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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 17, 1999
BINDLEY WESTERN INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Indiana 001-11519 84-0601662
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
8909 Purdue Road Indianapolis, Indiana 46268
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 704-4000
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Not Applicable
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(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS
On August 31, 1999, Bindley Western Industries, Inc. ("BWI") completed the
merger with Central Pharmacy Services, Inc ("CPSI") by exchanging 2.9 million
shares of BWI Common Stock for all of the Common Stock of CPSI. Each share of
CPSI was exchanged for 26.38 shares of BWI Common Stock. In addition,
outstanding CPSI employee stock options were converted at the same exchange
factor into options to purchase approximately 300,000 shares of BWI Common
Stock. CPSI operates specialized pharmacies in 27 cities located in 13 states.
These pharmacies prepare and deliver unit dose radiopharmaceuticals for use in
nuclear imaging procedures in hospitals and clinics.
The merger constituted a tax-free reorganization and has been accounted for as a
pooling of interests. As we filed the quarterly reports on Form 10Q for the
period ended September 30, 1999, giving effect to the pooling of interests, in
lieu of presenting the supplemental proforma financial statements, the
accompanying exhibits present historical financial statements for the years
ended December 31, 1998, 1997, and 1996 reflecting the pooling of interest.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Exhibit No. Description
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23.1 Consent of Independent Accountants
23.2 Consent of Independent Auditors
99.1 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
99.2 Report of Independent Accountants
Report of Independent Auditors
Consolidated Statements of Earnings for each of the three years
in the period ended December 31, 1998
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended December 31, 1998
Notes to Consolidated Financial Statements
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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.
Dated: November 17, 1999
BINDLEY WESTERN INDUSTRIES, INC.
By: /s/ Thomas J. Salentine
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Name: Thomas J. Salentine
Title: Executive Vice President and
Chief Financial Officer
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Exhibit 23.1
Consent of Independent Accountants
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We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No's. 333-75577, 333-85379, 333-60279, 333-04517, 33-
64828, 33-58947, 333-57975, 33-15471 and 33-37781) of Bindley Western
Industries, Inc. of our report dated February 24, 1999, except as to the stock
split as discussed in Note 12, which is as of June 25, 1999, and the pooling of
interests as discussed in Note 1, which is as of August 31, 1999, relating to
the financial statements which appear in this Form 8-K.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
November 15, 1999
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Exhibit 23.2
Consent of Independent Auditors
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We consent to the incorporation by reference in the Registration Statements
on Form S-8 (No. 333-75577, 333-85379, 333-60279, 333-04517, 33-64828, 33-58947,
333-57975, 33-15471 and 33-37781) of Bindley Western Industries, Inc. of our
report dated March 15,1999, except for Note 4 as to which the date is April 8,
1999, with respect to the consolidated financial statements of Central Pharmacy
Services, Inc. included in the Current Report on Form 8-K, dated November 17,
1999, of Bindley Western Industries, Inc. filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 15, 1999
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Exhibit 99.1
Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The discussion and analysis that follows should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere in this
report.
We have made the following acquisitions which affect the comparison of the
results of operations on a year to year basis. All acquisitions, except Central
Pharmacy Services, Inc., have been accounted for under the purchase method and,
accordingly, the results of operations of the acquired entities are included in
the Company's financial statements from the respective dates of acquisition.
The IV One Companies - Effective January 1995, we, through our Priority
Healthcare Corporation ("Priority") subsidiary, acquired all of the outstanding
stock of the IV One Companies ("IV One") in a cash transaction. IV One is
comprised of IV-1, Inc., IV-One Services, Inc. and National Pharmacy Providers,
Inc. These companies focus on high acuity specialty pharmacy services for
patients requiring home and ambulatory infusion therapy. Effective as of the
close of business on December 31, 1998, IV-One Services, Inc. and National
Pharmacy Providers, Inc. were merged into IV-1, Inc. and the name of IV-1, Inc.
was changed to Priority Healthcare Pharmacy, Inc.
Priority Healthcare Services Corporation - In January 1996, we formed a new
subsidiary, National Infusion Services, Inc. ("NIS"). Effective February 8,
1996, we, through our NIS subsidiary, purchased the assets of the infusion
services division of Infectious Disease of Indiana P.S.C. NIS is a provider of
quality care to patients in a variety of settings. In February of 1997, the
corporate name was changed from NIS to Priority Healthcare Services Corporation
("PHSC").
Tennessee Wholesale Drug Company - Effective July 31, 1997, we acquired
substantially all of the operating assets and assumed most of the liabilities of
Tennessee Wholesale Drug Company ("TWD"). TWD is a full-line, full-service
wholesale drug company with a distribution facility in Nashville, Tennessee.
Grove Way Pharmacy - Effective August 6, 1997, Priority acquired substantially
all of the assets of Grove Way Pharmacy, Inc. ("Grove Way"), a specialty
distributor of vaccines located in Castro Valley, California.
Central Pharmacy Services, Inc. - On August 31, 1999, we completed the merger
with Central Pharmacy Services, Inc. ("CPSI") of Atlanta, Georgia for
approximately $55 million of our Common Stock. CPSI operates specialized
pharmacies in 27 cities located in 13 states. These pharmacies prepare and
deliver unit dose radiopharmaceuticals for use in nuclear imaging procedures in
hospitals and clinics. The transaction was accounted for as a pooling of
interests and the financial statements for the periods ended December 31, 1998,
1997 and 1996 are based on the assumption that the companies were combined for
the full periods.
On December 31, 1998, we distributed to the holders of our Common Stock all of
the 10,214,286 shares of Priority Class A Common Stock owned by us on the basis
of .448 shares of Priority Class A Common Stock for each share of our Common
Stock outstanding on the record date, December 15, 1998. The two classes of
Priority Common Stock entitle holders to
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the same rights and privileges, except that holders of shares of Priority Class
A Common Stock are entitled to three votes per share on all matters submitted to
a vote of holders of Priority Common Stock and holders of shares of Priority
Class B Common Stock are entitled to one vote per share on such matters. As a
result of the distribution, Priority ceased to be our subsidiary as of December
31, 1998 and, therefore, their assets, liabilities and equity are not included
in the December 31, 1998 BWI Consolidated Balance Sheet. However, their results
of operations, net of minority interest, for the year ended December 31, 1998
are included in the BWI Consolidated Statement of Earnings as Priority was our
subsidiary for the full year of 1998.
Results of Operations.
Net sales for 1998, 1997 and 1996 were $7,654 million, $7,334 million and $5,335
million, respectively. The 4% increase in 1998 sales over 1997 and the 37%
increase in 1997 over 1996 were generated primarily through internal growth. In
all years, CPSI sales accounted for less than 1% of total sales. In 1998,
brokerage type sales ("brokerage sales") experienced a 23% decrease from 1997.
This was the result of the loss of the Rite Aid business. Brokerage sales had
increased by 43% from 1996 to 1997. This was the result of the consolidation
within the wholesale and chain drug industries. Brokerage sales generate very
little gross margin, however, they provide for increased working capital and
support our programs to attract more direct store delivery business from chain
customers. Sales from our inventory ("from stock sales") increased 49% in 1998.
These sales include sales from our inventory to chain customers and direct store
delivery business. Direct store delivery sales increased by 50% in 1998 and
increased to 51% of total sales in 1998. These sales were only 35% of total
sales in 1997. The increase in direct store delivery sales as a percent of total
sales was caused by the combination of our loss of the Rite Aid brokerage sales
business and our ability to expand our presence in the direct store delivery
portion of the business through increased sales to existing customers and the
addition of new customers. In both periods, the increase related to pricing was
approximately equal to the increase in the Consumer Price Index. Net sales for
Priority for 1998, 1997 and 1996 were $276 million, $231 million and $158
million, respectively. This growth was generated internally and reflected
primarily the addition of new customers, new product introductions (including
the new Rebetron treatment for Hepatitis-C), additional sales to existing
customers and, to a lesser extent, the acquisition of Grove Way Pharmacy and
inflationary price increases.
Gross margins for 1998, 1997 and 1996 were $206 million, $153 million and $128
million, respectively. The increases in gross margins from 1997 to 1998 and from
1996 to 1997 resulted primarily from internal growth. The acquisition of TWD
accounted for approximately 23% of the increase from 1996 to 1997 and had
substantially less impact from 1997 to 1998. The impact in 1998 is difficult to
quantify as the Baltimore, Maryland and Tampa, Florida warehouses of TWD were
closed in 1998 and their customers subsequently serviced out of existing
facilities. Gross margins as a percent of net sales increased to 2.69% in 1998
from 2.08% in 1997. This increase was the result of the change in mix away from
the lower margin brokerage sales to the higher margin from stock sales and the
increased higher margin sales of CPSI. The change in mix resulted from both the
loss of the Rite Aid brokerage sales business and the increased direct store
delivery sales. Gross margins as a percent of net sales declined from 2.40% in
1996 to 2.08% in 1997. This decrease was the result of the substantial increase
in low margin brokerage sales and a shift in the business mix of from stock
sales to more managed care business. In all years, the pressure on sell side
margins continued and the purchasing gains associated with pharmaceutical price
inflation remained relatively constant. Gross margins for Priority for 1998,
1997 and 1996 were $31.1 million, $23.2 million and $17.2 million, respectively.
Gross margins as a percent of sales for 1998, 1997 and 1996 were 11.30%,
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10.01% and 10.85%, respectively. The increase in 1998 margins over 1997 margins
is primarily attributed to the change in sales mix resulting from significantly
higher sales by Priority Pharmacy which generated higher gross margins than
those of Priority Distribution. The reduction in 1997 from 1996 is attributed to
increased competition and a change in sales mix to the lower margin wholesale
distribution business.
Other income in 1998, 1997 and 1996 represented finance charges on certain
customers' receivables and gains on the sale of assets. The 1998 balance also
includes approximately $200,000 of interest related to the note from the CEO of
the Company.
