UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-11519
BINDLEY WESTERN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 84-0601662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8909 Purdue Road, Indianapolis, Indiana 46268
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 704-4000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($.01 par value) New York Stock Exchange
(Title of class) (Name of exchange on which registered)
Securities registered pursuant to section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ____ ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. []
$425,537,218
Aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the last sale price for such stock on March xx, 2000
(assuming solely for the purposes of this calculation that all Directors and
Officers of the Registrant are "affiliates")
34,157,479
Number of shares of Common Stock outstanding as of March 17, 2000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document have been incorporated by reference into this
annual report on Form 10-K:
IDENTITY OF DOCUMENT PARTS OF FORM 10-K INTO WHICH
DOCUMENT IS INCORPORATED
PART III
Proxy Statement to be filed for the
2000Annual Meeting of Common
Shareholders of Registrant
<PAGE>
BINDLEY WESTERN INDUSTRIES, INC.
Indianapolis, Indiana
Annual Report to Securities and Exchange Commission
December 31, 1999
Part I
Item 1. Business.
General
Bindley Western Industries, Inc., an Indiana corporation, is the fifth
largest distributor of pharmaceuticals and related products in the United
States. We sell ethical (prescription) pharmaceuticals, health and beauty care
products, and homecare merchandise to chain drug companies that operate their
own warehouses as well as independent drug stores, hospitals, clinics, HMOs and
other managed care providers. We operate from 18 distribution centers in 14
states, serving customers located throughout the United States and in U.S.
military facilities in Europe. By using us as a primary source of
pharmaceuticals, our customers can centralize purchasing functions, exercise
better inventory control, maintain better security and reduce handling costs.
We sell to chain warehouses and direct store delivery customers. During
1999, we serviced three of the 10 largest chain warehouse customers in the
United States. We believe that technological innovation and emphasis on customer
service is critical to our ability to serve chain warehouse customers. Since
1987, we have focused significant resources on increasing sales to direct store
delivery customers. Direct store delivery sales increased from $171 million in
1987 to $4.9 billion in 1999. To complement our internal growth and strengthen
our position in the northeastern and southeastern United States, we purchased
J.E. Goold in 1992, Kendall Drug in 1994, Tennessee Wholesale Drug in 1997 and
Central Pharmacy Services in 1999.
Bindley Western's sales of $8.5 billion for 1999 represented the 31st
consecutive year of record sales, equating to a compound growth rate of
approximately 20% since our inception in 1968. Our growth has resulted from
acquisitions, expansion into new geographic areas and increased market share.
Spin-off of Priority Healthcare Corporation
On December 31, 1998, we distributed to our shareholders the remaining
82% interest that we then owned in our subsidiary, Priority Healthcare
Corporation ("Priority"). We formed Priority in 1994 to focus on distributing
products and providing services to the growing alternate site component of the
healthcare industry. The net cost of the acquisitions which created Priority was
approximately $7 million. The total market capitalization of the Priority shares
distributed to our shareholders exceeded $500 million.
The spin-off resulted in the removal of $107.5 million of assets and
$37.2 million of liabilities from our consolidated balance sheet as of December
31, 1998. The results of operations for Priority, net of minority interest, for
1998 and earlier periods are included in our
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consolidated statement of earnings because Priority was a subsidiary through
December 31, 1998.
Acquisition of Central Pharmacy
On August 31, 1999, we acquired Central Pharmacy Services, Inc., a
Georgia corporation, through the merger of one of our wholly owned subsidiaries
with and into Central Pharmacy, resulting in Central Pharmacy becoming a wholly
owned subsidiary of ours. Headquartered in Atlanta, Georgia, Central Pharmacy
operates centralized nuclear pharmacies that prepare and deliver
radiopharmaceuticals for use in nuclear imaging procedures in hospitals and
clinics. Central Pharmacy operates 29 specialized pharmacies located in 13
states. Central Pharmacy's revenues increased from $4.4 million in 1993 to $43.9
million in 1999, an average annual compound growth rate of 47%.
Central Pharmacy operates centralized nuclear pharmacies that prepare
and deliver unit dose radiopharmaceuticals for use in nuclear imaging procedures
in hospitals and clinics. Nuclear medicine uses small amounts of radioactive
material for the safe diagnosis, treatment and monitoring of disease. In nuclear
imaging procedures, a special camera scans a patient who has swallowed, inhaled
or been injected with a diluted radiopharmaceutical compound that emits
radiotracers. The special camera is able to detect the radiotracer emissions
from the compound. The compounds are usually specific to a particular organ in
which they concentrate and help the reader of the scan detect irregularities in
organ tissue for the identification of cancer or other diseases. Common types of
scans include heart, bone, liver, renal, lung and brain scans. Nuclear imaging
is a way to gather medical information that may otherwise be unavailable, that
may otherwise require invasive surgery or that otherwise would have necessitated
more expensive diagnostic tests.
Hospitals and clinics that perform diagnostic imaging procedures have
two means of acquiring the radiopharmaceuticals: they can buy directly from
manufacturers in bulk and perform the compounding and unit dosing themselves, or
they can purchase from centralized nuclear pharmacies principally in unit dose
form.
In addition to its core radiopharmaceutical compounding, dispensing and
distribution services, Central Pharmacy has recently expanded its service
offerings with its NuScan Services division. NuScan provides nuclear medicine
imaging department outsourcing services to hospital clients. The hospital
provides the space for the imaging department, while the radiopharmaceuticals,
equipment, personnel, scheduling and management are all controlled by NuScan.
NuScan charges the hospital on a fee-per-scan basis, which effectively switches
the department from a fixed to a variable cost.
The descriptions of the businesses of Bindley Western and Central
Pharmacy are discussed separately in this report because of the recent nature of
this acquisition.
Segments
The core operations of Bindley Western are included in the BWI segment
while the operations of Central Pharmacy comprise the Nuclear Pharmacy segment.
Prior to the spin-off, the operations of Priority comprised the Priority
segment.
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These segments have different management teams and infrastructures to
facilitate their specific customer needs and marketing strategies. These
segments are discussed separately in this report. See also Note 4 to the
Consolidated Financial Statements.
Suppliers
BWI
In every year for the last five years, sales of ethical (prescription)
pharmaceutical products accounted for approximately 85% of our total sales
volume. Our 800 plus suppliers are comprised of branded pharmaceutical
manufacturers, generic pharmaceutical manufacturers, private label manufacturers
of pharmaceutical and over-the-counter products, various health and beauty care
and home health care vendors, and other wholesale distributors which purchase
products directly from the manufacturer or sources other than the manufacturer.
Of the approximately 54,000 products in our inventory, a comparatively small
number account for a disproportionately large share of the total dollar volume
of products sold. Our five largest suppliers in 1999 were Pfizer, Bristol-Myers
Squibb Company, Astra Pharmaceutical, Eli Lilly and Company and SmithKline
Beecham. While none of these vendors account for over 10% of net sales, as a
group, they are significant. We maintain many competing products in inventory
and are not dependent upon any single supplier. Nevertheless, the loss of a
major supplier could adversely affect our business if we could not locate
alternate sources of supply. Our arrangements with suppliers typically may be
canceled by either party, without cause, on one month's notice. Many of these
arrangements are not governed by formal agreements. We believe our relationships
with our suppliers are generally good.
Nuclear Pharmacy
Although supplier contracts are negotiated centrally, each of our
pharmacy managers has the discretion to order from suppliers based on local
market demand for products and delivery availability from suppliers. However, in
the aggregate, the largest suppliers to Nuclear Pharmacy are Nycomed Amersham,
Mallinckrodt Medical, Inc. and DuPont Pharmaceuticals Company. These top three
suppliers accounted for 86% of total purchases in 1999, 79% of total purchases
in 1998 and 74% of total purchases in 1997.
Customers and Markets
BWI
We categorize our sales as either "brokerage sales" or "from stock
sales". Brokerage sales are made to the chain warehouse market and from stock
sales are made directly from our inventory to both the chain warehouse and
direct store delivery markets. See Item 6 -- Selected Financial Data for
revenues from brokerage sales and from stock sales.
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Direct Store Delivery Market. We provide direct store delivery service
to chain drug stores (both warehousing and non-warehousing), independent drug
stores, hospitals, clinics, HMOs, state and federal agencies and other health
care providers. These customers generally purchase less than full-case lots on a
daily basis when they need a particular item. While smaller in quantity, these
sales typically generate higher margins than sales to warehouse customers.
Shipments to direct store customers are delivered on a daily basis by our
vehicles or by carriers.
Our direct store delivery business has experienced significant growth.
Since 1987, direct store delivery sales increased from $171 million to $4.9
billion in 1999, a compound annual growth rate of 32%. Direct store delivery
sales as a percentage of net sales increased from approximately 16% to
approximately 58% during that period. During 1999, no single direct store
delivery customer accounted for 10% or more of our total net sales.
We compete with other drug wholesalers for direct store delivery sales
by offering value added services that our customers would not be likely to
develop on their own. These value added services are designed to enhance the
competitiveness of independent, small chain and managed care pharmacies. Two
examples are our "Profit Partners" and "1st Choice for Value" programs. These
are both PC-based, marketing support and merchandising programs which include a
generic pharmaceutical source program, a home health care program, a private
label over the counter program and the Rx Vector and Global Vector purchasing
and inventory management systems.
We believe that there are opportunities for growth in direct store
delivery sales by expanding into new geographical areas and increasing our
market share in existing markets. We are focused on the development of new
services and programs through interaction and cooperation with both customers
and suppliers, all of which are designed to enhance profitability, provide added
value to the customer and strengthen our role in the distribution channel. These
programs include computerized ordering systems, inventory management programs,
generic pharmaceutical source programs, repack programs, innovative advertising
and marketing campaigns and merchandising programs, including private label
product lines and e-commerce business solutions.
Chain Warehouse Market. Chain warehouse customers purchase in full-case
lots for redistribution to individual retail outlets. Approximately 42% of our
net sales in 1999 were to chain drug warehouse customers. At December 31, 1999,
our largest chain drug customers and the approximate period of time they had
done business with us were: Eckerd Corporation (27 years) and CVS (30 years).
The following chain drug warehouse customers each accounted for over 10% of net
sales during the years shown: Eckerd Corporation (16%) and CVS (21%) in 1999;
Eckerd Corporation (18%) and CVS (17%) in 1998; and CVS (22%), Rite Aid
Corporation (18%) and Eckerd Corporation (16%) in 1997. Net sales to these
customers aggregated 37% of net sales for 1999, 35% of net sales for 1998 and
56% of net sales for 1997.
By using us as a primary source of pharmaceuticals, a chain drug
customer can centralize its purchasing functions, exercise better inventory
control, maintain better security and reduce handling costs. Inventory control
and security are particularly important to these customers because of the
relatively high dollar value of pharmaceuticals in relation to their physical
size. In addition, we offer chain drug customers systems and procedures that we
have developed to facilitate their compliance with the recordkeeping and
physical security
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requirements of the Controlled Substances Act of 1970 and the Prescription Drug
Marketing Act of 1987. Additionally, we offer software to these customers which
permits direct communication between our computers and theirs.
We have, from time to time, entered into written understandings with
some chain warehouse customers setting forth various terms and conditions of
sale. Generally, we have few long-term contracts with our major customers and
the relationship is terminable at will by either party. The loss of any one of
our major chain warehouse customers could have a material adverse effect on our
operations. During the second quarter of 1998, Rite Aid informed us that it had
signed a supply agreement with another wholesaler that became effective in May
1998. In 1997, Rite Aid accounted for 18% of our net sales. Sales to Rite Aid
were predominantly to their warehouses. The loss of this customer has not had a
material adverse impact on our operations. See also, Note 15 -- Major Customers
in our financial statements.
Nuclear Pharmacy
We actively serve two types of customers: hospitals and outpatient
clinics. Each type of customer receives product deliveries through the same
network, but there are differences in the frequency and types of doses, the
number and timing of deliveries and the method of purchasing. Approximately 475
hospital customers generate nearly two-thirds of our revenue. Over the past
several years, the hospital industry has undergone significant consolidation.
