UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
----------------------------
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
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)
(317) 704-4000
--------------
(Registrant's telephone number,
including area code)
No Change
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes x No _________
---------
The number of shares of Common Stock outstanding as of March 31, 2000 was
34,238,271
<PAGE>
This Form 10-Q/A is being filed by the Registrant to amend the financial
statements and other information contained herein to account for the acquisition
of Central Pharmacy Services, Inc. on August 31, 1999 under the purchase method
of accounting rather than the pooling of interest method.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(000's omitted except share data)
(unaudited)
Three-month period ended
March 31,
-------------------------------
2000 1999
-------------------------------
(Restated) (Restated)
Revenues:
Net sales from stock $ 1,647,493 $ 1,216,572
Net brokerage sales 830,617 758,385
-------------------------------
Total net sales 2,478,110 1,974,957
Other income 543 483
-------------------------------
2,478,653 1,975,440
-------------------------------
Cost and expenses:
Cost of products sold 2,412,279 1,927,781
Selling, general and administrative 35,050 25,299
Depreciation and amortization 3,698 2,009
Interest 8,302 5,524
Unusual item 26,300
-------------------------------
2,485,629 1,960,613
-------------------------------
Earnings before income taxes (6,976) 14,827
-------------------------------
Provision for income taxes 7,291 5,894
-------------------------------
Net earnings $ (14,267) $ 8,933
===============================
Earnings per share:
Basic $ (0.42) $ 0.30
Diluted $ (0.42) $ 0.27
Average shares outstanding:
Basic 34,108,201 30,144,147
Diluted 34,108,201 32,975,355
(See accompanying notes to consolidated financial statements)
<PAGE>
<TABLE>
<CAPTION>
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(000's omitted except share data)
(unaudited)
March 31, December 31,
----------------------------------
2000 1999
----------------------------------
(Restated) (Restated)
<S> <C> <C>
Assets
Current assets:
Cash $ 58,154 $ 34,910
Accounts receivable, less allowance for doubtful
accounts of $9,547 for 2000 and 1999 705,637 721,829
Finished goods inventory 874,982 803,021
Deferred income taxes 13,768 13,168
Other current assets 9,802 9,926
----------------------------------
1,662,343 1,582,854
----------------------------------
Other assets 16 18
----------------------------------
Fixed assets, at cost 126,755 127,655
Less: accumulated depreciation (29,124) (26,287)
----------------------------------
97,631 101,368
----------------------------------
Intangibles including goodwill 81,258 81,976
----------------------------------
Total assets $ 1,841,248 $ 1,766,216
==================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $ 132,194 $ 45,000
Securitized borrowings 349,963 349,963
Accounts payable 840,706 864,271
Other current liabilities 51,397 25,957
----------------------------------
1,374,260 1,285,191
----------------------------------
Long-term debt 38,570 38,698
----------------------------------
Deferred income taxes 16,048 16,128
----------------------------------
Shareholders' equity:
Common stock, $.01 par value authorized 53,333,333 shares;
issued 35,450,503 and 35,213,201 shares, respectively 3,418 3,415
Special shares, $.01 par value-authorized 1,000,000 shares
Additional paid in capital 279,345 278,344
Note receivable from officer (3,282) (3,228)
Retained earnings 150,370 165,149
----------------------------------
429,851 443,680
Less: shares in treasury-at cost
1,212,232 and 1,212,232 shares, respectively (17,481) (17,481)
----------------------------------
Total shareholders' equity 412,370 426,199
----------------------------------
Commitments and contingencies
----------------------------------
Total liabilities and shareholders' equity $ 1,841,248 $ 1,766,216
==================================
</TABLE>
(See accompanying notes to consolidated financial statements)
<TABLE>
<CAPTION>
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted except share data)
(unaudited)
Three-month period ended
March 31,
-------------------------------
2000 1999
-------------------------------
(Restated) (Restated)
<S> <C> <C>