Selling, general and administrative ("SGA") expenses were $118.3 million, $89.4
million and $77.4 million in 1998, 1997 and 1996, respectively. The primary
reasons for the increase in SGA from 1997 to 1998 and from 1996 to 1997 were
normal inflationary increases and costs to support the growing direct store
delivery business of Bindley Western Drug Company, the alternate care/alternate
site business of Priority and the nuclear pharmacy expansion of CPSI. The cost
increases related to the direct store delivery and alternate care/alternate site
businesses include, among others, delivery expense, warehouse expense, and labor
costs, which are variable with the level of sales volume. However, management
remains focused on controlling SGA through improved technology, better asset
management and opportunities to consolidate distribution centers. This focus has
resulted in a decrease in SGA expense as a percent of from stock sales to 2.85%
in 1998 from 3.21% in 1997 and 3.61% in 1996. Non recurring charges related to
the startup, consolidation and closing of certain divisions were $200,000 in
1998, $575,000 in 1997 and $200,000 in 1996. SGA for Priority was $14.0 million
in 1998, $10.6 million in 1997 and $8.4 million in 1996. As a percent of sales,
SGA for 1998 was 5.1% as compared to 4.6% in 1997. This increase was the result
of expenses associated with the opening of the Grove City, Ohio facility, which
opened in November, 1997, training and payroll costs from hiring additional
sales personnel at Priority Pharmacy and increased overall costs of being a
publicly traded company. The increase in 1997 SGA from 1996 was attributed to
the above mentioned normal costs to support this business. SGA as a percent of
sales actually decreased from 5.3% in 1996 to 4.6% in 1997. SGA for CPSI
increased in all years as a result of continued expansion through the opening of
new nuclear pharmacies.
Depreciation and amortization was $8.9 million, $8.2 million and $7.4 million in
1998, 1997 and 1996, respectively. These increases were the result of the
inclusion of acquired entities and the depreciation and amortization on new
facilities and equipment, particularly in management information systems and
systems to support customer needs. Depreciation and amortization for Priority
increased from $1 million in 1996 to $1.2 million for both 1997 and 1998. These
increases also resulted from depreciation on new equipment, particularly
management information systems.
Interest expense for 1998, 1997 and 1996 was $18.6 million, $16.2 million and
$13.2 million, respectively. The average short-term borrowings outstanding were
$249 million, $152 million and $119 million at an average short-term interest
rate of 6.3%, 6.4% and 6.4% for 1998, 1997 and 1996, respectively. We also have
in place 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 was
approximately $2.2 million in both 1998 and 1997.
In the fourth quarter of 1998, we recorded a one-time, pre-tax charge of
approximately $19.0 million, which approximated $14.0 million on an after-tax
basis. Of the $19.0 million charge, $11.0 million represented a non-cash charge
for the acceleration of the amortization of compensation related to restricted
stock grants in connection with the Priority spin-off, $7.0
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million represented the non-cash write-off of goodwill that has been carried on
the books from an acquisition dating back to early 1996 and $1.0 million
represented the settlement of litigation associated with that acquisition. See
also, Note 6 -Intangibles, Note 9 - Long-term Debt, Note 12 - Capital Stock and
Note 16 -Legal Proceedings, of the Company's financial statements for further
discussion.
The provision for income taxes represented 44.1%, 39.0% and 42.2% of earnings
before taxes in 1998, 1997 and 1996, respectively. The increase in the 1998
effective rate was attributable to the nondeductible element of restricted stock
grants expensed in 1998.
On January 11, 1996, we were 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 our
Indianapolis Distribution Center during January and February 1994. On November
7, 1996, we 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, we paid $700,000, and agreed to pay an
additional $300,000 if we did not substantially comply with the terms of the
Civil Consent Decree over the next two years. The settlement charge recognized
by the Company in 1996 included professional fees of $112,000. On December 15,
1998, we were advised by the U. S. Attorney's office in Indianapolis that we had
fully complied with the terms of the 1996 Civil Consent Decree and, accordingly,
the civil penalty of $300,000 would not be imposed.
On October 7, 1996 we and our subsidiary, National Infusion Services (now known
as Priority Healthcare Services Corporation) ("PHSC"), were named as defendants
in an action filed by Thomas G. Slama, M.D. in the Superior Court of Hamilton
County, Indiana. Dr. Slama is a former director of the company and formerly was
Chief Executive Officer and President of PHSC. The complaint alleged breach of
contract and defamation arising from the termination of Dr. Slama's employment
with PHSC in October 1996. On October 26, 1998, Dr. Slama filed a Second Amended
Complaint which added Priority and William E. Bindley as defendants and stated
additional claims for breach of contract, breach of oral contract, breach of
fiduciary duty, securities fraud and conversion. Pursuant to an Indemnification
and Hold Harmless Agreement we indemnified and held harmless Priority and its
subsidiaries from and against any and all costs, damages, charges and expenses
(including without limitation legal and other professional fees) which Priority
might incur or which may be charged against Priority in any way based upon,
connected with or arising out of the lawsuit filed by Dr. Slama. All defendants
answered the complaint, denied the merits of Dr. Slama's claims, and also filed
a counterclaim against Dr. Slama which sought, among other things, declaratory
relief, compensatory and (in some instances) treble damages, punitive damages,
attorneys' fees, interest and costs. On December 31, 1998, a Settlement
Agreement was executed by and among the parties named above pursuant to which
mutual releases were obtained and, on January 4, 1999, a one-time payment of
$875,000 was made by the company to Dr. Slama. The corresponding Joint
Stipulation of Dismissal was approved by the Court on January 11, 1999.
Liquidity-Capital Resources.
On October 29, 1997, Priority consummated an initial public offering ("IPO").
Priority registered 2,300,000 shares of Class B Common Stock, all of which were
sold in a firm commitment underwriting at an aggregate offering price of $33.35
million. After underwriters' discount of
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$2.32 million and expenses incurred by Priority in conjunction with the IPO of
$1.05 million, the net offering proceeds to Priority were approximately $29.98
million.
On December 31, 1998, we distributed to the holders of our Common Stock all of
the 10,214,286 shares of Priority Class A Common Stock owned by us on the basis
of .448 shares of Priority Class A Common Stock for each share of our Common
Stock outstanding on the record date, December 15, 1998. The two classes of
Priority Common Stock entitle holders to the same rights and privileges, except
that holders of shares of Priority Class A Common Stock are entitled to three
votes per share on all matters submitted to a vote of holders of Priority Common
Stock and holders of shares of Priority Class B Common Stock are entitled to one
vote per share on such matters. As a result of the distribution, Priority ceased
to be our subsidiary. From the date of the IPO until the December 31, 1998
distribution to the holders of our Common Stock, we owned 81.6% of the
outstanding common stock of Priority. In 1998, the amount of net earnings
associated with the minority interest was $1.9 million as compared to $212,000
in 1997.
Our operations consumed $78.9 million in cash for the year ended December 31,
1998. The use of funds resulted from increases in inventories and a decrease in
accounts payable. The increase in inventory resulted from the significant
increase in direct store delivery sales and the new bulk inventory acquisition
and purchasing management programs with certain customers. The reduction of
accounts payable is attributed to the timing of payments of invoices and the
reduction of brokerage type sales to Rite Aid. These uses of cash were offset by
the decrease in accounts receivables resulting from the reduction of brokerage
type sales to Rite Aid. We continue to closely monitor working capital in
relation to economic and competitive conditions. However, the emphasis on direct
store delivery business will continue to require both net working capital and
cash.
Capital expenditures were predominantly for the construction of the new
corporate headquarters building, the construction of a new warehouse facility in
Westbrook, Maine, the expansion and automation of existing warehouses and the
investment in additional management information systems and other systems to
support customer needs. Total expenditures were $34.5 million during 1998.
Effective July 31, 1997, we purchased substantially all of the operating assets
and assumed most of the liabilities and contractual obligations of TWD. We
expended approximately $27 million for the acquisition of TWD, which
approximated the fair value of the net assets acquired.
Effective August 6, 1997, Priority acquired substantially all of the operating
assets and assumed most of the liabilities of Grove Way Pharmacy, Inc., a
specialty distributor of vaccines and injectables located in Castro Valley,
California. The amount expended approximated the fair value of the net assets
acquired.
On August 27, 1997, we called for redemption on September 12, 1997 all of our
outstanding 6 1/2% Convertible Subordinated Debentures Due 2002 at a redemption
price of $1,039 per $1,000 principal amount of Debentures plus accrued interest
through the redemption date. Debenture holders could elect to convert their
debentures into shares of our common stock through September 12, 1997, which was
the redemption date. Holders of all but $119,000 principal amount of the
$67,350,000 outstanding Debentures elected to convert their Debentures into
common stock at the rate of 50.4 shares of common stock for each $1,000
principal amount of Debentures. The redemption reduced our long-term debt by
$67,350,000 and increased by 3.4 million the number of issued shares of our
common stock.
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We hold a note receivable with a principal balance of $3.2 million from the CEO
of the Company. The proceeds of this note, which bears interest at 6.5% per
annum and matures on December 16, 2000, were used by the CEO to exercise stock
options. The note provides for annual interest only payments with outstanding
interest and principal to be repaid at maturity.
In December 1998, we established a receivables securitization facility (the
"Receivables Facility") pursuant to which we sell substantially all of our
receivables arising in connection with the sale of goods or the rendering of
services ("Receivables") to Bindley Western Funding Corporation ("Funding
Corp."), a wholly owned special purpose corporation subsidiary. The Receivables
are sold to Funding Corp. on a continuous basis, and the cash generated by sales
of interests in the Receivables or by collections on the Receivables retained is
used by Funding Corp. to, among other things, purchase additional Receivables
originated by the Company. The assets of Funding Corp. will be available first
and foremost to satisfy claims of Funding Corp. creditors.
In connection with the Receivables Facility, Funding Corp. entered into a
Receivables Purchase Agreement, dated as of December 28, 1998, with Falcon Asset
Securitization Corporation ("Falcon"), an affiliate of The First National Bank
of Chicago ("First Chicago"), certain other financial institutions (collectively
with Falcon, the "Purchasers"), and First Chicago, as Agent. Pursuant to the
Receivables Purchase Agreement, Funding Corp. may, from time to time, sell
interests in the Receivables ("Receivables Interests") to the Agent for the
benefit of the Purchasers. Each Receivables Interest has an associated Discount
Rate and Tranche Period applicable to it, as selected by Funding Corp. The
Discount Rate may, at Funding Corp.'s election, be the Base Rate (the corporate
prime or base rate announced from time to time by First Chicago) or, with
respect to the Receivables Interests purchased by Falcon, the CP Rate
(generally, a commercial paper related rate based on Falcon's funding charges)
or, with respect to the Receivables Interests purchased by other Purchasers, the
LIBO Rate (generally, LIBOR for the applicable Tranche Period, plus 1/25% per
annum). The Receivables Facility terminates on December 27, 1999, and is subject
to final termination on December 28, 2003, subject to earlier termination in
certain events. At December 31, 1998, there were $224 million of Receivables
Interests outstanding, bearing a Discount Rate of 5.5% per annum. We account for
the Receivables Facility as a financing transaction in our consolidated
financial statements.
