software programs was approximately $75,000.
Year 2000 issues have not had a material adverse effect on our
operations and we believe that we successfully avoided any significant
disruption from the year 2000 issue.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements which represent
our expectations or beliefs, and which involve certain risks and uncertainties,
including but not limited to, changes in interest rates, competitive pressures,
changes in customer mix, financial stability of major customers, investment
procurement opportunities, changes in governmental regulations or the
interpretation thereof and asserted and unasserted claims which could cause
actual results to differ from those in the forward-looking statements. For this
purpose, any statement contained in this report that is not a statement of
historical fact may be deemed to be a forward-looking statement. These
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.
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.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(000'S OMITTED, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
1997 1998 1999
----------------------------------------------
Net sales ................................. $ 230,982 $ 275,626 $ 427,887
Cost of products sold ..................... 207,755 244,485 375,263
------------ ------------ ------------
Gross profit .............................. 23,227 31,141 52,624
Selling, general and administrative expense 10,620 13,989 21,228
Depreciation and amortization ............. 1,161 1,234 1,290
------------ ------------ ------------
Earnings from operations .................. 11,446 15,918 30,106
Stock option expense ...................... 350 -- --
Interest income (expense), net ............ (887) 916 3,432
------------ ------------ ------------
Earnings before income taxes .............. 10,209 16,834 33,538
------------ ------------ ------------
Provision for income taxes:
Current ......................... 4,495 6,875 13,615
Deferred ........................ (437) (184) (771)
------------ ------------ ------------
4,058 6,691 12,844
------------ ------------ ------------
Net earnings .............................. $ 6,151 $ 10,143 $ 20,694
============ ============ ============
Earnings per share:
Basic ........................... $ .39 $ .54 $ 1.02
Diluted ......................... $ .39 $ .54 $ 1.00
Weighted average shares outstanding:
Basic ............................ 15,934,411 18,772,974 20,251,703
Diluted ......................... 15,939,883 18,854,041 20,767,821
See accompanying notes to consolidated financial statements.
22
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED, EXCEPT SHARE DATA)
DECEMBER 31,
1998 1999
-----------------------
ASSETS:
Current assets:
Cash and cash equivalents ............................................... $ 2 $ 24,814
Marketable securities ................................................... -- 56,795
Receivables, less allowance for doubtful accounts of
$778 and $1,764, respectively ................................ 56,825 88,793
Receivable from BWI ..................................................... 16,517 --
Finished goods inventory ................................................ 24,387 30,920
Deferred income taxes ................................................... 1,145 1,685
Other current assets .................................................... 284 1,860
--------- ---------
99,160 204,867
Fixed assets, net ............................................................ 1,820 2,562
Deferred income taxes ........................................................ -- 38
Other assets ................................................................. -- 469
Intangibles, net ............................................................. 6,539 9,768
--------- ---------
Total assets .................................................. $ 107,519 $ 217,704
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable ........................................................ $ 33,857 $ 53,897
Other current liabilities ............................................... 3,428 5,200
--------- ---------
37,285 59,097
Deferred income taxes ........................................................ 193 --
--------- ---------
Total liabilities ....................................................... 37,478 59,097
--------- ---------
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, 15,000,000 shares authorized, (and split
adjusted) 15,321,429 and 5,241,422 issued and outstanding,
respectively ............................................. 153 52
Class B, $0.01 par value, 40,000,000 shares authorized, (and split
adjusted) 3,452,214 and 16,642,434 issued and outstanding,
respectively ............................................. 35 167
Additional paid in capital ......................................... 52,859 151,036
Retained earnings .................................................. 16,994 37,688
--------- ---------
70,041 188,943
Less: Common stock in treasury (at cost), no shares in 1998
and 1,304,858 shares in 1999 ...................... -- (30,336)
--------- ---------
Total shareholders' equity .................................... 70,041 158,607
--------- ---------
Total liabilities and shareholders' equity .................... $ 107,519 $ 217,704
========= =========
See accompanying notes to consolidated financial statements.
