UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
(Mark
One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2004
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 April 26, 2004, the number of shares outstanding of each of the issuer’s classes of common stock were as follows:
Class A Common Stock – 6,642,984
Class B Common Stock – 36,754,141
Item 1. Financial Statements.
| PRIORITY HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (000's omitted, except share data) (unaudited) |
||||||||
|---|---|---|---|---|---|---|---|---|
| Three-month period ended April 3, 2004 |
Three-month period ended March 29, 2003 | |||||||
| Net sales | $ | 401,243 | $ | 351,529 | ||||
| Cost of products sold | 358,230 | 311,244 | ||||||
| Gross profit | 43,013 | 40,285 | ||||||
| Selling, general and administrative expense | 22,158 | 18,725 | ||||||
| Depreciation and amortization | 1,369 | 927 | ||||||
| Earnings from operations | 19,486 | 20,633 | ||||||
| Interest income | 206 | 461 | ||||||
| Interest expense | (32 | ) | -- | |||||
| Minority interest | (78 | ) | -- | |||||
| Earnings before income taxes | 19,582 | 21,094 | ||||||
| Provision for income taxes | 7,343 | 7,910 | ||||||
| Net earnings | $ | 12,239 | $ | 13,184 | ||||
| Earnings per share: | ||||||||
| Basic | $ | .28 | $ | .30 | ||||
| Diluted | $ | .28 | $ | .30 | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | 43,322,604 | 43,521,657 | ||||||
| Diluted | 44,056,295 | 44,010,503 | ||||||
See accompanying notes to consolidated financial statements.
2
| PRIORITY HEALTHCARE CORPORATION CONSOLIDATED BALANCE SHEETS (000's omitted, except share data) |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (unaudited) April 3, 2004 |
January 3, 2004 | |||||||||
| ASSETS: | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 53,945 | $ | 45,719 | ||||||
| Restricted cash | 2,000 | 2,000 | ||||||||
| Marketable securities | 10,006 | 15,317 | ||||||||
| Receivables, less allowance for doubtful accounts of | ||||||||||
| $5,978 and $5,480, respectively | 192,177 | 172,206 | ||||||||
| Finished goods inventory | 103,558 | 117,218 | ||||||||
| Deferred income taxes | 2,325 | 2,325 | ||||||||
| Other current assets | 19,305 | 18,317 | ||||||||
| 383,316 | 373,102 | |||||||||
| Fixed assets, net | 31,890 | 29,780 | ||||||||
| Investments | 4,582 | 4,000 | ||||||||
| Intangibles, net | 112,871 | 107,127 | ||||||||
| Total assets | $ | 532,659 | $ | 514,009 | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY: | ||||||||||
| Current liabilities: | ||||||||||
| Accounts payable | $ | 152,520 | $ | 151,539 | ||||||
| Other current liabilities | 18,696 | 13,124 | ||||||||
| 171,216 | 164,663 | |||||||||
| Deferred income taxes | 6,437 | 6,437 | ||||||||
| Total liabilities | 177,653 | 171,100 | ||||||||
| Minority interest | 78 | -- | ||||||||
| 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, | ||||||||||
| 6,643,636 and 6,677,683 issued and outstanding, | ||||||||||
| respectively | 66 | 67 | ||||||||
| Class B, $0.01 par value, 180,000,000 shares authorized, | ||||||||||
| 38,753,682 and 38,719,635 issued, respectively | 388 | 387 | ||||||||
| Additional paid in capital | 189,372 | 189,309 | ||||||||
| Retained earnings | 199,912 | 187,673 | ||||||||
| 389,738 | 377,436 | |||||||||
| Less: Class B Common unearned restricted stock, 108,323 | ||||||||||
| and 108,323 shares, respectively | (1,597 | ) | (1,846 | ) | ||||||
| Class B Common stock in treasury (at cost), 2,009,662 | ||||||||||
| and 1,987,739 shares, respectively | (33,213 | ) | (32,681 | ) | ||||||
| Total shareholders' equity | 354,928 | 342,909 | ||||||||
| Total liabilities and shareholders' equity | $ | 532,659 | $ | 514,009 | ||||||
See accompanying notes to consolidated financial statements.
