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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended June 30, 1998
-----------------------
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 1-5110
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BERGEN BRUNSWIG CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-1444512
- -------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Metropolitan Drive, Orange, California 92868-3510
- --------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 385-4000
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Title of each class of Number of Shares Outstanding
Common Stock July 31, 1998
---------------------- ----------------------------
<S> <C>
Class A Common Stock -
par value $1.50 per share 50,545,999
</TABLE>
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1
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
INDEX
-----
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, June
30, 1998 and September 30, 1997 3
Statements of Consolidated Earnings
for the third quarter and nine months
ended June 30, 1998 and 1997 4
Statements of Consolidated Cash Flows
for the nine months ended
June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Index to Exhibits 18
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BERGEN BRUNSWIG CORPORATION
---------------------------
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<CAPTION>
====================================================================================================================================
June 30, September 30, LIABILITIES AND June 30, September 30,
- - ASSETS - - 1998 1997 - - SHAREOWNERS' EQUITY - - 1998 1997
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and cash equivalents........... $ 50,654 $ 54,494 Accounts payable........................ $1,604,827 $1,336,070
Short-term investments.............. 2,259 2,786 Accrued liabilities..................... 70,237 82,070
Accounts and notes receivable, Customer credit balances................ 166,510 176,864
less allowance for doubtful Income taxes payable.................... 12,598 -
receivables: $34,671 at June Deferred income taxes................... 24,907 28,281
30, 1998 and $29,022 at Current portion of
September 30, 1997................ 884,724 772,342 long-term obligations................. 1,021 1,021
Inventories......................... 1,578,429 1,309,359 ---------- ----------
Income taxes receivable............. - 6,628 Total current liabilities...... 1,880,100 1,624,306
Prepaid expenses.................... 8,966 9,866 ---------- ----------
---------- ---------- LONG-TERM OBLIGATIONS:
Total current assets....... 2,525,032 2,155,475 7 3/8% senior notes..................... 149,494 149,411
---------- ---------- 7 1/4% senior notes..................... 99,758 99,732
Revolving bank loan payable............. 220,000 140,000
7% convertible subordinated debentures.. 20,609 20,609
6 7/8% exchangeable
subordinated debentures............... 8,425 8,425
Deferred income taxes................... 1,475 1,791
PROPERTY - at cost: Other................................... 19,484 17,988
Land................................ 12,209 12,602 ---------- ----------
Building and leasehold improvements. 87,019 83,829 Total long-term obligations 519,245 437,956
Equipment and fixtures.............. 174,052 173,875 ---------- ----------
---------- ---------- SHAREOWNERS' EQUITY:
Total property............. 273,280 270,306 Capital stock:
Less accumulated depreciation Preferred - authorized 3,000,000
and amortization.................. 135,177 131,944 shares; issued: none................ - -
---------- ---------- Class A Common - authorized
Property - net............. 138,103 138,362 100,000,000 shares; issued:
---------- ---------- 55,881,034 shares at June 30,
1998 and 55,870,183 shares at
September 30, 1997.................. 83,822 83,805
Paid-in capital......................... 156,457 156,361
Net unrealized gain on investments, net
of income tax of $46 at June 30, 1998
OTHER ASSETS: and $260 at September 30, 1997........ 75 409
Excess of cost over net assets Retained earnings....................... 541,732 492,565
of acquired companies - net....... 343,195 329,100 ---------- ----------
Investments......................... 5,301 5,895 Total................................. 782,086 733,140
Noncurrent receivables.............. 13,157 12,651 Less Treasury shares at cost:
Deferred charges and other assets... 70,240 65,640 5,339,099 shares at June 30,
---------- ---------- 1998 and 5,454,983 shares at
Total other assets......... 431,893 413,286 September 30, 1997.................... 86,403 88,279
---------- ---------- ---------- ----------
Total shareowners' equity...... 695,683 644,861