Cash flow from operating activities:
Net income $ (14,267) $ 8,933
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation and amortization 3,698 2,009
Unusual item 26,300
Deferred income taxes (680) (600)
Gain on sale of fixed assets (135)
Change in assets and liabilities, net of acquisition:
Accounts receivable 16,272 (65,204)
Finished goods inventory (71,939) 13,792
Accounts payable (23,713) (92,627)
Other current assets and liabilities (735) (3,076)
-------------------------------
Net cash used by operating activities (65,199) (136,773)
-------------------------------
Cash flow from investing activities:
Purchase of fixed assets and other assets (3,754) (5,607)
Proceeds from sale of fixed assets 4,960
Acquisition of business (268)
-------------------------------
Net cash provided (used) by investing activities 938 (5,607)
-------------------------------
Cash flow from financing activities:
Proceeds from sale of stock 1,004 1,642
Addition (reduction) in long term debt (127) (10)
Related party note receivable (54) (54)
Payment on note payable Priority Healthcare Corporation (3,350)
Proceeds under line of credit agreement 592,194 401,500
Payments under line of credit agreement (505,000) (298,500)
Proceeds from securitized borrowings 13,800
Purchase of common shares for treasury (5,647)
Dividends (512) (476)
-------------------------------
Net cash provided by financing activities 87,505 108,905
-------------------------------
Net increase (decrease) in cash 23,244 (33,475)
Cash at beginning of period 34,910 42,982
-------------------------------
Cash at end of period $ 58,154 $ 9,507
===============================
</TABLE>
(See accompanying notes to consolidated financial statements)
<PAGE>
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. We have prepared the consolidated financial statements in this report
without audit. We condensed or omitted some information and footnote
disclosures, including significant accounting policies, that would normally
be included in financial statements prepared in accordance with generally
accepted accounting principles. We believe that the financial statements
for the three-month periods ended March 31, 2000 and 1999 include all
necessary adjustments which are of a normal recurring nature, for fair
presentation. Results for any interim period may not be indicative of the
results of the entire year.
2. 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.
The following table shows certain income statement and balance sheet line
items that have been restated:
Restated As Previously Reported
(000's) (000's)
----------------------------------
Total net sales:
Three months ended 3/31/99 $1,974,957 $1,985,165
Three months ended 3/31/00 2,478,110 2,478,110
Net earnings:
Three months ended 3/31/99 8,933 9,705
Three months ended 3/31/00 (14,267) (13,707)
Basic earnings per share:
Three months ended 3/31/99 .30 .29
Three months ended 3/31/00 (.42) (.40)
Diluted earnings per share:
Three months ended 3/31/99 .27 .27
Three months ended 3/31/00 (.42) (.40)
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
Balance sheet line items at March 31, 2000:
Intangibles 81,258 18,504
Deferred tax liability 16,048 4,703
Additional paid in capital 279,345 226,460
Retained earnings 150,370 152,331
The following unaudited pro forma information presents the results of
operations of BWI as if the acquisition had taken place on January 1, 1999
(in thousands except for per share data):
Three month
Period ended
March 31, 1999
------------------------------------
Revenues $1,985,165
Net Earnings 9,145
Earnings per share:
Basic .28
Diluted .25
Weighted Average Outstanding
Common shares:
Basic 33,066,202
Diluted 36,186,232
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 January 1, 1999 or of future
results of operations.
3. On March 27, 2000, the Company disclosed in its Form 10-K filing that it
was a potential defendant in an ongoing grand jury investigation being
conducted by the U. S. Attorney's Office in Las Vegas, NV. Then, on April
24, 2000, the Company announced in its first quarter 2000 earnings release
that it had entered into an agreement for the purpose of settling the
subject matter of the government's investigation, subject to court
approval, which is expected to take place by the end of June 2000. Full
details of the tentative settlement cannot be disclosed prior to court
approval.