3
| PRIORITY HEALTHCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (000's omitted) (unaudited) |
||||||||
|---|---|---|---|---|---|---|---|---|
| Three-month period ended April 3, 2004 |
Three-month period ended March 29, 2003 | |||||||
| Cash flow from operating activities: | ||||||||
| Net earnings | $ | 12,239 | $ | 13,184 | ||||
| Adjustments to reconcile net earnings to net cash provided by | ||||||||
| operating activities: | ||||||||
| Depreciation and amortization | 1,369 | 927 | ||||||
| Provision for doubtful accounts | 701 | 576 | ||||||
| Tax benefit from stock option exercises | 145 | 203 | ||||||
| Compensation expense on stock grants | 249 | 267 | ||||||
| Minority interest | 78 | -- | ||||||
| Change in assets and liabilities, net of acquisitions: | ||||||||
| Receivables | (20,672 | ) | (6,517 | ) | ||||
| Finished goods inventory | 13,905 | 4,606 | ||||||
| Accounts payable | 342 | 8,711 | ||||||
| Other current assets and liabilities | 4,319 | (20,370 | ) | |||||
| Net cash provided by operating activities | 12,675 | 1,587 | ||||||
| Cash flow from investing activities: | ||||||||
| Sales, net of purchases, of marketable securities | 5,311 | 18,090 | ||||||
| Purchases of fixed assets | (2,768 | ) | (2,454 | ) | ||||
| (Increase) decrease in investments | (582 | ) | 2,430 | |||||
| Acquisition of businesses | (5,796 | ) | -- | |||||
| Net cash (used) provided by investing activities | (3,835 | ) | 18,066 | |||||
| Cash flow from financing activities: | ||||||||
| Proceeds from stock option exercises | 468 | 741 | ||||||
| Proceeds from employee stock purchase plan | 75 | -- | ||||||
| Payments for purchase of treasury stock | (1,157 | ) | -- | |||||
| Net cash (used) provided by financing activities | (614 | ) | 741 | |||||
| Net increase in cash | 8,226 | 20,394 | ||||||
| Cash and cash equivalents at beginning of period | 45,719 | 37,031 | ||||||
| Cash and cash equivalents at end of period | $ | 53,945 | $ | 57,425 | ||||
| Supplemental non-cash investing and financing activities: | ||||||||
| Acquisition liabilities | $ | 287 | $ | -- | ||||
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 periods ended April 3, 2004 and March 29, 2003 include all necessary adjustments for fair presentation. Results for any interim period may not be indicative of the results for the entire year. |
| For a summary of all of the Company’s accounting policies see Note 1 of the consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended January 3, 2004. The only such item that has changed, which had no significant impact on results of operations or financial position, since the description in the Company’s Form 10-K for the fiscal year ended January 3, 2004 is as follows: |
| Revenue Recognition — Revenues are recognized when products are delivered to unaffiliated customers with appropriate provisions recorded for estimated discounts and contractual allowances. Discounts and contractual allowances are estimated based on historical collections from all unaffiliated customers. Any differences between the estimates and actual collections are reflected in operations in the year payment is received. Differences may result in the amount and timing of revenue for any period if actual performance varies from the estimates. Financing charge revenue is recognized when received. |
| 2. | Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of common shares outstanding during the applicable period. Diluted EPS include the weighted average number of common shares outstanding and the effect of common stock equivalents. The following is a reconciliation between basic and diluted weighted average shares outstanding for the three-month periods ended April 3, 2004 and March 29, 2003: |
| (000's omitted) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Three-month period ended April 3, 2004 |
Three-month period ended March 29, 2003 | |||||||
| Weighted average number of Class A and Class B | ||||||||
| Common shares outstanding used as the denominator | ||||||||
| in the basic earnings per share calculation | 43,323 | 43,522 | ||||||
| Additional shares assuming exercise of dilutive stock options | 645 | 417 | ||||||
| Additional shares assuming unearned restricted stock is earned | 69 | 30 | ||||||
| Additional shares assuming contingently issuable shares related | ||||||||
| to acquisitions are issued | 19 | 42 | ||||||
| Weighted average number of Class A and Class B | ||||||||
| Common and equivalent shares used as the | ||||||||
| denominator in the diluted earnings per | ||||||||
| share calculation | 44,056 | 44,011 | ||||||
| Options to purchase 3.1 million and 3.6 million shares with exercise prices greater than the average market prices of common stock during the three-month periods ended April 3, 2004 and March 29, 2003 were outstanding at April 3, 2004 and March 29, 2003, respectively. These options were excluded from the respective computations of diluted earnings per share because their effect would be anti-dilutive. |
5
| 3. | In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for annual and interim periods beginning after December 15, 2002. The Company has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148. The adoption of SFAS No. 148 did not have a material impact on the Company’s consolidated financial position or results of operations. |
