UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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: 0-11355
BINDLEY WESTERN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 84-0601662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10333 North Meridian Street, Suite 300
Indianapolis, Indiana 46290
(Address of principal executive offices)
(Zip Code)
(317) 298-9900
(Registrant's telephone number,
including area code)
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 _________
The number of shares of Common Stock outstanding as of June 30, 1996 was
11,376,801.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(000's omitted except share data)
(unaudited)
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Six-month period ended Three-month period ended
June 30, June 30,
1996 1995 1996 1995
Revenues:
Net sales $ 2,406,883 $ 2,239,977 $ 1,217,896 $ 1,126,260
Other income 639 1,004 274 469
2,407,522 2,240,981 1,218,170 1,126,729
Cost and expenses:
Cost of products sold 2,347,450 2,186,949 1,187,888 1,100,240
Selling, general and administrative 34,517 31,048 17,436 15,376
Depreciation and amortization 3,339 3,201 1,705 1,629
Interest 6,497 5,550 3,226 2,364
Settlement of 1994 DEA inspection matter 812 812
2,392,615 2,226,748 1,211,067 1,119,609
Earnings before income taxes 14,907 14,233 7,103 7,120
Provision for income taxes 6,243 5,836 3,043 2,919
Net earnings $ 8,664 $ 8,397 $ 4,060 $ 4,201
Earnings per share:
Primary $ 0.74 $ 0.73 $ 0.34 $ 0.37
Fully diluted $ 0.65 $ 0.65 $ 0.31 $ 0.33
Average shares outstanding:
Primary 11,776,398 11,433,646 11,802,754 11,460,124
Fully diluted 15,277,426 14,872,376 15,303,782 14,898,854
(See accompanying notes to consolidated financial statements)
</TABLE>
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(000's omitted except share data)
(unaudited)
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June 30, December 31,
1996 1995
ASSETS
Current assets:
Cash $ 28,302 $ 34,819
Accounts receivable, less allowance for doubtful
accounts of $2,572 for 1996 and $3,057 for 1995 334,841 397,924
Finished goods inventory 348,974 332,054
Other current assets 7,857 7,964
719,974 772,761
Other assets 1,133 1,220
Fixed assets, at cost 71,589 59,468
Less: accumulated depreciation (19,672) (18,736)
51,916 40,732
Intangibles 38,205 29,390
TOTAL ASSETS $ 811,228 $ 844,103
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 148,000 $ 74,500
Accounts payable 377,682 491,844
Deferred income taxes (4,605) (4,605)
Other current liabilities 4,746 7,025
525,823 568,764
Long-term debt 70,717 69,473
Deferred income taxes 3,906 5,106
Shareholders' equity:
Common stock, $.01 par value authorized 30,000,000 shares;
issued 11,725,092 and 11,562,388 shares, respectively 3,315 3,313
Special shares, $.01 par value-authorized 1,000,000 shares
Additional paid in capital 89,540 87,707
Retained earnings 121,077 112,890
213,932 203,910
Less: 348,291 shares in treasury-at cost (3,150) (3,150)
Total shareholders' equity 210,782 200,760
Commitments and contingencies
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 811,228 $ 844,103
(See accompanying notes to consolidated financial statements)
</TABLE>
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted except share data)
(unaudited)
<TABLE>
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Six-month period ended
June 30,
1996 1995
Cash flow from operating activities:
Net income $ 8,664 $ 8,397
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation and amortization 3,339 3,201
Deferred income taxes (1,200) (1,200)
Loss (gain) on sale of marketable securities (96)
Loss (gain) on sale of fixed assets (18)
Change in assets and liabilities,
net of acquisition:
Accounts receivable 63,787 5,312
Finished goods inventory (16,871) 110,149
Accounts payable (114,246) (30,236)
Other current assets and liabilities (2,172) (8,186)
Net cash provided (used) by
operating activities (58,717) 87,341
Cash flow from investing activities:
Purchase of fixed assets and other assets (13,325) (3,551)
Proceeds from sale of fixed assets 16
Proceeds from sale of investment securities 535
Acquisition of business (9,064) (3,278)
Net cash provided (used) by
investing activities (22,373) (6,294)
Cash flow from financing activities:
Proceeds from sale of stock 1,835 1,457
Reduction in long term debt (285) (235)
Proceeds under line of credit agreement 556,500 471,500
Payments under line of credit agreement (483,000) (555,000)
Dividends (477) (468)
Net cash provided (used) by
financing activities 74,573 (82,746)
Net increase (decrease) in cash (6,517) (1,699)
Cash at beginning of period 34,819 39,840
Cash at end of period $ 28,302 $ 38,141
(See accompanying notes to consolidated financial statements)
</TABLE>
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements have been prepared
by the Company without audit. Certain information and footnote
disclosures, including significant accounting policies, normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
Company believes that the financial statements for the three and six
month periods ended June 30, 1996 and 1995 include all necessary
adjustments for fair presentation. Results for any interim period may
not be indicative of the results of the entire year.
