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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-12591
CARDINAL HEALTH, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5555 GLENDON COURT, DUBLIN, OHIO 43016
(Address of principal executive offices) (Zip Code)
(614) 717-5000
Registrant's telephone number, including area code
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON SHARES (WITHOUT PAR VALUE) NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None.
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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of September 12, 1997 was approximately $7,060,251,484.
The number of Registrant's Common Shares outstanding as of September 12,
1997, was as follows:
Common shares, without par value: 109,202,649
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Class B common shares, without par value: 0
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1996 are incorporated by reference into Part I of this Annual
Report on Form 10-K.
Portions of the Registrant's Definitive Proxy Statement to be filed for
its 1997 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Annual Report on Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
Forward-looking Statements.............................................. 3
PART I
1. Business................................................................ 3
2. Properties.............................................................. 6
3. Legal Proceedings....................................................... 6
4. Submission of Matters to a Vote of Security Holders..................... 7
Executive Officers of the Registrant.................................... 7
PART II
5. Market for the Registrant's Common Shares and Related
Shareholder Matters............................................... 8
6. Selected Financial Data................................................. 9
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................... 10
8. Financial Statements and Supplementary Data............................. 13
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................ 35
PART III
10. Directors and Executive Officers of the Registrant...................... 35
11. Executive Compensation.................................................. 35
12. Security Ownership of Certain Beneficial Owners and Management.......... 35
13. Certain Relationships and Related Transactions.......................... 35
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 36
Signatures.............................................................. 40
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Portions of this Annual Report on Form 10-K include "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to risks, uncertainties and other
factors which could cause actual results to materially differ from those
projected or implied. The most significant of such risks, uncertainties and
other factors are described in Exhibit 99.01 to this Form 10-K.
PART I
ITEM 1: BUSINESS
GENERAL
Cardinal Health, Inc., an Ohio corporation formed in 1979, is structured
as a holding company operating through a number of separate operating
subsidiaries. These operating subsidiaries are sometimes collectively referred
to as the "Cardinal Health" companies. As used in this report, the "Registrant"
and the "Company" refer to Cardinal Health, Inc. and its subsidiaries, unless
the context requires otherwise.
The Company is a leading healthcare service provider which offers an array
of value-added pharmaceutical distribution services and pharmaceutical-related
products and services to a broad base of customers. It is one of the country's
leading wholesale distributors of pharmaceutical and related healthcare
products to independent and chain drugstores, hospitals, alternate care centers
and the pharmacy departments of supermarkets and mass merchandisers located
throughout the continental United States. Through its Pyxis Corporation
subsidiary ("Pyxis"), the Company develops, manufactures, leases, sells and
services unique point-of-use systems which automate the distribution,
management and control of medications and supplies in hospitals and alternate
care facilities. Through its Owen Healthcare, Inc. subsidiary ("Owen"), the
Company provides pharmacy management and information services to hospitals. The
Company is also the largest franchisor of independent retail pharmacies in the
United States through its Medicine Shoppe International, Inc. subsidiary
("Medicine Shoppe"). PCI Services, Inc. ("PCI"), another one of the Company's
subsidiaries, is a leading international provider of integrated packaging
services to pharmaceutical manufacturers.
As a full-service wholesale distributor, the Company complements its
distribution activities by offering a broad range of value-added support
services to assist the Company's customers and suppliers in maintaining and
improving their sales volumes. 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. 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.
The Company operates several specialty healthcare businesses which offer
value-added services to the Company's customers and suppliers while providing
the Company with additional opportunities for growth and profitability. For
example, the Company operates a pharmaceutical repackaging program for both
independent and chain drugstore customers and serves as a distributor of
therapeutic plasma products, oncology products, and other specialty
pharmaceuticals to hospitals, clinics and other managed care facilities on a
nationwide basis through the utilization of telemarketing and direct mail
programs. These specialty distribution activities are part of the Company's
overall strategy of developing diversified products and services to enhance the
profitability of its business and that of its customers and suppliers.
ACQUISITIONS
Over the last five years, the Company has completed the following business
combinations. In May 1993, the Company purchased Solomons Company, a Savannah,
Georgia based pharmaceutical wholesaler servicing customers located primarily
in the southeastern region of the United States, in exchange for approximately
1.6 million Cardinal Common Shares, without par value, ("Common Shares"). In
December 1993, the Company issued approximately 0.4 million Common Shares in a
merger transaction for all of the capital stock of PRN Services, Inc., a
distributor of oncology and other specialty products to clinics and physician
groups across the United States. In February 1994, the Company merged with
Whitmire Distribution Corporation ("Whitmire"), a Folsom, California based
pharmaceutical wholesaler (the "Whitmire Merger") and issued approximately 15.6
million Common Shares in the transaction. Following the Whitmire Merger, the
Company had a network of distribution centers enabling it to routinely serve
the entire population of the continental U.S. on a next-day basis. On July 1,
1994, the Company purchased Humiston-Keeling, Inc., a Calumet City, Illinois
based pharmaceutical wholesaler serving customers located primarily in the
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upper Midwest region of the United States for cash of $33 million and assumed
liabilities of $94 million. On July 18, 1994, the Company issued approximately
1.4 million Common Shares in a merger transaction with Behrens Inc., a Waco,
Texas based pharmaceutical wholesaler servicing customers located primarily in
Texas and adjoining states. On November 13, 1995, the Company merged with
Medicine Shoppe, a St. Louis, Missouri based franchisor of independent,
apothecary-style retail pharmacies in the United States and abroad. On May 7,
1996, the Company merged with Pyxis, a San Diego, California based designer,
manufacturer, marketer and servicer of unique point-of-use systems which
automate the distribution, management and control of medications and supplies
in hospitals and other healthcare facilities. On October 11, 1996, the Company
merged with PCI, a Philadelphia, Pennsylvania based provider of diversified
packaging services to the pharmaceutical industry in the United States and
Europe. On March 18, 1997, the Company merged with Owen, a Houston, Texas based
provider of pharmacy management and information services to hospitals.
On May 27, 1997, the Company and MediQual Systems, Inc. ("MediQual")
announced that they had entered into a definitive merger agreement pursuant to
which a wholly owned subsidiary of the Company will be merged with and into
MediQual. Under the terms of the transaction, shareholders of MediQual will
receive a fraction of a Common Share in exchange for each common share of
MediQual and a fraction of a Common Share in exchange for each preferred share
of MediQual. The Company has also agreed to convert existing MediQual warrants
and stock options into Company warrants and options, respectively, at the same
exchange ratio as described above for MediQual common shares. The Company
estimates that it will issue approximately 0.6 million Common Shares in the
transaction, depending in part upon the average closing price of the Common
Shares over a specified period. The merger is intended to be tax-free and to
qualify as a pooling of interests for financial reporting purposes. Consummation
of the transaction is subject to the satisfaction of certain conditions,
including approval by the shareholders of MediQual.
On August 24, 1997, the Company and Bergen Brunswig Corporation ("Bergen")
announced that they had entered into a definitive merger agreement pursuant to
which a wholly owned subsidiary of the Company will be merged with and into
Bergen. Under the terms of the merger agreement, shareholders of Bergen will
receive 0.775 of a Common Share for each share of Bergen common stock they
hold. The Company has also agreed to convert existing Bergen stock options
into Company options at the same exchange ratio. The Company will issue
approximately 40 million Common Shares in the transaction and will also assume
approximately $386 million in long-term debt. The merger is intended to be
tax-free and to qualify as a pooling of interests for financial reporting
purposes. Consummation of the transaction is subject to the satisfaction of
certain conditions, including approvals by the shareholders of Bergen and the
Company and receipt of certain regulatory approvals.
