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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 1-5110
BERGEN BRUNSWIG CORPORATION
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(Exact name of registrant as specified in its charter)
New Jersey 22-1444512
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4000 Metropolitan Drive, Orange, California 92868-3598
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 385-4000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Class A Common Stock New York Stock Exchange
Par Value $1.50 per share
6 7/8% Exchangeable Subordinated New York Stock Exchange
Debentures due July 15, 2011
$150,000,000 7 3/8% Senior Notes New York Stock Exchange
due 2003
Securities registered pursuant to Section 12(g) of the Act:
7% Convertible Subordinated Debentures due March 1, 2006 - Durr-Fillauer
Medical, Inc.
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(Cover page continued)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No__
At November 30, 1998, 103,269,500 shares of Class A Common Stock were
outstanding. The aggregate market value of the Class A Common Stock held by
nonaffiliates of the registrant on November 30, 1998 was $3,053,887,205.
Documents Incorporated by Reference
-----------------------------------
List hereunder the following documents if incorporated by reference and the part
of the Form 10-K into which the document is incorporated:
Within 120 days after September 30, 1998, the Company will either file a
definitive proxy statement for its 1999 annual meeting of shareowners which will
be incorporated by reference in Part III of this Annual Report on Form 10-K or
will file an amendment to this Annual Report to provide the information called
for by such Part III.
TABLE OF CONTENTS
PART I
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ITEM PAGE
- ---- ----
Forward-looking Statements I - 1
1. Business I - 1
2. Properties I - 6
3. Legal Proceedings I - 7
4. Submission of Matters to a Vote of Security Holders I - 11
4A. Executive Officers of the Registrant I - 11
PART II
5. Market for the Registrant's Common Equity and II - 1
Related Stockholder Matters
6. Selected Financial Data II - 2
7. Management's Discussion and Analysis of Financial II - 3
Condition and Results of Operations
7a. Quantitative and Qualitative Disclosures About Market Risk II - 14
8. Financial Statements and Supplementary Data II - 15
9. Changes in and Disagreements with Accountants II - 40
on Accounting and Financial Disclosure
PART III
10. Directors of the Registrant III - 1
11. Executive Compensation III - 1
12. Security Ownership of Certain Beneficial Owners III - 1
and Management
13. Certain Relationships and Related Transactions III - 1
PART IV
14. Exhibits, Financial Statement Schedules and Reports IV - 1
on Form 8-K
Signatures IV - 6
Portions of this Annual Report on Form 10-K include "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to materially differ from those projected or
implied. The most significant of such risks, uncertainties and other factors are
described in Exhibit 99(a) to this Annual Report.
PART I
ITEM 1. BUSINESS
A. General Development of Business
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Bergen Brunswig Corporation, a New Jersey corporation formed in
1956, and its subsidiaries (collectively, the "Company") are a diversified drug
and health care distribution organization. The Company is the nation's largest
supplier of pharmaceuticals to the managed care market and the second largest
wholesaler to the retail pharmacy market. The Company is one of the leading
supply channel management companies to provide both pharmaceuticals and
medical-surgical supplies on a national basis.
On November 25, 1998, the Company signed an agreement to acquire
100% of the capital stock of J.M. Blanco, Inc. ("J.M. Blanco"), Puerto Rico's
largest pharmaceutical distributor. Under the terms of the agreement, the
Company will pay approximately $24 million in cash and assume approximately $27
million in debt.
On November 19, 1998, the Company signed an agreement to acquire
substantially all of the business, assets and property, subject to certain
liabilities, of Medical Initiatives, Inc. ("MII"), a pre-filler of
pharmaceuticals for oncology centers. Under the terms of the agreement, the
Company would issue approximately 227,000 shares of the Company's Class A Common
Stock ("Common Stock").
On November 8, 1998, the Company signed a definitive purchase
agreement to acquire Stadtlander Drug Co., Inc. ("Stadtlander"), a national
leader in disease-specific pharmaceutical care delivery for transplant, HIV,
infertility and serious mental illness patient populations and a leading
provider of pharmaceutical care to the privatized corrections market. Under the
terms of the agreement, the Company will pay approximately $178 million in cash,
issue approximately 6,000,000 shares of its Common Stock and assume
approximately $100 million in debt.
The J.M. Blanco, MII and Stadtlander transactions are more fully
described in Note 12 of Notes to Consolidated Financial Statements appearing in
Part II of this Annual Report.
I - 1
On September 30, 1998, the Company acquired Ransdell Surgical,
Inc. ("Ransdell"), a privately-held medical-surgical supply distributor, and its
affiliate, Choice Systems, Inc. ("Choice"), a developer of supply channel
management software for the healthcare industry. The Company issued
approximately 716,000 shares of its Common Stock to the Ransdell and Choice
shareowners.
On August 31, 1998, the Company acquired The Lash Group, Inc.
("Lash"), a privately-held healthcare reimbursement consulting firm. The Company
issued approximately 980,000 shares of its Common Stock to the Lash shareowners.
On May 12, 1998, the Company completed the acquisition of Pacific
Criticare, Inc. ("Pacific Criticare"), a privately-held distributor of
medical-surgical products, for approximately $4 million in cash, excluding
acquisition costs.
On January 2, 1998, the Company completed the acquisition of
substantially all of the net assets of Besse Medical Services, Inc.("Besse"), a
privately-held distributor of injectables diagnostics and medical supplies for
approximately $22 million in cash, excluding acquisition costs.
The Ransdell, Choice, Lash, Pacific Criticare and Besse
transactions are more fully described in Note 4 of Notes to Consolidated
Financial Statements appearing in Part II of this Annual Report.
During fiscal 1998, the Company recorded a special non-cash
pre-tax charge of $87.3 million for writedown of Bergen Brunswig Medical
Corporation ("BBMC") goodwill related to certain acquisitions made prior to
September 1995, resulting from a realized impairment to the carrying value of
BBMC's long-lived assets. In addition to the goodwill writedown, the Company
recorded a pre-tax charge of $3.0 million for BBMC restructuring expenses which
represent severance costs associated with streamlining and refocusing the sales
organization and costs associated with the consolidation of four divisions to
improve efficiency and customer service. Other special charges recorded during
fiscal 1998 include a non-cash pre-tax charge of $5.3 million related to the
abandonment of capitalized software as a result of technology improvements; and
a pre-tax charge of $14.6 million related primarily to the terminated merger
with Cardinal Health, Inc. ("Cardinal"). See Notes 10 and 13 of Notes to
Consolidated Financial Statements appearing in Part II of this Annual Report.
On September 24, 1998, the Company declared a 2-for-1 stock split
on the Company's Common Stock which was paid on December 1, 1998 to shareowners
of record on November 2, 1998. Share and per share amounts included in the
accompanying consolidated financial statements and notes are based on the
increased number of shares giving retroactive effect to the stock split.
On August 23, 1997, the Company signed a definitive merger
agreement with Cardinal Health, Inc. ("Cardinal"), a distributor of
I - 2
pharmaceuticals and provider of value-added pharmaceutical-related services,
headquartered in Dublin, Ohio. The merger agreement called for the Company to
become a wholly-owned subsidiary of Cardinal and for shareowners of the Company
to receive Cardinal Common Shares in exchange for outstanding shares of the
Company's Common Stock. On July 31, 1998, the United States District Court for
the District of Columbia granted the request of the Federal Trade Commission for
a preliminary injunction to halt the proposed merger. On August 7, 1998, the
Company and Cardinal jointly terminated the merger agreement. See Notes 10 and
13 of Notes to Consolidated Financial Statements appearing in Part II of this
Annual Report.
B. Narrative Description of Business
---------------------------------
Bergen Brunswig Drug Company ("BBDC"), a wholly-owned and the
largest subsidiary of the Company, is one of the largest national distributors
of products sold or used by institutional (hospital) and retail pharmacies. BBDC
distributes a full line of products, including pharmaceuticals, proprietary
medicines, cosmetics, toiletries, personal health products, sundries, and home
healthcare supplies and equipment from 31 locations in 23 states. These products
are sold to hospital pharmacies, managed care facilities, health maintenance
organizations ("HMOs"), independent retail pharmacies, pharmacy chains,
supermarkets, food-drug combination stores and other retailers located in all 50
states, the District of Columbia and Guam.
BBDC has been an innovator in the development and utilization of
computer-based retail order entry systems and of electronic data interchange
("EDI") systems including computer-to-computer ordering systems with suppliers.
During fiscal 1998, substantially all of BBDC's customer orders were received
via electronic order entry systems. These systems, combined with daily delivery,
are designed to improve customers' cash and inventory management, and
profitability, by freeing them from the burden of maintaining large inventories.
Although these systems require capital expenditures by the Company, benefits
from these systems to BBDC are expected to be realized through increased
productivity. BBDC is expanding its electronic interface with its suppliers and
now electronically processes a substantial portion of its purchase orders,
invoices and payments. BBDC has opened eight regional distribution centers
("RDCs") since fiscal 1986, replacing 20 older, smaller, less efficient
facilities. RDCs help improve customer service levels because a wider product
selection is more readily available. These facilities serviced 51% of BBDC's
sales volume in fiscal 1998.
In June 1996, BBDC introduced its Generic Purchasing Program
("GPP"). Designed to reduce customers' generic pharmaceutical costs, GPP
utilizes the products of a selected group of generic manufacturers and combines
that benefit with substantial volume to leverage buying power for BBDC's
customers.
I - 3
BBDC also provides a wide variety of promotional, advertising,
merchandising, and marketing assistance to independent community pharmacies. For
example, the Good Neighbor Pharmacy(R) program utilizes circular and media
advertising to strengthen the consumer image of the independent pharmacy without
sacrificing its local individuality. Other programs for the independent
community pharmacy include in-store merchandising programs, private label
products, shelf management systems, pharmacy computers and a fully-integrated
point-of-sale system marketed under BBDC's trademark of OmniPhaseTM.
Hospital and other institutional accounts are offered a wide
variety of inventory management and information services by BBDC to better
manage inventory investment and contain costs. AccuLineTM, introduced in June
1995, provides an on-line, real-time, hospital inventory management system in a
WindowsTM (a trademark of Microsoft(R) Corporation) environment and features
local area network capability.
BBMC, a wholly-owned subsidiary of the Company, distributes a
variety of medical and surgical products to individual hospitals and alternate
site healthcare providers through 32 distribution centers located in 25 states
in every region of the United States except the northeast.
BBMC serves hospital customers and alternate site customers in 45
states and the District of Columbia. Alternate site customers include outpatient
clinics, nursing homes, surgery centers, dialysis and oncology centers,
emergency centers and laboratories.
Bergen Brunswig Specialty Company ("BBSC"), a wholly-owned
subsidiary of the Company, supplies pharmaceuticals and oncology products to
physician and clinic accounts through four locations in four states. The Company
created BBSC during fiscal 1994 to respond to the rapid growth in the alternate
site market business. As a major supplier to the alternate site market, BBSC
seeks to give its customers quick access to a broad range of specialty,
value-added products and services, and commercial outsourcing through its ASD
Specialty Healthcare and Integrated Commercialization Solutions divisions.
In September 1995, the Company formed IntePlexTM Inc.
("IntePlex"), a wholly-owned subsidiary of the Company, to focus exclusively on
the evolving integrated healthcare marketplace. The foundation of IntePlex
involves the development of an electronic catalog for one-stop-shopping and a
centralized database for tracking customers' purchasing information. IntePlex's
offerings include logistics management, continuous replenishment, just-in-time
delivery, and benefit plan compliance for both pharmaceuticals and
medical-surgical supplies combined with delivery to all points in a network:
hospitals, alternate sites, physician offices and retail stores.
I - 4
1. Competition
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The Company, which is one of the largest national pharmaceutical
and medical-surgical supplies distributors measured by sales, faces intense
competition from other national pharmaceutical and medical-surgical supplies
distributors, as well as regional and local full-line and short-line
distributors, direct selling manufacturers and specialty distributors. The
principal competitive factors are service and price. Competition continues to
drive down the gross profit markup percentage, thereby lowering distributors'
gross profit margins.
2. Employees
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As of November 30, 1998, the Company employed approximately 5,400
people. The Company considers its relationship with its employees and the unions
representing certain of its employees to be satisfactory.
3. Other
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While the Company's operations may show quarterly fluctuations,
the Company does not consider its business to be seasonal in nature.
Although the Company's computer service operations expend time and
effort on the development and marketing of computer software used in support of
services offered by the Company for its customers, which are described in part
elsewhere herein, the Company has not, during the past three fiscal years,
expended any material amounts on research and development of computer software
for sale.
The Company relies heavily on computer technology throughout its
businesses to effectively carry out its day-to-day operations. The Company is
assessing all of its computer systems to ensure that they are "Year 2000"
compliant. For a detailed discussion of the Company's Year 2000 compliance, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing in Part II of this Annual Report.
I - 5
ITEM 2. PROPERTIES
Because of the nature of the Company's business, office and warehousing
facilities are operated in widely dispersed locations in the United States. Some
of the facilities are owned by the Company, but most are leased on a long-term
basis. The Company considers its operating properties to be in satisfactory
condition and well utilized with adequate capacity for growth.
As of November 30, 1998, BBDC's operations were located in 37 owned and
leased warehouse and office facilities in Alabama, Arizona, California,
Colorado, Florida, Georgia, Hawaii, Indiana, Kentucky, Massachusetts, Michigan,
Mississippi, Missouri, Nevada, New Jersey, New Mexico, North Carolina, Oklahoma,
Oregon, Tennessee, Texas, Utah, Virginia and Washington. Leased facilities range
in size from approximately 5,800 to 196,900 square feet and have a combined area
of approximately 1,602,600 square feet. The expiration dates of the leases range
from fiscal 1999 to fiscal 2008. Owned facilities range in size from
approximately 46,000 to 231,500 square feet.
As of November 30, 1998, BBMC's operations were located in 43 owned and
leased warehouse and office facilities in Alabama, Alaska, Arizona, California,
Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky,
Michigan, Minnesota, Missouri, Nevada, North Carolina, Ohio, Oklahoma, Oregon,
South Carolina, Tennessee, Texas, Utah, Virginia and Washington. Leased
facilities range in size from approximately 5,900 to 121,600 square feet and
have a combined area of approximately 1,327,000 square feet. The expiration
dates of the leases range from fiscal 1999 to fiscal 2005. Owned facilities
range in size from 30,800 to 188,000 square feet.
As of November 30, 1998, BBSC's operations, including the Lash
acquisition, were located in nine leased warehouse and office facilities in
Alabama, California, Kentucky, North Carolina, Ohio, Texas, Virginia and
Washington, D.C., ranging in size from 9,800 to 64,000 square feet and have a
combined area of approximately 157,000 square feet. The expiration dates of the
leases range from fiscal 1999 to fiscal 2001.
The combined area of the Company's owned facilities was approximately
2,182,000 square feet as of November 30, 1998.
The Company maintains approximately 208,800 square feet of general and
executive offices in Orange, California pursuant to certain leases. 175,000
square feet are leased pursuant to a 15-year lease which expires in fiscal 2000,
at which time the Company has the option to purchase the premises at the then
fair market value. Expiration dates range from fiscal 1999 to fiscal 2000.