23
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
YEARS ENDED DECEMBER 31,
1997 1998 1999
----------------------------------
Cash flow from operating activities:
Net income ................................................. $ 6,151 $ 10,143 $ 20,694
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation and amortization ......................... 1,161 1,234 1,290
Provision for doubtful accounts ....................... 283 221 1,655
Loss on disposal of fixed assets ...................... 126 -- 280
Compensation expense on stock and option grants ....... 365 15 30
Deferred income taxes ................................. (437) (184) (771)
Change in assets and liabilities, net of acquisitions:
Accounts receivable ................................... (13,832) (13,403) (33,499)
Finished goods inventory .............................. (8,554) 695 (6,004)
Trade accounts payable ................................ 5,992 10,677 19,944
Other current assets and liabilities .................. 877 1,018 196
-------- -------- --------
Net cash (used in) provided by operating
activities ......................................... (7,868) 10,416 3,815
-------- -------- --------
Cash flow from investing activities:
Purchase of marketable securities .......................... -- -- (56,795)
Purchase of fixed assets ................................... (727) (825) (1,609)
Proceeds from sale of fixed assets ......................... -- -- 47
Increase in other assets ................................... -- -- (469)
Acquisition of businesses .................................. (250) -- (4,536)
-------- -------- --------
Net cash used in investing activities ................. (977) (825) (63,362)
-------- -------- --------
Cash flow from financing activities:
Net change in amounts due to /from BWI ..................... (14,580) (11,227) 16,517
Repayment of subordinated note payable to BWI .............. -- 6,000) --
Payments on long-term obligations .......................... (288) (272) --
Proceeds from stock option exercises and related tax
benefit .................................................. -- -- 2,105
Payments for purchase of treasury stock .................... -- -- (30,336)
Proceeds from secondary stock offering, net ................ -- -- 96,073
Proceeds from initial public offering, net ................. 29,967 -- --
-------- -------- --------
Net cash provided by (used in) financing
activities ......................................... 15,099 (17,499) 84,359
-------- -------- --------
Net increase (decrease) in cash ................................. 6,254 (7,908) 24,812
Cash and cash equivalents at beginning of period ................ 1,656 7,910 2
-------- -------- --------
Cash and cash equivalents at end of period ...................... $ 7,910 $ 2 $ 24,814
======== ======== ========
Supplemental cash flow information:
Interest paid .............................................. $ 1,040 $ 361 $ --
Income taxes paid .......................................... $ 4,495 $ 6,875 $ 14,085
See accompanying notes to consolidated financial statements.
24
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
-------------------------- ----------------------- -----------------------
SHARES SHARES TREASURY
OUTSTANDING AMOUNT OUTSTANDING AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 ............... 15,321,429 $ 153 -- $ -- -- $ --
Net earnings .............................
Dividend to BWI ..........................
Issuance of Class B common stock:
Initial public offering ........... 3,450,000 35
Board of Directors' compensation .. 1,383
Stock option grant .......................
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 ............... 15,321,429 153 3,451,383 35 -- --
Net earnings .............................
Issuance of Class B common stock:
Board of Directors' compensation . 831
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1998 ............... 15,321,429 153 3,452,214 35 -- --
Net earnings .............................
Issuance of Class B common stock:
Secondary public offering ........ 2,990,000 30
Stock option exercises and related
tax benefit ........... 130,560 1
Board of Directors' compensation . 1,212
Repurchase of common stock ....... (1,304,858) (30,336)
Conversions from Class A ......... (10,080,007) (101) 10,068,448 101
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 ............... 5,241,422 $ 52 16,642,434 $ 167 (1,304,858) $ (30,336)
=========== =========== =========== =========== =========== ===========
ADDITIONAL
PAID IN RETAINED SHAREHOLDERS'
CAPITAL EARNINGS EQUITY
----------- ----------- -------------
Balances at December 31, 1996 ............... $ 22,547 $ 6,700 $ 29,400
Net earnings ............................. 6,151 6,151
Dividend to BWI .......................... (6,000) (6,000)
Issuance of Class B common stock:
Initial public offering ........... 29,932 29,967
Board of Directors' compensation .. 15 15
Stock option grant ....................... 350 350
----------- ----------- -----------
Balances at December 31, 1997 ............... 52,844 6,851 59,883
Net earnings ............................. 10,143 10,143
Issuance of Class B common stock:
Board of Directors' compensation . 15 15
----------- ----------- -----------
Balances at December 31, 1998 ............... 52,859 16,994 70,041
Net earnings ............................. 20,694 20,694
Issuance of Class B common stock:
Secondary public offering ........ 96,043 96,073
Stock option exercises and related
tax benefit ........... 2,104 2,105
Board of Directors' compensation . 30 30
Repurchase of common stock ....... (30,336)
Conversions from Class A ......... --
----------- ----------- -----------
Balances at December 31, 1999 ............... $ 151,036 $ 37,688 $ 158,607
=========== =========== ===========
See accompanying notes to consolidated financial statements.
25
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. The Company
now operates as a national distributor of specialty pharmaceuticals and related
medical supplies to the alternate site healthcare market and is a provider of
patient-specific, self-injectable biopharmaceuticals and disease prevention
programs to individuals with chronic diseases.
See discussions regarding recapitalization and distribution of the Class A
Common Stock owned by BWI in Note 10--Capital Stock.