The Company continually evaluates possible candidates for acquisition and
intends to continue to seek opportunities to expand its healthcare operations
and services. For additional information concerning the acquisitions described
above, see Notes 2 and 16 of "Notes to Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CUSTOMERS AND SUPPLIERS
The Company distributes pharmaceuticals, surgical and hospital supplies,
health and beauty care products, and related products and services to
hospitals, independent and chain drugstores, alternate care centers, and
pharmacy departments of supermarkets and mass merchandisers located throughout
the continental United States. In addition, the Company markets Pyxis'
automated dispensing systems to hospitals and alternate care centers in the
U.S. and Canada. Through Medicine Shoppe, the Company franchises retail
pharmacies in the U.S. and abroad. Owen provides pharmacy management and
information services to hospitals throughout the United States. PCI provides
integrated packaging services to pharmaceutical manufacturers located in the
United States, Canada and Europe. In fiscal 1997, 89% of the Company's total
revenues were derived from distribution activities. The Company's largest
customer, Kmart Corporation ("Kmart"), accounted for approximately 13% of net
revenues (by dollar volume) in fiscal 1997. The Company's business could be
adversely affected if Kmart were lost as a customer.
The Company obtains its products from many different suppliers, the
largest of which accounted for approximately 6% (by dollar volume) of its net
revenues in fiscal 1997. The Company's five largest suppliers accounted for
approximately 20% (by dollar volume) of its net revenues during fiscal 1997,
and the Company's relationships with its suppliers are generally very good. The
Company's arrangements with its pharmaceutical suppliers typically may be
canceled by either the Company or the supplier upon 30 to 90 days prior notice,
although many of these arrangements are not governed by formal agreements. The
loss of certain suppliers could adversely affect the Company's business if
alternative sources of supply were unavailable.
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While the Company's operations may show quarterly fluctuations, the
Company does not consider its business to be seasonal in nature on a
consolidated basis.
COMPETITION
The Company's markets are highly competitive. As a pharmaceutical
wholesaler, the Company competes directly with numerous 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 pharmaceutical
wholesaling operations 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. As a marketer of automated pharmaceutical dispensing systems through
Pyxis, the Company competes based upon its installed base of systems,
relationships with customers, customer service and support capabilities,
patents and other intellectual property, and its ability to interface with
customer information systems. Potential competitors to the Pyxis system include
both existing domestic and foreign companies, as well as emerging companies
that supply products for specialized markets and other outside service
providers. With its Owen subsidiary, the Company competes with both national
and regional hospital pharmacy management firms and self-managed hospitals and
hospital systems on the basis of its established base of business, the
effective use of information systems, the development of clinical programs, and
the quality of the services it provides to its customers. Several smaller
franchisors compete with Medicine Shoppe in the franchising of pharmacies,
where competition is based primarily upon price, benefits offered to both the
pharmacist and customer, access to third party programs, and the reputation of
the franchise. Through PCI, the Company competes with companies that provide
many types of packaging services and those that provide one or a few types of
packaging services, based primarily upon quality, variety of available
packaging services, customer service, responsiveness, and price.
EMPLOYEES
At September 12, 1997, the Company had approximately 11,000 employees, of
whom approximately 1,000 are subject to collective bargaining agreements.
Overall the Company considers its employee relations to be good.
INTELLECTUAL PROPERTY
The Company has applied to the United States Patent and Trademark Office
for registration of a number of trademarks and service marks, certain of which
have been registered, and also holds common law rights in various trademarks
and service marks. The Company has also applied for trademark and service mark
registrations for certain of its trademarks and service marks in certain
foreign countries. There can be no assurance that the Company will obtain the
registrations for trademarks and service marks for which it has applied. The
Company's principal trademarks include CardinalCHOICE (and Design)(R),
LEADER(R) DRUGSTORES, PYXIS(R), MEDSTATION(R), SUPPLYSTATION(R), THE MEDICINE
SHOPPE(R), and OMEGA-Rx(R).
The Company holds certain United States patents relating to certain
aspects of its automated pharmaceutical dispensing systems, its automated
medication management systems, and medication packaging. The Company has a
number of pending patent applications in the United States and certain foreign
countries, and intends to pursue additional patents as appropriate. The Company
also owns certain software, including software used for pharmaceutical
purchasing and inventory control, which is copyrighted and subject to the
protection of applicable copyright laws.
No assurances can be given that any intellectual property rights of the
Company will provide meaningful protection against competitive products or
otherwise be commercially valuable or that the Company will be successful in
obtaining additional patents or enforcing its proprietary rights against
others.
REGULATORY MATTERS
The Company, as a distributor of prescription pharmaceuticals (including
certain controlled substances), an operator of pharmacy operations, and a
pharmaceutical packager is required to register for permits and/or licenses
with, and comply with certain operating and security standards of, the United
States Drug Enforcement Administration, the Food and Drug Administration (the
"FDA") and various state boards of pharmacy or comparable agencies. In
addition, the Company is subject to requirements of the Controlled Substances
Act and the Prescription Drug Marketing Act of 1987, an amendment to the Food,
Drug and Cosmetic Act (the "FDCA") which requires each state to regulate the
purchase and distribution of prescription drugs under prescribed minimum
standards. The Company is not currently required to register or submit
premarket notifications to the FDA for its automated
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pharmaceutical dispensing systems. There can be no assurance, however, that FDA
policy in this regard will not change. Through its Medicine Shoppe subsidiary,
the Company is subject to laws adopted by certain states which regulate
franchise operations and the franchisor-franchisee relationship, and similar
legislation is proposed or pending in additional states. The most common
provisions of such laws establish restrictions on the ability of franchisors to
terminate or to refuse to renew franchise agreements. Federal Trade Commission
rules also require franchisors to make certain disclosures to prospective
franchisees prior to the offer or sale of franchises. Owen's pharmacy
operations and its pharmacies are subject to comprehensive regulation by state
and federal authorities, including state boards of pharmacy and federal
authorities with responsibility for monitoring the storage, handling, and
dispensing of narcotics and other controlled substances. Owen's contractual
arrangements with pharmaceutical manufacturers and healthcare providers also
subject it to certain provisions of the federal Social Security Act which (a)
prohibit financial arrangements between providers of healthcare services to
government healthcare program (including Medicare and Medicaid) beneficiaries
and potential referral sources that are designed to induce patient referrals or
the purchasing, leasing, ordering or arranging for any good, service or item
paid for by such government programs, and (b) impose certain restrictions upon
referring physicians and providers of certain designated health services under
Medicare and Medicaid programs. The Company's PCI operations in the United
Kingdom and Germany are subject to state and local certification requirements,
including compliance with the Good Manufacturing Practices adopted by the
European Community. The Company is also subject to various federal, state and
local laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, and the use and disposal of
hazardous or potentially hazardous substances.
