<PAGE> 1
FORM 10-Q
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 JUNE 30, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-23249
PRIORITY HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1927379
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
285 WEST CENTRAL PARKWAY, SUITE 1704
ALTAMONTE SPRINGS, FLORIDA 32714
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 869-7001
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
--- ---
As of July 20, 1999, the number of shares outstanding of each of the issuer's
classes of common stock were as follows:
Class A Common Stock - 6,216,900
Class B Common Stock - 15,647,309
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED THREE-MONTH PERIOD ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ................................... $ 185,203 $ 122,053 $ 102,044 $ 63,924
Cost of products sold ....................... 162,326 108,307 89,473 56,994
----------- ----------- ----------- -----------
Gross profit ................................ 22,877 13,746 12,571 6,930
Selling, general and administrative expense.. 9,238 6,215 4,987 3,048
Depreciation and amortization ............... 614 622 301 311
----------- ----------- ----------- -----------
Earnings from operations .................... 13,025 6,909 7,283 3,571
Interest income, net ........................ 614 306 356 198
----------- ----------- ----------- -----------
Earnings before income taxes ................ 13,639 7,215 7,639 3,769
Provision for income taxes .................. 5,415 2,868 3,033 1,498
----------- ----------- ----------- -----------
Net earnings ................................ $ 8,224 $ 4,347 $ 4,606 $ 2,271
=========== =========== =========== ===========
Earnings per share:
Basic ................................ $ .43 $ .23 $ .24 $ .12
Diluted .............................. $ .42 $ .23 $ .23 $ .12
Weighted average shares outstanding:
Basic ................................ 19,146,333 18,772,812 19,469,188 18,772,812
Diluted .............................. 19,664,223 18,825,255 20,102,812 18,890,011
</TABLE>
(See accompanying notes to consolidated financial statements.)
2
<PAGE> 3
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-----------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents .......................................... $ 54,734 $ 2
Marketable securities ............................................... 33,454 --
Accounts receivable, less allowance for doubtful accounts of
$862 and $778, respectively ...................................... 71,642 56,825
Receivable from BWI ................................................. 13,101 16,517
Finished goods inventory ............................................ 31,010 24,387
Deferred income taxes ............................................... 1,214 1,145
Other current assets ................................................ 415 284
-------- --------
205,570 99,160
-------- --------
Fixed assets, at cost .................................................... 3,501 3,279
Less: accumulated depreciation ...................................... 1,738 1,459
-------- --------
1,763 1,820
-------- --------
Intangibles, net ......................................................... 9,255 6,539
-------- --------
Other assets ............................................................. 250 --
-------- --------
Total assets .............................................. $216,838 $107,519
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable .................................................... $ 48,366 $ 33,857
Other current liabilities ........................................... 4,772 3,428
-------- --------
53,138 37,285
-------- --------
Deferred income taxes .................................................... 216 193
-------- --------
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized, none
issued and outstanding ........................................... -- --
Common stock
Class A, $0.01 par value, 15,000,000 shares authorized, (and split
adjusted) 6,323,464 and 15,321,429 issued and outstanding,
respectively .................................................. 63 153
Class B, $0.01 par value, 40,000,000 shares authorized, (and split
adjusted) 15,148,595 and 3,452,214 issued and outstanding,
respectively .................................................. 152 35
Additional paid in capital ....................................... 138,051 52,859
Retained earnings ................................................ 25,218 16,994
-------- --------
Total shareholders' equity ................................ 163,484 70,041
-------- --------
Commitments and contingencies ............................................ -- --
-------- --------
Total liabilities and shareholders' equity ................ $216,838 $107,519
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
3
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PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
JUNE 30,
1999 1998
----------------------
<S> <C> <C>
Cash flow from operating activities:
Net income ................................................. $ 8,224 $ 4,347
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................. 613 622
