-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GgOaRSq7M4v9j1kEOW+zMb7pktyNk50FEe9ZL0o4bp4yQEbp1XxIllr1K+NGhtxU elEoZWLMp8VcAA15RqfzFg== 0000950131-99-006415.txt : 19991118 0000950131-99-006415.hdr.sgml : 19991118 ACCESSION NUMBER: 0000950131-99-006415 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991117 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19991117 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BINDLEY WESTERN INDUSTRIES INC CENTRAL INDEX KEY: 0000722808 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 840601662 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11519 FILM NUMBER: 99759771 BUSINESS ADDRESS: STREET 1: 8909 PURDUE ROAD CITY: INDIANAPOLIS STATE: IN ZIP: 46268 BUSINESS PHONE: 3177044000 MAIL ADDRESS: STREET 1: 8909 PURDUE ROAD CITY: INDIANAPOLIS STATE: IN ZIP: 46268 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): November 17, 1999 BINDLEY WESTERN INDUSTRIES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Indiana 001-11519 84-0601662 -------------------------------------------------------------------------- (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 8909 Purdue Road Indianapolis, Indiana 46268 -------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (317) 704-4000 -------------- Not Applicable ----------------------------------------------------------- (Former name or former address, if changed since last report) ITEM 5. OTHER EVENTS On August 31, 1999, Bindley Western Industries, Inc. ("BWI") completed the merger with Central Pharmacy Services, Inc ("CPSI") by exchanging 2.9 million shares of BWI Common Stock for all of the Common Stock of CPSI. Each share of CPSI was exchanged for 26.38 shares of BWI Common Stock. In addition, outstanding CPSI employee stock options were converted at the same exchange factor into options to purchase approximately 300,000 shares of BWI Common Stock. CPSI operates specialized pharmacies in 27 cities located in 13 states. These pharmacies prepare and deliver unit dose radiopharmaceuticals for use in nuclear imaging procedures in hospitals and clinics. The merger constituted a tax-free reorganization and has been accounted for as a pooling of interests. As we filed the quarterly reports on Form 10Q for the period ended September 30, 1999, giving effect to the pooling of interests, in lieu of presenting the supplemental proforma financial statements, the accompanying exhibits present historical financial statements for the years ended December 31, 1998, 1997, and 1996 reflecting the pooling of interest. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS Exhibit No. Description ----------- ----------- 23.1 Consent of Independent Accountants 23.2 Consent of Independent Auditors 99.1 Management's Discussion and Analysis of Financial Condition and Results of Operations. 99.2 Report of Independent Accountants Report of Independent Auditors Consolidated Statements of Earnings for each of the three years in the period ended December 31, 1998 Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1998 Notes to Consolidated Financial Statements SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 17, 1999 BINDLEY WESTERN INDUSTRIES, INC. By: /s/ Thomas J. Salentine ----------------------------------------------- Name: Thomas J. Salentine Title: Executive Vice President and Chief Financial Officer EX-23.1 2 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 Consent of Independent Accountants ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No's. 333-75577, 333-85379, 333-60279, 333-04517, 33- 64828, 33-58947, 333-57975, 33-15471 and 33-37781) of Bindley Western Industries, Inc. of our report dated February 24, 1999, except as to the stock split as discussed in Note 12, which is as of June 25, 1999, and the pooling of interests as discussed in Note 1, which is as of August 31, 1999, relating to the financial statements which appear in this Form 8-K. PricewaterhouseCoopers LLP Indianapolis, Indiana November 15, 1999 EX-23.2 3 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.2 Consent of Independent Auditors ------------------------------- We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-75577, 333-85379, 333-60279, 333-04517, 33-64828, 33-58947, 333-57975, 33-15471 and 33-37781) of Bindley Western Industries, Inc. of our report dated March 15,1999, except for Note 4 as to which the date is April 8, 1999, with respect to the consolidated financial statements of Central Pharmacy Services, Inc. included in the Current Report on Form 8-K, dated November 17, 1999, of Bindley Western Industries, Inc. filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Atlanta, Georgia November 15, 1999 EX-99.1 4 MANAGEMENT'S DISCUSSION & ANALYSIS Exhibit 99.1 Management's Discussion and Analysis of Financial Condition and Results of Operations. The discussion and analysis that follows should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this report. We have made the following acquisitions which affect the comparison of the results of operations on a year to year basis. All acquisitions, except Central Pharmacy Services, Inc., have been accounted for under the purchase method and, accordingly, the results of operations of the acquired entities are included in the Company's financial statements from the respective dates of acquisition. The IV One Companies - Effective January 1995, we, through our Priority Healthcare Corporation ("Priority") subsidiary, acquired all of the outstanding stock of the IV One Companies ("IV One") in a cash transaction. IV One is comprised of IV-1, Inc., IV-One Services, Inc. and National Pharmacy Providers, Inc. These companies focus on high acuity specialty pharmacy services for patients requiring home and ambulatory infusion therapy. Effective as of the close of business on December 31, 1998, IV-One Services, Inc. and National Pharmacy Providers, Inc. were merged into IV-1, Inc. and the name of IV-1, Inc. was changed to Priority Healthcare Pharmacy, Inc. Priority Healthcare Services Corporation - In January 1996, we formed a new subsidiary, National Infusion Services, Inc. ("NIS"). Effective February 8, 1996, we, through our NIS subsidiary, purchased the assets of the infusion services division of Infectious Disease of Indiana P.S.C. NIS is a provider of quality care to patients in a variety of settings. In February of 1997, the corporate name was changed from NIS to Priority Healthcare Services Corporation ("PHSC"). Tennessee Wholesale Drug Company - Effective July 31, 1997, we acquired substantially all of the operating assets and assumed most of the liabilities of Tennessee Wholesale Drug Company ("TWD"). TWD is a full-line, full-service wholesale drug company with a distribution facility in Nashville, Tennessee. Grove Way Pharmacy - Effective August 6, 1997, Priority acquired substantially all of the assets of Grove Way Pharmacy, Inc. ("Grove Way"), a specialty distributor of vaccines located in Castro Valley, California. Central Pharmacy Services, Inc. - On August 31, 1999, we completed the merger with Central Pharmacy Services, Inc. ("CPSI") of Atlanta, Georgia for approximately $55 million of our Common Stock. CPSI operates specialized pharmacies in 27 cities located in 13 states. These pharmacies prepare and deliver unit dose radiopharmaceuticals for use in nuclear imaging procedures in hospitals and clinics. The transaction was accounted for as a pooling of interests and the financial statements for the periods ended December 31, 1998, 1997 and 1996 are based on the assumption that the companies were combined for the full periods. On December 31, 1998, we distributed to the holders of our Common Stock all of the 10,214,286 shares of Priority Class A Common Stock owned by us on the basis of .448 shares of Priority Class A Common Stock for each share of our Common Stock outstanding on the record date, December 15, 1998. The two classes of Priority Common Stock entitle holders to the same rights and privileges, except that holders of shares of Priority Class A Common Stock are entitled to three votes per share on all matters submitted to a vote of holders of Priority Common Stock and holders of shares of Priority Class B Common Stock are entitled to one vote per share on such matters. As a result of the distribution, Priority ceased to be our subsidiary as of December 31, 1998 and, therefore, their assets, liabilities and equity are not included in the December 31, 1998 BWI Consolidated Balance Sheet. However, their results of operations, net of minority interest, for the year ended December 31, 1998 are included in the BWI Consolidated Statement of Earnings as Priority was our subsidiary for the full year of 1998. Results of Operations. Net sales for 1998, 1997 and 1996 were $7,654 million, $7,334 million and $5,335 million, respectively. The 4% increase in 1998 sales over 1997 and the 37% increase in 1997 over 1996 were generated primarily through internal growth. In all years, CPSI sales accounted for less than 1% of total sales. In 1998, brokerage type sales ("brokerage sales") experienced a 23% decrease from 1997. This was the result of the loss of the Rite Aid business. Brokerage sales had increased by 43% from 1996 to 1997. This was the result of the consolidation within the wholesale and chain drug industries. Brokerage sales generate very little gross margin, however, they provide for increased working capital and support our programs to attract more direct store delivery business from chain customers. Sales from our inventory ("from stock sales") increased 49% in 1998. These sales include sales from our inventory to chain customers and direct store delivery business. Direct store delivery sales increased by 50% in 1998 and increased to 51% of total sales in 1998. These sales were only 35% of total sales in 1997. The increase in direct store delivery sales as a percent of total sales was caused by the combination of our loss of the Rite Aid brokerage sales business and our ability to expand our presence in the direct store delivery portion of the business through increased sales to existing customers and the addition of new customers. In both periods, the increase related to pricing was approximately equal to the increase in the Consumer Price Index. Net sales for Priority for 1998, 1997 and 1996 were $276 million, $231 million and $158 million, respectively. This growth was generated internally and reflected primarily the addition of new customers, new product introductions (including the new Rebetron treatment for Hepatitis-C), additional sales to existing customers and, to a lesser extent, the acquisition of Grove Way Pharmacy and inflationary price increases. Gross margins for 1998, 1997 and 1996 were $206 million, $153 million and $128 million, respectively. The increases in gross margins from 1997 to 1998 and from 1996 to 1997 resulted primarily from internal growth. The acquisition of TWD accounted for approximately 23% of the increase from 1996 to 1997 and had substantially less impact from 1997 to 1998. The impact in 1998 is difficult to quantify as the Baltimore, Maryland and Tampa, Florida warehouses of TWD were closed in 1998 and their customers subsequently serviced out of existing facilities. Gross margins as a percent of net sales increased to 2.69% in 1998 from 2.08% in 1997. This increase was the result of the change in mix away from the lower margin brokerage sales to the higher margin from stock sales and the increased higher margin sales of CPSI. The change in mix resulted from both the loss of the Rite Aid brokerage sales business and the increased direct store delivery sales. Gross margins as a percent of net sales declined from 2.40% in 1996 to 2.08% in 1997. This decrease was the result of the substantial increase in low margin brokerage sales and a shift in the business mix of from stock sales to more managed care business. In all years, the pressure on sell side margins continued and the purchasing gains associated with pharmaceutical price inflation remained relatively constant. Gross margins for Priority for 1998, 1997 and 1996 were $31.1 million, $23.2 million and $17.2 million, respectively. Gross margins as a percent of sales for 1998, 1997 and 1996 were 11.30%, 10.01% and 10.85%, respectively. The increase in 1998 margins over 1997 margins is primarily attributed to the change in sales mix resulting