UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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: 0-11355
BINDLEY WESTERN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 84-0601662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8909 Purdue Road
Indianapolis, Indiana 46268
(Address of principal executive offices)
(Zip Code)
(317) 704-4000
(Registrant's telephone number,
including area code)
10333 North Meridian Street, Suite 300
Indiananpolis, Indiana 46290
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes x No _________
The number of shares of Common Stock outstanding as of September 30, 1998 was
22,088,417.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(000's omitted except share data)
(unaudited)
Nine-month period ended Three-month period ended
September 30, September 30,
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1998 1997 1998 1997
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Revenues:
Net sales from stock $ 3,002,049 $ 1,967,973 $ 1,128,328 $ 694,472
Net brokerage sales 2,620,980 3,290,186 684,882 1,117,996
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Total net sales 5,623,029 5,258,159 1,813,210 1,812,468
Other income 1,471 1,095 484 470
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5,624,500 5,259,254 1,813,694 1,812,938
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Cost and expenses:
Cost of products sold 5,484,442 5,155,554 1,764,988 1,776,691
Selling, general and administrative 77,104 57,818 26,629 20,527
Depreciation and amortization 6,137 5,595 2,115 1,872
Interest 13,833 12,296 5,242 4,534
Noncash compensation charge 1,588 776
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5,583,104 5,231,263 1,799,750 1,803,624
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Earnings before income taxes 41,396 27,991 13,944 9,314
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Provision for income taxes 16,455 11,393 5,543 3,791
Minority interest in net income of
consolidated subsidiary 1,287 493
==========================================================================
Net earnings $ 23,654 $ 16,598 $ 7,908 $ 5,523
==========================================================================
Earnings per share:
Basic $ 1.10 $ 1.04 $ 0.37 $ 0.33
Diluted $ 1.06 $ 0.86 $ 0.35 $ 0.28
Average shares outstanding:
Basic 21,410,622 15,971,817 21,598,538 16,829,642
Diluted 22,300,161 21,491,897 22,881,133 21,729,503
(See accompanying notes to consolidated financial statements)
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(000's omitted except share data)
(unaudited)
September 30, December 31,
1998 1997
------------------------------------------
Assets
Current assets:
Cash $ 29,525 $ 42,895
Accounts receivable, less allowance for doubtful
accounts of $4,086 for 1998 and $4,756 for 1997 520,882 606,265
Finished goods inventory 641,940 520,769
Deferred income taxes 11,507 9,707
Other current assets 7,460 5,389
------------------------------------------
1,211,314 1,185,025
------------------------------------------
------------------------------------------
Other assets 47 76
------------------------------------------
------------------------------------------
Related party receivable 3,389 3,228
------------------------------------------
Fixed assets, at cost 113,604 89,704
Less: accumulated depreciation (26,204) (22,076)
------------------------------------------
87,400 67,628
------------------------------------------
------------------------------------------
Intangibles 33,667 35,050
------------------------------------------
==========================================
Total assets $ 1,335,817 $ 1,291,007
==========================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $ 310,000 $ 147,000
Accounts payable 572,205 734,346
Other current liabilities 29,222 16,570
------------------------------------------
911,427 897,916
------------------------------------------
------------------------------------------
Long-term debt 31,865 32,142
------------------------------------------
------------------------------------------
Deferred income taxes 4,343 4,343
------------------------------------------
------------------------------------------
Minority interest 12,297 11,010
------------------------------------------
Shareholders' equity:
Common stock, $.01 par value authorized 40,000,000 shares;
issued 22,613,823 and 16,135,319 shares, respectively 3,830 3,359
Special shares, $.01 par value-authorized 1,000,000 shares
Additional paid in capital 217,346 198,764
Retained earnings 169,864 147,400
Unamortized value of restricted shares (10,749)
------------------------------------------
380,291 349,523
Less: shares in treasury-at cost
525,406 and 380,942, respectively (4,406) (3,927)
------------------------------------------
Total shareholders' equity 375,885 345,596
------------------------------------------
==========================================
Total liabilities and shareholders' equity $ 1,335,817 $ 1,291,007
==========================================
(See accompanying notes to consolidated financial statements)
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted except share data)
(unaudited)
Nine-month period ended
September 30,
---------------------------------------------------
1998 1997
---------------------------------------------------
Cash flow from operating activities:
Net income $ 23,654 $ 16,598