---------- ----------
TOTAL ASSETS.......................... $3,095,028 $2,707,123 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY. $3,095,028 $2,707,123
========== ========== ========== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
3
</TABLE>
<PAGE>
<TABLE>
BERGEN BRUNSWIG CORPORATION
---------------------------
STATEMENTS OF CONSOLIDATED EARNINGS
FOR THE THIRD QUARTER AND NINE MONTHS ENDED
JUNE 30, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
THIRD QUARTER NINE MONTHS
---------------------------------- ----------------------------------
1998 1997 1998 1997
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net sales and other revenues $ 3,514,577 $ 2,927,874 $ 10,057,196 $ 8,640,453
--------------- --------------- ---------------- --------------
Costs and expenses:
Cost of sales 3,325,594 2,768,893 9,506,742 8,157,832
Distribution, selling, general
and administrative expenses 133,264 113,726 389,394 350,284
Merger expenses - - 9,800 5,800
--------------- --------------- ---------------- --------------
Total costs and expenses 3,458,858 2,882,619 9,905,936 8,513,916
--------------- --------------- ---------------- --------------
Operating earnings 55,719 45,255 151,260 126,537
Net interest expense 9,650 8,148 30,339 23,305
--------------- --------------- ---------------- --------------
Earnings before taxes on income 46,069 37,107 120,921 103,232
Taxes on income 18,889 14,883 53,596 42,325
--------------- --------------- ---------------- --------------
Net earnings $ 27,180 $ 22,224 $ 67,325 $ 60,907
=============== =============== ================ ==============
Earnings per share:
Basic $ .54 $ .44 $ 1.33 $ 1.21
=============== =============== ================ ==============
Diluted $ .53 $ .44 $ 1.31 $ 1.20
=============== =============== ================ ==============
Cash dividends per share
on Class A Common Stock $ .120 $ .120 $ .360 $ .312
=============== =============== ================ ==============
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
4
</TABLE>
<PAGE>
<TABLE>
BERGEN BRUNSWIG CORPORATION
---------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED
JUNE 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 67,325 $ 60,907
Adjustments to reconcile net earnings to net cash
flows from operating activities:
Provision for doubtful accounts 9,299 8,149
Depreciation and amortization of property 17,339 19,818
Loss on dispositions of property 998 -
Amortization of customer lists 1,312 1,312
Amortization of excess of cost over
net assets of acquired companies 7,520 7,277
Amortization of other intangible assets 1,338 1,676
Amortization of original issue discount on senior notes 109 110
Deferred compensation 2,128 1,726
Deferred income taxes (3,475) (1,952)
Effects of changes, net of acquisitions:
Receivables (117,275) (45,704)
Inventories (264,732) (79,981)
Income taxes receivable 19,226 10,690
Prepaid expenses and other assets (6,109) (2,759)
Accounts payable 260,943 79,080
Accrued liabilities (12,201) (20,328)
Customer credit balances (10,354) 6,450
------------ ------------
Net cash flows from operating activities (26,609) 46,471
------------ ------------
INVESTING ACTIVITIES
Sale (purchase) of other investments 573 (3,462)
Property acquisitions (17,604) (17,743)
Proceeds from property dispositions 71 -
Acquisition of businesses, less cash acquired (23,065) -
------------ ------------
Net cash flows from investing activities (40,025) (21,205)
------------ ------------
FINANCING ACTIVITIES
Net revolving bank loan activity 80,000 (13,000)
Repayment of other obligations (1,036) (3,047)
Shareowners' equity transactions:
Exercise of stock options 1,988 3,669
Cash dividends on Common Stock (18,158) (15,649)
------------ ------------
Net cash flows from financing activities 62,794 (28,027)
------------ ------------
Net decrease in cash and cash equivalents (3,840) (2,761)
Cash and cash equivalents at beginning of period 54,494 21,408
------------ ------------
Cash and cash equivalents at end of period $ 50,654 $ 18,647
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest $ 28,578 $ 22,137
Income taxes, net of refunds 38,651 36,341
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
5
</TABLE>
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Bergen Brunswig Corporation, a New Jersey corporation formed in 1956,
and its subsidiaries (collectively, the "Company") are a diversified
drug and health care distribution organization and, as such, the
nation's largest supplier of pharmaceuticals to the managed care market
and the second largest wholesaler to the retail pharmacy market. The
Company is one of the largest pharmaceutical distributors to provide
both pharmaceuticals and medical-surgical supplies on a national basis.