During 1997 and 1998 the consolidated financial statements of the Company
included certain allocations of corporate overhead and other expenses incurred
by BWI on behalf of the Company. These expenses and the basis of allocations are
discussed in Note 2--Related Party Transactions. The Company's financial
statements during 1997 and 1998 are not necessarily indicative of the results
the Company would have reported had it existed as a stand-alone public entity,
or of the financial position, results of operations and cash flows of the
Company in the future.
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.
REVENUE RECOGNITION. Revenues are recognized when products are shipped to
unaffiliated customers with appropriate provisions recorded for estimated
discounts and allowances.
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 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. Receivables include trade and patient account receivables and the
current portion of trade receivables that have been converted to notes
receivable.
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)
-----------
Furnishings........................... 5
Leasehold improvements................ 5-12
Transportation and other equipment.... 3-5
26
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 31, 1998 and December 31, 1999, 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. At December
31, 1998 and December 31, 1999, management has determined no impairments
existed. 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.
EARNINGS PER SHARE. Historical 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:
(In Thousands)
1997 1998 1999
------- ------- ------
Weighted average number of Class A and Class B
Common shares outstanding used as the denominator
in the basic earnings per share calculation 15,934 18,773 20,252
Additional shares assuming exercise of dilutive
stock options 6 81 516
------- ------- ------
Weighted average number of Class A and Class B
Common and equivalent shares used as the denominator
in the diluted earnings per share calculation 15,940 18,854 20,768
====== ====== ======
Unaudited pro forma earnings per share. Unaudited pro forma earnings per
share was $0.36 for the year ended December 31, 1997, and was calculated by
dividing pro forma net earnings of $6,248,000 by pro forma average shares
outstanding of 17,145,343. The pro forma adjustments to reported net earnings
reflect, on a net of tax basis (i) additional legal, audit, risk management and
administrative costs required to present the Company as if it had operated as a
stand-alone public company for all of 1997, (ii) the elimination of the interest
expense associated with the Company's payable to BWI, which was liquidated with
proceeds from the IPO and (iii) three months of additional interest expense on
the $6.0 million note payable on the dividend to BWI, as if it was outstanding
as of January 1, 1997. The pro forma average shares outstanding amount includes
an incremental number of Class B shares required to be issued to liquidate the
payable to BWI. This amount was calculated by dividing the average balance of
the payable to BWI from January 1, 1997 through the IPO date by the net proceeds
per share from the IPO.
INCOME TAXES. For the year ended December 31, 1999, the Company will
separately file consolidated federal and state income tax returns. Through
December 31, 1998, the Company participated in the consolidated federal and
state income tax returns filed by BWI. The Company was charged by BWI for
federal and state income tax expense as if the Company filed its own separate
federal and state income tax returns.
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 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 generally accepted accounting principles requires the use of estimates made
by management. Actual results could differ from those estimates.
27
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of cash and cash
equivalents, marketable securities, accounts receivable, receivable from BWI,
other current assets, accounts payable and other current liabilities approximate
their fair market values due to the short-term maturity of these instruments.
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
On October 29, 1997, the Company consummated an initial public offering
("IPO") of 3,000,000 shares of Class B Common Stock. An additional 450,000
shares of Class B Common Stock were sold on November 25, 1997 pursuant to the
exercise of the underwriters' overallotment option. Prior to the IPO, the
Company was a wholly-owned subsidiary of BWI. After the IPO, BWI owned over 80%
of the Company's outstanding capital stock. On October 23, 1998, the Board of
Directors of BWI declared a distribution payable on December 31, 1998 to the
holders of BWI common stock of the 15,321,429 shares of Priority Class A Common
Stock owned by BWI on the basis of .448 shares of Priority Class A Common Stock
for each share of BWI common stock outstanding on December 15, 1998, which was
the record date for the Distribution. The fraction of a share of Priority Class
A Common Stock that was distributed for each share of BWI Common Stock was based
upon the 10,214,286 shares of Priority Class A Common Stock owned by BWI divided
by the 22,782,545 shares of BWI Common Stock outstanding on the record date. The
Company and BWI have entered into certain related party transactions which are
described below. Had the Company operated as a stand-alone, non-public entity
for all periods presented, management believes the costs and expenses incurred
by the Company would not have differed materially from those reported in the
financial statements. In addition, the Company participated in the BWI profit
sharing plan, as discussed in Note 9--Profit Sharing Plan, through December 31,
1998.
BWI provided management and consulting services to the Company which
included, but were not limited to, legal, human resources, payroll and tax. The
Company was charged $65,000 during each of the years ended December 31, 1997 and
1998 for such services. These amounts were based on an allocation of the actual
services rendered by BWI and were calculated in a manner considered reasonable
by management.