Loss on disposal of fixed assets ........................... 28 --
Deferred income taxes ...................................... (46) --
Change in assets and liabilities, net of acquisition:
Accounts receivable ........................................ (14,817) (904)
Finished goods inventory ................................... (6,216) 9,043
Trade accounts payable ..................................... 14,509 (2,059)
Other current assets and liabilities ....................... 1,213 (233)
-------- --------
Net cash provided by operating activities ............. 3,508 10,816
-------- --------
Cash flow from investing activities:
Purchase of marketable securities .......................... (33,454) --
Purchase of fixed assets ................................... (212) (400)
Acquisition of business .................................... (3,495) --
Other ...................................................... (250) --
-------- --------
Net cash used by investing activities ................. (37,411) (400)
-------- --------
Cash flow from financing activities:
Net change in amounts due to/from BWI ...................... 3,416 (10,103)
Proceeds from stock option exercises and related tax benefit 1,839 --
Net proceeds from secondary stock offering ................. 83,380 --
Payments on long-term obligations .......................... -- (272)
-------- --------
Net cash provided (used) by financing activities ...... 88,635 (10,375)
-------- --------
Net increase in cash ............................................ 54,732 41
Cash and cash equivalents at beginning of period ................ 2 9,484
-------- --------
Cash and cash equivalents at end of period ...................... $ 54,734 $ 9,525
======== ========
Supplemental cash flow information:
Interest paid .............................................. $ -- $ 231
Income taxes paid .......................................... $ 3,920 $ 2,868
</TABLE>
(See accompanying notes to consolidated financial statements.)
4
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PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 generally accepted accounting
principles have been condensed or omitted. The Company believes that the
financial statements for the three and six month periods ended June 30,
1999 and 1998 include all necessary adjustments for fair presentation.
Results for any interim period may not be indicative of the results for the
entire year.
2. On April 7, 1999, the Company announced that the Board of Directors
authorized a 3-for-2 stock split of the Company's Common Stock to be
effected as a stock dividend to all shareholders of record at the close of
business on April 20, 1999, the Record Date. Shareholders on the Record
Date received a stock dividend of one share for each two shares held. The
stock dividend was paid on May 4, 1999. Holders of the Class A Common Stock
received Class A shares in the split and holders of Class B Common Stock
received Class B shares. Cash was paid in lieu of fractional shares. The
amounts presented herein give effect to the stock split as if it had
occurred at the beginning of all periods presented.
3. The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," for all periods
presented. Basic earnings per share is computed by dividing net income by
the weighted average of Class A and Class B shares outstanding for the
period. Diluted earnings per share computations assume outstanding stock
options with a dilutive effect on earnings were exercised. These common
stock equivalents are added to the weighted average number of shares
outstanding in the diluted calculation. Net earnings are the same for both
basic and diluted. A reconciliation of the basic and diluted weighted
average shares outstanding is as follows for the three and six month
periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998
---- ----
<S> <C> <C>
Six-month period ended June 30:
Weighted average number of Class A and Class B
Common shares outstanding used as the denominator
in the basic earnings per share calculation 19,146 18,773
Additional shares assuming exercise of dilutive
stock options 518 52
------ ------
Weighted average number of Class A and Class B
Common and equivalent shares used as the denominator
in the diluted earnings per share calculation 19,664 18,825
====== ======
Three-month period ended June 30:
Weighted average number of Class A and Class B
Common shares outstanding used as the denominator
in the basic earnings per share calculation 19,469 18,773
Additional shares assuming exercise of dilutive
stock options 634 117
------ ------
Weighted average number of Class A and Class B
Common and equivalent shares used as the denominator
in the diluted earnings per share calculation 20,103 18,890
====== ======
</TABLE>
5
<PAGE> 6
4. On April 12, 1999, the Company completed an acquisition of the majority of
the operating assets of Pharmacy Plus, Ltd., a specialty pharmacy in
Philadelphia, Pennsylvania, that primarily provides injectable
biopharmaceuticals. The acquisition was accounted for using the purchase
method of accounting and the results of operations are included in the
consolidated financial statements subsequent to the date of acquisition.