from significantly higher sales by Priority Pharmacy which generated higher gross margins than those of Priority Distribution. The reduction in 1997 from 1996 is attributed to increased competition and a change in sales mix to the lower margin wholesale distribution business. Other income in 1998, 1997 and 1996 represented finance charges on certain customers' receivables and gains on the sale of assets. The 1998 balance also includes approximately $200,000 of interest related to the note from the CEO of the Company. Selling, general and administrative ("SGA") expenses were $118.3 million, $89.4 million and $77.4 million in 1998, 1997 and 1996, respectively. The primary reasons for the increase in SGA from 1997 to 1998 and from 1996 to 1997 were normal inflationary increases and costs to support the growing direct store delivery business of Bindley Western Drug Company, the alternate care/alternate site business of Priority and the nuclear pharmacy expansion of CPSI. The cost increases related to the direct store delivery and alternate care/alternate site businesses include, among others, delivery expense, warehouse expense, and labor costs, which are variable with the level of sales volume. However, management remains focused on controlling SGA through improved technology, better asset management and opportunities to consolidate distribution centers. This focus has resulted in a decrease in SGA expense as a percent of from stock sales to 2.85% in 1998 from 3.21% in 1997 and 3.61% in 1996. Non recurring charges related to the startup, consolidation and closing of certain divisions were $200,000 in 1998, $575,000 in 1997 and $200,000 in 1996. SGA for Priority was $14.0 million in 1998, $10.6 million in 1997 and $8.4 million in 1996. As a percent of sales, SGA for 1998 was 5.1% as compared to 4.6% in 1997. This increase was the result of expenses associated with the opening of the Grove City, Ohio facility, which opened in November, 1997, training and payroll costs from hiring additional sales personnel at Priority Pharmacy and increased overall costs of being a publicly traded company. The increase in 1997 SGA from 1996 was attributed to the above mentioned normal costs to support this business. SGA as a percent of sales actually decreased from 5.3% in 1996 to 4.6% in 1997. SGA for CPSI increased in all years as a result of continued expansion through the opening of new nuclear pharmacies. Depreciation and amortization was $8.9 million, $8.2 million and $7.4 million in 1998, 1997 and 1996, respectively. These increases were the result of the inclusion of acquired entities and the depreciation and amortization on new facilities and equipment, particularly in management information systems and systems to support customer needs. Depreciation and amortization for Priority increased from $1 million in 1996 to $1.2 million for both 1997 and 1998. These increases also resulted from depreciation on new equipment, particularly management information systems. Interest expense for 1998, 1997 and 1996 was $18.6 million, $16.2 million and $13.2 million, respectively. The average short-term borrowings outstanding were $249 million, $152 million and $119 million at an average short-term interest rate of 6.3%, 6.4% and 6.4% for 1998, 1997 and 1996, respectively. We also have in place a private placement of $30 million Senior Notes due December 27, 1999 at an interest rate of 7.25%. Interest expense associated with these Notes was approximately $2.2 million in both 1998 and 1997. In the fourth quarter of 1998, we recorded a one-time, pre-tax charge of approximately $19.0 million, which approximated $14.0 million on an after-tax basis. Of the $19.0 million charge, $11.0 million represented a non-cash charge for the acceleration of the amortization of compensation related to restricted stock grants in connection with the Priority spin-off, $7.0 million represented the non-cash write-off of goodwill that has been carried on the books from an acquisition dating back to early 1996 and $1.0 million represented the settlement of litigation associated with that acquisition. See also, Note 6 -Intangibles, Note 9 - Long-term Debt, Note 12 - Capital Stock and Note 16 -Legal Proceedings, of the Company's financial statements for further discussion. The provision for income taxes represented 44.1%, 39.0% and 42.2% of earnings before taxes in 1998, 1997 and 1996, respectively. The increase in the 1998 effective rate was attributable to the nondeductible element of restricted stock grants expensed in 1998. On January 11, 1996, we were informed by the U.S. Attorney's office in Indianapolis that the Drug Enforcement Administration ("DEA") was alleging multiple violations of the recordkeeping and reporting regulations of the Controlled Substances Act ("Act") resulting from a routine inspection of our Indianapolis Distribution Center during January and February 1994. On November 7, 1996, we entered into a Civil Consent Decree with the United States and the DEA resolving all issues relating to its Indianapolis Distribution Center's alleged failure to comply with the Act. In exchange for the settlement of all civil and administrative issues, we paid $700,000, and agreed to pay an additional $300,000 if we did not substantially comply with the terms of the Civil Consent Decree over the next two years. The settlement charge recognized by the Company in 1996 included professional fees of $112,000. On December 15, 1998, we were advised by the U. S. Attorney's office in Indianapolis that we had fully complied with the terms of the 1996 Civil Consent Decree and, accordingly, the civil penalty of $300,000 would not be imposed. On October 7, 1996 we and our subsidiary, National Infusion Services (now known as Priority Healthcare Services Corporation) ("PHSC"), were named as defendants in an action filed by Thomas G. Slama, M.D. in the Superior Court of Hamilton County, Indiana. Dr. Slama is a former director of the company and formerly was Chief Executive Officer and President of PHSC. The complaint alleged breach of contract and defamation arising from the termination of Dr. Slama's employment with PHSC in October 1996. On October 26, 1998, Dr. Slama filed a Second Amended Complaint which added Priority and William E. Bindley as defendants and stated additional claims for breach of contract, breach of oral contract, breach of fiduciary duty, securities fraud and conversion. Pursuant to an Indemnification and Hold Harmless Agreement we indemnified and held harmless Priority and its subsidiaries from and against any and all costs, damages, charges and expenses (including without limitation legal and other professional fees) which Priority might incur or which may be charged against Priority in any way based upon, connected with or arising out of the lawsuit filed by Dr. Slama. All defendants answered the complaint, denied the merits of Dr. Slama's claims, and also filed a counterclaim against Dr. Slama which sought, among other things, declaratory relief, compensatory and (in some instances) treble damages, punitive damages, attorneys' fees, interest and costs. On December 31, 1998, a Settlement Agreement was executed by and among the parties named above pursuant to which mutual releases were obtained and, on January 4, 1999, a one-time payment of $875,000 was made by the company to Dr. Slama. The corresponding Joint Stipulation of Dismissal was approved by the Court on January 11, 1999. Liquidity-Capital Resources. On October 29, 1997, Priority consummated an initial public offering ("IPO"). Priority registered 2,300,000 shares of Class B Common Stock, all of which were sold in a firm commitment underwriting at an aggregate offering price of $33.35 million. After underwriters' discount of $2.32 million and expenses incurred by Priority in conjunction with the IPO of $1.05 million, the net offering proceeds to Priority were approximately $29.98 million. On December 31, 1998, we distributed to the holders of our Common Stock all of the 10,214,286 shares of Priority Class A Common Stock owned by us on the basis of .448 shares of Priority Class A Common Stock for each share of our Common Stock outstanding on the record date, December 15, 1998. The two classes of Priority Common Stock entitle holders to the same rights and privileges, except that holders of shares of Priority Class A Common Stock are entitled to three votes per share on all matters submitted to a vote of holders of Priority Common Stock and holders of shares of Priority Class B Common Stock are entitled to one vote per share on such matters. As a result of the distribution, Priority ceased to be our subsidiary. From the date of the IPO until the December 31, 1998 distribution to the holders of our Common Stock, we owned 81.6% of the outstanding common stock of Priority. In 1998, the amount of net earnings associated with the minority interest was $1.9 million as compared to $212,000 in 1997. Our operations consumed $78.9 million in cash for the year ended December 31, 1998. The use of funds resulted from increases in inventories and a decrease in accounts payable. The increase in inventory resulted from the significant increase in direct store delivery sales and the new bulk inventory acquisition and purchasing management programs with certain customers. The reduction of accounts payable is attributed to the timing of payments of invoices and the reduction of brokerage type sales to Rite Aid. These uses of cash were offset by the decrease in accounts receivables resulting from the reduction of brokerage type sales to Rite Aid. We continue to closely monitor working capital in relation to economic and competitive conditions. However, the emphasis on direct store delivery business will continue to require both net working capital and cash. Capital expenditures were predominantly for the construction of the new corporate headquarters building, the construction of a new warehouse facility in Westbrook, Maine, the expansion and automation of existing warehouses and the investment in additional management information systems and other systems to support customer needs. Total expenditures were $34.5 million during 1998. Effective July 31, 1997, we purchased substantially all of the operating assets and assumed most of the liabilities and contractual obligations of TWD. We expended approximately $27 million for the acquisition of TWD, which approximated the fair value of the net assets acquired. Effective August 6, 1997, Priority acquired substantially all of the operating assets and assumed most of the liabilities of Grove Way Pharmacy, Inc., a specialty distributor of vaccines and injectables located in Castro Valley, California. The amount expended approximated the fair value of the net assets acquired. On August 27, 1997, we called for redemption on September 12, 1997 all of our outstanding 6 1/2% Convertible Subordinated Debentures Due 2002 at a redemption price of $1,039 per $1,000 principal amount of Debentures plus accrued interest through the redemption date. Debenture holders could elect to convert their debentures into shares of our common stock through September 12, 1997, which was the redemption date. Holders of all but $119,000 principal amount of the $67,350,000 outstanding Debentures elected to convert their Debentures into common stock at the rate of 50.4 shares of common stock for each $1,000 principal amount of Debentures. The redemption reduced our long-term debt by $67,350,000 and increased by 3.4 million the number of issued shares of our common stock. We hold a note receivable with a principal balance of $3.2 million from the CEO of the Company. The proceeds of this note, which bears interest at 6.5% per annum and matures on December 16, 2000, were used by the CEO to exercise stock options. The note provides for annual interest only payments with outstanding interest and principal to be repaid at maturity. In December 1998, we established a receivables securitization facility (the "Receivables Facility") pursuant to which we sell substantially all of our receivables arising in connection with the sale of goods or the rendering of services ("Receivables") to Bindley Western Funding Corporation ("Funding Corp."), a wholly owned special purpose corporation subsidiary. The Receivables are sold to Funding Corp. on a continuous basis, and the cash generated