The hospitals that have not participated in this trend have aggregated
purchasing clout through group purchasing associations. We have been able to
participate in bidding on these accounts in partnership with other nuclear
pharmacy providers, due to the mismatch between the broad national coverage of
the group purchasing organizations and hospital consolidators and the focused,
regional coverage of our Nuclear Pharmacy segment. The Nuclear Pharmacy segment
also services approximately 115 clinic customers. Clinic customers differ from
hospitals in their price sensitivity, product focus and timing of deliveries.
While clinic customers are very price sensitive due to reimbursement concerns,
they tend to order exclusively the higher margin cardiology products on a
regular basis, which produces attractive margins. However, due to their
outpatient population, clinics do not require emergency deliveries, which
produce lower margins due to the small quantity of orders.
Central Pharmacy has partnered with two radiopharmaceutical
manufacturers to advance its position with group purchasing organizations.
Mallinckrodt Medical, Inc. has a contract that lasts through June 2004 with
Premier Purchasing Partners, L.P., the largest hospital group purchasing
organization in the United States representing approximately 30% of hospitals,
in which Mallinckrodt is the exclusive distributor of nuclear medicine products
to Premier members. Mallinckrodt established a similar relationship with
Consorta Catholic Resource Partners ("Consorta") in December 1999. We have a
parallel agreement with Mallinckrodt in which we are the exclusive service
representative for these Premier and Consorta accounts in specific geographic
areas. Our ability to sign new contracts with Premier and Consorta customers
under this arrangement is strong, but not automatic. Each contract must be
enrolled individually at the time the contract is up for renewal and
renegotiation, and therefore requires significant joint sales efforts by our
local pharmacy managers and the local Mallinckrodt and Premier representatives.
Similarly, Nycomed Amersham has a contract that lasts through 2001 with
Novation LLC, a group purchasing organization that represents approximately 30%
of all United States
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hospitals, in which Nycomed/Amersham is the exclusive distributor of nuclear
medicine products to Novation members. We have a parallel agreement with
Nycomed/Amersham to be the exclusive service representative for these Novation
accounts in specific geographic areas. The Novation contract is very similar to
the Premier contract in the manner of obtaining customers.
Internal Systems Development
BWI
We have developed and continue to improve our specialized internal
operating and management systems. We control inventories and accounts receivable
through the use of data processing and management information systems which we
developed. These assets are monitored by distribution center management using
real time connections to the Company's centralized data center. At present, many
operational functions, including accounting, cash management, accounts
receivable and inventory control are conducted through data processing
operations at our Indianapolis, Indiana facility. Data is transmitted to and
from on-site data processing equipment at the distribution centers.
Nuclear Pharmacy
We have developed programs to enhance internal operating and management
systems. We control accounts receivable, accounts payable and group purchasing
organization billing through the use of internally developed software programs.
The majority of operational functions, including accounting, cash management,
and accounts receivable are conducted through data processing operations in the
Atlanta, Georgia facility. Accounts receivable and accounts payable data are
transmitted electronically to and from on-site data processing equipment at each
of the pharmacies.
Expansion/Acquisitions
We have made several acquisitions since 1992. We continue to seek
opportunities to expand operations through our acquisition of wholesale drug
distributors and other businesses in the healthcare industry.
Within the past two years, we have established six distribution centers
in new operational areas and replaced three older distribution centers with new
centers.
Presented below is a brief discussion of acquisitions by Bindley
Western since 1992. All of the acquisitions have been accounted for under the
purchase method and, accordingly, the results of operations of the acquired
companies have been included in our financial statements from the effective date
of acquisition. 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
over periods not exceeding 40 years. See, also, Note 16 - Statement of Cash
Flows in our financial statements.
J.E. Goold. On March 25, 1992, we effected a merger with J.E. Goold, a
full-line, full-service distributor of pharmaceutical, health and beauty care
and home health care products based in Portland, Maine.
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Kendall Drug Company. Effective July 1, 1994, we acquired the net
assets of Kendall Drug Company, a wholesale distributor of pharmaceutical
products and health and beauty care products based in Shelby, North Carolina.
Priority Healthcare Services Corporation. On February 7, 1996, we
acquired all of the assets of the infusion services division of Infectious
Disease of Indiana, P.S.C. Through February 7, 1997, this business was operated
as National Infusion Services, Inc., a physician managed provider of infusion
services programs to patients in a variety of settings, including the home,
extended care facilities and its outpatient center in Indianapolis, Indiana. On
that date, the corporate name was changed to Priority Healthcare Services
Corporation. We expended approximately $9.0 million and incurred a long-term
obligation of approximately $1.5 million, resulting in approximately $9.8
million in intangible assets. See Note 7 - Intangibles and Note 10 - Long Term
Debt in our consolidated financial statements.
Tennessee Wholesale Drug Company. Effective July 31, 1997, we purchased
substantially all of the operating assets and assumed most of the liabilities
and contractual obligations of Tennessee Wholesale Drug Company, Inc. ("TWD"), a
full-line, full-service wholesale drug company with a distribution facility in
Nashville, Tennessee. We expended approximately $27 million which approximated
the net book value of the assets and liabilities acquired. While the acquisition
was not material to us as a whole, it provided further opportunities for us to
expand our presence in the direct store delivery and managed care markets.
Priority Healthcare Corporation. In August 1994, we formed Priority
Healthcare as our subsidiary by combining the businesses of two acquisitions
that we had made in 1993. From 1994 to 1997, Priority acquired three other
businesses in California and Florida. In October 1997, Priority Healthcare
completed an initial public offering in which 18% of its stock was issued to the
public. On December 31, 1998, we distributed to our shareholders the remaining
82% interest that we then owned in Priority Healthcare.
Central Pharmacy. Effective August 31, 1999, we completed the merger
with Central Pharmacy Services, Inc ("Central Pharmacy") by exchanging 2.9
million shares of our common stock for all of the common stock of Central
Pharmacy. Each share of Central Pharmacy was exchanged for 26.38 shares of our
common stock. In addition, outstanding Central Pharmacy employee stock options
were converted at the same exchange factor into options to purchase
approximately 300,000 shares of our common stock.
The merger with Central Pharmacy was originally accounted for as a
pooling of interests and was reflected for all periods presented, and the
financial statements of BWI have included the combined operations of both BWI
and Central Pharmacy. However, the Company subsequently determined that the
pooling of interests method was unavailable for the Central Pharmacy acquisition
because of a dividend paid to preferred shareholders of Central Pharmacy
immediately prior to the acquisition. Accordingly, the Company has restated its
financial statements and applied the purchase method of accounting for the
Central Pharmacy acquisition. The total purchase price of $56,700,000, including
acquisition costs, has been allocated based on estimated fair values at the date
of acquisition including net tangible assets of $4,000,000; identified
intangible assets of workforce in place of $1,400,000 amortized on a straight
line basis over 12 years, customer relationships of $28,000,000 amortized on a
straight line basis over 40 years and goodwill of $34,800,000 amortized on a
straight line basis over 20 years; offset by $11,500,000 in deferred tax
liabilities. The results of operations of Central Pharmacy are included from the
date of acquisition.
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Employees
BWI
At February 29, 2000, we had approximately 1,435 employees, of whom
approximately 4% were covered by a single collective bargaining agreement. We
believe that our relationship with our employees is good.
Nuclear Pharmacy
At February 29, 2000, we had a total of approximately 360 employees,
none of whom were covered by a collective bargaining agreement.
Competition
BWI
We compete with national full-line, full-service wholesale drug
distributors, some of which are larger and have substantially greater financial
resources than we do. We also compete with local and regional drug distributors,
direct selling manufacturers and specialty distributors. While competition is
primarily price oriented, it can also be affected by delivery requirements,
credit terms, technology services, depth of product line and other customer
service requirements. We cannot assure you that we will not encounter increased
competition in the future that could adversely affect our business. In recent
years there has been a trend toward consolidation in the wholesale drug
industry, as shown by the purchase of a number of distributors by national
wholesalers. We estimate that there are currently approximately 35 full-line,
full-service wholesale drug distributors in the United States.
Nuclear Pharmacy
We have only one significant competitor, Syncor International, a
publicly-traded national chain. Syncor is primarily a nuclear pharmacy services
company engaged in compounding, dispensing and distributing radiopharmaceutical
products and services to hospitals and clinics in the United States and
overseas. We also compete with the distribution arms of some major
manufacturers, such as Mallinckrodt and Nycomed/Amersham, but to a lesser extent
since they operate mostly in the largest metropolitan markets.
Government Regulation
BWI
We are subject to regulation by federal, state and local government
agencies and must obtain licenses or permits from, and comply with operating and
security standards of, the United States Drug Enforcement Administration, the
Food and Drug Administration ("FDA") and numerous state agencies. Each of our
distribution centers is licensed to distribute ethical pharmaceutical products
and certain controlled substances in accordance with the requirements of the
Prescription Drug Marketing Act of 1987 and the Controlled Substances Act of
1970.
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If we fail to comply with these laws and regulations, we could be
subject to both criminal and civil sanctions. We have full-time regulatory
compliance managers and outside advisors conduct compliance reviews at our
locations. We have also implemented a company-wide ethics and corporate
compliance program. We believe that our operations comply in all material
respects with applicable laws and regulations. However, because the health care
industry will continue to be subject to substantial regulations, we cannot
assure you that our activities will not be reviewed or challenged by the
government in the future.
Since Congress enacted the Prescription Drug Marketing Act ("PDMA") in
1987, we have conducted our alternate source purchasing and state licensing
activities in accordance with this legislation. On December 3, 1999, the FDA
published final regulations, to become effective December 4, 2000, that will,
among other things, require (a) alternate source vendors to provide purchasers
of pharmaceutical drugs with either (i) written proof that they are authorized
to distribute a manufacturer's pharmaceutical drugs or (ii) a statement
identifying each prior sale, purchase, or trade of that particular
pharmaceutical drug starting in the chain of distribution with the manufacturer
and (b) at least 44 states to change the record retention requirements for
wholesale distributors of prescription drugs from the current two years to three
years. Although the final regulations will require us to make some modifications
with respect to our current business practices related to alternate source
purchases and record retention, we do not anticipate that the final regulations
will have a material adverse effect on our business or results of operations.
Nuclear Pharmacy
We operate in a highly regulated industry which requires licenses or
permits from the Federal Nuclear Regulatory Commission, the Radiologic Health
Agency of each state in which we operate, the applicable State Board of Pharmacy
and the Department of Transportation which regulates the transport of
potentially hazardous material. We devote substantial human and financial
resources to complying with these applicable regulations.
Industry Overview
The wholesale drug industry in the United States continues to
experience significant growth. As reported by the National Wholesale Druggists'
Association, industry sales grew from $30 billion in 1990 to approximately $83
billion in 1998, a compound annual growth rate of 14%. Today, industry analysts
estimate over 80% of pharmaceutical sales are distributed through wholesalers
compared to less than 47% in 1970. Order processing, inventory management and
product delivery by wholesale distributors allow manufacturers to better
allocate their resources to research and development, manufacturing and
marketing their products. Wholesale distribution provides customers access to a
single supply source for a full line of pharmaceutical and health care products
that are manufactured by hundreds of other companies. Wholesale distribution can
lower customers' inventory, reduce costs and delivery time and improve
purchasing and inventory information. Wholesale distribution also offers value
added programs that can reduce customers' costs and increase their operating
efficiencies.
We believe the pharmaceutical industry, including drug wholesalers and
related health care distributors and providers, will continue to grow as a
result of the following trends:
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Aging Population. The number of individuals over 65 in the United
States is expected to grow 25% from approximately 28 million in 1985 to
approximately 35 million by the year 2000. This age group suffers from a greater
incidence of chronic illnesses and disabilities than the rest of the population
and is estimated to account for approximately two-thirds of total health care
expenditures by the end of the decade.
Introduction of New Pharmaceuticals. Traditional research and
development as well as the advent of new research and production methods, such
as biotechnology, continue to generate new compounds that are more effective in
treating diseases. We believe that ongoing research and development expenditures
by the leading pharmaceutical manufacturers will contribute to the continued
growth of the industry. Drug therapy has had a beneficial impact on the overall
increase in aggregate health care costs, by reducing expensive surgeries and
prolonged hospital stays. The Health Care Financing Administration estimates
that expenditures in the United States for pharmaceuticals will more than triple
by 2008 from current levels.
