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1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended June 30, 1994 Commission File Number 0-12591
------------- -------
CARDINAL HEALTH, INC.
(formerly known as Cardinal Distribution, Inc.)
(Exact name of Registrant as specified in its charter)
OHIO 31-0958666
---- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
655 METRO PLACE SOUTH, SUITE 925, DUBLIN, OHIO 43017
- - ---------------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (614) 761-8700
--------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON SHARES (WITHOUT PAR VALUE)
---------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates
of the Registrant as of August 19, 1994, was approximately $1,097,875,000.
The number of Registrant's Common Shares outstanding as of August 19,
1994, was as follows:
common shares, without par value 36,254,409
Class B common shares, without par value 2,971,375
Documents Incorporated by Reference: None
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PART I
ITEM 1: BUSINESS
- - -----------------
GENERAL
- - -------
The Company is a national, full-service wholesaler distributing a
broad line of pharmaceuticals, surgical and hospital supplies, health and
beauty care products, and other items typically sold by hospitals, retail drug
stores, and other health care providers. An important component of the
Company's distribution activities is the broad range of support services it
offers to its customers, which are designed to assist the Company's customers
in maintaining and improving their market positions. These support services
foster strong relationships between the Company and its customers by
positioning the Company as a valuable resource capable of offering the
centralized services which are increasingly important in today's competitive
market place. The Company believes that in most instances it would not be
economically feasible for its customers to develop and maintain these services
independently.
Cardinal Health, Inc. is a holding company with sixteen principal
operating subsidiaries: Whitmire Distribution Corporation ("Whitmire"); James
W. Daly, Inc. ("Daly"); Ellicott Drug Company ("Ellicott"); Cardinal Syracuse,
Inc. ("Syracuse"); Marmac Distributors, Inc. ("Marmac"); Bailey Drug Company
("Bailey"); Ohio Valley-Clarksburg, Inc. ("Ohio Valley"); Chapman Drug Company
("Chapman"); Solomons Company ("Solomons"); Cardinal Florida, Inc. ("Florida");
Cardinal Mississippi, Inc. ("Mississippi"); Humiston-Keeling, Inc. ("H-K");
Behrens Inc. ("Behrens"); National PharmPak Services, Inc. ("PharmPak");
National Specialty Services, Inc. ("NSS"); and PRN Services, Inc. ("PRN").
These separate operating subsidiaries are sometimes collectively referred to as
the "Cardinal Health" companies. As used in this report, the "Registrant" and
the "Company" refers to Cardinal Health, Inc. and subsidiaries, unless the
context requires otherwise. Prior to February 7, 1994, the Company was known
as Cardinal Distribution, Inc. The term "Cardinal," as used herein, refers to
Cardinal Health, Inc. and its subsidiaries prior to the business combination
with Whitmire on February 7, 1994.
The Company distributes products to hospitals, drug stores, alternate
care centers, and the pharmacy departments of supermarkets and mass
merchandisers located throughout the continental United States. The Company
obtains its products from many different suppliers, the largest of which
accounted for approximately 7% (by dollar volume) of its net sales in fiscal
1994. The Company's five largest suppliers accounted for approximately 29% (by
dollar volume) of its net sales during fiscal 1994. The loss of certain
pharmaceutical or medical/surgical product suppliers could adversely affect the
Company's business because many suppliers are the sole source of certain
pharmaceuticals and medical/surgical products under exclusive patents or
processes. The Company has agreements with many of its suppliers which
generally require the Company to maintain an adequate quantity of the
supplier's products in inventory. These agreements typically have a term of
one year and may be canceled by either the Company or the supplier, without
cause, upon specified prior notice. Management believes that the Company's
relationships with its suppliers are excellent.
SUPPORT SERVICES
- - ----------------
As a full-service wholesale distributor, the Company complements its
distribution activities by offering a broad range of value-added support
services to assist customers and suppliers in maintaining and improving their
market positions and to strengthen the Company's role in the channel of
distribution. These support services include computerized order entry and
order confirmation systems, customized invoicing, generic sourcing programs,
product movement and management reports, consultation on store operation and
merchandising, and customer training.
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Most customers transmit merchandise orders directly to the Company's
data processing system through computerized order entry devices. The Company's
proprietary software systems feature customized databases specially designed to
help its customers order more efficiently, contain costs, and monitor their
purchases which are covered by group contract purchasing arrangements. Upon
receipt of the customer's order at a distribution center, the Company's
warehouse management system processes the order and provides customized price
information to facilitate the customer's pricing of items. Customer orders are
routinely processed for next-day delivery, enabling the Company's customers to
minimize the size and carrying cost of their own inventories. In addition, the
Company's AccuNet(R), Otis(R), and Network(TM) proprietary software systems
facilitate primary supply relationships between the Company and its customers
and enable the Company's customers to reduce their costs. These systems
provide a variety of information which assist the customer to identify the best
price available under group purchasing contracts with pharmaceutical
manufacturers, maintain formulary compliance, and better manage their own
inventories. Over 2,800 of these systems have been placed with hospital,
managed care, and chain drug customers located throughout the United States.
SPECIALTY WHOLESALING
- - ---------------------
In addition to the comprehensive support services provided in
connection with its core drug wholesaling activities, the Company also offers
diversified "specialty wholesaling" enhancements to its customers and
suppliers. For example, the Company's PharmPak subsidiary operates a
pharmaceutical repackaging program for both independent and chain customers.
In January 1992, the Company formed National Specialty Services, Inc. ("NSS").
NSS is a distributor of therapeutic plasma products and other specialty
pharmaceuticals to hospitals and other managed care facilities on a nationwide
basis through the utilization of telemarketing and direct mail programs. In
December 1993, the Company expanded its specialty wholesaling business through
the acquisition of PRN Services, Inc., a distributor of pharmaceuticals and
medical supplies to oncologists and oncology clinics across the United States.
These specialty wholesaling activities are part of the Company's overall
strategy, which combines competitive pricing with diversified offerings in
order to enhance the profitability of its core business and that of its
customers and suppliers
CUSTOMERS
- - ---------
The Company regularly supplies pharmaceuticals, surgical and hospital
supplies, health and beauty care products, and other items to hospitals,
independent and chain drug stores, alternate care centers, and pharmacy
departments of supermarkets and mass merchandisers located throughout the
continental United States. In fiscal 1994, approximately 50% of the Company's
net sales were to hospitals and managed care facilities, approximately 23% of
the Company's net sales were to chain drug stores and the pharmacy departments
of supermarkets and mass merchandisers, approximately 21% of the Company's net
sales were to independently owned drug stores, and approximately 6% of the
Company's net sales were to specialty wholesaling customers.
COMPETITION
- - -----------
The Company's markets and those of its customers are highly
competitive. The Company competes directly with other national and regional
wholesalers, direct selling manufacturers, mail-order houses, and specialty
distributors on the basis of price, breadth of product lines, marketing
programs, and support services. The Company's businesses have narrow profit
margins and accordingly, the Company's earnings depend significantly on its
ability to distribute a large volume and variety of products efficiently and to
provide quality support services.
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RECENT ACQUISITIONS
- - -------------------
Since March 31, 1993, the Company has completed five business
combinations. On May 4, 1993, the Company purchased Solomons Company, a
Savannah, Georgia based drug wholesaler serving customers located primarily in
the southeastern region of the United States. On December 17, 1993, the
Company merged with PRN (see "Specialty Wholesaling" above). On February 7,
1994, the Company completed its largest business combination to date when it
merged with Whitmire Distribution Corporation, a Folsom, California based drug
wholesaler (the "Whitmire Merger"). The majority of Whitmire's sales were
concentrated in the western and central United States, complementing Cardinal's
former concentration of sales in the eastern United States and positioning the
combined company to service both customers and suppliers on a national basis.
Whitmire's customer base was weighted toward hospital, managed care, and large
retail chain customers, complementing Cardinal's rapidly expanding presence in
these customer categories and Cardinal's well-developed programs and services
for independent retail pharmacies.
The Company has completed two additional business combinations since
the Whitmire Merger. On July 1, 1994, the Company purchased Humiston-Keeling,
Inc., a Calumet City, Illinois based drug wholesaler serving customers located
primarily in the upper midwest region of the Unites States. On July 18, 1994,
the Company completed its merger with Behrens Inc., a Waco, Texas based drug
wholesaler serving customers located primarily in Texas and adjoining states.
The Company continually evaluates possible candidates for acquisition
and intends to continue to seek opportunities to expand its healthcare
distribution operations and services. For additional information concerning
the acquisitions described above see Notes 3 and 16 of "Notes to Consolidated
Financial Statements."
EMPLOYEES
- - ---------
At August 1, 1994, the Company had approximately 3,500 employees, of
which approximately 300 are subject to collective bargaining agreements. The
Company considers its employee relations to be good.
REGULATORY MATTERS
- - ------------------
The Company, as a distributor of prescription drugs, including certain
controlled substances, is required to register for permits and/or licenses with
appropriate federal and state agencies and comply with certain operating and
security standards. In addition, the Company is subject to the Prescription
Drug Marketing Act of 1987, an amendment to the Food, Drug and Cosmetic Act
which requires each state to regulate certain aspects of the purchase and
distribution of prescription drugs. The Company believes that it is in
substantial compliance with all federal and state statutes and regulations
applicable to its activities.
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INDUSTRY CONSIDERATIONS
- - -----------------------
An aging population, new product introductions, and a higher
concentration of distribution through wholesalers are all factors which have
created favorable growth patterns for the drug wholesaling industry. At the
same time, it is also a very competitive industry undergoing rapid change and
consolidation. A number of factors have in the recent past affected and are
expected to continue to affect the business equation for the Company,
including: (a) a greater mix of higher volume customers, where the lower cost
of distribution and better asset management and cash flow enable the Company to
offer lower pricing to the customer; (b) reduced inventory gains associated
with lower drug price inflation, which are partially offset by corresponding
decreases in last-in, first-out (LIFO) earnings charges and inventory carrying
costs; (c) increased merchandising funding from manufacturers, particularly
related to the growth in generic pharmaceuticals; (d) improved selling, general
and administrative cost absorption due to significant productivity investments
and the operating leverage associated with sales growth and acquisitions; and
(e) increased sales and earnings from specialty distribution services.
In response to cost containment pressure from private and governmental
payers and the current focus on healthcare reform in the United States,
customers are consolidating into super-regional and national affiliations while
manufacturers are under increased pressure to slow the rate of drug price
inflation and to seek more cost-effective methods of marketing and distributing
their products. In this regard, drug wholesalers, including the Company, will
be challenged to service customers over a wider geographic base, offer
manufacturers innovative marketing and distribution services, and provide both
manufacturers and customers with the common system and reporting links
necessary to streamline the efficient flow of product and information among
distribution partners. Another consideration associated with healthcare reform
is the wide variety of legislation which has been proposed at both the federal
and state level. The Company is unable to predict which, if any, of the
current legislative proposals may be adopted or what impact, if any, such
legislation would have upon the Company's business.
ITEM 2: PROPERTIES
- - -------------------
Because of the nature of the Company's business, office and
warehousing facilities are operated in widely dispersed locations across the
United States. At August 19, 1994, the Company distributed products from forty
principal operating facilities located in twenty-six states, eight of which
are owned by the Company and the balance of which are leased. The Company's
principal executive offices consist of leased office space located at 655 Metro
Place South, Dublin, Ohio. The Company considers its operating properties to
be in satisfactory condition and adequate to meet its present needs. However,
the Company expects to make further additions, improvements, and consolidations
to its properties as the Company's business continues to expand.
For certain financial information regarding the Company's office and
warehousing facilities, see Notes 5 and 9 of "Notes to Consolidated Financial
Statements."
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ITEM 3: LEGAL PROCEEDINGS
- - --------------------------
In November 1993, Cardinal and Whitmire were each named as defendants
in a series of purported class action antitrust lawsuits which were later
consolidated and transferred by the Judicial Panel for Multi District
Litigation to the United States District Court for the Northern District of
Illinois (the "Brand Name Prescription Drug Litigation"). Subsequent to the
consolidation, a new consolidated complaint ("amended complaint") was filed
which included allegations that the wholesaler defendants, including Cardinal
and Whitmire, conspired with manufacturers to inflate prices by using a
chargeback pricing system. Cardinal and Whitmire have filed an answer denying
the allegations in the amended complaint. Subsequent to the filing of the
answer, the wholesaler defendants filed a motion for summary judgment. The
Court has not yet ruled on the motion for summary judgment. In addition to the
federal court case described above, Whitmire has been named as a defendant in a
series of state court cases alleging similar claims under various state laws
regarding the sale of Brand Name Prescription Drugs. The Company believes that
both the federal and state court allegations against Cardinal and Whitmire are
without merit, and it intends to contest such allegations vigorously.
The Company also becomes involved from time-to-time in ordinary
routine litigation incidental to its business, none of which is expected to
have any material adverse effect on the Company's financial condition.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
- - ------------------------------------
There is hereby incorporated by reference information with respect to
the executive officers of the Registrant set forth in Item 10 of this Annual
Report on Form 10-K.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
- - --------------------------------------------------------------------------
MATTERS
- - -------
The Company's common shares, without par value (the "Class A Common
Shares") are quoted on the Nasdaq National Market under the symbol "CDIC."
Application has been made, however, to list the Class A Common
Shares on the New York Stock Exchange under the symbol "CAH" and such listing
is expected to occur in September 1994.
The following table reflects, for the periods indicated, the range of
the reported high and low last sale prices of the Class A Common Shares as
reported on the Nasdaq National Market, and the per share dividends
declared thereon. The information in the table has been adjusted to reflect
all stock splits and stock dividends and also to reflect the
Company's decision, as of March 1, 1994, to change its fiscal year end from
March 31 to June 30.
High Low Dividends
---- --- ---------
FISCAL 1993:
Quarter Ended
June 30, 1992 $24.00 $19.80 $.016
September 30, 1992 25.80 21.60 .016
December 31, 1992 24.20 20.20 .020
March 31, 1993 23.80 19.60 .020
Three Months Ended June 30, 1993 $23.70 $20.60 $.020
FISCAL 1994:
Quarter Ended
September 30, 1993 $30.00 $21.80 $.020
December 31, 1993 38.40 28.80 .024
March 31, 1994 40.60 33.30 .024
June 30, 1994 40.80 34.40 .030
FISCAL 1995:
Through August 19, 1994 $41.25 $36.625 $.030
At August 19, 1994, there were approximately 1,150 shareholders of
record of the Company's Class A Common Shares.
In connection with the Whitmire Merger in February 1994, the Company
issued Class B common shares, without par value (the "Class B Common
Shares"), to a former Whitmire stockholder. Holders of Class B Common Shares
are entitled to one-fifth of one vote per share in the election of Directors
and upon all matters on which shareholders are entitled to vote. At August 19,
1994, all 2,971,375 Class B Common Shares issued and outstanding were held by
one holder. There is no established public trading market for the Class B
Common Shares.
All holders of Class A Common Shares and Class B Common Shares
(collectively, "Common Shares") participate equally in dividends when and as
declared by the Company's Board of Directors. The Company paid a 25% stock
dividend on June 30, 1994, to effect a five-for-four stock split of the
Company's Common Shares. The Company anticipates that it will continue to pay
quarterly cash dividends in the future. However, the payment and amount of
future dividends remain within the discretion of the Company's Board of
Directors and will depend upon the Company's future earnings, financial
condition, capital requirements, and other factors.
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ITEM 6: SELECTED FINANCIAL DATA
- - --------------------------------
The following selected consolidated financial data of the Company
has been prepared giving retroactive effect to the business
combination with Whitmire Distribution Corporation ("Whitmire")
on February 7, 1994 (the "Whitmire Merger" ), which has been accounted for as a
pooling-of-interests transaction. The term "Cardinal," as used herein, refers
to Cardinal Health, Inc. and its subsidiaries prior to the Whitmire Merger.