The total purchase price for the Pharmacy Plus assets was approximately
$3.5 million, which included approximately $450,000 for inventory and fixed
assets and resulted in approximately $3.1 million of goodwill. No
indebtedness was assumed. The results of operations of Pharmacy Plus would
not have been material to the results of the Company for the periods
presented in these financial statements.
5. In June and July of 1999, the Company sold an aggregate of 2,990,000 shares
of Class B Common Stock in a secondary public offering (the "Offering") for
$32.30 per share after underwriting discount but before expenses of the
Offering. The aggregate net proceeds of approximately $96.6 million are
being used to pay expenses of the Offering, estimated at $600,000, and for
working capital and general corporate purposes, including potential
acquisitions. The shares of Class B Common Stock sold and the approximate
net proceeds in June 1999 were 2,600,000 and $83.4 million, respectively.
6. In accordance with provisions of Statement of Financial Accounting Standard
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company has classified all of its investments in
marketable securities as available-for-sale. These investments are stated
at fair value, with any unrealized holding gains or losses, net of tax,
included as a component of shareholders' equity until realized. The cost of
debt securities classified as available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity. Interest
income is included as a component of current earnings. Investments with an
original maturity of 90 days or less are included as cash equivalents.
At June 30, 1999 all of the Company's investments in marketable securities
were investment-grade government and corporate debt instruments. These
investments had a fair value of approximately $82.8 million (which includes
approximately $49.4 million classified as cash equivalents), which
approximates their amortized cost. There were no unrealized holding gains
or losses at June 30, 1999 and all investments mature within one year from
that date. No investments were disposed of during the three or six month
periods ended June 30, 1999 and there were no realized gains or losses
recorded in earnings for those periods. The Company had no investment in
marketable securities at December 31, 1998.
7. IV-1, Inc. ("IV-1") and IV-One Services, Inc. ("IV-One Services") have been
named as defendants in a second amended counterclaim filed by Amgen, Inc.
("Amgen") on May 14, 1996, in the Circuit Court of the Eighteenth Judicial
District of Seminole County, Florida. Amgen has asserted that these
entities tortiously interfered with a license agreement (the "License
Agreement") between Amgen and Ortho Pharmaceutical Corporation ("Ortho").
Pursuant to this agreement, Amgen licensed Ortho to sell EPO for use in the
treatment of non-dialysis patients, while Amgen reserved the exclusive
right to sell EPO for use in the treatment of dialysis patients. Amgen has
asserted that, prior to the purchase of IV-1 and IV-One Services by the
Company, these entities induced Ortho to sell EPO to them for resale in the
dialysis market in contravention of the License Agreement. Amgen has also
alleged that IV-1 and IV-One Services were involved in a civil conspiracy
to circumvent the terms of the License Agreement to allow the resale of EPO
to the dialysis market. Furthermore, Amgen has asserted unfair competition
claims against IV-1, including that IV-1 manufactured and distributed
unapproved prefilled syringes of EPO and another product manufactured by
Amgen in container systems unapproved by Amgen. Amgen did not specify a
time frame for the acts complained of in the civil conspiracy and unfair
competition allegations. In each count, Amgen has demanded an unspecified
amount of compensatory damages, including costs and interest.
The Company believes that the sellers of IV-1, IV-One Services and Charise
Charles, Ltd., Inc. ("Charise Charles") are contractually obligated to
provide legal defense and to indemnify the Company for losses and
liabilities with respect to this litigation, to the extent that the alleged
acts occurred prior to the purchase of such entities by the Company. To
date, the sellers have provided the legal defense for IV-1 and IV-One
Services in the litigation. Indemnification from the sellers of IV-1 and
IV-One Services is limited to no more than $1.5
6
<PAGE> 7
million and indemnification from the sellers of Charise Charles is limited
to no more than $2.0 million. The Company does not expect the Amgen
litigation to be material to the Company's results of operations, financial
condition or cash flows; however, no assurance can be given that this
litigation will not have a material adverse effect on the Company's
business, financial condition and results of operations. As of June 30,
1999, approximately $161,000 of charges have been incurred on behalf of the
sellers for claims for indemnification. In addition, Amgen is the Company's
largest supplier. Consequently, this litigation presents the risk of
adversely affecting the Company's business relationship with Amgen, which
could have a material adverse effect on the Company.