Managed Care. To remain competitive, pharmaceutical manufacturers are
required to sell their products to the managed care market, wherein employers
negotiate discounts from health care providers by committing to long-term
contracts involving thousands of patients. Health care costs are linked more
tightly to the provision of managed health care services, especially with
hospitals and doctors, than under traditional medical insurance plans. Managed
care organizations generally provide full coverage for prescription drugs to
lower health care costs by improving access to medical treatment rather than
delaying treatment until more expensive services are required. The costs
associated with the prescription drug benefit are monitored by the managed care
organization primarily through the establishment of tightly controlled
formularies of approved prescription drugs, including generic substitutes, and
by drug utilization review procedures wherein physicians' prescribing practices
and patients' usage are closely scrutinized. Even though there has been a recent
trend to increase co-payments, implement tighter drug formularies and cap annual
pharmaceutical costs per patient, analysts have determined that these efforts
have done little thus far to decrease demand for pharmaceutical drugs as part of
a general healthcare delivery strategy.
Increased Use of Generic Drugs. The growth of managed care's influence
on pharmacy along with the introduction of generic equivalent products for many
top selling brand name drugs has caused the generic market to grow
substantially. Branded drugs with annual sales of approximately $24 billion are
expected to come off patent in the next three years, thus expanding the generic
marketing opportunity. Analysts estimate that the size of the generic market is
expected to nearly double from $8.8 billion in 1998 to $16.6 billion in 2003.
Pharmaceutical Price Increases. As a result of competitive
market-driven cost containment measures implemented by both the private and
public sectors since 1993, pharmaceutical price increases are less than in prior
years. Nevertheless, we believe that price increases by pharmaceutical
manufacturers will continue to equal or exceed the overall Consumer Price Index,
which is due in large part to relatively inelastic demand in the face of higher
prices charged for patented drugs as manufacturers have attempted to recoup
costs associated with the research and development, clinical testing and FDA
approval of new products.
Continued Industry Consolidation. Largely in response to cost
containment pressure from private and governmental payers and the focus on
health care reform in the United States
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during the 1990's, the health care industry is experiencing significant
consolidation at the manufacturer, wholesaler and customer levels.
Pharmaceutical manufacturers consolidate to reduce operating expenses, gain
access to new drugs in the pipeline and enhance marketing efforts in a managed
care environment. Chain drug stores consolidate through combining with other
drug chains, as well as acquiring independent drug stores. Independent drug
stores are also consolidating through regional and national affiliations. The
number of pharmaceutical wholesalers in the United States has decreased from 139
in 1980 to approximately 35 full-line, full-service wholesalers at the end of
1999.
Medicare Prescription Drug Benefit. An emerging debate centers around
proposed legislation to offer an outpatient drug benefit for Medicare
beneficiaries. Although this proposed federal legislation could slow down the
recent growth of the pharmaceutical industry because of politically imposed
price controls, some analysts believe that drug wholesalers will benefit because
of increased volume and generic drug participation.
e-Commerce. Because wholesale drug distributors perform the fulfillment
function for on-line pharmacies, the recent advent of e-commerce companies that
distribute pharmaceuticals via the Internet should not threaten -- and may even
benefit -- drug distributors. Most industry observers have determined that
successful e-commerce companies will need to partner with retail drug chains or
pharmacy benefits management companies to provide for the orderly administration
of related claims.
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Five Year Financial Review and Selected Financial Data
Bindley Western Industries, Inc.
(in thousands, except share data)
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1999 1998 (1) 1997 1996 1995
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(Restated) (Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Net sales from stock $ 5,010,913 $ 4,123,930 $ 2,760,235 $ 2,127,307 $ 1,928,738
Net brokerage sales 3,468,425 3,497,422 4,549,687 3,190,219 2,741,415
Other income 1,937 1,702 1,882 1,407 2,322
Cost of products sold 8,272,576 7,429,793 7,167,274 5,197,008 4,565,750
Selling, general and administrative 112,619 107,852 81,078 70,531 62,555
Other expenses 34,417 45,711 23,688 20,523 16,406
Earnings before income taxes 61,663 39,698 39,764 30,871 27,764
Provision for income taxes 24,946 18,694 15,806 12,865 11,383
Minority interest in net income
of consolidated subsidiary - 1,865 212 - -
Net earnings 36,717 19,139 23,746 18,006 16,381
Earnings per share: (2)(3)
Basic $ 1.16 $ 0.67 $ 1.04 $ 0.89 $ 0.84
Diluted $ 1.07 $ 0.63 $ 0.89 $ 0.76 $ 0.72
Cash dividends declared per Common share $ 0.065 $ 0.08 $ 0.08 $ 0.08 $ 0.08
Other financial data:
Current assets $ 1,582,854 $ 1,175,806 $ 1,185,025 $ 850,965 $ 777,366
Total assets 1,766,216 1,286,575 1,287,779 941,206 848,708
Current liabilities 1,285,191 949,404 897,916 616,322 573,369
Long-term debt 38,698 628 32,142 99,766 69,473
Total liabilities 1,340,017 953,234 934,401 719,119 647,948
Minority interest - - 11,010 - -
Shareholders equity 426,199 333,341 42,368 222,087 200,760
Book value per share (2)(3) 12.53 14.66 21.73 19.27 17.90
</TABLE>
(1) On December 31, 1998, BWI distributed to the holders of BWI Common Stock all
of the 10,214,286 shares of Priority Class A Common Stock owned by BWI in the
form of a dividend. As a result of the distribution, Priority ceased to be a
subsidiary of BWI as of December 31, 1998 and as such, its assets, liabilities
and equity are not included in the December 31, 1998 Consolidated Balance Sheet.
However, Priority's 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 a subsidiary of the Company for the full year of 1998.
(2) On June 3, 1998, a 4-for-3 split of the Company's Common Stock was effected
in the form of a dividend to all shareholders of record at the close of business
on May 21, 1998. Accordingly, all historical weighted average and per share
amounts have been restated to reflect the stock split. Share amounts in the
Consolidated Balance Sheets reflect the actual share amounts outstanding for
each period presented.
(3) On June 25, 1999, a 4-for-3 split of the Company's Common Stock was effected
in the form of a dividend to all shareholders of record at the close of business
on June 11, 1999. Accordingly, all historical weighted average and per share
amounts have been restated to reflect the stock split. Share amounts in the
Consolidated Balance Sheets reflect the actual share amounts outstanding for
each period presented.
12
<PAGE>
Item 7. 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 and dispositions which affect the
comparison of the results of operations on a year to year basis. All
acquisitions 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.
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, we, through our Priority
Healthcare Corporation ("Priority") subsidiary, 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. - Effective August 31, 1999 the Company acquired
all of the common stock of Central Pharmacy Services, Inc. ("Central Pharmacy").
Central Pharmacy operates specialized pharmacies that prepare and deliver unit
dose radiopharmaceuticals for use in nuclear imaging procedures in hospitals and
clinics. Each share of Central Pharmacy was exchanged for 26.38 shares of BWI
common stock. BWI exchanged an aggregate of approximately 2.9 million shares of
its common stock valued at $17.03 per share for all of the common stock of
Central Pharmacy. In addition, outstanding Central Pharmacy employee stock
options were converted at the same exchange factor into options to purchase
approximately 300,000 shares of BWI common stock.
The merger with Central Pharmacy was originally accounted for as a
pooling of interests and was reflected for all periods presented, and the
financial statements of BWI have included the combined operations of both BWI
and Central Pharmacy. However, the Company subsequently determined that the
pooling of interests method was unavailable for the Central Pharmacy acquisition
because of a dividend paid to preferred shareholders of Central Pharmacy
immediately prior to the acquisition. Accordingly, the Company has restated its
financial statements and applied the purchase method of accounting for the
Central Pharmacy acquisition. The total purchase price of $56,700,000, including
acquisition costs, has been allocated based on estimated fair values at the date
of acquisition including net tangible assets of $4,000,000; identified
intangible assets of workforce in place of $1,400,000 amortized on a straight
line basis over 12 years, customer relationships of $28,000,000 amortized on a
straight line basis over 40 years and goodwill of $34,800,000 amortized on a
straight line basis over 20 years; offset by $11,500,000 in deferred tax
liabilities. The results of operations of Central Pharmacy are included from the
date of acquisition.
13
<PAGE>
The following table shows certain income statement and balance sheet
line items that have been restated:
<TABLE>
<CAPTION>
Restated As Previously Reported
(000's) (000's)
--------------------------------------------------
<S> <C> <C>
Total net sales:
1999 $8,479,338 $8,507,605
1998 7,621,352 7,654,221
1997 7,309,922 7,334,137
Net earnings:
1999 36,717 38,296
1998 19,139 22,236
1997 23,746 24,506
Basic earnings per share:
1999 1.16 1.14
1998 .67 .70
1997 1.04 .95
Diluted earnings per share:
1999 1.07 1.05
1998 .63 .66
1997 .89 .83
Balance sheet line items at December 31, 1999:
Intangibles 81,976 18,582
Deferred tax liability 16,128 4,703
Additional paid in capital 278,344 225,459
Retained earnings 165,149 166,550
</TABLE>
The following unaudited pro forma information presents the results of
operations of BWI as if the acquisition had taken place on January 1, 1999 and
1998 (in thousands except for per share data):
Unaudited Unaudited
1999 1998
----------------------- ------------------------
Revenues $8,507,605 $7,654,221
Net Earnings 37,669 19,997
Earnings per share:
Basic 1.13 .63
Diluted 1.03 .60
Weighted Average Outstanding
Common shares:
Basic 33,478,470 31,651,034
Diluted 36,467,639 33,508,668
These unaudited pro forma results have been prepared for analysis
14
<PAGE>
purposes only and include certain adjustments such as additional amortization
expenses related to intangible assets and goodwill. They do not purport to be
indicative of the results of operations that actually would have resulted had
the acquisition occurred on either January 1, 1999 or 1998 or of future results
of operations.
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 as of December 31, 1998 and,
therefore, its assets, liabilities and equity are not included in our December
31, 1998 Consolidated Balance Sheet. However, Priority's results of operations,
net of minority interest, for the year ended December 31, 1998 are included in
our Consolidated Statement of Earnings as Priority was our subsidiary for the
full year of 1998.
Results of Operations.
Net sales for 1999, 1998 and 1997 were $8,479 million, $7,621 million, and
$7,310 million, respectively. This represents an 11% increase for 1999 over 1998
(15% when Priority's sales are excluded from 1998 results) and a 4% increase in
1998 over 1997. In 1999, Central Pharmacy sales accounted for less than 1% of
total sales. The 1999 brokerage type sales ("brokerage sales") remained
relatively constant when compared to 1998. We experienced increased sales to
existing customers that offset the impact of the loss of a single chain
warehouse customer during the second quarter of 1998. The loss of this customer
resulted in a 23% decrease in 1998 brokerage sales when compared to 1997.
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 22% in 1999 (30% when Priority's sales are excluded from 1998
results). From stock sales include sales from our inventory to chain customers
and direct store delivery business. We continued 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. Direct store delivery
sales increased by 26% from 1998 to 1999 (35% when Priority's sales are excluded
from 1998 results) and 50% from 1997 to 1998. As a percentage of total sales,
direct store delivery sales represented 57% in 1999, 51% in 1998 and 35% in
1997. In both periods, the increase related to pricing was approximately equal
to the increase in the Consumer Price Index. Net sales for Priority were $276
million in 1998 and $231 million in 1997. 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 1999, 1998 and 1997 were $207 million, $192 million and $143
million, respectively. These increases in gross margin resulted primarily from
internal growth. Gross margins as a percent of net sales increased from 1.95% in
1997 to 2.51% in 1998 and then decreased to 2.44% in 1999. However, after the
exclusion of Priority, gross margins as a percent of sales were 1.69% for 1997
and 2.19% in 1998. These increases in gross margins resulted from the change in
mix away from the lower margin brokerage sales to the higher
15
<PAGE>
margin from stock sales in the BWI segment and also the increased sales of the
higher margin Nuclear Pharmacy segment from the date of acquisition. The change
in mix in the BWI segment resulted from both the increased direct store delivery
business and the loss of the chain warehouse customer. 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 were $31.1 million for 1998 and $23.2 million for 1997. Gross margins
as a percent of sales for Priority for 1998 and 1997 were 11.30% and 10.01%,
respectively. The increase in 1998 margins over 1997 margins was primarily
attributed to the change in sales mix resulting from significantly higher sales
by Priority Healthcare Pharmacy which generated higher gross margins than those
of Priority Healthcare Distribution.