ITEM 2: PROPERTIES
At September 12, 1997, the Company had 26 principal pharmaceutical
distribution facilities; 4 specialty distribution facilities; 1
medical/surgical distribution facility; the Pyxis assembly operation; 6
packaging facilities (2 of which are located in the United Kingdom and 1 of
which is located in Germany); and 4 PCI printing facilities (2 of which are
located in Puerto Rico). The Company's facilities are located in an aggregate
of 22 states, Puerto Rico, the United Kingdom and Germany. Fourteen of these
facilities are owned by the Company and the balance are leased. The Company's
principal executive offices are currently located in a leased four-story
building located at 5555 Glendon Court, Dublin, Ohio, pending construction of a
new leased headquarters facility in Dublin, Ohio. The new facility is scheduled
to be completed by the end of calendar 1998. 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 of its properties as the Company's business
continues to expand.
For certain financial information regarding the Company's facilities, see
Notes 5 and 9 of "Notes to Consolidated Financial Statements."
ITEM 3: LEGAL PROCEEDINGS
In November 1993, the Company and Whitmire, as well as other
pharmaceutical wholesalers, were 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 was filed which included allegations that the wholesaler
defendants, including the Company and Whitmire, conspired with manufacturers to
inflate prices by using a chargeback pricing system. In addition to the Federal
court cases described above, the Company and Whitmire have also been named as
defendants in a series of state court cases alleging similar claims under
various state laws regarding the sale of brand name prescription drugs. These
lawsuits are described in "Item 1-Legal Proceedings" of Part II of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996,
which was filed with the Securities and Exchange Commission and is incorporated
herein by reference. On November 9, 1995, the Company, along with the other
wholesaler defendants, filed a motion for summary judgment in the Brand Name
Prescription Drug Litigation. On April 4, 1996, summary judgment was granted in
favor of the Company and the other wholesaler defendants. The plaintiffs
appealed this decision. On August 15, 1997, the Court of Appeals for the
Seventh Circuit, along with other rulings, reversed the District Court's
decision granting summary judgment to the wholesaler defendants. On September
5, 1997, the wholesaler defendants filed a motion for this decision to be
reconsidered by the Court of Appeals en banc. The Company continues to believe
that the allegations against Cardinal and Whitmire in such litigation are
without merit, and it intends to contest such allegations vigorously. The
Company also becomes involved from time to time in litigation incidental to its
business. Although the ultimate resolution of the litigation referenced herein
cannot be forecast with certainty, the Company does not believe that the
outcome of these lawsuits will have a material adverse effect on the Company's
financial conditions or results of operations.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
The executive officers of the Company are as follows (information provided as
of September 12, 1997):
NAME AGE POSITION
- ----------------------------- --- ------------------------------------------------------
Robert D. Walter 52 Chairman and Chief Executive Officer
John C. Kane 57 President and Chief Operating Officer
David A. Abrahamson 57 Executive Vice President; President - Medicine Shoppe
International, Inc.
David Bearman 51 Executive Vice President and Chief Financial Officer
George H. Bennett, Jr. 44 Executive Vice President, General Counsel and Secretary
Lisa M. Dolin 38 Senior Vice President-- Specialty Companies
Daniel F. Gerner 51 Executive Vice President; President - PCI Services, Inc.
James F. Millar 49 Executive Vice President; Group President - Cardinal
Distribution
Richard J. Miller 40 Vice President, Controller and Principal Accounting Officer
Robert J. Zollars 40 Executive Vice President; Group President - Pharmacy
Automation and Management
Unless indicated to the contrary, the business experience summaries
provided below for the Company's 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, Westinghouse Electric Corporation and Karrington
Health, Inc.
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 healthcare manufacturer), where he served
most recently as President of the Ross Laboratories Division. Mr. Kane also
serves as director of Connetics Corporation.
DAVID A. ABRAHAMSON has been an Executive Vice President of the Company
since August 1996 and President of Medicine Shoppe International, Inc. since
May 1990.
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 of the Company from October 1989.
Mr. Bearman has also served as the Company's Chief Financial Officer since
joining the Company in October 1989.
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.
LISA M. DOLIN has been the Company's Senior Vice President -- Specialty
Companies since June 1996. She has served as President of the Company's
National PharmPak Services, Inc. subsidiary ("National PharmPak") since
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February 1995. Prior to that, Ms. Dolin served as National PharmPak's Vice
President and General Manager beginning in October 1990.
DANIEL F. GERNER has served as an Executive Vice President of the Company
since February 1997 and President of PCI Services, Inc. since 1986.
JAMES F. MILLAR has served as an Executive Vice President of the Company
since February 1994, and was named as President of the Company's Cardinal
Distribution pharmaceutical wholesaling business in June 1996. Prior to
February 1994, Mr. Millar served in a series of increasingly senior regional
operating positions within the Company's pharmaceutical wholesaling business
since he was hired in 1987.
RICHARD J. MILLER has been the Company's Principal Accounting Officer
since August 1996 and has served as Vice President, Controller since August
1995. Upon joining the Company in July 1994, and until August 1995, he served
as Vice President, Auditing. Prior to that, Mr. Miller was a partner at
Deloitte & Touche LLP (an international accounting firm).
ROBERT J. ZOLLARS joined the Company in January 1997 as an Executive Vice
President and Group President Pharmacy Automation and Management. Prior to
that, Mr. Zollars served as President of Allegiance Corporation since October
1996 and held various positions at Baxter Healthcare, Inc., most recently that
of President, U.S. Distribution.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
The Common Shares are quoted on the New York Stock Exchange under the
symbol "CAH." The following table reflects the range of the reported high and
low last sale prices of the Common Shares as reported on the New York Stock
Exchange Composite Tape and the per share dividends declared thereon for the
fiscal years ended June 30, 1997 and 1996. The information in the table has
been adjusted to reflect retroactively all applicable stock splits.
HIGH LOW DIVIDENDS
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Fiscal 1996:
Quarter Ended
September 30, 1995 $ 37.67 $ 29.17 $ 0.02
December 31, 1995 38.58 34.08 0.02
March 31, 1996 42.83 35.00 0.02
June 30, 1996 50.17 40.17 0.02
Fiscal 1997:
Quarter Ended
September 30, 1996 $ 55.08 $ 44.67 $ 0.02
December 31, 1996 58.38 51.92 0.025
March 31, 1997 64.13 54.38 0.025
June 30, 1997 62.00 51.63 0.025
Fiscal 1998:
Through September 12, 1997 $ 70.00 $ 54.63 $ 0.025
As of September 12, 1997, there were approximately 2,800 shareholders of
record 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 was
prepared giving retroactive effect to the business combinations with Whitmire
Distribution Corporation ("Whitmire") on February 7, 1994, Medicine Shoppe
International, Inc. ("Medicine Shoppe") on November 13, 1995, Pyxis Corporation
("Pyxis") on May 7, 1996 and Owen Healthcare Inc. ("Owen") on March 18, 1997,
all of which were accounted for as pooling-of-interests transactions. The
consolidated financial data includes all purchase transactions that occurred
during these periods. See "Item 1: Business" for further discussion.