In connection with the implementation of the Receivables Facility, on December
28, 1998, we renegotiated our bank line of credit and now have $174.5 million of
available credit. For 1998, the net decrease in borrowings under the bank credit
agreement was $127.5 million. At December 31, 1998, we had borrowed $19.5
million under the bank credit agreement and had a remaining availability of $155
million.
At December 31, 1998, we owed to Priority $16.5 million. This amount is due on
demand and represents loans of excess cash balances of Priority to us on a
short-term basis, bearing interest at our average incremental borrowing rate. At
December 31, 1998, the incremental borrowing rate was 6.3%.
We believe that our cash on hand, bank line of credit, Receivables Facility and
working capital management efforts are sufficient to meet future working capital
requirements.
Our primary exposure to market risk consists of changes in interest rates on
borrowings. An increase in interest rates would adversely affect our operating
results and the cash flow available to fund operations and expansion. Based on
the average variable borrowings for 1998, an increase of 10% in our average
variable borrowing rate would result in a $2.2 million
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annual increase in interest expense. Conversely, a 10% decrease in the average
variable borrowing rate would result in a $2.2 million annual decrease in
interest expense. We continually monitor this risk and review the potential
benefits of entering into hedging transactions, such as interest rate swaps, to
mitigate the exposure to interest rate fluctuations. At December 31, 1998, we
were not a party to any hedging transactions.
Our principal working capital needs are for inventory and accounts receivable.
We sell inventory to our 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 our chain
warehouse or other major customers encounter financial difficulties. Although we
monitor closely the creditworthiness of our major customers and, when feasible,
obtain security interests in the inventory sold, there can be no assurance that
we will not incur some collection loss on chain drug or other major customer
accounts receivable in the future.
Year 2000.
The year 2000 poses a unique set of challenges to those industries reliant on
information technology. As a result of the methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the year 2000 from the year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or in the worst
cases, the inability of the systems to continue to function altogether. We and
other companies in the same business are vulnerable to the dependence on
distribution and communications systems.
Our Daily Sales System, which controls ordering, pricing, inventory control, and
shipping and which accounts for 70% of our total investment in software, was
initially designed and programmed to comply with the Year 2000 challenge. We
anticipate that our remaining systems will be fully Year 2000 compliant by the
end of the second quarter of 1999. Furthermore, all software purchases within
the past three years have been guaranteed to be compliant by the vendor. We have
upgraded and replaced our hardware and network systems for reasons other than
Year 2000 compliance, however, and such new hardware and network systems will be
fully tested during 1999 to ensure that they are also Year 2000 compliant. We
estimate that the total cumulative costs relating to its efforts to make our
systems compliant for the Year 2000 will be approximately $1 million, of which
approximately $340,000 had been incurred as of December 31, 1998.
We believe that the expenditures required to bring our systems into compliance
will not have a material adverse effect on our performance. However, the Year
2000 problem is pervasive and complex and can potentially affect any computer
process. Accordingly, no assurance can be given that the Year 2000 compliance
can be achieved without additional unanticipated expenditures and uncertainties
that might affect future financial results.
Moreover, to operate our business, we rely on governmental agencies, utility
companies, telecommunications companies, shipping companies, suppliers and other
third party service providers over which we can assert little control. Our
ability to conduct our business is dependent upon the ability of these third
parties to avoid Year 2000 related disruptions. We are in the process of
contacting our third party service providers about their Year 2000 readiness,
but we have not yet received any assurances from any such third parties about
their Year 2000 compliance. If our key third party service providers do not
adequately address their Year 2000 issues, our business may be materially
affected, which could result in a material adverse effect
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on our results of operations and financial condition.
We have not to date developed any contingency plans, as such plans will depend
on the responses from our third party service providers, in the event we or any
key third party providers should fail to become Year 2000 compliant. If
required, critical functions could be handled on a manual basis until such time
that the Year 2000 malfunction was identified and resolved.
Inflation.
Our financial statements are prepared on the basis of historical costs and are
not intended to reflect changes in the relative purchasing power of the dollar.
Because of our ability to take advantage of forward purchasing opportunities, we
believe that our gross profits generally increase as a result of manufacturers'
price increases in the products we distribute. Gross profits may decline if the
rate of price increases by manufacturers declines.
Generally, price increases are passed through to customers as they are received
by the Company and therefore reduce the negative effect of inflation. Other non-
inventory cost increases, such as payroll, supplies and services, have been
partially offset during the past three years by increased volume and
productivity.
Forward Looking Statements.
Certain statements included in this annual 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, asserted and unasserted claims,
changes in government regulations or the interpretation thereof and our ability
and the entities with which we transact business to modify or redesign their
computer systems to work properly in the year 2000, which could cause actual
results to differ from those in the forward looking statements.
Quantitative and Qualitative Disclosures About Market Risk.
See discussion above in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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Exhibit 99.2
Report of Independent Accountants
To the Board of Directors and Shareholders of
Bindley Western Industries, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of earnings, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Bindley Western Industries, Inc. and its
subsidiaries (the "Company") at December 31, 1998 and December 31, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Central Pharmacy Services, Inc., which statements reflect total
assets of $7,497,000 and $5,347,000 as of December 31, 1998 and December 31,
1997, respectively, and total revenues of $32,869,000, $24,215,000 and
$17,955,000, respectively, for each of the three years in the period ended
December 31, 1998. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Central Pharmacy Services, Inc., is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 24, 1999, except as to the stock split as
discussed in Note 12, which is as of June 25, 1999,
and the pooling of interests as discussed in Note 1,
which is as of August 31, 1999
<PAGE>
Report of Independent Auditors
Board of Directors
Central Pharmacy Services, Inc.
We have audited the consolidated balance sheets of Central Pharmacy Services,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' (deficit) equity, and cash
flows for each of the three years in the period ended December 31, 1998, not
separately presented herein. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Central Pharmacy
Services, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 15, 1999, except for
Note 4 as to which the
date is April 8, 1999
<PAGE>
Consolidated Statements of Earnings
Bindley Western Industries, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
<S> <C> <C> <C>
(In thousands, except share data)
Revenues:
Net sales from stock $ 4,156,799 $ 2,784,450 $2,145,262
Net brokerage sales 3,497,422 4,549,687 3,190,219
----------- ----------- -----------
Total net sales 7,654,221 7,334,137 5,335,481
Other income 1,915 1,908 1,410
----------- ----------- -----------
7,656,136 7,336,045 5,336,891
Cost and expenses:
Cost of products sold 7,448,331 7,181,415 5,207,565
Selling, general and administrative 118,340 89,402 77,396
Depreciation and amortization 8,894 8,162 7,387
Interest 18,648 16,192 13,248
Settlement of 1994 DEA inspection matter 812
I.P.O. stock option grant 350
Unusual items 18,833
----------- ----------- -----------
7,613,046 7,295,521 5,306,408
Earnings before income taxes
and minority interest 43,090 40,524 30,483
----------- ----------- -----------
Provision for income taxes:
Current 22,636 19,640 14,896
Deferred (3,647) (3,834) (2,031)
----------- ----------- -----------
18,989 15,806 12,865
Minority interest in net income of
consolidated subsidiary 1,865 212
----------- ----------- -----------
Net earnings $ 22,236 $ 24,506 $ 17,618
=========== =========== ===========
Earnings per share:
Basic $ 0.70 $ .95 $ .76
Diluted $ 0.66 $ .83 $ .67
Average shares outstanding:
Basic 31,651,034 25,834,292 23,068,684
Diluted 33,508,668 31,890,035 30,359,442
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
Consolidated Balance Sheets
Bindley Western Industries, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
(In thousands, except share data)
Assets
Current assets:
Cash $ 42,982 $ 42,895
Accounts receivable, less allowance for doubtful
accounts of $3,606 for 1998 and $4,829 for 1997 456,994 608,882
Finished goods inventory 660,089 521,451
Deferred income taxes 11,552 9,526
Other current assets 8,659 5,649
------------- -------------
1,180,276 1,188,403
------------- -------------
Other assets 90 143
------------- -------------
Fixed assets, at cost 121,850 91,620
Less: accumulated depreciation (27,660) (22,933)
------------- -------------
94,190 68,687
------------- -------------
Intangibles, net 19,401 35,711
------------- -------------
Total assets $1,293,957 $1,292,944
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $ 19,500 $ 147,000
Securitized borrowings 224,163
Private placement debt 30,000
Accounts payable 644,461 737,657
Note payable to Priority Healthcare Corporation 16,517
Other current liabilities 19,869 19,288
------------- -------------
954,510 903,945
------------- -------------
Long-term debt 733 32,282
------------- -------------
Deferred income taxes 3,087 4,162
------------- -------------
Minority interest 11,010
------------- -------------
Shareholders' equity:
Common stock. $.01 par value-authorized 40,000,000 shares;
issued 26,345,421 and 19,025,715 shares, respectively 3,406 3,388
Special shares, $.01 par value-authorized 1,000,000 shares
Additional paid in capital 215,177 200,468
Note receivable from officer (3,228) (3,228)
Retained earnings 130,953 144,844
------------- -------------
346,308 345,472
------------- -------------
Less: shares in treasury-at cost 689,161 and 380,942, (10,681) (3,927)
respectively
------------- -------------
Total shareholders' equity 335,627 341,545
------------- -------------
Commitments and contingencies
------------- -------------
Total liabilities and shareholders' equity $1,293,957 $1,292,944
============= =============
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
Consolidated Statements of Cash Flows
Bindley Western Industries, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
(In thousands)
Cash flow from operating activities:
<S> <C> <C> <C>