Other income in 1999, 1998 and 1997 represented finance charges on certain
customers' receivables and gains on the sale of assets. The 1999 and 1998
balances also include approximately $200,000 of interest related to the note
from the CEO of the Company.
Selling, general and administrative ("SGA") expenses were $112.6 million, $107.9
million and $81.1 million in 1999, 1998 and 1997, respectively. When Priority is
excluded, SGA was $93.9 million for 1998 and $70.5 million for 1997. The
increase in SGA in the BWI segment resulted from costs associated with our
continued expansion, normal inflationary increases and increased variable costs
to support the growing direct store delivery business. In 1999, we incurred
startup costs associated with the opening of new distribution centers in
Milwaukee, Wisconsin, Kansas City, Missouri and Denver, Colorado. In 1998, we
incurred startup costs associated with the opening of new distribution centers
in Woodland, California and Portland, Oregon. The variable costs related to the
direct store delivery business include, among others, delivery expense,
warehouse expense, and labor costs. The remainder of the increase is associated
with the continued expansion, and the opening of new specialized pharmacies, in
our Nuclear Pharmacy segment. Our commitment to growth in both our direct store
delivery sales and our Nuclear Pharmacy segment will result in increased SGA in
the future. 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 2.25% in 1999 from 2.62% in 1998 (2.46%,
excluding Priority) and 2.94% in 1997 (2.77%, excluding Priority). SGA for
Priority was $14.0 million in 1998 and $10.6 million in 1997. As a percent of
sales, SGA for Priority 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 Healthcare Pharmacy and
increased overall costs of being a publicly traded company.
Depreciation and amortization was $11.0 million, $8.4 million and $7.4 million
in 1999, 1998 and 1997, respectively. When Priority is excluded, depreciation
and amortization was $7.2 million in 1998 and $6.2 million in 1997. These
increases were the result of the building of new facilities, expansion and
automation of existing facilities and investments in management information
systems. Depreciation and amortization for Priority was $1.2 million for both
1998 and 1997.
Interest expense for 1999, 1998 and 1997 was $23.4 million, $18.5 million and
$15.9 million, respectively. The inclusion of interest expense for Priority in
1998 and 1997 was not material. The average short-term borrowings outstanding
were $338 million, $249 million, and $152 million at an average short-term
interest rate of 5.5%, 6.3% and 6.4% for 1999, 1998 and 1997, respectively. We
also had 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 1999, 1998 and 1997. On December 27,
16
<PAGE>
1999, we repaid this private placement and negotiated a new private placement of
$25 million Senior Notes due December 27, 2004 at an interest rate of 7.93%.
In the fourth quarter of 1998, we recorded as an unusual item the 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
million represented the non-cash write-off of goodwill that had 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 7 - Intangibles, Note 10 - Long-term Debt, Note 13 - Capital Stock
and Note 17 - Legal Proceedings, of the Company's financial statements for
further discussion.
The provision for income taxes represented 40.5%, 47.1% and 39.8% of earnings
before taxes in 1999, 1998 and 1997, respectively. The increase in the 1998
effective rate was attributable to the nondeductible element of restricted stock
grants expensed in 1998.
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 $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
17
<PAGE>
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 $134.2 million in cash for the year ended December 31,
1999. The use of funds resulted from an increase in accounts receivables and
inventories. These uses were offset by an increase in accounts payable. The
increase in accounts receivables is a direct result of the overall increase in
direct store sales. The increase in inventories resulted from increased
purchases associated with the start up of our new distribution centers in
Milwaukee, Wisconsin and Kansas City, Missouri, additional volume associated
with the inventory and purchasing management systems with certain customers and
buildup related to Year 2000. The increase in accounts payable is attributed to
the timing of payments of invoices related to inventory purchases. We continue
to closely monitor working capital in relation to economic and competitive
conditions. However, our emphasis on direct store delivery business will
continue to require both net working capital and cash.
Capital expenditures for 1999 were $23.3 million. These were predominantly for
distribution centers, the expansion and automation of existing distribution
centers and the investment in additional management information systems.
On April 30, 1999, we sold our corporate office building to an unrelated party
and signed a 15 year lease for the top two floors of the building. This lease
meets the criteria of a capital lease and resulted in the recording of an asset
and liability in the amount of the present value of minimum lease payments of
$13.4 million. The asset is being amortized over the term of the lease.
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.
18
<PAGE>
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 Bank One, NA ("Bank
One"), certain other financial institutions (collectively with Falcon, the
"Purchasers"), and Bank One, 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 Bank One) 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 12, 2001, and is subject to final termination on
December 28, 2003, subject to earlier termination in certain events. At December
31, 1999, there were $350 million of Receivables Interests outstanding, which is
the maximum amount that could be drawn on this facility, bearing a Discount Rate
of 6.1% 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, we
renegotiated our bank line of credit on December 28, 1999 and now have $150
million of available credit. For 1999, the net increase in borrowings under the
bank credit agreement was $25.5 million. At December 31, 1999, we had borrowed
$45 million under the bank credit agreement and had a remaining availability of
$105 million.
On December 27, 1999, we repaid our $30 million Senior Notes. In addition on
December 27, 1999 we completed a new private placement of $25 million Senior
Notes due December 27, 2004 at an interest rate of 7.93%.
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. However, see Note 17 to our Consolidated Financial Statements for
a description of certain contingencies.
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 1999, an increase of 10% in our average
variable borrowing rate would result in a $2.2 million annual increase in
interest expense. Conversely, a 10% decrease in the average variable
19
<PAGE>
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, 1999, 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.
Currently, we have not experienced any significant Year 2000 related problems,
nor do we anticipate any Year 2000 related problems in the future. There have
been no instances where mission-critical and/or non-mission-critical systems
have failed to perform correctly. In addition, we have not experienced any
repercussions of Year 2000 related issues with either our suppliers or
customers. The total cumulative costs to make our systems compliant for the Year
2000 were approximately $1 million.
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,
the Company believes 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
and changes in government regulations or the interpretation thereof, which could
cause actual results to differ from those in the forward looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See discussion in Item 7.
20
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
The documents listed below are filed as a part of this report except as
otherwise indicated:
(a) 1. Financial Statements. The following described financial
statements, required to be filed by Item 8 and incorporated therein by reference
are set forth on pages F-1 through F-31.
Report of Independent Accountants F-1
Consolidated Statements of Earnings for each of the three years
in the period ended December 31, 1999 F-2
Consolidated Balance Sheets as of December 31, 1999
and 1998 F-3
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1999 F-4
Consolidated Statements of Shareholders' Equity for each
of the three years in the period ended December 31, 1999 F-5
Notes to Consolidated Financial Statements F-6 TO F-31
2. Financial Statement Schedules. No financial statement schedules
are included as the information required by Rule 5-04 is not applicable, or is
not material.
3. Exhibits. The list of exhibits filed as part of this report is
incorporated herein by reference to the Index to Exhibits beginning at Page [ ].
(b) Reports on Form 8-K. On November 17, 1999, we filed a current
report on Form 8-K, which described our merger with Central Pharmacy Services,
Inc., and which included the following historical financial statements, restated
to reflect the pooling of interest from Central Pharmacy: 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, and Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended December 31, 1998.
21
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
of Bindley Western Industries, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1 on page 21 present fairly, in all material respects,
the financial position of Bindley Western Industries, Inc. and its subsidiaries
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the thee years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States of
America. 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 of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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 provide a reasonable basis for the opinion expressed above.
As discussed in the consolidated financial statements, the Company has revised
the aforementioned consolidated financial statements to account for the business
combination with Central Pharmacy Services, Inc. as a purchase rather than a
pooling of interests.
PricewaterhouseCoopers LLP
March 21, 2000, except as to
Note 5, which is as of December 13, 2000 and
Note 3 and Note 20, which are as of December 15, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
Bindley Western Industries, Inc. and Subsidiaries
For the years ended December 31, 1999 1998 1997
(In thousands, except share data) (Restated) (Restated) (Restated)
<S> <C> <C> <C>
Revenues:
Net sales from stock $5,010,913 $4,123,930 $2,760,235
Net brokerage sales 3,468,425 3,497,422 4,549,687
-------------------------------------------------------------
Total net sales 8,479,338 7,621,352 7,309,922
Other income 1,937 1,702 1,882
-------------------------------------------------------------
8,481,275 7,623,054 7,311,804
Cost and expenses:
Cost of products sold 8,272,576 7,429,793 7,167,274
Selling, general and administrative 112,619 107,852 81,078
Depreciation and amortization 11,016 8,413 7,431
Interest 23,401 18,465 15,907
Unusual items 18,833 350
-------------------------------------------------------------
8,419,612 7,583,356 7,272,040
Earnings before income taxes
and minority interest 61,663 39,698 39,764
-------------------------------------------------------------
Provision for income taxes:
Current 25,053 22,180 19,640
Deferred (107) (3,486) (3,834)
-------------------------------------------------------------
24,946 18,694 15,806
Minority interest in net income of
consolidated subsidiary 1,865 212
-------------------------------------------------------------
Net earnings $ 36,717 $ 19,139 $ 23,746
=============================================================
Earnings per share:
Basic $ 1.16 $ 0.67 $ 1.04
Diluted $ 1.07 $ 0.63 $ 0.89
Average shares outstanding:
Basic 31,541,107 28,728,979 22,912,237
Diluted 34,384,628 30,296,160 28,677,528
</TABLE>
(See accompanying notes to consolidated financial statements)
F-2
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Bindley Western Industries, Inc. and Subsidiaries
<S> <C> <C>
December 31, 1999 1998
(In thousands, except share data) (Restated) (Restated)
Assets
Current assets:
Cash $ 34,910 $ 42,982
Accounts receivable, less allowance for doubtful
accounts of $9,547 for 1999 and $7,550 for 1998 721,829 453,552
Finished goods inventory 803,021 659,484
Deferred income taxes 13,168 11,506
Other current assets 9,926 8,282
------------- -------------
1,582,854 1,175,806
------------- -------------
Other assets 18 38
------------- -------------
Fixed assets, at cost 127,655 119,243
Less: accumulated depreciation (26,287) (26,491)
------------- -------------
101,368 92,752
------------- -------------
Intangibles, net 81,976 17,979
------------- -------------
Total assets $ 1,766,216 $ 1,286,575
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $ 45,000 $ 19,500
Securitized borrowings 349,963 224,163
Private placement debt 30,000
Accounts payable 864,271 640,540
Note payable to Priority Healthcare Corporation 16,517
Other current liabilities 25,957 18,684
------------- -------------
1,285,191 949,404
------------- -------------
Long-term debt 38,698 628
------------- -------------
Deferred income taxes 16,128 3,202
------------- -------------
Shareholders' equity:
Common stock. $.01 par value-authorized 53,333,333 shares;
issued 35,213,201 and 23,433,919 shares, respectively 3,415 3,376
Special shares, $.01 par value-authorized 1,000,000 shares
Additional paid in capital 278,344 213,462
Note receivable from officer (3,228) (3,228)
Retained earnings 165,149 130,412
------------- -------------
443,680 344,022
------------- -------------
Less: shares in treasury-at cost 1,212,232 and 689,161, respectively (17,481) (10,681)
------------- -------------
Total shareholders' equity 426,199 333,341
------------- -------------
Commitments and contingencies
------------- -------------
Total liabilities and shareholders' equity $ 1,766,216 $ 1,286,575
============= =============
</TABLE>
(See accompanying notes to consolidated financial statements)
F-3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Bindley Western Industries, Inc. and Subsidiaries
<S> <C> <C> <C> <C>
For the years ended December 31, 1999 1998 1997
(In thousands) (Restated) (Restated) (Restated)
Cash flow from operating activities:
Net income $ 36,717 $ 19,139 $ 23,746
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization 11,016 8,413 7,431
Deferred income taxes (107) (3,486) (3,834)
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 (183) (102) (103)
Unusual items 18,833
Change in assets and liabilities, net of acquisitions:
Accounts receivable (263,980) 95,417 (229,518)
Finished goods inventory (142,929) (163,102) (63,401)
Accounts payable 220,575 (60,203) 151,302
Other current assets and liabilities 4,684 401 4,724
------------ -------------- ------------
Net cash provided (used) by operating
activities (134,207) (81,236) (107,121)
------------ -------------- ------------
Cash flow from investing activities:
Purchase of fixed assets and other assets (23,266) (33,541) (22,643)
Proceeds from sale of fixed assets 20,600 89 2,082
Acquisition of businesses (2,096) (27,295)
Distribution of Priority Healthcare Corporation (2)
------------ -------------- ------------
Net cash used by investing activities (4,762) (33,454) (47,856)
------------ -------------- ------------
Cash flow from financing activities:
Proceeds from sale of stock 10,285 26,783 14,594
Proceeds from IPO of subsidiary 29,982
Related party note receivable (3,228)
Addition (reduction) of other debt, net (21,908) (282) (274)
Proceeds under line of credit agreement 1,540,500 1,600,000 1,496,000
Payments under line of credit agreement (1,515,000) (1,727,500) (1,401,000)
Proceeds from securitized borrowings 125,800 224,163
Payments to acquire treasury shares (6,800) (6,754) (777)
Dividends (1,980) (1,633) (1,083)
------------ -------------- ------------
Net cash provided by financing activities 130,897 114,777 134,214
------------ -------------- ------------
Net increase (decrease) in cash (8,072) 87 (20,763)
Cash at beginning of year 42,982 42,895 63,658
------------ -------------- ------------
Cash at end of year $ 34,910 $ 42,982 $ 42,895
============ ============== ============
</TABLE>
(See accompanying notes to consolidated financial statements)
F-4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
Bindley Western Industries, Inc. and Subsidiaries
Common Stock Treasury Stock
----------------------- --------------------
Additional Note
Shares Shares Paid in Receivable Retained Shareholders'
Outstanding Amount Outstanding Amount Capital From Officer Earnings Equity
------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
All years have been restated.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 11,871,042 $ 3,316 348,291 $(3,150) $91,964 $129,958 $ 222,088
Net earnings 23,746 23,746
Dividends at $.08 per share (1,083) (1,083)
Shares issued upon exercise of
stock options 870,130 9 14,585 14,594
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 16,135,319 3,359 380,942 (3,927) 198,764 (3,228) 147,400 342,368
Net earnings 19,139 19,139
Dividends at $.08 per share (1,633) (1,633)
Shares issued upon exercise of
stock options 1,324,943 13 26,770 26,783
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 23,433,919 3,376 689,161 (10,681) 213,462 (3,228) 130,412 333,341
Net earnings 36,717 36,717
Dividends at $.065 per share (1,980) (1,980)
Shares issued upon exercise of
stock options 916,595 9 10,276 10,285
Shares issued upon acquisition of
Central Pharmacy Services, Inc. 2,922,055 30 54,606 54,636
Shares issued upon stock split 7,940,632 301,466
Purchase of treasury shares 221,605 (6,800) (6,800)
------------ --------- ---------- --------------------- ------------- --------- -------------
Balances at December 31, 1999 35,213,201 $ 3,415 1,212,232 ($17,481) $278,344 $ (3,228) $165,149 $ 426,199
============ ========= ========== ========= =========== ============= ========= =============
</TABLE>
(See accompanying notes to consolidated financial statements)
F-5
<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 ("Central
Pharmacy") by exchanging 2.9 million shares of BWI common stock for all of the
common stock of Central Pharmacy. Each share of Central Pharmacy was exchanged
for 26.38 shares of BWI common stock. In addition, outstanding Central Pharmacy
employee stock options were converted at the same exchange factor into options
to purchase approximately 300,000 shares of BWI common stock. See Note 3 for
further discussion.