The consolidated financial statements include the accounts of the
Company, after elimination of the effect of intercompany transactions
and balances.
The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") for reporting on Form 10-Q
and do not include all of the information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles. The accompanying unaudited
interim consolidated financial statements should be read in conjunction
with the audited Consolidated Financial Statements and Notes to
Consolidated Financial Statements contained in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1997.
Certain reclassifications have been made in the consolidated financial
statements and notes to conform to fiscal 1998 presentations.
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles necessarily
require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the balance sheet dates and the reported
amounts of revenue and expense during the reporting periods. Actual
results could differ from these estimates and assumptions.
B. Gross profit related to bulk shipments of pharmaceuticals included in
net sales and other revenues for the third quarter and nine months
ended June 30, 1998 and 1997, respectively, was not material to the
Company's overall gross profit for these periods. Gross profit from
bulk sales was $1.4 million and $.4 million for the third quarter ended
June 30, 1998 and 1997, respectively, and $3.3 million and $1.0 million
for the comparable nine-month periods. As a percentage of the Company's
total gross profit, such gross profit amounted to .74% and .25% for the
third quarter ended June 30, 1998 and 1997, respectively, and .61% and
.21% of overall gross profit for the comparable nine-month periods.
Historically, the Company has reported as revenues the gross profit
relating to bulk shipments of pharmaceuticals. The Company has been
advised that, instead of
6
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
including gross profit on a net basis within revenues, it should report
the gross dollar amount of such shipments as part of its revenues and
should report related costs in cost of sales. The Company will adopt
such presentation beginning with its audited consolidated financial
statements for its fiscal year ending September 30, 1998. The Company
believes that other companies in its industry will also be adopting
such a presentation.
C. The Company's credit agreement (the "Credit Agreement") allows
borrowings of up to $400 million and also allows borrowings under
discretionary credit lines ("discretionary lines") outside of the
Credit Agreement. Outstanding borrowings under the Credit Agreement and
discretionary lines were $220 million at June 30, 1998 and averaged
$298 million during the three months then ended. The Credit Agreement
has loan covenants which require the Company to maintain certain
financial statement ratios. The Company is in compliance with all
required ratios at June 30, 1998.
The Company filed a shelf registration statement with the SEC which
became effective on March 27, 1996. The registration statement allows
the Company to sell senior and subordinated debt or equity securities
to the public from time to time up to an aggregate maximum principal
amount of $400 million. The Company intends to use the net proceeds
from the sale of such securities for general corporate purposes, which
may include, without limitation, the repayment of indebtedness of the
Company or of any of its subsidiaries, possible acquisitions, capital
expenditures and working capital needs. Pending such application, the
net proceeds may be temporarily invested in short-term securities. No
offering has occurred since the effective date of the registration
statement. Any offering of such securities shall be made only by means
of a prospectus.
D. During the fiscal quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share (EPS)," which replaced the previously reported primary and
fully diluted EPS with basic and diluted EPS. Unlike primary EPS, basic
EPS excludes any dilutive effects of options, warrants and convertible
securities. Diluted EPS is similar to the previously reported fully
diluted EPS. All EPS amounts for all fiscal periods have been presented
and, where necessary, restated to conform to the requirements of SFAS
No. 128.