The Company was also provided certain coverage under the BWI insurance
plans. These expenses were charged to the Company based on a combination of a
pro rata allocation and the push-down of actual expenses incurred, depending on
the type of expenditure. These methods are considered reasonable by management.
This insurance expense was $151,000 and $163,000 for 1997 and 1998,
respectively.
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. In 1997 (until the October 24, 1997 date of the IPO), the Company borrowed
from BWI to finance its operations, those borrowings offset in part by cash
collections from operations that were transferred to BWI. Net interest expense
attributable to those borrowings from BWI was $605,000 (net of $66,000 of
interest income) in 1997. Interest income attributable to loans to BWI was $1.1
million and $662,000 for 1998 and 1999, respectively. These amounts were
calculated by applying BWI's average incremental borrowing rate, which was 6.4%,
6.3% and 5.4% for 1997, 1998 and 1999, respectively, to the average outstanding
balances. During 1997 the average outstanding borrowings from BWI were $10.3
million. During 1998 and 1999 the average outstanding loans to BWI were $16.9
million and $12.3 million, respectively.
On March 31, 1997, the Company declared and paid a dividend to BWI in the
form of a $6.0 million subordinated promissory note that was to become due on
March 31, 1999. The Company paid the note on September 30, 1998. The note
carried an interest rate of 7.25% per annum. For 1997 and 1998, interest expense
associated with this note totaled $324,000 and $326,000, respectively.
For 1997 and 1998, intercompany purchases of inventory from BWI (at the
price paid by BWI) totaled $2.0 million and $6.0 million, respectively. In 1999
purchases of inventory from BWI totaled $18.1 million and sales of inventory to
BWI totaled $6.8 million.
Certain employees of the Company were granted options to purchase BWI stock
under a BWI stock option plan. 155,750 and 15,000 such options were granted by
BWI to Company employees in 1996 and 1997 (prior to the
28
IPO), respectively, with exercise prices equal to the market price of the BWI
stock at the date of grant. No compensation expense was recognized on any BWI
option grants pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". If the Company had recognized
compensation expense based on the grant date fair value of those options as
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation", net
income for the years ended December 31, 1997 and 1998 would have decreased
$377,000 and $54,000 , respectively, on a pro forma basis. See Note 10--Capital
Stock for a calculation of pro forma earnings per share required by SFAS No.
123. The weighted average fair value of each 1996 and 1997 BWI option granted of
$6.04 and $7.21, respectively, was estimated using the Black-Scholes option
pricing model, and certain assumptions relevant to those BWI options and the
underlying BWI common stock. On December 31, 1998, the unvested BWI stock
options were converted to options to purchase shares of Class B Common Stock of
the Company. See Note 10--Capital Stock.
NOTE 3--ACQUISITIONS
The Company acquired Grove Way Pharmacy effective August 6, 1997. This
acquisition was accounted for as a purchase and its results of operations are
included in the consolidated financial statements from the effective date of
acquisition. Grove Way Pharmacy was a specialty distributor of vaccines and
medical supplies to the physicians market. The consideration exchanged for Grove
Way Pharmacy was approximately $250,000, which exceeded the fair value of net
assets acquired and resulted in approximately $156,000 of intangibles. These
intangibles include a three-year noncompete with the prior owner. The results of
operations of Grove Way Pharmacy for the pre-acquisition period in 1997 were not
material to the Company's consolidated sales and net earnings.
On April 12, 1999, the Company completed an acquisition of the majority of
the operating assets of Pharmacy Plus, Ltd., a specialty pharmacy in
Philadelphia, Pennsylvania, that primarily provides injectable
biopharmaceuticals. 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. would not have been material to the results
of the Company for the periods presented in these financial statements.
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 $1.0 million,
which included approximately $245,000 for inventory and accounts receivable,
approximately $95,000 in assumed accounts payable debt, and resulted in
approximately $850,000 of goodwill. Additionally, contingent on related sales
volume during the third quarter of 2000, up to $200,000 of the Company's Class B
Common Stock may be payable to the sellers of Monitors Unlimited, Inc. The stock
is now being held in escrow. The results of operations of Monitors Unlimited,
Inc. would not have been material to the results of the Company for the periods
presented in these financial statements.
NOTE 4--MARKETABLE SECURITIES
Marketable securities are carried on the balance sheet at their market
value. They consist of the following:
DECEMBER 31,
1999
--------------
(IN THOUSANDS)
U.S. Government Agency Securities... $ 51,845
Commercial Paper........................ 4,950
--------
$ 56,795
========
The amortized cost of available-for-sale securities approximated their market
value at December 31, 1999. There were no marketable securities at December 31,
1998. There were no gross realized gains or losses on sales of
available-for-sale securities in 1999. All available-for-sale securities are due
in one year or less.