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, the information
presented is derived from consolidated financial statements which combine data
from Cardinal, Medicine Shoppe and Pyxis for the fiscal year ended March 31,
1993 with data from Whitmire for the fiscal year ended July 3, 1993 and Owen
for the fiscal year ended November 30, 1992. For the fiscal years ended June
30, 1996, 1995 and 1994, the information presented is derived from consolidated
financial statements which combine data from Cardinal, Whitmire, Medicine
Shoppe and Pyxis for the fiscal years ended June 30, 1996, 1995 and 1994 with
data from Owen for the fiscal years ending November 30, 1995, 1994 and 1993,
respectively. For the fiscal year ended June 30, 1997, the information
presented is derived from the consolidated financial statements which combine
Cardinal for the fiscal year ended June 30, 1997 with Owen's financial results
for the period of June 1, 1996 to June 30, 1997 (excluding Owen's financial
results for December 1996 in order to change Owen's November 30, fiscal year
end to June 30 ). 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."
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED
-----------------------------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30, MARCH 31,
1997 1996 1995 1994 1993
------------- -------------- ------------- -------------- -------------
Earnings Statement Data:
Net revenues $ 10,968,042 $ 9,246,420 $ 8,342,517 $ 6,253,557 $ 4,991,241
Earnings before cummulative effect
of change in accounting
principle $ 181,119 $ 117,634 $ 142,515 $ 84,628 $ 67,669
Cumulative effect of change in accounting
principle (10,000)
------------- -------------- ------------- -------------- -------------
Net earnings $ 181,119 $ 117,634 $ 142,515 $ 84,628 $ 57,669
============= ============== ============= ============== =============
Primary earnings per Common Share:
Before cumulative effect of change in
accounting principle $ 1.66 $ 1.14 $ 1.42 $ .88 $ .79
Cumulative effect of change in accounting
principle (.12)
------------- -------------- ------------- -------------- -------------
Net $ 1.66 $ 1.14 $ 1.42 $ .88 $ .67
============= ============== ============= ============== =============
Fully diluted earnings per Common Share:
Before cumulative effect of change in
accounting principle $ 1.66 $ 1.14 $ 1.40 $ .88 $ .76
Cumulative effect of change in accounting
principle (.10)
------------- -------------- ------------- -------------- -------------
Net $ 1.66 $ 1.14 $ 1.40 $ .88 $ .66
============= ============== ============= ============== =============
Balance Sheet Data:
Total assets $ 3,108,546 $ 2,825,175 $ 2,264,726 $ 1,710,949 $ 1,333,601
Long-term obligations 277,766 265,146 240,469 232,955 293,760
Redeemable preferred stock 20,400
Shareholders' equity 1,332,200 1,035,838 817,038 572,720 397,437
Cash dividends declared per Common Share $ 0.095 $ 0.08 $ 0.08 $ 0.07 $ 0.05
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 1997, 1996, 1995 and 1994. Fiscal 1997, 1996, 1994 and
1993 amounts reflect the impact of merger related costs. See Note 2 of "Notes
to Consolidated Financial Statements" for a further discussion of merger
related costs affecting fiscal 1997 and 1996.
9
10
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis has been prepared giving
retroactive effect to the pooling-of-interests business combinations with
Medicine Shoppe on November 13, 1995, Pyxis on May 7, 1996 and Owen on March
18, 1997 (see Note 2 of "Notes to Consolidated Financial Statements"). On
October 11, 1996, the Company completed a merger with PCI, which was also
accounted for as a pooling-of-interests. The impact of the PCI merger, on a
historical basis, is not significant. Accordingly, prior period financial
statements have not been restated for the PCI merger (see Note 2 of "Notes to
Consolidated Financial Statements"). The discussion and analysis presented
below should be read in conjunction with the consolidated financial statements
and related notes appearing elsewhere in this report.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues for fiscal 1997 increased 19%, as compared to
the prior year, primarily due to growth in the Company's pharmaceutical
distribution and pharmacy management service businesses. The increase resulted
mostly from internal growth generated primarily by the addition of new
customers, and, to a lesser extent, increased volume from existing customers and
price increases. Expansion of the Company's relationship with Kmart Corporation
("Kmart") and opportunities created by the deterioration of the financial
condition of a major pharmaceutical distribution competitor also contributed to
the increases during fiscal 1997.
Net revenues in fiscal 1996 increased 11% compared with fiscal 1995
primarily due to internal growth from pharmaceutical wholesaling activities,
mostly due to the addition of new customers, and, to a lesser extent, increased
sales to existing customers and price increases.
GROSS MARGIN. For fiscal 1997 and 1996, gross margin as a percentage of net
revenues was 8.25% and 8.36%, respectively. The change in gross margin for the
year is primarily due to the shift in net revenue mix caused by significant
increases in the relatively lower margin pharmaceutical distribution activities
The impact of this shift was partially offset by increased merchandising and
marketing programs with customers and suppliers. The Company's gross margin
continues to be affected by the combination of a highly competitive environment
and a greater mix of high volume customers, where a lower cost of service and
better asset management enable the Company to offer lower selling margins and
still achieve higher operating margins relative to other customer business.
The gross margin ratio increased to 8.36% for fiscal 1996 from 8.02% in
fiscal 1995. This increase was primarily due to the gross margin generated from
the acquisition of a pharmacy management operation in fiscal 1996 (see Note 2
of "Notes to Consolidated Financial Statements"). Pharmacy management
operations generally provide a higher gross margin than pharmaceutical
wholesaling activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net revenues improved to 4.68% in
fiscal 1997 compared to 5.19% in fiscal 1996. The improvements in fiscal 1997
reflect the economies associated with the Company's revenue growth, as well as
significant productivity gains resulting from continued cost control efforts
and the consolidation and selective automation of operating facilities.
Selling, general and administrative expenses as a percentage of net
revenues increased to 5.19% in fiscal 1996 compared to 4.96% in fiscal 1995 due
to the inclusion of pharmacy management services in fiscal 1996 operations (see
"Gross Margin" above). This increase was partially offset by economies
associated with the Company's revenue growth from pharmaceutical wholesaling
activities, as well as productivity gains resulting in part from warehouse
consolidations and management information system enhancements.
MERGER RELATED COSTS. The Company recorded charges to reflect the estimated
PCI and Owen merger related costs during fiscal 1997. During fiscal 1996, the
Company recorded charges to reflect the estimated Medicine Shoppe and Pyxis
merger related costs. See further discussion in Note 2 of "Notes to
Consolidated Financial Statements."
10
11
The Company classifies incremental costs associated with a merger
transaction as "merger related costs" as these costs would not have been
incurred in the absence of the business combination. It should be noted that the
amounts presented may not be comparable to similarly titled amounts reported by
other companies.
The following is a summary of the merger related costs:
Fiscal Year Ended
--------------------------------------
June 30, June 30,
(In thousands, except per share amounts) 1997 1996
--------- ---------
Transaction and Employee Related Costs:
Transaction Costs $(15,700) $(23,400)
PCI Vested Retirement Benefits and Incentive Fees (7,600) --
Pyxis Stay Bonuses -- (7,600)
Employee Severance/Termination (4,900) (5,400)
Other (3,000) (300)
-------- --------
Total Transaction and Employee Related Costs (31,200) (36,700)
-------- --------
Other Merger Related Costs:
Asset Impairments (13,200) (1,500)
Exit and Restructuring Costs (3,100) (17,600)
Duplicate Facilities Elimination (1,700) --
Integration and Efficiency Implementation (7,763) (11,450)
-------- --------
Total Other (25,763) (30,550)
-------- --------
Total Merger Related Costs (56,963) (67,250)
Tax Effect 16,786 19,417
-------- --------
Effect on Net Earnings $(40,177) $(47,833)
======== ========
Effect on Fully Diluted Earnings Per Share $ (0.37) $ (0.46)
======== ========
The effects of the merger related costs are included in the reported net
earnings of $181.1 million in fiscal 1997 and $117.6 million in fiscal 1996 and
in the reported fully diluted earnings per common share of $1.66 in fiscal
1997 and $1.14 in fiscal 1996.