Net income $ 22,236 $ 24,506 $ 17,618
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization 8,894 8,162 7,387
Deferred income taxes (3,647) (3,834) (2,031)
Minority interest 1,865 212
Compensation expense on stock option grant 350
Compensation expense on restricted stock 1,589
Interest capitalized on conversion of debt 1,970
Gain on sale of fixed assets (310) (77) (36)
Unusual items 18,833
Change in assets and liabilities,
net of acquisitions:
Accounts receivable 94,814 (229,880) 51,212
Finished goods inventory (163,310) (63,276) (99,977)
Accounts payable (60,700) 151,919 64,036
Other current assets and liabilities 816 4,317 6,538
------------ ----------- -----------
Net cash provided (used) by operating
activities (78,920) (105,631) 44,747
------------ ----------- -----------
Cash flow from investing activities:
Purchase of fixed assets and other assets (34,254) (23,164) (15,999)
Proceeds from sale of fixed assets 540 2,127 59
Acquisition of businesses (774) (27,711) (9,064)
Distribution of Priority Healthcare Corporation (2)
------------ ----------- -----------
Net cash used by investing activities (34,490) (48,748) (25,004)
------------ ----------- -----------
Cash flow from financing activities:
Proceeds from sale of stock 26,795 14,741 4,260
Proceeds from IPO of subsidiary 29,982
Related party note receivable (3,228)
Addition (reduction) of long-term debt, net (1,574) (1,823) 28,651
Proceeds under line of credit agreement 1,600,000 1,496,000 1,064,000
Payments under line of credit agreement (1,727,500) (1,401,000) (1,086,500)
Proceeds from securitized borrowings 224,163
Payments to acquire treasury shares (6,754) (777)
Dividends (1,633) (1,083) (938)
------------ ----------- -----------
Net cash provided by financing activities 113,497 132,812 9,473
------------ ----------- -----------
Net increase (decrease) in cash 87 (21,567) 29,216
Cash at beginning of year 42,895 64,462 35,246
------------ ----------- -----------
Cash at end of year $ 42,982 $ 42,895 $ 64,462
============ =========== ===========
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
Consolidated Statements of Shareholders' Equity
Bindley Western Industries, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------------------------
Note
Additional Receivable
Shares Shares Paid in From Retained Shareholders'
Outstanding Amount Outstanding Amount Capital Officer Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 14,199,805 $3,339 348,291 $ (3,150) $ 89,266 $109,962 $ 199,417
Net earnings 17,618 17,618
Dividends at $.08 per share (938) (938)
Shares issued upon exercise of
stock options 308,654 3 4,257 4,260
----------- ------ ----------- -------- ---------- ---------- -------- ------------
Balances at December 31, 1996 14,508,459 3,342 348,291 (3,150) 93,523 126,642 220,357
Net earnings 24,506 24,506
Dividends at $.08 per share (1,083) (1,083)
Shares issued upon exercise of
stock options 1,123,109 12 14,730 14,742
Shares issued upon conversion of
debt 3,394,147 34 67,460 67,494
IPO of subsidiary 24,405 (5,221) 19,184
IPO option grant 350 350
Note receivable from officer (3,228) (3,228)
Purchase of treasury shares 32,651 (777) (777)
----------- ------ ----------- -------- ---------- ---------- -------- ------------
Balances at December 31, 1997 19,025,715 3,388 380,942 (3,927) 200,468 (3,228) 144,844 341,545
Net earnings 22,236 22,236
Dividends at $.08 per share (1,633) (1,633)
Shares issued upon exercise of
Stock options 1,346,049 14 26,781 26,795
Shares issued upon issuance of
Restricted stock 350,000 4 12,334 12,338
Shares issued upon stock split 5,623,657 131,351
Distribution of Priority Healthcare (24,406) (34,494) (58,900)
Purchase of treasury shares 176,868 (6,754) (6,754)
----------- ------ ----------- -------- ---------- ---------- -------- ------------
Balances at December 31, 1998 26,345,421 $3,406 689,161 $(10,681) $ 215,177 $ (3,228) $130,953 $ 335,627
=========== ====== =========== ======== ========== ========== ======== ============
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include
the accounts of Bindley Western Industries, Inc. and its subsidiaries ("BWI" or
the "Company"). All significant intercompany accounts and transactions have been
eliminated.
Merger with Central Pharmacy Services, Inc. Effective August 31, 1999, BWI
completed the merger with Central Pharmacy Services, Inc ("CPSI") by exchanging
2.9 million shares of BWI Common Stock for all of the Common Stock of CPSI. Each
share of CPSI was exchanged for 26.38 shares of BWI Common Stock. In addition,
outstanding CPSI employee stock options were converted at the same exchange
factor into options to purchase approximately 300,000 shares of BWI Common
Stock. The consolidated financial statements include CPSI for all periods
presented.
Revenue recognition. The Company differentiates sales as either brokerage
type sales ("brokerage sales") or sales from the Company's inventory ("from
stock sales"). Brokerage sales are made to the chain warehouse market, whereas
from stock sales are made to both the chain warehouse and direct store delivery
markets. Revenues are recorded at the time of shipment.
Inventories. Inventories are stated on the basis of lower of cost or market
using the first-in, first-out (FIFO) method.
Fixed assets. Depreciation is computed on the straight-line method for
financial reporting purposes. Accelerated methods are primarily used for income
tax purposes. Assets, valued at cost, are generally being depreciated over their
estimated useful lives as follows:
Estimated useful life (years)
Buildings and furnishings 5-35
Leasehold improvements 3-20
Transportation and other equipment 3-20
In the event facts and circumstances indicate an asset could be impaired,
an evaluation of the undiscounted estimated future cash flows is compared to the
asset's carrying amount to determine if a write-down is required.
Debt issue costs. Debt issue costs are amortized on a straight-line basis
over the life of the Convertible Subordinated Debentures ("Debentures"), which
were redeemed on September 12, 1997, and the Senior Notes.
Intangibles. The Company continually monitors its cost in excess of net
assets acquired ("goodwill") and its other intangibles (customer lists and
covenants not to compete) to determine whether any impairment of these assets
has occurred. In making such determination, the Company evaluates the
performance, on an undiscounted basis, of the underlying businesses which gave
rise to such amounts. Goodwill is being amortized on the straight-line method
over periods not exceeding 40 years. Other intangibles are being amortized on
the straight-line method over five to 15 years.
Earnings per share. The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Basic
earnings per share is based on the weighted average number of common shares
outstanding during
<PAGE>
each period. The diluted earnings per share is based on the weighted average
number of common shares and dilutive potential common shares outstanding during
each period. All periods presented have been restated to conform with the
requirements of SFAS 128. See Note 17 for a reconciliation of earnings per
share.
Income taxes. In accordance with the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes," the Company accounts
for income taxes using the asset and liability method. The asset and liability
method requires the recognition of deferred tax assets and liabilities for
expected future tax consequences of temporary differences that currently exist
between the tax bases and financial reporting bases of the Company's assets and
liabilities.
Use of estimates. The preparation of financial statements in accordance
with generally accepted accounting principles requires the use of estimates made
by management. Actual results could differ from those estimates.
Fair value of financial instruments. The carrying values of cash, accounts
receivable, other current assets, short-term borrowings, accounts payable and
other current liabilities approximate their fair market values due to the short-
term maturity of these instruments. The fair market value of long term debt was
determined based on market quoted rates or was estimated using rates currently
available to the Company for debt with similar terms and maturities.
Other income. Other income for 1998, 1997 and 1996 was substantially all
interest income and gains on the sale of assets.
Prior year reclassifications. Certain amounts in the prior year financial
statements have been reclassified to conform to the current year presentation.
NOTE 2 - DISTRIBUTION OF PRIORITY HEALTHCARE CORPORATION
On December 31, 1998, the Company distributed to the holders of the
Company's Common Stock all of the 10,214,286 shares of Priority Healthcare
Corporation ("Priority") Class A Common Stock owned by the Company on the basis
of .448 shares Priority Class A Common Stock for each share of BWI Common Stock
outstanding on the record date, December 15, 1998. As a result of the
distribution, Priority ceased to be a subsidiary of the Company as of December
31, 1998. The dividend distribution of $58.9 million represents the Company's
ownership interest in the net assets of Priority. The spin-off resulted in the
removal of $107.5 million of assets and $37.2 million of liabilities from the
Company's Consolidated Balance Sheet as of December 31, 1998.
The results of operations for Priority, net of minority interest, for the
year ended December 31, 1998 are included in the Company's Consolidated
Statement of Earnings as Priority was a subsidiary for the full year of 1998.
Summary Statement of Earnings data for Priority is presented in Note 3 below.
<PAGE>
NOTE 3 - OPERATING SEGMENTS
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information", was issued effective for fiscal years ended after December
15, 1998. The Statement designates the internal management accountability
structure as the source of the Company's reportable segments. The statement also
requires disclosures about products and services, geographic areas and major
customers. The adoption of this standard did not affect results of operations or
financial position but did affect the disclosure of segment information.
Prior to 1998, the Company operated as one industry segment. The 1996 and
1997 information presented below has been restated in order to conform to the
current year presentation.
Giving effect to the CPSI merger, the Company has three reportable
segments, BWI, Priority and Nuclear Pharmacy, which conduct substantially all of
their business within the United States. The BWI segment specializes in the
distribution of pharmaceuticals and related health care products to chain drug
companies which operate their own warehouses, individual drug stores,
supermarkets and mass retailers with their own pharmacies, hospitals, clinics,
HMOs, state and federal government agencies and other health care providers. The
Priority segment distributes specialty pharmaceuticals and related medical
supplies to the alternate site healthcare market and is a provider of patient-
specific, self-injectable biopharmaceuticals and disease treatment programs to
individuals with chronic diseases. The Nuclear Pharmacy segment prepares and
delivers unit dose radiopharmaceuticals for use in nuclear imaging procedures in
hospitals and clinics. During 1998, approximately 79% of CPSI's purchases of
pharmaceuticals were from three vendors accounting for 42%, 24% and 13% of
CPSI's cost of sales for the year ended 1998. The significant customers reported
in Note 14 are all sold through the BWI segment.
These segments have separate management teams and infrastructures to
facilitate their specific customer needs and marketing strategies. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies. The intersegment sales and
transfers are not significant. As discussed in Note 2, Priority ceased to be a
subsidiary of the Company as of December 31, 1998 and, therefore, their assets,
liabilities and equity are not included in the Company's December 31, 1998
Consolidated Balance Sheet.