Cardinal's fiscal year has historically ended on March 31, while Whitmire's
fiscal year has ended on the Saturday closest to the end of June. On March 1,
1994, the Company changed its fiscal year end from March
31 to June 30. As a result, for the fiscal year ended March 31, 1993, and
prior years, the information presented is derived from consolidated financial
statements which combine data from Cardinal for the fiscal years ended March
31, 1993, March 31, 1992, March 31, 1991, and March 31, 1990, with data from
Whitmire for fiscal years ended July 3, 1993, June 27, 1992, June 29, 1991, and
June 30, 1990, respectively. For the fiscal year ended June 30, 1994, and the
twelve months ended June 30, 1993, the information presented is derived from
consolidated financial statements which combine data from Cardinal for the
fiscal year ended June 30, 1994, and the twelve months ended June 30, 1993,
with data from Whitmire for the fiscal years ended June 30, 1994, and July 3,
1993. Due to the different fiscal year ends of the merged companies,
Whitmire's results of operations for the three months ended July 3, 1993, have
been included in both the twelve months ended June 30, 1993, and the fiscal
year ended March 31, 1993. The selected consolidated financial data below
should be read in conjunction with the Company's consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
- - --------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- - ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Twelve
Year Months
Ended Ended Fiscal Year Ended
---------- ---------- ----------------------------------------------------------
June 30, June 30, March 31, March 31, March 31, March 31,
1994 1993 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
EARNINGS STATEMENT DATA
Net sales $5,790,411 $4,709,085 $4,633,375 $3,680,678 $2,803,111 $2,137,896
Earnings available for Common
Shares before cumulative
effect of change in accounting
principle 33,931 39,298 37,671 25,522 16,849 10,070
Cumulative effect of change in
accounting principle (10,000)
---------- ---------- ---------- ---------- ---------- ----------
Net earnings available for
Common Shares $ 33,931 $ 39,298 $ 27,671 $ 25,522 $ 16,849 $ 10,070
========== ========== ========== ========== ========== ==========
Primary earnings per Common
Share:
Before cumulative effect of
change in accounting principle $0.86 $1.14 $1.10 $0.74 $0.53 $0.34
Cumulative effect of change in
accounting principle (0.29)
----- ----- ----- ----- ----- -----
Net $0.86 $1.14 $0.81 $0.74 $0.53 $0.34
===== ===== ===== ===== ===== =====
Fully diluted earnings per Common
Share:
Before cumulative effect of
change in accounting principle $0.86 $1.10 $1.06 $0.74 $0.53 $0.34
Cumulative effect of change in
accounting principle (0.26)
----- ----- ----- ----- ----- -----
Net $0.86 $1.10 $0.80 $0.74 $0.53 $0.34
===== ===== ===== ===== ===== =====
BALANCE SHEET DATA
Total assets $1,395,602 $1,150,423 $1,099,850 $ 947,081 $ 800,213 $ 513,442
Long-term obligations 210,086 274,908 275,789 304,943 213,986 111,721
Redeemable preferred stock 20,400 20,400 19,560 18,320 17,480
Shareholders' equity 368,494 257,917 247,862 212,438 185,998 118,123
Cash dividends declared per
Common Share $0.10 $0.08 $0.07 $0.06 $0.05 $0.04
Net earnings and cash dividends per Common Share have been adjusted to
reflect all stock dividends and stock splits.
Amounts reflect business combinations in fiscal 1994, the twelve
months ended June 30, 1993, fiscal 1992 and 1991.
Fiscal 1994, the twelve months ended June 30, 1993, and fiscal 1993 and
1992 amounts reflect the impact of Unusual Items (See Note 2 of "Notes to
Consolidated Financial Statements").
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - -------------------------------------------------------------------------------
OF OPERATIONS
- - -------------
Management's discussion and analysis presented below has been
prepared giving retroactive effect to the pooling-of-interests business
combination with Whitmire on February 7, 1994 (see Note 3 of
"Notes to Consolidated Financial Statements"). The term "Cardinal," as used
herein, refers to Cardinal Health, Inc. and its subsidiaries prior to the
Whitmire Merger. Cardinal's fiscal year has historically ended on March 31,
while Whitmire's fiscal year has ended on the Saturday closest to the end of
June. On March 1, 1994, the Company changed its fiscal
year end from March 31 to June 30. Accordingly, the Company's consolidated
financial statements for the fiscal year ended June 30, 1994, and for the
twelve months ended June 30, 1993, combine the information for Cardinal and
Whitmire as of June 30, 1994, and for each of the two years then ended. The
Company's consolidated financial statements for earlier fiscal years combine
information for Cardinal's March year end with Whitmire's subsequent fiscal
June year end. The discussion and analysis presented below should be read in
conjunction with the consolidated financial statements and related notes
appearing in this report.
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The table below sets forth for the periods indicated certain financial
data expressed in a percentage relationship to net sales and in comparison to
prior periods. The data for the twelve months ended June 30, 1993, is
unaudited and is presented for informational purposes only. In the discussion
and analysis which follows the table, comments regarding the comparison of
fiscal 1994 to fiscal 1993 apply generally to the comparison of fiscal 1994 to
the twelve month period ended June 30, 1993.
Percentage Change
Percentage of Net Sales From Prior Period
------------------------------------------------ -----------------------------------------
Fiscal Year Twelve Months Fiscal 1994
Ended Ended Fiscal Year Ended vs.
----------- ------------- -------------------- Twelve Months Fiscal 1994 Fiscal 1993
June 30, June 30, March 31, March 31, Ended vs. vs.
1994 1993 1993 1992 June 30, 1993 Fiscal 1993 Fiscal 1992
----------- ------------- --------- --------- ------------- ----------- -----------
(Unaudited)
Net sales 100.00% 100.00% 100.00% 100.00% 23% 25% 26%
Gross margin 6.13 6.38 6.42 6.98 18 19 16
Selling, general
& administrative
expenses (4.03) (4.36) (4.40) (5.01) 14 15 10
Unusual items
Merger costs (0.62)
Termination fee 0.29 0.29
Nonrecurring charges (0.41) (0.41) (0.06)
------ ------ ------ ------
Operating earnings 1.48 1.90 1.90 1.91 (4) (2) 25
Interest expense (0.31) (0.55) (0.58) (0.76) (31) (32) (5)
Other income 0.05 0.11 0.10 0.15 (42) (39) (12)
Taxes (0.61) (0.56) (0.55) (0.53) 35 39 33
------ ------ ------ -----
Earnings before
cumulative effect of
change in accounting
principle 0.61 0.90 0.87 0.77 (17)% (13)% 43%
Preferred dividends
declared/accretion (0.02) (0.06) (0.06) (0.08)
------ ------ ----- -----
Earnings available for
Common Shares before
cumulative effect of
change in accounting
principle 0.59 0.84 0.81 0.69
Cumulative effect of
change in accounting
principle (0.21)
------ ------ ------ ------
Net earnings available
for Common Shares 0.59% 0.84% 0.60% 0.69%
====== ====== ====== ======
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NET SALES. Net sales in fiscal 1994 increased 25% compared to fiscal
1993 due to internal business growth of 20%, the merger with PRN Services, Inc.
in December 1993, and the acquisition of Solomons Company in May 1993 (see Note
3 of "Notes to Consolidated Financial Statements"). The 26% increase in net
sales in fiscal 1993 compared to fiscal 1992 was due to internal business
growth of 22%, sales resulting from the acquisition of Chapman Drug Company in
October 1991 (see Note 3 of "Notes to Consolidated Financial Statements"), and
the full consolidation of the Company's repackaging operation. The internal
business growth in both fiscal 1994 and fiscal 1993 resulted primarily from the
addition of new customers (partially as a result of expanded sales
territories), increased sales to existing customers, and price increases.
GROSS MARGIN. As a percentage of net sales, gross margin declined to
6.13% in fiscal 1994 from 6.42% in fiscal 1993 and 6.98% in fiscal 1992. The
decreases in the gross margin percentages were due to (a) lower selling margin
rates, reflecting a more competitive market and a greater mix of higher volume
customers, where a lower cost of distribution and better asset management and
cash flow enabled the Company to offer lower selling margins, and (b) reduced
purchasing gains associated with lower drug price inflation. The reduced
purchasing gains were partially offset by a lower LIFO charge. The Company
expects the decline in gross margin rates to continue, but at a more moderate
rate.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses as a percentage of net sales have improved consistently
from 5.01% in fiscal 1992 to 4.40% in fiscal 1993 and 4.03% in fiscal 1994.
The improvements are due primarily to economies associated with the Company's
significant sales growth, particularly with major customers where support costs
are generally lower, and to productivity improvements.
UNUSUAL ITEMS. In February 1994, the Company recorded a nonrecurring
charge to reflect estimated Whitmire Merger costs of approximately $35.9
million ($28.2 million net of tax), including (a) fees and other transaction
costs related to the combination, and (b) other nonrecurring costs expected to
be incurred in connection with the integration of Cardinal's and Whitmire's
business operations. These estimated costs include approximately $7 million
for investment banking, legal, accounting, and other related transaction fees
and costs associated with the combination; $13 million for corporate
restructuring and distribution rationalization; $6 million for integration of
information systems; and $2 million for restructuring Whitmire's revolving
credit agreement. Of these estimated costs, approximately $7 million pertain
to the revaluation of certain operating assets and $2 million pertain to
employee relocation, retraining and termination costs. Certain of these
amounts are based on a preliminary estimate of costs to be incurred by the
Company, and actual costs may differ from such estimate. At June 30, 1994, the
Company had incurred actual costs aggregating approximately $11.7 million
relative to the Whitmire Merger. The current estimates of merger costs
ultimately to be incurred are not materially different than the amounts
originally recorded.
During fiscal 1993, the Company received a termination fee of
approximately $13.5 million resulting from the termination by Durr-Fillauer
Medical, Inc. of its agreement to merge with the Company. Also during fiscal
1993, the Company recorded nonrecurring charges totaling approximately $13.7
million, primarily related to the closing of certain non-core operations and
the rationalization, standardization and improvement of selected distribution
operations, information systems and support functions. The charges included
the write-down of certain assets, moving costs and other costs associated with
the affected operations, and modification costs necessary to centralize and
standardize certain information systems and support functions. At June 30,
1994, the Company had incurred actual costs aggregating approximately $9.1
million related to these charges and expects most of the remaining amounts to
be incurred in fiscal 1995. The modification of the terms of certain Whitmire
stock options in fiscal 1993 also resulted in a one-time stock option
compensation charge of approximately $5.2 million (see Note 11 of "Notes to
Consolidated Financial Statements").
In fiscal 1992, the completion by Whitmire of certain equity
transactions resulted in the recording of an unusual expense of approximately
$2.0 million (see Note 11 of "Notes to Consolidated Financial Statements").
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INTEREST EXPENSE. The decrease in interest expense in fiscal 1994
compared to fiscal 1993 is due primarily to the following: (a) the conversion
of debt to equity following the call for redemption, effective July 2, 1993, of
the Company's $75 million face amount of 7.25% Convertible Debentures due 2015
(the "Subordinated Debentures") (see Note 5 of "Notes to Consolidated Financial
Statements"), and (b) reduced borrowings under Whitmire's revolving credit
agreements. The reductions in interest expense as discussed above were
partially offset by (a) increased interest expense resulting from the sale by
the Company of $100 million of 6.5% Notes due 2004 (the "New Notes") on
February 23, 1994 (see Note 5 of "Notes to Consolidated Financial Statements"),
and (b) increased average short-term borrowings (see Note 4 of "Notes to
Consolidated Financial Statements"). The increased average short-term
borrowings were a result of (a) increased working capital requirements, (b) the
repayment of amounts outstanding under Whitmire's revolving credit agreements
at the time of the Whitmire Merger (see Note 5 of "Notes to Consolidated
Financial Statements"), and (c) the redemption of Whitmire's preferred stock
(see Note 10 of "Notes to Consolidated Financial Statements").
Additional interest expense recognized in fiscal 1993 compared to
fiscal 1992 relating to the issuance of the Company's $100 million 8% Notes due
1997 (the "Notes") on March 11, 1992, was primarily offset by (a) the use of
the proceeds of the Notes to reduce short-term borrowings, and (b) lower
average interest rates on amounts borrowed under Whitmire's revolving credit
agreements. Fiscal 1992 interest expense also includes a charge of
approximately $1.8 million associated with the replacement of a
Whitmire credit agreement (see Note 5 of "Notes to Consolidated Financial
Statements").
The Company has entered into various interest rate swap agreements
which serve to hedge the Notes (see Note 5 of "Notes to Consolidated Financial
Statements"). The net effect of the swap agreements is that the Company
exchanged its 8% fixed rate position on the Notes for a fixed rate of 5.1% for
the period July 15, 1992, through March 1, 1993, a fixed rate of 6.5% for the
period March 2, 1993, through March 1, 1994, and, thereafter, a fixed rate of
8.1% through March 1, 1997 (the maturity date of the Notes). In May 1993, two
of the offsetting swap agreements were canceled at no gain or loss to the
Company.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
relative to pretax earnings increased significantly in fiscal 1994 compared to
fiscal 1993 due primarily to (a) certain nondeductible costs associated with
the Whitmire Merger recorded in the third quarter of fiscal 1994 (see Note 2 of
"Notes to Consolidated Financial Statements"), (b) the reduction of income from
tax-advantaged investments, and (c) the 1993 Omnibus Budget Reconciliation
Act's 1% tax rate increase enacted on August 11, 1993, retroactive to January
1, 1993.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Effective at the
beginning of fiscal 1993, Cardinal adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109). The cumulative
effect of adopting SFAS No. 109 ($10 million) by Cardinal has been reported as
a change in accounting principle retroactive to the beginning of fiscal 1993.
The $10 million cumulative effect recorded by Cardinal resulted primarily from
the fact that SFAS No. 109 modifies the accounting for business combinations
recorded using the purchase method. The cumulative effect of adopting SFAS No.
109 by Whitmire was not material and has been included in the fiscal 1992
provision for income taxes, and not presented separately in the consolidated
statement of earnings.
13
14
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased to $471.1 million at June 30, 1994, from
$440.7 million at March 31, 1993, and included increased investments in
merchandise inventories and trade receivables of $233.1 million and $92.5
million respectively, offset primarily by (a) an increase in accounts payable
of $219.7 million, (b) a reduction in cash and equivalents and marketable
securities of $49.1 million, and (c) an increase in notes payable-banks of
$25.0 million. The increases in merchandise inventories and accounts payable
primarily reflect the timing of seasonal purchases and related payments. The
increase in trade receivables was due primarily to increased sales (see "Net
Sales", above). The decrease in cash and marketable securities and the
increase in notes payable-banks resulted primarily from (a) the increased
investments in merchandise inventories and trade receivables (net of the
increase in accounts payable) as described above, (b) the repayment of amounts
outstanding under Whitmire's revolving credit arrangements at the time of the
Whitmire Merger (approximately $120 million, including a prepayment penalty of
approximately $1.2 million), and (c) the redemption of Whitmire's preferred
stock (approximately $20.4 million).
Long-term obligations decreased from $275.8 million at March 31, 1993,
to $210.1 million at June 30, 1994, due primarily to (a) the issuance by the
Company of additional Class A Common Shares upon the conversion of $74.9
million of the Subordinated Debentures, and (b) the repayment of amounts
outstanding under Whitmire's revolving credit arrangements, offset primarily by
the sale of the $100 million New Notes described above.
Shareholders' equity increased to $368.5 million at June 30, 1994 from
$247.9 million at March 31, 1993 due primarily to (a) the issuance of
additional Class A Common Shares upon conversion of $74.9 million of the
Subordinated Debentures, offset by approximately $1.8 million of unamortized
debenture offering costs charged to shareholders' equity, (b) net earnings of
the Company of approximately $35.1 million in fiscal 1994 and net earnings of
approximately $7.8 million by Cardinal (exclusive of Whitmire) in the three
months ended June 30, 1993 (see Note 1 of "Notes to Consolidated Financial
Statements"), and (c) the issuance of approximately 1,062,000 Class A Common
Shares to acquire all of the outstanding stock of Solomons Company (see Note 3
of "Notes to Consolidated Financial Statements"), offset primarily by (i) the
repurchase of approximately 725,000 Class A Common Shares owned by subsidiaries
of North American National Corporation (see Note 15 of "Notes to Consolidated
Financial Statements"), and (ii) dividends paid by the Company of approximately
$3.9 million in fiscal 1994.
The Company has line-of-credit agreements with various bank sources
aggregating $321 million, of which $100 million is represented by committed
line-of-credit agreements and the balance is uncommitted. The Company had
drawn upon $25 million of the available lines-of-credit at June 30, 1994,
leaving $296 million available under the Company's existing line-of-credit
agreements.
On May 6, 1993, the Company filed with the Securities and Exchange
Commission a Registration Statement for the public offering, from time-to-time,
of its debt securities (the "Debt Securities") issuable in one or more series
in an aggregate principal amount not to exceed $150 million. On February 23,
1994, the Company sold $100 million of the New Notes (see Note 5 of "Notes to
Consolidated Financial Statements"), the net proceeds of which were used for
general corporate purposes, including the repayment of the bank lines of credit
incurred as part of the Whitmire Merger. At June 30, 1994, $50 million of the
Debt Securities remain issuable.
On August 17, 1994, the Company filed with the Securities and Exchange
Commission a registration statement for an underwritten public offering of
5,250,000 Class A Common Shares. Of the 5,250,000 shares, 1,600,000 are being
sold by the Company and 3,650,000 are being sold by certain shareholders of the
Company. The underwriters have been granted an option to purchase up to
787,500 additional Class A Common Shares to cover overallotments, if any,
including up to 266,949 such shares from the Company.
