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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

For the quarterly period ended March 29, 2003

OR

For the transition period from              to             

Commission file number 000-23249

PRIORITY HEALTHCARE CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (407) 804-6700

250 Technology Park, Suite 124

Lake Mary, Florida

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x             No ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes x             No ¨

As of April 21, 2003, the number of shares outstanding of each of the issuer’s classes of common stock were as follows:

Class A Common Stock – 6,812,607

Class B Common Stock – 36,757,951

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS

(000’s omitted, except share data)

(unaudited)

See accompanying notes to consolidated financial statements.

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PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED BALANCE SHEETS

(000’s omitted, except share data)

See accompanying notes to consolidated financial statements.

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PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000’s omitted)

(unaudited)

See accompanying notes to consolidated financial statements.

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PRIORITY HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Options to purchase 3.6 million and 1.3 million shares with exercise prices greater than the average market prices of common stock during the three-month periods ended March 29, 2003 and March 30, 2002 were outstanding at March 29, 2003 and March 30, 2002, respectively. These options were excluded from the respective computations of diluted earnings per share because their effect would be anti-dilutive.

In accordance with the provision of SFAS No. 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting for its stock option plans. Accordingly, the Company uses the intrinsic-value method of accounting for stock options granted to employees and does not currently recognize compensation expense for its stock option awards to employees in the consolidated statements of earnings. If the Company had elected to recognize compensation expense based on the fair value of the options at the grant date as prescribed by SFAS No. 123,

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pro forma net income and earnings would have been:

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Certain statements included in this quarterly report, which are not historical facts, are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our expectations or beliefs and involve certain risks and uncertainties including, but not limited to, changes in interest rates, competitive pressures, changes in customer mix, changes in third party reimbursement rates, financial stability of major customers, changes in government regulations or the interpretation of these regulations, changes in supplier relationships, growth opportunities, cost savings, revenue enhancements, synergies and other benefits anticipated from acquisition transactions, difficulties related to integrating acquired businesses, the accounting and tax treatment of acquisitions, and asserted and unasserted claims, which could cause actual results to differ from those in the forward-looking statements. The forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. You are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date herein.

Introduction

Priority Healthcare Corporation was formed in June 1994 to succeed to the business operations of companies previously acquired by Bindley Western Industries, Inc. (“BWI”). From our formation through our initial public offering, or IPO, on October 24, 1997, we operated as a wholly owned subsidiary of BWI, and procured a number of services from, and engaged in a number of financial and other transactions with, BWI. After the IPO, we continued to be controlled by BWI, but operated on a stand-alone basis. On

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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.

Priority is a national specialty pharmacy and distributor that provides biopharmaceuticals, complex therapies and related disease treatment programs and services to individuals with chronic diseases. We sell over 5,000 SKUs of specialty pharmaceuticals and medical supplies to outpatient renal care centers and office-based physicians in oncology and other physician specialty markets. Priority offers value-added services to meet the specific needs of these markets by shipping refrigerated pharmaceuticals overnight in special packaging to maintain appropriate temperatures, offering automated order entry services and offering customized distribution for group accounts. From distribution centers in Sparks, Nevada and Grove City, Ohio, we service over 4,000 customers in all 50 states, including office-based oncologists, renal dialysis clinics, ambulatory surgery centers and primary care physicians.

Priority also fills individual patient prescriptions, primarily for self-administered biopharmaceuticals. These patient-specific prescriptions are filled at licensed pharmacies in Lake Mary, Florida, Byfield, Massachusetts, New Castle, Delaware, Memphis, Tennessee, Oldsmar, Florida and New York, New York and are shipped directly to the patient overnight in specialized packages. We also provide disease treatment programs for hepatitis, cancer, infertility, hemophilia, human growth hormone deficiency, rheumatoid arthritis, Crohn’s disease, respiratory syncytial virus (RSV), pulmonary hypertension, pain management, multiple sclerosis and other diseases.

Results of Operations

The following table sets forth for the periods indicated, the percentages of net sales represented by the respective financial items:

Net sales increased to $351.5 million in the first three months of 2003 from $266.5 million in the first three months of 2002, an increase of 32%. The growth primarily reflected the addition of new customers, new product introductions, additional sales to existing customers, the acquisition of HOSS effective March 11, 2002 and inflationary price increases. The additional net sales attributed to the acquisition of HOSS in the first three months of 2003 (prior to March 11, 2003) represented approximately 2% of the total net sales in the first three months of 2003.

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Gross profit increased to $40.3 million in the first three months of 2003 from $29.8 million in the first three months of 2002, an increase of 35%. The increase in gross profit reflected increased sales and the acquisition of HOSS. Gross profit as a percentage of net sales increased in the first three months of 2003 to 11.5% from 11.2% in the first three months of 2002. This increase was primarily attributable to the change in sales mix, as higher margin products experienced increased sales. Competition continues to exert pressure on margins.