<PAGE>
Segment information for the years ended 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Nuclear
BWI Priority Pharmacy Total
1998
<S> <C> <C> <C> <C>
Revenues $7,345,726 $275,626 $32,869 $7,654,221
Interest expense 18,310 155 183 18,648
Depreciation and amortization 7,179 1,234 481 8,894
Unusual items 18,833 18,833
Segment net earnings 8,996 10,143 3,097 22,236
Total assets 1,286,575 7,382 1,293,957
Capital expenditures 32,636 905 713 34,254
1997
Revenues $7,078,940 $230,982 $24,215 $7,334,137
Interest expense 15,907 285 16,192
Depreciation and amortization 6,270 1,161 731 8,162
Segment net earnings 17,595 6,151 760 24,506
Total assets 1,196,051 91,728 5,165 1,292,944
Capital expenditures 21,916 727 521 23,164
1996
Revenues $5,159,279 $158,247 $17,955 $5,335,481
Interest expense 12,992 256 13,248
Depreciation and amortization 5,710 1,009 668 7,387
Segment net earnings 13,637 4,369 (388) 17,618
Total assets 883,986 57,220 5,079 946,285
Capital expenditures 15,176 405 418 15,999
</TABLE>
NOTE 4 - SHORT-TERM BORROWINGS
The Company's short-term bank line of credit was $174,500,000 as of
December 31, 1998. The line was available, as necessary, for general corporate
purposes at rates based upon prevailing money market rates. At December 31,
1998, 1997 and 1996, the Company had borrowed on its short-term line of credit
$19,500,000 at a rate of 5.4%, $147,000,000 at a rate of 6.6% and $52,000,000 at
a rate of 6.4%, respectively.
No compensating balance is required on the line. Certain conditions
relating to the maintenance of working capital, net worth and corporate
existence have been imposed by the lenders.
A summary of 1998, 1997 and 1996 borrowings under the line of credit is as
follows:
<TABLE>
<CAPTION>
Maximum short-term Average Average
Year borrowings borrowings Interest rate
- --------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
1998 $338,000 $249,000 6.3%
1997 $270,000 $152,000 6.4%
1996 $192,000 $119,000 6.4%
</TABLE>
<PAGE>
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%. The
Company estimates the fair market value at December 31, 1998 approximates the
principal amount based on rates currently available to the Company for debt with
similar terms and maturities.
In December 1998, the Company established a receivables securitization
facility (the "Receivables Facility") pursuant to which the Company sells
substantially all of its receivables arising in connection with the sale of
goods or the rendering of services ("Receivables") to Bindley Western Funding
Corporation ("Funding Corp."), a wholly owned special purpose corporation
subsidiary. The Receivables are sold to Funding Corp. on a continuous basis, and
the cash generated by sales of interests in the Receivables or by collections on
the Receivables retained is used by Funding Corp. to, among other things,
purchase additional Receivables originated by the Company. The assets of Funding
Corp. will be available first and foremost to satisfy claims of Funding Corp.
creditors.
In connection with the Receivables Facility, Funding Corp. entered into a
Receivables Purchase Agreement, dated as of December 28, 1998, with Falcon Asset
Securitization Corporation ("Falcon"), an affiliate of The First National Bank
of Chicago ("First Chicago"), certain other financial institutions (collectively
with Falcon, the "Purchasers"), and First Chicago, as Agent. Pursuant to the
Receivables Purchase Agreement, Funding Corp. may, from time to time, sell
interests in the Receivables ("Receivables Interests") to the Agent for the
benefit of the Purchasers. Each Receivables Interest has an associated Discount
Rate and Tranche Period applicable to it, as selected by Funding Corp. The
Discount Rate may, at Funding Corp.'s election, be the Base Rate (the corporate
prime or base rate announced from time to time by First Chicago) or, with
respect to the Receivables Interests purchased by Falcon, the CP Rate
(generally, a commercial paper related rate based on Falcon's funding charges)
or, with respect to the Receivables Interests purchased by other Purchasers, the
LIBO Rate (generally, LIBOR for the applicable Tranche Period, plus 1/25% per
annum). The Receivables Facility terminates on December 27, 1999, and is subject
to final termination on December 28, 2003, subject to earlier termination in
certain events. At December 31, 1998, there were $224 million of Receivables
Interests outstanding, bearing a Discount Rate of 5.5% per annum. The Company
accounts for the Receivables Facility as a financing transaction in its
consolidated financial statements.
The agreement requires the Company to take a number of actions to
administer Bindley Western Funding Corporation as a separate legal entity such
as maintaining clearly identified offices, books and records and other
administrative procedures. Since the agreement was not executed until December
28, 1998, certain of these administrative matters were not yet completed. While
the Company was in technical noncompliance with certain provisions of the
agreement at December 31, 1998, management intends to expeditiously implement
all required provisions in early 1999.
CPSI's working capital line of credit agreement with a bank, as amended on
April 8, 1999, allows CPSI to borrow up to $3,500,000. Amounts borrowed under
this agreement bear interest at the bank's prime rate (7.75% at December 31,
1998) and are due on April 7, 2000. The line of credit agreement contains
various covenants which place restrictions on the CPSI's current ratio,
indebtedness and operating cash flows. Amounts borrowed under this agreement are
secured by CPSI's assets. As of December 31, 1998 and 1997, there was no
outstanding balance on this line of credit.
<PAGE>
NOTE 5 - FIXED ASSETS
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------
(in thousands)
<S> <C> <C>
Land $ 6,749 $ 6,321
Buildings and furnishings 52,633 34,050
Leasehold improvements 2,907 2,765
Transportation and
other equipment 59,561 48,484
--------------------------
121,850 91,620
Less: Accumulated
Depreciation (27,660) (22,933)
--------------------------
$ 94,190 $ 68,687
==========================
</TABLE>
NOTE 6- INTANGIBLES
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------
(in thousands)
<S> <C> <C>
Goodwill $ 23,537 $ 35,826
Accumulated amortization (5,424) (5,888)
--------------------------
Goodwill, net 18,113 29,938
Other 3,179 13,744
Accumulated amortization (1,891) (7,971)
--------------------------
Other, net 1,288 5,773
--------------------------
Intangibles, net $ 19,401 $ 35,711
==========================
</TABLE>
In performing the review for impairment on the intangible assets related to
Priority Healthcare Services, the Company determined that the loss of key
personnel as part of the distribution of Priority and the recent and projected
operating results and cash flows were not adequate to support the recorded
amount. In the fourth quarter of 1998, the Company wrote off approximately $6
million in goodwill and $2 million in other intangibles, which is presented in
the Consolidated Statement of Earnings as part of the unusual items caption.
Priority Healthcare Services is a component of the BWI segment.
The remainder of the reduction is the result of the distribution of
Priority at December 31, 1998.
<PAGE>
NOTE 7 - RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, the Company held a note receivable with a
principal balance of $3.2 million from the Chief Executive Officer of the
Company in connection with his exercise of stock options granted to him under
the 1993 Stock Option and Incentive Plan. This note, which bears interest at
6.5% per annum, matures on December 16, 2000 and provides for annual interest
only payments, beginning in 1998, with outstanding interest and principal to be
repaid at maturity. In 1998, other income includes $200,000 of interest income
related to this note.
At December 31, 1998, the Company owed Priority $16.5 million. This amount
is due on demand and represents loans of excess cash balances of Priority to the
Company on a short-term basis, bearing interest at the Company's average
incremental borrowing rate. At December 31, 1998, the incremental borrowing
rate was 6.3%.
NOTE 8 - INCOME TAXES
The provision for income taxes includes state income taxes of $3,320,000,
$2,706,000 and $2,092,000 in 1998, 1997 and 1996, respectively.
The following table indicates the significant elements contributing to the
difference between the U.S. federal statutory tax rate and the effective tax
rate:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Percentage of earnings before taxes:
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local taxes on income, net of
Federal income tax benefit 5.0% 4.4% 4.4%
Nondeductible element of restricted
stock grants 5.7%
CPSI utilization of NOL carryforwards (2.3%) (.8%)
Other .7% .4% 2.8%
------------------------------
Effective rate 44.1% 39.0% 42.2%
================================
</TABLE>
<PAGE>
Presented below are the significant elements of the net deferred tax
balance sheet accounts at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Deferred tax assets: 1998 1997
------ ------
<S> <C> <C>
Current:
Accounts receivable $ 6,635 $ 6,573
Inventories 1,371 977
Deferred compensation 2,382 848
Other, net 1,164 1,128
--------------------
Subtotal 11,552 9,526
Long-term:
Acquired net operating loss benefits 368 425
Intangibles 2,474 206
--------------------
Subtotal 2,842 631
--------------------
Total deferred tax assets $14,394 $10,157
====================
Deferred tax liabilities:
Current $ $
Long-term:
Fixed assets $ 5,897 $ 4,129
Intangibles 639
Other, net 32 25
--------------------
Subtotal 5,929 4,793
--------------------
Total deferred tax liabilities $ 5,929 $ 4,793
====================
</TABLE>
In connection with the acquisition of Goold, the Company acquired federal
net operating loss carryforwards of $2.3 million. Due to certain tax law
limitations, annual utilization of the carryforward is limited to $163,000. The
remaining tax loss carryforward at December 31, 1998 is $1.2 million. The
carryover period expires in 2006.
Prior to the merger between BWI and CPSI, the respective companies' income
tax returns were filed separately from each other. In its 1998 and 1997
returns, CPSI utilized $1,385,000 and $935,000, respectively, of net operating
loss carryforwards. At December 31, 1998, CPSI had utilized all of its NOL
carryforwards.
NOTE 9 - LONG-TERM DEBT
The long-term debt at December 31, 1998 is substantially comprised of a
mortgage obligation. In 1997, the balance included a private placement of $30
million Senior Notes due December 27, 1999 which was classified in short-term
borrowings as of December 31, 1998. The remaining balance in 1997 related to
mortgage obligations, and certain other obligations related to the purchases of
Nu-Scan, Inc. and the IV One Companies and Priority Healthcare Services
Corporation. The remaining $1.2 million obligation, which related to the
purchase of Priority Healthcare Services, was included as a reduction of the
fourth quarter unusual items charge resulting from the litigation settlement
agreement on December 31, 1998.