For additional information regarding the Company's lease obligations,
see Note 6 of Notes to Consolidated Financial Statements in Part II, Item 8,
"Financial Statements and Supplementary Data" of this Annual Report.
I - 6
ITEM 3. LEGAL PROCEEDINGS
Drug Barn, Inc. ("Drug Barn"), a former retail pharmacy chain in the
San Francisco Bay Area, owed the Company approximately $6.2 million in principal
obligations of which approximately $1.2 million represents trade receivables and
$5.0 million represents a note which matured on March 25, 1993 and has not been
paid to date. Drug Barn commenced a Chapter 11 case in U.S. Bankruptcy Court for
the Northern District of California, Case No. 93-3-3437 TC, by filing a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code on July 29, 1993 and remained in possession pursuant to 11 U.S.C. Section
1107.
In April 1996, the Company filed a plan of reorganization (the "Plan")
with the Bankruptcy Court to resolve all of its claims with Drug Barn. The Plan
was confirmed by the Bankruptcy Court on June 14, 1996. The Plan of
reorganization provided for, among other things, a sale of all Drug Barn's
assets, a distribution of the asset sale proceeds to creditors and a settlement
of all claims of any nature between the Company and Drug Barn (but not its
guarantors, Milton and Barbara Sloban). Approximately $3 million of Drug Barn's
debt to the Company is to be paid in accordance with the Plan by the purchaser
of Drug Barn's assets.
On April 20, 1993, the Company filed a complaint in the Orange County
Superior Court (State of California), Case No. 709136 against Drug Barn and
Milton Sloban and Barbara Sloban, as guarantors on the defaulted note and open
trade receivables, alleging breach of contract and guaranty, and requesting
judicial foreclosure of and the possession of collateral. In April 1994, this
matter (excluding the bankruptcy court matter) was transferred to the San
Francisco County Superior Court with the California state actions referenced in
the next paragraph.
The Company's collection suit against Milton and Barbara Sloban
commenced trial on August 14, 1996 in San Francisco Superior Court. On September
24, 1996, after a jury trial, the Company was awarded a judgment for damages
against Milton and Barbara Sloban in the amount of $3,336,953 plus interest at
$809 per day from August 20, 1996. Thereafter, the Court added $675,000 in
attorney's fees and costs to the amount of the judgment. In addition, the
Company prevailed on all claims brought against it by the Slobans. The Slobans
filed post-trial motions to vacate or modify the jury verdict which were denied
by the Court. The Slobans then filed an appeal of the judgment. The Slobans
thereafter filed personal bankruptcy petitions, temporarily staying their appeal
and the Company's collection efforts. On September 26, 1997, the parties filed a
stipulation modifying the stay so that the Slobans' appeal could proceed.
On January 29, 1998, the Court of Appeal of the State of California,
First Appellate District, Division Two filed an opinion reversing the portion of
the judgment holding Barbara Sloban liable. In all other respects, the judgment
was affirmed. Subsequently, the Superior Court awarded attorney's fees in the
amount of $680,000 to Barbara Sloban's attorneys. The Company has filed an
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appeal with respect to $426,000 of the fees awarded, which appeal is not
expected to be resolved until mid-1999.
Milton Sloban's personal bankruptcy case is still pending. The Company
is seeking to collect the remaining amounts due under the guarantee from Mr.
Sloban. Mr. Sloban has claimed that he has no non-exempt assets, which the
Company disputes. There can be no assurance as to the Company's likely
collection from Mr. Sloban.
Between August 3, 1993 and February 14, 1994, the Company, along with
various other pharmaceutical industry-related companies, was named as a
defendant in eight separate state antitrust actions in three courts in
California. These lawsuits are more fully detailed in "Item 1 - Legal
Proceedings" of Part II of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994 as filed with the Securities and Exchange Commission
and is incorporated herein by reference. In April 1994, these California state
actions were all coordinated as Pharmaceutical Cases I, II and III, and assigned
to a single judge in San Francisco Superior Court. On August 22, 1994, a
Consolidated Amended Complaint ("California Complaint"), which supersedes and
amends the eight prior complaints, was filed in these actions.
The California Complaint alleges that the Company and 35 other
pharmaceutical industry-related companies violated California's Cartwright Act,
Unfair Practices Act, and the Business and Professions Code unfair competition
statute. The California Complaint alleges that defendants jointly and separately
engaged in secret rebating, price fixing and price discrimination between
plaintiffs and plaintiffs' alleged competitors who sell pharmaceuticals to
patients or retail customers. Plaintiffs seek, on behalf of themselves and a
class of similarly situated California pharmacies, injunctive relief and treble
damages in an amount to be determined at trial. The judge struck the class
allegations from the Unfair Practices Act claims.
Between August 12, 1993 and November 29, 1993, the Company was also
named in 11 separate Federal antitrust actions. All 11 actions were consolidated
into one multidistrict action in the Northern District of Illinois entitled, In
Re Brand-Name Prescription Drugs Antitrust Litigation, No. 94 C. 897 (MDL 997).
On March 7, 1994, plaintiffs in these 11 actions filed a consolidated amended
class action complaint ("Federal Complaint") which amended and superseded all
previously filed Federal complaints against the Company. The Federal Complaint
names as defendants the Company and 30 other pharmaceutical industry-related
companies. The Federal Complaint alleges, on behalf of a nationwide class of
retail pharmacies, that the Company conspired with other wholesalers and
manufacturers to discriminatorily fix prices in violation of Section 1 of the
Sherman Act. The Federal Complaint seeks injunctive relief and treble damages.
On November 15, 1994, the Federal court certified the class defined in the
Federal Complaint for the time period October 15, 1989 to the present. These
lawsuits are more fully detailed in "Item 1 - Legal Proceedings" of Part II of
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994
as filed with the Securities and Exchange Commission and is incorporated herein
by reference.
I - 8
On May 2, 1994, the Company and Durr Drug Company were named as
defendants, along with 25 other pharmaceutical related-industry companies, in a
state antitrust class action in the Circuit Court of Greene County, Alabama
entitled Durrett v. UpJohn Company, et al., No. 94-029 ("Alabama Complaint").
The Alabama Complaint alleges on behalf of a class of Alabama retail pharmacies
and a class of Alabama consumers that the defendants conspired to
discriminatorily fix prices to plaintiffs at artificially high levels. The
Alabama Complaint seeks injunctive relief and treble damages. Similar actions
were also filed against the Company and other wholesalers and manufacturers in
Mississippi, Montgomery Drug v. UpJohn, et. al., No. 97-0103, and in Tennessee,
Graves v. Abbott, et. al., No. 25,109-II.
On October 21, 1994, the Company entered into a sharing agreement with
five other wholesalers and 26 pharmaceutical manufacturers. Among other things,
the agreement provides that: (a) if a judgment is entered against both the
manufacturer and wholesaler defendants, the total exposure for joint and several
liability of the Company is limited to $1.0 million; (b) if a settlement is
entered into by, between, and among the manufacturer and wholesaler defendants,
the Company has no monetary exposure for such settlement amount; (c) the six
wholesaler defendants will be reimbursed by the 26 pharmaceutical defendants for
related legal fees and expenses up to $9.0 million total (of which the Company
will receive a proportionate share); and (d) the Company is to release certain
claims which it might have had against the manufacturer defendants for the
claims presented by the plaintiffs in these cases. The agreement covers the
Federal court litigation, as well as the cases which have been filed in various
state courts. In December 1994, plaintiffs in the Federal action had moved to
set aside the agreement, but plaintiffs' motion was denied on April 25, 1995. In
1996, the class plaintiffs filed a motion for approval of a settlement with 12
of the manufacturer defendants, which would result in dismissal of claims
against those manufacturers and a reduction of the potential claims against the
remaining defendants, including those against the Company. The Court granted
approval for the settlement. In 1998, an additional four of the manufacturer
defendants settled. The effect of the settlements on the sharing agreement is
that the Company's maximum potential loss would be $1.0 million, regardless of
the outcome of the lawsuits, plus possible legal fee expenses in excess of the
Company's proportionate share of the $9.0 million reimbursement of such fees or
any additional amounts to be paid by the manufacturer defendants.
In September 1998, a jury trial of this action commenced in Federal
Court. On November 30, 1998, the Court granted all remaining defendants a
directed verdict, dismissing all class claims against the Company and other
defendants. It is unclear whether the ruling will be appealed.
In addition to the above-mentioned Federal class action and state court
actions, the Company and other wholesale defendants have been added as
defendants in a series of related antitrust lawsuits brought by certain
independent pharmacies who have opted out of the class action cases and by
I - 9
certain chain drug and grocery stores. After a successful motion by the Company
and other wholesalers, the damage period in these cases has been limited to
October 1993 to the present. These lawsuits are also covered by the sharing
agreement described above.
In November 1995, in the U.S. District Court, Northern District of
Illinois, Abbott Laboratories filed a complaint seeking damages of approximately
$4.0 million against the Company and various affiliates for credits allegedly
due in connection with the purchase and subsequent sale of Abbott products by
the Company. In October 1998, Abbott amended its complaint to allege spoliation
of evidence and to request punitive damages in excess of $30 million. The
Company has filed various counterclaims and has asked for damages according to
proof at trial. This matter is in the discovery stage.
After discussions with counsel, management of the Company believes that
any allegations of liability set forth in all of the lawsuits described above
are without merit and that any attendant liability of the Company, although
unlikely, would not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
On October 19, 1998, the Company received a general notice letter from
the U.S. Environmental Protection Agency ("EPA") informing the Company that it
is one of many potential responsible parties in connection with the Casmalia
Disposal Site in Santa Barbara, California, being remediated pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
and the Resource Conservation and Recovery Act. The notice explains that under
such federal statutes, "de minimis" waste generators such as the Company may be
offered a special settlement by the EPA to resolve the potential claim. A
settlement would be in the form of an Administrative Order on Consent pursuant
to CERCLA. Within the next several months, the EPA will send a settlement offer
to the Company. The EPA estimates that the settlement offer will propose that
the Company pay between $75,000 to $750,000, which would relieve the Company of
any further liability for the site. The Company is still evaluating the facts
underlying this potential claim, but based on the correspondence from the EPA,
believes that any potential liability of the Company would not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
The Company is involved in various additional items of litigation.
Although the amount of liability at September 30, 1998 with respect to these
additional items of litigation cannot be ascertained, in the opinion of
management, any resulting future liability will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
I - 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareowners of the Company was held on September
24, 1998 in Orange, California and the following matter, as described in the
Proxy Statement dated August 21, 1998, was voted upon:
(a) All of management's nominees for the Company's Board of Directors
were elected (for a term ending in the year so indicated) with the
following vote:
Nominee For Withheld
=======================================================================
Robert E. Martini (2001) 89,576,726 1,406,002
Neil F. Dimick (2001) 90,256,088 726,640
Donald R. Roden (2001) 90,249,594 733,134
<FN>
Directors whose term of office continued after the Annual Meeting were:
Jose E. Blanco, Sr., Rodney H. Brady, Charles C. Edwards, M.D., Charles
J. Lee, George R. Liddle, James R. Mellor, Francis G. Rodgers and
George E. Reinhardt, Jr.
</FN>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Executive Officers.
The executive officers of the Company are elected by, and serve at the
pleasure of, the Board of Directors. Each executive officer holds office until
the next election of officers which is generally held in December, January or
February of each year. The current executive officers of the Company, and their
respective principal occupations and employment during the last five years ended
September 30, 1998, are listed alphabetically as follows:
Linda M. Burkett, 48, Executive Vice President, Chief Information
Officer (since September 1996); Executive Vice President and Chief Information
Officer, Bergen Brunswig Drug Company (since 1995); Vice President, IR Support
Services (1992-1995).
Charles J. Carpenter, 49, Executive Vice President, Chief Procurement
Officer (since September 1996); Executive Vice President, Supplier Relations and
Operations (1995-1996), Bergen Brunswig Drug Company; Executive Vice President,
Northeast Region (1994-1995); Vice President, Northeast Region (1989-1994).
I - 11
Neil F. Dimick, 49, Executive Vice President, Chief Financial Officer
(since 1992); President, Bergen Brunswig Specialty Company (since September
1996). Mr. Dimick is also a member of the Board of Directors.
William J. Elliott, 49, President, Bergen Brunswig Medical Corporation
(since October 1996). Formerly Senior Vice President of Supply Chain Management,
VHA, Inc., a nationwide, network of leading community owned health care
organizations and physicians (1984-October 1996).
Brent R. Martini, 39, President, Bergen Brunswig Drug Company (since
September 1996); Executive Vice President, Bergen Brunswig Drug Company, West
Region (1994-1996); Vice President, Quality Organizational Development and
Training (1991-1994). Brent R. Martini is the son of Robert E. Martini.
Robert E. Martini, 66, Chairman of the Board (since 1992); a consultant
to the Company (since January 1997); Chief Executive Officer (1990-January
1997). Mr. Martini is also a member of the Board of Directors.
Andrew P. McVay, 38, Vice President, Controller of Bergen Brunswig Drug
Company (since July 1997); Controller, West Region, Bergen Brunswig Drug Company
(1994-July 1997); Director, Financial Planning (1990-1994).
Donald R. Roden, 52, President (since 1995); Chief Executive Officer
(since January 1997); Chief Operating Officer (1995-December 1996); formerly a
healthcare industry consultant (1993-1995). Mr. Roden is also a member of the
Board of Directors.
Milan A. Sawdei, 52, Secretary (since July 1992); Executive Vice
President (since April 1992); Chief Legal Officer (since 1989).
Carol E. Scherman, 43, Executive Vice President, Human Resources (since
September 1996); Executive Vice President, Human Resources (since 1994), Bergen
Brunswig Drug Company; Vice President, Human Resources and Associate Relations
(1993-1994).
Eric J. Schmitt, 48, Vice President, Finance and Treasurer (since
February 1994); Vice President, Financial Planning (1989-1994).
I - 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
For certain information regarding shares of the Company's Class A
Common Stock ("Common Stock"), including cash dividends per share, market prices
per share, stock market information and number of shareowners, see "Selected
Quarterly Results (unaudited)" as set forth in Part II, Item 8, "Financial
Statements and Supplementary Data," of this Annual Report.
On February 9, 1994, the Board adopted a Shareowner Rights Plan which
provides for the issuance of one Preferred Share Purchase Right (the "Rights")
for each outstanding share of Common Stock. The Rights are generally not
exercisable until 10 days after a person or group (an "Acquiror") acquires 15%
of the Common Stock or announces a tender offer which could result in a person
or group owning 15% or more of the Common Stock (an "Acquisition"). Each Right,
should it become exercisable, will entitle the owner to buy 1/100th of a share
of a new series of the Company's Series A Junior Preferred Stock at an exercise
price of $80.00.
In the event of an Acquisition without the approval of the Board, each
Right will entitle the owner, other than an Acquiror, to buy at the Rights'
then-current exercise price a number of shares of Common Stock with a market
value equal to twice the exercise price. In addition, if, after an Acquisition,
the Company were to be acquired by merger, shareowners with unexercised Rights
could purchase common stock of the Acquiror with a value of twice the exercise
price of the Rights. The Board may redeem the Rights for $0.01 per Right at any
time prior to an Acquisition. Unless earlier redeemed, the Rights will expire on
February 18, 2004.