Selling, general and administrative (“SGA”) expense increased to $18.7 million in the first three months of 2003 from $14.7 million in the first three months of 2002, an increase of 28%. SGA expense as a percentage of net sales decreased in the first three months of 2003 to 5.3% from 5.5% in the first three months of 2002. The increase in SGA expense reflected the growth in our business, costs related to new business relationships with drug manufacturers, significant premium increases for property and liability insurance, increased costs attributable to providing more clinically oriented services and the acquisition of HOSS. The decrease in SGA expense as a percentage of net sales resulted from spreading fixed costs over a larger sales base in 2003. Management continually monitors SGA expense and remains focused on controlling these increases through improved technology and efficient asset management.

Depreciation and amortization (“D&A”) increased to $927,000 in the first three months of 2003 from $646,000 in the first three months of 2002, an increase of 43%. The increase in D&A was primarily the result of additional depreciation on computer hardware and software, furniture and equipment, transportation equipment, telephone equipment and leasehold improvements.

Interest income decreased to $461,000 in the first three months of 2003 from $867,000 in the first three months of 2002, a decrease of 47%. In the first three months of 2003 we earned 2.18% on an average invested balance of $84.5 million. In the first three months of 2002 we earned 3.18% on an average invested balance of $109.1 million. The decrease in interest income was due to the lower average invested balance and the lower interest rate earned. In the first three months of 2003 and 2002 the interest income was primarily related to amounts earned by investing cash and funds received from operations, the secondary public offering of our Class B Common Stock and stock option exercises in overnight repurchase agreements with major financial institutions and in marketable securities.

The provision for income taxes in the first three months of 2003 and 2002 represented 37.5% of earnings before income taxes.

Liquidity—Capital Resources.

Net cash provided by operating activities.    Our operations generated $1.6 million in cash during the first three months of 2003. Receivables increased $6.5 million during the first three months of 2003, primarily to support the increase in sales and due to the extension of credit terms to meet competitive conditions. Finished goods inventory decreased $4.6 million during the first three months of 2003 partly due to our concerted effort to closely monitor inventory and maintain it at an optimal level and partly due to our taking advantage of purchasing opportunities during the fourth quarter of 2002 for certain inventory items that were sold during the first three months of 2003. The $8.7 million increase in accounts payable was in excess of the cash requirements for receivables; this increase was attributable to the timing of payments and credit terms negotiated with vendors. Other current assets and liabilities decreased cash by $20.4 million primarily due to the payment of 2002 income taxes, the payment of 2002 accrued expenses and an initial installment on 2003 property and liability insurance. We anticipate that our operations may require cash to fund our growth. D&A totaled $927,000, our provision for doubtful accounts totaled $576,000 and our compensation expense on stock grants totaled $267,000 during the first three months of 2003. During the first three months of 2003, we also generated $203,000 from the tax benefit related to stock option exercises.

Net cash provided by investing activities.    During the first three months of 2003, we sold $18.1 million of marketable securities that were in the over three month maturity category and placed them in the under three month maturity category (cash and cash equivalents) due to the low interest rates being earned. Capital expenditures during the first three months of 2003 totaled $2.5 million. Primarily these purchases were for computer hardware and software, furniture and equipment and leasehold improvements. We expect that capital

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expenditures during the last nine months of 2003 will be approximately $9 to $13 million and during 2004 will be approximately $11 to $15 million. We anticipate that these expenditures will relate primarily to the purchase of computer hardware and software, telecommunications equipment, furniture and equipment and leasehold improvements. During the first three months of 2003, other assets decreased $2.4 million due to recovering some of our investment in our joint venture upon its sale to AdvancePCS. We recovered the remaining portion of our investment in the joint venture in April, 2003.

Net cash provided by financing activities. During the first three months of 2003, we received proceeds of $741,000 from stock option exercises.

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.

On March 29, 2003, we had cash and cash equivalents of $57.4 million, marketable securities of $28.2 million and working capital of $201.1 million. We believe that the cash and cash equivalents, marketable securities, working capital and cash from operations will be sufficient to meet our working capital needs for at least one year.

Item 3. 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.

Item 4. Controls and Procedures.

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Within the 90 days prior to the filing date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act. Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no significant changes in our internal controls or other factors that could significantly affect those controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II—OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

(a)    Exhibits

(b)    Reports on Form 8-K

On April 17, 2003, Priority Healthcare Corporation furnished, not filed, a Form 8-K attaching a press release announcing its operating and financial results for the quarter ended March 29, 2003.

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SIGNATURE

Pursuant to the requirements 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.

BY:      /S/    STEPHEN M. SAFT        

          Stephen M. Saft

          Chief Financial Officer and Treasurer

          (Principal Financial Officer and Duly Authorized

          Officer)

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CERTIFICATIONS

I, Steven D. Cosler, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Priority Healthcare Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 6, 2003

  /S/ STEVEN D. COSLER

Steven D. Cosler

President and Chief Executive Officer

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I, Stephen M. Saft, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Priority Healthcare Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 6, 2003

  /S/ STEPHEN M. SAFT

Stephen M. Saft

Chief Financial Officer and Treasurer

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