14
15
The Company believes that it has adequate capital resources at its
disposal (exclusive of the anticipated proceeds from the proposed public
offering of Class A Common Shares described above) to meet currently
anticipated capital expenditures, routine business growth and expansion, and
current and projected debt service, including the additional liquidity and
capital requirements associated with recent and prospective business
combinations (see Notes 3 and 16 of "Notes to Consolidated Financial
Statements").
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- - -----------------------------------------------------
Independent Auditors' Reports
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Year Ended
June 30, 1994, Twelve Months Ended June 30, 1993,
and Fiscal Years Ended March 31, 1993, and March 31, 1992
Consolidated Balance Sheets at June 30, 1994, and March 31, 1993
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 1994, March 31, 1993, and March 31, 1992
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 1994, March 31, 1993, and March 31, 1992
Notes to Consolidated Financial Statements
15
16
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Cardinal Health, Inc.:
We have audited the accompanying consolidated balance sheets of
Cardinal Health, Inc. and subsidiaries as of June 30, 1994 and March 31, 1993,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for the years ended June 30, 1994, March 31, 1993 and March 31,
1992. Our audits also included the financial statement schedule listed in the
Index at Item 14. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. The consolidated financial statements and
financial statement schedule give retroactive effect to the
pooling-of-interests business combination of Cardinal Health, Inc. and Whitmire
Distribution Corporation on February 7, 1994, as described in Note 1 to the
consolidated financial statements. We did not audit the balance sheet of
Whitmire Distribution Corporation as of July 3, 1993, or the related statements
of earnings, shareholders' equity and cash flows of Whitmire Distribution
Corporation for the years ended July 3, 1993 and June 27, 1992, which
statements reflect total assets of $451,855,000 as of July 3, 1993; net sales
of $2,666,829,000 and $2,033,067,000 for the years ended July 3, 1993 and June
27, 1992, respectively; and net earnings available for common shares before
cumulative effect of change in accounting principle of $4,039,000 and $330,000
for the years ended July 3, 1993 and June 27, 1992, respectively. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Whitmire
Distribution Corporation in the March 31, 1993 and 1992 financial statements,
is based solely on the report of such other auditors.
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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cardinal Health, Inc. and
subsidiaries at June 30, 1994 and March 31, 1993, and the results of their
operations and their cash flows for the years ended June 30, 1994, March 31,
1993, and March 31, 1992 in conformity with generally accepted accounting
principles. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for income taxes to conform with Statement of
Financial Accounting Standards No. 109 by applying it retroactively effective
April 1, 1992.
DELOITTE & TOUCHE LLP
Columbus, Ohio
August 16, 1994
16
17
Report of Independent Public Accountants
To the Board of Directors of
Whitmire Distribution Corporation:
We have audited the balance sheet of Whitmire Distribution Corporation (a
Delaware corporation), as of July 3, 1993, and the related statements of
operations, stockholders' equity and cash flows for each of the two years in
the period ended July 3, 1993 (not presented herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Whitmire Distribution
Corporation as of July 3, 1993, and the results of its operations and its cash
flows for each of the two years in the period ended July 3, 1993, in conformity
with generally accepted accounting principles.
Arthur Andersen & Co.
Sacramento, California
September 3, 1993
(Except with respect to the matter discussed in Note 10, as to which date is
October 11, 1993.)
17
18
CARDINAL HEALTH, INC. AND SUBSIDIARIES
- - --------------------------------------
Fiscal Year Twelve Months
Ended Ended Fiscal Year Ended
-------------- ----------------- -------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS June 30, June 30, March 31, March 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1994 1993 1993 1992
- - ----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Net sales $ 5,790,411 $ 4,709,085 $ 4,633,375 $ 3,680,678
Cost of products sold 5,435,239 4,408,840 4,336,082 3,423,845
--------- --------- --------- ---------
Gross margin 355,172 300,245 297,293 256,833
Selling, general and administrative expenses (233,305) (205,161) (203,740) (184,523)
Unusual items
Merger costs (35,880)
Termination fee 13,466 13,466
Nonrecurring charges (18,904) (18,904) (1,973)
---------- -------- -------- -------
Operating earnings 85,987 89,646 88,115 70,337
Other income (expense):
Interest expense (18,140) (26,174) (26,623) (28,073)
Other, net - primarily interest income 2,913 5,047 4,765 5,389
---------- ---------- --------- -------
Earnings before income taxes and cumulative
effect of change in accounting principle 70,760 68,519 66,257 47,653
Provision for income taxes (35,624) (26,345) (25,710) (19,291)
-------- -------- -------- ---------
Earnings before cumulative effect of
change in accounting principle 35,136 42,174 40,547 28,362
Preferred dividends declared/accretion (1,205) (2,876) (2,876) (2,840)
--------- --------- --------- ----------
Earnings available for Common Shares before
cumulative effect of change in accounting principle 33,931 39,298 37,671 25,522
Cumulative effect of change in accounting principle (10,000)
--------- ------- ----------- ---------
Net earnings available for Common Shares $ 33,931 $ 39,298 $ 27,671 $ 25,522
=========== =========== =========== ==========
Primary earnings per Common Share:
Before cumulative effect of change in
accounting principle $0.86 $1.14 $1.10 $0.74
Cumulative effect of change in accounting principle ____ ____ (0.29) ___
-----
Net $0.86 $1.14 $0.81 $0.74
==== ==== ==== ====
Fully diluted earnings per Common Share:
Before cumulative effect of change in
accounting principle $0.86 $1.10 $1.06 $0.74
Cumulative effect of change in accounting principle ___ ___ (0.26) ___
------
Net $0.86 $1.10 $0.80 $0.74
==== ==== ==== ====
Weighted average number of Common Shares outstanding:
Primary 39,392 34,349 34,311 34,291
Fully diluted 39,477 38,653 38,616 38,571
The accompanying notes are an integral part of these statements.
18
19
CARDINAL HEALTH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
- - -----------------------------------------------------------------------------------------------------------------------------
June 30, March 31,
1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and equivalents $ 54,941 $ 66,739
Marketable securities 37,292
Trade receivables 340,911 248,398
Merchandise inventories 868,210 635,108
Prepaid expenses and other 23,062 8,295
---------- ----------
Total current assets 1,287,124 995,832
Property and equipment - at cost
Land, buildings and improvements 28,354 28,229
Machinery and equipment 81,925 65,528
Furniture and fixtures 9,096 10,057
---------- ----------
Total 119,375 103,814
Accumulated depreciation and amortization (59,346) (44,501)
---------- ----------
Property and equipment - net 60,029 59,313
Other assets 48,449 44,705
---------- ----------
Total $1,395,602 $1,099,850
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable - banks $ 25,000
Current portion of long-term obligations 2,929 $ 5,436
Accounts payable 705,702 485,978
Other accrued liabilities 82,411 63,680
---------- ----------
Total current liabilities 816,042 555,094
Long-term obligations - less current portion 210,086 275,789
Other liabilities 980 705
Redeemable preferred stock 20,400
Shareholders' equity:
Common Shares - without par value, authorized 65,000,000
shares, issued 1994 - 38,014,088 shares,
1993 - 23,943,376 shares 255,458 172,367
Retained earnings 120,399 81,573
Common Shares in treasury, at cost - 1994 - 179,878 shares,
1993 - 172,311 shares (3,390) (3,074)
Unamortized restricted stock awards (3,973) (3,004)
---------- ----------
Total shareholders' equity 368,494 247,862
---------- ----------
Total $ 1,395,602 $ 1,099,850
========== ==========
The accompanying notes are an integral part of these statements.
19
20
CARDINAL HEALTH INC. AND SUBSIDIARIES
- - -------------------------------------
Common Shares
------------- Treasury Shares Unamortized Total
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Shares Retained --------------- Restricted Shareholders'
(IN THOUSANDS) Issued Amount Earnings Shares Amount Stock Awards Equity
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1991 16,625 $159,777 $ 30,339 (141) $(2,183) $(1,935) $185,998
Earnings before preferred dividends 28,362 28,362
Shares issued in connection with stock options
and warrants 3,245 521 174 695
Restricted stock awards 37 1,388 (1,388)
Amortization of restricted stock awards 672 672
Treasury shares acquired (7) (201) (201)
Dividends paid and preferred stock accretion (4,190) (4,190)
5-for-4 stock split effected as a stock dividend and
cash paid in lieu of fractional shares 3,754 (11) (11)
Tax benefits related to restricted stock and
stock options 1,113 1,113
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1992 23,661 162,799 54,674 (148) (2,384) (2,651) 212,438
Earnings before cumulative effect of change in
accounting principle and preferred dividends 40,547 40,547
Cumulative effect of change in accounting principle (10,000) (10,000)
Shares issued in connection with stock options
and warrants 280 2,322 2,322
Stock option compensation 5,247 5,247
Restricted stock awards 40 1,054 (1,054)
Amortization of restricted stock awards 701 701
Treasury shares acquired (24) (690) (690)
Shares repurchased and retired (38) (199) (199)
Dividends paid and preferred stock accretion (4,488) (4,488)
Tax benefits related to restricted stock
and stock options 1,984 1,984
Miscellaneous other (840) 840
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1993 23,943 172,367 81,573 (172) (3,074) (3,004) 247,862
Earnings before preferred dividends 35,136 35,136
Shares issued pursuant to the conversion of $75 million
of convertible debentures 3,423 73,140 73,140
Shares issued pursuant to the acquisition of Solomons 849 18,006 18,006
Repurchase and retirement of shares owned by
North American National Corporation (580) (15,373) (15,373)
Shares issued in connection with stock options
and warrants 2,531 1,025 1,025
Restricted stock awards 47 1,984 (1,984)
Amortization of restricted stock awards 985 985
Treasury shares acquired and restricted stock forfeitures (8) (316) 30 (286)
Dividends paid (3,935) (3,935)
5-for-4 stock split effected as a stock dividend
and cash paid in lieu of fractional shares 7,564 (16) (16)
Adjustment to change fiscal year of
Cardinal Health, Inc. 7,293 7,293
Equity of PRN Services, Inc. on merger date
(see Note 3) 237 34 348 382
Tax benefits related to restricted stock
and stock options 4,275 4,275
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1994 38,014 $255,458 $120,399 (180) $(3,390) $(3,973) $368,494
===================================================================================================================================
The accompanying notes are an integral part of these statements.
20
21
CARDINAL HEALTH INC. AND SUBSIDIARIES
- - -------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Fiscal Year Ended
- - --------------------------------------------------------------------------------------------------------------------------------
June 30, March 31, March 31,
1994 1993 1992
- - --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings before cumulative effect of change in
accounting principle $ 35,136 $ 40,547 $ 28,362
Adjustments to reconcile earnings before cumulative effect of change
in accounting principle to net cash from operations:
Depreciation and amortization 16,971 18,260 18,036
Stock option compensation 5,247
Provision for deferred income taxes (11,374) (10,063) 3,293
Provision for bad debts 9,761 4,498 5,224
Change in operating assets and liabilities net of effects from acquisitions:
Increase in trade receivables (84,704) (5,139) (30,611)
Increase in merchandise inventories (232,178) (51,343) (129,016)
Increase in accounts payable 169,988 128,353 36,489
Other operating items - net 21,451 10,746 (4,185)
--------- -------- --------
Net cash provided by (used in) operating activities (74,949) 141,106 (72,408)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired (16,365)
Proceeds from sale of property and equipment 1,079 111 298
Additions to property and equipment (11,229) (14,620) (16,433)
Purchase of marketable securities (115,241) (330,371) (100,719)
Proceeds from sale of marketable securities 187,229 294,083 120,035
--------- -------- --------
Net cash provided by (used in) investing activities 61,838 (50,797) (13,184)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term activity 25,000 (46,375)
Reduction of short-term borrowing of an acquired subsidiary (5,226)
Reduction of long-term obligations (92,701) (30,495) (15,020)
Proceeds from long-term obligations 100,000 100,000
Issuance costs of long-term obligations (860) (2,468)
Proceeds from issuance of Class A Common Shares 1,025 2,322 695
Proceeds from issuance of preferred shares 400
Income tax credited to shareholders' equity 4,275 1,984 1,113
Dividends on common and preferred shares and cash paid
in lieu of fractional shares (3,951) (3,648) (3,361)
Redemption of preferred stock (20,400)
Purchase of treasury shares (307) (889) (201)
Debenture conversion costs charged to shareholders' equity (13)
--------- -------- --------
Net cash provided by (used in) financing activities 6,842 (30,726) 34,783
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (6,269) 59,583 (50,809)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 61,210 7,156 57,965
--------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR $ 54,941 $ 66,739 $ 7,156
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (NOTE 13)
Interest paid during the year (net of capitalized amount) $ 16,412 $ 25,889 $ 25,735
========= ========= ========
Income taxes paid during the year $ 35,974 $ 27,097 $ 16,740
========= ========= ========
The accompanying notes are an integral part of these statements.
21
22
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a full service wholesaler distributing a broad line of
pharmaceuticals, surgical and hospital supplies, health and beauty care
products, and other items typically sold by hospitals, retail drug stores,
and other health care providers. The Company is currently operating in
only one business segment.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts
of all majority-owned subsidiaries and all significant intercompany
amounts have been eliminated. The consolidated financial statements have
been prepared to give retroactive effect to the pooling-of-interests
business combination with Whitmire Distribution Corporation (the "Whitmire
Merger") on February 7, 1994 (see Note 3). The term "Cardinal," as used
herein, refers to Cardinal Health, Inc. and its subsidiaries prior to the
Whitmire Merger. Cardinal's fiscal year has historically ended on March
31, while Whitmire's fiscal year has ended on the Saturday closest to the
end of June. On March 1, 1994, the Company changed its fiscal year end
from March 31 to June 30. Accordingly, the accompanying consolidated
financial statements for the fiscal year ended June 30, 1994, and for the
twelve months ended June 30, 1993, combine the information for Cardinal
and Whitmire as of June 30, 1994, and for each of the two years then
ended. The accompanying consolidated financial statements for earlier
fiscal years combine information for Cardinal's March year end with
Whitmire's subsequent fiscal June year end. The consolidated statement of
earnings for the twelve months ended June 30, 1993, is unaudited and is
presented for the purpose of supplemental analysis.
Due to the different fiscal period ends of the merged companies, the
results of Whitmire for the three months ended July 3, 1993, have been
included in the consolidated statements of earnings for both the periods
ended June 30, 1993, and March 31, 1993. Cardinal's results of operations
(exclusive of Whitmire) for the three months ended June 30, 1993, are not
included in the consolidated statement of earnings but have been included
as an adjustment in the consolidated statement of shareholders' equity.
Such amounts, along with certain cash flow information, are summarized as
follows (in thousands):
Three Months Ended
June 30, 1993
-------------------
Net sales $550,034
Net earnings 7,771
Cash provided by operating activities $53,752
Cash used in investing activities 36,521
Cash used in financing activities 22,760
Dividends paid 478
CASH EQUIVALENTS
The company considers all liquid investments purchased with a maturity of
three months or less to be cash equivalents.
22
23
MARKETABLE SECURITIES
Marketable securities are recorded at cost, which approximates market value.
TRADE RECEIVABLES
Trade receivables are presented net of the related allowance for doubtful
accounts of approximately $21,594,000 and $13,428,000 at June 30, 1994, and
March 31, 1993, respectively.
MERCHANDISE INVENTORIES
Substantially all merchandise inventories are stated at lower of cost,
last-in, first-out (LIFO) method, or market. 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 at
June 30, 1994, by $61,852,000 and at March 31, 1993, by $55,374,000. The
impact of partial inventory liquidations in certain LIFO pools reduced the
LIFO provision by approximately $2,500,000 in fiscal 1993.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization for
financial reporting purposes are computed using the straight-line method
over the estimated useful lives of the assets which range from three to forty
years, including capital lease assets which are amortized over the terms of
their respective leases. Amortization of capital lease assets is included in
depreciation and amortization expense.
OTHER ASSETS
Other assets primarily represent intangible assets related to the excess of
cost over net assets of subsidiaries acquired and noncurrent deferred tax
assets (see Note 7). Intangible assets are being amortized using the
straight-line method over lives which range from ten to forty years.
Accumulated amortization was $16,571,000 and $15,369,000 at June 30, 1994,
and March 31, 1993, respectively. At each balance sheet date, a
determination is made by management to ascertain whether the intangible
assets have been impaired based on several criteria, including, but not
limited to, sales trends, undiscounted operating cash flows, and other
operating factors.
SALES RECOGNITION
The Company records sales when merchandise is delivered to its customers and
the Company has no further obligation to provide services related to
merchandise delivered. Service fees related to bulk sales of pharmaceuticals
are included in net sales. Such amounts are not significant in fiscal 1994,
1993 and 1992.