by sales of interests in the Receivables or by collections on the Receivables retained is used by Funding Corp. to, among other things, purchase additional Receivables originated by the Company. The assets of Funding Corp. will be available first and foremost to satisfy claims of Funding Corp. creditors. In connection with the Receivables Facility, Funding Corp. entered into a Receivables Purchase Agreement, dated as of December 28, 1998, with Falcon Asset Securitization Corporation ("Falcon"), an affiliate of The First National Bank of Chicago ("First Chicago"), certain other financial institutions (collectively with Falcon, the "Purchasers"), and First Chicago, as Agent. Pursuant to the Receivables Purchase Agreement, Funding Corp. may, from time to time, sell interests in the Receivables ("Receivables Interests") to the Agent for the benefit of the Purchasers. Each Receivables Interest has an associated Discount Rate and Tranche Period applicable to it, as selected by Funding Corp. The Discount Rate may, at Funding Corp.'s election, be the Base Rate (the corporate prime or base rate announced from time to time by First Chicago) or, with respect to the Receivables Interests purchased by Falcon, the CP Rate (generally, a commercial paper related rate based on Falcon's funding charges) or, with respect to the Receivables Interests purchased by other Purchasers, the LIBO Rate (generally, LIBOR for the applicable Tranche Period, plus 1/25% per annum). The Receivables Facility terminates on December 27, 1999, and is subject to final termination on December 28, 2003, subject to earlier termination in certain events. At December 31, 1998, there were $224 million of Receivables Interests outstanding, bearing a Discount Rate of 5.5% per annum. We account for the Receivables Facility as a financing transaction in our consolidated financial statements. In connection with the implementation of the Receivables Facility, on December 28, 1998, we renegotiated our bank line of credit and now have $174.5 million of available credit. For 1998, the net decrease in borrowings under the bank credit agreement was $127.5 million. At December 31, 1998, we had borrowed $19.5 million under the bank credit agreement and had a remaining availability of $155 million. At December 31, 1998, we owed to Priority $16.5 million. This amount is due on demand and represents loans of excess cash balances of Priority to us on a short-term basis, bearing interest at our average incremental borrowing rate. At December 31, 1998, the incremental borrowing rate was 6.3%. We believe that our cash on hand, bank line of credit, Receivables Facility and working capital management efforts are sufficient to meet future working capital requirements. Our primary exposure to market risk consists of changes in interest rates on borrowings. An increase in interest rates would adversely affect our operating results and the cash flow available to fund operations and expansion. Based on the average variable borrowings for 1998, an increase of 10% in our average variable borrowing rate would result in a $2.2 million annual increase in interest expense. Conversely, a 10% decrease in the average variable borrowing rate would result in a $2.2 million annual decrease in interest expense. We continually monitor this risk and review the potential benefits of entering into hedging transactions, such as interest rate swaps, to mitigate the exposure to interest rate fluctuations. At December 31, 1998, we were not a party to any hedging transactions. Our principal working capital needs are for inventory and accounts receivable. We sell inventory to our chain drug warehouse and other customers on various payment terms. This requires significant working capital to finance inventory purchases and entails accounts receivable exposure in the event any of our chain warehouse or other major customers encounter financial difficulties. Although we monitor closely the creditworthiness of our major customers and, when feasible, obtain security interests in the inventory sold, there can be no assurance that we will not incur some collection loss on chain drug or other major customer accounts receivable in the future. Year 2000. The year 2000 poses a unique set of challenges to those industries reliant on information technology. As a result of the methods employed by early programmers, many software applications and operational programs may be unable to distinguish the year 2000 from the year 1900. If not effectively addressed, this problem could result in the production of inaccurate data, or in the worst cases, the inability of the systems to continue to function altogether. We and other companies in the same business are vulnerable to the dependence on distribution and communications systems. Our Daily Sales System, which controls ordering, pricing, inventory control, and shipping and which accounts for 70% of our total investment in software, was initially designed and programmed to comply with the Year 2000 challenge. We anticipate that our remaining systems will be fully Year 2000 compliant by the end of the second quarter of 1999. Furthermore, all software purchases within the past three years have been guaranteed to be compliant by the vendor. We have upgraded and replaced our hardware and network systems for reasons other than Year 2000 compliance, however, and such new hardware and network systems will be fully tested during 1999 to ensure that they are also Year 2000 compliant. We estimate that the total cumulative costs relating to its efforts to make our systems compliant for the Year 2000 will be approximately $1 million, of which approximately $340,000 had been incurred as of December 31, 1998. We believe that the expenditures required to bring our systems into compliance will not have a material adverse effect on our performance. However, the Year 2000 problem is pervasive and complex and can potentially affect any computer process. Accordingly, no assurance can be given that the Year 2000 compliance can be achieved without additional unanticipated expenditures and uncertainties that might affect future financial results. Moreover, to operate our business, we rely on governmental agencies, utility companies, telecommunications companies, shipping companies, suppliers and other third party service providers over which we can assert little control. Our ability to conduct our business is dependent upon the ability of these third parties to avoid Year 2000 related disruptions. We are in the process of contacting our third party service providers about their Year 2000 readiness, but we have not yet received any assurances from any such third parties about their Year 2000 compliance. If our key third party service providers do not adequately address their Year 2000 issues, our business may be materially affected, which could result in a material adverse effect on our results of operations and financial condition. We have not to date developed any contingency plans, as such plans will depend on the responses from our third party service providers, in the event we or any key third party providers should fail to become Year 2000 compliant. If required, critical functions could be handled on a manual basis until such time that the Year 2000 malfunction was identified and resolved. Inflation. Our financial statements are prepared on the basis of historical costs and are not intended to reflect changes in the relative purchasing power of the dollar. Because of our ability to take advantage of forward purchasing opportunities, we believe that our gross profits generally increase as a result of manufacturers' price increases in the products we distribute. Gross profits may decline if the rate of price increases by manufacturers declines. Generally, price increases are passed through to customers as they are received by the Company and therefore reduce the negative effect of inflation. Other non- inventory cost increases, such as payroll, supplies and services, have been partially offset during the past three years by increased volume and productivity. Forward Looking Statements. Certain statements included in this annual report which are not historical facts are forward looking statements. Such forward looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements involve certain risks and uncertainties including, but not limited to, changes in interest rates, competitive pressures, changes in customer mix, financial stability of major customers, investment procurement opportunities, asserted and unasserted claims, changes in government regulations or the interpretation thereof and our ability and the entities with which we transact business to modify or redesign their computer systems to work properly in the year 2000, which could cause actual results to differ from those in the forward looking statements. Quantitative and Qualitative Disclosures About Market Risk. See discussion above in Management's Discussion and Analysis of Financial Condition and Results of Operations. EX-99.2 5 REPORT OF INDEPENDENT ACCOUNTANTS Exhibit 99.2 Report of Independent Accountants To the Board of Directors and Shareholders of Bindley Western Industries, Inc. In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of earnings, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Bindley Western Industries, Inc. and its subsidiaries (the "Company") at December 31, 1998 and December 31, 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Central Pharmacy Services, Inc., which statements reflect total assets of $7,497,000 and $5,347,000 as of December 31, 1998 and December 31, 1997, respectively, and total revenues of $32,869,000, $24,215,000 and $17,955,000, respectively, for each of the three years in the period ended December 31, 1998. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Central Pharmacy Services, Inc., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Indianapolis, Indiana February 24, 1999, except as to the stock split as discussed in Note 12, which is as of June 25, 1999, and the pooling of interests as discussed in Note 1, which is as of August 31, 1999 Report of Independent Auditors Board of Directors Central Pharmacy Services, Inc. We have audited the consolidated balance sheets of Central Pharmacy Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' (deficit) equity, and cash flows for each of the three years in the period ended December 31, 1998, not separately presented herein. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Central Pharmacy Services, Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Atlanta, Georgia March 15, 1999, except for Note 4 as to which the date is April 8, 1999 Consolidated Statements of Earnings Bindley Western Industries, Inc. and Subsidiaries
For the years ended December 31, 1998 1997 1996 (In thousands, except share data) Revenues: Net sales from stock $ 4,156,799 $ 2,784,450 $2,145,262 Net brokerage sales 3,497,422 4,549,687 3,190,219 ----------- ----------- ----------- Total net sales 7,654,221 7,334,137 5,335,481 Other income 1,915 1,908 1,410 ----------- ----------- ----------- 7,656,136 7,336,045 5,336,891 Cost and expenses: Cost of products sold 7,448,331 7,181,415 5,207,565 Selling, general and administrative 118,340 89,402 77,396 Depreciation and amortization 8,894 8,162 7,387 Interest 18,648 16,192 13,248 Settlement of 1994 DEA inspection matter 812 I.P.O. stock option grant 350 Unusual items 18,833 ----------- ----------- ----------- 7,613,046 7,295,521 5,306,408 Earnings before income taxes and minority interest 43,090 40,524 30,483 ----------- ----------- ----------- Provision for income taxes: Current 22,636 19,640 14,896 Deferred (3,647) (3,834) (2,031) ----------- ----------- ----------- 18,989 15,806 12,865 Minority interest in net income of consolidated subsidiary 1,865 212 ----------- ----------- ----------- Net earnings $ 22,236 $ 24,506 $ 17,618 =========== =========== =========== Earnings per share: Basic $ 0.70 $ .95 $ .76 Diluted $ 0.66 $ .83 $ .67 Average shares outstanding: Basic 31,651,034 25,834,292 23,068,684 Diluted 33,508,668 31,890,035 30,359,442
(See accompanying notes to consolidated financial statements) Consolidated Balance Sheets Bindley Western Industries, Inc. and Subsidiaries