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
Data equipment and software 3-5
In 1999, the Company implemented the Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". As a result, costs incurred for the coding, installation and
testing of internal-use software were capitalized beginning in 1999. These costs
are recorded as capitalized software and generally amortized over three years.
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 private placement debt.
Intangibles. The Company continually monitors its cost in excess of net
assets acquired ("goodwill") and its other intangibles (customer relationships,
workforce in place and
F-6
<PAGE>
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 of 20 to 40 years. Customer relationships are being amortized on
the straight-line method over periods of 12 to 20 years. Other intangibles are
being amortized on the straight-line method over five to 40 years.
Earnings per share. Basic earnings per share is based on the weighted
average number of common shares outstanding during 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. See Note 18 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 1999, 1998 and 1997 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 4 below.
F-7
<PAGE>
NOTE 3 - RESTATEMENT
As discussed in Note 1, effective August 31, 1999, BWI completed the merger with
Central Pharmacy. The merger with Central Pharmacy was originally accounted for
as a pooling of interests and was reflected for all periods presented, and the
financial statements of BWI have included the combined operations of both BWI
and Central Pharmacy. However, the Company subsequently determined that the
pooling of interests method was unavailable for the Central Pharmacy acquisition
because of a dividend paid to preferred shareholders of Central Pharmacy
immediately prior to the acquisition. Accordingly, the Company has restated its
financial statements and applied the purchase method of accounting for the
Central Pharmacy acquisition. The total purchase price of $56,700,000, including
acquisition costs, has been allocated based on estimated fair values at the date
of acquisition including net tangible assets of $4,000,000; identified
intangible assets of workforce in place of $1,400,000 amortized on a straight
line basis over 12 years, customer relationships of $28,000,000 amortized on a
straight line basis over 40 years and goodwill of $34,800,000 amortized on a
straight line basis over 20 years; offset by $11,500,000 in deferred tax
liabilities. The results of operations of Central Pharmacy are included from the
date of acquisition.
In all years, Central Pharmacy sales and total assets had accounted for
less than one percent of total sales and total assets, on a consolidated basis.
The following table shows certain income statement and balance sheet
line items that have been restated:
F-8
<PAGE>
<TABLE>
<CAPTION>
Restated As Previously Reported
(000's) (000's)
----------------------------------------------
<S> <C> <C>
Total net sales:
1999 $8,479,338 $8,507,605
1998 7,621,352 7,654,221
1997 7,309,922 7,334,137
Net earnings:
1999 36,717 38,296
1998 19,139 22,236
1997 23,746 24,506
Basic earnings per share:
1999 1.16 1.14
1998 .67 .70
1997 1.04 .95
Diluted earnings per share:
1999 1.07 1.05
1998 .63 .66
1997 .89 .83
Balance sheet line items at December 31, 1999:
Intangibles 81,976 18,582
Deferred tax liability 16,128 4,703
Additional paid in capital 278,344 225,459
Retained earnings 165,149 166,550
</TABLE>
The following unaudited pro forma information presents the results of
operations of BWI as if the acquisition had taken place on January 1, 1999 and
1998 (in thousands except for per share data):
Unaudited Unaudited
1999 1998
--------------------- -----------------------
Revenues $8,507,605 $7,654,221
Net Earnings 37,669 19,997
Earnings per share:
Basic 1.13 .63
Diluted 1.03 .60
Weighted Average Outstanding
Common shares:
Basic 33,478,470 31,651,034
Diluted 36,467,639 33,508,668
These unaudited pro forma results have been prepared for analysis
purposes only and include certain adjustments such as additional amortization
expenses related to intangible assets and goodwill. They do not purport to be
indicative of the results of operations that actually would have resulted had
the acquisition occurred on either January 1, 1999 or 1998 or of future results
of operations.
F-9
<PAGE>
NOTE 4 - 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 1997
information presented below has been restated in order to conform to the current
year presentation.
Giving effect to the Central Pharmacy 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 distributed specialty pharmaceuticals and
related medical supplies to the alternate site healthcare market and was 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 1999 approximately 86% of
this segment's purchases of pharmaceuticals were from three vendors accounting
for 44%, 26% and 16% of this segment's cost of sales for the year ended 1999.
The significant customers reported in Note 15 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, its assets,
liabilities and equity are not included in the Company's Consolidated Balance
Sheets at December 31, 1999 and 1998.
F-10
<PAGE>
Segment information for the years ended 1999, 1998 and 1997 on a
restated basis was as follows:
<TABLE>
<CAPTION>
BWI Priority Nuclear Pharmacy Total
1999
<S> <C> <C> <C> <C>
Revenues $ 8,463,700 $15,638 $ 8,479,338
Interest expense 23,390 11 23,401
Depreciation and amortization 9,945 1,071 11,016
Unusual items
Segment net earnings 36,437 280 36,717
Total assets 1,692,646 73,570 1,766,216
Capital expenditures 22,931 335 23,266
1998
Revenues $ 7,345,726 $ 275,626 $ 7,621,352
Interest expense 18,310 155 18,465
Depreciation and amortization 7,179 1,234 8,413
Unusual items 18,833 18,833
Segment net earnings 8,996 10,143 19,139
Total assets 1,286,575 1,286,575
Capital expenditures 32,636 905 33,541
1997
Revenues $ 7,078,940 $ 230,982 $ 7,309,922
Interest expense 15,907 15,907
Depreciation and amortization 6,270 1,161 7,431
Segment net earnings 17,595 6,151 23,746
Total assets 1,196,051 91,728 1,287,779
Capital expenditures 21,916 727 22,643
</TABLE>
NOTE 5- SHORT-TERM BORROWINGS
The Company's unsecured short-term bank line of credit was $150,000,000
as of December 31, 1999. The line was available, as necessary, for general
corporate purposes at rates based upon prevailing money market rates. At
December 31, 1999, 1998 and 1997, the Company had borrowed on its short-term
line of credit $45,000,000 at a rate of 5.7%, $19,500,000 at a rate of 5.4% and
$147,000,000 at a rate of 6.6%, respectively.
No compensating balance is required on the line. Certain conditions
relating to the maintenance of net worth, total debt and interest coverage
ratios have been imposed by the lenders.
A summary of 1999, 1998 and 1997 borrowings under the line of credit is
as follows:
Maximum short-term Average Average
Year borrowings borrowings Interest rate
----------------------------------------------------------------------------
(in thousands)
1999 $174,000 $96,000 6.2%
1998 $338,000 $249,000 6.3%
1997 $270,000 $152,000 6.4%
F-11
<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%. On
December 27, 1999, the Company repaid these Senior Notes with the proceeds from
the newly issued private placement Senior Notes discussed in Note10.
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 Bank One, NA
("Bank One"), certain other financial institutions (collectively with Falcon,
the "Purchasers"), and Bank One, 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 Bank One) 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). For 1999, the
average Receivables interests outstanding was $242 million at an average
interest rate of 5.4%. At December 31, 1999, there were $350 million of
Receivables Interests outstanding, which is the maximum amount that could be
drawn on this facility, bearing a Discount Rate of 6.1% per annum and at
December 31, 1998, there were $224 million of Receivables Interests outstanding,
bearing a Discount Rate of 5.5% per annum. The Receivables Facility terminates
on December 12, 2001, and is subject to final termination on December 28, 2003,
subject to earlier termination in certain events. The Company accounts for the
Receivables Facility as a financing transaction in its consolidated financial
statements. This facility and the private placement of $25 million Senior Notes
discussed in Note 10, contain certain conditions related to the maintenance of
net worth, total debt and interest coverage ratios.
Central Pharmacy's working capital line of credit agreement with a
bank, as amended on April 8, 1999, allows Central Pharmacy to borrow up to
$3,500,000. Amounts borrowed under this agreement bear interest at the bank's
prime rate (8.5% at December 31, 1999) and are due on April 7, 2000. The line of
credit agreement contains various covenants which place restrictions on Central
Pharmacy's current ratio, indebtedness and operating cash flows. Amounts
borrowed under this agreement are secured by Central Pharmacy's assets. As of
December 31, 1999, there was no outstanding balance on this line of credit.
F-12
<PAGE>
NOTE 6- FIXED ASSETS
December 31, 1999 1998
--------------------------------------------------------------------
(in thousands) Restated Restated
Land $ 4,450 $ 6,749
Buildings and furnishings 37,118 52,633
Leasehold improvements 3,527 2,849
Transportation and
Other equipment 46,738 35,911
Data equipment and software 22,388 21,101
Capitalized leases 13,434
----------------------------------------
127,655 119,243
Less: Accumulated
Depreciation (26,287) (26,491)
----------------------------------------
$ 101,368 $ 92,752
========================================
NOTE 7- INTANGIBLES
December 31, 1999 1998
----------------------------------------------------------------
(in thousands) Restated Restated
Goodwill $ 58,390 $ 22,091
Accumulated amortization (6,652) (5,342)
-----------------------------------
Goodwill, net 51,738 16,749
Customer relationships 31,074 3,074
Accumulated amortization (2,230) (1,844)
-----------------------------------
Customer relationships, net 28,844 1,230
Other 1,505
Accumulated amortization (111)
-----------------------------------
Other, net 1,394
-----------------------------------
Intangibles, net $ 81,976 $ 17,979
===================================
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.