During the year ended September 30, 1998, the Company issued shares of
its Common Stock without registration under the Securities Act of 1933 (the
"1933 Act") on two occasions. On August 31, 1998, in connection with its
acquisition of Lash, the Company issued approximately 980,000 shares of its
Common Stock to the former shareowners of Lash. On September 30, 1998, in
connection with its acquisitions of Ransdell and Choice, the Company issued
approximately 716,000 shares of its Common Stock to the former shareowners of
Ransdell and Choice. Such issuances were exempt from registration under Section
4(2) of the 1933 Act. In each of these instances, the privately issued shares
have been registered under the 1933 Act for resale by the former shareowners of
the acquired businesses.
II - 1
Item 6. SELECTED FINANCIAL DATA (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except for per share amounts
==================================================================================================================================
September 30,
---------------------------------------------------------------------------
Years Ended: 1998 1997 1996 1995 1994
==================================================================================================================================
Net sales and other revenues (a):
Excluding bulk shipments to customers' warehouses $13,720,017 $11,659,127 $9,941,633 $ 8,442,254 $7,479,391
Bulk shipments to customers' warehouses 3,401,651 2,837,646 2,476,110 2,355,094 2,184,335
---------------------------------------------------------------------------
Total net sales and other revenues 17,121,668 14,496,773 12,417,743 10,797,348 9,663,726
Net earnings 3,102(c) 81,679(e) 73,533 63,942 56,120(f)
Earnings per share - diluted (b) 0.03(c) 0.81(e) 0.73 0.64 0.58(f)
Cash dividends declared per share (b):
Class A Common 0.315(d) 0.216 0.192 0.190 0.175
Class B Common - - - - 0.799
At Years Ended:
==================================================================================================================================
Total assets $ 3,003,212 $2,707,123 $2,489,826 $2,405,530 $1,995,057
Long-term obligations 464,778 437,956 419,275 557,771 342,094
Shareowners' equity 629,064 644,861 578,966 519,349 461,851
==================================================================================================================================
<FN>
(a) Reclassified to include bulk shipments to customers' warehouses. For further information see Note 1 of Notes to
Consolidated Financial Statements.
(b) Gives effect to the 2-for-1 stock split declared September 24, 1998 and paid December 1, 1998. EPS has been restated in
accordance with Statement of Accounting Standards No. 128 "Earnings per Share."
(c) Includes special charges for writedown of goodwill of $87.3 million, no income tax effect; merger expenses of $8.6 million,
net of income tax benefit of $6.0 million; abandonment of capitalized software of $3.1 million, net of income tax benefit
of $2.2 million; and restructuring expenses of $1.8 million, net of income tax benefit of $1.2 million. Net earnings and
diluted earnings per share excluding the special charges were $103.9 million and $1.01, respectively. See Item 1 of this
Annual Report.
(d) Includes $0.075 per share declared September 24, 1998 and paid December 1, 1998. See Management's Discussion and Analysis
of Financial Condition and Results of Operations.
(e) Includes special charges for merger expenses of $3.4 million, net of income tax benefit of $2.4 million, relating to the
termination of the proposed IVAX merger. Net earnings and diluted earnings per share excluding the special charges were
$85.1 million and $.84, respectively. See Item I of this Annual Report.
(f) Includes special credit for a gain recognized from sale of investment securities of $2.9 million, net of income tax of $2.2
million, and provision for an earthquake-related charge of $0.8 million, net of income tax benefit of $0.6 million.
</FN>
II - 2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
The Company has reported significant increases in revenue during the
past three years. However, net earnings were adversely affected by special
charges in fiscal 1998 and 1997. Excluding the special charges, earnings growth
has approximated or exceeded revenue growth. Following is a summary of key
revenue and earnings trends during the fiscal years ended September 30, 1998,
1997 and 1996:
* Total net sales and other revenues were $17,121.7 million, $14,496.8
million and $12,417.7 million in fiscal 1998, 1997 and 1996,
respectively. Such amounts represented increases over the respective
prior years of 18%, 17% and 15%.
* After-tax earnings before special charges were $103.9 million, $85.1
million and $73.5 million in fiscal 1998, 1997 and 1996, respectively.
Such amounts represented increases over the respective prior years of
22%, 16% and 15%.
* After-tax special charges were $100.8 million and $3.4 million in
fiscal 1998 and 1997, respectively. The 1998 special charges were
incurred in connection with the writedown of goodwill relating to the
medical-surgical business, the restructuring of the medical-surgical
business, the abandonment of capitalized software, and the expenses of
certain mergers. The 1997 charges were incurred in connection with a
proposed merger. See the "Special Charges" section below for further
information.
* Net earnings were $3.1 million, $81.7 million and $73.5 million in
fiscal 1998, 1997 and 1996, respectively. The fiscal 1998 amount
represented a decrease of 96% from the prior year while the fiscal 1997
and 1996 amounts represented increases over the prior years of 11% and
15%, respectively.
II - 3
The following table summarizes the components of the Company's
operating income for the past three years and should be read in connection with
the discussion below.
Years Ended September 30, % Change
-------------------------------------- -------------
Dollars in millions 1998 1997 1996 1998 1997
==========================================================================================================
Revenues excluding bulk shipments $13,720.0 $11,659.1 $9,941.6 18% 17%
Bulk shipments 3,401.7 2,837.7 2,476.1 20 15
---------------------------------------------------------
Total net sales and other revenues 17,121.7 14,496.8 12,417.7 18 17
Cost of sales 16,371.4 13,842.4 11,843.9 18 17
---------------------------------------------------------
Gross profit 750.3 654.4 573.8 15 14
Distribution, selling, general &
administrative expenses (DSG&A) 534.2 479.4 418.4 11 15
---------------------------------------------------------
Operating earnings before
special charges 216.1 175.0 155.4 23 13
Special charges 110.2 5.8 - - -
---------------------------------------------------------
Operating earnings $ 105.9 $ 169.2 $ 155.4 (37)% 9%
==========================================================
Percentage of revenues excluding bulk shipments:
Gross profit 5.47% 5.61% 5.77%
DSG&A expenses 3.89% 4.11% 4.21%
Operating earnings before
special charges 1.58% 1.50% 1.56%
Operating earnings 0.77% 1.45% 1.56%
REVENUES
Along with other companies in its industry, the Company has begun
reporting bulk shipments of pharmaceuticals in revenues and cost of sales.
Previously, only the gross profit on such bulk shipments was reported in
revenues. All years presented herein have been reclassified to conform with the
new reporting method. Bulk shipment transactions are arranged by the Company
with its suppliers at the express direction of the customer, and involve either
(a) shipments from the supplier directly to the customer's warehouse or (b)
shipments from the supplier to Company warehouses for immediate shipment to the
customer's warehouse. Bulk sales of pharmaceuticals do not impact the Company's
inventory since the Company simply processes the orders that it receives from
its suppliers directly to the customers' warehouses. The Company serves as an
intermediary by paying the supplier and billing the customer for the goods. Due
to the insignificant margins generated through bulk shipments, fluctuations in
such revenues have an immaterial impact on the Company's pre-tax earnings.
II - 4
Revenues excluding bulk shipments increased 18% and 17% in fiscal 1998
and 1997, respectively. Substantially all of such increases reflect internal
growth within the Company's existing pharmaceutical, medical-surgical supply and
specialty products distribution businesses, with only a minor portion
attributable to acquired entities. All three of the aforementioned businesses
contributed to the revenue growth in these years. Revenues from the
pharmaceutical business grew 16% in 1998 and 15% in 1997, with increases across
all major customer categories and geographic regions. Such increases were
volume-related, reflecting growth from higher shipments to existing customers as
well as from shipments to a significant number of new customers. Revenues from
the medical-surgical business increased less than 5% in 1998 following a 21%
growth rate in 1997; the slower 1998 growth was principally due to (a) the
inability of the business' current sales and operating infrastructure to bring
on and process increased volume and (b) the discontinuance of certain product
lines. The Company is positioning the medical-surgical business for higher
future growth rates by increasing capacity in its distribution centers,
integrating its operations for greater efficiency, and developing a new
information technology platform. Revenues from the specialty products business
increased 106% and 169% in 1998 and 1997, respectively, primarily reflecting
growth from existing and new customers.
GROSS MARGINS
Gross profit as a percentage of revenues excluding bulk shipments
("gross margin") was 5.47%, 5.61% and 5.77% in fiscal 1998, 1997 and 1996,
respectively. These decreases primarily reflect lower margins in the
pharmaceutical and medical-surgical businesses, as well as a relatively lower
sales mix from the higher-margin medical-surgical business. Pharmaceutical
margins decreased principally due to lower selling margins resulting from
intense price competition in the industry, partially offset by increased
investment buying gains in fiscal 1998. Medical-surgical margins declined
primarily due to a higher sales mix of lower-margin shipments to the acute care
market. Specialty product margins improved due to investment buying
opportunities and the addition of higher-margin products and services.
In all of the Company's businesses, it is customary to pass on
manufacturers' price increases to customers. Investment buying enables
distributors such as the Company to benefit by purchasing goods in advance of
anticipated manufacturer price increases. Consequently, the rate or frequency of
future price increases by manufacturers, or the lack thereof, influences the
profitability of the Company.
Management anticipates further downward pressure on gross margins in
fiscal 1999 because of continued price competition influenced by large
customers. Management expects that these pressures may be offset to some extent
by an increased sales mix of more profitable products (such as generic drugs and
medical-surgical supplies) and services and continued reduction of distribution,
selling, general and administrative expenses as a percentage of revenues, as
described below.
II - 5
DISTRIBUTION, SELLING, GENERAL & ADMINISTRATIVE EXPENSES ("DSG&A")
DSG&A as a percentage of revenues excluding bulk shipments was 3.89%,
4.11% and 4.21% in fiscal 1998, 1997 and 1996, respectively. These decreases
were primarily attributable to continued operating efficiencies and the
spreading of fixed costs over a larger revenue base. Through such measures as
consolidation of distribution centers, installation of automated warehouse
equipment, and investments in information technology, the Company's
infrastructure has been able to process increasing volume without a
proportionate increase in DSG&A. Also contributing to the decrease in DSG&A
percentage in fiscal 1998 was the lower sales mix of the medical-surgical
business, which incurs relatively higher DSG&A per revenue dollar.
SPECIAL CHARGES
Following is a summary of the special charges incurred by the Company
in the last two fiscal years:
Years Ended September 30,
-------------------------
in millions except per share amounts 1998 1997
------------------------------------------------------------------------------
Goodwill writedown $ (87.3) $ -
Restructuring expenses (3.0) -
Abandoned capitalized software (5.3) -
Merger-related expenses (14.6) (5.8)
----------------------
Total special charges (110.2) (5.8)
Tax effect of special charges 9.4 2.4
---------------------
Effect on net earnings $ (100.8) $ (3.4)
======================
Effect on diluted earnings per share $ (0.98) $ (0.03)
======================
During fiscal 1998, the Company recorded a special non-cash pre-tax
charge of $87.3 million for the writedown of Bergen Brunswig Medical Corporation
("BBMC") goodwill related to certain acquisitions made prior to September 1995,
resulting from a realized impairment to the carrying value of BBMC's long-lived
assets. In addition to the goodwill writedown, the Company recorded a pre-tax
charge of $3.0 million for BBMC restructuring expenses which represent severance
costs associated with streamlining and refocusing the sales organization and
costs associated with the consolidation of four divisions to improve efficiency
and customer service. Other special charges recorded during fiscal 1998 include
a non-cash pre-tax charge of $5.3 million related to the
II - 6
abandonment of capitalized software as a result of technology improvements; and
a pre-tax charge of $14.6 million related primarily to the proposed merger with
Cardinal Health, Inc. ("Cardinal") which was terminated on August 7, 1998 (see
Note 13 of the accompanying Notes to Consolidated Financial Statements).
During fiscal 1997, the Company recorded a pre-tax charge of $5.8
million for expenses related to the proposed merger with IVAX Corporation which
was terminated on March 20, 1997.
OTHER INCOME STATEMENT LINE ITEMS
Net interest expense increased $9.2 million, or 30%, in fiscal 1998 and
$0.6 million, or 2%, in fiscal 1997. The fiscal 1998 increase resulted from
increased borrowings under the Credit Agreement, principally for funding higher
investments in inventory in order to (a) support the significant growth in the
Company's revenues and (b) to take advantage of increased investment buying
opportunities.
Taxes on income were approximately 95%, 41% and 41% of pre-tax earnings
in fiscal 1998, 1997 and 1996, respectively. The relatively high fiscal 1998
rate reflects the nondeductible writedown of goodwill described under "Special
Charges" above. Excluding this writedown, the effective tax rate for fiscal 1998
was 41%.
Earnings per share fluctuations primarily result from changes in the
Company's net earnings. Due primarily to the exercise of stock options, there
was a 1% increase in the weighted average number of shares outstanding for the
diluted earnings per share calculations in each of fiscal 1998 and 1997.
II - 7
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Following is a summary of the Company's capitalization at the end of
each of the last three fiscal years. Except that debt is net of cash herein,
these percentages are calculated in accordance with the covenants set forth in
the Company's Credit Agreement, in which certain non-cash charges are excluded
from the calculation:
September 30,
--------------------------------
1998 1997 1996
-----------------------------------------------------------------------
Debt, net of cash 34% 36% 39%
Equity 66% 64% 61%
The Company's Credit Agreement with a group of domestic and foreign
banks is effective through March 2001 and provides for maximum borrowings of up
to $400 million plus additional borrowings under discretionary lines outside of
the Credit Agreement. Outstanding borrowings at September 30, 1998 and 1997 were
$170 and $140 million, respectively. See Note 2 of the accompanying Notes to
Consolidated Financial Statements for further information.
The Company filed a shelf registration statement with the Securities
and Exchange Commission ("SEC") which became effective on March 27, 1996. The
registration statement allows the Company to sell senior and subordinated debt
or equity securities to the public from time to time up to an aggregate maximum
principal amount of $400 million. The Company intends to use the net proceeds
from the sale of any such securities for general corporate purposes, which may
include, without limitation, the repayment of indebtedness of the Company or any
of its subsidiaries, possible acquisitions, capital expenditures and working
capital requirements. See Note 2 of the accompanying Notes to Consolidated
Financial Statements for further information. To date, the Company has not sold
any securities pursuant to this shelf registration statement.
On September 24, 1998, the Company declared a 2-for-1 stock split on
the Company's Class A Common Stock ("Common Stock"), which was paid on December
1, 1998 to shareholders of record on November 2, 1998. All per share amounts
presented herein have been restated to reflect the effect of this stock split.
Dividends per share declared on Common Stock amounted to $.315, $.216
and $.192 per share in fiscal 1998, 1997 and 1996, respectively. However, the
fiscal 1998 amount includes the $.075 per share quarterly dividend which was
declared on September 24, 1998 but not paid until December 1, 1998 to
shareholders of record on November 2, 1998. This $.075 constituted the Company's
fiscal 1999 first quarter dividend; the declaration was made earlier than usual
in order to coincide with the announcement of the aforementioned 2-for-1 stock
split. Although the Company does not have a policy requiring the payment of any
II - 8
specified levels of dividends, the Company's dividends (excluding the
aforementioned $.075) have averaged approximately 25% of net earnings before
special charges for the three-year period ended September 30, 1998.
