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 September 30, 2000
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-23249
PRIORITY HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1927379
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 Technology Park, Suite 124
Lake Mary, Florida 32746
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 804-6700
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 October 20, 2000, the number of shares outstanding of each of the issuer's
classes of common stock were as follows:
Class A Common Stock - 4,160,153
Class B Common Stock - 18,537,928
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(000's omitted, except share data)
(unaudited)
<TABLE>
<CAPTION>
Nine-month period ended Three-month period ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales......................................... $ 430,464 $ 300,320 $ 147,725 $ 115,117
Cost of products sold............................. 378,994 263,249 130,328 100,923
--------- --------- --------- ---------
Gross profit...................................... 51,470 37,071 17,397 14,194
Selling, general and administrative expense....... 20,334 14,930 6,668 5,692
Depreciation and amortization..................... 1,035 947 345 333
--------- --------- --------- ---------
Earnings from operations.......................... 30,101 21,194 10,384 8,169
Interest income................................... 4,764 2,133 2,021 1,519
--------- --------- --------- ---------
Earnings before income taxes...................... 34,865 23,327 12,405 9,688
Provision for income taxes........................ 13,353 9,261 4,751 3,846
--------- --------- --------- ---------
Net earnings...................................... $ 21,512 $ 14,066 $ 7,654 $ 5,842
========= ========= ========= =========
Earnings per share:
Basic $1.02 $.70 $.36 $.27
Diluted................................... $1.00 $.68 $.35 $.26
Weighted average shares outstanding:
Basic 21,039,414 20,044,558 21,381,049 21,811,719
Diluted................................... 21,488,720 20,600,894 21,838,503 22,444,948
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(000's omitted, except share data)
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
2000 1999
------------------------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................................. $ 61,147 $ 24,814
Marketable securities................................................. 67,864 56,795
Receivables, less allowance for doubtful accounts of
$2,319 and $1,764, respectively............................ 96,999 88,793
Finished goods inventory.............................................. 26,938 30,920
Deferred income taxes................................................. 1,993 1,685
Other current assets.................................................. 2,742 1,860
--------- ---------
257,683 204,867
Fixed assets, net.......................................................... 3,762 2,562
Deferred income taxes...................................................... 38 38
Other assets .............................................................. 2,019 469
Intangibles, net........................................................... 9,760 9,768
--------- ---------
Total assets................................................ $ 273,262 $ 217,704
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable...................................................... $ 65,821 $ 53,897
Other current liabilities............................................. 4,843 5,200
--------- ---------
70,664 59,097
--------- ---------
Commitments and contingencies (note 7)
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,
4,244,839 and 5,241,422 issued and outstanding,
respectively........................................... 42 52
Class B, $0.01 par value, 180,000,000 shares authorized,
18,451,782 and 16,642,434 issued and outstanding,
respectively............................................ 185 167
Additional paid in capital....................................... 174,291 151,036
Retained earnings................................................ 59,200 37,688
Accumulated comprehensive loss................................... (495) --
--------- ---------
233,223 188,943
Less: Common stock in treasury (at cost), 1,306,338 and
1,304,858 shares, respectively.................. (30,625) (30,336)
--------- ---------
Total shareholders' equity.................................. 202,598 158,607
--------- ---------
Total liabilities and shareholders' equity.................. $ 273,262 $ 217,704
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(unaudited)
<TABLE>
<CAPTION>
Nine-month period ended
September 30,
2000 1999
-------------------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income........................................... $21,512 $ 14,066
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 1,035 947
Provision for doubtful accounts............................. 1,181 855
Tax benefit from stock option exercises..................... 12,437 865
Loss on disposal of fixed assets............................ -- 25
Deferred income taxes....................................... -- (46)
Change in assets and liabilities:
Receivables................................................. (9,387) (20,556)
Finished goods inventory.................................... 3,982 811
Accounts payable............................................ 11,924 13,295
Other current assets and liabilities........................ (1,239) 4,579
-------- --------