INCOME TAXES
Effective as of the beginning of fiscal 1993, Cardinal began accounting
for income taxes under the liability method by adopting Statement of
Financial Accounting Standards SFAS No. 109, "Accounting for Income Taxes"
(SFAS No. 109). The cumulative effect of adopting this statement
($10,000,000) has been reported as a change in accounting principle
retroactive to the beginning of fiscal 1993. The cumulative effect of
adopting SFAS No. 109 by Whitmire was not material and has been included in
the fiscal 1992 provision for income taxes, and not separately presented in
the accompanying consolidated financial statements. Prior to the adoption of
SFAS No. 109, both Cardinal and Whitmire accounted for income taxes in
accordance with Accounting Principles Board Opinion No. 11.
23
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CAPITAL STOCK
The Company's authorized capital shares consist of: (a) 60,000,000 common
shares, without par value ("Class A Common Shares"), of which at June 30,
1994, 34,862,835 were outstanding; (b) 5,000,000 Class B common shares,
without par value ("Class B Common Shares"), of which at June 30, 1994,
2,971,375 were outstanding; and (c) 500,000 non-voting preferred shares
without par value ("Preferred Shares"), none of which has been issued.
The Class B Common Shares were issued to a former Whitmire stockholder in
February 1994 in connection with the Whitmire Merger. All of the
outstanding Class B Common Shares are held by one holder.
All holders of Class A Common Shares and Class B Common Shares
(collectively, "Common Shares") participate equally in dividends when and
as declared by the Company's Board of Directors. Holders of Class A
Common Shares are entitled to one vote per share for the election of
Directors and upon all matters on which shareholders are entitled to vote.
Holders of Class B Common Shares are entitled to one-fifth of one vote per
share in the election of Directors and upon all matters which shareholders
are entitled to vote.
EARNINGS PER COMMON SHARE
Primary earnings per Common Share are based on the weighted average number
of Common Shares outstanding during each period and the dilutive effect of
stock options and warrants from the date of grant computed using the
treasury stock method.
Fully diluted earnings per Common Share reflect: (a) the dilutive effect
of stock options and warrants from the date of grant computed using the
treasury stock method; and (b) the full conversion of the 7.25%
Convertible Subordinated Debentures due 2015 through their conversion and
redemption in July 1993 (see Note 5).
STOCK SPLIT
The Company paid a 25% stock dividend on June 30, 1994, to effect a
five-for-four stock split of the Company's Common Shares. All share and
per share amounts included in the Consolidated Financial Statements,
except the Consolidated Statements of Shareholders' Equity, have been
adjusted to reflect this stock split.
2. UNUSUAL ITEMS
In February 1994, the Company recorded a nonrecurring charge to reflect
estimated Whitmire Merger costs of approximately $35.9 million ($28.2
million net of tax), including (a) fees and other transaction costs
related to the combination, and (b) other nonrecurring costs expected to
be incurred in connection with the integration of Cardinal's and
Whitmire's business operations. These estimated costs include
approximately $7 million for investment banking, legal, accounting, and
other related transaction fees and costs associated with the combination;
$13 million for corporate restructuring and distribution rationalization;
$6 million for integration of information systems; and $2 million for
restructuring Whitmire's revolving credit agreement. Of these estimated
costs, approximately $7 million pertain to the revaluation of certain
operating assets and $2 million pertain to employee relocation, retraining
and termination costs. Certain of these amounts are based on a
preliminary estimate of costs to be incurred by the Company, and actual
costs may differ from such estimate. At June 30, 1994, the Company had
incurred actual costs aggregating approximately $11.7 million relating to
the Whitmire Merger. The Company's current estimates of merger costs
ultimately to be incurred are not materially different than the amounts
originally recorded.
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25
During fiscal 1993, the Company received a termination fee of
approximately $13.5 million, resulting from the termination by
Durr-Fillauer Medical, Inc. of its agreement to merge with the Company.
Also during fiscal 1993, the Company recorded nonrecurring charges
totaling approximately $13.7 million, primarily related to the closing of
certain non-core operations and the rationalization, standardization and
improvement of selected distribution operations, information systems and
support functions. The charges included the write-down of certain assets,
moving costs and other costs associated with the affected operations, and
modification costs necessary to centralize and standardize certain
information systems and support functions. At June 30, 1994, the Company
had incurred actual costs aggregating approximately $9.1 million related
to these charges and expects most of the remaining amounts to be incurred
in fiscal 1995. The modification of the terms of certain Whitmire stock
options in fiscal 1993 also resulted in a one-time stock option
compensation charge of approximately $5.2 million (see Note 11).
In fiscal 1992, the completion by Whitmire of certain equity transactions
resulted in the recording of an unusual expense of approximately $2.0
million (see Note 11).
The following supplemental information summarizes the results of
operations of the Company, adjusted on a pro forma basis to reflect (a)
the elimination of the effect of the unusual items discussed above, and
(b) the redemption of Whitmire's preferred stock pursuant to the terms of
the Reorganization Agreement. Solely for purposes of the summary
presented below, such redemption is assumed to have been funded from the
liquidation of investments in tax-exempt marketable securities.
Fiscal Year Twelve Months
Ended Ended Fiscal Year Ended
-------- -------- -------------------------
June 30, June 30, March 31, March 31,
(In thousands, except per share amounts) 1994 1993 1993 1992
-------- -------- -------- --------
(Unaudited)
Operating earnings $121,867 $95,084 $93,553 $72,310
Earnings before cumulative effect of
change in accounting principle 63,044 44,510 42,865 29,252
Earnings per Common Share before
cumulative effect of change in accounting
principle:
Primary $1.60 $1.30 $1.25 $0.85
Fully diluted 1.60 1.24 1.19 0.84
3. BUSINESS COMBINATIONS
On January 27, 1994, shareholders of Cardinal and Whitmire approved and
adopted the Agreement and Plan of Reorganization dated October 11, 1993
(the "Reorganization Agreement"), pursuant to which Cardinal Merger Corp.,
a wholly owned subsidiary of Cardinal, was merged with and into Whitmire
effective February 7, 1994. In the merger, which was accounted for as a
pooling-of-interests business combination, holders of outstanding Whitmire
common stock received an aggregate of approximately 6,802,000 Class A
Common Shares and approximately 1,861,000 Class B Common Shares in
exchange for all of the previously outstanding common stock of Whitmire.
In addition, Whitmire's outstanding stock options were converted into
options to purchase an aggregate of approximately 1,721,000 additional
Class A Common Shares pursuant to the terms of such options and the
Reorganization Agreement.
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The following presents a reconciliation of amounts of net sales and net
earnings available for Common Shares as reported in the accompanying
consolidated financial statements with those previously reported by
Cardinal as well as such information for the interim period before the
combination occurred (in thousands):
Cardinal Whitmire Combined
-------- -------- --------
FISCAL YEAR ENDED MARCH 31, 1992
--------------------------------
Net sales $1,647,611 $2,033,067 $3,680,678
Net earnings available for
Common Shares $ 25,192 $ 330 $ 25,522
FISCAL YEAR ENDED MARCH 31, 1993
--------------------------------
Net sales $1,966,546 $2,666,829 $4,633,375
Net earnings available for
Common Shares $ 23,632 $ 4,039 $ 27,671
NINE MONTHS ENDED DECEMBER 31, 1993 (UNAUDITED)
-----------------------------------------------
Net sales $1,805,065 $2,197,386 $4,002,451
Net earnings available for
Common Shares $ 27,925 $ 10,246 $ 38,171
On December 17, 1993, the Company issued approximately 296,000 Class A
Common Shares in a merger transaction for all of the capital stock of PRN
Services, Inc., a distributor of pharmaceuticals and medical supplies to
oncologists and oncology clinics. The transaction was accounted for as a
pooling-of-interests business combination. The impact of the PRN merger,
on both an historical and pro forma basis, is not significant.
Accordingly, prior periods have not been restated for the PRN merger.
On May 4, 1993, the Company acquired all of the outstanding capital stock
of Solomons Company, a wholesale drug distributor based in Savannah,
Georgia, in exchange for approximately 1,062,000 Class A Common Shares.
The transaction was accounted for by the purchase method. Had the
acquisition occurred at the beginning of fiscal 1993, operating results on
a pro forma basis would not have been significantly different.
On October 15, 1991, the Company acquired all of the issued and
outstanding shares of Chapman Drug Company, a drug wholesaler based in
Knoxville, Tennessee, for cash of $16,800,000 in a transaction accounted
for by the purchase method. Had the acquisition occurred at the beginning
of fiscal 1992, operating results on a pro forma basis would not have been
significantly different.
4. NOTES PAYABLE - BANKS
The Company has entered into various uncommitted line-of-credit
arrangements which allow for borrowings up to $221,000,000 at various
money market rates. The amount outstanding under such arrangements as of
June 30, 1994 was $25,000,000.
In addition to the aforementioned credit arrangements, at June 30, 1994,
the Company has revolving credit agreements with eight banks which have a
maturity of less than one year, are renewable on a quarterly basis, and
allow the Company to borrow up to $100,000,000 (none of which was in use
at June 30, 1994) at either the prime rate, eurodollar rates plus .5%, or
a mutually agreed upon rate. The Company is required to pay a commitment
fee at the annual rate of .125% on the average daily unused amounts of the
total credit allowed under the revolving credit agreements.
Total unused lines of credit at June 30, 1994 and March 31, 1993 were
$296,000,000 and $176,000,000, respectively.
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The following summarizes notes payable - banks activity (in thousands,
except interest rate data):
Fiscal Year
-----------------------------------------------------
1994 1993 1992
-----------------------------------------------------
Weighted average interest rates:
During the year 5.06% 4.31% 5.92%
At end of year 4.28% ---- ----
Maximum amounts borrowed $244,400 $ 7,300 $136,750
Average amounts borrowed 46,799 129 71,780
The weighted average interest rates during the periods represent
annualized rates computed based on the number of days the borrowings were
outstanding. The average amounts borrowed were computed based on the
average of the daily amounts outstanding during the respective periods.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
June 30, March 31,
1994 1993
--------- --------
Notes; 6.5% due 2004 $100,000
Notes; 8%, due 1997 100,000 $100,000
Revolving credit agreement; rates that fluctuate based
on prime or LIBOR, due 1995 88,824
Convertible Subordinated Debentures; 7.25%,
due 2015 75,000
Various mortgage revenue bonds, notes and capital
leases; 8.5% to 10.05% and rates that fluctuate
based on prime, due in varying installments through 2002 13,015 17,401
-------- --------
Total 213,015 281,225
Less current portion 2,929 5,436
-------- --------
Long-term obligations - less current portion $210,086 $275,789
======== ========
On February 23, 1994, the Company sold $100,000,000 of 6.5% Notes due 2004
(the "New Notes") in a public offering. The New Notes represent unsecured
obligations of the Company, are not redeemable prior to maturity and are
not subject to a sinking fund. Issuance costs of approximately $860,000
incurred in connection with the offering are being amortized on a
straight-line basis over the period the New Notes will be outstanding.
The Company used the proceeds of this sale for general corporate purposes,
including the repayment of bank lines of credit incurred as part of the
Whitmire Merger (see Note 3). In anticipation of the sale of the New
Notes, the Company entered into an interest rate hedge agreement, which
was terminated at the approximate time of the issuance of the New Notes,
resulting in a deferred gain of approximately $1.3 million which will be
amortized as a reduction of interest expense over the period the New Notes
are outstanding.
On March 11, 1992, the Company sold $100,000,000 of 8% Notes due 1997 (the
"Notes") in a public offering. The Notes represent unsecured obligations
of the Company, are not redeemable prior to maturity and are not subject
to a sinking fund. Issuance costs of approximately $718,000 incurred in
connection with the offering, are being amortized on a straight-line basis
over the period the Notes will be outstanding.
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The Company has entered into various interest rate swap agreements which
serve to hedge the Notes. The net effect of the swap agreements is that
the Company exchanged its 8% fixed rate position on the Notes for a fixed
rate of 5.1% for the period July 15, 1992, through March 1, 1993, a fixed
rate of 6.5% for the period March 2, 1993, through March 1, 1994, and,
thereafter, a fixed rate of 8.1% through March 1, 1997 (the maturity date
of the Notes). In May 1993, two of the offsetting swap agreements were
canceled at no gain or loss to the Company. Due to the offsetting nature
of the swaps, the market value of those in a net receivable position
approximates the market value of those in a net payable position. The
risk of accounting loss in the event of nonperformance by counterparties
is approximately $4 million as of June 30, 1994; however, based on the
credit quality of the counterparties, the Company believes the
likelihood of such a credit loss to be remote.
During fiscal 1992, the Company, through Whitmire, entered into a
revolving credit agreement under which it could borrow up to $210,000,000.
During fiscal 1993, the agreement was amended to provide for seasonal
increases in the availability up to $235,000,000. Interest was payable
monthly at 1.5% over the prime rate or, at Whitmire's election, 3.25% over
the London Interbank Offered Rate (LIBOR). The average interest rate
under the revolving credit agreement at the end of fiscal 1993 was 6.9%.
This agreement replaced a $175,000,000 credit agreement, and interest
expense in fiscal 1992 includes a charge of $1,837,000 associated with
this replacement. On February 7, 1994, the revolving credit agreement was
terminated.
The Subordinated Debentures outstanding at March 31, 1993, were
convertible into the Company's Class A Common Shares at any time on or
before July 1, 2015, unless previously redeemed, at a conversion price of
$17.51 per share. Issuance costs of approximately $2,000,000 incurred in
connection with the offering were being amortized on a straight-line basis
over the original period the Subordinated Debentures were to be
outstanding. On June 11, 1993, the Company called the Subordinated
Debentures for redemption, effective as of July 2, 1993. Following this
call, $74,920,000 of Subordinated Debentures outstanding as of March 31,
1993, were converted into Class A Common Shares of the Company. The
remaining $80,000 of Subordinated Debentures outstanding as of March 31,
1993, were redeemed for cash. The pro forma primary earnings per share of
the Company, as if the above conversion and redemption had occurred as of
the beginning of fiscal 1992, would have been $0.80 and $0.74 in fiscal
1993 and 1992, respectively.
The amount credited to shareholders' equity as a result of the conversion
of the Subordinated Debentures was reduced by unamortized offering costs
of approximately $1,767,000 and costs directly related to the conversion
of approximately $13,000.
Certain long-term obligations are collateralized by property and equipment
of the Company with an aggregate book value of approximately $13,500,000
at June 30, 1994.
Maturities of long-term obligations for future fiscal years are as
follows (in thousands):
1995 $ 2,929
1996 2,236
1997 101,245
1998 868
1999 738
After 1999 104,999
-----------------------------------
Total $213,015
===================================
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6. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each material class of financial instruments for which estimates are
practicable:
CASH AND EQUIVALENTS, MARKETABLE SECURITIES, AND OTHER ACCRUED LIABILITIES
The carrying amount at June 30, 1994, and March 31, 1993, approximates the
fair value because of the short-term maturities of these items.
LONG-TERM OBLIGATIONS
The Company's long-term obligations are composed of notes, a long-term
revolving credit agreement, convertible debentures, and various mortgage
revenue bonds, notes and capital leases. The fair value of the Company's
long-term obligations is estimated based on the quoted market prices for
the same or similar issues and the current interest rates offered for debt
of the same remaining maturities.
Considerable judgment is required in interpreting market data to develop
the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair values do not include
early redemption premiums, underwriter's fees and commissions, and
refunding costs (legal and registration fees).
The estimated value of the Company's long-term obligations was
$206,116,000 and $313,704,000, as compared to the carrying amounts of
$213,015,000 and $281,225,000 at June 30, 1994, and March 31, 1993,
respectively.
The fair value estimates presented herein are based on pertinent
information available to management as of the dates indicated. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
current estimates of fair values may differ significantly from the amounts
presented herein.
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7. INCOME TAXES
Effective the beginning of fiscal 1993, Cardinal adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS
No. 109). Under the provisions of SFAS No. 109, income taxes are recorded
under the liability method. SFAS No. 109 results in the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of existing differences between financial reporting and tax
reporting bases of assets and liabilities (temporary differences), and
operating loss and tax credit carryforwards for tax purposes. The
cumulative effect of adopting SFAS No. 109 ($10,000,000) by Cardinal has
been reported as a change in accounting principle retroactive to the
beginning of fiscal 1993. The cumulative effect of adopting SFAS No. 109
by Whitmire was not material and has been included in the fiscal 1992
provision for income taxes, and not separately presented in the
accompanying consolidated statements of earnings.