29
NOTE 5--FIXED ASSETS
Fixed assets at December 31, 1998 and 1999 consist of the following:
(IN THOUSANDS)
1998 1999
------- -------
Furnishings............................ $ 857 $ 1,083
Leasehold improvements................. 450 176
Transportation and other equipment..... 1,972 2,352
------- -------
3,279 3,611
Less: accumulated depreciation......... (1,459) (1,049)
------- -------
$ 1,820 $ 2,562
======= =======
NOTE 6--INTANGIBLES
Intangibles at December 31, 1998 and 1999 consist of the following:
(IN THOUSANDS)
1998 1999
------- -------
Goodwill........................ $ 6,019 $ 9,911
Accumulated amortization........ (768) (1,040)
------- -------
Goodwill, net................... 5,251 8,871
------- -------
Other........................... 4,001 1,639
Accumulated amortization........ (2,713) (742)
------- -------
Other, net...................... 1,288 897
------- -------
Intangibles, net................ $ 6,539 $ 9,768
======== ========
NOTE 7--SHORT-TERM BORROWINGS
The Company entered into an agreement with a major financial
institution on November 24, 1998 for a three year unsecured revolving credit
facility. The Company may use the entire $10.0 million credit facility for
letters of credit or direct borrowings. The Company made no direct borrowings
during 1998 or 1999. The annual interest rate on direct borrowings is a variable
rate equal to LIBOR plus thirty-seven and one-half basis points (0.375%). The
Company is also required to maintain all of its operating accounts with this
financial institution. The revolving credit facility contains covenants related
to fixed charge coverage, funded debt to capitalization and funded debt to
EBITDA ratios.
NOTE 8--INCOME TAXES
The provision for income taxes includes state income taxes of $669,000,
$1.1 million and $1.5 million in 1997, 1998 and 1999, respectively.
30
The following table indicates the significant elements contributing to the
difference between the U.S. federal statutory tax rate and the effective tax
rate:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
---- ---- ----
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........................................... 4.3% 4.2% 3.2%
Other.................................................... 0.5% 0.5% .1%
----- ---- ---
Effective rate................................................ 39.8% 39.7% 38.3%
==== ==== ====
Presented below are the significant elements of the net deferred tax balance
sheet accounts at December 31, 1998 and 1999:
1998 1999
------- ------
(IN THOUSANDS)
Deferred tax asset:
Receivables............................... $ 635 $ 944
Finished goods inventories................ 223 396
Deferred compensation and stock
option expense ......................... 287 378
Accrued expenses ......................... -- 345
------- ------
Total deferred tax assets............ 1,145 2,063
------- ------
Deferred tax liabilities:
Fixed assets............................... (86) (158)
Intangibles................................ (107) (182)
------- ------
Total deferred tax liabilities....... (193) (340)
------- ------
Total net deferred tax assets........................ 952 1,723
Less current deferred tax assets..................... $ (1,145) (1,685)
------- -------
Deferred tax assets (liabilities).................... $ (193) $ 38
======= ======
NOTE 9--PROFIT SHARING PLAN
The Company's eligible employees participated in the BWI qualified Profit
Sharing Plan ("BWI Plan") through December 31, 1998 at which time the Company
established its own qualified Profit Sharing Plan ("Profit Sharing Plan"). On
February 8, 1999, all employees of the Company and their account balances
transferred from the BWI Plan to the Company's 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 21 ("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 21.
The annual contribution of the Company to the BWI Plan was at the discretion of
the Board of Directors of BWI and for the Profit Sharing Plan is now at the
discretion of the Board of Directors of the Company and is generally 8% 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 contribution to the
BWI Plan with respect to the Company which is included as expense in the
statement of earnings for 1997 was $260,000. The contributions to the Profit
Sharing Plan which are included as expense in the statement of earnings for 1998
and 1999 were $394,000 and $350,000, 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.
31
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, including one fund under the BWI Plan consisting of BWI Common Stock.
Under the Company's Profit Sharing Plan, a Participant may elect to invest in
the Company's Class B Common Stock, but may not make additional investments in
BWI 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.
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 10--CAPITAL STOCK
On August 25, 1997, the Board of Directors and BWI, as the sole shareholder
of the Company, completed a recapitalization of the Company. Effective on that
date, the Company's capitalization consisted of: (i) 15,000,000 authorized
shares of Class A Common Stock, $0.01 par value, 15,321,429 (split adjusted)
shares of which were issued and outstanding and owned by BWI, (ii) 40,000,000
shares of Class B Common Stock, $0.01 par value (of which 3,450,000 shares were
subsequently issued in an initial public offering described in Note 2--Related
Party Transactions), and (iii) 5,000,000 shares of Preferred Stock, without par
value, none of which are issued and outstanding. This recapitalization has been
given retroactive effect in these consolidated financial statements. 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 two classes of Common Stock vote together, as a single class on all
matters except as otherwise required by applicable law.
