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, 1997
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, 1997 was
11,799,487.
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)
<TABLE>
Six-month period ended Three-month period ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Net sales from stock $ 1,273,501 $ 979,599 $ 643,445 $ 500,360
Net brokerage sales 2,172,189 1,427,284 1,167,583 717,536
Total net sales 3,445,690 2,406,883 1,811,028 1,217,896
Other income 626 639 229 274
3,446,316 2,407,522 1,811,257 1,218,170
Cost and expenses:
Cost of products sold 3,378,863 2,347,450 1,777,031 1,187,888
Selling, general and administrative 37,291 34,517 18,657 17,436
Depreciation and amortization 3,723 3,339 1,909 1,705
Interest 7,762 6,497 4,294 3,226
Settlement of 1994 DEA inspection matter 812 812
3,427,639 2,392,615 1,801,891 1,211,067
Earnings before income taxes 18,677 14,907 9,366 7,103
Provision for income taxes 7,602 6,243 3,812 3,043
Net earnings $ 11,075 $ 8,664 $5,554 $4,060
Earnings per share:
Primary $ 0.88 $ 0.74 $ 0.44 $ 0.34
Fully diluted $ 0.77 $ 0.65 $ 0.39 $ 0.31
Average shares outstanding:
Primary 12,523,093 11,776,398 12,595,215 11,802,754
Fully diluted 16,068,242 15,277,426 16,140,364 15,303,782
(See accompanying notes to consolidated financial statements)
</TABLE>
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(000's omitted except share data)
(unaudited)
<TABLE>
June 30, December 31,
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash $ 48,519 $ 63,658
Accounts receivable, less allowance for doubtful
accounts of $4,010 for 1997 and $2,664 for 1996 522,074 346,802
Finished goods inventory 350,961 431,816
Deferred income taxes 4,560 4,560
Other current assets 5,842 4,129
931,956 850,965
Other assets 1,054 1,160
Fixed assets, at cost 76,037 71,915
Less: accumulated depreciation (21,511) (19,935)
54,526 51,980
Intangibles 36,096 37,101
TOTAL ASSETS $1,023,632 $ 941,206
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 118,500 $ 52,000
Accounts payable 559,037 555,034
Other current liabilities 8,560 9,288
686,097 616,322
Long-term debt 99,580 99,766
Deferred income taxes 1,830 3,030
Shareholders' equity:
Common stock, $.01 par value authorized 30,000,000 shares;
issued 12,160,729 and 11,871,042 shares, respectively 3,319 3,316
Special shares, $.01 par value-authorized 1,000,000 shares
Additional paid in capital 95,652 91,964
Retained earnings 140,564 129,958
239,535 225,238
Less: shares in treasury-at cost
361,242 and 348,291, respectively (3,410) (3,150)
Total shareholders' equity 236,125 222,088
Commitments and contingencies
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,023,632 $ 941,206
(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>
Six-month period ended
June 30,
1997 1996
<S> <C> <C>
Cash flow from operating activities:
Net income $ 11,075 $ 8,664
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation and amortization 3,723 3,339
Deferred income taxes (1,200) (1,200)
Gain on sale of fixed assets (49) (18)
Change in assets and liabilities,
net of acquisition:
Accounts receivable (175,272) 63,787
Finished goods inventory 80,855 (16,871)
Accounts payable 4,003 (114,246)
Other current assets and liabilities (2,441) (2,172)
Net cash used by operating activities (79,306) (58,717)
Cash flow from investing activities:
Purchase of fixed assets and other assets (5,188) (13,325)
Proceeds from sale of fixed assets 79 16
Acquisition of business (9,064)
Net cash used by investing activities (5,109) (22,373)
Cash flow from financing activities:
Proceeds from sale of stock 3,691 1,835
Reduction in long term debt (186) (285)
Proceeds under line of credit agreement 671,500 556,500
Payments under line of credit agreement (605,000) (483,000)
Purchase of shares for treasury (260)
Dividends (469) (477)
Net cash provided by financing activities 69,276 74,573
Net increase (decrease) in cash (15,139) (6,517)
Cash at beginning of period 63,658 34,819
Cash at end of period $ 48,520 $ 28,302
(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, 1997 and 1996 include all necessary adjustments for fair
presentation. Results for any interim period may not be indicative of
the results of the entire year.