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation and amortization 6,137 5,595
Deferred income taxes (1,800) (1,800)
Minority interest 1,287
Amortization of restricted shares 1,589
Gain on sale of fixed assets (54) (76)
Change in assets and liabilities:
Accounts receivable 85,382 (129,338)
Finished goods inventory (121,171) 60,129
Accounts payable (162,142) (78,978)
Other current assets and liabilities 10,582 (1,453)
---------------------------------------------------
Net cash used by operating activities (156,536) (129,323)
---------------------------------------------------
Cash flow from investing activities:
Purchase of fixed assets and other assets (24,532) (15,521)
Proceeds from sale of fixed assets 89 2,044
Related party note receivable (161)
Acquisition of business - (27,636)
---------------------------------------------------
Net cash used by investing activities (24,604) (41,113)
---------------------------------------------------
Cash flow from financing activities:
Proceeds from sale of stock 6,716 10,070
Reduction in long term debt (277) (239)
Proceeds under line of credit agreement 1,316,500 1,081,000
Payments under line of credit agreement (1,153,500) (967,000)
Purchase of shares for treasury (479) (777)
Dividends (1,190) (772)
---------------------------------------------------
Net cash provided by financing activities 167,770 122,283
---------------------------------------------------
Net increase (decrease) in cash (13,370) (48,153)
Cash at beginning of period 42,895 63,658
===================================================
Cash at end of period $ 29,525 $ 15,505
===================================================
(See accompanying notes to consolidated financial statements)
BINDLEY WESTERN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements have been prepared by
the Company without audit. Certain information and footnote disclosures,
including significant accounting policies, normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes that the
financial statements for the three and nine month periods ended September
30, 1998 and 1997 include all necessary adjustments for fair presentation.
Results for any interim period may not be indicative of the results of the
entire year.
2. The Company is a defendant in a consolidated class action filed in the
United States District Court for the Northern District of Illinois in 1993
which names the Company, other pharmaceutical wholesalers and
pharmaceutical manufacturers as defendants, In re Brand Name Prescription
Drugs Litigation, MDL 997. Plaintiffs allege that pharmaceutical
manufacturers and wholesalers conspired to fix prices of brand-name
prescription drugs sold to retail pharmacies at artificially high levels in
violation of the federal antitrust laws. The plaintiffs seek injunctive
relief, unspecified treble damages, costs, interest and attorneys' fees.
The Company has denied the complaint allegations.
Several of the manufacturer defendants and the class plaintiffs have
reached settlement agreements. The trial against the remaining defendants,
including the Company, began on September 14, 1998.
At this time, the Company is a defendant in 115 additional cases brought by
plaintiffs who "opted out" of the federal class action described above. One
hundred eleven of these complaints contain allegations and claims for
relief that are substantially similar to those in the federal class action.
The four remaining complaints add allegations that the defendants' conduct
violated state law. The Company has denied the allegations in all of these
complaints.
On November 20, 1997, two additional complaints were filed in the MDL 997
proceeding by Eckerd Corporation and American Drug Stores naming certain
pharmaceutical manufacturers and wholesalers, including the Company, as
defendants. These complaints contain allegations and claims for relief that
are substantially similar to those in the federal class action. The Company
has denied the allegations in these complaints.
On July 1, 1996, the Company and several other wholesalers were joined as
the defendants in a seventh amended and restated complaint filed in the
Circuit Court of Greene County, Alabama, Durrett v. The Upjohn Company,
Civil Action No. 94-029. The case was first filed in 1994. The plaintiffs
in this case claim the prices of prescription drugs they purchase in
interstate commerce are artificially high because of alleged illegal
activities of the defendant pharmaceutical manufacturers and wholesalers.
The plaintiffs seek monetary damages, injunctive relief and punitive
damages under the Alabama antitrust act. The Company has denied the
allegations of the complaint.
On June 16, 1998, a suit was filed in the Circuit Court for Cocke County,
Tennessee purportedly on behalf of consumers of prescription drugs in the
following states: Tennessee, Alabama, Arizona, Florida, Kansas, Maine,
Michigan, Minnesota, New Mexico, North Carolina, North Dakota, South
Dakota, West Virginia and Wisconsin. Graves et al. v. Abbott Laboratories
et al., Civil Action No. 25,109-II. The complaint charges that
pharmaceutical manufacturers and wholesalers, including the Company,
engaged in a price-fixing conspiracy in violation of the Tennessee's Trade
Practices Act and Consumer Protection Act, and the unfair or deceptive
trade practices statutes of the other jurisdictions named therein.