2. In January, 1996, the Company's wholly-owned subsidiary, Priority
Healthcare Corporation, formed a new subsidiary, National Infusion
Services, Inc. (NIS). Effective February 8, 1996 Priority Healthcare
Corporation, through its NIS subsidiary, acquired the assets of the
infusion services division of Infectious Disease of Indiana, P.S.C.
NIS is a physician managed provider of quality care to patients in a
variety of settings, including the home, extended care facilities and
NIS' state-of-the-art outpatient infusion center in Indianapolis,
Indiana.
The acquisition was accounted for as a purchase and, accordingly, the
1996 financial statements include the results of operations of NIS
from the date of acquisition. The Company expended approximately $9.0
million and incurred a long-term obligation of approximately $1.5
million, resulting in approximately $9.8 million in intangible assets.
3. The Company is a defendant in a consolidated class action
complaint(the "Complaint") filed in the United States District Court
for the Northern District of Illinois (the "Court") which names
Bindley Western, five other pharmaceutical wholesalers and 26
pharmaceutical manufacturers as defendants. Plaintiffs allege that
chargeback agreements between pharmaceutical manufacturers and
wholesalers are the result of price-fixing agreements in violation of
the federal antitrust laws. The plaintiffs seek injunctive relief,
unspecified treble damages, costs, interest and attorneys fees. On
October 21, 1994, the Company entered into an agreement in these cases
with five other wholesalers and 26 pharmaceutical manufacturers.
Among other things, 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 $1,000,000; (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 manufacturer
defendants for related legal fees and expenses up to $9,000,000 total
(the Company's initial portion of this amount is $1,000,000); 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. On April 4, 1996, the Court dismissed the wholesalers as
defendants in the Complaint. The Court's decision with respect to the
wholesaler defendants has been appealed to the United States Court of
Appeals for the Seventh Circuit.
The Company is unable to form a conclusion regarding the likelihood of
a favorable or unfavorable outcome of an appeal. As confirmed by the
Court's decision, the Company believes the allegations of liability
set forth in the complaint are without merit as to the wholesaler
defendants and that the attendant liability of the Company, if any,
would not have a material adverse effect on the Company's financial
condition.
On July 1, 1996 the Company was served for the first time with an
amended complaint that was filed in the Circuit Court of Green County,
Alabama, in a case that has been pending for well over a year. This
complaint alleges violations of state law that track the allegations
of the federal class action. The Company filed an answer on July 31,
1996 and will seek dismissal of this complaint at the earliest
opportunity based on the court's reasoning in the decision of the
federal class action as well as other grounds. As in the federal case,
the Company believes the allegations of liability set forth in the
Alabama complaint are without merit as to the wholesaler defendants
and that the attendant liability of the Company, if any, would not
have a material adverse effect on the Company's financial condition.
4. On January 11, 1996, the Company was informed by the U.S. Attorney's
office in Indianapolis that the Drug Enforcement Administration
("DEA") was alleging multiple violations of the recordkeeping and
reporting regulations of the Controlled Substances Act ("Act")
resulting from a routine inspection of the Company's Indianapolis
Distribution Center during January and February 1994. The maximum
civil penalty for each such violation is $25,000. Under the strict
liability standards of the Act, DEA registrants like Bindley Western
are subject to significant civil fines for even inadvertent errors in
DEA recordkeeping and reporting.
Specifically, the government alleged that the Company's Indianapolis
Distribution Center made recordkeeping errors with respect to
transaction dates, failed to mail properly prepared suspicious order
reports, and failed to report to the DEA ARCOS reporting system
transactions involving certain Schedule III controlled substances over
a two year period. After being informed of the alleged recordkeeping
and reporting violations, the Company cooperated fully with the
government and commenced its own investigation, which concluded from
its daily and monthly internal inventory reports that there had been
no diversion of any controlled substances.