The following table sets forth the computation of basic and diluted EPS
for the third quarter and nine months ended June 30, 1998 and 1997,
respectively:
7
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------- -----------
Dollars in thousands, except EPS 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator for both basic and
diluted EPS - net earnings $ 27,180 $ 22,224 $ 67,325 $ 60,907
============ ============ ============ ============
Denominator:
Denominator for basic EPS - weighted
average shares of Class A Common
Stock outstanding 50,519,009 50,291,574 50,459,399 50,139,982
Effect of dilutive employees' stock
options (dilutive potential common
shares) 754,611 510,106 752,212 461,154
------------ ------------ ------------ ------------
Denominator for diluted EPS - adjusted
weighted average shares and
assumed conversions 51,273,620 50,801,680 51,211,611 50,601,136
============ ============ ============ ============
Earnings per share:
Basic $ .54 $ .44 $ 1.33 $ 1.21
============ ============ ============ ============
Diluted $ .53 $ .44 $ 1.31 $ 1.20
============ ============ ============ ============
</TABLE>
E. On January 2, 1998, the Company completed the acquisition of
substantially all of the net assets of Besse Medical Services, Inc., a
privately-held distributor of injectables, diagnostics and medical
supplies located in Cincinnati, Ohio. The Company acquired assets at
fair value of approximately $11.5 million and assumed liabilities of
approximately $6.7 million. This acquisition has been accounted for as
a purchase for financial reporting purposes.
F. On May 12, 1998, the Company completed the acquisition of Pacific
Criticare, Inc., a privately-held distributor of medical-surgical
products located in Waipahu, Hawaii. The Company acquired assets at
fair value of approximately $2.1 million and assumed liabilities of
approximately $1.7 million. The acquisition has been accounted for as a
purchase for financial reporting purposes. The purchase price is
subject to adjustments after completion of the acquisition audit.
G. On August 23, 1997, the Company signed a definitive merger agreement
with Cardinal Health, Inc. ("Cardinal"), a distributor of
pharmaceuticals and provider of value-added pharmaceutical-related
services, headquartered in Dublin, Ohio. The merger agreement called
for the Company to become a wholly-owned subsidiary of Cardinal and for
shareowners of the Company to receive 0.775 of a Cardinal Common Share
in exchange for each outstanding share of the Company's Class A Common
Stock. On July 31, 1998, the United States District Court for the
District of Columbia granted the request of the Federal Trade
Commission for a preliminary injunction to halt the proposed merger. On
August 7, 1998, the Company and Cardinal jointly terminated the merger
agreement.
8
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
During the second quarter of fiscal 1998, the Company recorded a
pre-tax charge of $9.8 million ($9.8 million, net of tax, or $.19 per
diluted share) for expenses related to the Cardinal merger. During the
fourth quarter ending September 30, 1998, the Company will record an
additional charge, net of income tax benefit, for additional expenses
associated with the terminated merger, and record a $7.0 million
pre-tax reimbursement due from Cardinal upon termination of the
Cardinal merger agreement. Additionally, in the fourth quarter of
fiscal 1998, the Company will record an income tax benefit related to
the aforementioned merger expenses recorded in the second quarter of
fiscal 1998 due to the change in deductibility of the expenses as a
result of the termination of the merger.
H. During the second quarter of fiscal 1997, the Company recorded a
one-time, pre-tax charge of $5.8 million ($3.4 million, net of income
tax benefit of $2.4 million, or $.06 per diluted share) for expenses
related to the terminated merger with IVAX Corporation ("IVAX") which
was terminated on March 20, 1997.
I. In the opinion of management of the Company, the foregoing consolidated
financial statements reflect all adjustments necessary for a fair
statement of the results of the Company and its subsidiaries for the
periods shown and such adjustments are of a normal recurring nature.
Results of operations for the first nine months of fiscal 1998 are not
necessarily indicative of results to be expected for the full fiscal
year or any other fiscal period.