The Company is defending all of these cases vigorously.
On October 21, 1994, the Company entered into an agreement with five other
wholesalers and 26 pharmaceutical manufacturers covering all of the cases
listed above. Among other things, the agreement provides that for all
judgments that might be entered against both the manufacturer and
wholesaler defendants, the Company's total exposure for joint and several
liability is limited to $1,000,000 and the six wholesaler defendants are
indemnified for $9,000,000 in related legal fees and expenses.
The Company is unable to form a reasonably reliable conclusion regarding the
likelihood of a favorable or unfavorable outcome of these cases. The
Company believes the allegations of liability are without merit and that
the attendant liability of the Company, if any, would not have a material
adverse effect on the Company's financial condition or liquidity. Adverse
decisions, although not anticipated, could have an adverse material effect
on the Company's results of operations.
3. On October 7, 1996, the Company and its subsidiary, National Infusion
Services (now known as Priority Healthcare Services Corporation) ("PHSC"),
were named as defendants in an action filed by Thomas G. Slama, M.D. in the
Superior Court of Hamilton County, Indiana which is now pending in that
Court as Cause No. 29D03-9702-CP-81. Dr. Slama is a former director of the
Company and formerly was Chief Executive Officer and President of PHSC. The
complaint alleges breach of contract and defamation arising from the
termination of Dr. Slama's employment with PHSC in October 1996, and seeks
damages in excess of $3.4 million, punitive damages, attorneys' fees and
costs. The Company and PHSC believe Dr. Slama terminated his employment
without "cause" (as defined in his employment agreement), and
alternatively, that PHSC had grounds to terminate Dr. Slama for "cause"
under his employment agreement. The Company and PHSC have answered the
complaint, denying the merits of Dr. Slama's claims, and have also filed a
counterclaim against Dr. Slama seeking, among other things, declaratory
relief, compensatory and (in some instances) treble damages, punitive
damages, attorneys' fees, interest and costs. Dr. Slama moved to dismiss
portions of the counterclaim, which motion was denied by the court on July
14, 1997. The Company and PHSC thereafter filed an amended counterclaim
adding additional claims against Dr. Slama. On March 12, 1998, Dr. Slama
filed a motion for leave to amend his complaint to add Priority Healthcare
Corporation ("Priority") and William E. Bindley as defendants and to state
additional claims for breach of contract, breach of oral contract, breach
of fiduciary duty, securities fraud and conversion. On April 10, 1998, the
Company filed its objection to Dr. Slama's motion. In response, on May 1,
1998, Dr. Slama filed a second motion for leave to amend his complaint,
which alleges essentially the same claim as contained in the first amended
complaint. On October 5, 1998, the Court granted Dr. Slama's motion, in
part, and on October 26, 1998, Dr. Slama filed a Second Amended Complaint
adding Priority and William E. Bindley as defendants and stating additional
claims for breach of contract, breach of oral contract, breach of fiduciary
duty, securities fraud and conversion. The Company has entered into an
Indemnification and Hold Harmless Agreement with Priority, whereby the
Company has agreed to indemnify and hold harmless Priority and its
subsidiaries from and against any and all claims, losses, liabilities,
costs, damages, charges and expenses (including without limitation legal
and other professional fees) which they might incur or which may be charged
against them in any way based upon, connected with or arising out of the
lawsuit filed by Dr. Slama. Discovery is proceeding, and the matter is
currently set for trial on March 9, 1999. The Company, Priority, Mr.
Bindley and PHSC are contesting Dr. Slama's amended complaint and pursuing
their counterclaim vigorously. Although the outcome of any litigation is
uncertain, the Company believes after consultation with its counsel that
the attendant liability of the Company, if any, should not have a material
adverse effect on the Company's financial condition or liquidity. An
adverse decision, although not anticipated, could have a material effect on
the Company's results of operations.
4. On June 3, 1998, a 4-for-3 stock split of the Company's Common Stock was
effected in the form of a stock dividend to shareholders of record at the
close of business on May 21, 1998. Accordingly, all historical weighted
average shares and per share amounts have been restated to reflect the
stock split. Share amounts in the Consolidated Balance Sheets reflect the
actual share amounts outstanding for each period presented.