| The Company has elected to continue to measure compensation for stock options issued to its employees and outside directors pursuant to APB No. 25 under the intrinsic value method. All stock options are granted with an exercise price at or above fair market value at the date of grant. Accordingly, no compensation expense has been recognized in connection with the issuance of stock options. Had compensation cost been determined based upon the fair value of the stock options at grant date, consistent with the method under SFAS No. 123, the Company’s net earnings and earnings per share would have been reduced to the following pro forma amounts indicated: |
| (In Thousands, Except Share Data) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Three-month period ended April 3, 2004 |
Three-month period ended March 29, 2003 | |||||||
| Net earnings - as reported | $ | 12,239 | $ | 13,184 | ||||
| Deduct: Total stock-based employee compensation expense | ||||||||
| determined under fair value based method for all awards, net | ||||||||
| of related tax effects | (1,720 | ) | (2,826 | ) | ||||
| Pro forma net earnings | $ | 10,519 | $ | 10,358 | ||||
| Basic earnings per share: | ||||||||
| Basic - as reported | $ | 0.28 | $ | 0.30 | ||||
| Basic - pro forma | $ | 0.24 | $ | 0.24 | ||||
| Diluted earnings per share: | ||||||||
| Diluted - as reported | $ | 0.28 | $ | 0.30 | ||||
| Diluted - pro forma | $ | 0.24 | $ | 0.24 | ||||
| 4. | On April 2, 2004, the Company completed an acquisition of certain assets of Partners In Care Pharmacy, LLC (“Partners In Care”), an infertility specialty pharmacy. The acquisition was accounted for using the purchase method of accounting and the results of operations are included in the consolidated financial statements subsequent to the date of acquisition. The total purchase price for the Partners In Care assets was approximately $5.8 million, which included approximately $290,000 for inventory, deposits and fixed assets, and resulted in approximately $5.8 million of goodwill, which included other transaction costs. In addition, the former owners of Partners In Care are eligible to receive additional consideration based upon revenues received from new customers under a certain contract. The results of operations of Partners In Care prior to the date of acquisition were not material to the results of the Company for the periods presented in these financial statements. |
| 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. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date herein. |
Overview
| We were 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, infertility, pulmonary hypertension, pain management, multiple sclerosis, sinusitis, age-related macular degeneration and others. |
| We also sell 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 5,000 customers in all 50 states, including office-based oncologists, renal dialysis clinics, ambulatory surgery centers and primary care physicians. |
| Our objective is to continue to grow rapidly and enhance our market position as a leading healthcare company by capitalizing on our business strengths and pursuing the following strategy: (i) continue to focus on further penetrating the core specialty distribution and pharmacy market; (ii) develop new manufacturer relationships that provide access to new products and services; (iii) continue to develop group purchasing organization and payor networks; (iv) enter new specialty markets; and (v) pursue acquisitions to complement existing product offerings and further penetrate markets. |
| Over the past three years, we have continued to grow as we have executed on our growth strategy. Due to the nature of healthcare and the pharmaceutical industry, there is constant pressure on profit margins. Competition has resulted in some margin reduction on our products. However, as we have done in the past, we expect to be able to partially offset this impact through the continuing benefits of scale, as well as cost containment measures. |
7
Critical Accounting Policies
| The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. For a summary of all of our accounting policies see Note 1 of the consolidated financial statements contained in our Form 10-K for the fiscal year ended January 3, 2004. For the items in our financial statements that we believe are the most dependent on the applications of significant estimates and judgments see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” contained in our Form 10-K for the fiscal year ended January 3, 2004. The only such item that has changed, which had no significant impact on results of operations or financial position, since the description in our Form 10-K for the fiscal year ended January 3, 2004 is as follows: |
| Revenue Recognition — Revenues are recognized when products are delivered to unaffiliated customers with appropriate provisions recorded for estimated discounts and contractual allowances. Discounts and contractual allowances are estimated based on historical collections from all unaffiliated customers. Any differences between our estimates and actual collections are reflected in operations in the year payment is received. Differences may result in the amount and timing of our revenue for any period if actual performance varies from our estimates. Financing charge revenue is recognized when received. |
Results of Operations
| The following table sets forth for the periods indicated, the percentages of net sales represented by the respective financial items: |
| Three-month period ended April 3, 2004 |
Three-month period ended March 29, 2003 | ||||
|---|---|---|---|---|---|
| Net sales | 100 | .0% | 100 | .0% | |
| Cost of products sold | 89 | .3 | 88 | .5 | |
| Gross profit | 10 | .7 | 11 | .5 | |