9
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Portions of management's discussion and analysis presented below, consisting of
those statements which are not historical in nature, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are subject to risks, uncertainties and
other factors which could cause actual results to materially differ from those
projected or implied. The most significant of such risks, uncertainties and
other factors are described in Exhibit 99(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1997 and are incorporated
herein by reference. The Company disclaims any obligation to update any
forward-looking statement.
Results of Operations
- ---------------------
For the quarter ended June 30, 1998, net sales and other revenues increased 20%,
while operating earnings and pre-tax earnings increased 23% and 24%,
respectively, from the quarter ended June 30, 1997. For the nine months ended
June 30, 1998, net sales and other revenues increased 16%, while operating
earnings and pre-tax earnings increased 20% and 17%, respectively, compared to
the nine-month period ended June 30, 1997. Operating earnings and pre-tax
earnings for the first nine months of fiscal 1998 were impacted by a pre-tax
charge of $9.8 million for expenses related to the then pending merger with
Cardinal which was terminated on August 7, 1998. Operating earnings and pre-tax
earnings for the first nine months of fiscal 1997 were impacted by a pre-tax
charge of $5.8 million for expenses related to the terminated merger with IVAX.
See Notes G and H of Notes to Consolidated Financial Statements in Part I, Item
1 of this Quarterly Report.
Substantially all of the net sales and other revenues increase for both the
quarter and nine-month periods reflect internal growth within both the Company's
existing pharmaceutical and medical-surgical supply distribution businesses.
Had the Company not recorded the above-mentioned merger expenses of $9.8 million
($9.8 million, net of tax, or $.19 per diluted share) and $5.8 million ($3.4
million, net of tax, or $.06 per diluted share) in the second quarter of fiscal
1998 and 1997, respectively, operating earnings and pre-tax earnings for the
nine months ended June 30, 1998 would have increased 22% and 20%, respectively,
compared to the nine-month period ended June 30, 1997. Excluding these merger
expenses, diluted earnings per share for the nine months ended June 30, 1998
would have increased 19% over the comparable period of the prior year.
10
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Cost of sales increased 20% and 17% from the third fiscal quarter and nine-month
period, respectively, a year ago, due mainly to the Company's increased sales
levels. The overall gross profit as a percent of net sales and other revenues
(gross profit margin) for the third quarter and first nine months of fiscal 1998
decreased as a result of a decrease in gross margins due to continued price
competition and a lower mix of sales from the Company's higher gross margin
medical-surgical supply distribution business, partially offset by increased
opportunities for investment buying. The gross profit margin in the Company's
pharmaceutical distribution business for the third quarter of fiscal 1998
increased 1.50% over the comparable period of the prior year, primarily due to
greater opportunities for investment buying, partially offset by competitive
factors. The gross profit margin in that business for the nine-month period of
fiscal 1998 declined 2.07% from the prior year comparable period primarily due
to competitive factors. The gross profit margin in the Company's
medical-surgical supply distribution business for the third quarter decreased
3.56% compared to the prior year , primarily due to a higher mix of lower gross
margin acute care business and was "flat" for the nine-month period of fiscal
1998 compared to the same period a year ago. In both the pharmaceutical and
medical-surgical supply distribution industries, it has been customary to pass
on to customers price increases from manufacturers. Investment buying enables
distributors such as the Company to benefit from anticipated price increases.
During periods of low inflation, which has occurred the last few years,
wholesalers receive less benefit from manufacturers' price increases but also
incur lower LIFO charges. The rate or frequency of future price increases by
manufacturers, or the lack thereof, influences the profitability of the Company.
Management of the Company anticipates further downward pressure on gross margins
in the Company's pharmaceutical distribution and medical-surgical supply
businesses during the balance of fiscal 1998 because of continued price
competition influenced by large customers. The Company expects that these
pressures on operating margin may be offset to some extent by increased sales of
more profitable products, such as generic drugs and medical-surgical supplies,
increased opportunities for investment buying, and continued reduction of
distribution, selling, general and administrative expenses ("DSG&A") as a
percentage of net sales and other revenues through more efficient operations.