5. The Company issued restricted stock grants to certain key executives on
March 26, 1998. The grants were subject to shareholder approval which was
received on May 21, 1998. Pending the lapse of the forfeiture and transfer
restrictions established by the Compensation and Stock Option Committee,
the grantee generally will have all the rights of a shareholder, including
the right to vote the shares and the right to receive all dividends
thereon. Upon issuance of the stock grants, unearned compensation
equivalent to the market value at the date of grant was recorded as
unamortized value of restricted stock and is being charged to earnings over
the period during which the restrictions lapse. Compensation expense
related to these restricted stock grants of $1.6 million and $780,000 was
recorded in the first nine-months and third quarter of 1998, respectively.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations.
Effective July 31, 1997, the Company purchased substantially all of the
operating assets and assumed most of the liabilities and contractual obligations
of Tennessee Wholesale Drug Company, Inc. ("TWD"). TWD is a full-line,
full-service wholesale drug company. Effective August 6, 1997, Priority
Healthcare Corporation ("PHC"), a subsidiary of the Company, acquired
substantially all of the operating assets and assumed most of the liabilities of
Grove Way Pharmacy, Inc., a specialty distributor of vaccines and injectables
located in Castro Valley, California. The financial statements include the
results of operations from the respective effective dates of acquisition.
Net sales of $5,623 million for the first nine-months of 1998
represented a 6.9% increase over the same period of 1997. The net sales of
$1,813 million for the third quarter of 1998 remained flat when compared with
the third quarter of 1997. The loss of the Rite Aid business in May of 1998
resulted in a 20% and 39% decrease in brokerage type sales for the first
nine-months and third quarter of 1998, respectively. These sales generate very
little gross margin, however they do support the Company's programs to attract
more direct store delivery business from chain customers. From stock sales for
the first nine-months of 1998 increased by 52.6% over the same period in 1997.
Internal growth accounting for 83.1% of this increase. For the third quarter of
1998, from stock sales increased by 62.5% over 1997 and internal growth
accounted for 93.1% of the increase. The remainder of the growth in both the
nine-month period and the third quarter is attributed to the acquisition of TWD.
From stock sales include sales from the Company's inventory to chain customers
and direct store delivery business. The Company continued its commitment to
expand its presence in the direct store delivery portion of the business through
increased sales to existing customers and the addition of new customers. For the
nine-month period of 1998, direct store delivery sales increased 52.1% and
represented 49.6% of total sales. For the third quarter of 1998 direct store
delivery sales increased 51.5% and represented 56.3% of total sales. In both
periods, the increase related to price increases was approximately equal to the
increase in the Consumer Price Index. PHC sales for the nine-month period
increased 14% from $169.3 million in 1997 to $193.8 in 1998. PHC sales for the
third quarter increased 18% from $60.7 million in 1997 to $71.7 million in 1998.
This growth was essentially generated internally and reflected primarily the
addition of new customers, new product introductions, additional sales to
existing customers and, to a lesser extent, inflationary price increases.
Gross margin of $138.6 million and $48.2 million for the nine-months
and third quarter of 1998 represented increases of 35.1% and 34.8% over 1997,
respectively. Internal growth was the primary reason for the increase in gross
margins with the remainder attributed to TWD. The internal growth was the result
of the overall increase in net sales, and increased sales to the higher margin
alternate care/alternate site and direct store delivery markets. The significant
increase in the higher margin from stock sales resulted in an increase in gross
margin as a percent of net sales for the nine-months from 1.95% in 1997 to 2.46%
in 1998. For the third quarter, gross margin as a percent of net sales increased
from 1.97% in 1997 to 2.66% in 1998. The pressure on sell side margins continued
to be a significant factor in 1998 and the purchasing gains associated with
pharmaceutical price inflation remained relatively constant. Gross margins for
PHC of $21.8 million and $8.1 million for the first nine-months and third
quarter of 1998 represented increases of 26% and 37% over the respective periods
of 1997. The increase was attributable to the distribution business having more
sales of higher gross margin items and increased sales in the higher margin
pharmacy business.
Other income increased as a result of finance charges on certain
customers receivables and interest income related to PHC investing funds
received from its October 1997 Initial Public Offering.