The Company is also subject to ordinary and routine litigation incidental
to its business, none of which is material to the Company's results of
operations, financial condition, or cash flows.
On November 14, 1995, an investigator for the Food and Drug Administration
(the "FDA"), accompanied by an inspector from the State of Florida Board of
Pharmacy, inspected the Company's pharmacy in Altamonte Springs, Florida.
At the end of the inspection, the FDA investigator issued an FDA Form-483,
which is the form used by FDA investigators to identify any observed or
suspected noncompliance with the laws administered by the agency. The FDA
Form-483 identified the facility as a pharmacy/repackager and listed three
observations related to certain requirements that the FDA typically imposes
on manufacturers of sterile products. The Company advised the FDA in
December 1995 that the Company believes it is not, within the statutory or
regulatory meaning of these terms, a repackager or a manufacturer. A second
inspection of the same facility occurred on June 26, 1997, in which the FDA
investigator was again accompanied by Florida pharmacy authorities. The FDA
investigator issued a substantially identical FDA Form-483 at the end of
that inspection. The Florida State Board of Pharmacy did not issue any
deficiencies regarding the operations of the Altamonte Springs pharmacy in
either of these inspections.
On March 16, 1992, the FDA issued a Compliance Policy Guide (CPG 460.200),
which explains the criteria the FDA uses to distinguish between pharmacy
operations that are properly regulated under state law and drug
manufacturing regulated by the FDA. The Company's response to the FDA in
December 1995 cited this CPG and explained the Company's contention that,
according to the FDA's own criteria, the facility is a pharmacy properly
regulated under state and local laws.
On November 21, 1997, the President signed into law the FDA Modernization
Act of 1997, which, among a number of other items, adds a new section on
pharmacy compounding to the Federal Food, Drug and Cosmetic Act. In this
provision, Congress clarified a gray area by explicitly identifying the
circumstances in which pharmacies may compound drugs without the need for
filing a New Drug Application, observing the FDA's Good Manufacturing
Practice regulations or complying with certain other specific Federal Food,
Drug and Cosmetic Act requirements. Congress provided that the term
"compounding" does not include mixing or reconstituting that is done in
accordance with directions contained in approved labeling provided by the
manufacturer of the product. The Company believes that, as a result of this
amendment, so long as it follows the manufacturer's approved labeling in
each case, and prepares drugs only for identified individual patients using
licensed practitioners, the Company's activities should be regulated by the
Florida State Board of Pharmacy and not be subjected by the FDA to a full
New Drug Application requirement demonstrating the basic safety and
effectiveness of the drugs.
If the Company is correct and its operations are limited to those engaged
in by pharmacies, there should be no material adverse effect from the FDA
Form-483s because the Company believes it is currently in compliance in all
material respects with applicable state and local laws. If the Company is
deemed to be a sterile product manufacturer or a sterile product
repackager, it would be subject to additional regulatory requirements. If
for some reason the FDA or other legal authorities decide that the Company
must file for approval of a New Drug Application, such an event could have
a material adverse effect on the Company.
There can be no assurance that future legislation, future rulemaking, or
active enforcement by the FDA of a determination that the Company is a drug
manufacturer will not have a material adverse effect on the business of the
Company.
7
<PAGE> 8
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, asserted and unasserted claims, and our ability and the
ability of the entities with which we transact business to modify or redesign
computer systems to work properly in the year 2000, 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.
General.
We typically are reimbursed for products and services provided by Priority
Healthcare Pharmacy by third-party payors, primarily private insurers and
managed care organizations. Sales derived from agreements with managed care
organizations generally are made pursuant to established rates negotiated
periodically. We typically are reimbursed for products provided by Priority
Healthcare Distribution directly by oncology practices, renal dialysis centers
and other healthcare providers and pricing is negotiated directly with the
providers. The higher level of specialized services provided by Priority
Healthcare Pharmacy generates higher margins than Priority Healthcare
Distribution. As a result, sales from pharmacy services have a proportionately
greater impact on our earnings than sales from our lower margin distribution
services.
