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 September 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 September 30, 1996 was
11,405,801.
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 nine
month periods ended September 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.
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 since 1994. 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 sought dismissal of this complaint on October 25, 1996 based on
the court's reasoning in the decision of the federal class action as
well as other grounds.
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 or liquidity. An adverse decision, although not anticipated,
could have a material effect on the Company's results of operations.
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.
On November 7, 1996, the Company entered into a Civil Consent Decree
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 paid $700,000, and agreed to pay an
additional $300,000 if the Company does not substantially comply with
the terms of Civil Consent decree over the next two years. The
Company does not believe the amount of the settlement will exceed the
charge recognized by the Company for the quarter ended June 30, 1996,
which included estimated related professional fees of $112,000.
5. The Company and one of its indirect subsidiaries, National Infusion
Services, Inc. ("NIS"), are defendants in a complaint filed by Thomas
G. Slama, M.D. in the Hamilton County, Indiana Superior Court on
October 7, 1996. Dr. Slama is a director of the Company and formerly
was Chief Executive Officer and President of NIS. The complaint
alleges breach of contract and defamation resulting from the
termination of Dr. Slama's employment with NIS in October 1996. Dr.
Slama seeks damages in excess of $3.4 million, punitive damages,
attorneys fees, costs, and interest.
The Company believes Dr. Slama wrongfully terminated his employment,
and alternatively, that it had grounds to terminate Dr. Slama under
his employment agreement. Accordingly, the Company will aggressively
defend the suit, including the filing of its own complaint or
counterclaim against Dr. Slama seeking, among other things,
declaratory relief, compensatory and treble damages, punitive damages,
attorneys fees, costs, and interest.
Although the outcome of any litigation is uncertain, the Company
believes after consultation with its counsel that the attendant
liability of the Company, if any, should not have a material adverse
effect on the Company's financial condition or liquidity. An adverse
decision, although not anticipated, could have a material effect on
the Company's results of operations.
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 nine month period of $3.743 billion and the third
quarter net sales of $1.336 billion represented a 11% and 19% 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 36% of total net sales for the year to date
and 37% for the third quarter of 1996. This compares to 32% for the both the
first nine months and the third quarter of 1995. For the nine month and three
month periods ended September 30, 1996, direct store sales increased by 24% and
37%, respectfully, over the same periods of 1995.
Gross margin of $89.1 million for the nine months and $29.6 million for the
third quarter represented increases of 15% and 23%, 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 nine months from 2.29% in 1995 to 2.38% in 1996. For the
third quarter, gross margin as a percent of net sales increased from 2.14% in
1995 to 2.22% 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 remained constant at
1.39% of total sales for the nine month period and reduced in the third quarter
from 1.37% for 1995 to 1.32% for 1996. The 1996 periods include added SGA
expense related to NIS and the nine month period includes approximately $200,000
associated with the closing of the Brockton, Massachusetts and the Charlotte,
North Carolina distribution centers and the integration of their respective
operations into the Company's Portland, ME and Shelby, NC distribution centers.
These projects were substantially completed in the first quarter of 1996. The
increase in actual expenses for 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.
Management remains focused on controlling this increase through improved
technology, better asset management and opportunities to consolidate
distribution centers.
Depreciation and amortization for the nine month period increased from
$4.67 million in 1995 to $5.01 million in 1996. The third quarter increased
from $1.46 million in 1995 to $1.67 million in 1996. The increases resulted
from depreciation and amortization on new facilities, equipment and intangibles.
Interest expense for the nine month period increased from $7.59 million in
1995 to $9.93 million in 1996. The average short-term borrowings outstanding
increased from $104 million in 1995 to $123 million in 1996 while the average
short-term interest rate decreased from 7.0% in 1995 to 6.4% in 1996. In the
third quarter, interest expense increased from $2.04 million in 1995 to $3.43
million in 1996. The average short-term borrowings outstanding increased from
$77 million in 1995 to $127 million in 1996 and the average short-term interest
rate decreased from 7.1% in 1995 to 6.2% in 1996. The increase in the average
borrowings outstanding in the third quarter reflected the Company's decision to
increase inventory to meet increased customer demands due to a possible
reduction in shipments by certain vendors during the fourth quarter. The Company
has provided extended receivable terms on identifiable receivables of certain
chain warehouse customers and charged interest on these balances. To the extent
this interest offsets borrowing costs incurred to support these receivables, it
was treated as a reduction of interest expense. The interest received from
chain warehouse customers as a result of extended receivable terms is immaterial
in relation to total interest expense, and therefore, presented on a net basis.