DSG&A, including the merger expenses, increased 17% and 12% from the prior year
quarter and nine-month period, respectively, while net sales and other revenues
increased 20% and 16% over the prior year quarter and nine-month period,
respectively. These expenses as a percent of net sales and other revenues were
3.79% and 3.88% in the third quarter of fiscal 1998 and 1997, respectively, and
were 3.97% and 4.13% of net sales and other revenues in the current and prior
year nine-month periods, respectively. Had the Company not recorded the merger
expenses in the second quarters of fiscal 1998 and 1997, DSG&A as a percent of
net sales and other revenues would have been 3.87% and 4.06% for the current and
prior nine-month periods, respectively. The decreased DSG&A as a percent of net
11
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
sales and other revenues in the current year quarter and nine-month periods
reflects continued operating efficiencies experienced in both the Company's
pharmaceutical and medical-surgical businesses.
Net interest expense increased from $8.1 million for the third quarter of fiscal
1997 to $9.6 million for the third quarter of fiscal 1998, and from $23.3
million to $30.3 million for the comparable nine-month periods, primarily due to
increased borrowings under the Credit Agreement, principally the result of a
higher investment in inventory.
Taxes on income were 41.0% and 40.1% of pre-tax earnings for the third quarter
of fiscal 1998 and 1997, respectively, and 44.3% and 41.0% for the comparable
nine-month periods. The increase in the effective tax rate for the first nine
months of fiscal 1998 is primarily due to the impact of the non-deductible
merger expenses recorded in the second quarter of fiscal 1998. During the fourth
quarter of fiscal 1998, the Company will record an income tax benefit related to
the merger expenses recorded in the second quarter of fiscal 1998 due to the
change in the deductibility of the expenses as a result of the termination of
the Cardinal merger.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1998, capitalization consisted of 42% debt and 58% equity, compared
to 39% and 61%, respectively, at September 30, 1997. The increased debt
percentage primarily reflects increased borrowings under the Credit Agreement
and discretionary lines offset by an increase in shareowners' equity of $50.8
million. Borrowings under the Credit Agreement were $220.0 million and $140.0
million at June 30, 1998 and September 30, 1997, respectively. Cash and cash
equivalents decreased from $54.5 million at September 30, 1997 to $50.7 million
at June 30, 1998, primarily resulting from increases in both accounts receivable
and investment in inventory (net of increases in trade accounts payable),
property acquisitions and payments for acquired businesses, partially offset by
the Company's profitable operations and increased borrowings under the Credit
Agreement.
The Company filed a shelf registration statement with the SEC which became
effective on March 27, 1996. The registration statement allows the Company to
sell senior and subordinated debt or equity securities to the public from time
to time up to an aggregate amount of $400 million. The Company intends to use
the net proceeds from the sale of any such securities for general corporate
purposes, which may include, without limitation, the repayment of indebtedness
of the Company or of any of its subsidiaries, possible acquisitions, capital
expenditures and working capital needs. See Note C of Notes to Consolidated
Financial Statements.
12
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company's Credit Agreement provides for maximum borrowing of up to $400
million and has loan covenants which require the Company to maintain certain
financial statement ratios. The Company is in compliance with all required
ratios at June 30, 1998. See Note C of Notes to Consolidated Financial
Statements.
Cash dividends on Class A Common Stock amounted to $18.2 million for the nine
months ended June 30, 1998 and $15.6 million for the same period in the prior
fiscal year, reflecting, primarily, a 25% increase in the quarterly dividend
rate during the third quarter of fiscal 1997. In addition, on July 24, 1998, the
Company declared a regular cash dividend of $.12 per share on Class A Common
Stock, payable September 1, 1998 to shareowners of record on August 3, 1998.
Capital expenditures for the nine months ended June 30, 1998 were $17.6 million
and relate principally to additional investment in existing locations, the
acquisition of automated warehouse equipment and additional investments in data
processing equipment.
