UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
(Mark
One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2003
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-23249
PRIORITY HEALTHCARE
CORPORATION
(Exact name of
registrant as specified in its charter)
|
Indiana (State or other jurisdiction of incorporation or organization) 250 Technology Park Lake Mary, Florida (Address of principal executive offices) |
35-1927379 (I.R.S. Employer Identification No.) 32746 (Zip Code) |
Registrant’s telephone number, including area code: (407) 804-6700
| No Change | |
|
(Former
name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the
Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No __
As of October 24, 2003, the number of shares outstanding of each of the issuer’s classes of common stock were as follows:
Class A Common Stock – 6,712,325
Class B Common Stock – 36,563,386
| Nine-month period ended September 27, 2003 |
Nine-month period ended September 28, 2002 |
Three-month period ended September 27, 2003 |
Three-month period ended September 28, 2002 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | $ | 1,064,891 | $ | 863,465 | $ | 362,855 | $ | 306,009 | ||||||
| Cost of products sold | 947,450 |
765,401 |
323,483 |
270,671 |
||||||||||
| Gross profit | 117,441 | 98,064 | 39,372 | 35,338 | ||||||||||
| Selling, general and administrative expense | 56,506 | 46,892 | 18,981 | 16,458 | ||||||||||
| Depreciation and amortization | 3,137 | 1,980 | 1,127 | 677 | ||||||||||
| Earnings from operations | 57,798 | 49,192 | 19,264 | 18,203 | ||||||||||
| Interest income | 1,058 |
2,046 |
246 |
508 |
||||||||||
| Earnings before income taxes | 58,856 | 51,238 | 19,510 | 18,711 | ||||||||||
| Provision for income taxes | 22,071 |
19,214 |
7,316 |
7,016 |
||||||||||
| Net earnings | $ | 36,785 | $ | 32,024 | $ | 12,194 | $ | 11,695 | ||||||
| Earnings per share: | ||||||||||||||
| Basic | $ | .85 | $ | .73 | $ | .28 | $ | .27 | ||||||
| Diluted | $ | .84 | $ | .72 | $ | .28 | $ | .27 | ||||||
| Weighted average shares outstanding: | ||||||||||||||
| Basic | 43,452,856 | 43,781,392 | 43,259,781 | 43,597,491 | ||||||||||
| Diluted | 44,024,550 | 44,447,572 | 43,773,728 | 44,032,375 | ||||||||||
See accompanying notes to consolidated financial statements.
2
| (unaudited) September 27, 2003 |
December 28, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS: | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 47,088 | $ | 37,031 | ||||
| Restricted cash | 7,000 | -- | ||||||
| Marketable securities | 21,675 | 46,337 | ||||||
| Receivables, less allowance for doubtful accounts of $6,073 and $5,437, respectively | 181,979 | 163,688 | ||||||
| Finished goods inventory | 99,553 | 108,604 | ||||||
| Deferred income taxes | 3,221 | 3,221 | ||||||
| Other current assets | 17,878 | 14,667 | ||||||
| 378,394 | 373,548 | |||||||
| Fixed assets, net | 23,962 | 13,749 | ||||||
| Restricted cash | 2,000 | -- | ||||||
| Other assets | 4,000 | 4,780 | ||||||
| Intangibles, net | 105,402 | 92,785 | ||||||
| Total assets | $ | 513,758 | $ | 484,862 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 157,768 | $ | 142,666 | ||||
| Other current liabilities | 24,154 | 45,448 | ||||||
| 181,922 | 188,114 | |||||||
| Other liabilities | 2,000 | -- | ||||||
| Deferred income taxes | 2,321 | 2,321 | ||||||
| Total liabilities | 186,243 | 190,435 | ||||||
| Commitments and contingencies (note 5) | ||||||||
| Shareholders' equity: | ||||||||
| Preferred stock, no par value, 5,000,000 shares authorized, none issued and outstanding | -- | -- | ||||||
| Common stock | ||||||||
| Class A, $0.01 par value, 55,000,000 shares authorized, 6,716,678 and 6,880,497 issued and outstanding, respectively | 67 | 69 | ||||||
| Class B, $0.01 par value, 180,000,000 shares authorized, 38,680,640 and 38,516,821 issued, respectively | 387 | 385 | ||||||
| Additional paid in capital | 188,907 | 187,158 | ||||||
| Retained earnings | 173,858 | 137,073 | ||||||
| 363,219 | 324,685 | |||||||
| Less: Class B Common unearned restricted stock, 53,000 and 53,000 shares, respectively | (715 | ) | (1,291 | ) | ||||
| Class B Common stock in treasury (at cost), 2,129,297 and 1,884,078 shares, respectively | (34,989 | ) | (28,967 | ) | ||||
| Total shareholders' equity | 327,515 | 294,427 | ||||||
| Total liabilities and shareholders' equity | $ | 513,758 | $ | 484,862 | ||||
See
accompanying notes to consolidated financial statements.