As previously reported, the Company is currently negotiating an
agreement with the United States and the DEA resolving all issues
relating to its Indianapolis Distribution Center's alleged failure to
comply with the Act. In exchange for the settlement of all civil and
administrative issues, the Company proposes to pay $700,000, and an
additional $300,000 if the Company does not substantially comply with
the terms of the proposed agreement over the next two years. The
Company does not believe the amount of the proposed settlement will
exceed the charge established by the Company for the quarter ending
June 30, 1996, which included estimated related professional fees of
$112,000.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations.
In January, 1996, the Company's wholly-owned subsidiary, Priority
Healthcare Corporation, formed a new subsidiary, National Infusion Services,
Inc. (NIS). Effective February 8, 1996 Priority Healthcare Corporation (PHC)
through its NIS subsidiary acquired the assets of the infusion services division
of Infectious Disease of Indiana, P.S.C. NIS is a physician managed provider of
quality care to patients in a variety of settings, including the home, extended
care facilities and NIS' state-of-the-art out patient infusion center in
Indianapolis, Indiana. The acquisition was accounted for as a purchase and,
accordingly, the 1996 financial statements include the results of operations of
NIS from the date of acquisition.
The net sales for the six month period of $2,407 million and the second
quarter net sales of $1,218 represented a 7% and 8% increase, respectfully, over
the same periods of 1995. Both pharmaceutical price inflation, which
approximated 4%, and volume increases accounted for the net sales increases.
These increases reflected strength in most of the Company's operating units,
especially the direct store delivery segment. Direct store delivery sales were
approximately 35% of total net sales for both the year to date and the second
quarter of 1996. This compares to 28% for the year to date and 32% for the
second quarter of 1995. For the six month period, direct store sales increased
17% over 1995.
Gross margin of $59.4 million for the six months and $30.0 million for the
second quarter represented increases of 12% and 15%, respectively, over 1995.
The increases resulted from the overall increase in net sales and the successful
increase in revenue mix of higher margin alternate care/alternate site and
direct store delivery business. This growth increased gross margin as a percent
of net sales for the six months from 2.37% in 1995 to 2.47% in 1996. For the
second quarter, gross margin as a percent of net sales increased from 2.31% in
1995 to 2.46% in 1996. The pressure on sell side margins continued to be a
significant factor in 1996 and the purchasing gains associated with
pharmaceutical price inflation remained relatively constant.
The decrease in other income resulted from reduced gains associated with
the sale of marketable securities and a decrease in service fee income on
certain customer receivable balances.
Selling, general and administration (SGA) expenses for the six month period
increased from $31.0 million in 1995 to $34.5 million in 1996. For the second
quarter, SGA increased from $15.4 million in 1995 to $17.4 million in 1996. The
increase in 1996 resulted from normal inflationary increases, costs to support
the growing direct store delivery program of Bindley Western Drug Company and
the alternate care/alternate site business of PHC. The cost increases related
to the direct store delivery and the alternate care/alternate site programs
include, among others, delivery expenses, warehouse expense and labor costs,
which are variable with the level of sales volume. In 1996, SGA expense also
includes added SGA related to NIS and non-recurring expenses of approximately
$200,000 associated with the closing and consolidation of the Brockton,
Massachusetts and the Charlotte, North Carolina distribution centers. These
projects were substantially completed in the first quarter. SGA expenses will
continue to increase as direct store delivery and alternate care/alternate site
sales increase. However, management remains focused on controlling this
increase through improved technology, better asset management and opportunities
to consolidate distribution centers.
Depreciation and amortization for the six month period increased from $3.20
million in 1995 to $3.34 million in 1996. The second quarter increased from
$1.63 million in 1995 to $1.70 million in 1996. The increases resulted from
depreciation and amortization on new facilities, equipment and intangibles.
Interest expense for the six month period increased from $5.55 million in
1995 to $6.50 million in 1996. The average short-term borrowings outstanding
increased from $117 million in 1995 to $122 million in 1996 and the average
short-term interest rate decreased from 7.2% in 1995 to 6.5% in 1996. In the
second quarter, interest expense also increased from $2.36 million in 1995 to
$3.23 in 1996. The average short-term borrowings outstanding increased from $87
million in 1995 to $115 million in 1996 and the average short-term interest rate
decreased from 7.2% in 1995 to 6.4% in 1996. Funds received from customers in
respect of working capital carrying cost are treated as a reduction of interest
expense and decreased in 1996.
The provision for income taxes for the six month period and second quarter
of 1996 represented 41.88% and 42.84%, respectively, of earnings before taxes.
The provision for income taxes represented 41.00% of earnings before taxes for
both the six month period and the second quarter of 1995.