| Selling, general and administrative expense | 5 | .5 | 5 | .3 | |
| Depreciation and amortization | .3 | .3 | |||
| Earnings from operations | 4 | .9 | 5 | .9 | |
| Interest income | .1 | .1 | |||
| Interest expense | -- | -- | |||
| Minority interest | -- | -- | |||
| Earnings before income taxes | 4 | .9 | 6 | .0 | |
| Provision for income taxes | 1 | .8 | 2 | .3 | |
| Net earnings | 3 | .1% | 3 | .8% | |
| Net sales increased to $401.2 million in the first three months of 2004 from $351.5 million in the first three months of 2003, an increase of 14%. The growth primarily reflected the addition of new customers, new product introductions, additional sales to existing customers, the acquisition of SinusPharmacy Corporation (“Sinus”) on September 11, 2003 and inflationary price increases. The additional net sales attributed to the acquisition of Sinus in the first three months of 2004 represented approximately 1% of the total net sales in the first three months of 2004. |
8
| Gross profit increased to $43.0 million in the first three months of 2004 from $40.3 million in the first three months of 2003, an increase of 7%. The increase in gross profit reflected increased sales and the acquisition of Sinus. Gross profit as a percentage of net sales decreased in the first three months of 2004 to 10.7% from 11.5% in the first three months of 2003. This decrease was primarily attributable to the change in sales mix, as lower margin products experienced increased sales, and the impact of the Medicare Modernization Act of 2003 on certain oncology drugs. Competition continues to exert pressure on margins. |
| Selling, general and administrative (“SGA”) expense increased to $22.2 million in the first three months of 2004 from $18.7 million in the first three months of 2003, an increase of 18%. SGA expense as a percentage of net sales increased in the first three months of 2004 to 5.5% from 5.3% in the first three months of 2003. The increase in SGA expense reflected the growth in our business, costs related to new business relationships with drug manufacturers, increased costs attributable to providing more clinically oriented services, costs related to our Sarbanes-Oxley Section 404 internal control project, incremental costs of running multiple information systems as we prepare to bring the remaining modules of our new enterprise wide information technology system live and the acquisition of Sinus. The increase in SGA expense as a percentage of net sales resulted from costs related to new business relationships with drug manufacturers, increased costs attributable to providing more clinically oriented services, costs related to our Sarbanes-Oxley Section 404 internal control project, incremental costs of running multiple information systems as we prepare to bring the remaining modules of our new enterprise wide information technology system live and the acquisition of Sinus. 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 $1.4 million in the first three months of 2004 from $927,000 in the first three months of 2003, an increase of 48%. The increase in D&A was primarily the result of depreciation on newly acquired computer hardware and software, furniture and equipment, transportation equipment, telephone equipment and leasehold improvements. |
| Interest income decreased to $206,000 in the first three months of 2004 from $461,000 in the first three months of 2003, a decrease of 55%. In the first three months of 2004 we earned 1.28% on an average invested balance of $64.5 million. In the first three months of 2003 we earned 2.18% on an average invested balance of $84.5 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 2004 and 2003 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 2004 and 2003 represented 37.5% of earnings before income taxes. |
Liquidity — 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 customers, there can be no assurance that we will not incur some collection loss on accounts receivable in the future. |
9
| On April 3, 2004, we had cash and cash equivalents of $55.9 million, marketable securities of $10.0 million and working capital of $212.1 million. On February 27, 2004, we entered into an agreement with Suntrust Bank, as administrative agent, for an unsecured three year revolving credit facility for up to $150 million. We intend to use the available proceeds to fund acquisitions, repurchase shares of our Class B Common Stock, provide for working capital and capital expenditures, and for other general corporate purposes. The revolving credit facility requires us, among other things, to maintain a minimum consolidated net worth, a minimum interest coverage ratio and limits our leverage ratio. We were in compliance with these covenants as of April 3, 2004. We had no borrowings under this facility for the three-month period ended April 3, 2004. We believe that the cash and cash equivalents, marketable securities, working capital, revolving credit facility and cash from operations will be sufficient to meet our working capital needs for at least one year. |
| Net cash provided by operating activities. Our operations generated $12.7 million in cash during the first three months of 2004. Net receivables increased $20.7 million during the first three months of 2004, 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 $13.9 million during the first three months of 2004 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 2003 for certain inventory items that were sold during the first three months of 2004. The $342,000 increase in accounts payable was attributable to the timing of payments to and credit terms negotiated with vendors. Other current assets and liabilities increased cash by $4.3 million primarily due to an increase in income taxes payable. We anticipate that our operations may require cash to fund our growth. |