3
| Nine-month period ended September 27, 2003 |
Nine-month period ended September 28, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| Cash flow from operating activities: | ||||||||
| Net earnings | $ | 36,785 | $ | 32,024 | ||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 3,137 | 1,980 | ||||||
| Provision for doubtful accounts | 1,842 | 1,749 | ||||||
| Tax benefit from stock option exercises | 422 | 892 | ||||||
| Compensation expense on restricted stock grants | 619 | — | ||||||
| Change in assets and liabilities, net of acquisitions: | ||||||||
| Receivables | (20,133 | ) | (36,789 | ) | ||||
| Finished goods inventory | 9,308 | (3,217 | ) | |||||
| Accounts payable | 12,450 | 1,513 | ||||||
| Other current assets and liabilities | (17,560 | ) | 8,688 | |||||
| Net cash provided by operating activities | 26,870 | 6,840 | ||||||
| Cash flow from investing activities: | ||||||||
| Sales, net of purchases, of marketable securities | 24,662 | 55,500 | ||||||
| Restricted cash for acquisition of business | (9,000 | ) | — | |||||
| Purchases of fixed assets | (11,588 | ) | (5,912 | ) | ||||
| Decrease (increase) in other assets | 3,075 | (8,649 | ) | |||||
| Acquisition of businesses | (15,226 | ) | (32,881 | ) | ||||
| Net cash (used) provided by investing activities | (8,077 | ) | 8,058 | |||||
| Cash flow from financing activities: | ||||||||
| Proceeds from stock option exercises | 1,534 | 3,465 | ||||||
| Purchases of treasury stock | (10,270 | ) | (13,190 | ) | ||||
| Net cash used by financing activities | (8,736 | ) | (9,725 | ) | ||||
| Net increase in cash | 10,057 | 5,173 | ||||||
| Cash and cash equivalents at beginning of period | 37,031 | 32,758 | ||||||
| Cash and cash equivalents at end of period | $ | 47,088 | $ | 37,931 | ||||
| Supplemental non-cash investing and financing activities: | ||||||||
| Acquisition liabilities | $ | 9,000 | $ | 1,176 | ||||
| Stock issued in connection with acquisition | 1,500 | 5,000 | ||||||
| Stock issued in connection with investment | 3,500 | — | ||||||
See accompanying notes to consolidated financial statements.