December 31, 1998 1997 (In thousands, except share data) Assets Current assets: Cash $ 42,982 $ 42,895 Accounts receivable, less allowance for doubtful accounts of $3,606 for 1998 and $4,829 for 1997 456,994 608,882 Finished goods inventory 660,089 521,451 Deferred income taxes 11,552 9,526 Other current assets 8,659 5,649 ------------- ------------- 1,180,276 1,188,403 ------------- ------------- Other assets 90 143 ------------- ------------- Fixed assets, at cost 121,850 91,620 Less: accumulated depreciation (27,660) (22,933) ------------- ------------- 94,190 68,687 ------------- ------------- Intangibles, net 19,401 35,711 ------------- ------------- Total assets $1,293,957 $1,292,944 ============= ============= Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings $ 19,500 $ 147,000 Securitized borrowings 224,163 Private placement debt 30,000 Accounts payable 644,461 737,657 Note payable to Priority Healthcare Corporation 16,517 Other current liabilities 19,869 19,288 ------------- ------------- 954,510 903,945 ------------- ------------- Long-term debt 733 32,282 ------------- ------------- Deferred income taxes 3,087 4,162 ------------- ------------- Minority interest 11,010 ------------- ------------- Shareholders' equity: Common stock. $.01 par value-authorized 40,000,000 shares; issued 26,345,421 and 19,025,715 shares, respectively 3,406 3,388 Special shares, $.01 par value-authorized 1,000,000 shares Additional paid in capital 215,177 200,468 Note receivable from officer (3,228) (3,228) Retained earnings 130,953 144,844 ------------- ------------- 346,308 345,472 ------------- ------------- Less: shares in treasury-at cost 689,161 and 380,942, (10,681) (3,927) respectively ------------- ------------- Total shareholders' equity 335,627 341,545 ------------- ------------- Commitments and contingencies ------------- ------------- Total liabilities and shareholders' equity $1,293,957 $1,292,944 ============= =============
(See accompanying notes to consolidated financial statements) Consolidated Statements of Cash Flows Bindley Western Industries, Inc. and Subsidiaries
For the years ended December 31, 1998 1997 1996 (In thousands) Cash flow from operating activities: Net income $ 22,236 $ 24,506 $ 17,618 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 8,894 8,162 7,387 Deferred income taxes (3,647) (3,834) (2,031) Minority interest 1,865 212 Compensation expense on stock option grant 350 Compensation expense on restricted stock 1,589 Interest capitalized on conversion of debt 1,970 Gain on sale of fixed assets (310) (77) (36) Unusual items 18,833 Change in assets and liabilities, net of acquisitions: Accounts receivable 94,814 (229,880) 51,212 Finished goods inventory (163,310) (63,276) (99,977) Accounts payable (60,700) 151,919 64,036 Other current assets and liabilities 816 4,317 6,538 ------------ ----------- ----------- Net cash provided (used) by operating activities (78,920) (105,631) 44,747 ------------ ----------- ----------- Cash flow from investing activities: Purchase of fixed assets and other assets (34,254) (23,164) (15,999) Proceeds from sale of fixed assets 540 2,127 59 Acquisition of businesses (774) (27,711) (9,064) Distribution of Priority Healthcare Corporation (2) ------------ ----------- ----------- Net cash used by investing activities (34,490) (48,748) (25,004) ------------ ----------- ----------- Cash flow from financing activities: Proceeds from sale of stock 26,795 14,741 4,260 Proceeds from IPO of subsidiary 29,982 Related party note receivable (3,228) Addition (reduction) of long-term debt, net (1,574) (1,823) 28,651 Proceeds under line of credit agreement 1,600,000 1,496,000 1,064,000 Payments under line of credit agreement (1,727,500) (1,401,000) (1,086,500) Proceeds from securitized borrowings 224,163 Payments to acquire treasury shares (6,754) (777) Dividends (1,633) (1,083) (938) ------------ ----------- ----------- Net cash provided by financing activities 113,497 132,812 9,473 ------------ ----------- ----------- Net increase (decrease) in cash 87 (21,567) 29,216 Cash at beginning of year 42,895 64,462 35,246 ------------ ----------- ----------- Cash at end of year $ 42,982 $ 42,895 $ 64,462 ============ =========== ===========
(See accompanying notes to consolidated financial statements) Consolidated Statements of Shareholders' Equity Bindley Western Industries, Inc. and Subsidiaries
Common Stock Treasury Stock ------------------------------------------ Note Additional Receivable Shares Shares Paid in From Retained Shareholders' Outstanding Amount Outstanding Amount Capital Officer Earnings Equity - ---------------------------------------------------------------------------------------------------------------------------------- (In thousands, except share data) Balances at December 31, 1995 14,199,805 $3,339 348,291 $ (3,150) $ 89,266 $109,962 $ 199,417 Net earnings 17,618 17,618 Dividends at $.08 per share (938) (938) Shares issued upon exercise of stock options 308,654 3 4,257 4,260 ----------- ------ ----------- -------- ---------- ---------- -------- ------------ Balances at December 31, 1996 14,508,459 3,342 348,291 (3,150) 93,523 126,642 220,357 Net earnings 24,506 24,506 Dividends at $.08 per share (1,083) (1,083) Shares issued upon exercise of stock options 1,123,109 12 14,730 14,742 Shares issued upon conversion of debt 3,394,147 34 67,460 67,494 IPO of subsidiary 24,405 (5,221) 19,184 IPO option grant 350 350 Note receivable from officer (3,228) (3,228) Purchase of treasury shares 32,651 (777) (777) ----------- ------ ----------- -------- ---------- ---------- -------- ------------ Balances at December 31, 1997 19,025,715 3,388 380,942 (3,927) 200,468 (3,228) 144,844 341,545 Net earnings 22,236 22,236 Dividends at $.08 per share (1,633) (1,633) Shares issued upon exercise of Stock options 1,346,049 14 26,781 26,795 Shares issued upon issuance of Restricted stock 350,000 4 12,334 12,338 Shares issued upon stock split 5,623,657 131,351 Distribution of Priority Healthcare (24,406) (34,494) (58,900) Purchase of treasury shares 176,868 (6,754) (6,754) ----------- ------ ----------- -------- ---------- ---------- -------- ------------ Balances at December 31, 1998 26,345,421 $3,406 689,161 $(10,681) $ 215,177 $ (3,228) $130,953 $ 335,627 =========== ====== =========== ======== ========== ========== ======== ============
(See accompanying notes to consolidated financial statements) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation. The consolidated financial statements include the accounts of Bindley Western Industries, Inc. and its subsidiaries ("BWI" or the "Company"). All significant intercompany accounts and transactions have been eliminated. Merger with Central Pharmacy Services, Inc. Effective August 31, 1999, BWI completed the merger with Central Pharmacy Services, Inc ("CPSI") by exchanging 2.9 million shares of BWI Common Stock for all of the Common Stock of CPSI. Each share of CPSI was exchanged for 26.38 shares of BWI Common Stock. In addition, outstanding CPSI employee stock options were converted at the same exchange factor into options to purchase approximately 300,000 shares of BWI Common Stock. The consolidated financial statements include CPSI for all periods presented. Revenue recognition. The Company differentiates sales as either brokerage type sales ("brokerage sales") or sales from the Company's inventory ("from stock sales"). Brokerage sales are made to the chain warehouse market, whereas from stock sales are made to both the chain warehouse and direct store delivery markets. Revenues are recorded at the time of shipment. Inventories. Inventories are stated on the basis of lower of cost or market using the first-in, first-out (FIFO) method. Fixed assets. Depreciation is computed on the straight-line method for financial reporting purposes. Accelerated methods are primarily used for income tax purposes. Assets, valued at cost, are generally being depreciated over their estimated useful lives as follows: Estimated useful life (years) Buildings and furnishings 5-35 Leasehold improvements 3-20 Transportation and other equipment 3-20 In the event facts and circumstances indicate an asset could be impaired, an evaluation of the undiscounted estimated future cash flows is compared to the asset's carrying amount to determine if a write-down is required. Debt issue costs. Debt issue costs are amortized on a straight-line basis over the life of the Convertible Subordinated Debentures ("Debentures"), which were redeemed on September 12, 1997, and the Senior Notes. Intangibles. The Company continually monitors its cost in excess of net assets acquired ("goodwill") and its other intangibles (customer lists and covenants not to compete) to determine whether any impairment of these assets has occurred. In making such determination, the Company evaluates the performance, on an undiscounted basis, of the underlying businesses which gave rise to such amounts. Goodwill is being amortized on the straight-line method over periods not exceeding 40 years. Other intangibles are being amortized on the straight-line method over five to 15 years. Earnings per share. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Basic earnings per share is based on the weighted average number of common shares outstanding during each period. The diluted earnings per share is based on the weighted average number of common shares and dilutive potential common shares outstanding during each period. All periods presented have been restated to conform with the requirements of SFAS 128. See Note 17 for a reconciliation of earnings per share. Income taxes. In accordance with the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," the Company accounts for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax bases and financial reporting bases of the Company's assets and liabilities. Use of estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates made by management. Actual results could differ from those estimates. Fair value of financial instruments. The carrying values of cash, accounts receivable, other current assets, short-term borrowings, accounts payable and other current liabilities approximate their fair market values due to the short- term maturity of these instruments. The fair market value of long term debt was determined based on market quoted rates or was estimated using rates currently available to the Company for debt with similar terms and maturities. Other income. Other income for 1998, 1997 and 1996 was substantially all interest income and gains on the sale of assets. Prior year reclassifications. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. NOTE 2 - DISTRIBUTION OF PRIORITY HEALTHCARE CORPORATION On December 31, 1998, the Company distributed to the holders of the Company's Common Stock all of the 10,214,286 shares of Priority Healthcare Corporation ("Priority") Class A Common Stock owned by the Company on the basis of .448 shares Priority Class A Common Stock for each share of BWI Common Stock outstanding on the record date, December 15, 1998. As a result of the distribution, Priority ceased to be a subsidiary of the Company as of December 31, 1998. The dividend distribution of $58.9 million represents the Company's ownership interest in the net assets of Priority. The spin-off resulted in the removal of $107.5 million of assets and $37.2 million of liabilities from the Company's Consolidated Balance Sheet as of December 31, 1998. The results of operations for Priority, net of minority interest, for the year ended December 31, 1998 are included in the Company's Consolidated Statement of Earnings as Priority was a subsidiary for the full year of 1998. Summary Statement of Earnings data for Priority is presented in Note 3 below. NOTE 3 - OPERATING SEGMENTS In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", was issued effective for fiscal years ended after December 15, 1998. The Statement designates the internal management accountability structure as the source of the Company's reportable segments. The statement also requires disclosures about products and services, geographic areas and major customers. The adoption of this standard did not affect results of operations or financial position but did affect the disclosure of segment information. Prior to 1998, the Company operated as one industry segment. The 1996 and 1997 information presented below has been restated in order to conform to the current year presentation. Giving effect to the CPSI merger, the Company has three reportable segments, BWI, Priority and Nuclear Pharmacy, which conduct substantially all of their business within the United States. The BWI segment specializes in the distribution of pharmaceuticals and related health care products to chain drug companies which operate their own warehouses, individual drug stores, supermarkets and mass retailers with their own pharmacies, hospitals, clinics, HMOs, state and federal government agencies and other health care providers. The Priority segment distributes specialty pharmaceuticals and related medical supplies to the alternate site healthcare market and is a provider of patient- specific, self-injectable biopharmaceuticals and disease treatment programs to individuals with chronic diseases. The Nuclear Pharmacy segment prepares and delivers unit dose radiopharmaceuticals for use in nuclear imaging procedures in hospitals and clinics. During 1998, approximately 79% of CPSI's purchases of pharmaceuticals were from three vendors accounting for 42%, 24% and 13% of CPSI's cost of sales for the year ended 1998. The significant customers reported in Note 14 are all sold through the BWI segment. These segments have separate management teams and infrastructures to facilitate their specific customer needs and marketing strategies. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The intersegment sales and transfers are not significant. As discussed in Note 2, Priority ceased to be a subsidiary of the Company as of December 31, 1998 and, therefore, their assets, liabilities and equity are not included in the Company's December 31, 1998 Consolidated Balance Sheet. Segment information for the years ended 1998, 1997 and 1996 was as follows:
Nuclear BWI Priority Pharmacy Total 1998 Revenues $7,345,726 $275,626 $32,869 $7,654,221 Interest expense 18,310 155 183 18,648 Depreciation and amortization 7,179 1,234 481 8,894 Unusual items 18,833 18,833 Segment net earnings 8,996 10,143 3,097 22,236 Total assets 1,286,575 7,382 1,293,957 Capital expenditures 32,636 905 713 34,254 1997 Revenues $7,078,940 $230,982 $24,215 $7,334,137 Interest expense 15,907 285 16,192 Depreciation and amortization 6,270 1,161 731 8,162 Segment net earnings 17,595 6,151 760 24,506 Total assets 1,196,051 91,728 5,165 1,292,944 Capital expenditures 21,916 727 521 23,164 1996 Revenues $5,159,279 $158,247 $17,955 $5,335,481 Interest expense 12,992 256 13,248 Depreciation and amortization 5,710 1,009 668 7,387 Segment net earnings 13,637 4,369 (388) 17,618 Total assets 883,986 57,220 5,079 946,285 Capital expenditures 15,176 405 418 15,999
NOTE 4 - SHORT-TERM BORROWINGS The Company's short-term bank line of credit was $174,500,000 as of December 31, 1998. The line was available, as necessary, for general corporate purposes at rates based upon prevailing money market rates. At December 31, 1998, 1997 and 1996, the Company had borrowed on its short-term line of credit $19,500,000 at a rate of 5.4%, $147,000,000 at a rate of 6.6% and $52,000,000 at a rate of 6.4%, respectively. No compensating balance is required on the line. Certain conditions relating to the maintenance of working capital, net worth and corporate existence have been imposed by the lenders. A summary of 1998, 1997 and 1996 borrowings under the line of credit is as follows:
Maximum short-term Average Average Year borrowings borrowings Interest rate - -------------------------------------------------------------------------------------------------- (in thousands) 1998 $338,000 $249,000 6.3% 1997 $270,000 $152,000 6.4% 1996 $192,000 $119,000 6.4%
On December 27, 1996, the Company completed a private placement of $30 million Senior Notes due December 27, 1999 at an interest rate of 7.25%. The Company estimates the fair market value at December 31, 1998 approximates the principal amount based on rates currently available to the Company for debt with similar terms and maturities. In December 1998, the Company established a receivables securitization facility (the "Receivables Facility") pursuant to which the Company sells substantially all of its receivables arising in connection with the sale of goods or the rendering of services ("Receivables") to Bindley Western Funding Corporation ("Funding Corp."), a wholly owned special purpose corporation subsidiary. The Receivables are sold to Funding Corp. on a continuous basis, and the cash generated by sales of interests in the Receivables or by collections on the Receivables retained is used by Funding Corp. to, among other things, purchase additional Receivables originated by the Company. The assets of Funding Corp. will be available first and foremost to satisfy claims of Funding Corp. creditors. In connection with the Receivables Facility, Funding Corp. entered into a Receivables Purchase Agreement, dated as of December 28, 1998, with Falcon Asset Securitization Corporation ("Falcon"), an affiliate of The First National Bank of Chicago ("First Chicago"), certain other financial institutions (collectively with Falcon, the "Purchasers"), and First Chicago, as Agent. Pursuant to the Receivables Purchase Agreement, Funding Corp. may, from time to time, sell interests in the Receivables ("Receivables Interests") to the Agent for the benefit of the Purchasers. Each Receivables Interest has an associated Discount Rate and Tranche Period applicable to it, as selected by Funding Corp. The Discount Rate may, at Funding Corp.'s election, be the Base Rate (the corporate prime or base rate announced from time to time by First Chicago) or, with respect to the Receivables Interests purchased by Falcon, the CP Rate (generally, a commercial paper related rate based on Falcon's funding charges) or, with respect to the Receivables Interests purchased by other Purchasers, the LIBO Rate (generally, LIBOR for the applicable Tranche Period, plus 1/25% per annum). The Receivables Facility terminates on December 27, 1999, and is subject to final termination on December 28, 2003, subject to earlier termination in certain events. At December 31, 1998, there were $224 million of Receivables Interests outstanding, bearing a Discount Rate of 5.5% per annum. The Company accounts for the Receivables Facility as a financing transaction in its consolidated financial statements. The agreement requires the Company to take a number of actions to administer Bindley Western Funding Corporation as a separate legal entity such as maintaining clearly identified offices, books and records and other administrative procedures. Since the agreement was not executed until December 28, 1998, certain of these administrative matters were not yet completed. While the Company was in technical noncompliance with certain provisions of the agreement at December 31, 1998, management intends to expeditiously implement all required provisions in early 1999. CPSI's working capital line of credit agreement with a bank, as amended on April 8, 1999, allows CPSI to borrow up to $3,500,000. Amounts borrowed under this agreement bear interest at the bank's prime rate (7.75% at December 31, 1998) and are due on April 7, 2000. The line of credit agreement contains various covenants which place restrictions on the CPSI's current ratio, indebtedness and operating cash flows. Amounts borrowed under this agreement are secured by CPSI's assets. As of December 31, 1998 and 1997, there was no outstanding balance on this line of credit. NOTE 5 - FIXED ASSETS
December 31, 1998 1997 - ----------------------------------------------------------------- (in thousands) Land $ 6,749 $ 6,321 Buildings and furnishings 52,633 34,050 Leasehold improvements 2,907 2,765 Transportation and other equipment 59,561 48,484 -------------------------- 121,850 91,620 Less: Accumulated Depreciation (27,660) (22,933) -------------------------- $ 94,190 $ 68,687 ==========================
NOTE 6- INTANGIBLES
December 31, 1998 1997 - ----------------------------------------------------------------- (in thousands) Goodwill $ 23,537 $ 35,826 Accumulated amortization (5,424) (5,888) -------------------------- Goodwill, net 18,113 29,938 Other 3,179 13,744 Accumulated amortization (1,891) (7,971) -------------------------- Other, net 1,288 5,773 -------------------------- Intangibles, net $ 19,401 $ 35,711 ==========================
In performing the review for impairment on the intangible assets related to Priority Healthcare Services, the Company determined that the loss of key personnel as part of the distribution of Priority and the recent and projected operating results and cash flows were not adequate to support the recorded amount. In the fourth quarter of 1998, the Company wrote off approximately $6 million in goodwill and $2 million in other intangibles, which is presented in the Consolidated Statement of Earnings as part of the unusual items caption. Priority Healthcare Services is a component of the BWI segment. The remainder of the reduction is the result of the distribution of Priority at December 31, 1998. NOTE 7 - RELATED PARTY TRANSACTIONS At December 31, 1998 and 1997, the Company held a note receivable with a principal balance of $3.2 million from the Chief Executive Officer of the Company in connection with his exercise of stock options granted to him under the 1993 Stock Option and Incentive Plan. This note, which bears interest at 6.5% per annum, matures on December 16, 2000 and provides for annual interest only payments, beginning in 1998, with outstanding interest and principal to be repaid at maturity. In 1998, other income includes $200,000 of interest income related to this note. At December 31, 1998, the Company owed Priority $16.5 million. This amount is due on demand and represents loans of excess cash balances of Priority to the Company on a short-term basis, bearing interest at the Company's average incremental borrowing rate. At December 31, 1998, the incremental borrowing rate was 6.3%. NOTE 8 - INCOME TAXES The provision for income taxes includes state income taxes of $3,320,000, $2,706,000 and $2,092,000 in 1998, 1997 and 1996, respectively. The following table indicates the significant elements contributing to the difference between the U.S. federal statutory tax rate and the effective tax rate:
Year ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Percentage of earnings before taxes: U.S. federal statutory rate 35.0% 35.0% 35.0% State and local taxes on income, net of Federal income tax benefit 5.0% 4.4% 4.4% Nondeductible element of restricted stock grants 5.7% CPSI utilization of NOL carryforwards (2.3%) (.8%) Other .7% .4% 2.8% ------------------------------ Effective rate 44.1% 39.0% 42.2% ================================
Presented below are the significant elements of the net deferred tax balance sheet accounts at December 31, 1998 and 1997:
Deferred tax assets: 1998 1997 ------ ------ Current: Accounts receivable $ 6,635 $ 6,573 Inventories 1,371 977 Deferred compensation 2,382 848 Other, net 1,164 1,128 -------------------- Subtotal 11,552 9,526 Long-term: Acquired net operating loss benefits 368 425 Intangibles 2,474 206 -------------------- Subtotal 2,842 631 -------------------- Total deferred tax assets $14,394 $10,157 ==================== Deferred tax liabilities: Current $ $ Long-term: Fixed assets $ 5,897 $ 4,129 Intangibles 639 Other, net 32 25 -------------------- Subtotal 5,929 4,793 -------------------- Total deferred tax liabilities $ 5,929 $ 4,793 ====================