Asset impairments in fiscal 1997 include the write off of a patent ($7.4
million) and the write down of certain operating assets ($3.2 million) related
to MediTROL (a wholly owned subsidiary of Owen) as a result of management's
decision to merge the operations of MediTROL into Pyxis and phase-out production
of the separate MediTROL product line.
Exit and restructuring costs in fiscal 1996 include $17.2 million related
to management's commitment to exit a long term contract with a financing company
at the time of the Pyxis Merger (see further discussion in Note 3 of "Notes to
Consolidated Financial Statements"). Additionally, in fiscal 1996, $7.4 million
of unconditional commitments made by the Company to Medicine Shoppe franchisees
as a result of the Medicine Shoppe Merger is included in the Integration and
Efficiency Implementation category above.
The Company's trend with regard to acquisitions has been to expand its
role as a provider of services to the healthcare industry. This trend has
resulted in both expansion of its pharmaceutical distribution business and
diversification into related service areas which (a) complement the Company's
core pharmaceutical distribution business; (b) provide opportunities for the
Company to develop synergies with, and thus strengthen, the acquired business;
and (c) generally generate higher margins as a percentage of net revenues than
pharmaceutical distribution. As the healthcare industry continues to change,
the Company is constantly evaluating acquisition candidates in pharmaceutical
distribution, as well as related sectors of the healthcare industry that would
expand its role as a service provider; however, there can be no assurance that
it will be able to successfully pursue any such opportunity or consummate any
such transaction. If a transaction was consummated, additional merger related
costs would be incurred by the Company.
INTEREST EXPENSE. Growth in the Company's business and the resultant need
for additional working capital led to the Company's issuance of $150 million 6%
Notes due 2006, in a public offering in January 1996. This caused the increase
in interest expense of $1.1 million in fiscal 1997, as compared to fiscal 1996,
and the increase in interest expense of $4.8 million in fiscal 1996 compared to
fiscal 1995 (see "Liquidity and Capital Resources"). Partially offsetting this
increase in fiscal 1997 is the impact of the extinguishment of the Company's
$100 million 8% Notes on March 1, 1997.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
relative to pretax earnings was 42%, 44.5%, and 41.1% for fiscal years 1997,
1996, and 1995, respectively. The fluctuation in the tax rate is primarily due
to certain nondeductible costs associated with the business combinations in
fiscal 1997 and 1996 (see Note 7 of "Notes to Consolidated Financial
Statements").
11
12
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $1,095 million at June 30, 1997 from $924.4
million at June 30, 1996. This increase included additional investments in
merchandise inventories and trade receivables of $180.1 million and $59.9
million, respectively, and a decrease in accounts payable of $2.4 million.
Offsetting the increases in working capital were decreases in cash and
equivalents, and marketable securities available-for-sale of $61.2 million and
$54.3 million, respectively. Increases in merchandise inventories reflect the
higher level of business volume in pharmaceutical distribution activities,
including higher inventories required by the Company's new pharmaceutical
services agreement with Kmart. The increase in trade receivables is consistent
with the Company's revenue growth (see "Net Revenues" above). The change in
cash and equivalents, marketable securities available-for-sale and accounts
payable is due to the timing of inventory purchases and related payments.
The Company fully redeemed $100 million of long-term debt during fiscal
1997 and currently has the capacity to issue $400 million of additional
long-term debt pursuant to shelf debt registration statements filed with the
Securities and Exchange Commission (see Note 5 of "Notes to Consolidated
Financial Statements"). The Company does not currently have any specific plans
to issue additional debt under these facilities.
Property and equipment, at cost, increased by $176.2 million in fiscal
1997. Of this amount, $111.5 million was attributable to the merger with PCI.
The remaining increase in property and equipment included additional
investments in management information systems and customer support systems, as
well as upgrades to distribution facilities. The Company has several operating
lease agreements for the construction of new facilities. See further discussion
in Note 9 of "Notes to Consolidated Financial Statements".
Shareholders' equity increased to $1,332.2 million at June 30, 1997 from
$1,035.8 million at June 30, 1996, primarily due to net earnings of $181.1
million and the investment of $61.4 million by employees of the Company through
various stock ownership plans.
The Company has line-of-credit agreements with various bank sources
aggregating $374 million, of which $95 million is represented by committed
line-of-credit agreements and the balance is uncommitted. The Company had $22.2
million outstanding under these lines at June 30, 1997.
The Company believes that it has adequate capital resources at its
disposal to fund currently anticipated capital expenditures, business growth
and expansion, and current and projected debt service requirements.
OTHER
PENDING BUSINESS COMBINATIONS. On May 27, 1997, the Company announced that
it had entered into a definitive merger agreement with MediQual Systems, Inc.
("MediQual"), pursuant to which MediQual will become a wholly-owned subsidiary
of the Company in a stock-for-stock merger expected to be accounted for as a
pooling-of-interests for financial reporting purposes. In connection with the
merger, the Company estimates that it will issue approximately 0.6 million
Common Shares. The merger is expected to be completed in the first half of
fiscal 1998, subject to satisfaction of certain conditions, including approval
by shareholders of MediQual.
On August 23, 1997, the Company signed a definitive merger agreement with
Bergen Brunswig Corporation ("Bergen"), a distributor of pharmaceuticals and
medical-surgical supplies. Under the terms of the transaction, shareholders of
Bergen will receive a fixed exchange ratio of .775 of the Company's Common
Shares in exchange for each common share of Bergen. The Company will issue
approximately 40 million Common Shares in the transaction and will also assume
approximately $386 million in long-term debt. The merger is expected to be
completed by the end of the third quarter of fiscal 1998, subject to certain
conditions, including approval by shareholders and receipt of certain
regulatory approvals. The transaction is expected to be accounted for as a
pooling-of-interests.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. In February 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which will
require retroactive adoption in the Company's fiscal quarter ending December
31, 1997. The new standard simplifies the computation of earnings per share and
requires the presentation of basic and diluted earnings per share. In light of
the present capital structure, the impact of adopting SFAS 128 will not be
significant.
12
13
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income," which will require adoption
no later than the Company's fiscal quarter ending September 30, 1998. This new
statement defines comprehensive income as "all changes in equity during a
period, with the exception of stock issuances and dividends." The new
pronouncement establishes standards for the reporting and display of
comprehensive income and its components in the financial statements.