NOTE 8 - RELATED PARTY TRANSACTIONS
At December 31, 1999 and 1998, 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
F-13
<PAGE>
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 both 1999 and 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 was due on demand and represented 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%. This balance was repaid in 1999.
NOTE 9 - INCOME TAXES
The provision for income taxes includes state income taxes of
$4,148,000, $3,110,000 and $2,657,000 in 1999, 1998 and 1997, 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:
Year ended December 31, 1999 1998 1997
--------------------------------------- ----------- ------------- -------------
Percentage of earnings before taxes: Restated Restated Restated
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local taxes on income, net of
Federal income tax benefit 4.4% 5.1% 4.4%
Nondeductible element of restricted
stock grants 6.2%
Other 1.1% .8%
.6%
----------- ------------- -------------
Effective rate 40.5% 47.1% 40.0%
=========== ============= =============
F-14
<PAGE>
Presented below are the significant elements of the net deferred tax
balance sheet accounts at December 31, 1999 and 1998:
Deferred tax assets: 1999 1998
---- ----
Restated Restated
Current:
Accounts receivable $8,051 $6,635
Inventories 1,049 1,371
Deferred compensation 3,458 2,354
Other, net 610 1,146
------------------ -----------------
Subtotal 13,168 11,506
Long-term:
Acquired net operating loss benefits 311 368
Intangibles 2,327
------------------ -----------------
Subtotal 311 2,695
------------------ -----------------
Total deferred tax assets $13,479 $14,201
================== =================
Deferred tax liabilities:
Current $ $
Long-term:
Fixed assets 7,425 5,897
Intangibles 9,014
------------------ -----------------
Subtotal 16,439 5,897
------------------ -----------------
Total deferred tax liabilities $16,439 $5,897
================== =================
In connection with a prior year acquisition, 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, 1999 is $1.1 million. The
carryover period expires in 2006.
NOTE 10 - LONG-TERM DEBT
On December 27, 1999, the Company completed a private placement of $25
million Senior Notes due December 27, 2004 at an interest rate of 7.93%. The
Company estimates the fair market value at December 27, 1999 approximates the
principal amount based on the proximity of the issuance date to the fiscal year
end.
On April 30, 1999, the Company sold its corporate office building to an
unrelated party for approximately net book value and signed a 15 year lease for
the top two floors of the building. The lease meets the criteria of a
capitalized lease and resulted in the recording of an asset and liability in the
amount of the present value of minimum lease payments of $13.4 million. The
asset is being amortized over the term of the lease and the depreciation of the
asset is included in depreciation expense.
The remaining 1999 balance, and substantially all of the 1998 balance,
was comprised of a mortgage obligation.
F-15
<PAGE>
In 1998, a $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.
NOTE 11- 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, 1999, 1998 and 1997
were $2,077,000, $1,785,000 and $1,576,000, respectively.
The Profit Sharing Plan has been amended to adopt, effective as of
January 1, 2000, one of the permissible safe harbor methods of satisfying the
nondiscrimination test for elective deferrals under the 401(k) feature of the
Profit Sharing Plan. Under this safe harbor method, the Company and its
subsidiaries will make a contribution each year, on behalf of their eligible
employees, equal to 3% of the employee's eligible compensation for the year.
These contributions, and attributable earnings, will be 100% vested at all
times, rather than subject to the graded vesting schedule that applies to the
discretionary contributions by the Company and its subsidiaries. The annual
contribution of the Company and its subsidiaries to the Profit Sharing Plan
beyond the 3% safe harbor contribution is at the discretion of the Board, and
the Company expects that the combination of the safe harbor contributions and
discretionary contributions by the Company and its subsidiaries will generally
total 8% of a participant's compensation for the year. The employer contribution
for a year is allocated among participants employed on the last day of the year
in proportion to their relative compensation for the year.
Subject to limitations imposed by the Code, a participant may, in
addition to receiving a share of the employer contribution, have a percentage of
his or her compensation withheld from pay and contributed to the Profit Sharing
Plan. Subject to applicable Code requirements, employees may 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 discretionary 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 discretionary 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,
F-16
<PAGE>
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.
Effective July 1, 1993, Central Pharmacy adopted the Central Pharmacy
Services, Inc. 401(k) Plan (the "Plan"), a defined contribution plan which
intended to qualify under Section 401(k) of the Internal Revenue Code. The Plan
also includes a cash or defined arrangement to qualify under Section 401(k) of
the code. All employees of Central Pharmacy 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 Central Pharmacy will match 100% of the
participants' contributions up to 2% of their base salaries. Contibutions to the
Plan were approximately $118,000 for the period ended December 31, 1999. The
plan was frozen effective as of the close of business on December 31, 1999, and
the Plan will be merged into the Profit Sharing Plan in the second quarter of
2000.
NOTE 12 - 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 represented 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 represented 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 13 - CAPITAL STOCK
The Company's capitalization consists of 53,333,333 authorized shares
of common stock 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 25,
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 June 11, 1999. On June 3,
1998, 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.
F-17
<PAGE>
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.
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 (restated to 5,333,332 as a result of the June 3, 1998 stock split, to
7,821,973 as a result of the spin-off of Priority, and to 10,271,118 as a result
of the June 25, 1999 stock split, 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. On July 22, 1999, the Company's Board of Directors approved an
amendment to the 1998 Non-Qualified Plan to increase the reserves for issuance
to 1,200,000 shares of the Company's common stock held by the Company as
treasury shares. The 1998 Non-Qualified Plan provides 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.
Options generally become exercisable over a one to four year period following
date of grant and expire 10 years following date of grant.
The Central Pharmacy 1993 Stock Option Plan (the "Central Pharmacy
Option Plan") provided for the issuance of options to employees of Central
Pharmacy for the purchase of shares of Central Pharmacy's common stock. Options
were issued with exercise prices equal to or in excess of the fair market value
of Central Pharmacy's common stock, as determined by
F-18
<PAGE>
Central Pharmacy's Board of Directors, on the date of grant. Vesting and terms
of all options were determined by Central Pharmacy's Board of Directors and may
vary by optionee; however, the term may be no longer than 10 years from the date
of grant.
In accordance with the terms of the Central Pharmacy Option Plan and
merger between BWI and Central Pharmacy, all options outstanding under the
Central Pharmacy option plan vested at the date of the merger. Furthermore, all
such outstanding Central Pharmacy 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 Central Pharmacy Option Plan subsequent to the merger.
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:
For the years ended December 31, 1999 1998 1997
---------------------------------- -------------- ------------- --------------
(In thousands, except share data) Restated Restated Restated
Net earnings - as reported $36,717 $19,139 $23,746
Net earnings - pro forma $33,640 $ 15,849 $21,211
Earnings per share
Basic - as reported 1.16 .67 1.04
Basic - pro forma 1.07 .55 .93
Diluted - as 1.07 .63 .89
reported
Diluted - pro forma .98 .52 .81
F-19
<PAGE>
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 following years ended December 31:
1999 1998 1997
------------------- ---------------- ---------------
Restated Restated Restated
Company Options
Risk free interest rates 4.96% 5.31% 5.71%
Expected dividend yields .53% .16% .26%
Expected life of options 4.98 4.34 4.66
Volatility of stock price 32.94% 28.85% 27.23%
Weighted average fair
value of options $6.91 $9.34 $ 10.16
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
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.
F-20
<PAGE>
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
two aforementioned 4-for-3 stock splits):
Weighted
Number average
of Shares option price
------------------------------------------------ -------- -----------------
Restated Restated
Options outstanding
at December 31, 1996 5,822,797 $8.32
Forfeited during 1997 (69,623) $9.89
Granted during 1997 1,451,725 $17.25
Exercised during 1997 (1,546,909) $7.25
-------------------
Options outstanding
at December 31, 1997 5,657,990 $10.88
Forfeited during 1998 (195,497) $11.36
Granted during 1998 36,375 $19.10
Exercised during 1998 (1,927,873) $8.80
-------------------
Options outstanding
at December 31, 1998 3,570,995 $12.06
Effect of Spin-off of
Priority Healthcare (1) 3,193,251
-------------------
Converted options outstanding
at December 31, 1998 6,764,246 $6.37
===================
Forfeited during 1999 (70,217) $14.51
Granted during 1999 1,283,218 $19.25
Exercised during 1999 (1,045,862) $5.52
Conversion of
Central Pharmacy options 326,595 $2.28
==============================================
Options outstanding
at December 31, 1999 7,257,980 $8.51
==============================================
Exercisable
at December 31, 1999 4,868,072 $5.82
==============================================
Available for grant
at December 31, 1999 961,058
===================
(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
F-21
<PAGE>
issued by the Financial Accounting Standards Board, no compensation expense was
recorded as a result of such conversion.
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 of $4,476,000, $9,593,000 and $3,305,000 are
included in additional paid in capital in 1999, 1998 and 1997, respectively.
Additional information regarding the Company's options outstanding at
December 31, 1999 is shown below:
<TABLE>
<CAPTION>
Exercise Price Range
----------------------- ------------ --------------- ----------------- ------------------------------------
$.59 $2.93 - $5.68 $7.48 - $12.88 $16.75 - $23.95 Total
----------------------- ------------ --------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Number of options 192,329 3,666,198 2,157,335 1,242,118 7,257,980
Outstanding
Weighted average
exercise price $.59 $4.80 $9.31 $19.26 $8.51
Weighted average
remaining
contractual life 6.03 5.63 8.01 9.10 6.94
Number of shares
exercisable 192,329 3,369,938 1,296,474 9,331 4,868,072
Weighted average
exercisable price $.59 $4.75 $9.29 $20.36 $5.82
</TABLE>
During 1998, the Company issued 350,000 (restated to 466,667 to reflect
the 1998 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 had 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 was charged to earnings over the period during which the
restrictions lapsed. 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 of 1998 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.
Priority's stock option plans. Presented below is information
concerning Priority's stock option plans for the years ended December 31, 1998
and 1997. The information has not been updated to reflect events subsequent to
December 31, 1998.
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 reserved for
issuance 1,250,000 shares of Priority Class B common stock, subject to
adjustment in certain events. The 1997 Stock Option Plan provided 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 were either options
intended to qualify for federal
F-22
<PAGE>
income tax purposes as "incentive stock options" or options not qualifying for
favorable tax treatment ("nonqualified stock options"). No individual
participant could 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 was 25,000. Each eligible director was granted an option to purchase 1,000
shares of Priority's Class B common stock on June 1 of 1998. The option
exercise price per share was equal to the fair market value of one share of
Class B common stock on the date of grant. Each option became exercisable six
months following the date of grant and will expire 10 years following the date
of grant.
On September 15, 1998, Priority's Board of Directors adopted the
Broad Based Stock Option Plan, which reserved for issuance 400,000 shares of
Priority Class B common stock. The Broad Based Stock Option Plan provided for
the grant of nonqualified stock options to key employees who were not officers
or directors of Priority or its affiliates. The number of shares which could be
granted under the Broad Based Plan during any calendar year could not exceed
40,000 shares to any one person.
Changes in stock options under all of Priority's plans through December
31, 1998 are shown below:
Number Option price
of shares per share
--------------------------------- ---------------- -------------------------
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
================
NOTE 14 - COMMITMENTS
The Company leases warehouse and office space under noncancelable
operating leases expiring at various dates through 2005, with options to renew
for various periods.
On April 30, 1999, the Company sold its corporate office building to an
unrelated party for approximately net book value and signed a 15 year lease for
the top two floors of the building. The lease meets the criteria of a
capitalized lease and resulted in the recording of an asset and liability in the
amount of the present value of minimum lease payments of $13.4 million. The
asset is being amortized over the term of the lease.