The Company's cash flows during the past three years are summarized in
the following table:
(in millions) 1998 1997 1996
---------------------------------------------------------------------------
Net earnings after non-cash charges $ 191.0 $ 146.8 $ 131.4
Increases in non-cash
assets and liabilities (120.8) (72.4) (3.2)
-----------------------------------
Cash flows from operations 70.2 74.4 128.2
Capital expenditures (29.8) (23.8) (16.7)
Acquisition of businesses (22.6) - (6.0)
Net proceeds (repayments) of debt 27.5 16.0 (143.1)
Cash dividends (24.2) (21.7) (19.2)
Other - net 3.4 (11.8) 13.8
-----------------------------------
Net increase (decrease) in cash $ 24.5 $ 33.1 $ (43.0)
===================================
During the past three years, cash flow from operations has been
adequate to fund working capital increases, capital expenditures, business
acquisitions and dividend payments. The Company believes that
internally-generated cash flow, funds available under the Credit Agreement, and
funds potentially available in the private and public capital markets will be
sufficient to meet anticipated cash and capital requirements. However, actual
results could differ materially from this forward-looking statement as a result
of unanticipated capital requirements or an inability to access the capital
markets on acceptable terms when, and, if necessary.
Working capital increased to $591.4 million at September 30, 1998 from
$531.2 million at September 30, 1997, primarily as a result of higher
receivables and inventory balances supporting an 18% growth in revenues. The
current ratio decreased slightly to 1.31 at September 30, 1998 from 1.33 at
September 30, 1997. Trade receivables outstanding, net of customer credit
balances, were 16 days during fiscal 1998 and 15 days during fiscal 1997. The
inventory turnover rate on a first-in, first-out ("FIFO") basis was 7.2 times
during fiscal 1998 and 7.7 times during fiscal 1997.
Capital expenditures for fiscal 1998 and 1997 related principally to
additional investments in existing locations as well as purchases of automated
warehousing and data processing equipment.
II - 9
BUSINESS ACQUISITIONS
---------------------
During fiscal 1998, the Company completed four business acquisitions.
Besse Medical Services, Inc., an Ohio-based distributor of injectables and other
products, was acquired for approximately $22 million in cash in January 1998.
Pacific Criticare, Inc., a Hawaii-based distributor of medical-surgical
supplies, was acquired for approximately $4 million in cash in May 1998. Both of
these acquisitions were accounted for by the purchase method. The Lash Group, a
Washington, D.C.-based healthcare reimbursement consulting firm, was acquired
for approximately 980,000 shares of the Company's Common Stock in August 1998.
Ransdell Surgical, a medical-surgical supply distributor, and its affiliate,
Choice Systems, Inc., a developer of healthcare management software, both of
which are headquartered in Kentucky, were acquired for approximately 716,000
shares of the Company's Common Stock in September 1998. These acquisitions were
accounted for by the pooling of interests method. The aggregate effect of all
four acquisitions did not have a significant impact on the Company's
consolidated results of operations and financial position in fiscal 1998. See
Note 4 of the accompanying Notes to Consolidated Financial Statements for
further information.
Subsequent to September 30, 1998, the Company entered into agreements
for several business combinations which are expected to be consummated during
the first half of fiscal 1999.
On November 25, 1998, the Company signed an agreement to acquire 100%
of the capital stock of J.M.Blanco, Inc. ("J.M. Blanco"), Puerto Rico's largest
pharma-ceutical distributor, headquartered in Guaynabo, Puerto Rico. Under the
terms of the agreement, the Company would pay approximately $24 million in cash
and assume approximately $27 million in debt.
On November 19, 1998, the Company signed an agreement to acquire
substantially all of the business, assets and property, subject to certain
liabilities, of Medical Initiatives, Inc. ("MII"), a pre-filler of
pharmaceuticals for oncology centers, located in Tampa, Florida. Under the terms
of the agreement, the Company would issue approximately 227,000 shares of the
Company's Common Stock.
On November 8, 1998, the Company signed a definitive purchase agreement
to acquire Stadtlander Drug Co. Inc. ("Stadtlander"), headquartered in
Pittsburgh, Pennsylvania, a national leader in disease-specific pharmaceutical
care delivery for transplant, HIV, infertility and serious mental illness
patient populations and a leading provider of pharmaceutical care to the
privatized corrections market. Under the terms of the agreement, the Company
would pay approximately $178 million in cash, issue approximately 6,000,000
shares of its Common Stock and assume approximately $100 million in debt.
Consummation of the J.M. Blanco, MII and Stadtlander transactions, to
be accounted for as purchases for financial reporting purposes, are subject to
II - 10
certain conditions, including the receipt of regulatory approvals. The purchase
prices of these acquisitions are subject to adjustments after completion of
acquisition audits. The MII acquisition is expected to be completed in the first
quarter of fiscal 1999, while the J.M. Blanco and Stadtlander acquisitions are
expected to be completed in the second quarter of fiscal 1999. The J.M. Blanco
acquisition and the cash portion of the Stadtlander acquisition will be financed
from borrowings under the Credit Agreement and other bank borrowings.
TERMINATED MERGER
-----------------
On August 23, 1997, the Company signed a definitive merger agreement
with Cardinal, a distributor of pharmaceuticals and a provider of value-added
pharmaceutical-related services, headquartered in Dublin, Ohio. The merger
agreement called for the Company to become a wholly-owned subsidiary of Cardinal
and for shareowners of the Company to receive Cardinal Common Shares in exchange
for shares of the Company's Common Stock. On July 31, 1998, the United States
District Court for the District of Columbia granted the Federal Trade
Commission's request for a preliminary injunction to halt the proposed merger.
On August 7, 1998, the Company and Cardinal jointly terminated the merger
agreement. As mentioned under "Special Charges" above, the Company recorded
approximately $14 million in pre-tax charges during fiscal 1998 relating to
legal fees and other expenses incurred in connection with the terminated merger,
net of a $7 million reimbursement received from Cardinal.
YEAR 2000 READINESS DISCLOSURE
------------------------------
The Year 2000 problem results from computer programs and devices which
do not differentiate between the year 1900 and the year 2000 because they were
written using two digits rather than four to define the applicable year;
accordingly, computer systems that have date-sensitive calculations may not
properly recognize the year 2000. This situation may cause systems to process
critical financial and operational information incorrectly or not at all, which
would result in significant disruptions of the Company's business activities.
Since the Company relies heavily on computer technology throughout its
businesses to effectively carry out its day-to-day operations, it has made
resolution of the Year 2000 problem a major corporate initiative. In October
1996, the Company established a central office to direct its companywide Year
2000 efforts for all of its business, including BBDC, BBMC and BBSC. A steering
committee comprised of several executive officers provides top-level oversight
for the program. Both internal and external resources are being used to
identify, correct and test the Company's systems for Year 2000 compliance.
II - 11
The Company's Year 2000 program addresses both information technology
("IT") and non-IT systems. The Company's business applications reside on
mainframe, midrange and desktop computer systems. The Company's IT
infrastructure is comprised of hardware, internally-developed software, and
software purchased from external vendors. The Company's non-IT systems include
equipment which uses date-sensitive embedded technology. Principal non-IT
systems include telecommunications equipment, certain facilities functions,
automated warehouse equipment, and hand-held order entry devices which the
Company has provided to its customers.
The Company has divided its Year 2000 program by business unit and
functional area into numerous individual projects in order to provide detailed
management for each at-risk system. The Company's approach is to address each
Year 2000 project in the following phases: inventory, assessment, planning,
renovation, testing and certification. For BBDC, renovation of all critical
systems and the majority of other systems will be completed by December 31,
1998. Certain systems have already been tested and certified as Year 2000
compliant, and the Company expects testing and certification of substantially
all remaining systems to be completed by June 30, 1999. By that date, the
Company also plans to complete a comprehensive enterprise integration testing
program. During the latter half of calendar 1999, the Company expects there to
be a relatively limited amount of effort required to complete the renovation and
testing of certain non-IT systems.
BBMC and BBSC are comprised of a number of entities acquired during the
last several years. Although some of the computer systems within these entities
are Year 2000 complaint, certain significant computer systems are not Year 2000
compliant. Certain of the non-compliant systems will be remediated for Year 2000
compliance while the remainder will be replaced with Year 2000 compliant
systems. It is expected that all of BBMC's and BBSC's systems will be Year 2000
compliant by October 1999, including testing and certification.
The Company also recognizes that it would be at risk if its suppliers,
customers, banks, utilities, transportation companies and other business
partners fail to properly remediate their Year 2000 systems and software.
Accordingly, during calendar 1998 the Company began the process of communicating
with such entities through questionnaires and other means in order to assess the
status of their remediation efforts. During early calendar 1999, the Company
will meet with major business partners to discuss progress and contingencies,
conduct on-site assessments, and test critical electronic interfaces. Although
the Company is not aware of any significant Year 2000 problems with any of these
third parties, there can be no assurances that their systems or software will be
remediated in a timely manner, or that a remediation failure would not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
The Company is also subject to risk should government or private payors
and insurers fail to become Year 2000 compliant and therefore be unable to make
full or timely reimbursement to the Company's customers. Such a situation could
II - 12
have a material adverse affect on the Company's cash flows by reducing the
ability of customers to pay for products purchased from the Company.
The Company is charging the cost of its Year 2000 program to expense as
incurred, except for purchases of computer hardware and other equipment, which
are capitalized as property and depreciated over the equipment's estimated
useful lives in accordance with the Company's normal accounting policies.
Through September 30, 1998, total Year 2000 costs have amounted to approximately
$6.5 million, of which $5.0 million was incurred in fiscal 1998 and $1.5 million
was incurred in fiscal 1997. Remaining expenditures are expected to be
approximately $13.5 million (including $5.5 million of hardware and other
equipment), of which $12.0 million is planned for fiscal 1999 and $1.5 million
is planned for fiscal 2000. The aforementioned amounts exclude the costs
associated with new BBMC and BBSC systems which are being installed primarily to
integrate operations and achieve additional information technology
functionality. The Year 2000 remediation effort has not had a material impact on
the Company's daily operations or the development of its information technology
systems. Although the aforementioned cost estimates reflect management's best
judgment using current information and assumptions about the future, actual
costs could vary significantly from the Company's estimates, due to
technological difficulties, the noncompliance of IT vendors or other third
parties, the Year 2000 readiness of companies acquired by the Company subsequent
to September 30, 1998 and by entities that communicate with such companies, and
other factors.
While the Company is not presently aware of any significant exposure
that its systems and software will not be properly remediated on a timely basis,
there can be no assurances that all Year 2000 remediation processes will be
completed and tested before January 1, 2000 or that the contingency plans
described below will sufficiently mitigate the risk of a Year 2000 compliance
problem. If Year 2000 remediation efforts by the Company or third parties are
unsuccessful, there could be a significant disruption of the Company's business
operations, which could have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
The Company is in the process of identifying the major potential
failure points and the related adverse consequences associated with them,
including "a reasonably worst-case scenario". Once these risks are identified,
the Company will develop contingency plans for conducting its business until the
problems can be corrected. For example, such plans will include alternative
electronic or manual means of receiving, processing and shipping customer
orders, purchasing inventory from suppliers, and sending and receiving cash
payments. It is anticipated that contingency plans will be substantially
completed by May 1999, although there will be continuing follow-up activity
later in calendar 1999 as January 1, 2000 approaches.
The foregoing discussion concerning the Year 2000 problem contains
forward-looking statements that involve risks and uncertainties (referred to
above and in Exhibit 99(a) to this Annual Report) that could cause actual
II - 13
results to differ materially from such statements. Although the Company believes
that minimal business disruption will occur as a result of Year 2000 issues,
there is no assurance that all Year 2000 problems will be remediated in a timely
manner by the Company or third parties and that any such failures will not have
a material adverse impact on the Company's financial position, results of
operations or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In fiscal 1999 and fiscal 2000, the Company plans to adopt several new
accounting pronouncements issued by The Financial Accounting Standards Board and
the American Institute of Certified Public Accountants. None of these
pronouncements are expected to have a significant impact on the Company's
reported financial position or results of operations. See Note 1 of the
accompanying Notes to Consolidated Financial Statements for further information.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company's major "market risk" exposure is the effect of changing
interest rates. The Company manages its interest expense by using a combination
of fixed and variable rate debt. At September 30, 1998, the Company's debt
consisted of approximately $278 million of fixed-rate debt with a weighted
average interest rate of 7.29% and $170 million of variable-rate debt with a
weighted average interest rate of 6.02%. The amount of variable-rate debt
fluctuates during the year based on the Company's cash requirements; maximum
borrowings at any quarter end during fiscal 1998 were $368 million. If interest
rates on such variable debt were to increase by 60 basis points (one-tenth of
the rate at September 30, 1998), the net impact on the Company's results of
operations and cash flows would be immaterial.
II - 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
a. Supplementary Data
SELECTED QUARTERLY RESULTS (unaudited)
Dollars in thousands, except for per share amounts
================================================================================================================================
First Second Third Fourth Fiscal
Year Ended September 30, 1998 Quarter Quarter Quarter Quarter Year
================================================================================================================================
Net sales and other revenues:
Excluding bulk shipments to
customers' warehouses $3,168,431 $ 3,372,236 $ 3,513,184 $ 3,666,166 $13,720,017
Bulk shipments to customers' warehouses 727,744 748,947 946,420 978,540 3,401,651
------------------------------------------------------------------------------
Total net sales and other revenues 3,896,175 4,121,183 4,459,604 4,644,706 17,121,668
Gross margin 170,671 190,800 188,983 199,811 750,265
Net earnings (loss) 21,337 18,808(c) 27,180 (64,223)(d) 3,102
Earnings (loss) per share - diluted (a)(b) 0.21 0.18(c) 0.26 (0.63)(d) 0.03
Cash dividends declared per Class A
Common share (a) 0.060 0.060 0.060 0.135 (e) 0.315
Market prices per Class A
Common share (a) $23 1/16-18 13/16 $ 26 1/8-19 $25-20 1/16 $31 1/8-16 13/16 $31 1/8-16 13/16
Year Ended September 30, 1997
=================================================================================================================================
Net sales and other revenues:
Excluding bulk shipments to
customers' warehouses $2,821,946 $2,890,026 $ 2,927,473 $3,019,682 $11,659,127
Bulk shipments to customers' warehouses 756,254 583,894 680,141 817,357 2,837,646
------------------------------------------------------------------------------
Total net sales and other revenues 3,578,200 3,473,920 3,607,614 3,837,039 14,496,773
Gross margin 153,976 169,664 158,981 171,810 654,431
Net earnings 18,178 20,505(f) 22,224 20,772 81,679
Earnings per share- diluted (a)(b) 0.18 0.20(f) 0.22 0.20 0.81
Cash dividends declared per Class A
Common share (a) 0.048 0.048 0.060 0.060 0.216
Market prices per Class A Common share (a) $13 3/16-10 3/8 $13 5/16-11 $15 1/2-11 1/4 $22 7/8-14 1/16 $22 7/8-10 3/8
================================================================================================================================
<FN>
(a) Gives effect to the 2-for-1 stock split declared September 24, 1998 and paid December 1, 1998.