In June 1997, FASB also issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which will require adoption no later than fiscal 1999. SFAS 131
requires companies to define and report financial and descriptive information
about its operating segments. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company is presently evaluating the applicability of SFAS 130 and 131
to its operations.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Reports
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 1997, 1996 and 1995
Consolidated Balance Sheets at June 30, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Fiscal Years Ended June
30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
13
14
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, 1997 and 1996, and the related
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1997. Our audits also included the
consolidated financial statement schedule listed in the Index at Item 14. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits. We did not audit the
financial statements of Owen Healthcare, Inc. ("Owen") and of Pyxis Corporation
("Pyxis"), both wholly owned subsidiaries of Cardinal Health, Inc., for the
years ended June 30, 1996 and 1995. The combined financial statement amounts of
Owen and Pyxis represent approximately 13% of consolidated total assets at June
30, 1996 and represent combined revenues and net income of approximately 6% and
6%, and 37% and 29%, respectively, of consolidated amounts for each of the two
years in the period ended June 30, 1996. These statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to the amounts included for Owen and Pyxis, is based solely on the
reports 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997
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.
DELOITTE & TOUCHE LLP
Columbus, Ohio
August 12, 1997, except for Note 16
as to which the date is August 23, 1997
14
15
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Cardinal Health, Inc.
We have audited the consolidated balance sheets of Pyxis Corporation as of June
30, 1996, and the related consolidated statements of income, shareholder's
equity, and cash flows for each of the two years in the period ended June 30,
1996 (not included herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pyxis Corporation
at June 30, 1996, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended June 30,1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
August 2, 1996
15
16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Owen Healthcare, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, of stockholders' equity and of cash flows of Owen
Healthcare, Inc. and its subsidiaries (not presented separately herein) present
fairly, in all material respects, the financial position of Owen Healthcare,
Inc. and its subsidiaries (Owen) at November 30, 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
November 30, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Owen's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
January 30, 1997
16
17
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------
1997 1996 1995
-------------------------------------------------
Net revenues $ 10,968,042 $ 9,246,420 $ 8,342,517
Cost of products sold 10,063,084 8,473,186 7,673,044
---------------- --------------- ---------------
Gross margin 904,958 773,234 669,473
Selling, general and administrative expenses 513,617 479,440 413,630
Merger related costs:
Transaction and employee related costs (31,200) (36,700) --
Other (25,763) (30,550) --
---------------- --------------- ---------------
Operating earnings 334,378 226,544 255,843
Other income (expense):
Interest expense (27,974) (26,903) (22,110)
Other, net-- primarily interest income 5,876 12,422 8,386
---------------- --------------- ---------------
Earnings before income taxes 312,280 212,063 242,119
Provision for income taxes 131,161 94,429 99,604
---------------- --------------- ---------------
Net earnings $ 181,119 $ 117,634 $ 142,515
================ =============== ===============
Earnings per Common Share:
Primary $ 1.66 $ 1.14 $ 1.42
Fully diluted $ 1.66 $ 1.14 $ 1.40
Weighted average number of Common Shares outstanding:
Primary 109,118 102,922 100,566
Fully diluted 109,172 103,832 101,756
The accompanying notes are an integral part of these statements.
17
18
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, JUNE 30,
1997 1996
---------------- ---------------
ASSETS
Current assets:
Cash and equivalents $ 243,061 $ 304,281
Marketable securities available-for-sale - 54,335
Trade receivables, net 672,164 612,277
Current portion of net investment in sales-type leases 40,720 37,953
Merchandise inventories 1,453,120 1,272,616
Prepaid expenses and other 94,668 62,826
---------------- ---------------
Total current assets 2,503,733 2,344,288
---------------- ---------------
Property and equipment, at cost:
Land, buildings and improvements 110,552 62,534
Machinery and equipment 304,946 182,999
Furniture and fixtures 61,046 54,795
---------------- ---------------
Total 476,544 300,328
Accumulated depreciation and amortization (199,869) (133,472)
---------------- ---------------
Property and equipment, net 276,675 166,856
Other assets:
Net investment in sales-type leases, less current portion 119,532 111,604
Goodwill and other intangibles 122,104 114,901
Other 86,502 87,526
---------------- ---------------
Total $ 3,108,546 $ 2,825,175
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 22,159 $ -
Current portion of long-term obligations 6,158 106,008
Accounts payable 1,135,951 1,138,368
Other accrued liabilities 244,491 175,498
---------------- ---------------
Total current liabilities 1,408,759 1,419,874
---------------- ---------------
Long-term obligations, less current portion 277,766 265,146
Deferred income taxes and other liabilities 89,821 104,317
Shareholders' equity:
Common Shares, without par value 645,051 558,598
Retained earnings 699,366 492,762
Common Shares in treasury, at cost (6,373) (11,522)
Other (5,844) (4,000)
---------------- ---------------
Total shareholders' equity 1,332,200 1,035,838
---------------- ---------------
Total $ 3,108,546 $ 2,825,175
================ ===============
The accompanying notes are an integral part of these statements.
18
19
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON SHARES
-------------------------
SHARES RETAINED TREASURY SHARES
-----------------------
ISSUED AMOUNT EARNINGS SHARES AMOUNT
---------- ------------- ------------- --------- ------------
BALANCE, JUNE 30, 1994 63,391 $ 360,052 $ 244,812 (1,075) $ (9,164)
Net earnings 142,515
Employee stock plans activity, including
tax benefits of $22,236 1,684 27,605 6 45
Treasury shares acquired and shares retired (186) (300) (4,805) (47) (1,185)
Change in unrealized loss on marketable securities
available-for-sale, net of tax
Dividends paid (9,107)
Adjustment for ESOP
Acquisition of subsidiaries (See Note 2) 1,784 11,650 9,328
Shares issued in connection with stock offering 1,867 70,468
---------- ------------- ------------- --------- ------------
BALANCE, JUNE 30, 1995 68,540 469,475 382,743 (1,116) (10,304)
Net earnings 117,634
Employee stock plans activity, including tax
benefits of $11,168 982 28,682 134 922
Treasury shares acquired and restricted stock forfeitures (70) (2,140)
Change in unrealized loss on marketable securities
available-for-sale, net of tax
Dividends paid (7,615)
Adjustment for ESOP
Shares issued in connection with stock offering 2,069 50,654
Conversion of subordinated debt, net 1,071 9,787
---------- ------------- ------------- --------- ------------
BALANCE, JUNE 30, 1996 72,662 558,598 492,762 (1,052) (11,522)
Net earnings 181,119
Employee stock plans activity, including tax
benefits of $18,459 1,655 62,483
Treasury shares acquired and shares retired (748) (7,051) 728 5,076
Dividends paid (9,045)
Foreign currency translation adjustment
3-for-2 stock split effected as a stock dividend
and cash paid in lieu of fractional shares 33,411 (30)
Acquisition of subsidiary (See Note 2) 2,092 30,878 28,854
Adjustment for change in fiscal year of an
acquired subsidiary (See Note 1) 143 5,706 84 73
---------- ------------- ------------- --------- ------------
BALANCE, JUNE 30, 1997 109,072 $ 645,051 $ 699,366 (240) $ (6,373)
========== ============= ============= ========= ============
TOTAL
ADJUSTMENT SHAREHOLDERS'
FOR ESOP OTHER EQUITY
-------------- ------------ ----------------
BALANCE, JUNE 30, 1994 $ (17,736) $ (5,244) $ 572,720
Net earnings 142,515
Employee stock plans activity, including
tax benefits of $22,236 839 28,489
Treasury shares acquired and shares retired (6,290)
Change in unrealized loss on marketable securities
available-for-sale, net of tax 825 825
Dividends paid (9,107)
Adjustment for ESOP (3,560) (3,560)
Acquisition of subsidiaries (See Note 2) 20,978
Shares issued in connection with stock offering 70,468
----------------- ------------ ----------------
BALANCE, JUNE 30, 1995 (21,296) (3,580) 817,038
Net earnings 117,634
Employee stock plans activity, including tax
benefits of $11,168 (1,173) 28,431
Treasury shares acquired and restricted stock forfeitures 307 (1,833)
Change in unrealized loss on marketable securities
available-for-sale, net of tax 446 446
Dividends paid (7,615)
Adjustment for ESOP 21,296 21,296
Shares issued in connection with stock offering 50,654
Conversion of subordinated debt, net 9,787
----------------- ------------ ----------------
BALANCE, JUNE 30, 1996 -- (4,000) 1,035,838
Net earnings 181,119
Employee stock plans activity, including tax
benefits of $18,459 (1,098) 61,385
Treasury shares acquired and shares retired (1,975)
Dividends paid (9,045)
Foreign currency translation adjustment (1,373) (1,373)
3-for-2 stock split effected as a stock dividend
and cash paid in lieu of fractional shares (30)
Acquisition of subsidiary (See Note 2) 627 60,359
Adjustment for change in fiscal year of an
acquired subsidiary (See Note 1) 5,922
----------------- ------------ ----------------
BALANCE, JUNE 30, 1997 $ -- $ (5,844) $ 1,332,200
================= ============ ================
The accompanying notes are an integral part of these statements.