The provision for income taxes for the nine month period and third quarter
of 1996 represented 41.67% and 41.25%, respectively, of earnings before taxes.
The provision for income taxes represented 41.00% of earnings before taxes for
both the nine month period and the third quarter of 1995.
The Company is still considering a pro rata distribution to its
shareholders of all of the stock of PHC. The possible 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 nine month period ended September 30, 1996, the Company's
operations consumed $51.6 million in cash. The use of funds was primarily a
result of a reduction of accounts payable. This use was partially offset by
the decrease in accounts receivable and inventory. 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 $76 million during the period. At
September 30, 1996 the Company had borrowed $150.5 million under the bank credit
agreement and had a remaining availability of $119.5 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.
On November 7, 1996, the Company entered into a Civil Consent Decree 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 paid
$700,000, and agreed to pay an additional $300,000 if the Company does not
substantially comply with the terms of the Civil Consent Decree over the next
two years. The Company does not believe the amount of the settlement will
exceed the charge recognized by the Company for the quarter ended 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 1. Legal Proceedings
The Company and one of its indirect subsidiaries, National Infusion
Services, Inc. ("NIS"), are defendants in a complaint filed by Thomas
G. Slama, M.D. in the Hamilton County, Indiana Superior Court on
October 7, 1996. Dr. Slama is a director of the Company and formerly
was Chief Executive Officer and President of NIS. The complaint
alleges breach of contract and defamation resulting from the
termination of Dr. Slama's employment with NIS in October 1996. Dr.
Slama seeks damages in excess of $3.4 million, punitive damages,
attorneys fees, costs, and interest.
The Company believes Dr. Slama wrongfully terminated his employment,
and alternatively, that it had grounds to terminate Dr. Slama under
his employment agreement. Accordingly, the Company will aggressively
defend the suit, including the filing of its own complaint or
counterclaim against Dr. Slama seeking, among other things,
declaratory relief, compensatory and treble damages, punitive damages,
attorneys fees, costs, and interest.
Although the outcome of any litigation is uncertain, the Company
believes after consultation with its counsel that the attendant
liability of the Company, if any, should not have a material adverse
effect on the Company's financial condition or liquidity. An adverse
decision, although not anticipated, could have a material effect on
the Company's results of operations.
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.
November 14, 1996 BINDLEY WESTERN INDUSTRIES, INC.