Results of Operations.
The following table sets forth for the periods indicated, the percentages of
total revenues represented by the respective financial items:
<TABLE>
<CAPTION>
SIX-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
--------------------------------------
<S> <C> <C> <C> <C>
Net sales ................................... 100.0% 100.0% 100.0% 100.0%
Cost of products sold ....................... 87.6 88.7 87.7 89.2
----- ----- ----- -----
Gross profit ................................ 12.4 11.3 12.3 10.8
Selling, general and administrative expense 5.0 5.1 4.9 4.8
Depreciation and amortization ............... .3 .5 .3 .5
----- ----- ----- -----
Earnings from operations .................... 7.0 5.7 7.1 5.6
Interest income, net ........................ .3 .3 .3 .3
----- ----- ----- -----
Earnings before income taxes ................ 7.4 5.9 7.5 5.9
Provision for income taxes .................. 2.9 2.3 3.0 2.3
----- ----- ----- -----
Net earnings ................................ 4.4% 3.6% 4.5% 3.6%
===== ===== ===== =====
</TABLE>
8
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Net sales increased to $185.2 million in the first six months of 1999 from
$122.1 million in the first six months of 1998, an increase of 52%. Net sales
increased to $102.0 million in the three months ended June 30, 1999, from $63.9
million in the three months ended June 30, 1998, an increase of 60%. The growth
primarily reflected the addition of new customers, new product introductions
(including the new Rebetron treatment for Hepatitis-C), additional sales to
existing customers, the acquisition of Pharmacy Plus, Ltd. and inflationary
price increases.
Gross profit increased to $22.9 million in the first six months of 1999 from
$13.7 million in the first six months of 1998, an increase of 66%. Gross profit
as a percentage of net sales increased in the first six months of 1999 to 12.4%
from 11.3% in the first six months of 1998. Gross profit increased to $12.6
million in the three months ended June 30, 1999, from $6.9 million in the three
months ended June 30, 1998, an increase of 81%. Gross profit as a percentage of
net sales increased in the three months ended June 30, 1999, to 12.3% from 10.8%
in the three months ended June 30, 1998. The increase in gross profit reflected
increased sales by both Priority Healthcare Pharmacy and Priority Healthcare
Distribution and the acquisition of Pharmacy Plus. The increase in gross profit
as a percentage of net sales was primarily attributed to the change in sales
mix, as Priority Healthcare Pharmacy experienced increased sales, which generate
higher gross margins than Priority Healthcare Distribution sales. Competition
continues to exert pressure on margins, particularly those of Priority
Healthcare Distribution.
Selling, general and administrative ("SGA") expense increased to $9.2 million in
the first six months of 1999 from $6.2 million in the first six months of 1998,
an increase of 49%. SGA expense as a percentage of net sales decreased to 5.0%
in the first six months of 1999 from 5.1% in the first six months of 1998. SGA
expense increased to $5.0 million in the three months ended June 30, 1999, from
$3.0 million in the three months ended June 30, 1998, an increase of 64%. SGA
expense as a percentage of net sales increased in the three months ended June
30, 1999, to 4.9% from 4.8% in the three months ended June 30, 1998. The
increases in SGA expense reflected the growth in our business and the
acquisition of Pharmacy Plus. The decrease in SGA expense as a percentage of net
sales from that in the six months ended June 30, 1998 to that in the six months
ended June 30, 1999 resulted from the spreading of fixed costs over a larger
sales base. The increase in SGA expense as a percentage of net sales from that
in the three months ended June 30, 1998 to that in the three months ended June
30, 1999 resulted from increased overall costs of positioning ourselves for
future growth. Management continually monitors SGA expense and remains focused
on controlling these increases through improved technology and efficient asset
management.