2. The Company is a defendant in a consolidated class action filed in the
United States District Court for the Northern District of Illinois in
1993 which names the Company, five other pharmaceutical wholesalers
and twenty-six pharmaceutical manufacturers as defendants, In re Brand
Name Prescription Drugs Litigation, MDL 997. Plaintiffs allege that
pharmaceutical manufacturers and wholesalers conspired to fix prices
of brand-name prescription drugs sold to retail pharmacies at
artificially high levels in violation of the federal antitrust laws.
The plaintiffs seek injunctive relief, unspecified treble damages,
costs, interest and attorneys' fees. The Company has denied the
complaint allegations.
In April 1996, the Court granted the wholesalers' motion for summary
judgment and dismissed the wholesaler defendants, including the
Company, from the action finding that there was no evidence in the
record that the wholesaler defendants had conspired with the
pharmaceutical manufacturer defendants. The class action plaintiffs
appealed this decision to the U.S. Court of Appeals for the Seventh
Circuit. The Court of Appeals heard oral argument on June 25, 1997.
It has not yet issued a decision.
The trial court, on January 30, 1997, denied the plaintiffs' motion
under Fed. R. Civ. P. 60(b) to reopen the summary judgment issues
involving the wholesaler defendants.
A majority of the manufacturer defendants and the class plaintiffs
have reached a settlement agreement, which was approved by the Court.
The approval was affirmed by the Seventh Circuit. In addition, on May
30, 1997, the Court of Appeals dismissed the individual plaintiffs'
appeals of the summary judgment in favor of the wholesaler defendants,
holding that these plaintiffs had no standing to prosecute the appeal.
On July 1, 1996, the Company and several other wholesalers were joined
as the defendants in a seventh amended and restated complaint filed in
the Circuit Court of Greene County, Alabama, Durrett v. The Upjohn
Company, Civil Action No. 94-029. The case was first filed in 1994.
The plaintiffs claim the prices of prescription drugs they purchase in
interstate commerce are artificially high because of alleged illegal
activities of the defendant pharmaceutical manufacturers and
wholesalers. The plaintiffs seek monetary damages, injunctive relief
and punitive damages. The Company has denied the allegations of the
complaint.
The manufacturer defendants filed motions to dismiss and for judgment
on the pleadings arguing that the Alabama Antitrust Statute applies
only to intrastate commerce. The trial court denied defendants'
motions and defendants have appealed the issue to the Alabama Supreme
Court, which accepted the appeal on February 7, 1997. The defendants
submitted their appeal briefs on May 12, 1997. In addition,
plaintiffs' motion for class certification is pending before trial
court.
On March 7, 1997, the manufacturer defendants filed a motion for a
continuance of the trial in the Alabama action pending the Alabama
Supreme Court's decision and pending a decision by the Seventh Circuit
Court of Appeals in the federal multidistrict litigation. The
plaintiffs moved for a complete stay of discovery for the same
reasons. The trial court granted the manufacturer defendants' motion
to continue the trial from October 1997 to Spring 1998. The case has
not otherwise been stayed pending the appeal.
On October 21, 1994, the Company entered into an agreement in these
cases with five other wholesalers and twenty-six pharmaceutical
manufacturers. Among other things, the agreement provides: (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 twenty-six
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.
The Company is unable to form a reasonably reliable conclusion
regarding the likelihood of a favorable or unfavorable outcome of
these cases. As confirmed by the federal district court's decision,
the Company believes the allegations of liability are without merit
with regard 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. Adverse
decisions, although not anticipated, could have an adverse material
effect on the Company's results of operations.
3. On October 7, 1996, the Company and its subsidiary, National Infusion
Services, ("NIS"), were named as defendants in an action filed by
Thomas G. Slama, M.D. in the Superior Court of Hamilton County,
Indiana which is now pending in that Court as Cause No. 29D03-9702-CP-
81. Dr. Slama was formerly a director of the Company and Chief
Executive Officer and President of NIS. The complaint alleges breach
of contract and defamation arising from the termination of Dr. Slama's
employment with NIS in October 1996, and seeks damages in excess of
$3.4 million, punitive damages, attorneys fees and costs. The Company
and NIS believe Dr. Slama terminated his employment without "cause"
(as defined in his employment agreement), and alternatively, that NIS
had grounds to terminate Dr. Slama for "cause" under his employment
agreement. The Company and NIS have answered the complaint, denying
the merits of Dr. Slama's claims, and have also filed a counterclaim
against Dr. Slama seeking, among other things, declaratory relief,
compensatory and (in some instances) treble damages, punitive damages,
attorneys' fees, interest and costs. Dr. Slama moved to dismiss
portions of the counterclaim; which motion, after briefing and oral
argument was denied by the court on July 14, 1997. The Company and
NIS are contesting Dr. Slama's complaint and pursuing their
counterclaim vigorously. 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.
4. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128)
"Earnings per share". SFAS 128 requires the dual presentation of
basic earnings per share and diluted earnings per share. The Company
will adopt the provisions of SFAS 128 in the last quarter of 1997.
Pro forma basic earnings per share, which was calculated by dividing
income available to common stockholders by the weighted average number
of common shares outstanding, would have been $.95 and $.47 per share
for the six month and three month periods ended June 30, 1997,
respectively.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations.
Effective February 8, 1996, a newly formed subsidiary of the Company,
National Infusion Services, Inc. (NIS), acquired the assets of the infusion
services division of Infectious Disease of Indiana, P.S.C. 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.
Net sales of $3,446 million for the six month period and $1,811 million
for the second quarter represented a 43.2% and 48.7% increase over the same
periods of 1996, respectively. The Company experienced continued sales growth in
most of its operating units which resulted from internal growth in both
brokerage type sales (brokerage sales) and sales from the Company's inventory
(from stock sales). Consolidations within both the wholesale and chain drug
industries provided substantial growth in brokerage sales. These sales generate
very little gross margin, however they provide for increased working capital and
support the Company's programs to attract more direct store delivery business
from chain customers. Brokerage sales for the six months and the second quarter
increased 52.2% and 62.7%, over 1996, respectively. From stock sales for the six
month period and second quarter increased 30.0% and 28.6%, over 1996,
respectively. While overall price changes accounted for approximately 4% of the
growth in from stock sales, increased sales to existing and new customers were
the primary components of the increase.
Gross margin of $66.8 million for the six months and $34.0 million for the
second quarter represented increases of 12% and 13.3% over 1996, respectively.
The increases resulted from the overall increase in net sales, and increased
sales to the higher margin alternate care/alternate site and direct store
delivery markets. The significant increase in the lower margin brokerage sales
resulted in a reduction of gross margin as a percent of net sales for the six
months from 2.47% in 1996 to 1.94% in 1997. For the second quarter, gross
margin as a percent of net sales decreased from 2.46% in 1996 to 1.88% in 1997.
The pressure on sell side margins continued to be a significant factor in 1997
and the purchasing gains associated with pharmaceutical price inflation remained
relatively constant.
Other income remained relatively constant and represented finance charges
on certain customer receivable balances.
Selling, general and administration (SGA) expenses for the six month period
increased from $34.5 million in 1996 to $37.3 million in 1997. For the second
quarter, SGA increased from $17.4 million in 1996 to $18.7 million in 1997.
Normal inflationary increases and costs to support the growing direct store
delivery program of Bindley Western Drug Company and the
alternate care/alternate site business of Priority Healthcare Corporation (PHC)
have generated increased SGA expenses. However, total SGA expense as a percent
of from stock sales for both periods decreased from 3.5% to 2.9% as compared to
1996. Management remains focused on controlling SGA through improved technology,
better asset management and opportunities to consolidate distribution centers.
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. SGA expenses will continue to increase as direct store delivery and
alternate care/alternate site sales increase.
Depreciation and amortization on new facilities, management information
systems and equipment caused depreciation and amortization expense to increase
from $3.34 million in 1996 to $3.72 million in 1997 for the six month period.
The second quarter expense increased from $1.70 million in 1996 to $1.91 million
in 1997.
Interest expense for the six month period increased from $6.50 million in
1996 to $7.76 million in 1997. In 1997, average short-term borrowings
outstanding were $123 million at an average short term interest rate of 6.4%, as
compared to $122 million in 1996 at an average short-term interest rate of
6.5% . In the second quarter, interest expense increased from $3.23 million in
1996 to $4.29 million in 1997. Average short-term borrowings outstanding
increased from $115 million to $148 million and the average short-term
interest rate increased from 6.4% to 6.5% . On December 27, 1996, the Company
completed a private placement of $30 million Senior Notes due December 27, 1999
at an interest rate of 7.25%. Interest expense associated with these Notes for
the six month and three month periods ended June 30, 1997 was approximately $1.1
million and $500,000, respectively.