4
| 1. | The accompanying consolidated financial statements have been prepared by the Company without audit. Certain information and footnote disclosures, including significant accounting policies, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The Company believes that the financial statements for the three-month and nine-month periods ended September 27, 2003 and September 28, 2002 include all necessary adjustments for fair presentation. Results for any interim period may not be indicative of the results for the entire year. |
| 2. | A reconciliation of the basic and diluted weighted average shares outstanding is as follows for the three-month and nine-month periods ended September 27, 2003 and September 28, 2002: |
| (000's omitted) | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Nine-month period ended September 27, 2003 |
Nine-month period ended September 28, 2002 |
Three-month period ended September 27, 2003 |
Three-month period ended September 28, 2002 | |||||||||||
| Weighted average number of Class A and Class B Common shares outstanding used as the denominator in the basic earnings per share calculation | 43,453 | 43,781 | 43,260 | 43,597 | ||||||||||
| Additional shares assuming exercise of dilutive stock options | 518 | 667 | 481 | 435 | ||||||||||
| Additional shares assuming unearned restricted stock is earned | 33 | -- | 33 | -- | ||||||||||
| Additional shares assuming contingently issuable shares related to acquisitions are issued | 21 | -- | -- | -- | ||||||||||
| Weighted average number of Class A and Class B Common and equivalent shares used as the denominator in the diluted earnings per share calculation | 44,025 | 44,448 | 43,774 | 44,032 | ||||||||||
| Options to purchase 3.6 million and 2.9 million shares with exercise prices greater than the average market prices of common stock during the three-month periods ended September 27, 2003 and September 28, 2002 were outstanding at September 27, 2003 and September 28, 2002, respectively. These options were excluded from the respective computations of diluted earnings per share because their effect would be anti-dilutive. |
| 3. | In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” was issued. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” to require prominent disclosures about the method of accounting for stock-based compensation and the effect of the method used on reported results. Finally, this statement amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. As required, the Company adopted this statement effective in 2002. The adoption did not have a material impact on the Company’s consolidated results of operations or financial position. |
5
| 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, pro forma net income and earnings would have been: |
| (000's omitted, except share data) | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Nine-month period ended September 27, 2003 |
Nine-month period ended September 28, 2002 |
Three-month period ended September 27, 2003 |
Three-month period ended September 28, 2002 |
|||||||||||
| Net earnings - as reported | $ | 36,785 | $ | 32,024 | $ | 12,194 | $ | 11,695 | ||||||
| Pro forma impact of Company option grants | (8,497 | ) | (8,142 | ) | (2,834 | ) | (2,728 | ) | ||||||
| Pro forma net earnings | $ | 28,288 | $ | 23,882 | $ | 9,360 | $ | 8,967 | ||||||
| Pro forma earnings per share: | ||||||||||||||
| Basic | $ | 0.65 | $ | 0.55 | $ | 0.22 | $ | 0.21 | ||||||
| Diluted | $ | 0.64 | $ | 0.54 | $ | 0.21 | $ | 0.20 | ||||||
| 4. | During the first nine months of 2003, the Company paid additional consideration of $8.0 million in cash and $1.0 million in Class B Common Stock related to the 2001 acquisitions of Freedom Drug and InfuRx because Freedom Drug and InfuRx achieved certain predetermined financial results during the year ended December 28, 2002. During the three-month period ended September 27, 2003, the Company paid $3.8 million in cash related to a holdback on the 2001 acquisition of Physicians Formulary International. |
| On September 18, 2003, the Company completed an acquisition of the majority of the operating assets of SinusPharmacy Corporation (“Sinus”), the leading provider of intranasal nebulized therapies for the treatment of chronic sinusitis. Pursuant to the Asset Purchase Agreement, the Company paid approximately $3.3 million in cash at closing, will pay an additional $7.0 million on January 1, 2004 and an additional $2.0 million on January 1, 2005, issued $500,000 in the Company’s Class B Common Stock, and assumed approximately $153,000 in current liabilities. In addition, if Sinus achieves certain predetermined financial results during the two twelve-month periods ending September 30, 2004 and September 30, 2005, the Company will make additional payments. The acquisition was accounted for under the purchase method of accounting resulting in goodwill and identifiable intangible assets of approximately $12.6 million. On September 18, 2003, Sinus’s finished goods inventory was approximately $257,000 and fixed assets were approximately $37,000. The results of operations of Sinus are included in the Company’s consolidated financial statements subsequent to the date of acquisition. The results of operations of Sinus prior to the date of acquisition would not have been material to the results of the Company for the periods presented in these financial statements. |
| On September 18, 2003, the Company purchased a 10% equity interest in SinusPharma, Inc. (former owner of Sinus) for $3.5 million. The $3.5 million was paid with 152,505 shares of Class B Common Stock of the Company. |