Selling, general and administration ("SGA") expenses for the first
nine-months increased from $57.8 million in 1997 to $77.1 million in 1998. For
the third quarter, SGA increased from $20.5 million in 1997 to $26.6 million in
1998. The first nine-months of 1998 includes approximately $2.4 million of
incremental SGA related to TWD. The remainder resulted from normal inflationary
increases and costs to support the growing direct store delivery program of
Bindley Western Drug Company and the alternate care/alternate site business of
PHC. The cost increases related to the direct store delivery and the alternate
care/alternate site programs include, among others, delivery expenses, warehouse
expense and labor costs, which are variable with the level of sales volume.
However, total SGA expense as a percent of from stock sales for the first
nine-months decreased from 2.9% in 1997 to 2.6% in 1998. For the third quarter,
it decreased from 3.0% in 1997 to 2.4% in 1998. Management remains focused on
controlling SGA through improved technology, better asset management and
opportunities to consolidate distribution centers. In 1998, SGA includes
non-recurring expenses of approximately $250,000 related to start up expenses of
new distribution centers in Portland, Oregon and Woodland, California.
Depreciation and amortization on new facilities, expansion and
automation of existing facilities and investments in management information
systems resulted in increases in depreciation and amortization expense. For the
first nine-months the expense increased from $5.6 million in 1997 to $6.1
million in 1998. The increase for the third quarter was from $1.9 million in
1997 to $2.1 million in 1998.
Interest expense for the first nine-months increased from $12.3 million
in 1997 to $13.8 million in 1998. In 1997, average short-term borrowings
outstanding were $142 million at an average short term interest rate of 6.4%, as
compared to $239 million in 1998 at an average short-term interest rate of 6.4%.
In the third quarter, interest expense increased from $4.5 million in 1997 to
$5.2 million in 1998. Average short-term borrowings outstanding increased from
$181 million in the third quarter of 1997 to $291 million in the third quarter
of 1998 and the average short-term interest rate remained constant at 6.4%. On
August 27, 1997, the Company called for redemption all of its outstanding 6 1/2%
Convertible Subordinated Debentures Due 2002.
The first nine-months and the third quarter of 1998 also includes a
non-cash charge to compensation expense associated with restricted stock grants
of approximately $1.6 million and $780,000, respectively.
The provision for income taxes for the nine-month period and third
quarter of 1998 represented 39.75% of earnings before taxes for both periods.
The provision for income taxes for the nine-month period and third quarter of
1997 represented 40.70% of earnings before taxes for both periods.
Rite Aid informed the Company that Rite Aid signed a supply agreement
with McKesson that began in May 1998. In 1997, Rite Aid comprised 18% of the
Company's sales. However, the Company does not believe the loss of this customer
will negatively impact its results of operations. Sales to Rite Aid were
predominantly to their warehouses. In 1997, the resources the Company expended
on servicing Rite Aid's pharmaceutical warehouse programs were such that they
generated an overall negative return. In addition, the Company only serviced a
portion of the Rite Aid California stores on a direct store basis. The
logistical costs involved in servicing these stores were high, and thus, the
contribution from the direct store delivery segment was not sufficient to
produce an overall favorable return.
On October 27, 1998, the Company announced that the Board of Directors
established December 15 and 31, 1998 as the respective record and distribution
dates for the previously announced spin-off of its approximately 82% owned
subsidiary, PHC. The spin-off will result in the pro rata distribution of the
10,214,286 PHC Class A Common Shares currently owned by the Company to the
Company's common shareholders. It is estimated that The Company's shareholders
will receive approximately 0.46 shares of PHC Class A Common Stock for each
share of the Company's Common Stock owned as of the record date. The actual
ratio will be calculated by dividing 10,214,286 by the number of shares of the
Company's Common Stock outstanding as of December 15, 1998. The spin-off is
subject to finalizing certain regulatory approvals and continued favorable
market conditions.
Liquidity-Capital Resources.
For the nine-month period ended September 30, 1998, the Company's
operations consumed $156.5 million in cash. The use of funds resulted from an
increase in inventories and a decrease in accounts payable. The increase in
inventory resulted from the increase in direct store delivery sales and new bulk
inventory acquisition and purchasing management programs with certain customers.
The reduction of accounts payable is attributable to the timing of payments of
invoices and the reduction of brokerage type sales to Rite Aid. These uses of
cash were offset by the decrease in accounts receivables resulting from the
reduction of brokerage sales to Rite Aid. The Company continues to closely
monitor working capital in relation to economic and competitive conditions.