The Company believes that internally generated funds, funds available under the
existing Credit Agreement and discretionary credit lines and funds available
under the existing shelf registration will be sufficient to meet anticipated
cash and capital needs.
Other Matters
- -------------
The Company relies heavily on computer technology throughout its businesses to
effectively carry out its day-to-day operations. As the millennium approaches,
the Company is assessing all of its computer systems to ensure that they are
"Year 2000"-compliant. In this process, the Company expects to both replace some
systems and upgrade others which are not Year 2000-compliant, in order to meet
its internal needs and those of its customers. The Company expects its Year 2000
project to be completed on a timely basis. However, there can be no assurance
that the systems of other companies on which the Company may rely also will be
timely converted or that such failure to convert by another company would not
have a material adverse effect on the Company's systems. The Company estimates
that the costs of its Year 2000 project will be approximately $11 million and
will continue through calendar 1999. These costs are difficult to estimate
accurately and they will not necessarily be incremental. To date, the Company
has spent approximately $4.6 million on the project. The Company's stated
expectations regarding its Year 2000 project constitute forward-looking
statements. Actual results could differ materially from the Company's
expectations due to unanticipated technological difficulties, project vendor
delays and project vendor cost overruns. Reference is also made to the above
introductory paragraph of management's discussion and analysis in this Quarterly
Report.
13
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BERGEN BRUNSWIG CORPORATION
---------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
On January 2, 1998, the Company completed the acquisition of substantially all
of the net assets of Besse Medical Services, Inc., a privately-held distributor
of injectables, diagnostics and medical supplies located in Cincinnati, Ohio.
The Company acquired assets at fair value of approximately $11.5 million and
assumed liabilities of approximately $6.7 million. This acquisition has been
accounted for as a purchase for financial reporting purposes.
On May 12, 1998, the Company completed the acquisition of Pacific Criticare,
Inc., a privately-held distributor of medical-surgical products located in
Waipahu, Hawaii. The Company acquired assets at fair value of approximately $2.1
million and assumed liabilities of approximately $1.7 million. The acquisition
has been accounted for as a purchase for financial reporting purposes. The
purchase price is subject to adjustments after completion of the acquisition
audit.
On August 23, 1997, the Company signed a definitive merger agreement with
Cardinal Health, Inc. ("Cardinal"), a distributor of pharmaceuticals and
provider of value-added pharmaceutical- related services, headquartered in
Dublin, Ohio. The merger agreement called for the Company to become a
wholly-owned subsidiary of Cardinal and for shareowners of the Company to
receive 0.775 of a Cardinal Common Share in exchange for each outstanding share
of the Company's Class A Common Stock. On July 31, 1998, the United States
District Court for the District of Columbia granted the Federal Trade
Commission's request for a preliminary injunction to halt the proposed merger.
On August 7, 1998, the Company and Cardinal jointly terminated the merger
agreement.
During the fourth quarter ending September 30, 1998, the Company will record an
additional charge, net of income tax benefit, for additional expenses associated
with the terminated merger, and record a $7.0 million pre-tax reimbursement due
from Cardinal upon termination of the Cardinal merger agreement. Additionally,
in the fourth quarter of fiscal 1998, the Company will record an income tax
benefit related to the aforementioned merger expenses recorded in the second
quarter of fiscal 1998 due to the change in deductibility of the expenses as a
result of the termination of the Cardinal merger.
Historically, the Company has reported as revenues gross profit relating to bulk
shipments of pharmaceuticals. See Note B of Notes to Consolidated Financial
Statements. The Company has been advised that, instead of including gross profit
on a net basis within revenues, it should report the gross dollar amount of such
shipments as part of its revenues and should report related costs in cost of
sales. The Company will adopt such presentation beginning with its audited
consolidated financial statements for its fiscal year ending September 30, 1998.