(b) Sum of quarterly EPS does not equal the EPS for the year. Fourth quarter 1998 computation is anti-dilutive.
(c) Includes provision for merger expenses of $9.8 million, no income tax effect.
(d) Includes provisions for writedown of goodwill of $87.3 million, no income tax effect; merger expenses of $(1.2) million,
net of income tax benefit of $6.0 million; abandonment of capitalized software of $3.1 million, net of income tax benefit
of $2.2 million; and restructuring expenses of $1.8 million, net of income tax benefit of $1.2 million.
(e) Includes $0.075 per share declared September 24, 1998 and paid December 1, 1998. See Management's Discussion and Analysis
of Financial Consolidation and Results of Operation.
(f) Includes provision for merger expenses of $3.4 million, net of income tax benefit of $2.4 million, relating to the
termination of the proposed IVAX merger.
Bergen Brunswig Corporation Class A Common Stock is listed on the New York Stock Exchange. There were approximately 2,100
Class A Common Stock shareowners of record on September 30, 1998.
</FN>
II - 15
b. Financial Statements
STATEMENTS OF CONSOLIDATED EARNINGS
Dollars in thousands, except for per share amounts
===================================================================================================
Years Ended September 30, 1998 1997 1996
===================================================================================================
Consolidated Earnings:
Net sales and other revenues:
Excluding bulk shipments to customers' warehouses $13,720,017 $11,659,127 $ 9,941,633
Bulk shipments to customers' warehouses 3,401,651 2,837,646 2,476,110
-------------------------------------------
Total net sales and other revenues 17,121,668 14,496,773 12,417,743
-------------------------------------------
Costs and expenses:
Cost of sales 16,371,403 13,842,342 11,843,939
Distribution, selling, general and
administrative expenses 534,119 479,399 418,364
Special charges 110,247 5,800 -
-------------------------------------------
Total costs and expenses 17,015,769 14,327,541 12,262,303
-------------------------------------------
Operating earnings 105,899 169,232 155,440
Net interest expense 39,996 30,793 30,170
-------------------------------------------
Earnings before taxes on income 65,903 138,439 125,270
Taxes on income 62,801 56,760 51,737
-------------------------------------------
Net earnings $ 3,102 $ 81,679 $ 73,533
===========================================
Earnings per share:
Basic $ 0.03 $ 0.81 $ 0.74
===========================================
Diluted $ 0.03 $ 0.81 $ 0.73
===========================================
Weighted average number of shares outstanding:
Basic 101,118 100,413 99,948
===========================================
Diluted 102,620 101,429 100,648
===========================================
===================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
II - 16
CONSOLIDATED BALANCE SHEETS
Dollars in thousands
====================================================================================================
September 30, 1998 1997
====================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 79,004 $ 54,494
Short-term investments - 2,786
Accounts and notes receivable, less allowance for
doubtful receivables: 1998, $30,363; 1997, $29,022 920,247 772,342
Inventories 1,458,290 1,309,359
Income taxes receivable 38,371 6,628
Prepaid expenses 4,876 9,866
-------------------------------
Total current assets 2,500,788 2,155,475
-------------------------------
Property - at cost:
Land 12,427 12,602
Buildings and leasehold improvements 88,055 83,829
Equipment and fixtures 186,077 173,875
-------------------------------
Total property 286,559 270,306
Less accumulated depreciation and amortization 141,745 131,944
-------------------------------
Property - net 144,814 138,362
-------------------------------
Other assets:
Goodwill - net 253,568 329,100
Other investments 8,851 5,895
Noncurrent receivables 19,176 12,651
Deferred income taxes 7,352 -
Deferred charges and other assets 68,663 65,640
-------------------------------
Total other assets 357,610 413,286
-------------------------------
Total assets $3,003,212 $2,707,123
===============================
====================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
II - 17
CONSOLIDATED BALANCE SHEETS
Dollars in thousands
====================================================================================================
September 30, 1998 1997
====================================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $1,579,332 $1,336,070
Accrued liabilities 113,331 82,070
Customer credit balances 137,832 176,864
Deferred income taxes 72,846 28,281
Current portion of long-term obligations 6,029 1,021
-------------------------------
Total current liabilities 1,909,370 1,624,306
-------------------------------
Long-term obligations:
7 3/8% senior notes 149,522 149,411
7 1/4% senior notes 99,767 99,732
Revolving bank loan payable 170,000 140,000
7% convertible subordinated debentures 20,609 20,609
6 7/8% exchangeable subordinated debentures 8,425 8,425
Deferred income taxes - 1,791
Other 16,455 17,988
-------------------------------
Total long-term obligations 464,778 437,956
-------------------------------
Shareowners' equity:
Capital stock:
Preferred - Authorized: 3,000,000 shares; issued: none - -
Class A Common - Authorized: 200,000,000 shares;
issued: 1998, 111,835,142 shares; 1997, 111,740,366 shares 167,753 167,611
Paid-in capital 80,231 72,555
Net unrealized (loss) gain on investments, net of income taxes (132) 409
Retained earnings 453,654 492,565
-------------------------------
Total 701,506 733,140
Treasury shares, at cost: 1998, 8,952,812 shares;
1997, 10,909,966 shares (72,442) (88,279)
-------------------------------
Total shareowners' equity 629,064 644,861
-------------------------------
Total liabilities and shareowners' equity $3,003,212 $2,707,123
===============================
====================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
II - 18
STATEMENTS OF CONSOLIDATED SHAREOWNERS' EQUITY
====================================================================================================================================
Class A Common Treasury Shares Total
-------------------- Paid-in Retained -------------------- Shareowners'
Dollars And Shares In Thousands Shares Amount Capital Earnings Shares Amount Other Equity
====================================================================================================================================
Balance, September 30, 1995
as previously reported 55,229 $ 82,843 $146,507 $ 378,229 (5,443) $(87,911) $(319) $519,349
1998 2-for-1 Class A Common Stock split 55,229 82,843 (82,843) (5,443) -
----------------------------------------------------------------------------------------
Balance, September 30, 1995 as adjusted 110,458 165,686 63,664 378,229 (10,886) (87,911) (319) 519,349
Net earnings - - - 73,533 - - - 73,533
Exercise of stock options 584 877 3,707 - - - - 4,584
Cash dividends declared, $0.192 per share - - - (19,182) - - - (19,182)
Change in net unrealized loss on
investments, net of income tax - - - - - - 682 682
----------------------------------------------------------------------------------------
Balance, September 30, 1996 111,042 166,563 67,371 432,580 (10,886) (87,911) 363 578,966
Net earnings - - - 81,679 - - - 81,679
Exercise of stock options 688 1,032 5,086 - (22) (332) - 5,786
Cash dividends declared, $0.216 per share - - - (21,694) - - - (21,694)
Change in net unrealized gain on
investments, net of income tax - - - - - - 46 46
Acquisition of Treasury shares - - - - - (36) - (36)
Other 10 16 98 - (2) - - 114
----------------------------------------------------------------------------------------
Balance, September 30, 1997 111,740 167,611 72,555 492,565 (10,910) (88,279) 409 644,861
Net earnings - - - 3,102 - - - 3,102
Exercise of stock options 95 142 2,087 261 2,110 4,339
Cash dividends declared, $0.315 per share - - - (31,939) - - - (31,939)
Change in net unrealized gain on
investments, net of income tax - - - - - - (541) (541)
Acquisition of businesses - - 5,589 (10,074) 1,696 13,727 - 9,242
----------------------------------------------------------------------------------------
Balance, September 30, 1998 111,835 $167,753 $ 80,231 $ 453,654 (8,953) $(72,442) $(132) $629,064
=========================================================================================
====================================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
II - 19
STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in thousands
===========================================================================================================
Years Ended September 30, 1998 1997 1996
===========================================================================================================
OPERATING ACTIVITIES
Net earnings $ 3,102 $ 81,679 $ 73,533
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Provision for doubtful receivables 11,934 11,899 8,213
Depreciation and amortization of property 23,995 26,919 25,183
Loss (gain) on dispositions of property 1,214 (382) 12
Amortization of intangible assets 13,470 13,837 13,203
Writedown of goodwill 87,271 - -
Abandonment of capitalized software 5,307 - -
Deferred compensation 2,809 2,266 2,242
Deferred income taxes 41,955 10,577 9,070
Effects of changes, net of acquisitions:
Receivables (153,505) (103,814) (76,926)
Inventories (139,209) (88,384) (60,699)
Income taxes receivable (31,663) 7,287 (9,114)
Prepaid expenses and other assets (11,886) (8,043) (5,985)
Accounts payable 231,282 86,903 108,701
Accrued liabilities 23,207 (9,935) 2,252
Customer credit balances (39,050) 43,582 38,516
------------------------------------------
Net cash flows from operating activities 70,233 74,391 128,201
------------------------------------------
Investing Activities
Property acquisitions (29,783) (23,806) (16,696)
Proceeds from dispositions of property 79 1,634 1,833
Purchases of other investments (1,055) (3,447) (327)
Acquisition of businesses, less cash acquired (22,578) - (5,999)
Repurchase (proceeds from sale) of notes receivable
with recourse - (15,884) 7,712
------------------------------------------
Net cash flows from investing activities (53,337) (41,503) (13,477)
------------------------------------------
FINANCING ACTIVITIES
Net revolving bank loan activity 30,000 20,000 (39,000)
Repayment of senior notes - - (100,000)
Repayment of other obligations (2,502) (3,972) (5,020)
Increase in other obligations - - 902
Shareowners' equity transactions:
Exercise of stock options 4,339 5,786 4,584
Cash dividends paid on Common Stock (24,223) (21,694) (19,182)
Other - 78 -
------------------------------------------
Net cash flows from financing activities 7,614 198 (157,716)
------------------------------------------
Net increase (decrease) in cash and cash equivalents 24,510 33,086 (42,992)
Cash and cash equivalents at beginning of year 54,494 21,408 64,400
------------------------------------------
Cash and cash equivalents at end of year $ 79,004 $ 54,494 $ 21,408
==========================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for:
Interest $ 37,823 $ 32,061 $ 31,317
Income taxes, net of refunds 61,731 50,715 51,077
===========================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
II - 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
For the Years Ended September 30, 1998, 1997, and 1996
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Bergen
Brunswig Corporation and its subsidiaries (the "Company"), after elimination of
the effect of intercompany transactions and balances. Certain reclassifications
have been made in the consolidated financial statements and notes to conform to
1998 presentations.
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the balance sheet dates and the reported amounts of revenue and expense during
the reporting periods. Actual results could differ from these estimates and
assumptions.
Cash Equivalents and Investments
The Company considers all highly-liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents. Short-term
investments include debt instruments, principally variable rate demand notes
having maturities of more than three months but less than one year. Other
investments consist of equity securities and are classified as noncurrent
assets.
The Company has classified its investments in debt and equity
securities as "available for sale" securities and has reported such investments
at fair value, with unrealized gains and losses excluded from earnings, and
reported as a separate component of shareowners' equity. Realized gains and
losses on investments are determined by the specific identification method and
are included in net earnings. Such realized gains and losses for the years ended
September 30, 1998, 1997 and 1996 were not material.
Inventories
Inventories are valued at the lower of cost or market, determined on
the last-in, first-out (LIFO) method. If the Company had used the first-in,
first-out (FIFO) method of inventory valuation, which approximates current
replacement cost, inventories would have been higher than reported by $132.3
million and $136.4 million at September 30, 1998 and 1997, respectively.
II - 21
Property
Depreciation and amortization of property are computed principally on a
straight-line basis over estimated useful lives. Generally, the estimated useful
lives are 15 to 40 years for buildings and leasehold improvements, and 3 to 10
years for equipment and fixtures.
Intangible Assets
Goodwill, defined as the excess of cost over net assets of acquired
companies (net of accumulated amortization of $67.2 million at September 30,
1998 and $57.3 million at September 30, 1997), is amortized on a straight-line
basis principally over 40 years. Customer lists, included in deferred charges
and other assets ($5.2 million at September 30, 1998, net of accumulated
amortization of $21.0 million; $7.1 million at September 30, 1997, net of
accumulated amortization of $19.1 million), are amortized on a straight-line
basis over 15 years. In fiscal 1998, the Company changed its method for
assessing the recoverability of goodwill from an undiscounted operating cash
flow analysis to a fair value approach, based on discounted future operating
cash flows. Management of the Company believes a fair value approach, based on
discounted cash flows, is preferable for assessing the recoverability of
goodwill. At least annually, management reviews intangible assets for possible
impairment based on several criteria, including, but not limited to, sales
trends, discounted operating cash flows and other operating factors. See Note 10
for a charge the Company recorded in fiscal 1998 related to impairment of
intangible assets.
Noncurrent Receivables
Noncurrent receivables include notes receivable from employees and
officers due at the Company's discretion in the amount of $4.8 million and $4.9
million at September 30, 1998 and 1997, respectively.
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived assets in accordance
with the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121")
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted future
cash flows are not sufficient to recover the assets' carrying amounts. An
impairment loss is measured by comparing the fair value of an asset to its
carrying amount.
Revenue Recognition
The Company records revenues when product is shipped or services are
provided to its customers.
II - 22
Along with other companies in its industry, the Company has begun
reporting as revenues the gross dollar amount of bulk shipments to customers'
warehouses and the related costs in cost of sales. Bulk shipment transactions
are arranged by the Company with its suppliers at the express direction of the
customer, and involve either shipments from the supplier directly to customers'
warehouse sites or shipments from the supplier to Company warehouses for
immediate shipment to customers' warehouse sites. All years presented have been
reclassified to reflect the new presentation (previously only the gross profit
related to these bulk shipments was reported in revenues; this gross profit was
not material in any year presented). During each of the fiscal years ended
September 30, 1998, 1997 and 1996, the Company made bulk shipments to one
customer's warehouses which comprised approximately 14% of the Company's
consolidated total net sales and other revenues in those years.
Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits" ("SFAS 132") which standardizes
the disclosure requirements for pensions and other postretirement benefits
plans. This new statement does not change the measurement or recognition of
those plans.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of Enterprise and Related Information" ("SFAS 131") which requires companies to
define and report financial and descriptive information on an annual and
quarterly basis about their operating segments. This new statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130") which establishes standards for the reporting and display
of comprehensive income and its components in financial statements. This new
statement defines comprehensive income as "all changes in equity during a
period, with the exception of stock issuances and dividends."
SFAS 133 will be adopted in the Company's 2000 fiscal year, and SFAS
132, 131 and 130 will be adopted in the Company's 1999 fiscal year as required.
Management believes the adoption of these standards will not have a material
effect on the Company's consolidated financial position, results of operations
or cash flows, and any effect will generally be limited to the form and content
of its disclosures.