<PAGE>
On September 24, 1992 and October 20, 1992, the Company concluded a public
offering of $65,000,000 and $2,350,000, respectively, of 6 1/2% Convertible
Subordinated Debentures, due 2002, for approximately $65,565,000, net of
underwriting and other costs. On August 27, 1997, the Company called for
redemption on September 12, 1997 all of these Debentures at a redemption price
of $1,039 per $1,000 principal amount of Debentures plus accrued interest
through the redemption date. Debenture holders could elect to convert their
debentures into shares of common stock of the Company through September 12,
1997. Holders of all but $119,000 principal amount of the $67,350,000
outstanding Debentures elected to convert their Debentures into common stock at
the rate of 50.4 shares of common stock for each $1,000 principal amount of
Debentures. The redemption reduced the Company's long-term debt by $67,350,000
and increased by 3.4 million the number of issued shares of the Company's common
stock.
NOTE 10 - PROFIT SHARING PLAN
The Company and its subsidiaries maintain a qualified Profit Sharing Plan
("Profit Sharing Plan") for eligible employees. All employees are generally
eligible to participate in the Profit Sharing Plan as of the first January 1,
April 1, July 1 or October 1 after having completed at least one year of service
(as defined in the Profit Sharing Plan) and having reached age 21.
The annual contribution of the Company and its subsidiaries to the Profit
Sharing Plan is at the discretion of the Board and is generally 8% of the
Participant's compensation for the year. The employer contribution for a year
is allocated among the Participants employed on the last day of the year in
proportion to their relative compensation for the year. The Company's
contributions to the plan for the years ended December 31, 1998, 1997 and 1996
were $1,785,000, $1,576,000 and $1,334,600, respectively.
Subject to limitations imposed by the Internal Revenue Code, a Participant
may have a percentage of his or her compensation withheld from pay and
contributed to the Profit Sharing Plan and make "rollover" contributions to the
Profit Sharing Plan of qualifying distributions from other employers' qualified
plans.
A Participant's interest in amounts withheld from his or her pay and
contributed to the Profit Sharing Plan or in rollover contributions and in the
earnings on those amounts are fully vested at all times. A Participant's
interest in employer contributions made on his or her behalf and the earnings on
those contributions become 20% vested after three years of service and an
additional 20% vested during each of the next four years. A Participant's
interest in employer contributions made on his or her behalf and the earnings on
those contributions will also become fully vested when the employee retires at
age 65 or older, dies or becomes totally disabled.
All contributions to the Profit Sharing Plan are paid in cash to a trustee
bank, as trustee, and are invested by the trustee until distributed to
Participants or their beneficiaries. Participants are permitted to direct the
trustee as to the investment of their accounts by choosing among several
investment funds that are offered under the Profit Sharing Plan, including one
fund consisting of common stock of the Company. Participants may elect to invest
in one fund or a combination of the available funds according to their
investment goals. If a Participant does not make an investment election, his or
her Profit Sharing Plan accounts will be invested in a fund designated by the
Company.
<PAGE>
Effective July 1, 1993, CPSI adopted the Central Pharmacy Services, Inc.
401(k) Plan (the "Plan"), a defined contribution plan which qualifies under
Section 401(k) of the Internal Revenue Code. All employees of the Company are
eligible to participate in the Plan after one year of service. Participants may
contribute up to 20% of their base salaries to the Plan, and the company will
match 100% of the participants' contributions up to 2% of their base salaries.
Contibutions to the Plan were approximately $90,000, $71,000, and $40,000 for
the years ended December 31, 1998, 1997, and 1996, respectively.
NOTE 11 - MINORITY INTEREST
On October 29, 1997, the Company consummated an initial public offering
("IPO") of its Priority Healthcare Corporation ("Priority") subsidiary. Priority
registered 2,300,000 shares of Class B Common Stock, all of which were sold in a
firm commitment underwriting at an aggregate offering price of $33.35 million.
After underwriters' discount of $2.32 million and expenses incurred in
conjunction with the IPO of $1.05 million, the net offering proceeds to Priority
were approximately $29.98 million.
The Priority IPO resulted in the establishment of minority interest of $11
million, which represents the minority shareholders' interest in shareholders'
equity of Priority, and an increase of $19.2 million in the Company's additional
paid in capital, which represents the Company's incremental share of Priority's
shareholders' equity, both at October 29, 1997.
See Note 2 for discussion of the Company's distribution of Priority.
NOTE 12 - CAPITAL STOCK
On June 25, 1999, a 4-for-3 stock split was paid in the form of a stock
dividend to shareholders of record at the close of business on June 11, 1999.
Earnings per share and related earnings per share disclosures in Notes 17 and 18
for all years presented herein have been restated to give effect to this stock
split. The Company's capitalization consists of 53,333,333 authorized shares of
Common Stock, giving effect to the aforementioned 1999 stock split and 1,000,000
authorized shares of Special Stock. Both the Common Stock and Special Stock
have a $.01 par value per share. On June 3, 1999, a 4-for-3 stock split was
effected in the form of a stock dividend to shareholders of record at the close
of business on May 21, 1998.
Prior to May 20, 1993, the Company had a 1983 Incentive Stock Option Plan,
a 1983 Nonqualified Option Plan, and a 1987 Stock Option and Incentive Plan. The
number of shares available for issuance pursuant to such plans aggregated
2,500,000 shares. Incentive stock options, granted at a minimum of 100% of fair
market value, and nonqualified stock options, granted at a minimum of 85% of
fair market value, both exercisable for up to 10 years from the date of grant,
were authorized under such plans.
On May 20, 1993, the Company's shareholders approved the 1993 Stock Option
and Incentive Plan (the "1993 Plan") authorizing 1,000,000 shares of the
Company's common stock for sale or award to officers and key employees
(including any such officer or employee who holds at least 10% of the Company's
common stock) as stock options or restricted stock. Options generally become
exercisable over a one to four year period following date of grant and expire 10
years following date of grant. No further awards will be made from the shares of
common stock that remained available for grants under the prior stock option
plans.
<PAGE>
On May 19, 1994, the Company's shareholders approved amendments to the
Company's 1983 Incentive Stock Option Plan, the 1983 Nonqualified Stock Option
Plan, the 1987 Stock Option and Incentive Plan and the 1993 Plan to permit the
Company's Compensation and Stock Option Committee of the Board of Directors
("Committee") to allow participants under these plans, including the holders of
outstanding options, to exercise an option during its term following cessation
of employment by reason of death, disability or retirement. Such amendments
also permitted the Committee, in its sole discretion, to change the exercise and
termination terms of options granted if such changes are otherwise consistent
with applicable federal and state laws. In addition, the 1993 Plan was amended
to (i) increase from 1,000,000 to 1,500,000 the number of shares authorized for
issuance pursuant to awards made under the 1993 Plan; (ii) limit to 100,000
shares the number of shares that any one participant may receive under the 1993
Plan during any calendar year; and (iii) provide that the Board of Directors may
amend the 1993 Plan in any respect without shareholder approval, unless such
approval is required to comply with Rule 16b-3 under the Securities Exchange Act
of 1934 or Section 422 of the Internal Revenue Code of 1986. On May 16, 1996,
the Company's shareholders approved an amendment to the 1993 Plan to increase to
3,000,000 the number of shares authorized for issuance pursuant to awards made
under the 1993 Plan. At the May 21, 1998 annual shareholders meeting, the
Company's shareholders approved an amendment to the 1993 Plan to (i) increase to
4,000,000 (now restated to 5,333,332 as a result of the stock split and to
7,821,973 as a result of the spin-off of Priority, each restatement made
pursuant to an anti-dilution provision contained in the 1993 Plan) the number of
shares authorized for issuance pursuant to awards made under the 1993 Plan and
(ii) increase to 300,000 the number of shares that any one participant may
receive under the 1993 Plan during any calendar year.
On May 14, 1991, the Company's shareholders approved the Outside Directors
Stock Option Plan (the "Directors Plan"). Each eligible director is
automatically granted an option to purchase 1,000 shares of the Company's common
stock on June 1 of each year beginning in 1991. The option exercise price per
share is 85% of the fair market value of one share of common stock on the date
of grant. Each option becomes exercisable six months following the date of
grant and expires 10 years following the date of grant.
On December 11, 1998, the Company's Board of Directors adopted the 1998
Non-Qualified Stock Option Plan (the "1998 Non-Qualified Plan"), which reserves
for issuance 600,000 shares of the Company's common stock held by the Company as
treasury shares. The 1998 Non-Qualified Plan provided for the grant of
nonqualified stock options to employees who are not officers or directors of the
Company or its affiliates. Under the 1998 Non-Qualified Plan, no individual
participant may receive awards for more than 50,000 shares in any calendar year.
The CPSI 1993 Stock Option Plan (the "CPSI Option Plan") provided for the
issuance of options to employees of CPSI for the purchase of shares of CPSI's
common stock. Options were issued with exercise prices equal to or in excess of
the fair market value of CPSI's common stock, as determined by CPSI's Board of
Directors, on the date of grant. Vesting and terms of all options are
determined by CPSI's Board of Directors and may vary by optionee; however, the
term may be no longer than 10 years from the date of grant.
<PAGE>
In accordance with the terms of the merger between BWI and CPSI, all
options outstanding under the CPSI plan vested at the date of the merger.
Furthermore, all such outstanding CPSI options were converted to BWI options
pursuant to the terms of the merger which, in essence, provided that such
options would be converted based on the calculated "in-the-money" amounts and
exercise price to fair market value ratios at the time of the merger.
Additionally, in accordance with the terms of the merger, no further options can
be issued from the CPSI Option Plan subsequent to the merger.
On August 25, 1997, Priority's Board of Directors and the then sole
shareholder (the Company) adopted Priority's 1997 Stock Option and Incentive
Plan (the "1997 Stock Option Plan"). The 1997 Stock Option Plan reserves for
issuance 1,250,000 shares of Priority Class B Common Stock, subject to
adjustment in certain events. The 1997 Stock Option Plan provides for the grant
of options to purchase shares of Class B Common Stock and restricted shares of
Class B Common Stock to officers, key employees and consultants of Priority.
Stock options granted under the 1997 Stock Option Plan may be either options
intended to qualify for federal income tax purposes as "incentive stock options"
or options not qualifying for favorable tax treatment ("nonqualified stock
options"). No individual participant may receive awards for more than 300,000
shares in any calendar year.