In connection with the acquisition of Goold, the Company acquired federal net operating loss carryforwards of $2.3 million. Due to certain tax law limitations, annual utilization of the carryforward is limited to $163,000. The remaining tax loss carryforward at December 31, 1998 is $1.2 million. The carryover period expires in 2006. Prior to the merger between BWI and CPSI, the respective companies' income tax returns were filed separately from each other. In its 1998 and 1997 returns, CPSI utilized $1,385,000 and $935,000, respectively, of net operating loss carryforwards. At December 31, 1998, CPSI had utilized all of its NOL carryforwards. NOTE 9 - LONG-TERM DEBT The long-term debt at December 31, 1998 is substantially comprised of a mortgage obligation. In 1997, the balance included a private placement of $30 million Senior Notes due December 27, 1999 which was classified in short-term borrowings as of December 31, 1998. The remaining balance in 1997 related to mortgage obligations, and certain other obligations related to the purchases of Nu-Scan, Inc. and the IV One Companies and Priority Healthcare Services Corporation. The remaining $1.2 million obligation, which related to the purchase of Priority Healthcare Services, was included as a reduction of the fourth quarter unusual items charge resulting from the litigation settlement agreement on December 31, 1998. On September 24, 1992 and October 20, 1992, the Company concluded a public offering of $65,000,000 and $2,350,000, respectively, of 6 1/2% Convertible Subordinated Debentures, due 2002, for approximately $65,565,000, net of underwriting and other costs. On August 27, 1997, the Company called for redemption on September 12, 1997 all of these Debentures at a redemption price of $1,039 per $1,000 principal amount of Debentures plus accrued interest through the redemption date. Debenture holders could elect to convert their debentures into shares of common stock of the Company through September 12, 1997. Holders of all but $119,000 principal amount of the $67,350,000 outstanding Debentures elected to convert their Debentures into common stock at the rate of 50.4 shares of common stock for each $1,000 principal amount of Debentures. The redemption reduced the Company's long-term debt by $67,350,000 and increased by 3.4 million the number of issued shares of the Company's common stock. NOTE 10 - PROFIT SHARING PLAN The Company and its subsidiaries maintain a qualified Profit Sharing Plan ("Profit Sharing Plan") for eligible employees. All employees are generally eligible to participate in the Profit Sharing Plan as of the first January 1, April 1, July 1 or October 1 after having completed at least one year of service (as defined in the Profit Sharing Plan) and having reached age 21. The annual contribution of the Company and its subsidiaries to the Profit Sharing Plan is at the discretion of the Board and is generally 8% of the Participant's compensation for the year. The employer contribution for a year is allocated among the Participants employed on the last day of the year in proportion to their relative compensation for the year. The Company's contributions to the plan for the years ended December 31, 1998, 1997 and 1996 were $1,785,000, $1,576,000 and $1,334,600, respectively. Subject to limitations imposed by the Internal Revenue Code, a Participant may have a percentage of his or her compensation withheld from pay and contributed to the Profit Sharing Plan and make "rollover" contributions to the Profit Sharing Plan of qualifying distributions from other employers' qualified plans. A Participant's interest in amounts withheld from his or her pay and contributed to the Profit Sharing Plan or in rollover contributions and in the earnings on those amounts are fully vested at all times. A Participant's interest in employer contributions made on his or her behalf and the earnings on those contributions become 20% vested after three years of service and an additional 20% vested during each of the next four years. A Participant's interest in employer contributions made on his or her behalf and the earnings on those contributions will also become fully vested when the employee retires at age 65 or older, dies or becomes totally disabled. All contributions to the Profit Sharing Plan are paid in cash to a trustee bank, as trustee, and are invested by the trustee until distributed to Participants or their beneficiaries. Participants are permitted to direct the trustee as to the investment of their accounts by choosing among several investment funds that are offered under the Profit Sharing Plan, including one fund consisting of common stock of the Company. Participants may elect to invest in one fund or a combination of the available funds according to their investment goals. If a Participant does not make an investment election, his or her Profit Sharing Plan accounts will be invested in a fund designated by the Company. Effective July 1, 1993, CPSI adopted the Central Pharmacy Services, Inc. 401(k) Plan (the "Plan"), a defined contribution plan which qualifies under Section 401(k) of the Internal Revenue Code. All employees of the Company are eligible to participate in the Plan after one year of service. Participants may contribute up to 20% of their base salaries to the Plan, and the company will match 100% of the participants' contributions up to 2% of their base salaries. Contibutions to the Plan were approximately $90,000, $71,000, and $40,000 for the years ended December 31, 1998, 1997, and 1996, respectively. NOTE 11 - MINORITY INTEREST On October 29, 1997, the Company consummated an initial public offering ("IPO") of its Priority Healthcare Corporation ("Priority") subsidiary. Priority registered 2,300,000 shares of Class B Common Stock, all of which were sold in a firm commitment underwriting at an aggregate offering price of $33.35 million. After underwriters' discount of $2.32 million and expenses incurred in conjunction with the IPO of $1.05 million, the net offering proceeds to Priority were approximately $29.98 million. The Priority IPO resulted in the establishment of minority interest of $11 million, which represents the minority shareholders' interest in shareholders' equity of Priority, and an increase of $19.2 million in the Company's additional paid in capital, which represents the Company's incremental share of Priority's shareholders' equity, both at October 29, 1997. See Note 2 for discussion of the Company's distribution of Priority. NOTE 12 - CAPITAL STOCK On June 25, 1999, a 4-for-3 stock split was paid in the form of a stock dividend to shareholders of record at the close of business on June 11, 1999. Earnings per share and related earnings per share disclosures in Notes 17 and 18 for all years presented herein have been restated to give effect to this stock split. The Company's capitalization consists of 53,333,333 authorized shares of Common Stock, giving effect to the aforementioned 1999 stock split and 1,000,000 authorized shares of Special Stock. Both the Common Stock and Special Stock have a $.01 par value per share. On June 3, 1999, a 4-for-3 stock split was effected in the form of a stock dividend to shareholders of record at the close of business on May 21, 1998. Prior to May 20, 1993, the Company had a 1983 Incentive Stock Option Plan, a 1983 Nonqualified Option Plan, and a 1987 Stock Option and Incentive Plan. The number of shares available for issuance pursuant to such plans aggregated 2,500,000 shares. Incentive stock options, granted at a minimum of 100% of fair market value, and nonqualified stock options, granted at a minimum of 85% of fair market value, both exercisable for up to 10 years from the date of grant, were authorized under such plans. On May 20, 1993, the Company's shareholders approved the 1993 Stock Option and Incentive Plan (the "1993 Plan") authorizing 1,000,000 shares of the Company's common stock for sale or award to officers and key employees (including any such officer or employee who holds at least 10% of the Company's common stock) as stock options or restricted stock. Options generally become exercisable over a one to four year period following date of grant and expire 10 years following date of grant. No further awards will be made from the shares of common stock that remained available for grants under the prior stock option plans. On May 19, 1994, the Company's shareholders approved amendments to the Company's 1983 Incentive Stock Option Plan, the 1983 Nonqualified Stock Option Plan, the 1987 Stock Option and Incentive Plan and the 1993 Plan to permit the Company's Compensation and Stock Option Committee of the Board of Directors ("Committee") to allow participants under these plans, including the holders of outstanding options, to exercise an option during its term following cessation of employment by reason of death, disability or retirement. Such amendments also permitted the Committee, in its sole discretion, to change the exercise and termination terms of options granted if such changes are otherwise consistent with applicable federal and state laws. In addition, the 1993 Plan was amended to (i) increase from 1,000,000 to 1,500,000 the number of shares authorized for issuance pursuant to awards made under the 1993 Plan; (ii) limit to 100,000 shares the number of shares that any one participant may receive under the 1993 Plan during any calendar year; and (iii) provide that the Board of Directors may amend the 1993 Plan in any respect without shareholder approval, unless such approval is required to comply with Rule 16b-3 under the Securities Exchange Act of 1934 or Section 422 of the Internal Revenue Code of 1986. On May 16, 1996, the Company's shareholders approved an amendment to the 1993 Plan to increase to 3,000,000 the number of shares authorized for issuance pursuant to awards made under the 1993 Plan. At the May 21, 1998 annual shareholders meeting, the Company's shareholders approved an amendment to the 1993 Plan to (i) increase to 4,000,000 (now restated to 5,333,332 as a result of the stock split and to 7,821,973 as a result of the spin-off of Priority, each restatement made pursuant to an anti-dilution provision contained in the 1993 Plan) the number of shares authorized for issuance pursuant to awards made under the 1993 Plan and (ii) increase to 300,000 the number of shares that any one participant may receive under the 1993 Plan during any calendar year. On May 14, 1991, the Company's shareholders approved the Outside Directors Stock Option Plan (the "Directors Plan"). Each eligible director is automatically granted an option to purchase 1,000 shares of the Company's common stock on June 1 of each year beginning in 1991. The option exercise price per share is 85% of the fair market value of one share of common stock on the date of grant. Each option becomes exercisable six months following the date of grant and expires 10 years following the date of grant. On December 11, 1998, the Company's Board of Directors adopted the 1998 Non-Qualified Stock Option Plan (the "1998 Non-Qualified Plan"), which reserves for issuance 600,000 shares of the Company's common stock held by the Company as treasury shares. The 1998 Non-Qualified Plan provided for the grant of nonqualified stock options to employees who are not officers or directors of the Company or its affiliates. Under the 1998 Non-Qualified Plan, no individual participant may receive awards for more than 50,000 shares in any calendar year. The CPSI 1993 Stock Option Plan (the "CPSI Option Plan") provided for the issuance of options to employees of CPSI for the purchase of shares of CPSI's common stock. Options were issued with exercise prices equal to or in excess of the fair market value of CPSI's common stock, as determined by CPSI's Board of Directors, on the date of grant. Vesting and terms of all options are determined by CPSI's Board of Directors and may vary by optionee; however, the term may be no longer than 10 years from the date of grant. In accordance with the terms of the merger between BWI and CPSI, all options outstanding under the CPSI plan vested at the date of the merger. Furthermore, all such outstanding CPSI options were converted to BWI options pursuant to the terms of the merger which, in essence, provided that such options would be converted based on the calculated "in-the-money" amounts and exercise price to fair market value ratios at the time of the merger. Additionally, in accordance with the terms of the merger, no further options can be issued from the CPSI Option Plan subsequent to the merger. On August 25, 1997, Priority's Board of Directors and the then sole shareholder (the Company) adopted Priority's 1997 Stock Option and Incentive Plan (the "1997 Stock Option Plan"). The 1997 Stock Option Plan reserves for issuance 1,250,000 shares of Priority Class B Common Stock, subject to adjustment in certain events. The 1997 Stock Option Plan provides for the grant of options to purchase shares of Class B Common Stock and restricted shares of Class B Common Stock to officers, key employees and consultants of Priority. Stock options granted under the 1997 Stock Option Plan may be either options intended to qualify for federal income tax purposes as "incentive stock options" or options not qualifying for favorable tax treatment ("nonqualified stock options"). No individual participant may receive awards for more than 300,000 shares in any calendar year. Also on August 25, 1997, Priority's Board of Directors and the then sole shareholder (the Company) adopted Priority's Outside Directors Stock Option Plan ("the Priority Directors Plan"). The number of shares of Priority's Class B Common Stock authorized for issuance pursuant to the Priority Directors Plan is 25,000. Each eligible director is automatically granted an option to purchase 1,000 shares of Priority's Class B Common Stock on June 1 of each year beginning in 1998. The option exercise price per share is equal to the fair market value of one share of Class B Common Stock on the date of grant. Each option becomes exercisable six months following the date of grant and expires 10 years following the date of grant. On September 15, 1998, Priority's Board of Directors adopted the Broad Based Stock Option Plan, which reserves for issuance 400,000 shares of Priority Class B Common Stock. The Broad Based Stock Option Plan provides for the grant of nonqualified stock options to key employees who are not officers or directors of Priority or its affiliates. The number of shares which may be granted under the Broad Based Plan during any calendar year shall not exceed 40,000 shares to any one person. 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, 1998 1997 1996 - ----------------------------------------------------------------------------- (In thousands, except share data) Net earnings - as reported $ 22,236 $ 24,506 $ 17,618 Net earnings - pro forma $ 18,946 $ 21,971 $ 15,631 Earnings per share Basic - as reported .70 .95 .76 Basic - pro forma .60 .85 .68 Diluted - as reported .66 .83 .67 Diluted - pro forma .57 .75 .60