F-23
<PAGE>
The following is a summary of the future minimum lease commitments
under capitalized leases and under operating leases as of December 31, 1999:
Year ended December 31, Capitalized Leases Operating Leases
------------------------------------------------------------------------------
(in thousands)
2000 $ 1,221 $ 2,956
2001 1,221 2,625
2002 1,221 1,963
2003 1,221 1,568
2004 1,322 982
Later years 13,916 264
-----------------------------------------
Total minimum lease payments 20,122 $10,358
----------------------===================
Imputed interest 6,998
----------------------
Present value of minimum capitalized
lease obligations $13,124
======================
The consolidated rent expense for the years ended December 31, 1999,
1998 and 1997 was $2,414,000, $2,272,000 and $2,107,000, respectively.
Prior to the sale of the corporate office building on April 30, 1999,
the Company received rental income of $313,000 from operating lease agreements
for the bottom three floors of the building.
NOTE 15 - MAJOR CUSTOMERS
The BWI segment services customers in 48 states and Puerto Rico from
its 18 distribution centers located in 14 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 (16%) and CVS (21%) in 1999;
Eckerd Corporation (18%) and CVS (17%) in 1998; and CVS (22%), Rite Aid
Corporation (18%) and Eckerd Corporation (16%) in 1997. Sales to these customers
aggregated 37%, 35% and 56% of net sales in 1999, 1998 and 1997, 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.
F-24
<PAGE>
NOTE 16 - STATEMENT OF CASH FLOWS
Cash paid for interest expense and income taxes on a restated basis was
as follows:
December 31, 1999 1998 1997
(in thousands)
Interest $20,273 $ 19,632 $14,129
Income taxes $19,142 $ 14,941 $16,935
Presented below is a brief discussion of recent acquisitions by the
Company. This discussion does not include the acquisition of Central Pharmacy
which is discussed in Note 1 and Note 3. The purchase price of the acquisitions
discussed 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 provided 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 7 and Note 10 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 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.
F-25
<PAGE>
NOTE 17 - LEGAL PROCEEDINGS
In a consolidated class action filed in the United States District
Court for the Northern District of Illinois in 1993, the Company, other
pharmaceutical wholesalers and pharmaceutical manufacturers were named as
defendants, In re Brand Name Prescription Drugs Litigation, MDL 997. Plaintiffs
alleged 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 sought injunctive relief, unspecified treble damages, costs, interest
and attorneys' fees. The Company denied the complaint allegations.
Several of the manufacturer defendants and the class plaintiffs have
reached settlement agreements. Under these agreements, the settling manufacturer
defendants retain certain contingent liabilities under the October 21, 1994
agreement discussed below. 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 In re Brand Name Prescription Drugs class claims against the
Company and other defendants. The class plaintiffs appealed the Court's ruling
and, on July 13, 1999, the appeals court dismissed the wholesalers, including
the Company, from the case. On February 22, 2000, the United States Supreme
Court denied the plaintiffs' petition for certiorari, thus concluding the In re
Brand Name Prescription Drugs class action litigation.
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. Discovery in the opt out
cases is currently ongoing and no trial dates have yet been scheduled.
On November 20, 1997, two additional complaints were filed in the MDL
997 proceeding by Eckerd Corporation and American Drug Stores naming certain
pharmaceutical 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. No trial date has been set in these
cases.
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. An order dismissing the action and taxing costs against the plaintiffs
was entered by the Circuit Court on November 29, 1999.
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-II. The complaint charges that pharmaceutical manufacturers
and wholesalers, including the Company, engaged in a price-fixing conspiracy in
violation of 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 and all
proceedings in this suit have been stayed until further order of the Circuit
Court.
F-26
<PAGE>
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
million and the wholesaler defendants are indemnified for $9 million in related
legal fees and expenses. As a result of the previously noted settlements, we
have periodically received reimbursement of our legal fees and expenses in
excess of our proportionate share of the $9 million, and we expect to receive
reimbursement of substantially all of such fees and expenses in the future.
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 a material adverse 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 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.
The Company has been advised that it is a potential defendant in an
ongoing grand jury investigation being conducted by the U.S. Attorney's Office
in Las Vegas, NV. The investigation concerns transactions between wholesale
pharmaceutical distributors and licensed institutional pharmacies known as
closed-door pharmacies. Closed-door or institutional pharmacies are entitled to
purchase pharmaceuticals at a discount from wholesale prices, but typically have
an agreement with the manufacturers to service only their own long-term care
patients. Wholesalers seek chargeback credits from the manufacturers for sales
to closed-door pharmacies.
F-27
<PAGE>
The Company understands that the government's inquiry focuses
principally on whether pharmaceutical manufacturers have been defrauded by
institutional or closed-door pharmacies, which allegedly resold discount-priced
pharmaceutical drugs at a profit in violation of agreements with pharmaceutical
manufacturers to purchase the product solely for their own use. The government
is examining whether the Company, through any of its employees, participated in
these transactions by selling discount-priced pharmaceutical drugs with
knowledge of the pharmacies' plans to resell the product at a profit. These
sales of excess pharmaceutical drugs were allegedly made to alternate source
vendors that, in turn, sold the product in the secondary market to numerous
wholesale distributors and other customers.
To date, the government's investigation has been substantially focused
on sales that the Company made at the San Dimas, California division of Bindley
Western Drug Company to certain institutional pharmacies located in California
and Nevada, principally between 1995 and 1997. The Company no longer employs the
two managers who were primarily involved in the questioned sales. One was
terminated by the Company approximately two years ago for violation of the
Company's ethics code, and the other abruptly resigned in October 1999 during
the investigation of this matter. The Company has determined that sales to
institutional pharmacies served by the San Dimas division of Bindley Western
Drug Company represented less than 1% of total Company sales during the period
in question. The Company has further determined that no related business has
been conducted with these accounts for an extended period.
The Company believes that its two former managers have admitted to
certain wrongdoing in connection with their activities while employed by the
Company. The Company is cooperating with the government and has undertaken its
own investigation. At this stage of the government's investigation, the Company
does not believe it is possible to predict or determine the outcome, resolution
or timing of the final resolution of this matter. The Company is currently
unable to estimate the range of any potential loss, the amount of which could
have a material adverse effect on the Company's financial condition, results of
operations and/or cash flows.
We are also subject to ordinary and routine lawsuits and governmental
inspections, investigations and proceedings incidental to our business, the
outcome of which should not have a material adverse effect on our financial
condition, results of operations, or cash flows.
F-28
<PAGE>
NOTE 18 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for 1999, 1998 and 1997.
1999 1998 1997
--------------------- ------------ --------------
(in thousands, except per share data)
Restated Restated Restated
Basic:
Net earnings $ 36,717 $ 19,139 $ 23,746
Basic shares
Outstanding 31,541,107 28,728,979 22,912,237
Per share amount $ 1.16 $ .67 $ 1.04
Diluted:
Net earnings $ 36,717 $ 19,139 $ 23,746
6 1/2% convertible
debentures 1,889
Diluted earnings $ 36,717 $ 19,139 $ 25,635
Weighted shares
Outstanding 31,541,107 28,728,979 22,912,237
Debentures 4,193,297
Stock Options 2,843,521 1,418,537 1,571,994
Restricted Stock 148,644
Diluted Shares 34,384,628 30,296,160 28,677,528
Per share amount $ 1.07 $ .63 $ .89
The earnings per share for 1998 and 1997 have been restated to give effect for
the 4-for-3 stock split on June 25, 1999 and the earnings per share for 1997 has
been restated to give effect for the 4-for-3 stock split on June 3, 1998.
See Note 13 regarding changes to outstanding options at the close of business on
December 31, 1998.
F-29
<PAGE>
NOTE 19 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
As discussed in Note 3, the Company has restated its financial
statements to apply purchase accounting to the Central Pharmacy acquisition
which was originally accounted for as a pooling of interests. The following
table presents the quarterly financial data for 1999 and 1998 as restated and
previously reported:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------ ------------------- --------------------- ---------------- -------------------
(in thousands, except per share data)
1999 Restated
<S> <C> <C> <C> <C>
Net sales $1,974,957 $2,045,216 $ 2,138,410 $ 2,320,755
Gross margin 47,176 48,762 52,005 58,819
Net earnings 8,933 8,970 8,945 9,869
Earnings per share:
Basic (1) $ 0.30 $ 0.29 $ 0.28 $ 0.29
Diluted (1) 0.27 0.27 0.25 0.28
1999 as Previously Reported
Net sales $1,985,165 $2,055,841 $ 2,145,845 $ 2,320,754
Gross margin 51,740 53,724 55,481 58,816
Net earnings 9,704 9,810 8,528 10,251
Earnings per share:
Basic (1) $ 0.29 $ 0.29 $ 0.25 $ 0.30
Diluted (1) 0.27 0.27 0.23 0.29
1998 Restated
Net sales $1,961,771 $1,848,048 $ 1,813,210 $ 1,998,323
Gross margin 43,124 47,241 48,222 52,971
Net earnings 7,574 8,172 7,908 (4,515)
Earnings per share:
Basic (1) $ 0.27 $ 0.28 $ 0.27 $ (0.15)
Diluted (1) 0.25 0.27 0.26 (0.15)
1998 as Previously Reported
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)
</TABLE>
(1) The earnings per share for 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 1998
and the first quarter of 1999 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.
F-30
<PAGE>
NOTE 20 - SUBSEQUENT EVENTS
On December 4, 2000, it was announced that the Company agreed to merge
with Cardinal Health, Inc. The terms of the definitive agreement call for
Bindley Western shareholders to receive a fixed exchange of 0.4275 Cardinal
Health, Inc. common shares for each outstanding share of Bindley Western. The
transaction will include the assumption of Bindley Western's debt and is
intended to be accounted for as a pooling of interests for financial reporting
purposes and to be tax-free to the holders of Bindley Western common shares. In
connection with the transaction, the Company has issued to Cardinal Health a
stock option exercisable under certain circumstances for newly issued shares
equal to 19.9 percent of Bindley Western's currently outstanding common shares.
With respect to the grand jury investigation conducted by the U.S.
Attorney's Office in Las Vegas, NV, discussed in Note 17, on August 29, 2000,
the Company agreed to accept vicarious liability for the acts of two former vice
presidents of Bindley Western Drug Company, a division of the Company. Both
former employees have entered into plea agreements with the government regarding
their conduct, which occurred between 1995 and 1997. Under the doctrine of
vicarious liability, an employer may be held liable for the criminal conduct of
its officers even when that conduct is detrimental to the employer and contrary
to its internal policies and procedures. The government has agreed that all of
the alleged criminal conduct was attributable to these two former employees
located in the San Dimas, CA division and that the employees' improper
activities occurred without the knowledge of corporate officers in Bindley
Western's Indianapolis headquarters. One of these employees was terminated in
January 1998 and the other resigned in October 1999.
The settlement required the Company to plead guilty to one charge of
conspiracy to commit interstate transportation of property obtained by fraud,
and to pay a fine of $20 million. The agreement imposes no probation and the
government agreed that no further criminal charges will be brought against the
Company, including its subsidiaries or affiliates, or any current or former
director, officer, or employee arising out of any matters associated with the
government's investigation. The agreement specifies that the alleged conduct did
not involve harm to public health or safety; that there were no allegations of
fraud against the United States or federal or state healthcare systems; and,
that the offense occurred despite the Company's effective program to prevent
violations of the law. The government also confirmed that the Company committed
no violations of the Prescription Drug Marketing Act, a federal law applying to
sales and purchases of pharmaceutical products. The $20 million fine was paid on
August 29, 2000.
In conformance with generally accepted accounting principles, the
Company recorded the amount of the tentative settlement plus the estimated fees
and expenses associated with its internal investigation and recorded an unusual
charge of $26.3 million ($25.8 million net of tax) for the March 31, 2000
quarter. As a result of this fine being less than the tentative settlement
recorded in the first quarter of 2000, a $5 million unusual benefit was recorded
in the third quarter of 2000.
On December 13, 2000, the Company increased our unsecured short-term
bank line of credit to $269 million. The line is available, as necessary, for
general corporate purposes at rates based upon prevailing money market rates. No
compensating balance is required on the line. Certain conditions relating to the
maintenance of net worth, total debt and interest coverage ratios have been
imposed by the lenders.
F-31
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this amended
report to be signed on its behalf by the undersigned, thereunto duly authorized.
December 21, 2000 BINDLEY WESTERN INDUSTRIES, INC.
By /s/ William E. Bindley
---------------------------
William E. Bindley
Chairman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this amended report has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<PAGE>
INDEX TO EXHIBITS (12/31/99 10-K)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Page No.