19
20
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------
1997 1996 1995
-------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 181,119 $ 117,634 $ 142,515
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 51,288 39,501 29,455
Provision for deferred income taxes 15,897 21,502 48,454
Provision for bad debts 8,073 10,111 14,659
Change in operating assets and liabilities, net of effects from acquisitions:
Increase in trade receivables (46,971) (62,646) (140,336)
Increase in merchandise inventories (169,408) (159,616) (161,558)
Increase in net investment in sales-type leases (10,695) (34,125) (40,584)
Increase (decrease) in accounts payable (10,778) 162,996 156,687
Increase (decrease) in accrued other 22,488 41,523 (24,185)
Other operating items, net (1,862) (22,492) 12,718
-------------- ------------- -------------
Net cash provided by operating activities 39,151 114,388 37,825
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired - (36,244) (19,632)
Proceeds from sale of property and equipment 2,986 1,038 764
Additions to property and equipment (75,213) (83,385) (56,377)
Purchase of marketable securities available-for-sale (3,400) (163,719) (169,599)
Proceeds from sale of marketable securities available-for-sale 57,735 218,019 143,501
-------------- ------------- -------------
Net cash used in investing activities (17,892) (64,291) (101,343)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 3,347 (3,000) (22,500)
Reduction of long-term obligations (134,479) (33,075) (7,393)
Proceeds from long-term obligations, net of issuance costs - 148,960 76
Proceeds from issuance of Common Shares 41,244 68,919 75,818
Tax benefit of stock options 18,459 11,168 22,236
Dividends on common shares and cash paid
in lieu of fractional shares (9,075) (7,615) (9,107)
Purchase of treasury shares (1,975) (1,833) (6,290)
-------------- ------------- -------------
Net cash (used in) provided by financing activities (82,479) 183,524 52,840
-------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (61,220) 233,621 (10,678)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 304,281 70,660 81,338
-------------- ------------- -------------
CASH AND EQUIVALENTS AT END OF YEAR $ 243,061 $ 304,281 $ 70,660
============== ============= =============
The accompanying notes are an integral part of these statements.
20
21
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Health, Inc. and subsidiaries (the "Company") is a provider of
services to the healthcare industry offering an array of value-added
pharmaceutical distribution services and pharmaceutical-related products and
services to a broad base of customers. The Company distributes a broad line of
pharmaceuticals, surgical and hospital supplies, therapeutic plasma and other
specialty pharmaceutical products, health and beauty care products, and other
items typically sold by hospitals, retail drug stores, and other healthcare
providers. The Company also operates a variety of related healthcare service
businesses, including Pyxis Corporation ("Pyxis") (which develops,
manufactures, leases, sells and services point-of-use pharmacy systems which
automate the distribution and management of medications and supplies in
hospitals and other healthcare facilities); Medicine Shoppe International, Inc.
("Medicine Shoppe") (a franchisor of apothecary-style retail pharmacies); PCI
Services, Inc. ("PCI") (an international provider of integrated packaging
services to pharmaceutical manufacturers); and Owen Healthcare, Inc. ("Owen")
(a provider of pharmacy management and information services to hospitals). See
"Basis of Presentation" below. The Company is currently operating in one
business segment, primarily in the continental United States.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts
of all majority-owned subsidiaries and all significant intercompany accounts
and transactions have been eliminated. In addition, the consolidated financial
statements give retroactive effect to the mergers with Medicine Shoppe on
November 13, 1995, Pyxis on May 7, 1996 and Owen on March 18, 1997 (see Note
2). Such business combinations were accounted for under the pooling-of-
interests method.
On October 11, 1996, the Company completed a merger with PCI (the "PCI
Merger"). The PCI Merger was accounted for as a pooling-of-interests. The
Company issued approximately 3.1 million Common Shares to PCI shareholders and
PCI's outstanding stock options were converted into options to purchase
approximately 0.2 million Common Shares. Because the impact of the PCI Merger,
on a historical basis, was not significant, prior period financial statements
have not been restated.
On March 18, 1997, the Company completed a merger with Owen (the "Owen
Merger"). The Company issued approximately 7.7 million Common Shares to Owen
shareholders and Owen's outstanding stock options were converted into options
to purchase approximately 0.7 million Common Shares. The term "Cardinal" as
used in this footnote refers to Cardinal Health, Inc. and subsidiaries prior to
the Owen Merger.
Cardinal's fiscal year end is June 30 and Owen's fiscal year end was
November 30. For fiscal years ended June 30, 1996 and 1995, the consolidated
financial statements combine Cardinal's fiscal year ended June 30, 1996 and
1995 with the financial results for Owen's fiscal years ended November 30, 1995
and 1994, respectively. For the fiscal year ended June 30, 1997, the
consolidated financial statements combine Cardinal's fiscal year ended June 30,
1997 with Owen's financial results for the period of June 1, 1996 to June 30,
1997 (excluding Owen's financial results for December 1996 in order to change
Owen's November 30 fiscal year end to June 30). Due to the change in Owen's
fiscal year from November 30 to conform with Cardinal's June 30 fiscal year
end, Owen's results of operations for the periods from December 1, 1995 through
May 31, 1996 and the month of December 1996 will not be included in the
combined results of operations but are reflected as an adjustment in the
Consolidated Statements of Shareholders' Equity. Owen's net revenues and net
earnings for these periods were $260.1 million and $5.7 million, respectively.
Owen's cash flows from operating and financing activities for these periods
were $0.9 million and $0.7 million, respectively, while cash flows used in
investing activities were $5.6 million.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual amounts may differ from these estimated amounts.
21
22
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH EQUIVALENTS
The Company considers all liquid investments purchased with a maturity of
three months or less to be cash equivalents. The carrying value of cash
equivalents approximates their fair value.