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31:
1998 1997 1996 ----------------------------------------- Company Options Risk free interest rates 5.31% 5.71% 6.05% Expected dividend yields .16% .26% .41% Expected life of options 4.34 4.66 4.60 Volatility of stock price 28.85% 27.23% 29.43% Weighted average fair value of options $ 9.34 $ 10.16 $ 6.20 Priority Options Risk free interest rates 5.02% 5.90% Expected dividend yields .00% .00% Expected life of options 4.71 4.60 Volatility of stock price 55.94% 54.79% Weighted average fair value of options $ 9.65 $ 7.52
Compensation expense based on the fair value of options granted prior to January 1, 1995 was not included in the preceding pro forma calculations. Therefore, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Changes in stock options under the Company's plans are shown below, (All historical shares and per share amounts have been restated to reflect the 4-for- 3 stock split):
Number of Option price per shares share - -------------------------------------------------------------------------------- Options outstanding at December 31, 1995 4,152,105 $ .59 to $14.54 Forfeited during 1996 (95,252) $ .59 to $13.59 Granted during 1996 1,185,777 $ .59 to $15.06 Exercised during 1996 (411,537) $ 4.07 to $13.22 ----------- Options outstanding at December 31, 1996 4,831,093 $ .59 to $15.06 Forfeited during 1997 (60,132) $ .59 to $17.72 Granted during 1997 1,174,532 $ .59 to $23.63 Exercised during 1997 (1,413,161) $ .59 to $15.06 ----------- Options outstanding at December 31, 1997 4,532,332 $ .59 to $23.63 Forfeited during 1998 (157,175) $ .59 to $28.45 Granted during 1998 32,557 $ .59 to $31.94 Exercised during 1998 (1,467,011) $ .59 to $23.63 ----------- Options outstanding at December 31, 1998 2,940,703 $ .59 to $31.94 Effect of Spin-off of Priority Healthcare (1) 2,394,938 ----------- Converted options outstanding at December 31, 1998 5,335,641 $ .59 to $16.86 ===================================== Exercisable at December 31, 1998 3,398,544 $ .59 to $12.47 ===================================== Available for grant at December 31, 1998 1,409,763 ===========
(1) As a result of the spin-off of Priority, in order to preserve the economic value of the outstanding stock options, effective after the close of business on December 31, 1998, all such outstanding options were converted pursuant to anti- dilution provisions contained in the various stock option plans. As these options were converted in accordance with accounting principles issued by the Financial Accounting Standards Board, no compensation expense was recorded as a result of such conversion. In certain cases, the exercise of stock options results in state and federal income tax deductions to the Company on the difference between the market price at the date of exercise and the option price. The tax benefits obtained from these deductions are included in additional paid in capital. Additional information regarding the Company's options outstanding at December 31, 1998 is shown below:
Exercise Price Range - -------------------------------------------------------------------------------- $.59-$6.98 $7.18-$9.97 $11.06-$16.86 Total - -------------------------------------------------------------------------------- Number of options Outstanding 2,532,018 1,019,408 1,784,215 5,335,641 Weighted average exercise price $ 5.36 $ 7.25 $ 12.49 $ 8.10 Weighted average remaining contractual life 5.89 7.96 8.96 7.31 Number of shares exercisable 2,044,649 580,677 773,218 3,398,544 Weighted average exercisable price $ 5.60 $ 7.26 $ 12.44 $ 7.44
Changes in stock options under all of Priority's plans are shown below:
Number of Option price per share shares - ------------------------------------------------------------------------------- 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 =========
During 1998, the Company issued 350,000 (restated to 466,667 to reflect the stock split) restricted stock grants to certain key executives with a grant date fair value of $35.25 per share. Pending the lapse of the forfeiture and transfer restrictions established by the Compensation and Stock Option Committee, the grantee generally will have all the rights of a shareholder, including the right to vote the shares and the right to receive all dividends thereon. Upon issuance of the restricted stock grants, unearned compensation equivalent to the market value at the date of grant was recorded as unamortized value of restricted stock and is being charged to earnings over the period during which the restrictions lapse. Compensation expense related to these restricted stock grants of $1.6 million was recorded in the first nine months of 1998. The remaining $11.1 million was recorded in the fourth quarter as part of the unusual items when the lapse of the forfeiture and transfer restrictions on the restricted stock was accelerated by the Compensation and Stock Option Committee. NOTE 13 - COMMITMENTS The Company leases warehouse and office space under noncancelable operating leases expiring at various dates through 2004, with options to renew for various periods. Minimum commitments under leases aggregate $2,260,000 for 1999, $1,996,000 for 2000, $1,536,000 for 2001, $1,071,000 for 2002 and $777,000 for 2003. The consolidated rent expense for the years ended December 31, 1998, 1997 and 1996 was $2,961,000, $2,615,000 and $1,941,000, respectively, of which none pertained to leases of one year or less for 1998 and approximately $1,034,000 in 1997 and $209,000 in 1996 which pertained to leases with terms of one year or less. In 1998, the Company completed construction of a new 180,000 square foot, five-story office building in Indianapolis, Indiana. This building provides space for the accounting, human resources, information systems, purchasing and sales and marketing departments, along with the Company's executive offices and related staff. Subject to favorable market conditions, the Company through its wholly-owned subsidiary, College Park Plaza Associates, Inc., intends to sell the building to a third party and then lease back the top two floors. In 1998, the Company entered into operating lease agreements for the bottom three floors of the newly constructed office building in Indianapolis, Indiana. The rental income received in 1998 was immaterial. Minimum future rentals on noncancelable leases aggregate $1,268,000 for 1999 and $1,506,000 per year for 2000, 2001, 2002 and 2003. NOTE 14 - MAJOR CUSTOMERS The BWI segment services customers in 37 states and Puerto Rico from its 14 distribution centers located in 13 states. The Nuclear Pharmacy segment operates specialized pharmacies in 13 states. The principal customers of the BWI segment are chain drug companies that operate their own warehouses. Other customers include independent drug stores, chain drug stores, supermarkets and mass merchandisers with their own pharmacies, hospitals, clinics, HMOs, state and federal government agencies and other health care providers. The following chain drug warehouse customers each accounted for over 10% of the Company's net sales during the years shown: Eckerd Corporation (18%) and CVS (17%) in 1998; CVS (22%), Rite Aid Corporation (18%) and Eckerd Corporation (16%) in 1997; and Eckerd Corporation (17%), Rite Aid Corporation (14%) and Revco D.S., Inc. (12%) in 1996. Sales to these customers aggregated 35%, 56% and 43% of net sales in 1998, 1997 and 1996, respectively. The Company sells inventory to its chain drug warehouse and other customers on various payment terms. This entails accounts receivable exposure, especially if any of its chain warehouse customers encounter financial difficulties. Although the Company monitors closely the creditworthiness of its major customers and, when feasible, obtains security interests in the inventory sold, there can be no assurance that the Company will not incur the write-off or writedown of chain drug accounts receivable in the future. During the second quarter of 1998, Rite Aid informed the Company that Rite Aid signed a supply agreement with another wholesaler that began in May 1998. In 1997, Rite Aid comprised 18% of the Company's sales. Sales to Rite Aid were predominantly to their warehouses. The loss of this customer did not have a material adverse impact on the Company's results of operations. NOTE 15 - STATEMENT OF CASH FLOWS Cash paid for interest expense and income taxes was as follows:
December 31, 1998 1997 1996 (in thousands) Interest $20,330 $14,697 $13,126 Income taxes $15,017 $16,935 $13,640
Presented below is a brief discussion of recent acquisitions by the Company. The purchase price has been allocated based on a determination of the fair value of the assets acquired and liabilities assumed. The goodwill associated with these acquisitions is being amortized on a straight line basis not exceeding 40 years. All acquisitions were treated as purchases and the financial statements include the results of operations from the respective effective date of acquisition. Results of operations of the acquired companies from January 1 of the year of acquisition to the effective dates of the transactions are not material to the consolidated results of operations of the Company for the respective years. In January 1996, the Company formed a new subsidiary, National Infusion Services, Inc. ("NIS"). Effective February 8, 1996, the Company through its NIS subsidiary purchased the assets of the infusion services division of Infectious Disease of Indiana P.S.C. NIS is a provider of quality care to patients in a variety of settings. In February 1997, the corporate name was changed from NIS to Priority Healthcare Services Corporation. The Company acquired the assets of NIS for approximately $9 million in cash and incurred a long-term obligation of approximately $1.5 million, resulting in approximately $9.8 million in intangible assets. As discussed in Note 6 and Note 9 above, the remaining balance of the intangible assets and the long-term obligation were written off as part of the unusual items caption in the fourth quarter of 1998. Effective July 31, 1997, the Company purchased substantially all of the operating assets and assumed most of the liabilities and contractual obligations of Tennessee Wholesale Drug Company ("TWD"). The Company expended approximately $27 million for the acquisition of TWD, which approximated the fair value of the net assets acquired. During 1998, the Company closed the TWD divisions located in Baltimore, Maryland and