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.
On October 29, 1997, the Company consummated an initial public offering of
3,000,000 shares of Class B Common Stock. An additional 450,000 shares of Class
B Common Stock were sold on November 25, 1997 pursuant to the exercise of the
underwriters' overallotment option. All shares were issued at an initial price
of $9.67 per share. Net proceeds to the Company, after deducting underwriting
discounts and commissions and other expenses of the offering, was $30.0 million.
On June 10, 1999, the Company consummated a secondary public offering of
2,600,000 shares of Class B Common Stock. An additional 390,000 shares of Class
B Common Stock were sold on July 1, 1999 pursuant to the exercise of the
underwriters' overallotment option. All shares were issued at a price of $34.00
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 2,000,000 shares of the Company's outstanding shares of Class B Common Stock.
This purchase was approved through August 23, 2000. As of December 31, 1999,
1,304,858 shares had been purchased at an average price of $23.25 and are
included in treasury stock. The Company purchased the treasury stock because
management felt the market undervalued the stock.
32
On October 29, 1997 and October 22, 1998, 1,383 and 831 shares,
respectively, of Class B Common Stock were granted to the two non-employee
directors of the Company, representing the stock portion of their annual
retainer for serving on the Board of Directors. Compensation expense relating to
these grants was $15,000 in both 1997 and 1998. On October 13, 1999, 1,212
shares of Class B Common Stock was granted to the four non-employee directors of
the Company, representing the stock portion of their annual retainer for serving
on the Board of Directors. Compensation expense relating to these grants was
$30,000 in 1999.
On December 31, 1998, BWI made a distribution to the holders of BWI Common
Stock of the 15,321,429 shares of Priority Class A Common Stock owned by BWI on
the basis of .448 shares of Priority Class A Common Stock for each share of BWI
Common Stock outstanding on December 15, 1998, which was the Record Date for the
Distribution. The fraction of a share of Priority Class A Common Stock that was
distributed for each share of BWI Common Stock was based upon the number of
shares of Priority Class A Common Stock owned by BWI divided by the number of
shares of BWI Common Stock outstanding on the Record Date.
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 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 2,875,000, subject
to adjustment in certain events. No individual participant may receive awards
for more than 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 and 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 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 37,500 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 1,500 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 600,000 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 40,000 shares to any one person.
33
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,
whether granted by the Company or by BWI as described in Note 2--Related Party
Transactions, as prescribed by SFAS No. 123, pro forma net income and earnings
would have been:
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
Net earnings - as reported .......... $ 6,151 $ 10,143 $ 20,694
Pro forma impact of
BWI option grants (Note 2) (377) (54) --
Pro forma impact of
Company option grants .... (224) (1,718) (4,049)
-------- -------- --------
Pro forma net earnings .............. $ 5,550 $ 8,371 $ 16,645
======== ======== ========
Pro forma earnings per share:
Basic ........................ $ 0.35 $ 0.45 $ 0.82
Diluted ...................... $ 0.35 $ 0.44 $ 0.80
The fair values of the Company's 1997, 1998 and 1999 option grants were
estimated on the date of grant using the Black-Scholes option pricing model,
with the following weighted average assumptions:
1997 1998 1999
-------- -------- --------
Risk free interest rate .............. 5.90% 5.02% 5.67%
Expected dividend yield .............. .00% .00% .00%
Expected life of options ............. 4.60 4.71 4.87
Volatility of stock price ............ 54.79% 55.94% 57.09%
Weighted average fair value of options $ 5.01 $ 6.43 $16.80
The Board of Directors granted a non-qualified stock option to a consultant
of the Company for 75,000 shares of Class B Common Stock effective at the
closing date of the IPO. This option granted to the consultant of the Company (a
non-employee under SFAS No. 123 and APB 25) resulted in $350,000 of compensation
expense that was recorded by the Company in October, 1997. The compensation
expense was determined based on the fair value of those options at the date of
grant as estimated by using the Black-Scholes option pricing model.
As discussed in Note 2--Related Party Transactions, prior to the IPO,
certain employees of the Company were granted options to purchase BWI stock
under a BWI stock option plan. On December 31, 1998, the unvested BWI stock
options held by these employees were converted to options to purchase 100,549
shares of Class B Common Stock of the Company. No compensation expense was
recorded on the conversion.