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 in 1996, which included estimated
related professional fees of $112,000.
The provision for income taxes for the six month period and second quarter
of 1997 represented 40.70% of earnings before taxes for both periods. 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 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, obtaining a favorable tax ruling and
compliance with applicable securities and other governmental regulations and
other business considerations.
LIQUIDITY-CAPITAL RESOURCES.
For the six month period ended June 30, 1997, the Company's operations
consumed $79.3 million in cash. The use of funds resulted from an increase in
accounts receivable which was a direct result of the increase in both brokerage
and from stock sales. This use was partially offset by the decrease in
merchandise inventories which resulted from the Company selling off the safety
stock it accumulated at the end of 1996. This stock was accumulated to reduce
the possibility of shortages due to certain vendors reducing shipments during
the fourth quarter. 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 business will continue to require both
net working capital and cash.
Capital expenditures, predominantly for the purchase of warehouse
facilities, the expansion and automation of existing warehouses and the
investment in additional management information systems were $5.2 million during
the period.
The net increase in borrowings under the bank credit agreement was $66.5
million during the period. At June 30, 1997 the Company had borrowed $118.5
million under the bank credit agreement and had a remaining availability of
$151.5 million.
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.
SUBSEQUENT EVENTS.
Effective July 31, 1997, the Company acquired for cash substantially
all of the operating assets and assumed most of the liabilities and contractual
obligations of Tennessee Wholesale Drug Company, Inc. (TWD). TWD is a full-
line, full-service wholesale drug company with distribution facilities in
Nashville, TN, Baltimore, MD and Tampa, FL, with sales of $308 million for
fiscal year ended March 31, 1997.
Effective August 7, 1997, the Priority Healthcare subsidiary of the Company
acquired for cash substantially all of the operating assets and assumed most of
the liabilities of Groveway Pharmacy, Inc. a specialty distributor of vaccines
and injectables located in Castro Valley, CA. Groveway Pharmacy, Inc. had 1996
sales of approximately $6 million.
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 involve certain risks and uncertainties including, but not limited
to, changes in interest rates, competitive pressures, changes in customer mix,
financial stability of major customers, investment procurement opportunities and
changes in government regulations or the interpretation thereof, which could
cause actual results to differ from those in the forward looking statements.
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 15, 1997.
b) The following directors were elected at the meeting:
Votes For Votes Against
William E. Bindley 9,515,503 2,102
Robert L. Koch, II 9,514,196 3,409
James K. Risk, III 9,512,851 4,754
K. Clay Smith 9,511,730 5,875
J. Timothy McGinley 9,512,646 4,959
Michael D. McCormick 9,517,339 266
William F. Bindley, II 9,514,155 3,750
Thomas J. Salentine 9,516,339 1,266
Keith W. Burks 9,516,739 866
Seth B. Harris 9,509,546 8,059
c) Other matters voted upon and the results of the voting were
as follows:
1) The shareholders voted 9,614,168 shares in the
affirmative and 6,929 votes in the negative, with 71,459
abstentions, to appoint Price Waterhouse LLP as auditors
of the Corporation.
2) The shareholders voted 1,108,706 shares in the
affirmative and 6,835,412 votes in the negative, with
106,842 abstentions, to approve a shareholder proposal
that the Board of Directors take the necessary steps to
ensure that from here forward all non-employee directors
should receive a minimum of fifty percent (50%) of their
total compensation in the form of Company stock which
cannot be sold for three years.
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 8, 1997 BINDLEY WESTERN INDUSTRIES, INC.
BY /s/ Thomas J. Salentine
Thomas J. Salentine
Executive Vice President
(Principal Financial Officer)
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 48,519
<SECURITIES> 0
<RECEIVABLES> 522,074
<ALLOWANCES> 4,010
<INVENTORY> 350,961
<CURRENT-ASSETS> 931,956
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<DEPRECIATION> 21,511
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3,319
0
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<INCOME-TAX> 7,602
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