| 5. | The Company is 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. |
6
| 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 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. Priority 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, New York, New York, Carpinteria, California and Monrovia, California 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, pulmonary hypertension, pain management, multiple sclerosis, chronic sinusitis and other diseases. |
| Priority also sells over 5,000 SKUs of specialty pharmaceuticals and medical supplies to office-based physicians in oncology and other specialty markets and to outpatient renal care centers. 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. |
7
| Results of Operations |
| The following table sets forth for the periods indicated, the percentages of net sales represented by the respective financial items: |
| Nine-month period ended September 27, 2003 |
Nine-month period ended September 28, 2002 |
Three-month period ended September 27, 2003 |
Three-month period ended September 28, 2002 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | 100 | .0% | 100 | .0% | 100 | .0% | 100 | .0% | ||||||
| Cost of products sold | 89 | .0 | 88 | .6 | 89 | .1 | 88 | .5 | ||||||
| Gross profit | 11 | .0 | 11 | .4 | 10 | .9 | 11 | .5 | ||||||
| Selling, general and administrative | 5 | .3 | 5 | .4 | 5 | .2 | 5 | .4 | ||||||
| Depreciation and amortization | .3 | .2 | .3 | .2 | ||||||||||
| Earnings from operations | 5 | .4 | 5 | .7 | 5 | .3 | 5 | .9 | ||||||
| Interest income | .1 | .2 | .1 | .2 | ||||||||||
| Earnings before income taxes | 5 | .5 | 5 | .9 | 5 | .4 | 6 | .1 | ||||||
| Provision for income taxes | 2 | .1 | 2 | .2 | 2 | .0 | 2 | .3 | ||||||
| Net earnings | 3 | .5% | 3 | .7% | 3 | .4% | 3 | .8% | ||||||
| Net sales increased to $1.06 billion in the first nine months of 2003 from $863.5 million in the first nine months of 2002, an increase of 23%. Net sales increased to $362.9 million in the three months ended September 27, 2003, from $306.0 million in the three months ended September 28, 2002, an increase of 19%. The growth primarily reflected the addition of new customers, new product introductions, additional sales to existing customers and inflationary price increases. |
| Gross profit increased to $117.4 million in the first nine months of 2003 from $98.1 million in the first nine months of 2002, an increase of 20%. Gross profit as a percentage of net sales decreased in the first nine months of 2003 to 11.0% from 11.4% in the first nine months of 2002. Gross profit increased to $39.4 million in the three months ended September 27, 2003, from $35.3 million in the three months ended September 28, 2002, an increase of 11%. Gross profit as a percentage of net sales decreased in the three months ended September 27, 2003, to 10.9% from 11.5% in the three months ended September 28, 2002. The increases in gross profit reflected increased sales. The decrease in gross profit as a percentage of net sales in the first nine months of 2003 was primarily attributable to infertility sales and margins being negatively impacted by a change in the spread between Average Wholesale Price (AWP) and Wholesale Acquisition Cost (WAC), as published by First Databank, during part of the nine months, contraction on gross profit related to oncology distribution products and the change in sales mix, as lower margin products experienced increased sales. The decrease in gross profit as a percentage of net sales in the three months ended September 27, 2003 was primarily attributable to contraction on gross profit related to oncology distribution products and the change in sales mix, as lower margin products experienced increased sales. Competition continues to exert pressure on margins. |
| Selling, general and administrative (“SGA”) expense increased to $56.5 million in the first nine months of 2003 from $46.9 million in the first nine months of 2002, an increase of 21%. SGA expense as a percentage of net sales decreased to 5.3% in the first nine months of 2003 from 5.4% in the first nine months of 2002. SGA expense increased to $19.0 million in the three months ended September 27, 2003, from $16.5 million in the three months ended September 28, 2002, an increase of 15%. SGA expense as a percentage of net sales decreased to 5.2% in the three months ended September 27, 2003 from 5.4% in the three months ended |
8
| September 28, 2002. The increases 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 and increased costs attributable to providing more clinically oriented services. 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 $3.1 million in the first nine months of 2003 from $2.0 million in the first nine months of 2002, an increase of 58%. D&A increased to $1.1 million in the three months ended September 27, 2003, from $677,000 in the three months ended September 28, 2002, an increase of 66%. The increases in D&A were primarily the result of depreciation on newly acquired computer hardware and software, furniture and equipment, telephone equipment and leasehold improvements. |