Depreciation and amortization ("D&A") decreased to $614,000 in the first six
months of 1999 from $622,000 in the first six months of 1998, a decrease of
1.3%. D&A decreased to $301,000 in the three months ended June 30, 1999, from
$311,000 in the three months ended June 30, 1998, a decrease of 3.2%. The
decrease in D&A was primarily the result of a decrease in amortization of
intangible assets that became fully amortized, offset, in part, by depreciation
of new equipment, particularly in management information systems.
Interest income, net, increased to $614,000 in the first six months of 1999 from
$306,000 in the first six months of 1998. Interest income, net, increased to
$356,000 in the three months ended June 30, 1999 from $198,000 in the three
months ended June 30, 1998. In the first six months of 1999, interest income of
$280,000 was primarily related to amounts earned by investing excess cash and
funds received from the June 1999 secondary public offering of our Class B
Common Stock (the "Secondary Offering") in overnight repurchase agreements with
major financial institutions and in marketable securities, and interest income
of $377,000 was related to loaning funds to Bindley Western Industries, Inc.
("BWI"). In the three months ended June 30, 1999, interest income of $235,000
was primarily related to amounts earned by investing excess cash and funds
received from the Secondary Offering in overnight repurchase agreements with
major financial institutions and in marketable securities, and interest income
of $164,000 was related to loaning funds to BWI. In the first six months of
1998, interest income of $186,000 and $356,000 were primarily related to amounts
earned by investing funds received from the October 1997 initial public offering
of our Class B Common Stock (the "IPO") in overnight repurchase agreements with
a major financial institution and loaning funds to BWI, respectively. In the
three months ended June 30, 1998 interest income of $75,000 and $244,000 were
primarily related to amounts earned by investing funds received from the IPO in
overnight repurchase agreements with a major financial institution
9
<PAGE> 10
and loaning funds to BWI, respectively. This interest income was partially
offset by interest expense of $218,000 in the first six months of 1998 and
$109,000 in the three months ended June 30, 1998 for interest due on the
subordinated note issued to BWI on March 31, 1997. The subordinated note issued
to BWI was paid on September 30, 1998. The interest income on the loans to BWI
was calculated by applying BWI's average incremental borrowing rate to the
average outstanding balances. The average outstanding loans to BWI were $13.2
million in the first six months of 1999 and $11.2 million in the first six
months of 1998. The average outstanding loans to BWI were $12.9 million in the
three months ended June 30, 1999 and $15.3 million in the three months ended
June 30, 1998. BWI's average incremental borrowing rate was 5.2% in the first
six months of 1999 and 6.4% in the first six months of 1998. BWI's average
incremental borrowing rate was 5.1% in the three months ended June 30, 1999 and
6.4% in the three months ended June 30, 1998.
Through December 31, 1998, we participated in the consolidated federal and state
income tax returns filed by BWI. BWI charged federal and state income tax
expense to us as if we filed our own separate federal and state income tax
returns. The provision for income taxes represented 39.7% of earnings before
taxes for the first six months of 1999 and 1998 and the three months ended June
30, 1999 and 1998.
Liquidity - Capital Resources.
Net cash provided by operating activities. Our operations generated $3.5 million
in cash during the first six months of 1999. Accounts receivable increased $14.8
million during the first six months of 1999, primarily to support the increase
in sales and the extension of credit terms to meet competitive conditions.
Inventory increased $6.2 million during the first six months of 1999 to support
the increase in sales. Trade accounts payable increased $14.5 million and
partially reduced the cash required to support the increases in accounts
receivable and inventory. This increase was attributable to the timing of
payments, the inventory increase and the credit terms negotiated with vendors.
Other current assets and liabilities increased $1.2 million primarily due to the
increase in income taxes payable and accruing for secondary public offering
costs. Depreciation and amortization totaled $613,000 during the first six
months of 1999.