II - 23
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which
the Company plans to adopt in fiscal 1999. This statement provides guidance for
the capitalization and amortization of costs incurred in connection with
software to be used internally by the Company. Although the guidance set forth
in SOP 98-1 differs from the Company's current accounting methods in certain
respects, management does not expect that adoption of the statement will have a
significant impact on the Company's financial position, results of operations or
cash flows.
2. Borrowing Arrangements
The Company's credit agreement (the "Credit Agreement") with a group of
domestic and foreign banks allows for maximum borrowing up to $400 million, a
maturity date of March 15, 2001, and borrowing under discretionary credit lines
("Discretionary Lines") outside of the Credit Agreement. Borrowings outstanding
under the Credit Agreement were $170 million and $140 million at September 30,
1998 and 1997, respectively. Weighted average interest rates were 6.02% and
6.60% for borrowings outstanding at September 30, 1998 and 1997, respectively.
The maximum outstanding borrowings at any quarter end under the Credit Agreement
including Discretionary Lines for the years ended September 30, 1998 and 1997
were $368 million and $228 million, respectively. The Credit Agreement has loan
covenants which require the Company to maintain certain financial statement
ratios. The Company was in compliance with all required ratios at September 30,
1998.
On May 23, 1995, the Company sold $100 million aggregate principal
amount of 7 1/4% Senior Notes due June 1, 2005 (the "7 1/4% Notes"). On January
14, 1993, the Company sold $150 million aggregate principal amount of 7 3/8%
Senior Notes due January 15, 2003 (the "7 3/8% Notes"). The 7 1/4% Notes and 7
3/8% Notes are not redeemable prior to maturity and are not entitled to any
sinking fund. Interest on the 7 1/4% Notes is payable semi-annually on June 1
and December 1 of each year. Interest on the 7 3/8% Notes is payable
semi-annually on January 15 and July 15 of each year. The carrying value of the
7 1/4% Notes and 7 3/8% Notes represents gross proceeds plus amortization of the
original issue discount ratably over the life of each issue.
The Company filed a shelf registration statement with the Securities
and Exchange Commission, which became effective on March 27, 1996. The
registration statement allows the Company to sell senior and subordinated debt
or equity securities to the public from time to time, up to an aggregate maximum
principal amount of $400 million. The Company intends to use the net proceeds
from the sale of any such securities for general corporate purposes, which may
include, without limitation, the repayment of indebtedness of the Company or of
any of its subsidiaries, possible acquisitions, capital expenditures and working
capital requirements. Pending such application, the net proceeds may be
temporarily invested in short-term securities. No offering has occurred since
the effective date of the registration statement. Any offering of such
securities shall be made only by means of a prospectus.
II - 24
In July 1986, the Company issued $43.0 million of 6 7/8% Exchangeable
Subordinated Debentures due July 2011 (the "6 7/8% Debentures") and during March
1990, $32.1 million principal amount of the 6 7/8% Debentures was tendered and
purchased pursuant to an offer from the Company. Since March 1990, the Company
has redeemed an additional $2.5 million aggregate principal amount plus accrued
interest. The remaining unredeemed 6 7/8% Debentures receive interest on January
15 and July 15 of each year.
In connection with the acquisition of Durr-Fillauer Medical Inc. and
subsidiaries ("Durr") in September 1992, the Company assumed $69.0 million of
Durr's 7% Convertible Subordinated Debentures due March 1, 2006 (the "7%
Debentures"). Since September 1992, the Company has redeemed $48.4 million
aggregate principal amount plus accrued interest. The remaining unredeemed 7%
Debentures receive interest on March 1 and September 1 of each year.
Scheduled future principal payments of long-term obligations, excluding
deferred income taxes, are $6.0 million in fiscal 1999, $1.4 million in fiscal
2000, $171.3 million in fiscal 2001, $1.1 million in fiscal 2002, $150.5 million
in fiscal 2003, and $140.5 million thereafter.
3. Capital Stock, Paid-in Capital and Stock Options
The authorized capital stock of the Company consists of 200,000,000
shares of Class A Common Stock, par value $1.50 per share (the "Common Stock");
and 3,000,000 shares of Preferred Stock without nominal or par value (the
"Preferred Stock").
The Board of Directors (the "Board") is authorized to divide the
Preferred Stock into one or more series and to determine the relative rights,
preferences and limitations of the shares of any such series. In addition, the
Board may give the Preferred Stock (or any series) special, limited, multiple or
no voting rights.
Subject to the preferences and other rights of the Preferred Stock, the
Common Stock may receive stock or cash dividends as declared by the Board and
each share of Common Stock is entitled to one vote per share at every meeting of
shareowners. In the event of any liquidation, dissolution or winding up of the
affairs of the Company, the holders of the Preferred Stock may be entitled to a
liquidation preference as compared with the rights of owners of the Common
Stock.
On February 9, 1994, the Board adopted a Shareowner Rights Plan which
provides for the issuance of one Preferred Share Purchase Right (the "Rights")
for each outstanding share of Common Stock. The Rights are generally not
exercisable until 10 days after a person or group ("Acquiror") acquires 15% of
II - 25
the Common Stock or announces a tender offer which could result in a person or
group owning 15% or more of the Common Stock (an "Acquisition"). Each Right,
should it become exercisable, will entitle the owner to buy 1/100th of a share
of a new series of the Company's Series A Junior Preferred Stock at an exercise
price of $80.00.
In the event of an Acquisition without the approval of the Board, each
Right will entitle the owner, other than an Acquiror, to buy at the Rights'
then-current exercise price a number of shares of Common Stock with a market
value equal to twice the exercise price. In addition, if, after an Acquisition,
the Company were to be acquired by merger, shareowners with unexercised Rights
could purchase common stock of the Acquiror with a value of twice the exercise
price of the Rights. The Board may redeem the Rights for $0.01 per Right at any
time prior to an Acquisition. Unless earlier redeemed, the Rights will expire on
February 18, 2004.
On September 24, 1998, the Company declared a 2-for-1 stock split on
the Company's Common Stock which was paid on December 1, 1998 to shareowners of
record on November 2, 1998. Share and per share amounts included in the
accompanying consolidated financial statements and notes are based on the
increased number of shares giving retroactive effect to the stock split.
At September 30, 1998, there were outstanding options to purchase
43,885 shares of Common Stock, under a 1983 stock option plan, at prices per
share not less than the fair market value on the dates the options were granted.
No additional options may be granted under this plan.
The Company has an amended and restated 1989 stock incentive plan which
authorizes the granting of stock options to officers, key employees and other
recipients to purchase shares of Common Stock within a ten-year period from date
of grant at such price per share as may be set by the Company's
Compensation/Stock Option Committee. The number of shares available for grant
under the plan is formula-based, providing that, upon certain conditions, no
more than 1% of the number of issued shares at the immediately preceding fiscal
year-end may be added to the shares available for the grant pool in any fiscal
year to this class of optionees. Stock option grants are also available to
nonemployee directors and only at a price per share equal to the market value on
the grant date. At September 30, 1998, there were 327,488 shares available for
grant under the plan, with 182,260 shares specifically reserved for nonemployee
directors.
Stock appreciation rights may be offered to some or all of the
employees, but not nonemployee directors, who hold or receive options granted
under the stock option plans. No stock appreciation rights were outstanding as
of September 30, 1998, 1997, or 1996.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). No compensation cost has
been recognized for the Company's stock option plans. Had compensation cost for
the
II - 26
Company's 1989 stock incentive plan been determined based on the fair value at
the grant date for grants in fiscal 1998, 1997 and 1996 consistent with the
provisions of SFAS 123, the Company's net earnings and diluted earnings per
share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996
----------------------------------------------------------------------------------
(in thousands, except for per share amounts)
Net earnings - as reported $ 3,102 $81,679 $73,533
Net earnings - pro forma $ 576 $80,474 $73,000
Diluted earnings per share - as reported $ 0.03 $ 0.81 $ 0.73
Diluted earnings per share - pro forma $ 0.01 $ 0.79 $ 0.73
The fair value of options granted under the 1989 stock incentive plan
during fiscal 1998, 1997 and 1996 were used to calculate the pro forma net
earnings and diluted earnings per share above, on the various grant dates, using
a binomial option-pricing model with the following weighted average assumptions:
1998 1997 1996
--------------------------------------------------------------------------------
Dividend yield 2.0% 2.0% 2.0%
Expected volatility 46.9% 36.6% 31.7%
Risk-free interest rate 4.9% 5.9% 5.8%
Expected life 4 years 4 years 4 years
Fair value of grants $8.65 $4.14 $2.90
II - 27
Changes in the number of shares represented by outstanding options
during the years ended September 30, 1998, 1997 and 1996 are summarized as
follows:
1998 1997 1996
--------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Actual Price Actual Price Actual Price
------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 4,467,584 $9.13 4,723,566 $8.01 3,522,736 $6.58
Options granted ($8.63 to
$24.91 per share) 3,105,716 23.06 787,506 12.86 1,887,500 10.12
Options exercised ($2.97 to
$12.30 per share) (355,546) 7.97 (688,342) 6.34 (584,664) 6.32
Options canceled ($2.97 to
$21.00 per share) (152,294) 13.65 (355,146) 8.50 (102,006) 7.50
---------------------------------------------------------------
Outstanding at end of year
(1998, $4.97 to $24.91 per share) 7,065,460 $15.21 4,467,584 $9.13 4,723,566 $8.01
==============================================================
Exercisable at end of year 2,772,161 2,581,592 1,666,830
========= ========== =========
Available for grant at end of year 327,488 427,006 886,406
======= ======= =======
The following table summarizes information concerning outstanding and
exercisable options at September 30, 1998:
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of exercise prices Outstanding Life Price Exercisable Price
------------------------------------------------------------------------------------------------------------------
$4.97 - $5.93 396,172 5.03 $5.90 396,172 $5.90
$6.00 - $6.76 624,006 5.67 $6.30 624,006 $6.30
$7.24 - $8.48 746,270 3.16 $7.82 746,270 $7.82
$8.52 - $8.90 202,330 6.41 $8.67 125,424 $8.68
$9.77 863,466 7.11 $9.77 431,733 $9.77
$10.40 - $11.55 512,622 7.89 $11.37 248,186 $11.36
$12.30 - $14.57 778,978 8.15 $13.09 194,745 $13.09
$21.00 - $21.11 1,065,100 8.90 $21.06 5,625 $21.00
$24.91 1,876,516 9.99 $24.91 - $ -
-------------------------------------------------------------------
7,065,460 6.30 $15.21 2,772,161 $ 8.26
===================================================================
II - 28
At September 30, 1998, an aggregate of 9,244,766 shares of Class A
Common Stock was reserved for the exercise of stock options and for issuance
under the elective retirement savings plan (see Note 8).
4. Acquisitions
On September 30, 1998, the Company acquired Ransdell Surgical, Inc.
("Ransdell"), a privately-held medical-surgical supply distributor, and its
affiliate, Choice Systems, Inc. ("Choice"), a developer of supply channel
management software for the healthcare industry, headquartered in Louisville,
Kentucky. These acquisitions were accounted for as poolings of interests for
financial reporting purposes. The Company issued approximately 716,000 shares of
its Common Stock to the Ransdell and Choice shareowners.
On August 31, 1998, the Company acquired The Lash Group, Inc. ("Lash"),
a privately-held healthcare reimbursement consulting firm headquartered in
Washington, D.C. This acquisition was accounted for as a pooling of interests
for financial reporting purposes and the Company issued approximately 980,000
shares of its Common Stock to the Lash shareowners.
The impact of the Ransdell, Choice and Lash acquisitions, on a
historical basis, is not significant. Accordingly, prior period historical
financial statements have not been restated for these acquisitions. The above
acquired entities' financial results have been included in the consolidated
financial results of the Company since the date of their respective acquisition
dates. The aggregate merger expenses incurred related to these acquisitions were
not material.
On May 12, 1998, the Company completed the acquisition of Pacific
Criticare, Inc. ("Pacific Criticare"), a privately-held distributor of
medical-surgical products located in Waipahu, Hawaii for a cash purchase price
of $4.0 million. The Company acquired assets at fair value of approximately $2.1
million, assumed liabilities of approximately $1.7 million and incurred costs of
$.3 million. The Company recorded goodwill of approximately $3.9 million in the
transaction.
On January 2, 1998, the Company completed the acquisition of
substantially all of the net assets of Besse Medical Services ("Besse"), Inc., a
privately-held distributor of injectables, diagnostics and medical supplies
located in Cincinnati, Ohio, for a cash purchase price of $22.2 million. The
Company acquired assets at fair value of approximately $11.5 million, assumed
liabilities of approximately $6.7 million and incurred costs of $.4 million. The
Company recorded goodwill of approximately $17.8 million in the transaction.
On August 7, 1996, the Company completed the acquisition of certain net
assets of Oncology Supply Company ("Oncology"), a privately-held oncology supply
distributor located in Dothan, Alabama for a cash purchase price of $5.8
million. The Company acquired assets at fair value of approximately $6.5
million, assumed liabilities of approximately $5.4 million and incurred costs of
$.2 million. The Company recorded goodwill of approximately $4.9 million in the
transaction.
II - 29
Had the acquisitions of Pacific Criticare and Besse occurred at the
beginning of fiscal 1997, the pro-forma inclusion of their operating results
would not have had a significant effect on the reported consolidated net sales
and other revenues and net earnings in either fiscal 1997 or 1998. Had the
acquisition of Oncology occurred at the beginning of fiscal 1996, the pro-forma
inclusion of its operating results would not have had a significant effect on
the reported consolidated net sales and other revenues and net earnings in
fiscal 1996.
5. Earnings per Share
During the fiscal year 1998, the Company adopted SFAS No. 128 ("SFAS
128"), "Earnings Per Share (EPS)," which replaced the previously reported
primary and fully diluted EPS with basic and diluted EPS. Unlike primary EPS,
basic EPS excludes any dilutive effect of options, warrants and convertible
securities. Diluted EPS is similar to the previously reported fully diluted EPS.
All EPS amounts for all fiscal years have been presented and, where necessary,
restated to conform to the requirements of SFAS 128.
The following table sets forth the computation of basic and diluted EPS
for the fiscal years ended September 30, 1998, 1997 and 1996, respectively.
In thousands, except EPS 1998 1997 1996
----------------------------------------------------------------------------------
Numerator for both basic and
diluted EPS - net earnings $ 3,102 $ 81,679 $ 73,533
=================================
Denominator:
Denominator for basic EPS - weighted
average shares of Class A Common
Stock outstanding 101,118 100,413 99,948
Effect of dilutive employees' stock
options (dilutive potential common
shares) 1,502 1,016 700
---------------------------------
Denominator for diluted EPS - adjusted
weighted average shares and
assumed conversions 102,620 101,429 100,648
=================================
Earnings per share:
Basic $ 0.03 $ 0.81 $ 0.74
=================================
Diluted $ 0.03 $ 0.81 $ 0.73
=================================
II - 30
6. Leases
The Company conducts most of its operations from leased warehouse and
office facilities and uses certain data processing, transportation, and other
equipment under lease agreements expiring at various dates through fiscal 2008,
excluding renewal options. Future minimum rental commitments at September 30,
1998, under operating leases having noncancelable lease terms in excess of one
year, aggregated $64.8 million, with rental payments during the five succeeding
fiscal years of $23.1 million, $15.3 million, $10.9 million, $6.3 million and
$3.2 million, respectively. Future minimum rentals to be received under
noncancelable subleases at September 30, 1998 were not material. Net rental
expense for the years ended September 30, 1998, 1997, and 1996, was $26.2
million, $22.3 million and $17.9 million, respectively. Sublease income was not
material in any of these years.