The provision for income taxes consists of the following (in thousands):
Fiscal Year
---------------------------------------------
1994 1993 1992
---------------------------------------------
Current:
Federal $42,146 $29,991 $12,260
State 4,852 5,782 4,790
------- ------- -------
Total 46,998 35,773 17,050
------ ------ ------
Deferred (11,374) (10,063) 3,293
Whitmire net operating loss benefit _____ _____ ( 1,052)
-------
Total provision $35,624 $25,710 $19,291
====== ====== ======
A reconciliation of the Company's income tax provision and the provision
based on the Federal statutory income tax rate follows:
Fiscal Year
------------------------------------------
1994 1993 1992
-----------------------------------------
Provision at Federal
statutory rate 35.0% 34.0% 34.0%
State income taxes - net of
Federal benefit 4.5 5.0 6.6
Income from tax-advantaged
investments (0.8) (1.4) (2.5)
Nondeductible expenses 9.5 1.7
Valuation allowance 2.0
Net operating loss benefit (2.2)
Other 2.1 1.2 0.9
------- -------- -----
Effective income tax rate 50.3% 38.8% 40.5%
===== ===== =====
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After giving effect to the adoption of SFAS No. 109, the components of the
Company's deferred income tax assets (liabilities), the current portion of
which (an asset of $4,990,000 and a liability of $5,358,000 at June 30,
1994, and March 31, 1993, respectively) is included in the Consolidated
Balance Sheet captions "Prepaid expenses and other" and "Other accrued
liabilities," and the noncurrent portion of which (an asset of $467,000
and $1,822,000 at June 30, 1994, and March 31, 1993, respectively) is
included in the Consolidated Balance Sheet caption "Other assets," are as
follows (in thousands):
As of
--------------------------------------
June 30, March 31,
1994 1993
------------ -----------
Deferred income tax assets:
Allowance for doubtful accounts $ 7,839 $ 4,823
Accrued liabilities 22,623 12,038
Stock option compensation 2,240 2,275
Other 1,929 1,878
-------- ---------
Total deferred income tax assets $ 34,631 $ 21,014
-------- --------
Deferred income tax liabilities:
Inventory basis differences $ (25,210) $ (20,282)
Property related (2,840) (3,428)
Other (1,124) (840)
--------- ----------
Total deferred income tax liabilities $ (29,174) $ (24,550)
-------- --------
Net deferred income tax assets (liabilities) $ 5,457 $ (3,536)
========= =========
8. EMPLOYEE RETIREMENT BENEFIT PLANS
Substantially all of the Company's non-union employees are enrolled in
Company-sponsored contributory profit sharing and retirement savings plans
which include features under Section 401(k) of the Internal Revenue Code,
and provide for matching Company contributions. The Company's
contributions to the plans are determined by the Board of Directors
subject to certain minimum requirements as specified in the plans.
Qualified union employees are covered by Company-sponsored and
multiemployer defined benefit pension plans under the provisions of
collective bargaining agreements. Benefits under these plans are
generally based on the employee's years of service and average
compensation at retirement.
The effect of the Company-sponsored defined benefit plans on the Company's
consolidated financial statements is not material.
Employee retirement benefit plans expense was as follows (in thousands):
Fiscal Year
------------------------------------------
1994 1993 1992
------------------------------------------
Defined contribution plans $3,917 $3,400 $2,727
Multiemployer plans 522 538 543
----- ----- -----
Total $4,439 $3,938 $3,270
===== ===== =====
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The Financial Accounting Standards Board has issued Statement No. 112,
"Employer's Accounting for Postemployment Benefits" which requires
employers to accrue for certain postemployment benefits provided to former
or inactive employees, their beneficiaries, and covered dependents after
employment, but before retirement. This change must be implemented by the
Company in fiscal 1995. Based upon preliminary estimates, management does
not believe that the new statement will have a material effect on the
consolidated financial statements of the Company.
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases certain warehouse and office facilities, vehicles, and
data processing equipment under operating leases. The leases expire at
various dates over the next thirteen years. Certain of these leases
provide for renewal options and/or contingent rentals based on various
factors.
The future minimum rental payments for operating leases having initial or
remaining non-cancelable lease terms in excess of one year at June 30,
1994, are as follows (in thousands):
1995 $10,300
1996 8,835
1997 6,737
1998 5,373
1999 4,700
After 1999 6,306
---------------------------------
Total $42,251
=================================
The minimum rental payments above have been reduced by sublease rentals of
approximately $582,000 in 1995, $215,000 in 1996, $79,000 in 1997, and
$12,000 in 1998. Rental expense (net of sublease rental income) relating
to operating leases and short-term cancelable leases was approximately
$11,189,000, $10,316,000 and $8,990,000 in fiscal 1994, 1993, and 1992,
respectively.
In connection with its supplier relationship with various customers, the
Company has guaranteed certain indebtedness and lease payments. As of
June 30, 1994, these guarantees total approximately $2,251,000.
During fiscal 1994, the Company began a program whereby certain customer
notes receivables were sold, with full recourse, to a commercial bank. As
of June 30, 1994, amounts outstanding on customer notes receivables sold
to the commercial bank under this program totaled approximately $6.7
million.
The Company becomes involved from time-to-time in litigation arising out
of its normal business activities. In addition, in November 1993,
Cardinal, Whitmire, five other pharmaceutical wholesalers, and twenty-four
pharmaceutical manufacturers were named as defendants in a series of
purported class action antitrust lawsuits alleging violations of various
antitrust laws associated with the chargeback pricing system. The Company
believes that the allegations set forth against Cardinal and Whitmire in
these lawsuits are without merit. In the opinion of management, the
Company's liability, if any, under any pending litigation would not have a
material adverse effect on the Company's financial condition.
10. REDEEMABLE PREFERRED STOCK
The Company had authorized 360,000 shares of redeemable preferred $.01
par value stock in Whitmire. The redeemable preferred stock was divided
into two series: 350,000 shares designated as Senior Preferred Stock and
10,000 shares designated as Series A Preferred Stock.
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33
The holders of the Whitmire redeemable preferred stock were entitled to
cumulative annual dividends of $10.00 per share for Senior Preferred Stock
and $10.125 for Series A Preferred Stock when and as declared by
Whitmire's board of directors. In lieu of paying cash dividends to the
holders of Senior Preferred Stock and Series A Preferred Stock, Whitmire
could, at its election, pay scheduled dividends with additional shares of
Senior Preferred Stock or Series A Preferred Stock, as appropriate.
Whitmire would have been required to redeem, at $100.00 per share plus
accrued but unpaid dividends, all shares of its Senior and Series A
Preferred Stock commencing in October 1994 through July 1996.
Stockholders' equity was charged $840,000 in each of fiscal 1993 and 1992
for accretion relative to this mandatory redemption obligation. As of
March 31, 1993, a total of $4,200,000 had been credited to redeemable
preferred stock through accretion. Pursuant to the terms of the
Reorganization Agreement between Cardinal and Whitmire (see Note 3), all
of the outstanding shares of Senior and Series A Preferred Stock were
redeemed as of February 7, 1994, the date of the Whitmire Merger.
11. STOCKHOLDERS' EQUITY
During fiscal 1992, the Company, through Whitmire, completed a series
of transactions which affected its capitalization as follows: warrants for
the purchase of Whitmire common stock were returned and canceled; options
were granted for the benefit of key employees to purchase shares of
Whitmire common stock; outside investors were granted adjustment share
rights representing rights to purchase shares of Whitmire common stock (a
defined percentage of the adjustment share rights were cancelable
annually, up to 100%, based upon the achievement of certain financial
targets); shares of Whitmire's Series A Preferred Stock were issued to
certain outside investors as reimbursement of expenses incurred in
connection with their ownership interest; and put and call provisions of
certain outstanding warrants were canceled. The fiscal 1992 consolidated
statement of earnings reflects an expense associated with the above
transactions of approximately $2.0 million.
During fiscal 1993, the adjustment share rights were canceled and certain
conditions relative to the exercise of options were eliminated. For
financial reporting purposes, the modification of the terms of these
options has been treated as if the options were issued on the date that
the terms were modified. Accordingly, a compensation charge totaling
approximately $5.2 million was recorded relative to these changes. The
compensation charge is equal to the fair value (as determined by an
independent appraisal) of the options on the date that the terms of the
options were modified.
Pursuant to the terms of the Reorganization Agreement (see Note 3),
warrants to purchase shares of Whitmire common stock which, upon exercise
became convertible into approximately 2,831,000 Common Shares at an
average price of $.08 per share, were exercised prior to the consummation
of the pooling-of-interests business combination of Cardinal and Whitmire.
12. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains stock incentive plans (the "Plans") for the benefit
of certain officers, directors and key employees. Under the Plans, at
June 30, 1994, the Company was authorized to issue up to an aggregate of
approximately 3,875,000 Class A Common Shares in the form of incentive
stock options, nonqualified stock options, and restricted shares. Options
granted are generally exercisable for periods up to ten years from the
date of grant at a price approximating fair market value at the date of
grant.
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34
The following summarizes all stock option transactions under the Plans
from March 31, 1991, through June 30, 1994, giving retroactive effect to
stock dividends and stock splits (in thousands, except per share amounts):
Number of Exercise Price
Shares Per Share Total
--------------------------------------------------------
Balance, March 31, 1991 852 4.00 - 22.24 $ 7,657
Granted 146 19.00 - 28.96 3,623
Exercised (116) 4.00 - 7.78 (517)
Canceled (7) 7.78 - 28.80 (127)
- - ------------------------------------------------------------------------------------------------
Balance, March 31, 1992 875 4.00 - 28.96 10,636
Granted 229 20.80 - 22.00 4,801
Exercised (349) 4.00 - 17.04 (2,319)
Canceled (16) 11.14 - 24.50 (279)
- - ------------------------------------------------------------------------------------------------
Balance, March 31, 1993 739 7.78 - 28.96 12,839
Granted 751 23.20 - 38.60 26,286
Exercised (58) 7.78 - 28.96 (787)
Canceled (35) 17.04 - 38.60 (899)
- - ------------------------------------------------------------------------------------------------
Balance, June 30, 1994 1,397 7.78 - 38.60 $ 37,439
At June 30, 1994, approximately 389,000 option shares under the Plans were
exercisable and approximately 2,919,000 Class A Common Shares were
reserved for issuance under the Plans.
In connection with a 1988 acquisition, the Company issued options for
approximately 133,000 Class A Common Shares at $7.45 per share. All of
these options were exercised in fiscal 1993.
In connection with the Whitmire Merger, outstanding Whitmire stock options
granted to current or former Whitmire officers or employees were
automatically converted into options ("Cardinal Exchange Options") to
purchase an aggregate of approximately 1,721,000 additional Cardinal Class
A Common Shares pursuant to the terms of such options and the
Reorganization Agreement (see Note 3). Under the terms of their original
issuance and as reflected in the Reorganization Agreement, the exercise
price for substantially all of the Cardinal Exchange Options is remitted
to certain former investors of Whitmire. During fiscal 1994, Cardinal
Exchange Options to purchase approximately 271,000 shares were exercised
with an average option price of $1.60 per share. At June 30, 1994,
Cardinal Exchange Options to purchase approximately 1,450,000 shares were
outstanding with an average exercise price of $1.60 per share.
Substantially all of the Cardinal Exchange Options outstanding at June 30,
1994, are 100% vested and are exercisable through October 25, 1995.
The market value of restricted shares awarded by the Company is recorded
as unamortized restricted stock awards and shown as a separate component
of shareholders' equity. The compensation awards are amortized to expense
over the period in which participants perform services, generally four to
seven years. As of June 30, 1994, approximately 414,000 restricted shares
have been issued, of which approximately 195,000 shares remain restricted
and subject to forfeiture and approximately 16,000 shares have been
forfeited.
34
35
13. SUPPLEMENTAL INFORMATION REGARDING NONCASH INVESTING AND FINANCING
ACTIVITIES
Capital lease obligations of $906,000, $648,000 and $2,130,000 were
incurred in 1994, 1993 and 1992, respectively, as a result of the Company
entering into leases for equipment.
In conjunction with the acquisitions of Solomons and Chapman (see Note 3),
liabilities were assumed as follows (in thousands):
Three Months Ended Fiscal Year Ended
June 30, 1993 March 31, 1992
------------- --------------
Fair value of assets acquired $ 44,468 $ 45,302
Cash paid for the issued and outstanding shares 16,800
Common Shares issued for the issued and
outstanding shares 18,006 ______
------
Liabilities assumed $ 26,462 $ 28,502
======= ======
Total debt assumed by the Company as a result of these acquisitions was
$6,275,000 in fiscal 1992 and $4,315,000 in the three months ended June
30, 1993, and is included as part of the amount of liabilities assumed.
In conjunction with the pooling-of-interests combination with PRN (see
Note 3) in fiscal 1994, the historical cost of PRN assets combined was
approximately $16,946,000, and the total PRN liabilities assumed
(including total debt of approximately $5,847,000) were approximately
$16,564,000.
35
36
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following information presents the selected quarterly financial data
using the same basis of presentation as the accompanying consolidated
financial statements (see Note 1):
First Second Third Fourth Total
(In thousands, except per share amounts) Quarter Quarter Quarter Quarter Year
- - ----------------------------------------------------------------------------------------------------------------------------------
Fiscal 1994:
Net sales $1,291,470 $1,397,769 $1,510,674 $1,590,498 $5,790,411
Gross margin 77,775 83,312 98,371 95,714 355,172
Selling, general and administrative
expenses (53,556) (54,855) (61,531) (63,363) (233,305)
Unusual items (35,880) (35,880)
Operating earnings 24,219 28,457 960 32,351 85,987
Net earnings (loss) available for
Common Shares 11,806 14,574 (9,096) 16,647 33,931
Net earnings (loss) per Common
Share:
Primary $0.30 $0.37 $(0.23) $0.42 $0.86
Fully diluted 0.30 0.37 (0.23) 0.42 0.86
Fiscal 1993:
Net sales $1,041,252 $1,111,449 $1,218,590 $1,262,084 $4,633,375
Gross margin 67,089 69,082 77,983 83,139 297,293
Selling, general and administrative
expenses (49,098) (49,928) (52,203) (52,511) (203,740)
Unusual items 3,584 (9,022) (5,438)
Operating earnings 17,991 22,738 25,780 21,606 88,115
Cumulative effect of change in
accounting principle (10,000) (10,000)
Net earnings (loss) available for
Common Shares (3,490) 10,228 6,323 14,610 27,671
Primary earnings (loss) per Common
Share:
Before cumulative effect of change
in accounting principle $ 0.19 $0.30 $0.18 $0.43 $1.10
Cumulative effect of change in
accounting principle (0.29) (0.29)
------ ----- ----- ----- -----
Net $(0.10) $0.30 $0.18 $0.43 $0.81
====== ===== ===== ===== =====
Fully diluted earnings(loss) per
Common Share:
Before cumulative effect of change
in accounting principle $ 0.19 $0.29 $0.18 $0.40 $1.06
Cumulative effect of change in
accounting principle (0.29) (0.26)
------ ----- ----- ----- -----
Net $(0.10) $0.29 $0.18 $0.40 $0.80
====== ===== ===== ===== =====
36
37
The above amounts differ from amounts reported in previously filed
quarterly reports due to the pooling-of-interests transaction between
Cardinal and Whitmire consummated February 7, 1994. Amounts originally
reported by Cardinal before the pooling-of-interests transaction were as
follows:
First Second Third Fourth
(In thousands, except per share amounts) Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------------------
Fiscal 1994:
Net sales $597,378 $657,653
Gross margin 45,888 48,824
Selling, general and administrative
expenses (29,451) (30,151)
Operating earnings 16,437 18,673
Net earnings available
for Common Shares 9,230 10,924
Net earnings per Common Share:
Primary $ 0.32 $ 0.38
Fully diluted 0.32 0.38
Fiscal 1993:
Net sales $474,324 $481,693 $511,623 $498,906
Gross margin 39,263 38,041 40,105 44,481
Selling, general and administrative
expenses (26,024) (25,627) (25,860) (25,321)
Unusual items 3,584
Operating earnings 13,239 15,998 14,245 19,160
Cumulative effect of change in
accounting principle (10,000)
Net earnings (loss) available for
Common Shares (3,855) 8,924 7,972 10,591
Primary earnings (loss) per Common
Share:
Before cumulative effect of change in
accounting principle $0.26 $0.38 $0.34 $0.44
Cumulative effect of change in
accounting principle (0.42)
----- ----- ----- -----
Net $(0.16) $0.38 $0.34 $0.44
====== ===== ===== =====
Fully diluted earnings (loss) per
Common Share:
Before cumulative effect of change
in accounting principle $0.25 $0.34 $0.31 $0.40
Cumulative effect of change in
accounting principle (0.41)
----- ----- ----- -----
Net $(0.16) $0.34 $0.31 $0.40
====== ===== ===== =====
37
38
The following supplemental information, presented to show the seasonal
trend of earnings, reflects the selected quarterly financial data on the
basis of consolidating the same calendar quarters for Cardinal and
Whitmire, excludes the impact of unusual items (see Note 2) and assumes the
redemption of Whitmire's preferred stock. Solely for purposes of the
supplemental information presented below, such redemption is assumed to
have been funded from the liquidation of investments in tax-exempt
marketable securities.