Tampa, Florida. The customers of these divisions are serviced from existing facilities. The Company recognized a liability related to the closure of the facilities of $413,000 as of December 31, 1997. The Company offered all employees an opportunity to interview for openings elsewhere in the Company and agreed to pay a lump sum relocation cost to those that relocated. Employees who did not relocate and worked up to the designated date of his/her separation of employment received a benefits and compensation package based on his or her tenure with the Company. The plan also included operational and data processing costs associated with the closure. Both facilities were closed in 1998 and the costs associated with those closures were paid and approximated the liability established. Effective August 6, 1997, Priority acquired substantially all of the operating assets and assumed most of the liabilities of Grove Way Pharmacy, Inc., a specialty distributor of vaccines and injectables located in Castro Valley, California. The amount expended approximated the fair value of the net assets acquired. In 1997, CPSI acquired certain assets and assumed certain liabilities of Nu-Scan, Inc., Sholars Drugs, Inc. and Alpha Nuclear Pharmacy, Inc. Aggregate consideration for these transactions was approximately $666,000, consisting of approximately $441,000 in cash (including $25,000 paid in 1998) and a note payable for $225,000. CPSI recorded $60,000 as noncompete agreements in accordance with the terms of the asset purchase and other related agreements. The remainder of the excess of the cost over the fair value of net assets acquired of approximately $612,000 has been recorded as goodwill and is being amortized on a straight-line basis over 20 years. In December 1998, CPSI acquired the remaining interest in its 50% owned affiliate, Central Source Pharmacy Services, LLC for cash consideration of approximately $877,000. The excess of cost over the fair value of net assets acquired of approximately $780,000 has been recorded as goodwill and is be amortized on a straight-line basis over 20 years. NOTE 16 - LEGAL PROCEEDINGS The Company is a defendant in a consolidated class action filed in the United States District Court for the Northern District of Illinois in 1993 which names the Company, other pharmaceutical wholesalers and pharmaceutical manufacturers as defendants, In re Brand Name Prescription Drugs Litigation, MDL 997. Plaintiffs allege that pharmaceutical manufacturers and wholesalers conspired to fix prices of brand-name prescription drugs sold to retail pharmacies at artificially high levels in violation of the federal antitrust laws. The plaintiffs seek injunctive relief, unspecified treble damages, costs, interest and attorneys' fees. The Company has denied the complaint allegations. Several of the manufacturer defendants and the class plaintiffs have reached settlement agreements. The trial against the remaining defendants, including the Company, began on September 14, 1998. On November 30, 1998, the Court granted all remaining defendants' motions for judgments as a matter of law, dismissing all class claims against the Company and other defendants. The class plaintiffs' appeal of the Court's ruling is pending. At this time, the Company is a defendant in 115 additional cases brought by plaintiffs who "opted out" of the federal class action described above. One hundred eleven of these complaints contain allegations and claims for relief that are substantially similar to those in the federal class action. The four remaining complaints add allegations that the defendants' conduct violated state law. The damages period in these cases begins in October 1993. The Company has denied the allegations in all of these complaints. On November 20, 1997, two additional complaints were filed in the MDL 997 proceeding by Eckerd Corporation and American Drug Stores naming certain pharmaceutical manufacturers and wholesalers, including the Company, as defendants. These complaints contain allegations and claims for relief that are substantially similar to those in the federal class action. The Company has denied the allegations in these complaints. On July 1, 1996, the Company and several other wholesalers were joined as the defendants in a seventh amended and restated complaint filed in the Circuit Court of Greene County, Alabama, Durrett v. The Upjohn Company, Civil Action No. 94-029. The case was first filed in 1994. The plaintiffs claim the prices of prescription drugs they purchase in interstate commerce are artificially high because of alleged illegal activities of the defendant pharmaceutical manufacturers and wholesalers. The plaintiffs seek monetary damages, injunctive relief and punitive damages. The Company has denied the allegations of the complaint. On June 16, 1998, a suit was filed in the Circuit Court for Cocke County, Tennessee purportedly on behalf of consumers of prescription drugs in the following states: Tennessee, Alabama, Arizona, Florida, Kansas, Maine, Michigan, Minnesota, New Mexico, North Carolina, North Dakota, South Dakota, West Virginia and Wisconsin. Graves et al. v. Abbott Laboratories et al., Civil Action No. 25,109-00. The complaint charges that pharmaceutical manufacturers and wholesalers, including the Company, engaged in a price-fixing conspiracy in violation of the Tennessee's Trade Practices Act and Consumer Protection Act, and the unfair or deceptive trade practices statutes of the other jurisdictions named therein. The Company has denied the allegations of the complaint. On October 21, 1994, the Company entered into an agreement with the other wholesalers and pharmaceutical manufacturers covering all of the cases listed above. Among other things, the agreement provides that for all judgments that might be entered against both the manufacturer and wholesaler defendants, the Company's total exposure for joint and several liability is limited to $1,000,000 and the wholesaler defendants are indemnified for $9,000,000 in related legal fees and expenses. The effect of the previously noted settlements on the agreement is that the Company will continue to receive reimbursement of some, if not all, of its legal fees and expenses in excess of its proportionate share of the $9,000,000. The Company is unable to form a reasonably reliable conclusion regarding the likelihood of a favorable or unfavorable outcome of these cases, each of which is being defended vigorously. The Company believes the allegations of liability are without merit with regard to the wholesaler defendants and that the attendant liability of the Company, if any, would not have a material adverse effect on the Company's financial condition or liquidity. Adverse decisions, although not anticipated, could have an adverse material effect on the Company's results of operations. On October 7, 1996, the Company and its subsidiary, National Infusion Services (now known as Priority Healthcare Services Corporation) ("PHSC"), were named as defendants in an action filed by Thomas G. Slama, M.D. in the Superior Court of Hamilton County, Indiana. Dr. Slama is a former director of the Company and formerly was Chief Executive Officer and President of PHSC. The complaint alleged breach of contract and defamation arising from the termination of Dr. Slama's employment with PHSC in October 1996. On October 26, 1998, Dr. Slama filed a Second Amended Complaint which added Priority and William E. Bindley as defendants and stated additional claims for breach of contract, breach of oral contract, breach of fiduciary duty, securities fraud and conversion. Pursuant to an Indemnification and Hold Harmless Agreement the Company indemnified and held harmless Priority and its subsidiaries from and against any and all costs, damages, charges and expenses (including without limitation legal and other professional fees) which Priority might incur or which may be charged against Priority in any way based upon, connected with or arising out of the lawsuit filed by Dr. Slama. The Company, PHSC, Priority and Mr. Bindley answered the complaint, denied the merits of Dr. Slama's claims, and also filed a counterclaim against Dr. Slama which sought, among other things, declaratory relief, compensatory and (in some instances) treble damages, punitive damages, attorneys' fees, interest and costs. On December 31, 1998, a Settlement Agreement was executed by and among the parties named above pursuant to which mutual releases were obtained, and on January 4, 1999, a one-time payment of $875,000 was made by the Company to Dr. Slama. The corresponding Joint Stipulation of Dismissal was approved by the Court on January 11, 1999. This one time payment, and approximately $150,000 of legal costs, were included in the unusual item charge recorded in the fourth quarter of 1998. On January 11, 1996, the Company was informed by the U.S. Attorney's office in Indianapolis that the Drug Enforcement Administration ("DEA") was alleging multiple violations of the recordkeeping and reporting regulations of the Controlled Substances Act ("Act") resulting from a routine inspection of the Company's Indianapolis Distribution Center during January and February 1994. On November 7, 1996, the Company entered into a Civil Consent Decree with the United States and the DEA resolving all issues relating to its Indianapolis Distribution Center's alleged failure to comply with the Act. In exchange for the settlement of all civil and administrative issues, the Company paid $700,000, and agreed to pay an additional $300,000 if the Company did not substantially comply with the terms of the Civil Consent Decree over the next two years. The settlement charge recognized by the Company in 1996 included professional fees of $112,000. On December 15, 1998, the Company was advised by the U. S. Attorney's office in Indianapolis that the Company had fully complied with the terms of the 1996 Civil Consent Decree and, accordingly, the civil penalty of $300,000 would not be imposed. NOTE 17 - EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for 1998, 1997 and 1996.
1998 1997 1996 ------------------------------------------------------------------------------ (in thousands, except per share data) Basic: Net earnings $ 22,236 $ 24,506 $ 17,618 Weighted shares Outstanding 28,728,979 22,912,237 20,146,629 Shares issued in CPSI merger 2,922,055 2,922,055 2,922,055 Basic shares Outstanding 31,651,034 25,834,292 23,068,684 Per share amount $ .70 $ .95 $ .76 Diluted: Net earnings $ 22,236 $ 24,506 $ 17,618 6 1/2% convertible debentures 1,889 2,654 Diluted earnings $ 22,236 $ 26,395 $ 20,272 Weighted shares Outstanding 28,728,979 22,912,237 20,146,629 Debentures 4,193,297 6,039,513 Shares issued in CPSI merger 2,922,055 2,922,055 2,922,055 Stock Options 1,708,990 1,862,446 1,251,243 Restricted Stock 148,644 Diluted Shares 33,508,668 31,890,035 30,359,442 Per share amount $ .66 $ .83 $ .67
The earnings per share for all years have been restated to give effect for the 4-for-3 stock split on June 25, 1999 and the earnings per share for 1997 and 1996 have been restated to give effect for the 4-for-3 stock split on June 3, 1998. See Note 12 regarding changes to outstanding options at the close of business on December 31, 1998. NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table presents the quarterly financial data for 1998 and 1997.
First Second Third Fourth Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1998 Net sales $1,969,157 $1,856,142 $1,821,594 $2,007,328 Gross margin 46,217 50,842 51,896 56,933 Net earnings 8,007 9,069 8,763 (3,603) Earnings per share: Basic (1) $ 0.26 $ 0.29 $ 0.28 $ (0.11) Diluted (1) 0.24 0.27 0.26 (0.11) 1997 Net sales $1,639,874 $1,816,884 $1,818,821 $2,058,558 Gross margin 35,060 36,425 38,429 42,808 Net earnings 5,639 5,774 5,827 7,266 Earnings per share: Basic (1) $ 0.24 $ 0.24 $ 0.23 $ 0.24 Diluted (1) 0.21 0.20 0.20 0.22
(1) The earnings per share for 1997 and the first quarter of 1998 have been restated to give effect for the 4-for-3 stock split effected in the form of a dividend on June 3, 1998 to shareholders of record on May 21, 1998. The earnings per share for 1997 and 1998 have been restated to give effect for the 4-for-3 stock split effected in the form of a dividend on June 25, 1999 to shareholders of record on June 11, 1999. -----END PRIVACY-ENHANCED MESSAGE-----