7. Taxes on Income
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
established for temporary differences between the financial reporting bases and
the tax bases of the Company's assets and liabilities at tax rates expected to
be in effect when such assets or liabilities are realized or settled.
Total Federal and state taxes on income for the years ended September
30, 1998, 1997, and 1996 are summarized as follows:
Dollars in thousands 1998 1997 1996
------------------------------------------------------------------
Currently payable
Federal $15,714 $38,964 $35,985
State 5,132 7,219 6,682
Deferred (principally Federal) 41,955 10,577 9,070
--------------------------------
Total $62,801 $56,760 $51,737
================================
II - 31
Taxes on income vary from the statutory Federal income tax rate applied
to earnings before taxes on income as the result of the following:
Dollars in thousands 1998 1997 1996
---------------------------------------------------------------------
Statutory Federal income tax
rate applied to earnings before
taxes on income $23,066 $48,454 $43,844
Increase (decrease) in taxes
resulting from:
Amortization of goodwill 3,319 3,262 2,447
State income taxes - net of
Federal benefits 6,385 5,578 4,992
Governmental investment income (45) (184) (157)
Goodwill writedown 30,545 - -
Other (469) (350) 611
-----------------------------
Total taxes on income $62,801 $56,760 $51,737
=============================
The tax effects of significant items comprising the Company's net
deferred tax liability as of September 30, 1998 and 1997 are as follows:
Dollars in thousands 1998 1997
--------------------------------------------------------------------------------
Deferred tax liabilities:
Inventory basis difference due to LIFO
method and uniform capitalization $114,552 $49,142
Accelerated depreciation 7,368 8,223
Employee benefits 2,481 4,048
Mark to market receivables 7,535 -
Other 2,868 3,074
--------------------------
Total 134,804 64,487
--------------------------
Deferred tax assets:
Reserves for doubtful receivables 17,695 15,639
Restructuring expenses not currently deductible 2,736 1,264
Vacation pay not currently deductible 3,018 1,933
Accrued liabilities not currently deductible 17,188 15,579
AMT credit carryforward 22,400 -
Net operating loss carryforwards 15,050 -
--------------------------
Total 78,077 34,415
Valuation allowance for deferred income tax assets (8,777) -
--------------------------
Deferred income tax assets 69,310 34,415
--------------------------
Net deferred tax liability $65,494 $30,072
==========================
II - 32
Deferred taxes result from temporary differences in the recognition of
revenues and expenses for tax and financial reporting purposes.
The Company has approximately $43.0 million of net operating loss
carryforwards related to an acquisition that can be used to reduce future
taxable income. These net operating losses can only be used to offset income of
the acquired entity, and, if not utilized, will begin expiring in fiscal 2002.
The Company has provided a valuation allowance on a portion of the deferred tax
asset related to the pre-acquisition net operating losses at September 30, 1998
due to the uncertainly regarding realization.
8. Retirement and Savings Plans
The Company provides for retirement benefits through an elective
retirement savings plan and supplemental retirement plans.
The Company has an elective retirement savings plan generally available
to all employees with 30 days of service. Under the terms of the plan, the
Company guarantees a contribution of $0.50 for each $1.00 invested by the
participant up to the participant's investment of 6% of salary, subject to plan
and regulatory limitations. The Company may also make additional cash or stock
contributions to the plan at its discretion. The Company's contributions are
vested to participants over five years. The Company made contributions of $4.5
million, $3.8 million, and $3.4 million to the plan in fiscal 1998, 1997, and
1996, respectively.
The supplemental retirement plans provide benefits for certain officers
and key employees. The Company has a Supplemental Executive Retirement Plan
("SERP") for officers and key employees. SERP is a "target" benefit plan, with
the annual lifetime benefit based upon a percentage of salary during the final
five years of pay at age 62, offset by several other sources of income including
benefits payable under a prior supplemental retirement plan.
The components of net periodic pension cost for the supplemental
retirement plans for fiscal 1998, 1997, and 1996 are as follows:
Dollars in thousands 1998 1997 1996
-----------------------------------------------------------------------
Service cost $ 916 $ 598 $ 294
Interest cost 1,843 1,596 1,519
Amortization of prior service cost 251 378 378
Amortization of initial unrecognized
net obligation 264 264 264
---------------------------
Total $3,274 $2,836 $2,455
===========================
II - 33
Assumptions used to develop the net periodic pension cost for
supplemental retirement plans were:
1998 1997 1996
-----------------------------------------------------------------------
Discount rate 6.75% 7.00-8.00% 7.00-8.00%
Rate of increase in salary levels 5.50% 5.50% 5.50%
The funded status of the supplemental retirement plans at September 30,
1998 and 1997 is as follows:
Dollars in thousands 1998 1997
---------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $16,979 $15,961
Nonvested benefits 186 -
------------------
Accumulated benefit obligation 17,165 15,961
Effect of assumed increase in future compensation levels 5,522 5,522
------------------
Projected benefit obligation 22,687 21,483
Assets of plans at fair value (2,919) (2,865)
-------------------
Excess of projected benefit obligation over assets 19,768 18,618
Unrecognized prior service cost (1,882) (2,132)
Unrecognized net loss (8,885) (7,882)
Unrecognized net obligation remaining from date of adoption (3,049) (3,314)
-------------------
Pension liability recognized in the consolidated balance sheets $ 5,952 $ 5,290
==================
At September 30, 1998 and 1997, the Company owned life insurance in the
aggregate amounts of $48.8 million and $46.5 million, respectively, covering
substantially all of the participants in the supplemental retirement plans. The
Company intends to keep this life insurance in force until the demise of the
participants.
Contributions are also made to multi-employer defined benefit plans
administered by labor unions for certain union employees. Approximately $0.4
million was charged to pension expense and contributed to these plans in each of
the years ended September 30, 1998, 1997, and 1996.
9. Contingencies
The Company has been named as a defendant, along with several
pharmaceutical industry-related companies, in several state antitrust actions in
California and Alabama and a Federal multidistrict antitrust action. The
California State action purports to be a coordinated class action under
II - 34
California's Cartwright Act, Unfair Practices Act and Business and Professions
Code. The Alabama State complaint purports to be a class action under Alabama
antitrust law. The Federal class action complaint alleges that the Company and
numerous manufacturers and other wholesalers violated the Sherman Act. In
November 1994, the Federal court certified the class defined in the Federal
class action complaint from October 15, 1989 to the present. Plaintiffs seek
injunctive relief and treble damages in an amount to be determined at trial.
In October 1994, the Company entered into a sharing agreement
with five other wholesalers and 26 pharmaceutical manufacturers. Among other
things, the agreement provides that: (a) if a judgment is entered into against
both the manufacturer and wholesaler defendants, the total exposure for joint
and several liability of the Company is limited to $1.0 million; (b) if a
settlement is entered into by, between, and among the manufacturer and
wholesaler defendants, the Company has no monetary exposure for such settlement
amount; (c) the six wholesaler defendants will be reimbursed by the 26
pharmaceutical defendants for related legal fees and expenses up to $9.0 million
total (of which the Company will receive a proportionate share); and (d) the
Company is to release certain claims which it might have had against the
manufacturer defendants for the claims presented by the plaintiffs in these
cases. The agreement covers the Federal court litigation, as well as the cases
which have been filed in various state courts. In December 1994, plaintiffs in
the Federal action had moved to set aside the agreement, but plaintiffs' motion
was denied on April 25, 1995. In 1996, the class plaintiffs filed a motion for
approval of a settlement with 12 of the manufacturer defendants, which would
result in dismissal of claims against those manufacturers and a reduction of the
potential claims against the remaining defendants, including those against the
Company. The Court granted approval for the settlement. In 1998, an additional
four of the manufacturer defendants settled. The effect of the settlements on
the sharing agreement is that the Company's maximum potential loss would be $1.0
million, regardless of the outcome of the lawsuits, plus possible legal fee
expenses in excess of the Company's proportionate share of the $9.0 million
reimbursement of such fees or any additional amounts to be paid by the
manufacturer defendants.
In September 1998, a jury trial of this action commenced in Federal
Court. On November 30, 1998, the Court granted all remaining defendants a
directed verdict, dismissing all class claims against the Company and other
defendants. It is unclear whether the ruling will be appealed.
In addition to the above-mentioned Federal class action and state court
actions, the Company and other wholesale defendants have been added as
defendants in a series of related antitrust lawsuits brought by certain
independent pharmacies who have opted out of the class action cases and by
certain chain drug and grocery stores. After a successful motion by the Company
and other wholesalers, the damage period in these cases has been limited to
October 1993 to the present. These lawsuits are also covered by the sharing
agreement described above.
II - 35
The Company believes that the allegations of liability set forth in
these lawsuits are without merit as to the wholesaler defendants and that any
attendant liability of the Company, although unlikely, would not have a material
effect on the Company's consolidated financial condition, results of operations
or cash flows.
The Company is involved in various additional items of litigation.
Although the amount of liability at September 30, 1998 with respect to these
additional items of litigation cannot be ascertained, in the opinion of
management, any resulting future liability will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
10. Special Charges
During fiscal 1998, the Company recorded a special non-cash pre-tax
charge of $87.3 million for writedown of Bergen Brunswig Medical Corporation
("BBMC") goodwill related to certain acquisitions made prior to September 1995,
resulting from a realized impairment to the carrying value of BBMC's long-lived
assets. In addition to the goodwill writedown, the Company recorded a pre-tax
charge of $3.0 million for BBMC restructuring expenses which represent severance
costs associated with streamlining and refocusing the sales organization and
costs associated with the consolidation of four divisions to improve efficiency
and customer service. Other special charges recorded during fiscal 1998 include
a non-cash pre-tax charge of $5.3 million related to the abandonment of
capitalized software as a result of technology improvements; and a pre-tax
charge of $14.6 million related primarily to the terminated merger with Cardinal
Health, Inc. ("Cardinal") (see Note 13).
During fiscal 1997, the Company recorded a pre-tax charge of $5.8
million for expenses related to the proposed merger with IVAX Corporation which
was terminated on March 20, 1997.
II - 36
Following is a summary of the special charges incurred by the Company
in the last two fiscal years:
Years Ended September 30,
-------------------------
In thousands 1998 1997
----------------------------------------------------------------
Goodwill writedown $ (87,271) $ -
Restructuring expenses (3,034) -
Abandoned capitalized software (5,307) -
Merger-related expenses (14,635) (5,800)
-------------------------
Total special charges (110,247) (5,800)
Tax effect of special charges 9,421 2,378
------------------------
Effect on net earnings $(100,826) $(3,422)
=========================
11. Disclosures About Fair Value of Financial Instruments
The recorded amounts of the Company's cash and cash equivalents,
short-term investments, accounts and notes receivable, other investments,
noncurrent receivables, accounts payable and the revolving bank loan payable,
the 6 7/8% Debentures and the 7% Debentures at September 30, 1998 approximate
fair value. The fair values of the Company's 7 3/8% Notes and 7 1/4% Notes are
estimated as follows, based on the market prices of these instruments as of
September 30, 1998:
Recorded
Dollars in thousands Amount Fair Value
--------------------------------------------------------------
7 3/8% Notes $149,522 $156,715
7 1/4% Notes 99,767 104,720
12. Pending Business Combinations
On November 25, 1998, the Company signed an agreement to acquire 100%
of the capital stock of J.M. Blanco, Inc. ("J.M. Blanco"), Puerto Rico's largest
pharmaceutical distributor, headquartered in Guaynabo, Puerto Rico. Under the
terms of the agreement, the Company would pay approximately $24 million in cash
and assume approximately $27 million in debt.
On November 19, 1998, the Company signed an agreement to acquire
substantially all of the business, assets and property, subject to certain
II - 37
liabilities, of Medical Initiatives, Inc. ("MII"), a pre-filler of
pharmaceuticals for oncology centers, located in Tampa, Florida. Under the terms
of the agreement, the Company would issue approximately 227,000 shares of the
Company's Common Stock.
On November 8, 1998, the Company signed a definitive purchase agreement
to acquire Stadtlander Drug Co. Inc. ("Stadtlander"), a national leader in
disease-specific pharmaceutical care delivery for transplant, HIV, infertility
and serious mental illness patient populations and a leading provider of
pharmaceutical care to the privatized corrections market, headquartered in
Pittsburgh, Pennsylvania. Under the terms of the agreement, the Company would
pay approximately $178 million in cash and issue approximately 6,000,000 shares
of its Common Stock, and assume approximately $100 million in debt.
Consummations of the J.M. Blanco, MII and Stadtlander transactions, to
be accounted for as purchases for financial reporting purposes, are subject to
certain conditions, including the receipt of regulatory approvals. The purchase
prices of these acquisitions are subject to adjustments after completion of
acquisition audits. The MII acquisition is expected to be completed in the first
quarter of fiscal 1999, while the J.M. Blanco and Stadtlander acquisitions are
expected to be completed in the second quarter of fiscal 1999. The J.M. Blanco
acquisition and the cash portion of the Stadtlander acquisition will be financed
from borrowings under the Credit Agreement and other bank borrowings.
13. Terminated Merger Agreement
On August 23, 1997, the Company signed a definitive merger agreement
with Cardinal, a distributor of pharmaceuticals and provider of value-added
pharmaceutical-related services, headquartered in Dublin, Ohio. The merger
agreement called for the Company to become a wholly-owned subsidiary of Cardinal
and for shareowners of the Company to receive Cardinal Common Shares in exchange
for outstanding shares of the Company's Common Stock. On July 31, 1998, the
United States District Court for the District of Columbia granted the request of
the Federal Trade Commission for a preliminary injunction to halt the proposed
merger. On August 7, 1998, the Company and Cardinal jointly terminated the
merger agreement.
During fiscal 1998, the Company recorded a pre-tax charge of $14.0
million for expenses related to the Cardinal merger, net of a $7.0 million
pre-tax reimbursement from Cardinal upon termination of the merger agreement.
Additionally, the termination of the Cardinal merger agreement will cause the
expenses incurred by the Company (that would not have been deductible had the
proposed merger been consummated) to become deductible, resulting in a
tax-benefit of $5.8 million (see Note 10).
II - 38
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareowners of
Bergen Brunswig Corporation:
We have audited the accompanying consolidated balance sheets of Bergen
Brunswig Corporation and subsidiaries as of September 30, 1998 and 1997 and the
related statements of consolidated earnings, shareowners' equity and cash flows
for each of the three years in the period ended September 30, 1998. These
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bergen
Brunswig Corporation and subsidiaries at September 30, 1998 and 1997, and the
results of their operations, and their cash flows for each of the three years in
the period ended September 30, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 1 of Notes to the Consolidated Financial
Statements, the Company changed its method of accounting for the assessment of
the recoverability of goodwill from an undiscounted operating cash flow analysis
to a fair value approach based on discounted future operating cash flows.