First Second Third Fourth Total
(In thousands, except per share amounts) Quarter Quarter Quarter Quarter Year
- - ---------------------------------------- ------- ------- ------- ------- -----
Fiscal 1994
Net sales $1,291,470 $1,397,769 $1,510,674 $1,590,498 $5,790,411
Gross margin 77,775 83,312 98,371 95,714 355,172
Selling, general and administrative expenses (53,556) (54,855) (61,531) (63,363) (233,305)
Operating earnings 24,219 28,457 36,840 32,351 121,867
Net earnings 12,201 14,968 19,228 16,647 63,044
Net earnings per Common Share:
Primary $0.31 $0.38 $0.49 $0.42 $1.60
Fully diluted 0.31 0.38 0.49 0.42 1.60
Twelve Months Ended June 30, 1993:
Net Sales $1,048,621 $1,141,379 $1,205,873 $1,313,212 $4,709,085
Gross margin 65,867 71,146 82,359 80,873 300,245
Selling, general, and administrative expenses (48,701) (50,161) (51,664) (54,635) (205,161)
Operating earnings 17,166 20,985 30,695 26,238 95,084
Net earnings 7,624 9,851 14,650 12,385 44,510
Net earnings per Common Share:
Primary $0.22 $0.29 $0.43 $0.36 $1.30
Fully diluted 0.22 0.28 0.40 0.34 1.24
15. COMMON SHARES REPURCHASE
On April 14, 1993, the Company repurchased all of the Class A Common Shares
(approximately 725,000) owned by subsidiaries of North American National
Corporation, the former Chairman of which is also a Director of the
Company, at a price of $21.20 per share. Nearly all of these shares were
subject to certain restrictions contained in a Shareholders Agreement among
North American National Corporation and other individual shareholders,
which restrictions were released as part of the repurchase transaction.
16. SUBSEQUENT EVENTS
On July 1, 1994, the Company purchased all of the common stock of
Humiston-Keeling, Inc. in a transaction to be accounted for by the
purchase method. Humiston-Keeling is a Calumet City, Illinois based
wholesale drug distributor with annualized revenues of approximately $330
million.
On July 18, 1994, the Company issued Class A Common Shares in exchange for
all of the common shares of Behrens Inc. in a transaction to be accounted
for as a pooling-of-interests business combination. The impact of the
Behrens combination, on both an historical and pro forma basis, is not
significant. Accordingly, prior periods will not be restated for the
Behrens combination. Behrens is a Waco, Texas based wholesale drug
distributor with annualized revenues of approximately $185 million.
38
39
On August 17, 1994, the Company filed with the Securities and Exchange
Commission a registration statement for an underwritten public offering of
5,250,000 Class A Common Shares. Of the 5,250,000 shares, 1,600,000 are
being sold by the Company and 3,650,000 are being sold by certain
shareholders of the Company. The underwriters have been granted an option
to purchase up to 787,500 additional Class A Common Shares to cover
overallotments, including up to 266,949 such shares from the Company. The
net proceeds payable to the Company will be used to finance working
capital growth and for other general corporate purposes.
39
40
Item 9: Disagreements on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10: Directors and Executive Officers of the Registrant.
The Directors and executive officers of the Company are as follows:
Director's
Term
Name Age Positions Expires
---- --- --------- ---------
Robert D. Walter 49 Chairman and Chief Executive Officer (1) 1994
Melburn G. Whitmire 54 Vice Chairman (1) 1995
John C. Kane 54 President and Chief Operating Officer 1996
David Bearman 48 Executive Vice President and Chief Financial
Officer
George H. Bennett, Jr. 41 Executive Vice President, General Counsel
and Secretary
James E. Clare 36 Executive Vice President - Southern Group
Gary E. Close 49 Executive Vice President - Western Group
Daniel P. Finkelman 38 Executive Vice President - Marketing
James F. Millar 46 Executive Vice President - Northern Group
Mitchell J. Blutt, M.D. 37 Director 1996
John F. Finn 46 Director (2) 1994
Robert L. Gerbig 49 Director 1995
Michael S. Gross 32 Director (3) 1996
John F. Havens 67 Director (2) 1994
James L. Heskett 61 Director (2) 1996
George R. Manser 63 Director (1)(3) 1995
John B. McCoy 51 Director (2) 1996
Michael E. Moritz 61 Director (1)(3) 1995
Jerry E. Robertson 61 Director (3) 1995
L. Jack Van Fossen 56 Director (3) 1994
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
40
41
Unless indicated to the contrary, the business experience summaries provided
below for the Company's Directors and executive officers describe positions
held by the named individuals during the last five years but may exclude other
positions held with subsidiaries of the Company.
Robert D. Walter has been a Director, Chairman of the Board and Chief
Executive Officer of the Company since its formation in 1979 and has served as
a director and officer of certain of the Company's subsidiaries since their
formation or acquisition by the Company. Mr. Walter also serves as a director
of Banc One Corporation and Columbia/HCA Healthcare Corporation.
Melburn G. Whitmire has been a Director of the Company since January 1994 and
was elected Vice Chairman of the Company in February 1994. Prior to that, Mr.
Whitmire was Chairman of the Board, Chief Executive Officer and President of
Whitmire Distribution Corporation, and he has continued to serve in those
capacities for Whitmire following its merger transaction with the Company.
John C. Kane has been a Director of the Company since August 1993 and has
been the Company's President and Chief Operating Officer since joining the
Company in February 1993. Prior to that, Mr. Kane was employed by Abbott
Laboratories (a pharmaceutical and health care manufacturer), where he served
most recently as President of the Ross Laboratories Division.
David Bearman has been an Executive Vice President of the Company since
February 1994 and, prior to that, served as a Region President from May 1991 to
February 1994 and as a Senior Vice President from October 1989. Mr. Bearman
has also served as the Company's Chief Financial Officer since joining the
Company in October 1989 and serves in similar capacities for subsidiaries of
the Company. Prior to joining the Company, Mr. Bearman served as the Chief
Finance Executive of the Medical Systems Division of General Electric Company.
George H. Bennett, Jr. has been Secretary of the Company since July 1994 and
an Executive Vice President of the Company since February 1994. Prior to that,
Mr. Bennett was a Senior Vice President and Chief Administrative Officer of the
Company from May 1991. Mr. Bennett has also served as General Counsel of the
Company since joining the Company in January 1984, and serves in a similar
capacity for subsidiaries of the Company.
James E. Clare has been the Company's Executive Vice President - Southern
Group since February 1994. Prior to that, Mr. Clare served as the Vice
President - Eastern Region of Whitmire Distribution Corporation and has
continued to serve as an officer of Whitmire following its merger transaction
with the Company.
Gary E. Close has been the Company's Executive Vice President - Western Group
since February 1994. Prior to that, Mr. Close served as the Executive Vice
President - Operations of Whitmire Distribution Corporation and has continued
to serve as an officer of Whitmire following its merger transaction with the
Company.
Daniel P. Finkelman has been the Company's Executive Vice President -
Marketing since joining the Company in May 1994. Prior to that, Mr. Finkelman
was a principal with McKinsey & Company, Inc. (an international management
consulting firm).
James F. Millar has been the Company's Executive Vice President - Northern
Group since February 1994. Prior to that, Mr. Millar served as a Region
President from May 1991, a Senior Vice President of the Company from November
1992, and President of the Company's Cardinal Syracuse, Inc. subsidiary.
41
42
Mitchell J. Blutt has been a Director of the Company since January 1994. Dr.
Blutt is an Executive Partner of Chemical Venture Partners (an investment
partnership which is the general partner of Chemical Equity Associates). Dr.
Blutt also serves as a director of Hanger Orthopedic Group, Inc. and
Cyberonics, Inc. See Item 12 for a description of an arrangement pursuant to
which Dr. Blutt may continue to be nominated and elected as a Director of the
Company.
John F. Finn has been a Director of the Company since January 1994. Mr. Finn
is the Chairman and Chief Executive Officer of Gardner Inc. (an outdoor power
equipment distributor).
Robert L. Gerbig has been a Director of the Company since July 1982. Mr.
Gerbig is the President and Chief Executive Officer of Gerbig, Snell/Weisheimer
& Associates, Inc. (an advertising agency).
Michael S. Gross has been a Director of the Company since January 1994. Mr.
Gross has been Vice President of Apollo Capital Management, Inc. (which is the
general partner of Apollo Investment Fund, L.P., a securities investment fund),
since February 1990. Prior to February 1990, Mr. Gross served as an associate
of Drexel Burnham Lambert Incorporated. Mr. Gross also serves as a director
of Buster Brown Apparel, Inc.; Interco Incorporated; Hills Stores, Inc.; and
Cole National Group. See Item 12 for a description of an arrangement pursuant
to which Mr. Gross may continue to be nominated and elected as a Director of
the Company.
John F. Havens has been a Director of the Company since its formation in
1979. Prior to his retirement in April 1986, Mr. Havens was the Chairman of the
Board of Banc One Corporation (a bank holding company), and he continues to
serve as a Director Emeritus of Banc One. Mr. Havens also serves as a
director of Worthington Industries, Inc.
James L. Heskett has been a Director of the Company since December 1982. Dr.
Heskett is a Professor at the Harvard University Graduate School of Business
Administration and also serves as a director of the Equitable of Iowa
Companies.
George R. Manser has been a Director of the Company since July 1982. Mr.
Manser is Chairman of Uniglobe Travel (Capital Cities) Inc. (a travel planning
services company). Prior to his retirement in June 1994, Mr. Manser was a
director and Chairman of the Board of North American National Corporation (an
insurance holding company). Mr. Manser currently serves as a director of
AmeriLink Corporation and State Auto Financial Corporation.
John B. McCoy has been a Director of the Company since November 1987. Mr.
McCoy is the Chairman and Chief Executive Officer of Banc One Corporation (a
bank holding company). Mr. McCoy also serves as a director of Federal Home
Loan Mortgage Corporation; Tenneco Incorporated; and Ameritech Corporation.
Michael E. Moritz has been a Director of the Company since its formation in
1979. Mr. Moritz served as Secretary of the Company from the formation of the
Company in 1979 to July 1994, and served in a similar capacity for subsidiaries
of the Company. Mr. Moritz is a partner in the law firm of Baker & Hostetler,
which has in the past and currently serves as outside counsel to the Company.
Jerry E. Robertson has been a Director of the Company since December 1991.
Until his retirement in March 1994, Dr. Robertson served as Executive Vice
President of the Life Sciences Sector and Corporate Services of Minnesota
Mining and Manufacturing Company (a manufacturer of industrial, commercial,
health care and consumer products). Dr. Robertson also serves as a director of
Manor Care, Inc.; Allianz Life Insurance Company of North America; Coherent,
Inc.; Haemonetics Corporation; Life Technologies, Inc.; and Steris Corporation.
42
43
L. Jack Van Fossen has been a Director of the Company since August 1983. Mr.
Van Fossen has been the President and Chief Executive Officer of Red Roof Inns,
Inc. (a lodging company) since May 1991. Prior to that time, Mr. Van Fossen
served as President of Nessoff Corp. (a private investment company) and as
President and Chief Executive Officer of Chemlawn Corporation (a lawn care
company). Mr. Van Fossen also serves as a director of The Scotts Company.
The Company's Restated Code of Regulations provides that the Board of
Directors shall consist of fourteen members, divided into two classes of five
members each and a third class of four members. The Regulations provide that
the number of Directors may be increased or decreased by action of the Board of
Directors upon the majority vote of the Board, but in no case shall the number
of Directors be fewer than nine or more than fourteen without an amendment
approved by the affirmative vote of the holders of not less than 75% of the
shares having voting power with respect to that proposed amendment. The
Regulations require that any proposal to either remove a Director during his
term of office or to further amend the Regulations relating to the
classification or removal of Directors be approved by the affirmative vote of
the holders of not less than 75% of the shares having voting power with respect
to that proposal. The Board of Directors may fill any vacancies with a person
who shall serve until the shareholders hold an election to fill the vacancy.
There are currently no vacancies on the Company's Board of Directors. The
officers of the Company serve at the pleasure of the Company's Board of
Directors.
The Executive Committee is empowered to exercise all powers and perform all
duties of the Board of Directors when the Board is not in session other than
the authority of filling vacancies among the Directors or in any committee of
the Directors. The Audit Committee is empowered to exercise all of the powers
and authority of the Board of Directors with respect to the Company's annual
audit, accounting policies, financial reporting, and internal controls. The
Compensation Committee is empowered to exercise all powers and authority of the
Board of Directors with respect to compensation of the employees of the
Company, sales to employees of stock in the Company, or grants to employees of
options to purchase stock in the Company. The Company does not have a
nominating committee of the Board of Directors or other committee which
performs similar functions.
43
44
ITEM 11: EXECUTIVE COMPENSATION
-------------------------------
The following information is set forth with respect to the Company's Chief Executive Officer and
each of the Company's four other most highly compensated executive officers.
I. SUMMARY COMPENSATION TABLE
- - ------------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
AWARDS
------------------------------------------------------------------------
OTHER ALL
ANNUAL RESTRICTED SECURITIES OTHER
FY - COMPEN- STOCK UNDERLYING COMPEN-
NAME AND ENDED SALARY BONUS SATION AWARDS OPTIONS SATION
PRINCIPAL POSITION (1) ($) ($) ($)(2) ($)(3) (#) ($)(4)
===================================================================================================================
Robert D. Walter 1994 $463,458 $333,705 - $336,563 73,963 $153,306 (5)
---------------------------------------------------------------------------------------
Chairman and Chief 1993 424,046 190,000 $102,967 -0- 17,250 23,544
---------------------------------------------------------------------------------------
Executive Officer 1992 387,808 256,000 - 1,140,000 16,250 -
---------------------------------------------------------------------------------------
John C. Kane (6) 1994 360,789 255,472 - 251,850 51,225 22,298
---------------------------------------------------------------------------------------
President and Chief 1993 13,269 -0- - 1,470,000 68,750 -
---------------------------------------------------------------------------------------
Operating Officer
Melburn G. Whitmire (6) 1994 120,385 300,000 - -0- -0- 193,530 (7)
---------------------------------------------------------------------------------------
Vice Chairman
David Bearman 1994 239,989 127,754 - 73,950 24,425 23,545
---------------------------------------------------------------------------------------
Executive Vice President 1993 223,170 87,000 20,381 -0- 5,000 58,178 (8)
---------------------------------------------------------------------------------------
and Chief Financial
Officer 1992 213,308 99,000 - -0- 4,813 -
---------------------------------------------------------------------------------------
James F. Millar 1994 201,375 110,515 106,451 65,250 22,225 22,224
---------------------------------------------------------------------------------------
Executive Vice President-- 1993 178,846 68,400 - 147,538 4,625 22,794
---------------------------------------------------------------------------------------
Northern Group 1992 165,847 62,000 - 122,648 4,250 -
===================================================================================================================
(1) On March 1, 1994, the Company changed its fiscal year end from March 31 to June 30. As
such, the information presented for 1994 includes compensation earned, awarded or paid during the fiscal
year ended June 30, 1994, and the information presented for prior fiscal years includes compensation earned,
awarded or paid during those fiscal years ended March 31.
(2) Amounts shown represent reimbursements paid by the Company for taxes incurred by the
executive.
(3) Aggregate restricted share holdings and values at June 30, 1994, for the named executive
officers are as follows: (i) Mr. Walter--47,265 shares, $1,852,788; (ii) Mr. Whitmire--0 shares; (iii) Mr.
Kane--44,500 shares, $1,744,400; (iv) Mr. Bearman--8,716 shares, $341,667; and (v) Mr. Millar--12,487
shares, $489,490. Dividends are paid on restricted shares at the same rate as all shares of record. The
restrictions on all shares granted to the named executive officers in fiscal year 1994 lapse 50% on the
third anniversary of the grant and 50% on the sixth anniversary of the grant. The restrictions on the
shares granted to Mr. Walter on May 23, 1991 (fiscal year 1992) lapse(d) as follows -- 30% on December 23,
1992, 10% on each of the third through sixth anniversaries of the grant, and 30% on the seventh anniversary
of the grant. The restrictions on the shares granted to Mr. Kane on February 17, 1993 (fiscal year 1993)
lapse 20% on each of the third through seventh anniversaries of the grant; provided that if Mr. Kane's
employment with the Company continues through the fifth anniversary of the grant and is thereafter
terminated by the Company other than for cause, then the restrictions on the remaining unvested shares shall
lapse as of such termination date. The restrictions on the shares granted to Mr. Millar on: (i) July 2,
1991 (fiscal year 1992) lapsed on April 30, 1994; and (ii) June 18, 1992 (fiscal year 1993) lapse on April
30, 1995.
(4) Amounts shown represent Company contributions to the executive's account under the
Company's Profit Sharing and Retirement Savings Plan in the case of Messrs. Walter, Kane, Bearman and
Millar; and contributions under the Whitmire Retirement Savings Plan in the case of Mr. Whitmire.
