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 JULY 1, 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 July 24, 2000, the number of shares outstanding of each of the issuer's
classes of common stock were as follows:
Class A Common Stock - 4,338,972
Class B Common Stock - 18,352,124
<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>
SIX-MONTH SIX-MONTH THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
JULY 1, JUNE 30, JULY 1, JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales ................................. $ 282,739 $ 185,203 $ 146,186 $ 102,044
Cost of products sold ..................... 248,666 162,326 129,005 89,473
----------- ----------- ----------- -----------
Gross profit .............................. 34,073 22,877 17,181 12,571
Selling, general and administrative expense 13,666 9,238 6,873 4,987
Depreciation and amortization ............. 690 614 345 301
----------- ----------- ----------- -----------
Earnings from operations .................. 19,717 13,025 9,963 7,283
Interest income ........................... 2,743 614 1,539 356
----------- ----------- ----------- -----------
Earnings before income taxes .............. 22,460 13,639 11,502 7,639
Provision for income taxes ................ 8,602 5,415 4,405 3,033
----------- ----------- ----------- -----------
Net earnings .............................. $ 13,858 $ 8,224 $ 7,097 $ 4,606
=========== =========== =========== ===========
Earnings per share:
Basic ............................. $ .66 $ .43 $ .34 $ .24
Diluted ........................... $ .65 $ .42 $ .33 $ .23
Weighted average shares outstanding:
Basic .............................. 20,869,522 19,146,333 21,025,534 19,469,188
Diluted ........................... 21,314,754 19,664,223 21,466,075 20,102,812
</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)
JULY 1, DECEMBER 31,
2000 1999
--------- -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ...................................... $ 28,779 $ 24,814
Marketable securities .......................................... 92,606 56,795
Receivables, less allowance for doubtful accounts of
$1,909 and $1,764, respectively ..................... 98,385 88,793
Finished goods inventory ....................................... 24,807 30,920
Deferred income taxes .......................................... 1,917 1,685
Other current assets ........................................... 7,423 1,860
--------- ---------
253,917 204,867
Fixed assets, net ................................................... 3,655 2,562
Deferred income taxes ............................................... 38 38
Other assets ........................................................ 2,019 469
Intangibles, net .................................................... 9,527 9,768
--------- ---------
Total assets ......................................... $ 269,156 $ 217,704
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable ............................................... $ 64,114 $ 53,897
Other current liabilities ...................................... 10,542 5,200
--------- ---------
74,656 59,097
Commitments and contingencies (note 6)
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,
4,411,676 and 5,241,422 issued and outstanding,
respectively .................................... 44 52
Class B, $0.01 par value, 180,000,000 shares authorized,
18,277,810 and 16,642,434 issued and outstanding,
respectively .......................................... 183 167
Additional paid in capital ................................ 173,834 151,036
Retained earnings ......................................... 51,546 37,688
Accumulated comprehensive loss ............................ (373) --
--------- ---------
225,234 188,943
Less: Common stock in treasury (at cost), 1,310,980 and
1,304,858 shares, respectively ........... (30,734) (30,336)
--------- ---------
Total shareholders' equity ........................... 194,500 158,607
--------- ---------
Total liabilities and shareholders' equity ........... $ 269,156 $ 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>
SIX-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
JULY 1, JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income ................................................... $ 13,858 $ 8,224
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ...................... 690 614
Provision for doubtful accounts .................... 508 298
Loss on disposal of fixed assets ................... -- 27
Deferred income taxes .............................. -- (46)
Change in assets and liabilities:
Receivables ........................................ (10,100) (15,115)
Finished goods inventory ........................... 6,113 (6,216)
Accounts payable ................................... 10,217 14,509
Other current assets and liabilities ............... (221) 1,213
-------- --------
Net cash provided by operating activities ........ 21,065 3,508
-------- --------
Cash flow from investing activities:
Purchase of marketable securities ............................ (36,416) (33,454)
Purchase of fixed assets ..................................... (1,542) (212)
Acquisition of business ...................................... -- (3,495)
Increase in other assets ..................................... (1,550) (250)
-------- --------
Net cash used by investing activities ............ (39,508) (37,411)
-------- --------
Cash flow from financing activities:
Net change in amounts due to /from BWI ....................... -- 3,416
Proceeds from stock option exercises and related tax benefit . 22,806 1,839
Net proceeds from secondary stock offering ................... -- 83,380
Payments for purchase of treasury stock ...................... (398) --
-------- --------
Net cash provided by financing activities ........ 22,408 88,635
-------- --------
Net increase in cash .............................................. 3,965 54,732
Cash and cash equivalents at beginning of period .................. 24,814 2
-------- --------
Cash and cash equivalents at end of period ........................ $ 28,779 $ 54,734
======== ========
Supplemental cash flow information:
Income taxes paid ............................................ $ 585 $ 3,920
</TABLE>
4
See accompanying notes to consolidated financial statements.