34
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, 1996........ -- --
Forfeited during 1997........................... (20,700) $ 9.67
Granted during 1997............................. 709,575 $ 9.68
Exercised during 1997........................... -- --
----------
Options outstanding at December 31, 1997
(0 shares exercisable).......................... 688,875 $ 9.68
Forfeited during 1998........................... (43,680) $ 10.61
Granted during 1998............................. 802,380 $ 12.43
Exercised during 1998........................... -- --
Converted from BWI during 1998.................. 100,549 $ 9.50
---------
Options outstanding at December 31, 1998
(0 shares exercisable).......................... 1,548,124 $ 11.07
Forfeited during 1999........................... (76,990) $ 19.52
Granted during 1999............................. 983,585 $ 30.89
Exercised during 1999........................... (130,560) $ 9.73
---------
Options outstanding at December 31, 1999
(320,493 shares exercisable).................... 2,324,159 $ 19.25
=========
Available for grant at December 31, 1999........ 1,057,781
=========
Additional information regarding the Company's options outstanding at
December 31, 1999 is shown below:
WEIGHTED AVERAGE
NUMBER OUTSTANDING REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES AT DECEMBER 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE
------------------------ -------------------- ---------------- ----------------
$ 8.16 to $13.33 1,363,758 8.53 Years $11.11
$25.58 to $35.94 960,401 9.47 Years $30.83
NOTE 11--COMMITMENTS
The Company leases warehouse and office space under noncancelable operating
leases expiring at various dates through 2004, with options to renew for various
periods. Minimum commitments under leases aggregate $812,000 for 2000, $758,000
for 2001, $705,000 for 2002, $651,000 for 2003 and $642,000 for 2004.
The consolidated rent expense for 1997, 1998 and 1999 was $515,000,
$635,000 and $674,000, respectively, of which approximately $89,000 in 1997,
$26,000 in 1998 and $370,000 in 1999 pertained to leases with terms of one year
or less.
NOTE 12--MAJOR CUSTOMERS AND OTHER CONCENTRATIONS
The Company services customers in 50 states and Puerto Rico. For the years
ended December 31, 1997, 1998 and 1999, the Company had one customer, Everest
Healthcare Services Corporation, which accounted for 11%, 12%, and 10%,
respectively, of the Company's revenues. 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 the Company's largest vendor accounted for
approximately 40% of total revenues in 1997, 32% in 1998 and 21% in 1999. In
addition, the sale of one product supplied by this vendor accounted for 35% of
35
revenues in 1997, 27% in 1998 and 18% in 1999. 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 also has another vendor whose products
accounted for approximately 11% of total revenues in 1999.
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 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 31, 1999, 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.
On November 14, 1995, an investigator for the Food and Drug Administration
(the "FDA"), accompanied by an inspector from the State of Florida Board of
Pharmacy, inspected the Company's pharmacy in Florida. At the end of the
inspection, the FDA investigator issued an FDA Form-483, which is the form used
by FDA investigators to identify any observed or suspected noncompliance with
the laws administered by the agency. The FDA Form-483 identified the facility as
a pharmacy/repackager and listed three observations related to certain
requirements that the FDA typically imposes on manufacturers of sterile
products. The Company advised the FDA in December 1995 that the Company believes
it is not, within the statutory or regulatory meaning of these terms, a
repackager or a manufacturer. A second inspection of the same facility occurred
on June 26, 1997, in which the FDA investigator was again accompanied by Florida
pharmacy authorities. The FDA investigator issued a substantially identical FDA
Form-483 at the end of that inspection. The Florida State Board of Pharmacy did
not issue any deficiencies regarding the operations of this pharmacy in either
of these inspections.
On March 16, 1992, the FDA issued a Compliance Policy Guide (CPG 460.200),
which explains the criteria the FDA uses to distinguish between pharmacy
operations that are properly regulated under state law and drug manufacturing
regulated by the FDA. The Company's response to the FDA in December 1995 cited
this CPG and explained the Company's contention that, according to the FDA's own
criteria, the facility is a pharmacy properly regulated under state and local
laws.
36
On November 21, 1997, the President signed into law the FDA Modernization
Act of 1997, which, among a number of other items, adds a new section on
pharmacy compounding to the Federal Food, Drug and Cosmetic Act. In this
provision, Congress clarified a gray area by explicitly identifying the
circumstances in which pharmacies may compound drugs without the need for filing
a New Drug Application, observing the FDA's Good Manufacturing Practice
regulations or complying with certain other specific Federal Food, Drug and
Cosmetic Act requirements. 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, as a result of this amendment, so long as it follows the
manufacturer's approved labeling in each case, and prepares drugs only for
identified individual patients using licensed practitioners, the Company's
activities should be regulated by the Florida State Board of Pharmacy and not be
subjected by the FDA to a full New Drug Application requirement demonstrating
the basic safety and effectiveness of the drugs.