/s/ Deloitte & Touche LLP
Costa Mesa, California
October 30, 1998 (except for
Note 12 as to which the date
is November 25, 1998)
II - 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II - 40
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
The registrant incorporates by reference herein information to be set
forth in its definitive proxy statement for its 1999 annual meeting of
shareowners that is responsive to the information required with respect to this
Item. If such proxy statement is not mailed to shareowners and filed with the
Securities and Exchange Commission within 120 days after the end of the
registrant's most recently completed fiscal year, the registrant will provide
such information by means of an amendment to this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The registrant incorporates by reference herein information to be set
forth in its definitive proxy statement for its 1999 annual meeting of
shareowners that is responsive to the information required with respect to this
Item. If such proxy statement is not mailed to shareowners and filed with the
Securities and Exchange Commission within 120 days after the end of the
registrant's most recently completed fiscal year, the registrant will provide
such information by means of an amendment to this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The registrant incorporates by reference herein information to be set
forth in its definitive proxy statement for its 1999 annual meeting of
shareowners that is responsive to the information required with respect to this
Item. If such proxy statement is not mailed to shareowners and filed with the
Securities and Exchange Commission within 120 days after the end of the
registrant's most recently completed fiscal year, the registrant will provide
such information by means of an amendment to this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The registrant incorporates by reference herein information to be set
forth in its definitive proxy statement for its 1999 annual meeting of
shareowners that is responsive to the information required with respect to this
Item. If such proxy statement is not mailed to shareowners and filed with the
Securities and Exchange Commission within 120 days after the end of the
registrant's most recently completed fiscal year, the registrant will provide
such information by means of an amendment to this Annual Report on Form 10-K.
III - 1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements
The following Consolidated Financial Statements of
Bergen Brunswig Corporation and Subsidiaries are included in
Part II, Item 8:
Statements of Consolidated Earnings for the Years
Ended September 30, 1998, 1997 and 1996
Consolidated Balance Sheets, September 30, 1998
and 1997
Statements of Consolidated Shareowners' Equity for
the Years Ended September 30, 1998, 1997
and 1996
Statements of Consolidated Cash Flows for the Years
Ended September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
Financial statements and schedules not listed are omitted because of
the absence of the conditions under which they are required or because
all material information is included in the consolidated financial
statements or notes thereto.
IV - 1
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (Continued)
3. Exhibits
--------
*3(a) The Restated Certificate of Incorporation dated November 13,
1998.
*3(b) The By-Laws as amended and restated, dated November 13,
1998.
Exhibits 3(a) and 3(b) above are set forth as Exhibits 4.1
and 4.2 in the Company's Post Effective Amendment No. 2 to
Form S-3 dated December 17, 1998 (file no. 333-63441).
*4(a) The Senior Indenture for $400,000,000 of Debt Securities
dated as of December 1, 1992 between the Company and
Chemical Trust Company of California as Trustee is set forth
as Exhibit 4.1 to the Company's Registration Statement on
Form S-3 dated December 1, 1992 (file no. 33-55136).
The Company agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of each instrument with
respect to other issues of long-term debt of the Company,
the authorized principal amount of which does not exceed 10%
of the total assets of the Company on a consolidated basis.
*4(b) Rights Agreement, dated as of February 8, 1994, between
Bergen Brunswig Corporation and Chemical Trust Company of
California, as Rights Agent, including all exhibits thereto,
is incorporated herein by reference to Exhibit 1 to the
Company's Registration Statement on Form 8-A dated February
14, 1994.
**10(a) Bergen Brunswig Corporation Deferred Compensation Plan.
**10(b) Director Indemnification Agreement and Amendment to Director
Indemnification Agreement.
*10(c) Bergen Brunswig Corporation Bonus Plan as adopted September
1, 1977 and amended October 19, 1990.
*10(d) Amended and Restated 1989 Stock Incentive Plan of Bergen
Brunswig Corporation and Subsidiary Companies.
*10(e) Retired Officers' Medical Plan.
IV - 2
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (Continued)
3. Exhibits
--------
Exhibits 10(c), 10(d) and 10(e) are set forth as Exhibits
10(e), 10(g) and 10(o) in the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1997.
**10(f) Bergen Brunswig Corporation Stock Option Plans, other than
the Amended and Restated 1989 Stock Incentive Plan.
*10(g) Form of Amended and Restated Capital Accumulation Plan is
set forth as Exhibit 10.2 in the Company's Registration
Statement on Form S-3 and Amendment No.1 thereto relating to
a shelf offering of $400 million in securities filed
February 1, 1996 and March 19, 1996, respectively (file no.
333-631).
10(h) Amended and Restated Supplemental Executive Retirement Plan
dated September 24, 1998.
*10(i) Amendment No.1 to the Amended and Restated Capital
Accumulation Plan is set forth as Exhibit 10(m) in the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996.
*10(j) Amended and Restated Executive Loan Program dated March 3,
1995 is set forth as Exhibit 10(g) in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1995.
*10(k) Employment Agreement and Schedule.
*10(l) Severance Agreement and Schedule.
Exhibits 10(k) and 10(l) above are set forth as Exhibit
10(q) and 10(r) in the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994.
*10(m) Stock Purchase Agreement, dated as of November 8, 1998, by
and among Stadtlander Drug Co., Inc., Counsel Corporation,
Stadt Holdings Inc. and the Company is set forth as Exhibit
2.1 to the Company's Report on Schedule 13D, dated November
18, 1998, filed with respect to PharMerica, Inc.
IV - 3
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (Continued)
3. Exhibits
--------
21 List of subsidiaries of Bergen Brunswig Corporation.
23 Independent Auditors' Consent.
24 Power of Attorney is set forth on the Signature pages in
Part IV of this Annual Report.
27 Financial Data Schedule for the year ended September 30,
1998.
99(a) Statement Regarding Forward-Looking Information.
*99(b) Split Dollar Life Insurance Plan with Robert E. Martini is
set forth as Exhibit 99(b) in the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1997.
*99(c) Amended and Restated Credit Agreement dated as of September
30, 1994 among Bergen Brunswig Drug Company, Bergen Brunswig
Corporation and Bank of America National Trust and Savings
Association is set forth as Exhibit 99(h) in the Company's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1994.
*99(d) First and Second Amendments to Amended and Restated Credit
Agreement dated as of February 27, 1995 and March 16, 1996,
respectively, are set forth as Exhibits 99(a) and 99(b),
respectively, in the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
99(e) Waiver Letter to Amended and Restated Credit Agreement dated
as of October 23, 1998.
*99(f) Item 1 - Legal Proceedings of Part II of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, are incorporated herein by reference in Part I, Item 3
of this Annual Report.
99(g) Independent Auditors' Preferability Letter.
IV - 4
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (Continued)
3. Exhibits
--------
* Document has heretofore been filed with the Securities and Exchange
Commission and is incorporated herein by reference and made a part
hereof.
** Incorporated herein by reference to the exhibits filed as part of the
Company's Registration Statement on Form S-3 (Registration No. 33-5530)
and Amendment Nos. 1 and 2 thereto relating to an offering of
$43,000,000 principal amount of 6 7/8% Exchangeable Subordinated
Debentures due 2011, filed with the Securities and Exchange Commission
on May 8, July 1, and July 8, 1986, respectively.
(b) Reports on Form 8-K:
On November 12, 1998, a Current Report on Form 8-K, dated November 9,
1998, was filed, reporting under Item 5, that the Company entered into
a Stock Purchase Agreement with Stadtlander Drug Co., Inc. ("SDC"),
Counsel Corporation and Stadt Holdings, Inc., pursuant to which the
Company has agreed to acquire 100% of the outstanding stock of SDC.
On August 12, 1998, a Current Report on Form 8-K, dated August 7, 1998,
was filed, reporting under Item 5, that the Company and Cardinal had
jointly terminated the Agreement and Plan of Merger, dated as of August
23, 1997, as amended as of March 16, 1998 by and among Cardinal, Bruin
Merger Corp. and the Company.
IV - 5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BERGEN BRUNSWIG CORPORATION
December 28, 1998 By /s/ Donald R. Roden
------------------------------------
Donald R. Roden
President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below, hereby constitutes and appoints Robert E. Martini, Donald R. Roden and
Milan A. Sawdei and each of them singly, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments (including pre-effective amendments and post-effective amendments) to
this Annual Report on Form 10-K, and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Robert E. Martini Chairman of the Board December 28, 1998
- ----------------------- and Director
Robert E. Martini
/s/ Donald R. Roden President and Chief December 28, 1998
- --------------------- Executive Officer
Donald R. Roden and Director (Principal
Executive Officer)
IV - 6
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Neil F. Dimick Executive Vice President, December 28, 1998
- -------------------- Chief Financial Officer
Neil F. Dimick and Director
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ John Calasibetta Senior Vice President December 28, 1998
- ---------------------- and Director
John Calasibetta
/s/ Jose E. Blanco, Sr. Director December 28, 1998
- -------------------------
Jose E. Blanco, Sr.
/s/ Rodney H. Brady Director December 28, 1998
- ---------------------
Rodney H. Brady
/s/ Charles C. Edwards, M.D. Director December 28, 1998
- ------------------------------
Charles C. Edwards, M.D.
/s/ Charles J. Lee Director December 28, 1998
- --------------------
Charles J. Lee
/s/ George R. Liddle Director December 28, 1998
- ----------------------
George R. Liddle
/s/ James R. Mellor Director December 28, 1998
- ---------------------
James R. Mellor
/s/ George E. Reinhardt, Jr. Director December 28, 1998
- ------------------------------
George E. Reinhardt, Jr.
/s/ Francis G. Rodgers Director December 28, 1998
- ------------------------
Francis G. Rodgers
IV - 7
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. PAGE NO.
- ----------- --------
*3(a) The Restated Certificate of Incorporation dated November
13, 1998.
*3(b) The By-Laws as amended and restated, dated November 13,
1998.
Exhibits 3(a) and 3(b) above are set forth as Exhibit
4.1 and 4.2 in the Company's Post Effective Amendment
No. 2 to Form S-3 dated December 17, 1998 (file no.
333-63441).
*4(a) The Senior Indenture for $400,000,000 of Debt Securities
dated as of December 1, 1992 between the Company and
Chemical Trust Company of California as Trustee is set
forth as Exhibit 4.1 to the Company's Registration
Statement on Form S-3 dated December 1, 1992 (file no.
33-55136).
The Company agrees to furnish to the Securities and
Exchange Commission, upon request, a copy of each
instrument with respect to other issues of long-term
debt of the Company, the authorized principal amount of
which does not exceed 10% of the total assets of the
Company on a consolidated basis.
*4(b) Rights Agreement, dated as of February 8, 1994, between
Bergen Brunswig Corporation and Chemical Trust Company
of California, as Rights Agent, including all exhibits
thereto, is incorporated herein by reference to Exhibit
1 to the Company's Registration Statement on Form 8-A
dated February 14, 1994.
**10(a) Bergen Brunswig Corporation Deferred Compensation Plan.
**10(b) Director Indemnification Agreement and Amendment to
Director Indemnification Agreement.
*10(c) Bergen Brunswig Corporation Bonus Plan as adopted
September 1, 1977 and amended October 19, 1990.
*10(d) Amended and Restated 1989 Stock Incentive Plan of Bergen
Brunswig Corporation and Subsidiary Companies.
*10(e) Retired Officers' Medical Plan.
INDEX TO EXHIBITS (CONTINUED)
-----------------------------
EXHIBIT NO. PAGE NO.
- ----------- --------
Exhibits 10(c), 10(d) and 10(e) are set forth as
Exhibits 10(e), 10(g) and 10(o) in the Company's Annual
Report on Form 10-K for the fiscal year ended September
30, 1997.
**10(f) Bergen Brunswig Corporation Stock Option Plans, other
than the Amended and Restated 1989 Stock Incentive Plan.
*10(g) Form of Amended and Restated Capital Accumulation Plan
is set forth as Exhibit 10.2 in the Company's
Registration Statement on Form S-3 and Amendment No.1
thereto relating to a shelf offering of $400 million in
securities filed February 1, 1996 and March 19, 1996,
respectively (file no. 333-631).
10(h) Amended and Restated Supplemental Executive Retirement
Plan dated September 24, 1998. 68
*10(i) Amendment No.1 to the Amended and Restated Capital
Accumulation Plan is set forth as Exhibit 10(m) in the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996.
*10(j) Amended and Restated Executive Loan Program dated March
3, 1995 is set forth as Exhibit 10(g) in the Company's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1995.
*10(k) Employment Agreement and Schedule.
*10(l) Severance Agreement and Schedule.
Exhibits 10(k) and 10(l) above are set forth as Exhibit
10(q) and 10(r) in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1994.
*10(m) Stock Purchase Agreement, dated as of November 8, 1998,
by and among Stadtlander Drug Co., Inc., Counsel
Corporation, Stadt Holdings Inc. and the Company is set
forth as Exhibit 2.1 to the Company's Report on Schedule
13D, dated November 18, 1998, filed with respect to
PharMerica, Inc.
INDEX TO EXHIBITS (CONTINUED)
-----------------------------
EXHIBIT NO. PAGE NO.
- ----------- --------
21 List of subsidiaries of Bergen Brunswig Corporation. 130
23 Independent Auditors' Consent. 131
24 Power of Attorney is set forth on the Signature pages in
Part IV of this Annual Report.
27 Financial Data Schedule for the year ended September 30,
1998. 132
99(a) Statement Regarding Forward-Looking Information. 133
*99(b) Split Dollar Life Insurance Plan with Robert E. Martini
is set forth as Exhibit 99(b) in the Company's Annual
Report on Form 10-K for the fiscal year ended September
30, 1997.
*99(c) Amended and Restated Credit Agreement dated as of
September 30, 1994 among Bergen Brunswig Drug Company,
Bergen Brunswig Corporation and Bank of America National
Trust and Savings Association is set forth as Exhibit
99(h) in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1994.
*99(d) First and Second Amendments to Amended and Restated
Credit Agreement dated as of February 27, 1995 and March
16, 1996, respectively, are set forth as Exhibits 99(a)
and 99(b), respectively, in the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1996.
99(e) Waiver Letter to Amended and Restated Credit Agreement
dated as of October 23, 1998. 134
*99(f) Item 1 - Legal Proceedings of Part II of the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1994, are incorporated herein by reference in Part
I, Item 3 of this Annual Report.
99(g) Independent Auditors' Preferability Letter. 139
INDEX TO EXHIBITS (CONTINUED)
-----------------------------
EXHIBIT NO. PAGE NO.
- ----------- --------
* Document has heretofore been filed with the Securities and Exchange
Commission and is incorporated herein by reference and made a part
hereof.
** Incorporated herein by reference to the exhibits filed as part of the
Company's Registration Statement on Form S-3 (Registration No. 33-5530)
and Amendment Nos. 1 and 2 thereto relating to an offering of
$43,000,000 principal amount of 6 7/8% Exchangeable Subordinated
Debentures due 2011, filed with the Securities and Exchange Commission
on May 8, July 1, and July 8, 1986, respectively.