(5) Includes $130,635 for premiums paid by the Company on a split-dollar life insurance
arrangement among the Company, Mr. Walter, and a trust for Mr. Walter's family. The Company will recover
all such premiums paid by it, plus interest at the rate of 3% per annum, upon the earlier to occur of
January 12, 2003, or the death of the survivor of Mr. Walter and his spouse.
(6) Mr. Kane joined the Company in February 1993. Mr. Whitmire joined the Company in February
1994 following the Whitmire Merger. Compensation included in the Summary Compensation Table for Mr.
Whitmire excludes all compensation paid by Whitmire prior to the Whitmire Merger (including the Cardinal
Exchange Options described in "Certain Relationships and Related Transactions-Transactions in Connection
with the Whitmire Merger").
44
45
(7) Includes $10,000 for Company funded matching contributions and $85,000 for
premiums paid by the Company on a split-dollar insurance arrangement
between the Company and Mr. Whitmire under the Whitmire Selective Deferred
Compensation Plan. The Company will recover all such premiums paid by it
upon the death of Mr. Whitmire. Also includes $90,000 for previously
accrued vacation time paid to Mr. Whitmire in connection with the Whitmire
Merger.
(8) Includes $34,634 for expenses related to relocation.
II. OPTION/SAR GRANTS IN LAST FISCAL YEAR
- - ---------------------------------------------------------------------------------------------------------------------
Individual Grants
- - ---------------------------------------------------------------
Percent of
Number of Total Potential Realizable Value
Securities Options at Assumed Annual Rates
Underlying Granted to of Stock Price Appreciation
Options Employees Exercise for Option Term(3)
Granted in Fiscal Price Expiration
Name (#)(1) Year(2) ($/Sh) Date 0%($) 5%($) 10%($)
=====================================================================================================================
Robert D. Walter 34,500(4) 4.74% $34.60 10/13/03 $-0- $750,712 $1,902,450
- - ---------------------------------------------------------------------------------------------------------------------
39,463(5) 5.42 38.60 4/08/04 -0- 957,977 2,427,703
- - ---------------------------------------------------------------------------------------------------------------------
John C. Kane 25,000(4) 3.43 34.60 10/13/03 -0- 543,994 1,378,587
- - ---------------------------------------------------------------------------------------------------------------------
26,225(5) 3.60 38.60 4/08/04 -0- 636,621 1,613,322
- - ---------------------------------------------------------------------------------------------------------------------
Melbum G. Whitmire N/A N/A N/A N/A N/A N/A N/A
- - ---------------------------------------------------------------------------------------------------------------------
David Bearman 11,250(4) 1.55 34.60 10/13/03 -0- 244,797 620,364
- - ---------------------------------------------------------------------------------------------------------------------
13,175(5) 1.81 38.60 4/08/04 -0- 319,828 810,506
- - ---------------------------------------------------------------------------------------------------------------------
James F. Miller 10,000(4) 1.37 34.60 10/13/03 -0- 217,598 551,435
- - ---------------------------------------------------------------------------------------------------------------------
12,225(5) 1.68 38.60 4/08/04 -0- 296,766 752,063
=====================================================================================================================
(1) All options granted during the fiscal year to the named executives were qualified stock options.
(2) Based on 728,058 options granted to all employees during the fiscal year ended June 30, 1994.
(3) These accounts are based on hypothetical appreciation rates of 0%, 5% and 10% and are not intended to forecast the actual
future appreciation of the Company's stock price. No gain to optionees is possible without an actual increase in the price
of the Company's shares, which increase benefits all of the Company's shareholders.
(4) Option is exerciseable on and after October 13, 1996.
(5) Option is exercisable on and after April 8, 1997.
45
46
III. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
===========================================================================================
Number of Value of
Unexercised Unexercised
Options In-the-Money
at FY-End Options
(#) ($)
------------ --------------
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexerciseable Unexerciseable
- - ------- ------------- --------- -------------- ------------------
===========================================================================================
Robert D. Walter -0- $-0- 38,125/107,463 $960,278/$735,202
- - -------------------------------------------------------------------------------------------
John C. Kane -0- -0- -0-/119,975 -0-/1,395,735
- - -------------------------------------------------------------------------------------------
Melburn G. Whitmire(1) -0- -0- 532,333/-0- 19,986,259/-0-
- - -------------------------------------------------------------------------------------------
David Besman -0- -0- 19,239/34,238 503,125/221,406
- - -------------------------------------------------------------------------------------------
James F. Miller 1,788 65,262 10,264/31,100 260,355/199,985
===========================================================================================
(1) Prior to the Whitmire Merger, Mr. Whitmire held options to purchase 51,002 shares of common stock, $0.01 par value,
of Whitmire. In connection with the Whitmire Merger, these options were automatically converted into options to
purchase 532,333 Class A Common Shares of the Company (as adjusted to reflect the Company's 5-for-4 stock split paid
June 30, 1994).
EMPLOYMENT AGREEMENTS
- - ----------------------
In connection with the Whitmire Merger, Messrs. Whitmire, Clare and Close
each entered into an employment agreement with Whitmire, the performance of
which was guaranteed by the Company. The employment agreements provide for an
employment term of three years commencing February 7, 1994, and payment of a
base salary of $275,000 for Mr. Whitmire, $98,400 for Mr. Clare and $180,000 for
Mr. Close, such base salaries to be reviewed for possible increase at least
annually. The agreements also provide for an annual bonus payable in accordance
with the bonus plan in which other Company executive officers participate from
time to time. The emplyment agreements provide that individual parties to the
employment agreements will be entitled to participate in group health, life,
disability insurance, retirement savings and other employee benefit plans which
are substantially equivalent in the aggregate to either (i) Whitmire's group
benefit plans in effect at the time of the Whitmire Merger or (ii) the group
benefit plans maintained from time to time by the Company in which the other
executives of the Company participate. In addition, the employment agreements
contain noncompete covenants effective throughout the employment term, and for
up to two additional one year periods following the employment term (the
"Extension Period"). As consideration for his noncompete covenants, Mr. Whitmire
will receive two consecutive annual payments of $600,000 each, with the first
such payment to be paid on the 30th day after the earlier of the termination of
Mr. Whitmire's employment or February 7, 1999. As consideration for their
respective noncompete covenants following the termination of their employment
with the Company, each of Messrs. Clare and Close may, if the noncompete
covenants are triggered during the Extension Period by the Company, at its
election, continue to receive during the Extension Period base salary, 50% of
their bonus target, and participation in certain group benefit plans.
COMPENSATION OF DIRECTORS
- - -------------------------
The Company's non-employee Directors are paid $2,000 per quarter plus $1,000
for each Board meeting attended. Non-employee Directors are also entitled to
receive $600 for each Committee meeting attended. Employee Directors do not
receive compensation in their capacity as a Director.
46
47
Pursuant to the Company's Directors' Stock Option Plan, as amended (the
"Directors' Option Plan"), options to purchase that number of Class A Common
Shares having a fair market value of $50,000 on the date of grant are
automatically granted on an annual basis to each non-employee Director who has
served as such for three consecutive annual meetings. The exercise price of
these options is the fair market value of the Class A Common Shares on the date
of grant. In addition, options to purchase that number of Class A Common
Shares having a fair market value of $100,000 on the date of grant are
automatically made to each non-employee Director subsequently added to the
Board. The exercise price of these options is the fair market value of Class A
Common Shares on the date of grant. All grants under the Directors' Option
Plan vest immediately, are exerciseable for ten years from the date of grant,
and are subject to adjustment for subsequent stock dividends, splits, and other
changes in the Company's capital structure. If a Director ceases to serve as
such, then options previously granted under the Directors' Option Plan lapse
unless exercised within six months (twelve months in the case of a Director's
death). Options granted under the Directors' Option Plan are treated as
"nonqualified options" under the Code.
The Company has entered into Indemnification Agreements with each of its
Directors. See "Certain Relationships and Related Transactions--
Indemnification Agreements."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
- - -----------------------------------------------------------
John F. Finn, John F. Havens, James L. Heskett and John B. McCoy are
the members of the Company's Compensation Committee. Mr. McCoy is Chairman and
Chief Executive Officer of Banc One Corporation ("Banc One"). Robert D. Walter,
Chairman and Chief Executive Officer of the Company, is a director of Banc One.
Banc One is the parent corporation of Bank One, Columbus, N.A. ("Bank One,
Columbus"), a bank with which the Company conducts business. As of June 30,
1994, the Company had lines of credit totaling $46 million with Bank One,
Columbus, of which $4 million was drawn upon at June 30, 1994. Bank One is
also the parent corporation of Bank One, Indianapolis, N.A. ("Bank One,
Indianapolis"), which serves as the transfer agent for the Company's Class A
Common Shares and as Trustee under the Indentures pertaining to the Company's
8% Notes due 1997 and its 6 1/2% Notes due 2004.
47
48
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - ------------------------------------------------------------------------
The following table sets forth certain information regarding the
beneficial ownership of the Company's Class A Common Shares as of August 19,
1994, by: (a) Company Directors; (b) each other person who is known by the
Company to own beneficially more than 5% of the outstanding Class A Common
Shares; (c) the Company's Chief Executive Officer and the other four most
highly compensated executive officers named in the Summary Compensation Table;
and (d) the Company's executive officers and Directors as a group. Except as
otherwise described in the notes below, the following beneficial owners have
sole voting power and sole investment power with respect to all Class A Common
Shares set forth opposite their names.
Number of Class A
Common Shares
Name of Beneficial Owner Beneficially Owned Percent of Class
------------------------ ------------------ ----------------
Robert D. Walter (1) (2) (3) 3,315,975 9.14%
Apollo Investment Fund, L.P. (4) 3,333,921 9.20
Chemical Equity Associates (5) 3,261,803 8.32
FMR Corp. (6) 2,650,857 7.31
Firstar Corporation (7) 2,147,863 5.92
Nicholas Company, Inc. (8) 2,011,500 5.55
Melburn G. Whitmire (3) (9) 1,205,134 3.28
Michael E. Moritz (1) (10) (11) 551,233 1.52
John C. Kane (3) 58,250 *
George R. Manser (11) 52,598 *
Robert L. Gerbig (11) 38,642 *
John B. McCoy (11) (12) 33,434 *
L. Jack Van Fossen (11) 29,724 *
James L. Heskett (11) (13) 18,521 *
John F. Havens (11) 12,805 *
Jerry E. Robertson (11) 8,056 *
John F. Finn (11) (14) 5,057 *
Michael S. Gross (11) (15) 2,865 *
Mitchell J. Blutt, M.D. (11) (15) 2,865 *
James F. Millar (3) 36,530 *
David Bearman (3) 35,483 *
All Executive Officers and Directors as a 5,301,729 14.27%
Group (16) (20 Persons)
_________________
(1) Mr. Walter's address is 655 Metro Place South, Suite 925, Dublin, Ohio
43017. Mr. Walter, Edward D. Esping and members of his family (the
"Espings"), and Mr. Moritz are parties to a Shareholders Agreement dated
July 13, 1984, as amended (the "Shareholders Agreement"), pursuant to
which they have agreed to act jointly in voting certain Class A Common
Shares (the "Pooled Shares") owned by each of them in a manner determined
desirable by the holders of a majority of the Pooled Shares. The Pooled
Shares are owned as follows: Mr. Walter - 2,525,146 shares; the
Espings - 173,505 shares; and Mr. Moritz - 528,428 shares. Since Mr.
Walter owns a majority of the Pooled Shares, he controls the voting of the
Pooled Shares. The Pooled Shares are subject to a right of first refusal
in favor of the owners of the remaining Pooled Shares. The terms of the
Shareholders Agreement will continue through September 14, 1999, unless
earlier terminated by, among other things, the decision by then-holders of
a majority of the Pooled Shares, any event which results in Mr. Walter not
owning a majority of the Pooled Shares, or the release from the
Shareholders Agreement of more than 50% of the original Pooled Shares.
Mr. Walter has sole investment power with respect to the 2,525,146 Pooled
Shares he owns of record and, as a result of the Shareholders Agreement,
he has shared voting power with respect to all the Pooled Shares (which
include such 2,525,146 shares).
(2) Bank One Trust Company, N.A. is the trustee of separate trusts (the
"Walter Trusts") for the benefit of each of Mr. Walter's three children.
Each such trust owns 45,897 Class A Common Shares. Class A Common Shares
listed as being beneficially owned by Mr. Walter exclude the 137,691 Class
A Common Shares owned by the Walter Trusts, and Mr. Walter disclaims
beneficial ownership of such Class A Common Shares.
48
49
(3) Class A Common Shares and the percent of class listed as being beneficially
owned by the Company's named executive officers include outstanding options
to purchase Class A Common Shares which are exercisable within 60 days of
August 19, 1994, as follows: Mr. Walter - 38,125 shares; Mr. Kane - -0-
shares; Mr. Whitmire - 532,333 shares; Mr. Bearman - 19,239 shares; and Mr.
Millar - 10,264 shares.
(4) The address of Apollo Investment Fund, L.P. ("Apollo") is Two
Manhattanville Road, Purchase, New York 10577. Apollo's managing general
partner is Apollo Advisors, L.P., whose general partner is Apollo Capital
Management, Inc. Michael S. Gross, who also serves as a Director of the
Company, is a Vice President of Apollo Capital Management, Inc. Each of
the foregoing parties may be deemed to be the beneficial owner of the Class
A Common Shares owned by Apollo, although each expressly disclaims
beneficial ownership of such shares.
(5) The address of Chemical Equity Associates ("CEA") is c/o Apollo Advisors,
L.P., 270 Park Avenue (5th Floor), New York, New York 10017. Class A
Common Shares and the percent of class listed as being beneficially owned
by CEA include 2,971,375 Class A Common Shares issuable upon the
conversion of the same number of Class B Common Shares, which conversion is
possible only under the circumstances set forth in the Company's Articles.
At August 19, 1994, CEA was the beneficial owner of all of the Company's
2,971,375 Class B Common Shares issued and outstanding. Mitchell J. Blutt,
M.D., who serves as a Director of the Company and as an Executive Partner
of Chemical Venture Partners, the sole general partner of CEA; Chemical
Banking Corporation, whose wholly owned subsidiary is a general partner of
Chemical Venture Partners; Jeffrey C. Walker, Managing General Partner of
Chemical Venture Partners; and Arnold L. Chavkin, David L. Ferguson, Donald
J. Hofmann, Brian J. Richmand and Shahan D. Soghikian, partners of
Chemical Venture Partners; may also be deemed to be beneficial owners of
the Common Shares held by CEA, although they expressly disclaim beneficial
ownership of such shares.
(6) Based on information obtained from a 13G filed by FMR Corp. with the
Securities and Exchange Commission on or about February 11, 1994. The
address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109.
(7) Based on information obtained from a 13G filed by Firstar Corporation with
the Securities and Exchange Commission on or about February 11, 1994. The
address of Firstar Corporation is 777 E. Wisconsin Avenue, Milwaukee,
Wisconsin 53202.
(8) Based on information obtained from a 13G filed by Nicholas Company, Inc.
with the Securities and Exchange Commission on or about February 8, 1994.
The address of Nicholas Company, Inc. is 700 North Water Street,
Milwaukee, Wisconsin 53202.
(9) Includes 4,801 Class A Common Shares held by Mr. Whitmire and his wife as
custodian for the benefit of their minor daughter.
(10) Mr. Moritz has sole investment power with respect to all but 10,000 Class
A Common Shares listed as being beneficially owned by him in the table
above, which 10,000 shares are held by a family partnership of which Mr.
Moritz and his spouse are general partners and over which he has shared
investment and voting power. As a result of the Shareholders Agreement
described in Note (1) above, Mr. Moritz has shared voting power with
respect to the Pooled Shares owned by him.
(11) Class A Common Shares and the percent of class listed as being
beneficially owned by the listed Company Directors (except for Messrs.
Kane, Walter and Whitmire) include outstanding options to purchase Class A
Common Shares which are exercisable under the Company's Directors' Stock
Option Plan as follows: Mr. Moritz - 12,805 shares; Dr. Robertson - 8,056
shares; Messrs. Gross, Blutt, and Finn - 2,865 shares each; and each other
listed Director (except for Messrs., Kane, Walter and Whitmire) - 10,120
shares.
(12) Includes 2,827 Class A Common Shares which are held by Mr. McCoy in trust
for the benefit of his children, but does not include Class A Common
Shares owned by Banc One Corporation and its subsidiaries.
(13) Includes 686 Class A Common Shares held by Mr. Heskett in trust for the
benefit of his children.
(14) Includes 625 Class A Common Shares held jointly by Mr. Finn and his wife,
106 Class A Common Shares held in his wife's individual retirement
account, and 62 Class A Common Shares held for the benefit of each of Mr.