The Company is still considering a pro rata distribution to its
shareholders of all of the stock of PHC. The proposed spin-off would separate
the Company's wholesale drug business from the wholesale drug and alternate
care/alternate site business of PHC. The contemplated spin-off would be subject
to, among other business considerations, compliance with applicable securities
and other governmental regulations.
LIQUIDITY-CAPITAL RESOURCES.
For the six month period ended June 30, 1996, the Company's operations
consumed $58.7 million in cash. The use of funds was primarily a result of a
reduction of accounts payable and an increase in merchandise inventories. This
use was partially offset by the decrease in accounts receivable. The Company
continues to closely monitor working capital in relation to economic and
competitive conditions. However, the emphasis on direct-store delivery and
alternate care/alternate site business will continue to require both net working
capital and cash.
Capital expenditures, predominantly for the purchase of transportation
equipment, the expansion and automation of existing warehouses and the
investment in additional management information systems were $13.3 million
during the period. The Company acquired the assets of NIS for approximately $9
million in cash. The Company also incurred a long-term obligation of
approximately $1.5 million related to the purchase of NIS.
On May 15,1996, the Company negotiated an increase in its bank credit
agreement from $250 million to $270 million. The net increase in borrowings
under the bank credit agreement was $73.5 million during the period. At
June 30, 1996 the Company had borrowed $148 million under the bank credit
agreement and had a remaining availability of $122 million.
On January 11, 1996, the Company was informed by the U.S. Attorney's office
in Indianapolis that the Drug Enforcement Administration ("DEA") was alleging
multiple violations of the recordkeeping and reporting regulations of the
Controlled Substances Act ("Act") resulting from a routine inspection of the
Company's Indianapolis Distribution Center during January and February 1994.
As previously reported, the Company is currently negotiating an agreement
with the United States and the DEA resolving all issues relating to its
Indianapolis Distribution Center's alleged failure to comply with the Act. In
exchange for the settlement of all civil and administrative issues, the Company
proposes to pay $700,000, and an additional $300,000 if the Company does not
substantially comply with the terms of the proposed agreement over the next two
years. The Company does not believe the amount of the proposed settlement will
exceed the charge established by the Company for the quarter ending June 30,
1996, which included estimated related professional fees of $112,000.
The Company believes that its cash on hand, cash equivalents, line of
credit and working capital management efforts are sufficient to meet future
working capital requirements.
The Company's principal working capital needs are for inventory and
accounts receivable. The Company sells inventory to its chain drug warehouse
and other customers on various payment terms. This requires significant working
capital to finance inventory purchases and entails accounts receivable exposure
in the event any of its chain warehouse or other significant customers encounter
financial difficulties. Although the Company monitors closely the
creditworthiness of its major customers and, when feasible, obtains security
interests in the inventory sold, there can be no assurance that the Company will
not incur the write off or write down of chain warehouse or other significant
accounts receivable in the future.
PART II - OTHER INFORMATION
Item 4. Submission of matters to a Vote of Security Holders
a) The annual meeting of the shareholders of Bindley Western
Industries, Inc. was held on May 16, 1996.
b) The following directors were elected at the meeting
Votes For Votes Against
William E. Bindley 8,971,093 -
K. Clay Smith 8,969,690 1,403
Robert L. Koch, II 8,970,689 404
James K. Risk, III 8,970,689 404
Seth B. Harris 8,969,424 1,669
J. Timothy McGinley 8,970,189 904
Michael D. McCormick 8,970,189 903
William F. Bindley, II 8,970,991 102
Thomas J. Salentine 8,970,190 903
Keith W. Burks 8,969,924 1,169
Thomas G. Slama, MD 8,969,387 1,706
c) Other matters voted upon and the results of the voting were
as follows:
1) The shareholders voted 9,270,803 shares in the
affirmative and 41,374 votes in the negative, with
132,091 abstentions, to appoint Price Waterhouse LLP
as auditors of the Corporation.
2) The shareholders voted 5,748,462 shares in the
affirmative and 2,105,488 votes in the negative, with
77,322 abstentions, to approve an amendment to the
Company's 1993 Stock option and incentive plan,
increasing from 1,500,000 to 3,000,000 the number of
shares of the Company's Common Stock subject to
issuance under the plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Selected Financial Data Schedule per Item
601 (c) (1) (ii) of Regulation S-B and S-K
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 14, 1996 BINDLEY WESTERN INDUSTRIES, INC.
BY /s/ Thomas J. Salentine
Thomas J. Salentine
Executive Vice President
(Principal Financial Officer)
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