Net cash provided by operating activities................. 41,445 14,841
-------- --------
Cash flow from investing activities:
Purchase of marketable securities..................................... (11,871) (64,574)
Purchase of fixed assets.............................................. (1,873) (882)
Acquisition of businesses............................................. -- (4,536)
Increase in other assets.............................................. (1,550) --
-------- --------
Net cash used by investing activities..................... (15,294) (69,992)
-------- --------
Cash flow from financing activities:
Net change in amounts due to /from BWI................................ -- 3,577
Proceeds from stock option exercises.................................. 10,580 1,171
Net proceeds from secondary stock offering............................ -- 96,073
Payments for purchase of treasury stock............................... (398) (7,041)
-------- --------
Net cash provided by financing activities................. 10,182 93,780
-------- --------
Net increase in cash....................................................... 36,333 38,629
Cash and cash equivalents at beginning of period........................... 24,814 2
-------- --------
Cash and cash equivalents at end of period................................. $ 61,147 $ 38,631
========= ========
Supplemental cash flow information:
Income taxes paid..................................................... $ 754 $ 5,385
Supplemental non-cash investing and financing activities:
Stock issued in connection with acquisition........................... $ 354 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
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-month and nine-month periods ended
September 30, 2000 and 1999 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 12, 2000, the Company changed its reporting period for this fiscal
year from a calendar year ending December 31 to the 52 or 53 week period
ending on the Saturday closest to December 31. The three-month and
nine-month periods ended September 30, 2000 and 1999 each contained 13 and
39 weeks, respectively.
3. On October 19, 2000, the Company announced that the Board of Directors
authorized a 2-for-1 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 November 8, 2000, the Record Date. Shareholders on the Record
Date will receive a stock dividend of one share for each one share held.
The stock dividend will be paid on November 22, 2000. Holders of the Class
A Common Stock will receive Class A shares in the split and holders of
Class B Common Stock will receive Class B shares. The pro forma amounts
that follow give effect to the stock split as if it had occurred at the
beginning of all periods presented:
<TABLE>
<CAPTION>
Nine-month period ended Three-month period ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pro forma earnings per share:
Basic..................... $.51 $.35 $.18 $.13
Diluted................... $.50 $.34 $.18 $.13
Pro forma weighted average shares
outstanding:
Basic..................... 42,078,828 40,089,116 42,762,098 43,623,438
Diluted................... 42,977,440 41,201,788 43,677,006 44,889,896
</TABLE>
4. A reconciliation of the basic and diluted weighted average shares
outstanding is as follows for the three-month and nine-month periods ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(000's omitted)
2000 1999
------ ------
<S> <C> <C>
Historical:
Nine-month periods ended September 30:
Weighted average number of Class A and Class B
Common shares outstanding used as the denominator
in the basic earnings per share calculation 21,039 20,045
Additional shares assuming exercise of dilutive
stock options 450 556
------ ------
Weighted average number of Class A and Class B
Common and equivalent shares used as the denominator
in the diluted earnings per share calculation 21,489 20,601
====== ======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
(000's omitted)
2000 1999
------ ------
<S> <C> <C>
Three-month periods ended September 30:
Weighted average number of Class A and Class B
Common shares outstanding used as the denominator
in the basic earnings per share calculation 21,381 21,812
Additional shares assuming exercise of dilutive
stock options 458 633
------ ------
Weighted average number of Class A and Class B
Common and equivalent shares used as the denominator
in the diluted earnings per share calculation 21,839 22,445
====== ======
Pro forma for effect of stock split:
Nine-month periods ended September 30:
Weighted average number of Class A and Class B
Common shares outstanding used as the denominator
in the basic earnings per share calculation 42,079 40,089
Additional shares assuming exercise of dilutive
stock options 898 1,113
------ ------
Weighted average number of Class A and Class B
Common and equivalent shares used as the denominator
in the diluted earnings per share calculation 42,977 41,202
====== ======
Three-month periods ended September 30:
Weighted average number of Class A and Class B
Common shares outstanding used as the denominator
in the basic earnings per share calculation 42,762 43,623
Additional shares assuming exercise of dilutive
stock options 915 1,267
------ ------
Weighted average number of Class A and Class B
Common and equivalent shares used as the denominator
in the diluted earnings per share calculation 43,677 44,890
====== ======
</TABLE>
5. 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
less than 3 months are included as cash equivalents.