Net cash used by investing activities. We purchased $33.5 million of marketable
securities with a portion of the funds received from the June 1999 secondary
public offering. Effective April 12, 1999, we also acquired the majority of the
operating assets of Pharmacy Plus, Ltd., a specialty pharmacy in Philadelphia,
Pennsylvania for $3.5 million. Capital expenditures during the first six months
of 1999 totaled $212,000. We expect that capital expenditures during the last
six months of 1999 will be approximately $850,000 and during 2000 will be
approximately $1.0 million. We anticipate that these expenditures will relate
primarily to the purchase of computer hardware and software, telecommunications
equipment, and furniture and equipment for a new corporate facility. We expect
to complete the move to our new corporate facility in November of 1999.
Net cash provided by financing activities. In June 1999 we received $83.4
million from our secondary public offering of our Class B Common Stock. We have
also advanced excess cash to BWI on an interest-bearing basis under the terms of
a $25.0 million Revolving Credit Promissory Note which is effective through
December 31, 1999, at which time all outstanding amounts are due in full. During
the first six months of 1999, our receivable from BWI decreased by $3.4 million.
During the first six months of 1999, we also received proceeds of $1.8 million,
including the income tax benefit, 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, we cannot assure you that we will not
incur some collection loss on major customer accounts receivable in the future.
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We believe that the net proceeds from the Secondary Offering, cash from
operations, repayment by BWI of advances made to it and availability under our
line of credit will be sufficient to meet our working capital needs for at least
two years.
Year 2000 Compliance.
The year 2000 will pose a unique set of challenges to those industries that rely
on information technology. As a result of the methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the year 2000 from the year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether. We, and
other companies in the same business, are vulnerable to this problem because of
our dependence on distribution and communications systems.
Since December 31, 1996, we have replaced all of our hardware and software
systems for reasons other than year 2000 compliance; we have spent approximately
$875,000 for these systems. The hardware systems have been successfully tested
for year 2000 compliance. In May 1998, we initiated the process of preparing our
software applications to make them year 2000 compliant. Two of the three main
software packages that we use were tested for year 2000 compliance during 1998
and the third software package was upgraded during January 1999. We believe
these software systems are now year 2000 compliant. The total costs relating to
the upgrade of our software programs was approximately $75,000. Funds for these
payments were generated from operations. In addition, we have tested the
recently acquired software and hardware systems of Pharmacy Plus and estimate
that it will cost approximately $15,000, of which $10,000 has been already
spent, to make those systems year 2000 compliant.
We believe that the payments required to bring our systems into compliance have
not and will not have a material adverse effect on us. However, the year 2000
problem is widespread and complex and can potentially affect any computer
process. As a result, we cannot assure you that the year 2000 compliance can be
achieved without additional unanticipated expenditures and uncertainties that
might affect future financial results.
Also, to operate our business, we rely on governmental agencies, utility
companies, telecommunications companies, shipping companies, suppliers and other
third party service providers over which we have little control. Our ability to
conduct our business is dependent upon the ability of these third parties to
avoid year 2000 related disruptions. We are in the process of contacting our
third party service providers about their year 2000 readiness and to date the
majority of these third parties have assured us they are year 2000 compliant.
The failure of our key third party service providers, customers, suppliers or
third party payors to adequately address their year 2000 issues could result in
a material adverse effect on our business, financial condition or results of
operations.
We have not to date developed any contingency plans, because these plans will
depend on any negative responses from our third party service providers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary exposure to market risk as it relates to future earnings consists of
changes in interest rates on our loans to BWI. Our interest income on these
loans is determined based on BWI's average incremental borrowing rate (a
variable rate) with its third-party lender. A decrease in interest rates would
adversely affect our operating results and cash flow available to fund
operations and expansion. Based on the average loan balance for the first six
months of 1999, a decrease of 10% in BWI's average incremental borrowing rate
would result in an approximately $69,000 annual decrease in interest income.
Conversely, a 10% increase in BWI's average incremental borrowing rate would
result in an approximately $69,000 annual increase in interest income.
At June 30, 1999 our exposure to market risk also includes exposure to 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
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<PAGE> 12
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.