However, the emphasis on direct-store delivery and alternate care business will
continue to require both net working capital and cash.
Capital expenditures, predominantly for the purchase of the corporate
offices and warehouse facilities, the expansion and automation of existing
warehouses and the investment in additional management information systems were
$24.5 million for the first nine-months of 1998.
On June 30, 1998, the Company negotiated an increase in its bank line
of credit from $270 million to $325 million. The net increase in borrowings
under the bank credit agreement was $105 million during the nine-month period.
At September 30, 1998 the Company had borrowed $310 million under the bank
credit agreement and had a remaining availability of $15 million. On November 3,
1998, the Company negotiated a further increase in its bank line of credit to
$350 million.
The Company believes that its cash on hand, cash equivalents, line of
credit and working capital management efforts are sufficient to meet future
working capital requirements.
The Company's principal working capital needs are for inventory and
accounts receivable. The Company sells inventory to its chain drug warehouse and
other customers on various payment terms. This requires significant working
capital to finance inventory purchases and entails accounts receivable exposure
in the event any of its chain warehouse or other significant customers encounter
financial difficulties. Although the Company monitors closely the
creditworthiness of its major customers and, when feasible, obtains security
interests in the inventory sold, there can be no assurance that the Company will
not incur the write off or write down of chain warehouse or other significant
accounts receivable in the future.
Year 2000.
The Year 2000 will pose a unique set of challenges to those industries
reliant on information technology. As a result of the methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether. The
Company and other companies in the same business are vulnerable to the
dependence on distribution and communications systems.
Our Daily Sales System, which controls ordering, pricing, inventory
control, and shipping for the Company and which accounts for 70% of our total
investment in software, was initially designed and programmed to comply with the
Y2K challenge. The Company's remaining systems will be fully Year 2000 compliant
by the end of the first quarter of 1999. Furthermore, all software purchases
within the past three years have been guaranteed to be compliant by the vendor.
The Company has upgraded and replaced its hardware and network systems for
reasons other then Y2K compliance, however, and such new hardware and network
systems will be fully tested during the first quarter of 1999 to ensure that
they are also Year 2000 compliant. Management estimates that the total
cumulative costs relating to its efforts to make its systems compliant for the
Year 2000 will be $350,000, of which approximately $150,000 had been incurred as
of September 30, 1998.
Management believes that the expenditures required to bring the
Company's systems into compliance will not have a materially adverse effect on
the Company's performance. However, the Year 2000 problem is pervasive and
complex and can potentially affect any computer process. Accordingly, no
assurance can be given that the Year 2000 compliance can be achieved without
additional unanticipated expenditures and uncertainties that might affect future
financial results.
Moreover, to operate its business, the Company relies on governmental
agencies, utility companies, telecommunications companies, shipping companies,
suppliers and other third party service providers over which it can assert
little control. The Company's ability to conduct its business is dependent upon
the ability of these third parties to avoid Year 2000-related disruptions. The
company is in the process of contacting its third party service providers about
their Year 2000 readiness, but the Company has not yet received any assurances
from any such third parties about their Year 2000 compliance. If the Company's
key third party service providers do not adequately address their Year 2000
issues, the Company's business may be materially affected, which could result in
a materially adverse effect on the Company's results of operations and financial
condition.
The Company has not to date developed any contingency plans, as such
plans will depend on the responses from its third party service providers, in
the event the Company or any key third party providers should fail to become
Year 2000 compliant.
Forward Looking Statements.
Certain statements included in this quarterly report which are not
historical facts are forward looking statements. Such forward looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward looking statements involve certain
risks and uncertainties including, but not limited to, changes in interest
rates, competitive pressures, changes in customer mix, financial stability of
major customers, investment procurement opportunities, changes in government
regulations or the interpretation thereof and the ability of the Company and the
entities with which it transacts business to modify or redesign their computer
systems to work properly in the year 2000, which could cause actual results to
differ from those in the forward looking statements.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Not applicable,
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Notes 2 and 3 to the Notes to Consolidated
Financial Statements set forth elsewhere in this Report is incorporated herein
by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Selected Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
November 13, 1998 BINDLEY WESTERN INDUSTRIES, INC.
BY /s/ Thomas J. Salentine
Thomas J. Salentine
Executive Vice President
(Principal Financial Officer)