Also on August 25, 1997, Priority's Board of Directors and the then sole
shareholder (the Company) adopted Priority's Outside Directors Stock Option Plan
("the Priority Directors Plan"). The number of shares of Priority's Class B
Common Stock authorized for issuance pursuant to the Priority Directors Plan is
25,000. Each eligible director is automatically granted an option to purchase
1,000 shares of Priority's Class B Common Stock on June 1 of each year beginning
in 1998. The option exercise price per share is equal to the fair market value
of one share of Class B Common Stock on the date of grant. Each option becomes
exercisable six months following the date of grant and expires 10 years
following the date of grant.
On September 15, 1998, Priority's Board of Directors adopted the Broad
Based Stock Option Plan, which reserves for issuance 400,000 shares of Priority
Class B Common Stock. The Broad Based Stock Option Plan provides for the grant
of nonqualified stock options to key employees who are not officers or directors
of Priority or its affiliates. The number of shares which may be granted under
the Broad Based Plan during any calendar year shall not exceed 40,000 shares to
any one person.
<PAGE>
In accordance with the provisions of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has
elected to continue following Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock option plans, and accordingly,
generally does not recognize compensation expense related to these options. If
the Company had elected to recognize compensation expense based on the fair
value of the options at the grant date as prescribed by SFAS 123, pro forma net
income and earnings would have been:
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
Net earnings - as reported $ 22,236 $ 24,506 $ 17,618
Net earnings - pro forma $ 18,946 $ 21,971 $ 15,631
Earnings per share
Basic - as reported .70 .95 .76
Basic - pro forma .60 .85 .68
Diluted - as reported .66 .83 .67
Diluted - pro forma .57 .75 .60
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Company Options
Risk free interest rates 5.31% 5.71% 6.05%
Expected dividend yields .16% .26% .41%
Expected life of options 4.34 4.66 4.60
Volatility of stock price 28.85% 27.23% 29.43%
Weighted average fair
value of options $ 9.34 $ 10.16 $ 6.20
Priority Options
Risk free interest rates 5.02% 5.90%
Expected dividend yields .00% .00%
Expected life of options 4.71 4.60
Volatility of stock price 55.94% 54.79%
Weighted average fair
value of options $ 9.65 $ 7.52
</TABLE>
Compensation expense based on the fair value of options granted prior to
January 1, 1995 was not included in the preceding pro forma calculations.
Therefore, the resulting pro forma compensation cost may not be representative
of that to be expected in future years.
Changes in stock options under the Company's plans are shown below, (All
historical shares and per share amounts have been restated to reflect the 4-for-
3 stock split):
<PAGE>
<TABLE>
<CAPTION>
Number of Option price per
shares share
- --------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding
at December 31, 1995 4,152,105 $ .59 to $14.54
Forfeited during 1996 (95,252) $ .59 to $13.59
Granted during 1996 1,185,777 $ .59 to $15.06
Exercised during 1996 (411,537) $ 4.07 to $13.22
-----------
Options outstanding
at December 31, 1996 4,831,093 $ .59 to $15.06
Forfeited during 1997 (60,132) $ .59 to $17.72
Granted during 1997 1,174,532 $ .59 to $23.63
Exercised during 1997 (1,413,161) $ .59 to $15.06
-----------
Options outstanding
at December 31, 1997 4,532,332 $ .59 to $23.63
Forfeited during 1998 (157,175) $ .59 to $28.45
Granted during 1998 32,557 $ .59 to $31.94
Exercised during 1998 (1,467,011) $ .59 to $23.63
-----------
Options outstanding
at December 31, 1998 2,940,703 $ .59 to $31.94
Effect of Spin-off of
Priority Healthcare (1) 2,394,938
-----------
Converted options outstanding
at December 31, 1998 5,335,641 $ .59 to $16.86
=====================================
Exercisable
at December 31, 1998 3,398,544 $ .59 to $12.47
=====================================
Available for grant
at December 31, 1998 1,409,763
===========
</TABLE>
(1) As a result of the spin-off of Priority, in order to preserve the economic
value of the outstanding stock options, effective after the close of business on
December 31, 1998, all such outstanding options were converted pursuant to anti-
dilution provisions contained in the various stock option plans. As these
options were converted in accordance with accounting principles issued by the
Financial Accounting Standards Board, no compensation expense was recorded as a
result of such conversion.
<PAGE>
In certain cases, the exercise of stock options results in state and
federal income tax deductions to the Company on the difference between the
market price at the date of exercise and the option price. The tax benefits
obtained from these deductions are included in additional paid in capital.
Additional information regarding the Company's options outstanding at
December 31, 1998 is shown below:
<TABLE>
<CAPTION>
Exercise Price Range
- --------------------------------------------------------------------------------
$.59-$6.98 $7.18-$9.97 $11.06-$16.86 Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of options
Outstanding 2,532,018 1,019,408 1,784,215 5,335,641
Weighted average
exercise price $ 5.36 $ 7.25 $ 12.49 $ 8.10
Weighted average remaining
contractual life 5.89 7.96 8.96 7.31
Number of shares
exercisable 2,044,649 580,677 773,218 3,398,544
Weighted average
exercisable price $ 5.60 $ 7.26 $ 12.44 $ 7.44
</TABLE>
Changes in stock options under all of Priority's plans are shown below:
<TABLE>
<CAPTION>
Number of Option price per share
shares
- -------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding
at December 31, 1996
Forfeited during 1997 (13,800) $ 14.50 to $14.50
Granted during 1997 473,050 $ 14.50 to $15.00
Exercised during 1997
---------
Options outstanding
at December 31, 1997 459,250 $ 14.50 to $15.00
=========
Forfeited during 1998 (29,120) $ 14.50 to $20.00
Granted during 1998 601,953 $ 12.24 to $20.00
Exercised during 1998
---------
Options outstanding
at December 31, 1998 1,032,083 $ 12.24 to $20.00
=========
</TABLE>
<PAGE>
During 1998, the Company issued 350,000 (restated to 466,667 to
reflect the stock split) restricted stock grants to certain key executives with
a grant date fair value of $35.25 per share. Pending the lapse of the
forfeiture and transfer restrictions established by the Compensation and Stock
Option Committee, the grantee generally will have all the rights of a
shareholder, including the right to vote the shares and the right to receive all
dividends thereon. Upon issuance of the restricted stock grants, unearned
compensation equivalent to the market value at the date of grant was recorded as
unamortized value of restricted stock and is being charged to earnings over the
period during which the restrictions lapse. Compensation expense related to
these restricted stock grants of $1.6 million was recorded in the first nine
months of 1998. The remaining $11.1 million was recorded in the fourth quarter
as part of the unusual items when the lapse of the forfeiture and transfer
restrictions on the restricted stock was accelerated by the Compensation and
Stock Option Committee.
NOTE 13 - COMMITMENTS
The Company leases warehouse and office space under noncancelable
operating leases expiring at various dates through 2004, with options to renew
for various periods. Minimum commitments under leases aggregate $2,260,000 for
1999, $1,996,000 for 2000, $1,536,000 for 2001, $1,071,000 for 2002 and $777,000
for 2003.
The consolidated rent expense for the years ended December 31, 1998,
1997 and 1996 was $2,961,000, $2,615,000 and $1,941,000, respectively, of which
none pertained to leases of one year or less for 1998 and approximately
$1,034,000 in 1997 and $209,000 in 1996 which pertained to leases with terms of
one year or less.
In 1998, the Company completed construction of a new 180,000 square
foot, five-story office building in Indianapolis, Indiana. This building
provides space for the accounting, human resources, information systems,
purchasing and sales and marketing departments, along with the Company's
executive offices and related staff. Subject to favorable market conditions,
the Company through its wholly-owned subsidiary, College Park Plaza Associates,
Inc., intends to sell the building to a third party and then lease back the top
two floors.
In 1998, the Company entered into operating lease agreements for the
bottom three floors of the newly constructed office building in Indianapolis,
Indiana. The rental income received in 1998 was immaterial. Minimum future
rentals on noncancelable leases aggregate $1,268,000 for 1999 and $1,506,000 per
year for 2000, 2001, 2002 and 2003.
NOTE 14 - MAJOR CUSTOMERS
The BWI segment services customers in 37 states and Puerto Rico from its 14
distribution centers located in 13 states. The Nuclear Pharmacy segment operates
specialized pharmacies in 13 states. The principal customers of the BWI segment
are chain drug companies that operate their own warehouses. Other customers
include independent drug stores, chain drug stores, supermarkets and mass
merchandisers with their own pharmacies, hospitals, clinics, HMOs, state and
federal government agencies and other health care providers. The following
chain drug warehouse customers each accounted for over 10% of the Company's net
sales during the years shown: Eckerd Corporation (18%) and CVS (17%) in 1998;
CVS (22%), Rite Aid Corporation (18%) and Eckerd Corporation (16%) in 1997; and
Eckerd Corporation (17%), Rite Aid Corporation (14%) and Revco D.S., Inc. (12%)
in 1996. Sales to these customers aggregated 35%, 56% and 43% of net sales in
1998, 1997 and 1996,
<PAGE>
respectively. The Company sells inventory to its chain drug warehouse and other
customers on various payment terms. This entails accounts receivable exposure,
especially if any of its chain warehouse 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
writedown of chain drug accounts receivable in the future.
During the second quarter of 1998, Rite Aid informed the Company that Rite
Aid signed a supply agreement with another wholesaler that began in May 1998.
In 1997, Rite Aid comprised 18% of the Company's sales. Sales to Rite Aid were
predominantly to their warehouses. The loss of this customer did not have a
material adverse impact on the Company's results of operations.
NOTE 15 - STATEMENT OF CASH FLOWS
Cash paid for interest expense and income taxes was as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
(in thousands)
<S> <C> <C> <C>
Interest $20,330 $14,697 $13,126
Income taxes $15,017 $16,935 $13,640
</TABLE>
Presented below is a brief discussion of recent acquisitions by the
Company. The purchase price has been allocated based on a determination of the
fair value of the assets acquired and liabilities assumed. The goodwill
associated with these acquisitions is being amortized on a straight line basis
not exceeding 40 years. All acquisitions were treated as purchases and the
financial statements include the results of operations from the respective
effective date of acquisition. Results of operations of the acquired companies
from January 1 of the year of acquisition to the effective dates of the
transactions are not material to the consolidated results of operations of the
Company for the respective years.