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<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The information set forth in Note 5 to the Notes to Consolidated
Financial Statements (unaudited) set forth elsewhere in this Report is
incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) Sales of Unregistered Securities
None.
(d) Use of Proceeds
The Company's Registration Statement on Form S-1 (File No. 333-34463)
was declared effective on October 23, 1997. There has been no change in the Use
of Proceeds since that reported in the Company's Form 10-Q for the quarter ended
March 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a) The annual meeting of the shareholders of the Company was held on May
10, 1999.
b) The following directors were elected at the meeting to serve until the
annual meeting of shareholders in the year 2002:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Robert L. Myers 20,348,685 0 279,130 0
Donald J. Perfetto 20,348,673 0 279,142 0
Richard W. Roberson 20,411,773 0 216,042 0
</TABLE>
In addition, the following directors continue in office until the annual meeting
of shareholders in the year indicated:
William E. Bindley 2000
Rebecca M. Shanahan 2000
Michael D. McCormick 2001
Thomas J. Salentine 2001
c) Other matters voted upon and the results of the voting were as follows:
1) The shareholders voted 20,612,127 in the affirmative and 6,446 in
the negative, with 9,242 abstentions and 0 broker non-votes, to
appoint PricewaterhouseCoopers LLP as auditors of the Company for
1999.
2) The shareholders voted 15,850,344 in the affirmative and 2,636,069
in the negative, with 73,181 abstentions and 2,068,221 broker
non-votes, to approve the proposed amendment to the Company's 1997
Stock Option and Incentive Plan, which increases from 1,875,000 to
2,875,000 the number of shares of the Company's Class B Common
Stock subject to issuance under the plan.
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<PAGE> 14
ITEM 5. OTHER INFORMATION.
On April 7, 1999, the Company announced that the Board of Directors
authorized a 3-for-2 stock split of the Company's Common Stock to be effected as
a stock dividend to all shareholders of record at the close of business on April
20, 1999, the Record Date. Shareholders on the Record Date received a stock
dividend of one share for each two shares held. The stock dividend was paid on
May 4, 1999. Holders of the Class A Common Stock received Class A shares in the
split and holders of Class B Common Stock received Class B shares. Cash was paid
in lieu of fractional shares.
On April 12, 1999, the Company completed an acquisition of the majority
of the operating assets of Pharmacy Plus, Ltd., a specialty pharmacy in
Philadelphia, Pennsylvania, that primarily provides injectable
biopharmaceuticals. The acquisition was accounted for using the purchase method
of accounting and the results of operations are included in the consolidated
financial statements subsequent to the date of acquisition. The total purchase
price for the Pharmacy Plus assets was approximately $3.5 million, which
includes approximately $450,000 for inventory and fixed assets and results in
approximately $3.1 million of goodwill. No indebtedness was assumed. The results
of operations of Pharmacy Plus would not have been material to the results of
the Company for the periods presented.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None.
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<PAGE> 15
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.
August 10, 1999 PRIORITY HEALTHCARE CORPORATION
BY: /s/ DONALD J. PERFETTO
---------------------------------
Donald J. Perfetto
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 54,734
<SECURITIES> 33,454
<RECEIVABLES> 71,642
<ALLOWANCES> 862
<INVENTORY> 31,010
<CURRENT-ASSETS> 205,570
<PP&E> 3,501
<DEPRECIATION> 1,738
<TOTAL-ASSETS> 216,838
<CURRENT-LIABILITIES> 53,138
<BONDS> 0
0
0
<COMMON> 215
<OTHER-SE> 163,269
<TOTAL-LIABILITY-AND-EQUITY> 216,838
<SALES> 185,203
<TOTAL-REVENUES> 185,203
<CGS> 162,326
<TOTAL-COSTS> 171,564
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 298
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,639
<INCOME-TAX> 5,415
<INCOME-CONTINUING> 8,224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,224
<EPS-BASIC> .43
<EPS-DILUTED> .42
</TABLE>