If the Company is correct and its operations are limited to those engaged
in by pharmacies, there should be no material adverse effect from the FDA
Form-483s because the Company believes it is currently in compliance in all
material respects with applicable state and local laws. If the Company is deemed
to be a sterile product manufacturer or a sterile product repackager, it would
be subject to additional regulatory requirements. If for some reason the FDA or
other legal authorities decide that the Company must file for approval of a New
Drug Application, such an event could have a material adverse effect on the
Company.
There can be no assurance that future legislation, future rulemaking, or
active enforcement by the FDA of a determination that the Company is a drug
manufacturer will not have a material adverse effect on the business of the
Company.
37
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 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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, 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 expressed above.
PricewaterhouseCoopers LLP
Orlando, Florida
February 22, 2000
38
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 2000 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 2000 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 2000 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 2000 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.
39
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, 1997, December 31, 1998 and December 31, 1999
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1999
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, December 31, 1998 and
December 31, 1999
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1997, December 31, 1998
and December 31, 1999
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
40
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/ ROBERT L. MYERS
------------------------
Dated: March 13, 2000 Robert L. Myers
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 13, 2000
------------------------
William E. Bindley
/s/ ROBERT L. MYERS President, Chief Executive Officer and March 13, 2000
------------------------ Director (Principal Executive Officer)
Robert L. Myers
/s/ DONALD J. PERFETTO Chief Financial Officer and Director March 13, 2000
------------------------ (Principal Financial and Accounting
Donald J. Perfetto Officer)
/s/ STEVEN D. COSLER Executive Vice President and Chief March 13, 2000
------------------------- Operating Officer and Director
Steven D. Cosler
/s/ MICHAEL D. MCCORMICK Director March 13, 2000
-------------------------
Michael D. McCormick
/s/ RICHARD W. ROBERSON Director March 13, 2000
-------------------------
Richard W. Roberson
/s/ THOMAS J. SALENTINE Director March 13, 2000
-------------------------
Thomas J. Salentine
/s/ REBECCA M. SHANAHAN Director March 13, 2000
-------------------------
Rebecca M. Shanahan
41
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, 1997............. $ 815 $ 283 $ -- $(696) $ 402
Year ended December 31, 1998............. 402 221 -- 155 778
Year ended December 31, 1999............. 778 1,655 -- (669) 1,764
42
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 22, 2000, appearing in the Annual Report 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 22, 2000
43
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
- -------- ----------------------------------------------------------------------------------
3-A (7) Restated Articles of Incorporation of the Registrant.
3-B 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.
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-F (1) *(i) Employment Agreement between the Registrant and Melissa E.
McIntyre dated June 1, 1997; and (ii) Noncompete Agreement between the
Registrant and Melissa E. McIntyre dated June 1, 1997.
10-G (1) *(i) Employment Agreement between the Registrant and William M.
Woodard dated June 1, 1997; and (ii) Noncompete Agreement between the
Registrant and William M. Woodard dated June 1, 1997.
10-H * Form of Termination Benefits Agreement, dated January 1, 2000,
between the Registrant and each of Messrs. Bryant, Cosler and Perfetto.
10-I Form of Noncompete Agreement, dated January 1, 2000, between the
Registrant and each of Messrs. Bryant, Cosler and Perfetto.
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.
10-Q (5) *Profit Sharing Plan of Priority Healthcare Corporation and
Subsidiaries.
*(i)First Amendment to the Profit Sharing Plan of Priority
Healthcare Corporation and Affiliates.
*(ii)Second Amendment to the Profit Sharing Plan of Priority
Healthcare Corporation and Affiliates.
10-R (8) *Priority Healthcare Corporation 401(k) Excess Plan.
44
10-S (8) *(i) Employment Agreement between the Registrant and Guy F. Bryant
dated March 1, 1999; and
(8) (ii) Noncompete Agreement between the Registrant and Guy F. Bryant
dated March 1, 1999.
10-T (8) *(i) Employment Agreement between the Registrant and Steven D.
Cosler dated March 1, 1999; and
(8) (ii) Noncompete Agreement between the Registrant and Steven D.
Cosler dated March 1, 1999.
10-U (8) *(i) Employment Agreement between the Registrant and Donald J.
Perfetto dated March 1, 1999; and
(8) (ii) Noncompete Agreement between the Registrant and Donald J.
Perfetto dated March 1, 1999.
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
27 Financial Data Schedule.
- ----------
* 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.
45