Under the tentative settlement, the Company has agreed to a one count plea
in which the Company accepts the responsibility for the unlawful acts of
two of its former employees based in San Dimas, CA and to pay a lump sum
fine in the amount of $25 million at the time of court approval. The
tentative settlement satisfies all government claims arising from the
conduct that was disclosed in the March 27 SEC filing and there are no
other claims. Additionally, there is no probation associated with the
settlement.
In conformance with generally accepted accounting principles, the Company
booked the amount of the 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.
On August 29, 2000, we 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 us 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; 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.
4. 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.
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.
5. On June 25, 1999, a 4-for-3 stock split of our common stock was paid in the
form of a stock dividend to shareholders of record at the close of business
on June 11, 1999. We restated all historical weighted average shares and
per share amounts in this report to reflect these stock splits. Share
amounts in the Consolidated Balance Sheets reflect the actual share amounts
outstanding for each period presented.
6. Giving effect of the CPSI merger, we have two reportable segments. These
segments are BWI and Nuclear Pharmacy. These segments conducted
substantially all of their business within the United States. The BWI
segment specialized 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 Nuclear Pharmacy
segment prepares and delivers unit dose radiopharmaceuticals for use in
nuclear imaging procedures in hospitals and clinics. Our segments have
separate management teams and infrastructures to meet the specific needs of
our customers and our marketing strategies.
Segment information for the three-month periods ended March 31, 1999 and
2000 on a restated basis was as follows:
<TABLE>
<CAPTION>
(in thousands) BWI Nuclear Pharmacy Total
----------------- ---------------- ------------
<S> <C> <C> <C>
Three-months ended March 31, 1999
Revenues $ 1,974,957 $ 1,974,957
Segment operating earnings 20,351 20,351
Interest Expense (5,524)
-------------
Earnings before income taxes 14,827
=============
Three-months ended March 31, 2000
Revenues $2,463,815 $ 14,295 $ 2,478,110
Segment operating earnings 26,229 1,397 27,626
Interest Expense (8,302)
Unusual item (26,300)
-------------
Earnings before income taxes (6,976)
=============
</TABLE>
Operating earnings, as opposed to net earnings, has been determined to be a
better indicator of a segment's operating profitability for management
purposes.
7. The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the three month
periods ended March 31, 2000 and 1999 on a restated basis:
Three-month period ended
March 31,
--------------------------------- ------------------ ---------------------
(in thousands, except share data) 2000 1999
--------------------------------- ------------------ ---------------------
Basic:
Net earnings ($ 14,267) $ 8,933
Weighted shares
Outstanding 34,108,201 22,607,433
1999 4 for 3 stock split 7,536,714
Basic shares
Outstanding 34,108,201 30,144,147
Per share amount ($ .42) $ .30
Diluted:
Net earnings ($ 14,267) $ 8,933
Weighted shares
Outstanding 34,108,201 22,607,433
Stock options 2,831,208
1999 4 for 3 stock split 7,536,714
Diluted Shares 34,108,201 32,975,355
Per share amount ($ .42) $ .27
The diluted average shares outstanding for the three-month period ended
March 31, 2000 does not include 2,952,813 potential common shares because
they would be anti-dilutive.
8. 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
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.
The following table shows certain income statement and balance sheet
line items that have been restated:
Restated As Previously Reported
(000's) (000's)
----------------------------------
Total net sales:
Three months ended 3/31/99 $1,974,957 $1,985,165
Three months ended 3/31/00 2,478,110 2,478,110
Net earnings:
Three months ended 3/31/99 8,933 9,705
Three months ended 3/31/00 (14,267) (13,707)
Basic earnings per share:
Three months ended 3/31/99 .30 .29
Three months ended 3/31/00 (.42) (.40)
Diluted earnings per share:
Three months ended 3/31/99 .27 .27
Three months ended 3/31/00 (.42) (.40)
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
Balance sheet line items at March 31, 2000:
Intangibles 81,258 18,504
Deferred tax liability 16,048 4,703
Additional paid in capital 279,345 226,460
Retained earnings 150,370 152,331
<PAGE>
Results of Operations
Net sales of $2,478 million for the first three months of 2000
represented a 25.5% increase over the first three months of 1999. Nuclear
Pharmacy sales accounted for less than 1% of sales for the three months of 2000.