In January 1996, the Company formed a new subsidiary, National Infusion
Services, Inc. ("NIS"). Effective February 8, 1996, the Company through its NIS
subsidiary purchased the assets of the infusion services division of Infectious
Disease of Indiana P.S.C. NIS is a provider of quality care to patients in a
variety of settings. In February 1997, the corporate name was changed from NIS
to Priority Healthcare Services Corporation. The Company acquired the assets of
NIS for approximately $9 million in cash and incurred a long-term obligation of
approximately $1.5 million, resulting in approximately $9.8 million in
intangible assets. As discussed in Note 6 and Note 9 above, the remaining
balance of the intangible assets and the long-term obligation were written off
as part of the unusual items caption in the fourth quarter of 1998.
Effective July 31, 1997, the Company purchased substantially all of the
operating assets and assumed most of the liabilities and contractual obligations
of Tennessee Wholesale Drug Company ("TWD"). The Company expended approximately
$27 million for the acquisition of TWD, which approximated the fair value of the
net assets acquired. During 1998, the Company closed the TWD divisions located
in Baltimore, Maryland and Tampa, Florida. The customers of these divisions are
serviced from existing facilities. The Company recognized a liability related
to the closure of the facilities of $413,000 as of December 31, 1997. The
Company offered all employees an opportunity to interview for openings elsewhere
in the Company and agreed to pay a lump sum relocation cost to those that
relocated. Employees who did not relocate and
<PAGE>
worked up to the designated date of his/her separation of employment received a
benefits and compensation package based on his or her tenure with the Company.
The plan also included operational and data processing costs associated with the
closure. Both facilities were closed in 1998 and the costs associated with those
closures were paid and approximated the liability established.
Effective August 6, 1997, Priority acquired substantially all of the
operating assets and assumed most of the liabilities of Grove Way Pharmacy,
Inc., a specialty distributor of vaccines and injectables located in Castro
Valley, California. The amount expended approximated the fair value of the net
assets acquired.
In 1997, CPSI acquired certain assets and assumed certain liabilities of
Nu-Scan, Inc., Sholars Drugs, Inc. and Alpha Nuclear Pharmacy, Inc. Aggregate
consideration for these transactions was approximately $666,000, consisting of
approximately $441,000 in cash (including $25,000 paid in 1998) and a note
payable for $225,000. CPSI recorded $60,000 as noncompete agreements in
accordance with the terms of the asset purchase and other related agreements.
The remainder of the excess of the cost over the fair value of net assets
acquired of approximately $612,000 has been recorded as goodwill and is being
amortized on a straight-line basis over 20 years.
In December 1998, CPSI acquired the remaining interest in its 50% owned
affiliate, Central Source Pharmacy Services, LLC for cash consideration of
approximately $877,000. The excess of cost over the fair value of net assets
acquired of approximately $780,000 has been recorded as goodwill and is be
amortized on a straight-line basis over 20 years.
NOTE 16 - LEGAL PROCEEDINGS
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, other pharmaceutical wholesalers and 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.
Several of the manufacturer defendants and the class plaintiffs have
reached settlement agreements. The trial against the remaining defendants,
including the Company, began on September 14, 1998. On November 30, 1998, the
Court granted all remaining defendants' motions for judgments as a matter of
law, dismissing all class claims against the Company and other defendants. The
class plaintiffs' appeal of the Court's ruling is pending.
At this time, the Company is a defendant in 115 additional cases brought by
plaintiffs who "opted out" of the federal class action described above. One
hundred eleven of these complaints contain allegations and claims for relief
that are substantially similar to those in the federal class action. The four
remaining complaints add allegations that the defendants' conduct violated state
law. The damages period in these cases begins in October 1993. The Company has
denied the allegations in all of these complaints.
On November 20, 1997, two additional complaints were filed in the MDL 997
proceeding by Eckerd Corporation and American Drug Stores naming certain
pharmaceutical
<PAGE>
manufacturers and wholesalers, including the Company, as defendants. These
complaints contain allegations and claims for relief that are substantially
similar to those in the federal class action. The Company has denied the
allegations in these complaints.
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.
On June 16, 1998, a suit was filed in the Circuit Court for Cocke County,
Tennessee purportedly on behalf of consumers of prescription drugs in the
following states: Tennessee, Alabama, Arizona, Florida, Kansas, Maine, Michigan,
Minnesota, New Mexico, North Carolina, North Dakota, South Dakota, West Virginia
and Wisconsin. Graves et al. v. Abbott Laboratories et al., Civil Action
No. 25,109-00. The complaint charges that pharmaceutical manufacturers and
wholesalers, including the Company, engaged in a price-fixing conspiracy in
violation of the Tennessee's Trade Practices Act and Consumer Protection Act,
and the unfair or deceptive trade practices statutes of the other jurisdictions
named therein. The Company has denied the allegations of the complaint.
On October 21, 1994, the Company entered into an agreement with the other
wholesalers and pharmaceutical manufacturers covering all of the cases listed
above. Among other things, the agreement provides that for all judgments that
might be entered against both the manufacturer and wholesaler defendants, the
Company's total exposure for joint and several liability is limited to
$1,000,000 and the wholesaler defendants are indemnified for $9,000,000 in
related legal fees and expenses. The effect of the previously noted settlements
on the agreement is that the Company will continue to receive reimbursement of
some, if not all, of its legal fees and expenses in excess of its proportionate
share of the $9,000,000.
The Company is unable to form a reasonably reliable conclusion regarding
the likelihood of a favorable or unfavorable outcome of these cases, each of
which is being defended vigorously. 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.
On October 7, 1996, the Company and its subsidiary, National Infusion
Services (now known as Priority Healthcare Services Corporation) ("PHSC"), were
named as defendants in an action filed by Thomas G. Slama, M.D. in the Superior
Court of Hamilton County, Indiana. Dr. Slama is a former director of the Company
and formerly was Chief Executive Officer and President of PHSC. The complaint
alleged breach of contract and defamation arising from the termination of Dr.
Slama's employment with PHSC in October 1996. On October 26, 1998, Dr. Slama
filed a Second Amended Complaint which added Priority and William E. Bindley as
defendants and stated additional claims for breach of contract, breach of oral
contract, breach of fiduciary duty, securities fraud and conversion. Pursuant to
an Indemnification and Hold Harmless Agreement the Company indemnified and held
harmless Priority and its subsidiaries from and against any and all costs,
damages, charges and expenses (including without
<PAGE>
limitation legal and other professional fees) which Priority might incur or
which may be charged against Priority in any way based upon, connected with or
arising out of the lawsuit filed by Dr. Slama. The Company, PHSC, Priority and
Mr. Bindley answered the complaint, denied the merits of Dr. Slama's claims, and
also filed a counterclaim against Dr. Slama which sought, among other things,
declaratory relief, compensatory and (in some instances) treble damages,
punitive damages, attorneys' fees, interest and costs. On December 31, 1998, a
Settlement Agreement was executed by and among the parties named above pursuant
to which mutual releases were obtained, and on January 4, 1999, a one-time
payment of $875,000 was made by the Company to Dr. Slama. The corresponding
Joint Stipulation of Dismissal was approved by the Court on January 11, 1999.
This one time payment, and approximately $150,000 of legal costs, were included
in the unusual item charge recorded in the fourth quarter of 1998.
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 did not
substantially comply with the terms of the Civil Consent Decree over the next
two years. The settlement charge recognized by the Company in 1996 included
professional fees of $112,000. On December 15, 1998, the Company was advised by
the U. S. Attorney's office in Indianapolis that the Company had fully complied
with the terms of the 1996 Civil Consent Decree and, accordingly, the civil
penalty of $300,000 would not be imposed.
<PAGE>
NOTE 17 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Basic:
Net earnings $ 22,236 $ 24,506 $ 17,618
Weighted shares
Outstanding 28,728,979 22,912,237 20,146,629
Shares issued in
CPSI merger 2,922,055 2,922,055 2,922,055
Basic shares
Outstanding 31,651,034 25,834,292 23,068,684
Per share amount $ .70 $ .95 $ .76
Diluted:
Net earnings $ 22,236 $ 24,506 $ 17,618
6 1/2% convertible
debentures 1,889 2,654
Diluted earnings $ 22,236 $ 26,395 $ 20,272
Weighted shares
Outstanding 28,728,979 22,912,237 20,146,629
Debentures 4,193,297 6,039,513
Shares issued in
CPSI merger 2,922,055 2,922,055 2,922,055
Stock Options 1,708,990 1,862,446 1,251,243
Restricted Stock 148,644
Diluted Shares 33,508,668 31,890,035 30,359,442
Per share amount $ .66 $ .83 $ .67
</TABLE>
The earnings per share for all years have been restated to give effect for the
4-for-3 stock split on June 25, 1999 and the earnings per share for 1997 and
1996 have been restated to give effect for the 4-for-3 stock split on June 3,
1998.
See Note 12 regarding changes to outstanding options at the close of business on
December 31, 1998.
<PAGE>
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the quarterly financial data for 1998 and 1997.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
Net sales $1,969,157 $1,856,142 $1,821,594 $2,007,328
Gross margin 46,217 50,842 51,896 56,933
Net earnings 8,007 9,069 8,763 (3,603)
Earnings per share:
Basic (1) $ 0.26 $ 0.29 $ 0.28 $ (0.11)
Diluted (1) 0.24 0.27 0.26 (0.11)
1997
Net sales $1,639,874 $1,816,884 $1,818,821 $2,058,558
Gross margin 35,060 36,425 38,429 42,808
Net earnings 5,639 5,774 5,827 7,266
Earnings per share:
Basic (1) $ 0.24 $ 0.24 $ 0.23 $ 0.24
Diluted (1) 0.21 0.20 0.20 0.22
</TABLE>
(1) The earnings per share for 1997 and the first quarter of 1998 have been
restated to give effect for the 4-for-3 stock split effected in the form of a
dividend on June 3, 1998 to shareholders of record on May 21, 1998. The earnings
per share for 1997 and 1998 have been restated to give effect for the 4-for-3
stock split effected in the form of a dividend on June 25, 1999 to shareholders
of record on June 11, 1999.