| Interest income decreased to $1.1 million in the first nine months of 2003 from $2.0 million in the first nine months of 2002, a decrease of 48%. Interest income decreased to $246,000 in the three months ended September 27, 2003 from $508,000 in the three months ended September 28, 2002, a decrease of 52%. In the first nine months of 2003 we earned 1.75% on an average invested balance of $80.6 million. In the first nine months of 2002 we earned 2.68% on an average invested balance of $101.8 million. In the three months ended September 27, 2003 we earned 1.23% on an average invested balance of $79.8 million. In the three months ended September 28, 2002 we earned 2.35% on an average invested balance of $86.6 million. The decreases in interest income were due to the lower average invested balances and the lower interest rates earned. In the three-month and nine-month periods ended September 27, 2003 and September 28, 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 three-month and nine-month periods ended September 27, 2003 and September 28, 2002 represented 37.5% of earnings before income taxes. |
| Liquidity and Capital Resources. |
| Net cash provided by operating activities. Our operations generated $26.9 million in cash during the first nine months of 2003. Receivables increased $20.1 million during the first nine 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, net of acquisitions, decreased $9.3 million during the first nine 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 nine months of 2003. The $12.5 million increase in accounts payable was attributable to the timing of payments and credit terms negotiated with vendors. Other current assets and liabilities, net of acquisitions, decreased cash by $17.6 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 $3.1 million, our provision for doubtful accounts totaled $1.8 million and our compensation expense on stock grants totaled $619,000 during the first nine months of 2003. During the first nine months of 2003, we also generated $422,000 from the tax benefit related to stock option exercises. |
| Net cash used by investing activities. During the first nine months of 2003, we sold $24.7 million of marketable securities that were in the over three month maturity category and placed $6.1 million in the under three month maturity category (cash and cash equivalents), placed $9.0 million in marketable securities that are under restriction related to the Sinus acquisition and used the balance to partially finance the acquisition of Sinus, purchase treasury stock and purchase fixed assets. Capital expenditures during the first nine months of 2003 totaled $11.6 million. These purchases were primarily for our new enterprise wide information technology system, computer hardware and software, telecommunications equipment, furniture and equipment and leasehold improvements. We expect that capital expenditures during the last three months of 2003 will be approximately $3 to $4 million and during 2004 will be approximately $13 to $16 million. We anticipate that |
9
| these expenditures will relate primarily to our new
enterprise wide information technology system, computer hardware and software,
telecommunications equipment, furniture and equipment and leasehold improvements. During
the first nine months of 2003, other assets decreased $3.1 million primarily due to
recovering our investment in our joint venture upon its sale to AdvancePCS. On September
18, 2003, we acquired the majority of the operating assets of SinusPharmacy Corporation (“Sinus”),
the leading provider of intranasal nebulized therapies for the treatment of chronic
sinusitis. We paid $3.4 million related to the acquisition of Sinus. During the first
nine months of 2003, we also paid $8.0 million related to the 2001 acquisitions of
Freedom Drug and InfuRx because Freedom Drug and InfuRx achieved certain predetermined
financial results during the year ended December 28, 2002. During the first nine months
of 2003, we also paid $3.8 million related to a holdback on the 2001 acquisition of
Physicians Formulary International. |
| Net cash used by financing activities. During the first nine months of 2003, we received proceeds of $1.5 million from stock option exercises. Also during the first nine months of 2003, we purchased treasury stock for $10.3 million. |
| On July 17, 2003, the Board of Directors approved the purchase of up to 3,000,000 shares of our outstanding shares of Class B Common Stock. The purchases are approved through July 16, 2004. The purchases may be made from time to time in the open market or in privately negotiated transactions depending on market conditions and other considerations. From July 17, 2003 to September 27, 2003, 394,100 shares were purchased at an average price of $19.89 and were included in treasury stock. The Company purchased the treasury stock because management felt the market undervalued the stock. |
| 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 September 27, 2003, we had cash and cash equivalents of $47.1 million, marketable securities of $21.7 million and working capital of $196.5 million. We believe that the cash and cash equivalents, marketable securities, working capital and cash from operations will be sufficient to meet our normal 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. 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 as of September 27, 2003 pursuant to Rule 13a-15(b) 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. |
10
| There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 27, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
| PART II — OTHER INFORMATION |
|---|
| Item 6. Exhibits and Reports on Form 8-K. |
|
(a) Exhibits: |
| 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Reports on Form 8-K:
| On October 16, 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 September 27, 2003. |
11
| 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. |
| November 10, 2003 | PRIORITY HEALTHCARE CORPORATION |
| BY: | /s/ STEPHEN M. SAFT Stephen M. Saft Chief Financial Officer and Treasurer (Principal Financial Officer and Duly Authorized Officer) |
12