Brokerage type sales ("brokerage sales") in 2000 experienced a 9.5% increase for
the first three months when compared to the same period in 1999. This increase
is the result of increased sales to existing customers. Although brokerage sales
generate very little gross margin, they provide increased working capital and
support our programs to attract more direct store delivery business from chain
warehouse customers. Sales from inventory ("from stock sales") increased 35% in
the first three months of 2000 when compared to the first three months of 1999.
From stock sales include sales from inventory to chain warehouse customers and
direct store delivery sales. 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 37% for the first three months of 2000 when compared to the first
three months of 1999. As a percentage of total sales, direct store delivery
sales increased from 60% for the first three months of 1999 to 65% for the first
three months of 2000. In both the first three months of 2000 and 1999, the
increase related to price increases was approximately equal to the increase in
the Consumer Price Index.
Gross margin of $65.8 million for the first three months of 2000
represented an increase of 40% over the first three months of 1999. Gross margin
as a percentage of net sales increased to 2.66% for the first three months of
2000 from 2.38% for the first three months of 1999. The inclusion of the higher
margin Nuclear Pharmacy margins in the first three months of 2000 represented
approximately 36% of the incremental margin. The remainder of the increase was
the result of the change in mix away from the lower margin brokerage sales to
the higher margin from stock sales in the BWI segment. In both periods, the
pressure on sell side margins continued to be a significant factor and the
purchasing gains associated with pharmaceutical price inflation remained
relatively constant.
Other income is attributable primarily to finance charges on customers'
receivables and gains on the sale of fixed assets.
Selling, general and administrative ("SGA") expense increased 39% from
$25.3 million for the first three months of 1999 to $35.0 million for the first
three months of 2000. A significant factor contributing to this increase was the
inclusion of the Nuclear Pharmacy SGA in the first three months of 2000. The
remainder of the increase is the result of expenses associated with the new
distribution centers opened in 1999 in Milwaukee, Wisconsin, Kansas City,
Missouri and Denver, Colorado, normal inflationary increases and increased
variable costs to support our growing direct store delivery programs in the BWI
segment. These variable costs include, among others, delivery expenses,
warehouse expenses and labor costs. Our commitment to growth in both our direct
store delivery sales and our Nuclear Pharmacy segment will result in increased
SGA in the future. Total SGA expense as a percent of from stock sales for the
first three months remained relatively constant at 2.1% for both 1999 and 2000.
We remain focused on controlling SGA through improved technology, better asset
management and opportunities to consolidate distribution centers.
Depreciation and amortization expense increased as a result of the
goodwill and intangibles associated with the acquisition of Central Pharmacy,
the building of new facilities, expansion and automation of existing facilities
and investments in management information systems. Depreciation and amortization
expense increased from $2.0 million in the first three months of 1999 to $3.7
million in the first three months of 2000.
Interest expense for the three-month period increased from $5.5 million
in 1999 to $8.3 million in 2000. The average short-term borrowings outstanding
for the three-month period in 1999 were $335 million at an average short-term
interest rate of 5.1%, as compared to $449 million at an average short-term
interest rate of 6.2% in 2000. At March 31, 2000, CPSI had outstanding
borrowings on their line of credit of $2.2 million at a short-term interest rate
of 9%.
The provision for income taxes represented approximately 39.7% of
earnings before taxes for the first three months of 1999 and 37.7% of earnings
before taxes and the effect of the nondeductible element of the unusual item for
the first three months of 2000.