Exhibit This
No. Description Filing
- ---------- --------------------------------------------------------------- ---------
3-A 1 (i)Amended and Restated Articles of Incorporation of
Registrant....................................................
2 (ii)Amendment to Restated Articles of Incorporation
increasing number of authorized shares........................
3 (iii)Amendment to Restated Articles of Incorporation
establishing terms of Class A Preferred Stock.................
17 (iv)Amendment to Restated Articles of Incorporation
increasing number of authorized shares........................
15 (v)Amendment to Restated Articles of Incorporation increasing
number of authorized shares...................................
3-B 18 Restated By-Laws of Registrant, as amended to date............
4-A 16 (i)Third Amended and Restated Credit Agreement, dated as of
December 28, 1998, by and among Registrant, NationsBank,
N.A., The Bank of Tokyo-Mitsubishi, Ltd., KeyBank National
Association, Suntrust Bank, Central Florida, N.A., National
City Bank of Indiana, Fifth Third Bank, Indiana, (f/k/a The
Fifth Third Bank of Central Indiana), The Northern Trust
Company, NBD Bank, N.A., and Bank One, Indiana, NA, as Agent..
(ii)First Amendment to Third Amended and Restated Credit
Agreement, dated as of December 16, 1999, by and among
Registrant, Bank One, Indiana, NA, KeyBank National
Association, Suntrust Bank, Central Florida, N.A., National
City Bank of Indiana, Fifth Third Bank, Indiana, The Northern
Trust Company, The Huntington National Bank and Comerica
Bank..........................................................
4-B 16 (i)Receivables Purchase Agreement, dated as of December 28,
1998, among Bindley Western Funding Corporation, Falcon Asset
Securitization Corporation, NBD Bank, N.A., KeyBank National
Association, Comerica Bank, NationsBank, N.A., Fifth Third
Bank, Indiana, National City Bank of Indiana, and The First
National Bank of Chicago, as Agent............................
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Page No.
Exhibit This
No. Description Filing
- ---------- --------------------------------------------------------------- ---------
(ii)Amendment No. 1 to Receivables Purchase Agreement, dated
as of December 15, 1999, among Bindley Western Funding
Corporation, Falcon Asset Securitization Corporation, and Bank
One, NA..................................................................
4-C Note Purchase Agreement, dated as of December 15, 1999,
between Registrant and Nationwide Life Insurance Company,
relating to 7.93% Senior Notes due December 27, 2004 of
Registrant...............................................................
Registrant agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of each instrument with
respect to other issues of Registrant's long-term debt, the
authorized principal amount of which exceeds 10% of
Registrant's total assets on a consolidated
basis.....................................
10-A* 6 (iii)Employee Benefit Trust Agreement of Registrant dated
November 30, 1990........................................................
5 (v)Split Dollar Insurance Agreement dated December 11, 1992
between Registrant and William F. Bindley, II and K. Clay
Smith as trustees of the William E. Bindley Irrevocable Trust............
5 (vi)The William E. Bindley Trust Agreement dated December 11,
1992 between William E. Bindley, grantor, and William F. Bindley,
II and K. Clay Smith, trustees...........................................
10-B* 7 (i)Nonqualified Stock Option Plan of Registrant..........................
10 (ii)Amendment to the Nonqualified Stock Option Plan of Registrant........
10-C* 7 (i)Incentive Stock Option Plan of Registrant.............................
10 (ii)Amendment to the Incentive Stock Option Plan of Registrant...........
10-D* 8 (i)1987 Stock Option and Incentive Plan of Registrant....................
9 (ii)Amendment to 1987 Stock Option and Incentive Plan......................
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Page No.
Exhibit This
No. Description Filing
- ---------- --------------------------------------------------------------- ---------
9 (iii)Outside Directors Stock Option Plan of Registrant............
10 (iv)Amendment to the 1987 Stock Option and Incentive Plan of
Registrant........................................................
24 (v)First Amendment to Outside Directors Stock Option Plan of
Registrant........................................................
10-E* 5 (i)1993 Stock Option and Incentive Plan of Registrant.............
10 (ii) First Amendment to the 1993 Stock Option and Incentive Plan
of Registrant.....................................................
14 (iii) Second Amendment to the 1993 Stock Option and Incentive
Plan of Registrant................................................
20 (iv)Third Amendment to the 1993 Stock Option and Incentive Plan
of Registrant.....................................................
21 (v)Fourth Amendment to the 1993 Stock Option and Incentive Plan
of Registrant.....................................................
10-H 4 Distribution Agreement, dated as of October 23, 1998, between
Registrant and Priority Healthcare Corporation.
10-I 23 Revolving Credit Promissory Note between Registrant (Maker) and
Priority Healthcare Corporation (Holder)..........................
10-J* 13 Form of Termination Benefits Agreement, dated April 1, 1996,
between Registrant and each of William E. Bindley, Keith W.
Burks, Michael D. McCormick, and Thomas J. Salentine..............
10-K Agreement of Purchase and Sale and Joint Escrow Instructions
("Purchase Agreement"), dated March 30, 1999, between College
Park Plaza Associates, Inc. and College Park Plaza, Inc.,
relating to the sale of Registrant's headquarters building
located at 8909 Purdue Road, Indianapolis, Indiana; First
Amendment to Purchase Agreement, dated April 12, 1999, Second
Amendment to Purchase Agreement, dated April 22, 1999, and Third
Amendment to Purchase Agreement, dated April 30, 1999.............
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Page No.
Exhibit This
No. Description Filing
- ---------- --------------------------------------------------------------- ---------
10-L Lease Agreement, dated April 30, 1999, between Registrant and
College Park Plaza, LLC, relating to the lease of Registrant's
headquarters located at 8909 Purdue Road, Indianapolis,
Indiana...........................................................
10-Y 12 Collective Bargaining Agreement dated October 21, 1994 between
J.E. Goold & Co. and Truck Drivers, Warehousemen and Helpers
Union Local No. 340...............................................
10-Z* 10 (i)401(k) Profit Sharing Plan (Nonstandardized) Adoption
Agreement of Registrant, effective January 1, 1994................
11 (ii)Amendment to page 4 of the 401(k) Profit Sharing Plan
(Nonstandardized) Adoption Agreement of Registrant, effective
January 1, 1994...................................................
12 (iii)401(k) Profit Sharing Plan (Nonstandardized) Adoption
Agreement of Registrant, effective January 1, 1996................
12 (iv)Amendment to page 6 of the 401(k) Profit Sharing Plan
(Nonstandardized) Adoption Agreement of Registrant, effective
January 1, 1996...................................................
19 (v)Amendment to Item B.3 of the 401(k) Profit Sharing Plan
(Nonstandardized) Adoption Agreement of Registrant, effective
October 1, 1997...................................................
19 (vi)401(k) Profit Sharing Plan (Nonstandardized) Participation
Agreement of Registrant, effective July 31,1997...................
19 (vii)401(k) Profit Sharing Plan (Nonstandardized) Participation
Agreement of Registrant, effective August 8, 1997.................
22 (viii)Profit Sharing Plan of Bindley Western Industries, Inc. &
Subsidiaries (PRISM(R) Prototype Retirement Plan and Trust).......
25 (ix)Spin-off Amendment to the Profit Sharing Plan of Registrant
effective December 11, 1998.......................................
</TABLE>
E-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Page No.
Exhibit This
No. Description Filing
- ---------- -------------------------------------------------------------------- ----------
/25/ (x)Second Amendment to the Profit Sharing Plan of Registrant
effective December 31, 1999.........................................
/25/ (xi)Third Amendment to the Profit Sharing Plan of Registrant
effective January 1, 2000...........................................
10-AA* /11/ (i)Form of Profit Sharing Excess Plan and related Trust between
Registrant and each of William E. Bindley, Keith W. Burks,
Michael D. McCormick, and Thomas J. Salentine.......................
/11/ (ii)Form of 401(k) Excess Plan and Related Trust between Registrant
and each of William E. Bindley, Keith W. Burks, Michael D.
McCormick, and Thomas J. Salentine..................................
/12/ (iii)First Amendment to 401(k) Excess Plan..........................
/19/ (iv)Form of Profit Sharing Excess Plan, restated as of January
1,1996, between Registrant and each of William E. Bindley, Keith W.
Burks, Michael D. McCormick, Robert L. Myers, and Thomas J.
Salentine...........................................................
/19/ (v)Form of 401(k) Excess Plan, restated as of January 1, 1996,
between Registrant and each of William E. Bindley, Keith W. Burks,
Michael D. McCormick, Robert L. Myers, and Thomas J. Salentine......
10-BB* /16/ (i) 1998 Non-Qualified Stock Option Plan of Registrant, as
amended.............................................................
/26/ (ii) Amendment to 1998 Non-Qualified Stock Option Plan of
Registrant..........................................................
10-CC* /25/ Central Pharmacy Services, Inc. 1993 Stock Option Plan, as
amended.............................................................
21 List of subsidiaries of Registrant..................................
23 Written Consent of PricewaterhouseCoopers LLP.......................
27 Financial Data Schedule.............................................
</TABLE>
- -----------------------
*The indicated exhibit is a management contract, compensatory plan, or
arrangement required to be filed by Item 601 of Regulation S-K.
E-5
<PAGE>
/1/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1987 is incorporated herein by reference.
/2/ The copy of this exhibit filed as Exhibit 4(a)(ii) to the Registrant's
Registration Statement on Form S-3 (Registration No. 33-45965) is
incorporated herein by reference.
/3/ The copy of this exhibit filed as Exhibit 1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992 is incorporated
herein by reference.
/4/ The copy of this exhibit filed as Exhibit 10 to the Registrant's Current
Report on Form 8-K, as filed with the Commission on January 4, 1999, is
incorporated herein by reference.
/5/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992 is incorporated herein by reference.
/6/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1990 is incorporated herein by reference.
/7/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Registration Statement on Form S-1 (Registration No. 2-84862)
is incorporated herein by reference.
/8/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1986 is incorporated herein by reference.
/9/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1991 is incorporated herein by reference.
/10/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993 is incorporated herein by reference.
/11/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994 is incorporated herein by reference.
/12/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995 is incorporated herein by reference.
/13/ The copy of this exhibit filed as Exhibit 10-CC to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 is
incorporated herein by reference.
E-6
<PAGE>
/14/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996 is incorporated herein by reference.
/15/ The copy of this exhibit filed as Exhibit 4 to the Registrant's Current
Report on Form 8-K, as filed with the Commission on August 23, 1999, is
incorporated herein by reference.
/16/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998 is incorporated herein by reference.
/17/ The copy of this exhibit filed as Exhibit 4.1 (iv) to the Registrant's
Registration Statement on Form S-8 (Registration No. 333-57975) is
incorporated herein by reference.
/18/ The copy of this exhibit filed as Exhibit 4.2 to the Registrant's
Registration Statement on Form S-8 (Registration No. 333-57975) is
incorporated herein by reference.
/19/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997 is incorporated herein by reference.
/20/ The copy of this exhibit filed as Exhibit 4.3 (iv) to the Registrant's
Registration Statement on Form S-8 (Registration No. 333-60279) is
incorporated herein by reference.
/21/ The copy of this exhibit filed as Exhibit 4.3 (v) to the Registrant's
Registration Statement on Form S-8 (Registration No. 333-60279) is
incorporated herein by reference.
/22/ The copy of this exhibit filed as Exhibit 4.3 to the Registrant's
Registration Statement on Form S-8 (Registration No. 333-57975) is
incorporated herein by reference.
/23/ The copy of this exhibit filed as Exhibit 10-G (ii) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 is
incorporated herein by reference.
/24/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999 is incorporated herein by reference.
/25/ The copy of this exhibit filed as the same exhibit number to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999 is incorporated herein by reference.
/26/ The copy of this exhibit filed as Exhibit 4.3(ii) to the Registrant's
Registration Statement on Form S-8 (Registration No. 333-85379) is
incorporated herein by reference.
E-7
<PAGE>
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No's. 333-39038, 333-91153, 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 21, 2000, except as
to Note 5, which is as of December 13, 2000, and Notes 3 and 20, which are as of
December 15, 2000, relating to the financial statements, which appears in this
Amendment No. 1 to Form 10-K.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
December 21, 2000