<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 and six month periods ended July 1, 2000
and June 30, 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 and six month
periods ended July 1, 2000 and June 30, 1999 each contained 13 and 26
weeks, respectively.
3. A reconciliation of the basic and diluted weighted average shares
outstanding is as follows for the three and six month periods ended July 1,
2000 and June 30, 1999:
(000'S OMITTED)
2000 1999
------ ------
Six-month periods ended July 1 and 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 20,870 19,146
Additional shares assuming exercise of dilutive
stock options 445 518
------ ------
Weighted average number of Class A and Class B
Common and equivalent shares used as the denominator
in the diluted earnings per share calculation 21,315 19,664
====== ======
Three-month periods ended July 1 and 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 21,026 19,469
Additional shares assuming exercise of dilutive
stock options 440 634
------ ------
Weighted average number of Class A and Class B
Common and equivalent shares used as the denominator
in the diluted earnings per share calculation 21,466 20,103
====== ======
4. 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 July 1, 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 $115.6
million (which includes approximately $23.0 million classified as cash
equivalents) and
5
<PAGE>
$75.0 million (which includes approximately $18.2 million classified as
cash equivalents) at July 1, 2000 and December 31, 1999, respectively. At
July 1, 2000 the amortized cost of available-for-sale securities was
approximately $604,000 more than their market value and there was an
unrealized holding loss, net of tax, of approximately $373,000. 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 July 1, 2000 and
December 31, 1999. No investments were disposed of during the three and six
month periods ended July 1, 2000 and June 30, 1999.
5. The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." The total comprehensive
loss was $373,000 for the three and six month periods ended July 1, 2000.
The Company's only item of other comprehensive loss is an unrealized loss
on investments that has been reported separately within shareholders'
equity on the consolidated balance sheet. There was no comprehensive gain
or loss for the three and six month periods ended June 30, 1999.
6. 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 July 1, 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
6
<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.
7
<PAGE>
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 SIX-MONTH THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
JULY 1, JUNE 30, JULY 1, JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ......................... 100.0% 100.0% 100.0% 100.0%
Cost of products sold ............. 87.9 87.6 88.2 87.7
------ ------ ------ ------
Gross profit ...................... 12.1 12.4 11.8 12.3
Selling, general and administrative 4.8 5.0 4.7 4.9
Depreciation and amortization ..... .2 .3 .2 .3
------ ------ ------ ------
Earnings from operations .......... 7.0 7.0 6.8 7.1
Interest income ................... 1.0 .3 1.1 .3
------ ------ ------ ------
Earnings before income taxes ...... 7.9 7.4 7.9 7.5
Provision for income taxes ........ 3.0 2.9 3.0 3.0
------ ------ ------ ------
Net earnings ...................... 4.9% 4.4% 4.9% 4.5%
====== ====== ====== ======
</TABLE>
Net sales increased to $282.7 million in the first six months of 2000 from
$185.2 million in the first six months of 1999, an increase of 53%. Net
sales increased to $146.2 million in the three months ended July 1, 2000,
from $102.0 million in the three months ended June 30, 1999, an increase of
43%. 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 $34.1 million in the first six months of 2000
from $22.9 million in the first six months of 1999, an increase of 49%.
Gross profit as a percentage of net sales decreased in the first six months
of 2000 to 12.1% from 12.4% in the first six months of 1999. Gross profit
increased to $17.2 million in the three months ended July 1, 2000, from
$12.6 million in the three months ended June 30, 1999, an increase of 37%.
Gross profit as a percentage of net sales decreased in the three months
ended July 1, 2000, to 11.8% from 12.3% in the three months ended June 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 $13.7
million in the first six months of 2000 from $9.2 million in the first six
months of 1999, an increase of 48%. SGA expense as a percentage of net
sales decreased to 4.8% in the first six months of 2000 from 5.0% in the
first six months of 1999. SGA expense increased to $6.9 million in the
three months ended July 1, 2000, from $5.0 million in the three months
ended June 30, 1999, an increase of 38%. SGA expense as a percentage of net
sales decreased in the three months ended July 1, 2000, to 4.7% from 4.9%
in the three months ended June 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 $690,000 in the first
six months of 2000 from $614,000 in the first six months of 1999, an
increase of 12.4%. D&A increased to $345,000 in the three months ended July
1, 2000, from $301,000 in the three months ended June 30, 1999, an increase
of 14.6%. The increase in D&A
8
<PAGE>
was primarily the result of additional depreciation on computer hardware
and software, furniture and equipment for our new corporate facility,
transportation equipment and a new telephone system for our corporate
facility.