At September 30, 2000 and December 31, 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 $128.0 million (which includes approximately $60.1 million
classified as cash equivalents) and $75.0 million (which includes
approximately $18.2 million classified as cash equivalents) at September
30, 2000 and December 31, 1999, respectively. At September 30, 2000 the
amortized cost of available-for-sale securities was approximately $802,000
more than their market value and there was an unrealized holding loss,
6
<PAGE>
net of tax, of approximately $495,000. The amortized cost of
available-for-sale securities approximated their market value at December
31, 1999 and there were no unrealized holding gains or losses. All of the
investments mature within one year from September 30, 2000 and December 31,
1999. No investments were disposed of during the three-month and nine-month
periods ended September 30, 2000 and 1999.
6. The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." The total other
comprehensive loss was approximately $122,000 and $495,000 for the
three-month and nine-month periods ended September 30, 2000, respectively.
The Company's only item of comprehensive loss is an unrealized loss on
investments that has been reported separately within shareholders' equity
on the consolidated balance sheet. Total comprehensive income was
approximately $7,532,000 and $21,017,000 for the three-month and nine-month
periods ended September 30, 2000, respectively. There was no other
comprehensive gain or loss for the three-month and nine-month periods ended
September 30, 1999.
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 any losses and
liabilities with respect to this litigation, to the extent that the alleged
acts occurred prior to the purchase of such entities by the Company. To
date, the sellers have provided the legal defense for IV-1 and IV-One
Services in the litigation. Indemnification from the sellers of IV-1 and
IV-One Services is limited to no more than $1.5 million and indemnification
from the sellers of Charise Charles is limited to no more than $2.0
million. The Company does not expect the Amgen litigation to be material to
the Company's results of operations, financial condition or cash flows;
however, no assurance can be given that this litigation will not have a
material adverse effect on the Company's business, financial condition and
results of operations. As of September 30, 2000, 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 expected to be material to the Company's
results of operations, financial condition, or cash flows.
On November 14, 1995, an investigator for the Food and Drug Administration
(the "FDA"), accompanied by an inspector from the State of Florida Board of
Pharmacy, inspected the Company's pharmacy in Florida. At the end of the
inspection, the FDA investigator issued an FDA Form-483, which is the form
used by FDA investigators to identify any observed or suspected
noncompliance with the laws administered by the agency. The FDA Form-483
identified the facility as a pharmacy/repackager and listed three
observations related to certain requirements that the FDA typically imposes
on manufacturers of sterile products. The Company advised the FDA in
December 1995 that the Company believes it is not, within the statutory or
regulatory meaning of these terms, a repackager or a manufacturer. A second
inspection of the same facility occurred on June 26, 1997, in which the FDA
investigator was again accompanied by Florida pharmacy authorities. The FDA
investigator issued a substantially identical FDA Form-483 at the end of
that inspection. The Florida State
7
<PAGE>
Board of Pharmacy did not issue any deficiencies regarding the operations
of this pharmacy in either of these inspections.
On March 16, 1992, the FDA issued a Compliance Policy Guide (CPG 460.200),
which explains the criteria the FDA uses to distinguish between pharmacy
operations that are properly regulated under state law and drug
manufacturing regulated by the FDA. The Company's response to the FDA in
December 1995 cited this CPG and explained the Company's contention that,
according to the FDA's own criteria, the facility is a pharmacy properly
regulated under state and local laws.
On November 21, 1997, the President signed into law the FDA Modernization
Act of 1997, which, among a number of other items, 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.
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, 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.
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.
8
<PAGE>
Results of Operations.