BY /s/ Thomas J. Salentine
Thomas J. Salentine
Executive Vice President
(Principal Financial Officer)
<TABLE>
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)
Nine-month period ended Three-month period ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Net sales $3,743,149 $3,361,510 $1,336,265 $1,121,533
Other income 953 1,820 314 816
3,744,102 3,363,330 1,336,579 1,122,349
Cost and expenses:
Cost of products sold 3,654,068 3,284,442 1,306,616 1,097,492
Selling, general and administrative 52,205 46,390 17,688 15,342
Depreciation and amortization 5,012 4,665 1,674 1,465
Interest 9,927 7,588 3,430 2,038
Settlement of 1994 DEA inspection matter 812
3,722,024 3,343,085 1,329,408 1,116,337
Earnings before income taxes 22,078 20,245 7,171 6,012
Provision for income taxes 9,201 8,300 2,958 2,465
Net earnings $12,877 $11,945 $4,213 $3,547
Earnings per share:
Primary $1.09 $1.04 $0.35 $0.31
Fully diluted $0.97 $0.92 $0.32 $0.28
Average shares outstanding:
Primary 11,846,653 11,504,237 11,886,532 11,566,585
Fully diluted 15,328,806 15,142,825 15,368,685 15,205,173
(See accompanying notes to consolidated financial
statements)
</TABLE>
<TABLE>
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(000's omitted except share data)
(unaudited)
<S> <C> <C>
September 30, December 31,
1996 1995
ASSETS
Current assets:
Cash $36,606 $34,819
Accounts receivable, less allowance for doubtful
accounts of $2,930 for 1996 and $3,057 for 1995 383,111 397,924
Finished goods inventory 316,306 332,054
Deferred income taxes 4,605 4,605
Other current assets 4,586 7,964
745,213 777,366
Other assets 1,089 1,220
Fixed assets, at cost 72,046 59,468
Less: accumulated depreciation (19,980) (18,736)
52,065 40,732
Intangibles 37,653 29,390
TOTAL ASSETS $836,021 $848,708
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $150,500 $74,500
Accounts payable 386,843 491,844
Other current liabilities 9,732 7,025
547,075 573,369
Long-term debt 70,562 69,473
Deferred income taxes 3,306 5,106
Shareholders' equity:
Common stock, $.01 par value authorized 30,000,000 shares;
issued 11,754,092 and 11,562,388 shares, respectively 3,315 3,313
Special shares, $.01 par value-authorized 1,000,000 shares
Additional paid in capital 89,855 87,707
Retained earnings 125,057 112,890
218,227 203,910
Less: 348,291 shares in treasury-at cost (3,150) (3,150)
Total shareholders' equity 215,078 200,760
Commitments and contingencies
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $836,021 $848,708
(See accompanying notes to consolidated financial statements)
</TABLE>
<TABLE>
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted except share data)
(unaudited)
Nine-month period ended
September 30,
1996 1995
<S> <C> <C>
Cash flow from operating activities:
Net income $12,877 $11,945
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation and amortization 5,012 4,665
Deferred income taxes (1,800) (1,800)
Loss (gain) on sale of marketable securities (96)
Loss (gain) on sale of fixed assets (45) (56)
Change in assets and liabilities,
net of acquisition:
Accounts receivable 15,517 14,621
Finished goods inventory 15,797 91,251
Accounts payable (105,086) (96,941)
Other current assets and liabilities 6,085 (5,773)
Net cash provided (used) by
operating activities (51,642) 17,816
Cash flow from investing activities:
Purchase of fixed assets and other assets (14,551) (7,181)
Proceeds from sale of fixed assets 42 373
Proceeds from sale of investment securities 1,298
Acquisition of business (9,064) (3,279)
Net cash provided (used) by
investing activities (23,573) (8,789)
Cash flow from financing activities:
Proceeds from sale of stock 2,151 3,390
Reduction in long term debt (439) (619)
Proceeds under line of credit agreement 804,500 775,500
Payments under line of credit agreement (728,500) (801,500)
Dividends (710) (695)
Net cash provided (used) by
financing activities 77,002 (23,924)
Net increase (decrease) in cash 1,787 (14,897)
Cash at beginning of period 34,819 39,840
Cash at end of period $36,606 $24,943
(See accompanying notes to consolidated financial statements)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 36,606
<SECURITIES> 0
<RECEIVABLES> 383,111
<ALLOWANCES> 2,930
<INVENTORY> 316,306
<CURRENT-ASSETS> 745,213
<PP&E> 72,046
<DEPRECIATION> 19,980
<TOTAL-ASSETS> 836,021
<CURRENT-LIABILITIES> 547,075
<BONDS> 70,562
<COMMON> 3,315
0
0
<OTHER-SE> 211,762
<TOTAL-LIABILITY-AND-EQUITY> 836,021
<SALES> 3,743,149
<TOTAL-REVENUES> 3,744,102
<CGS> 3,654,068
<TOTAL-COSTS> 3,722,024
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,873
<INTEREST-EXPENSE> 9,927
<INCOME-PRETAX> 22,078
<INCOME-TAX> 9,201
<INCOME-CONTINUING> 12,877
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,877
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 0.97
</TABLE>