| Net cash used by investing activities. During the first three months of 2004, we sold $5.3 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 2004 totaled $2.8 million. Primarily these purchases were for our new enterprise wide information technology system, computer hardware and software, furniture and equipment and leasehold improvements. We expect that capital expenditures during the last nine months of 2004 will be approximately $10 to $13 million and during 2005 will be approximately $12 to $15 million. We anticipate that 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 three months of 2004, investments increased $582,000 due to making an additional investment in Burrill Life Sciences Capital Fund, L.P. On April 2, 2004 we acquired certain assets of Partners In Care for $5.8 million. |
| Net cash used by financing activities. During the first three months of 2004, we received proceeds of $468,000 from stock option exercises and $75,000 from the employee stock purchase plan. Also during the first three months of 2004, we purchased treasury stock for $1.2 million. |
Off-Balance Sheet Arrangements and Contractual Obligations
| There have been no material changes to off-balance sheet arrangements described in our Form 10-K for the fiscal year ended January 3, 2004. Also, there have been no material changes outside the ordinary course of business in our contractual obligations described in our Form 10-K for the fiscal year ended January 3, 2004. |
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. |
10
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 April 3, 2004 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. |
| There have been no changes in our internal control over financial reporting that occurred during the quarter ended April 3, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
Sales of Unregistered Securities
| The following information is furnished as to securities of the Company sold during 2004 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”): |
| On April 15, 2004, the Company issued 9,469 shares of Class B Common Stock to the former owners of Chesapeake Infusion LLC, dba InfuRx, in connection with its acquisition. This transaction was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. |
Issuer Purchases of Equity Securities
| Period |
Total Number of Shares of Class B Common Stock Purchased |
Average Price Paid per Share of Class B Common Stock |
Total Number of Shares of Class B Common Stock Purchased as Part of Publicly Announced Program (1) |
Maximum Number of Shares of Class B Common Stock that May Yet Be Purchased Under the Program (1) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| January 4, 2004 - | ||||||||||||||
| February 3, 2004 | 0 | -- | 0 | 2,605,900 | ||||||||||
| February 4, 2004 - | ||||||||||||||
| March 3, 2004 | 0 | -- | 0 | 2,605,900 | ||||||||||
| March 4, 2004 - | ||||||||||||||
| April 3, 2004 | 60,000 | $ | 19 | .28 | 60,000 | 2,545,900 | ||||||||
| Total | 60,000 | $ | 19 | .28 | 60,000 | 2,545,900 | ||||||||
| (1) | On July 17, 2003, the Company’s Board of Directors approved the purchase of up to 3,000,000 shares of the Company’s 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 January 3, 2004, 394,100 shares were purchased in the open market at an average price of $19.89 and were included in treasury stock. From January 4, 2004 to April 3, 2004, 60,000 shares were purchased in the open market at an average price of $19.28 and were included in treasury stock. |
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Item 5. Other Information
| On March 15, 2004, the Company announced the retirement of Donald J. Perfetto, effective June 30, 2004. Mr. Perfetto had served as the Company’s Executive Vice President and Chief Operating Officer since January 2002 and in other executive positions with the Company since 1997. The Company also announced on March 15, 2004 the appointment of Tracy R. Nolan to Executive Vice President and Chief Operating Officer. From March 15, 2004 until June 30, 2004, Mr. Perfetto will serve as the Company’s Executive Vice President – Special Projects. Mr. Perfetto will also resign from the Company’s Board of Directors on May 17, 2004, the date of the Company’s 2004 annual meeting of shareholders. |
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
| 10-AA | Executive Employment Agreement between the Registrant and Tracy R. Nolan dated March
15, 2004. | |
| 10-BB | Noncompete Agreement between the Registrant and Tracy R. Nolan dated March 15, 2004. | |
| 10-CC | Restricted Stock Agreement between the Registrant and Tracy R. Nolan dated March 31, 2004. | |
| 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 April 22, 2004, Priority Healthcare Corporation furnished, not filed, a Form 8-K attaching a press release announcing its operating and financial results for the quarter ended April 3, 2004. |
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| 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. |
| May 11, 2004 | PRIORITY HEALTHCARE CORPORATION |
| BY: | /s/ STEPHEN M. SAFT Stephen M. Saft Chief Financial Officer and Treasurer (Principal Financial Officer and Duly Authorized Officer) |
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