The following table sets forth for the periods indicated, the percentages
of net sales represented by the respective financial items:
<TABLE>
<CAPTION>
Nine-month period ended Three-month period ended
September 30, September 30,
2000 1999 2000 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0% 100.0%
Cost of products sold................. 88.0 87.7 88.2 87.7
----- ----- ----- -----
Gross profit.......................... 12.0 12.3 11.8 12.3
Selling, general and administrative... 4.7 5.0 4.5 4.9
Depreciation and amortization......... .2 .3 .2 .3
----- ----- ----- -----
Earnings from operations.............. 7.0 7.1 7.0 7.1
Interest income....................... 1.1 .7 1.4 1.3
----- ----- ----- -----
Earnings before income taxes.......... 8.1 7.8 8.4 8.4
Provision for income taxes............ 3.1 3.1 3.2 3.3
----- ----- ----- -----
Net earnings.......................... 5.0% 4.7% 5.2% 5.1%
===== ===== ===== =====
</TABLE>
Net sales increased to $430.5 million in the first nine months of 2000 from
$300.3 million in the first nine months of 1999, an increase of 43%. Net
sales increased to $147.7 million in the three months ended September 30,
2000, from $115.1 million in the three months ended September 30, 1999, an
increase of 28%. The growth primarily reflected the addition of new
customers, new product introductions, additional sales to existing
customers, the acquisitions of Pharmacy Plus, Ltd. and Monitors Unlimited,
Inc. and inflationary price increases.
Gross profit increased to $51.5 million in the first nine months of 2000
from $37.1 million in the first nine months of 1999, an increase of 39%.
Gross profit as a percentage of net sales decreased in the first nine
months of 2000 to 12.0% from 12.3% in the first nine months of 1999. Gross
profit increased to $17.4 million in the three months ended September 30,
2000, from $14.2 million in the three months ended September 30, 1999, an
increase of 23%. Gross profit as a percentage of net sales decreased in the
three months ended September 30, 2000, to 11.8% from 12.3% in the three
months ended September 30, 1999. The increase in gross profit reflected
increased sales. The decrease in gross profit as a percentage of net sales
was primarily attributed to 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 $20.3
million in the first nine months of 2000 from $14.9 million in the first
nine months of 1999, an increase of 36%. SGA expense as a percentage of net
sales decreased to 4.7% in the first nine months of 2000 from 5.0% in the
first nine months of 1999. SGA expense increased to $6.7 million in the
three months ended September 30, 2000, from $5.7 million in the three
months ended September 30, 1999, an increase of 17%. SGA expense as a
percentage of net sales decreased in the three months ended September 30,
2000, to 4.5% from 4.9% in the three months ended September 30, 1999. The
increases in SGA expense reflected the growth in our business and the
acquisitions of Pharmacy Plus and Monitors Unlimited. The decreases in SGA
expense as a percentage of net sales resulted from the spreading of fixed
costs over a larger sales base. 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 $1.0 million in the
first nine months of 2000 from $947,000 in the first nine months of 1999,
an increase of 9.3%. D&A increased to $345,000 in the three months ended
September 30, 2000, from $333,000 in the three months ended September 30,
1999, an increase
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<PAGE>
of 3.6%. The increase in D&A was primarily the result of additional
depreciation on computer hardware and software, transportation equipment, a
telephone system and furniture and equipment for our new corporate
facility.
Interest income increased to $4.8 million in the first nine months of 2000
from $2.1 million in the first nine months of 1999, an increase of 123.3%.