The Company believes that other companies in its industry will also be adopting
such a presentation.
14
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no new material developments in the legal proceedings
as previously reported in Part I, Item 3 of the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997 filed with the Securities and
Exchange Commission on December 24, 1997, except as otherwise might be set forth
below.
As previously reported in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1996, the Company entered into a sharing
agreement in October 1994, with five other wholesalers and 26 pharmaceutical
manufacturers in connection with a Federal class action and various state court
suits. The agreement provides that: (a) if a judgment is entered into against
both the manufacturer and wholesaler defendants, the total exposure for joint
and several liability of the Company is limited to $1.0 million; (b) if a
settlement is entered into by, between, and among the manufacturer and
wholesaler defendants, the Company has no monetary exposure for such settlement
amount; (c) the six wholesaler defendants will be reimbursed by the 26
pharmaceutical defendants for related legal fees and expenses up to $9.0 million
total (of which the Company will receive a proportionate share); and (d) the
Company is to release certain claims which it might have had against the
manufacturer defendants for the claims presented by the plaintiffs in these
cases. The agreement covers the Federal court litigation as well as cases which
have been filed in various state courts. The effect of the agreement is that the
Company's maximum potential loss would be $1.0 million, regardless of the
outcome of the lawsuits, plus possible legal fee expenses in excess of the
Company's proportionate share of the $9 million reimbursement of such fees to be
paid by the manufacturer defendants. In addition to the above-mentioned Federal
class action and state court actions, the Company and other wholesaler
defendants have been added as defendants in a series of related antitrust
lawsuits brought by certain independent pharmacies who have opted out of the
class action cases and by certain chain drug and grocery stores. These lawsuits
are also covered by the sharing agreement described above.
On March 9, 1998, the U.S. Federal Trade Commission (the "FTC") filed
two complaints in the United States District Court for the District of Columbia
seeking preliminary injunctions blocking consummation of the Company's proposed
merger involving Cardinal Health, Inc. ("Cardinal") and the proposed merger of
McKesson Corporation and AmeriSource Healthcare Corporation. On July 31, 1998,
the United States District Court for the District of Columbia granted the FTC's
request for a preliminary injunction to halt both of these mergers.
The Company is also involved in various additional items of litigation.
Although the amount of liability at June 30, 1998 with respect to these items of
litigation cannot be ascertained, in the opinion of management, any resulting
future liability will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
15
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule for the nine months ended June 30, 1998.
99* Statement Regarding Forward-Looking Information is set forth
as Exhibit 99(a) in the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997.
* Document has heretofore been filed with the Securities and
Exchange Commission and is incoporated herein by reference
and made a part thereof.
(b) REPORTS ON FORM 8-K:
On August 12, 1998, a Current Report on Form 8-K, dated August 7, 1998,
was filed, reporting under Item 5, that the Company and Cardinal had
jointly terminated the Agreement and Plan of Merger, dated as of August
23, 1997, as amended as of March 16, 1998 by and among Cardinal, Bruin
Merger Corp. and the Company.
16
<PAGE>
SIGNATURES
----------
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.
BERGEN BRUNSWIG CORPORATION
By /s/ Donald R. Roden
--------------------------------------------------
Donald R. Roden
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Neil F. Dimick
--------------------------------------------------
Neil F. Dimick
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
August 12, 1998
17
<PAGE>
BERGEN BRUNSWIG CORPORATION
---------------------------
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. PAGE NO.
- ----------- --------
27 Financial Data Schedule for the nine months ended June
30, 1998. 19
99* Statement Regarding Forward-Looking Information is
set forth as Exhibit 99(a) in the Company's Annual
Report on Form 10-K for the fiscal year ended September
30, 1997.
* Document has heretofore been filed with the Securities and
Exchange Commission and is incoporated herein by reference
and made a part thereof.
18
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BERGEN BRUNSWIG CORPORATION FOR THE NINE
MONTH PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
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