Interest income increased to $2.7 million in the first six months of 2000
from $614,000 in the first six months of 1999, an increase of 347%.
Interest income increased to $1.5 million in the three months ended July 1,
2000, from $356,000 in the three months ended June 30, 1999, an increase of
332%. In the first six 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 six months of 1999, interest income of $280,000 was primarily
related to amounts earned by investing cash and funds received from the
June 1999 secondary public 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 July 1, 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 June 30, 1999, interest income of $235,000 was
primarily related to amounts earned by investing cash and funds received
from the June 1999 secondary public 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. 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 six 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 June 30,
1999.
The provision for income taxes in the three and six month periods ended
July 1, 2000 and June 30, 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 $21.1
million in cash during the first six months of 2000. Receivables increased
$10.1 million during the first six months of 2000 primarily to support the
increase in sales and the extension of credit terms to meet competitive
conditions. Inventory decreased $6.1 million during the first six months of
2000 due to our concerted effort to closely monitor inventory and maintain
it at an optimal level. Accounts payable increased $10.2 million during the
first six 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 $690,000 during the first six months
of 2000. Provision for doubtful accounts totaled $508,000 during the first
six months of 2000.
NET CASH USED BY INVESTING ACTIVITIES. During the first six months of 2000,
we purchased $36.4 million of marketable securities in order to take
advantage of interest rate increases. During the first six months of 2000,
other assets increased $1.6 million primarily due to a $2.0 million equity
investment, which will be carried at cost. Capital expenditures during the
first six months of 2000 totaled $1.5 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 six months of 2000 will be approximately $1.5
million and during 2001 will be approximately $2.0 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.
NET CASH PROVIDED BY FINANCING ACTIVITIES. During the first six months of
2000, we received proceeds of $22.8 million, including the income tax
benefit, from stock option exercises. Also during the first six 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
9
<PAGE>
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 July 1, 2000, we had cash and cash equivalents of $28.8 million,
marketable securities of $92.6 million and working capital of $179.3
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 July 1, 2000 we have an unrealized
loss of approximately $604,000 due to the market value of our investments
in marketable debt securities. We have no intention of disposing marketable
securities that would result in the realization of a loss.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The information set forth in Note 6 to the Notes to Consolidated
Financial Statements (unaudited) set forth elsewhere in this Report is
incorporated herein by reference.
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
15, 2000.
b) The following directors were elected at the meeting to serve until
the annual meeting of shareholders in the year 2003:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
---------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
William E. Bindley 25,216,113 0 590,439 0
Steven D. Cosler 25,220,176 0 586,376 0
Rebecca M. Shanahan 25,340,899 0 465,653 0
</TABLE>
In addition, the following directors continue in office until the annual
meeting of shareholders in the year indicated:
Michael D. McCormick 2001
Thomas J. Salentine 2001
Robert L. Myers 2002
Donald J. Perfetto 2002
Richard W. Roberson 2002
c) Other matters voted upon and the results of the voting were as
follows:
1) The shareholders voted 25,319,150 in the affirmative and 94,292
in the negative, with 393,160 abstentions and 0 broker
non-votes, to appoint PricewaterhouseCoopers LLP as auditors of
the Company for 2000.
2) The shareholders voted 19,641,066 in the affirmative and
6,139,307 in the negative, with 26,179 abstentions and 0 broker
non-votes, to approve the proposed amendment to the Company's
Restated Articles of Incorporation which increases the number of
authorized shares of the Company's Class A Common Stock from
15,000,000 to 55,000,000.
The Class A shareholders voted 12,113,508 in the affirmative and
1,325,091 in the negative, with 20,625 abstentions and 0 broker
non-votes, to approve the proposed amendment to the Company's
Restated Articles of Incorporation which increases the number of
authorized shares of the Company's Class A Common Stock from
15,000,000 to 55,000,000.
3) The shareholders voted 20,055,815 in the affirmative and
5,723,738 in the negative, with 26,999 abstentions and 0 broker
non-votes, to approve the proposed amendment to the Company's
Restated Articles of Incorporation which increases the number of
authorized shares of the Company's Class B Common Stock from
40,000,000 to 180,000,000.
The Class B shareholders voted 7,951,334 in the affirmative and
4,389,581 in the negative, with 6,413 abstentions and 0 broker
non-votes, to approve the proposed amendment to the Company's
Restated Articles of Incorporation which increases the number of
authorized shares of the Company's Class B Common Stock from
40,000,000 to 180,000,000.
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 3-A (ii) Articles of Amendment to the Restated
Articles of Incorporation of the Registrant.
Exhibit 27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None.
12
<PAGE>
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.
July 28, 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)
13