Interest income increased to $2.0 million in the three months ended
September 30, 2000, from $1.5 million in the three months ended September
30, 1999, an increase of 33.0%. In the first nine months of 2000, the
interest income was primarily related to amounts earned by investing cash
and funds received from operations, the June and July 1999 secondary public
offering of our Class B Common Stock and employee stock option exercises in
overnight repurchase agreements with major financial institutions and in
marketable securities. In the first nine months of 1999, interest income of
$1.6 million was primarily related to amounts earned by investing cash and
funds received from the June and July 1999 secondary public offering in
overnight repurchase agreements with major financial institutions and in
marketable securities, and interest income of $544,000 was related to
loaning funds to Bindley Western Industries, Inc. ("BWI"). In the three
months ended September 30, 2000 the interest income was primarily related
to amounts earned by investing cash and funds received from operations, the
June and July 1999 secondary public offering and employee stock option
exercises in overnight repurchase agreements with major financial
institutions and in marketable securities. In the three months ended
September 30, 1999, interest income of $1.4 million was primarily related
to amounts earned by investing cash and funds received from the June and
July 1999 secondary public offering in overnight repurchase agreements with
major financial institutions and in marketable securities, and interest
income of $167,000 was related to loaning funds to BWI. The interest income
on the loans to BWI was calculated by applying BWI's average incremental
borrowing rate to the average outstanding loans. The average outstanding
loans to BWI were $13.2 million and BWI's average incremental borrowing
rate was 5.2% in the first nine months of 1999. The average outstanding
loans to BWI were $12.9 million and BWI's average incremental borrowing
rate was 5.1% in the three months ended September 30, 1999.
The provision for income taxes in the three-month and nine-month periods
ended September 30, 2000 and 1999 represented 38.3% and 39.7%,
respectively, of earnings before taxes. During the fourth quarter of 1999,
we implemented selected tax strategies which reduced our effective tax
rate.
Liquidity - Capital Resources.
Net cash provided by operating activities. Our operations generated $41.4
million in cash during the first nine months of 2000. Receivables increased
$9.4 million during the first nine months of 2000 primarily to support the
increase in sales and the extension of credit terms to meet competitive
conditions. Inventory decreased $4.0 million during the first nine months
of 2000 due to our concerted effort to closely monitor inventory and
maintain it at an optimal level. Accounts payable increased $11.9 million
during the first nine months of 2000 to offset the cash required to support
the increase in receivables. The accounts payable increase was attributable
to the timing of payments and the credit terms negotiated with vendors. We
anticipate that our operations may require cash to fund our growth.
Depreciation and amortization totaled $1.0 million during the first nine
months of 2000. Provision for doubtful accounts totaled $1.2 million during
the first nine months of 2000. During the first nine months of 2000 we also
generated $12.4 million from the tax benefit related to stock option
exercises.
Net cash used by investing activities. During the first nine months of
2000, we purchased $11.9 million of marketable securities in order to take
advantage of interest rate increases. Capital expenditures during the first
nine months of 2000 totaled $1.9 million. Primarily these purchases were
for computer hardware and software, a telephone system and furniture and
equipment for the new corporate facility. We expect that capital
expenditures during the last three months of 2000 will be approximately
$1.5 million and during 2001 will be approximately $3.0 million. We
anticipate that these expenditures will relate primarily to the purchase of
computer hardware and software and furniture and equipment for the
corporate facility. During the first nine months of 2000, other assets
increased $1.6 million primarily due to a $2.0 million equity investment,
which will be carried at cost.
10
<PAGE>
Net cash provided by financing activities. During the first nine months of
2000, we received proceeds of $10.6 million from stock option exercises.
Also during the first nine months of 2000 we purchased treasury stock for
$398,000.
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.
On September 30, 2000, we had cash and cash equivalents of $61.1 million,
marketable securities of $67.9 million and working capital of $187.0
million. In addition, we have a $10 million unsecured line of credit which
has not been used. We believe that the cash and cash equivalents,
marketable securities, working capital, cash from operations and
availability under our line of credit will be sufficient to meet our
working capital needs for at least two years.
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. At September 30, 2000 we have an
unrealized loss of approximately $802,000 due to the market value of our
investments in marketable debt securities. We have no intention of
disposing of marketable securities that would result in the realization of
a loss.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 7 to the Notes to Consolidated
Financial Statements (unaudited) set forth elsewhere in this Report is
incorporated herein by reference.
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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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.
October 25, 2000 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)
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