Liquidity-Capital Resources
For the three-month period ended March 31, 2000, our operations
consumed $65 million in cash. The use of funds resulted from an increase in
inventories and a decrease in accounts payable. These uses were offset by a
decrease in accounts receivables. The increase in inventories resulted from
increased purchases necessitated by the increase in direct store delivery sales
and the continued stocking of our new facilities in Kansas City, Missouri and
Denver, Colorado. The decrease in accounts payable is attributed to the timing
of payments of invoices related to inventory purchases while the decrease in
accounts receivables resulted from the timing of brokerage sales. 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.
On March 27, 2000, the Company disclosed in its Form 10-K filing that
it was a potential defendant in an ongoing grand jury investigation being
conducted by the U. S. Attorney's Office in Las Vegas, NV. Then, on April 24,
2000, the Company announced in its first quarter 2000 earnings release that it
had entered into an agreement for the purpose of settling the subject matter of
the government's investigation, subject to court approval, which is expected to
take place by the end of June 2000. Full details of the tentative settlement
cannot be disclosed prior to court approval.
Under the tentative settlement, the Company has agreed to a one count
plea in which the Company accepts the responsibility for the unlawful acts of
two of its former employees based in San Dimas, CA and to pay a lump sum fine in
the amount of $25 million at the time of court approval. The tentative
settlement satisfies all government claims arising from the conduct that was
disclosed in the March 27 SEC filing and there are no other claims.
Additionally, there is no probation associated with the settlement.
In conformance with generally accepted accounting principles, the
Company booked the amount of the 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.
On August 29, 2000, we 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 us 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; 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.
Capital expenditures were $3.7 million during the first three months of
2000. These were predominantly for distribution centers, the expansion and
automation of existing distribution centers and the investment in additional
management information systems.
Under our receivables securitization facility, we sell substantially
all of our receivables arising in connection with the sale of goods or the
rendering of services 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. The cash generated by sales of interests
in the receivables and from collections on the receivables retained is used by
Funding Corp. to purchase additional receivables. The assets of Funding Corp.
are available first to satisfy any claims of Funding Corp. creditors.
Funding Corp. sells our receivables at specified discount rates to a
group of banks. At March 31, 2000, there were $350 million of receivables
interests outstanding that have been sold at an annual average discount rate of
6.0%. We account for the receivables facility as a financing transaction in our
consolidated financial statements.
Our bank credit facility allows us to borrow up to $150 million. The
net increase in borrowings under our bank credit agreement was $85 million
during the three-month period.
We believe that our cash on hand, cash equivalents, line of credit and
working capital management efforts are sufficient to meet our future working
capital requirements.
Our principal working capital needs are for inventory and accounts
receivables. We sell inventory to our chain warehouse and other customers on
various payment terms. This requires significant working capital to finance
inventory purchases and entails accounts receivables exposure in the event any
of our chain warehouse or other significant customers encounter financial
difficulties. Although we monitor closely the creditworthiness of our major
customers and, when feasible, obtain security interests in the inventory sold,
we cannot assure you that we will not incur the write off or write down of chain
warehouse customer or other significant accounts receivables in the future.
Forward-Looking Statements
We make forward-looking statements in this report which represent our
expectations or beliefs about future events and financial performance.
Forward-looking statements are subject to known and unknown risks and
uncertainties, including:
o changes in interest rates;
o competitive pressures;
o changes in customer mix;
o financial stability of major customers and key suppliers;
o investment procurement opportunities;
o asserted and unasserted claims; and
o changes in governmental regulations or the interpretation and
enforcement of these regulations;
In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this report might not occur. In addition,
actual results could differ materially from those suggested by the
forward-looking statements, and therefore you should not place undue reliance on
the forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Item 3. Qualitative and Quantitative Disclosures About Market Risks
There have been no material changes in our market risk exposure from the risks
described in our Annual Report on Form 10-K/A for the year ended December 31,
1999.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 3 and 4 to the Notes to Consolidated
Financial Statements set forth elsewhere in this Report is incorporated herein
by reference.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
December 21, 2000 BINDLEY WESTERN INDUSTRIES, INC.
BY /s/ Thomas J. Salentine
Thomas J. Salentine
Executive Vice President
(Principal Financial Officer)