Finn's two minor children.
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50
(15) Does not include Common Shares beneficially owned by Apollo, in the
case of Mr. Gross, or by CEA, in the case of Dr. Blutt (see Notes (4) and
(5)). As a result of the Company's merger with Whitmire Distribution
Corporation in February 1994 (the "Whitmire Merger"), Apollo has the right
to designate two nominees for election as Directors of the Company for so
long as (A) Apollo, including any of its affiliates and any of its
accounts under common management and control (the "Apollo Group"), and
(B) any former shareholder of Whitmire (exclusive of Apollo Advisors, L.P.
and any such shareholders who were current or former employees of Whitmire
as of October 11, 1993, or any family members of such employees or trusts
for their benefit ("Management Shareholders")) each continue to have a
pecuniary interest in 1,250,000 or more Common Shares issued to such
person in the Whitmire Merger (the "Threshold Amount"). Further, Apollo
Advisors, L.P. has the right to designate one individual for so long as
only one of the Apollo Group or any former shareholder of Whitmire
(exclusive of Apollo Advisors, L.P. or Management Shareholders) shall
continue to have a pecuniary interest in a number of Common Shares which
equals or exceeds the Threshold Amount. In connection with the Whitmire
Merger, Apollo designated Messrs. Gross and Blutt as nominees for
Directors of the Company and they were elected by the Company's
shareholders. In addition, until the Apollo Group no longer has
a pecuniary interest in a number of Common Shares equal to or exceeding
the Threshold Amount, the Company must include as a member of its Audit
Committee one Director designated by the Apollo Group and, if Mr.Whitmire
ceases to be a member of the Company's Executive Committee, one Director
designated by the Apollo Group on the Company's Executive Committee.
(16) Class A Common Shares and percent of class listed as being beneficially
owned by all executive officers and Directors as a group include: (a) all
Pooled Shares, including those Pooled Shares owned by the Espings; and (b)
outstanding options to purchase Class A Common Shares which are
exercisable within 60 days of August 19, 1994, but do not include any
Class A Common Shares beneficially owned by Apollo, CEA or Banc One
(including the 137,691 Class A Common Shares owned by the Walter Trusts).
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - -------------------------------------------------------
BUSINESS TRANSACTIONS
- - ---------------------
A property which includes parts of the Company's former Columbus food
distribution center is leased by the Company from a limited partnership in
which the general partner is Mr. Walter and the limited partners include
certain shareholders and directors of the Company or their affiliates. The
Company has subleased this property to third parties at rentals substantially
in excess of the rentals it is required to pay. The initial term of the
Company's lease expired February 29, 1984, and the lease is currently in its
second ten-year renewal term. The Company has options to renew the lease for
two additional ten-year terms. The rent payable by the Company is $92,000 per
annum during each of the first two renewal terms, and the fair rental value of
the premises during each of the last two renewal terms. The Company has a
first- refusal option to purchase the premises in the event the lessor proposes
to sell the premises to a third party. See also, "Executive Compensation -
Compensation Committee Interlocks and Insider Participation."
In the opinion of management, the transactions described above are on
terms at least as favorable as could be obtained from unaffiliated third
parties.
EMPLOYMENT AGREEMENTS
- - ---------------------
For a discussion of the employment agreements between the Company and
each of Messrs. Whitmire, Close and Clare, see "Executive Compensation -
Employment Agreements."
50
51
TRANSACTIONS IN CONNECTION WITH THE WHITMIRE MERGER
- - ---------------------------------------------------
COMPANY COMMON SHARES ISSUED IN THE MERGER
As a result of the Whitmire Merger, the persons listed in the table
below received either Class A Common Shares or Class B Common Shares of the
Company in exchange for Whitmire common stock or Whitmire class B common stock
(including Whitmire stock acquired upon the exercise of warrants):
Class A Class B
Common Shares Common Shares
-------------- -------------
Melburn G. Whitmire 672,801 -0-
Gary E. Close 167,000 -0-
James E. Clare 62,625 -0-
Apollo Investment Fund, L.P. (1) 3,333,921 -0-
Chemical Equity Associates (1) 290,428 2,971,375
(1) At the time of the Whitmire Merger, the Whitmire stock was held
of record by M.D. investors, L.P. ("MD"), a limited partnership
whose general partner was Apollo and whose limited partner was
CEA. Shortly following the Whitmire Merger, MD was dissolved and
the Common Shares of the Company issued in the Whitmire Merger
were distributed to MD's partners. The numbers shown in the table
above reflect the Common Shares held by Apollo and CEA following
the dissolution of MD.
CONVERSION OF OPTIONS
In connection with the Whitmire Merger, options to purchase Whitmire
common stock were automatically converted into options to purchase a number of
Class A Common Shares equal to the number of shares of Whitmire common stock
issuable immediately prior to the Whitmire Merger multiplied by the exchange
ratio used for the Whitmire Merger. Accordingly, options to purchase Whitmire
common stock held by Messrs. Whitmire, Close and Clare were converted into
options to purchase Class A Common Shares of the Company ("Cardinal Exchange
Options") at exercise prices ranging from less than $.01 to $2.20 per share as
follows: Mr. Whitmire -- 532,333 shares; Mr. Close -- 146,125 shares; Mr.
Clare -- 52,187 shares.
REDEMPTION OF WHITMIRE PREFERRED STOCK
Immediately prior to the completion of the Whitmire Merger, and as a
condition to such completion, Whitmire redeemed all of its issued and
outstanding Senior Preferred Stock and Series A Preferred Stock at the
redemption price of $100 per share, plus cumulated and unpaid dividends,
resulting in redemption payments to MD and CEA of $13,598,000 and $6,558,000,
respectively. As described above, MD was dissolved shortly following the
Whitmire Merger. Of the $13,598,000 in redemption payments to MD, $10,200,182
was for the benefit of Apollo and $3,398,248 was for the benefit of CEA.
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52
WHITMIRE REGISTRATION RIGHTS AGREEMENT
In connection with the Whitmire Merger, the Company granted to Apollo,
CEA, and Mr. Whitmire (collectively, the "Whitmire Stockholders") certain
rights to require the Company to register under the Securities Act of 1933, as
amended (the "Securities Act") Class A Common Shares held by them (including
Class A Common Shares issuable to CEA upon conversion of Class B Common
Shares). These rights include "demand" and "piggyback" registration rights and
are contained in the Registration Rights Agreement dated as of October 11,
1993, as amended (the "Registration Rights Agreement"), among the Company, the
Whitmire Stockholders, and Robert D. Walter, Chairman of the Company. Under
the Registration Rights Agreement, the Whitmire Stockholders are entitled to
require the Company to file a registration statement under the Securities Act
with the Securities and Exchange Commission covering the sale of their shares
(a "Required Registration") up to seven times in the five-year period ending
April 25, 1999, unless earlier terminated or extended as provided below. The
Whitmire Stockholders may only request up to four Required Registrations during
the three-year period ending April 25, 1997. The Company will pay all expenses
incurred in connection with up to four Required Registrations, exclusive of the
fees and expenses of counsel for selling stockholders. In addition, the
selling Whitmire Stockholders will be responsible for any underwriters'
discounts and commissions attributable to the sale of their shares.
The Company is not required to effect the first Required Registration
under the Registration Rights Agreement unless Whitmire Stockholders (together
with certain permitted transferees) making the request hold at least 1,250,000
Common Shares, and the Company is not required to effect subsequent Required
Registrations unless such persons hold (i) at least 937,500 Common Shares
acquired in the Whitmire Merger, or (ii) Common Shares acquired in the Whitmire
Merger with a fair market value of at least $25 million. The Whitmire
Stockholders may not make a request for a Required Registration until 180 days
have elapsed since the completion of a prior Required Registration. In
addition, the Company has the right to delay for up to 90 days the filing of a
registration statement with respect to a Required Registration if the Company's
Board of Directors determines such action is in the best interests of the
Company's shareholders, but the Company may not invoke a delay if at least 12
months have not elapsed from the end of any previous delay period. These
delays and certain other events will extend on a day-for-day basis the five-and
three-year periods referred to in the preceding and following paragraphs.
The Registration Rights Agreement also provides that the Whitmire
Stockholders have the right to include their Class A Common Shares in
registration statements filed by the Company in connection with primary or
secondary offerings for cash (with certain exceptions). These "piggyback"
registration rights also terminate on April 25, 1999, unless earlier terminated
or extended.
The demand and piggyback registration rights granted to (i) CEA, its
affiliates and successors (the "Chemical Holders"), and (ii) Apollo, its
affiliates and successors (the "Apollo Holders"), terminate prior to April 25,
1999, if the Chemical Holders or the Apollo Holders, as the case may be, either
(i) shall beneficially own fewer than 312,500 Common Shares or (ii) shall
acquire more than an additional 625,000 Common Shares without the Company's
consent. The Registration Rights Agreement also limits the grant by the
Company of additional registration rights.
52
53
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- - -------------------------------------------------------------------------
(a)(1) The following financial statements are included in Item 8 of this
report:
Pag
---
Independent Auditors' Reports 16-17
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 1994, Twelve Months Ended June 30, 1993,
and Fiscal Years Ended March 31, 1993, and March 31, 1992 18
Consolidated Balance Sheets at June 30, 1994, and March 31, 1993 19
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 1994, March 31, 1993, and March 31, 1992 20
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 1994, March 31, 1993, and March 31, 1992 21
Notes to Consolidated Financial Statements 22-39
(a)(2) The following Supplemental Schedule is included in this report:
Page
----
Schedule VIII - Valuation and Qualifying Accounts 58
All other schedules not listed above have been omitted as not
applicable or because the required information is included in the Consolidated
Financial Statements or in notes thereto.
(a)(3) Exhibits required by S-K item 601:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------ -------------------
2.01 Agreement and Plan of Reorganization dated October 11, 1993, among the Registrant,
Cardinal Merger Corp., Whitmire, and certain other persons named therein.(1)
3.01 Amended and Restated Articles of Incorporation of the Registrant, as amended.(2)
3.02 Restated Code of Regulations of the Registrant, as amended.(2)
4.01 Specimen Certificate for the Registrant's Class A Common Shares.
4.02 Indenture between the Registrant and Bank One, Indianapolis, NA relating to the Registrant's 8% Notes Due 1997.(3)
54
4.03 Indenture between the Registrant and Bank One Indianapolis, NA relating to the Registrant's 6 1/2% Notes Due 2004.(2)
4.04 Registration Rights Agreement dated as of October 11, 1993, as amended, among the Registrant, certain former stockholders
of Whitmire, and Robert D. Walter.
Other long-term debt agreements of the Registrant are not filed pursuant to
Item 601(b)(4)(iii)(A) of Regulation S-K and the Registrant agrees to furnish
copies of such agreements to the Securities and Exchange Commission upon its
request.
10.01 Stock Incentive Plan of the Registrant, as amended.*
10.02 Forms of Cardinal Exchange Option Agreements entered into February 7, 1994, by the Registrant, Whitmire, and certain
officers of the Registrant and certain employees of Whitmire.(4)*
10.03 Directors' Stock Option Plan of the Registrant, as amended and restated.
10.04 Employment Agreement dated October 11, 1993, among Whitmire, Melburn G. Whitmire and the Registrant, as amended.(5)*
10.05 Employment Agreement dated October 11, 1993, among Whitmire, Gary E. Close, and the Registrant, as amended. (5)*
10.06 Employment Agreement dated October 11, 1993, among Whitmire, James E. Clare, and the Registrant.(2)*
10.07 Form of Indemnification Agreement between the Registrant and individual directors.(6)
10.08 Form of Indemnification Agreement between the Registrant and individual officers.(7)*
10.09 Form of Indemnification Agreement between Whitmire and directors and officers of Whitmire.*
10.10 Split Dollar Agreement dated April 16, 1993, among the Registrant, Robert D. Walter, and Bank One Ohio Trust Company,
NA, Trustee U/A dated April 16, 1993 FBO Robert D. Walter.*
10.11 Whitmire Distribution Corporation Selective Deferred Compensation Plan, as amended, and form of related Split-Dollar
Agreements.*
10.12 Lease for Registrant's Peabody, Massachusetts, distribution center dated April 30, 1986, as amended.(8)
10.13 Lease for portions of the Registrant's Columbus Investment Property dated July 7, 1958, as amended.(9)
10.14 Cardinal Health, Inc. Incentive Deferred Compensation Plan dated April 7, 1994.*
10.15 Shareholders Agreement dated July 13, 1984, as amended.(10)
11.01 Statement concerning computation of per share earnings.
21.01 List of subsidiaries of the Registrant.
54
55
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of Arthur Andersen & Co.
27.01 Financial Data Table
______________
(1) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993 (No. 0-12592)
and incorporated herein by reference.
(2) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994 (No. 0-12591) and
incorporated herein by reference.
(3) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1992 (No. 0-12591) and
incorporated herein by reference.
(4) Included as an exhibit to the Registrant's Statement on Form S-8
(No. 33-52535) and incorporated herein by reference.
(5) Included as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1993 (No. 0-12591)
and hereby incorporated herein by reference.
(6) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 29, 1986 (No. 0-12591) and
incorporated herein by reference.
(7) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 28, 1987 (No. 0-12591) and
incorporated herein by reference.
(8) Included as an Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1988 (No. 0-12591) and
incorporated herein by reference.
(9) Included as an exhibit to the Registrant's Registration Statement
on Form S-1 (No. 2-84444) and incorporated herein by reference.
(10) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1993 (No. 0-12592) and
incorporated herein by reference.
* Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K: None.
55
56
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.
CARDINAL HEALTH, INC.
September 2, 1994 By: /s/ Robert D. Walter
--------------------------
Robert D. Walter, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Name Title Date
- - ---- ----- ----
/s/ Robert D. Walter Chairman, Chief Executive September 2, 1994
- - -------------------------- Officer and Director
Robert D. Walter (principal executive officer)
/s/ David Bearman Executive Vice President and Chief September 2, 1994
- - -------------------------- Financial Officer (principal
David Bearman financial officer and principal
accounting officer)
/s/ John C. Kane President, Chief Operating Officer
- - -------------------------- and Director September 2, 1994
John C. Kane
/s/ Mitchell J. Blutt, M.D. Director September 2, 1994
- - ---------------------------
Mitchell J. Blutt, M.D.
/s/ John F. Finn Director September 2, 1994
- - --------------------------
John F. Finn
/s/ Robert L. Gerbig Director September 2, 1994
- - --------------------------
Robert L. Gerbig
56
57
/s/ Michael S. Gross Director September 2, 1994
- - --------------------------
Michael S. Gross
/s/ John F. Havens Director September 2, 1994
- - --------------------------
John F. Havens
/s/ James L. Heskett Director September 2, 1994
- - --------------------------
James L. Heskett
/s/ George R. Manser Director September 2, 1994
- - --------------------------
George R. Manser
/s/ John B. McCoy Director September 2, 1994
- - --------------------------
John B. McCoy
/s/ Michael E. Moritz Director September 2, 1994
- - --------------------------
Michael E. Moritz
/s/ Jerry E. Robertson Director September 2, 1994
- - --------------------------
Jerry E. Robertson
/s/ L. Jack Van Fossen Director September 2, 1994
- - --------------------------
L. Jack Van Fossen
/s/ Melburn G. Whitmire Director September 2, 1994
- - --------------------------
Melburn G. Whitmire
57
58
CARDINAL HEALTH, INC. AND SUBSIDIARIES
- - --------------------------------------
Schedule VIII - Valuation and Qualifying Accounts
For Fiscal Year Ended June 30, 1994, Three Months ended June 30, 1993, Fiscal
- - -----------------------------------------------------------------------------
Years March 31, 1993, and March 31, 1992 (In thousands)
- - -------------------------------------------------------
Column A Column B Column C Column D Column E
-------- ---------- ----------------------- -------- --------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- --------- --------- ---------- ----------
Valuation allowance for doubtful receivable:
$ 308 (1)
648 (3)
------
Fiscal Year 1994 $15,108 $9,761 $ 956 $(4,231) (2) $21,594
======= ====== ====== ======= =======
$ 38 (1)
Three-months ended June 30, 1993 (4) 1,410 (3)
------
(Columns C & D Cardinal only) $13,428 $ 606 $1,448 $ (374) (2) $15,108
======= ======= ====== ======= =======
Fiscal Year 1993 $12,257 $4,498 $ 136 (1) $(3,463) (2) $13,428
======= ====== ====== ======= =======
$1,304 (1)
2,022 (3)
------
Fiscal Year 1992 $ 8,371 $5,224 $3,326 $(4,664) (2) $12,257
======= ====== ====== ======= =======
(1) Recovery of amounts provided for or written off in prior years.
(2) Current year write-off of uncollectible accounts.
(3) Amount arises from the acquisition of a subsidiary.
(4) See Note 1 of "Notes to Consolidated Financial Statements" regarding basis of presentation.
58