MARKETABLE SECURITIES AVAILABLE-FOR-SALE
As of June 30, 1996, the Company has classified its investment in municipal
bonds and U.S. Treasury obligations as available-for-sale. The fair value of
the marketable securities approximates the adjusted book value determined on a
specific identification basis at June 30, 1996. Gross and net realized and
unrealized holding gains and losses were not material in any period presented
in the accompanying financial statements.
RECEIVABLES
Trade receivables are primarily comprised of amounts owed to the Company
through its pharmaceutical wholesaling activities and are presented net of an
allowance for doubtful accounts of $ 35.0 million and $36.2 million at June 30,
1997 and 1996, respectively.
The Company provides financing to various customers. Such financing
arrangements range from one year to ten years, at interest rates which
generally fluctuate with the prime rate. The financings may be collateralized,
guaranteed by third parties or unsecured. Finance notes and accrued interest
receivable are $52.5 million and $59.1 million at June 30, 1997 and 1996,
respectively (the current portion was $12.1 million and $14.8 million,
respectively), and are included in other assets. These amounts are reported net
of an allowance for doubtful accounts of $8.2 million and $9.1 million at June
30, 1997 and 1996, respectively.
MERCHANDISE INVENTORIES
Substantially all merchandise inventories (86% in 1997 and 81% in 1996)
are stated at lower of cost, using the 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, 1997, by $69.6 million and at
June 30, 1996, by $76.3 million.
The Company continues to consolidate locations, automate selected
distribution facilities and invest in management information systems which
achieve efficiencies in inventory management processes. As a result of the
facility and related inventory consolidations, and the operational efficiencies
achieved in fiscal 1997 and 1996, the Company had partial inventory
liquidations in certain LIFO pools which reduced the LIFO provision by
approximately $2 million and $7 million, respectively.
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. Certain software costs related to
internally developed or purchased software are capitalized and amortized using
the straight-line method over the useful lives, not exceeding five years.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles primarily represent intangible assets
related to the excess of cost over net assets of subsidiaries acquired.
Intangible assets are being amortized using the straight-line method over lives
which range from ten to forty years. Accumulated amortization was $20.3 million
and $25.6 million at June 30, 1997 and 1996, respectively. At each balance
sheet date, a determination is made by management to ascertain whether there is
an indication that the intangible assets may have been impaired based on
undiscounted operating cash flows.
22
23
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
The Company records distribution revenues when merchandise is shipped to
its customers and the Company has no further obligation to provide services
related to such merchandise. The Company also arranges for bulk deliveries to
be made to customer warehouses which are excluded from net revenues and totaled
$2.5 billion, $2.2 billion and $1.8 billion in fiscal 1997, 1996 and 1995,
respectively. The service fees related to bulk deliveries are included in net
revenues and were not significant in any of the fiscal years presented.
Revenues are recognized from sales-type leases of point-of-use pharmacy
systems when the systems are delivered, and the customer accepts the system,
and the lease becomes noncancellable. Unearned income on sales-type leases is
recognized using the interest method. Sales of point-of-use pharmacy systems
are recognized upon delivery and customer acceptance. Revenues for systems
installed under operating lease arrangements are recognized over the lease term
as it becomes receivable according to the provisions of the lease. The revenue
from such operating leases is not significant.
The Company earns franchise and origination fees from its apothecary-style
pharmacy franchisees. Franchise fees represent monthly fees based upon
franchisees' sales and are recognized as revenues when they are earned.
Origination fees from signing new franchise agreements are recognized as
revenues when the new franchise store is opened. Master franchise origination
fees are recognized as revenues when all significant conditions relating to the
master franchise agreement have been satisfied by the Company.
Pharmacy management revenue is recognized as the related services are
rendered according to the contracts established. A fee is charged under such
contracts through a monthly management fee arrangement, a capitated fee
arrangement or a portion of the hospital charges to patients. Under certain
contracts, fees for management services are guaranteed by the Company not to
exceed stipulated amounts or have other risk-sharing provisions. Revenues
include the estimated effects of such contractual guarantees and risk-sharing
provisions.
Packaging revenues are recognized from services provided upon the
completion of such services.
EARNINGS PER COMMON SHARE
Primary and fully diluted earnings per Common Share are computed using the
treasury stock method and are based on the weighted average number of Common
Shares outstanding during each period and the dilutive effect of stock options
from the date of grant. Additionally, fully diluted earnings per share for all
periods prior to the conversion include the effect of the shares assumed to be
issued upon conversion of the convertible subordinated notes (see Note 5).
Excluding dividends paid by all entities with which the Company has
merged, the Company paid cash dividends per Common Share of $0.09 for the
fiscal year ended June 30, 1997 and $0.08 for each of the fiscal years ended
June 30, 1996 and 1995.
STOCK SPLITS
On October 29, 1996, the Company declared a three-for-two stock split
which was effected as a stock dividend and distributed on December 16, 1996 to
shareholders of record on December 2, 1996. All share and per share amounts
included in the consolidated financial statements, except the Consolidated
Statements of Shareholders' Equity, have been adjusted to retroactively reflect
this stock split.
23
24
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting For
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which the Company adopted at the beginning of fiscal 1997. SFAS 121
requires impairment losses to be recorded on long-lived assets used in
operations when an indication of impairment is present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses accounting for long-lived assets that
are expected to be disposed of. The impact of adopting SFAS 121 has had an
immaterial effect on the Company's financial condition and results of
operations.
2. BUSINESS COMBINATIONS
On March 18, 1997, the Company completed the Owen Merger. The Owen Merger
was accounted for as a pooling-of-interests business combination and the Company
issued approximately 7.7 million Common Shares to Owen shareholders and Owen's
outstanding stock options were converted into options to purchase approximately
0.7 million Common Shares. The Company recorded costs of approximately $39.6
million ($27.5 million, net of tax) related to the Owen Merger. These costs
include $16.7 million for transaction and employee related costs associated with
the merger, $13.2 million for asset impairments ($10.6 million of which related
to MediTROL, as further discussed below), and $9.7 million related to other
integration activities, including the elimination of duplicate facilities and
certain exit and restructuring costs. At the time of the Owen Merger, Owen had a
wholly-owned subsidiary, MediTROL, that manufactured, marketed, sold and
serviced point-of-use medication distribution systems similar to Pyxis. Upon
consummation of the Owen Merger, management committed to merge the operations of
MediTROL into Pyxis, and phase-out production of the separate MediTROL product
line. As a result of this decision, a MediTROL patent ($7.4 million) and certain
other operating assets ($3.2 million) were written off as impaired.
On October 11, 1996, the Company completed the PCI Merger. The PCI Merger
was accounted for as a pooling-of-interests business combination and the Company
issued approximately 3.1 million Common Shares to PCI shareholders and PCI's
outstanding stock options were converted into options to purchase approximately
0.2 million Common Shares. The historical cost of PCI assets combined was
approximately $147.6 million and the total liabilities assumed (including total
debt of approximately $62.0 million) were approximately $87.2 million. Because
the impact of the PCI Merger, on a historical basis, was not significant, prior
period financial statements have not been restated. The Company recorded costs
totaling approximately $17.4 million ($12.7 million, net of tax) related to the
PCI Merger. These costs include $14.5 million for transaction and employee
related costs associated with the PCI Merger, (including $7.6 million for
retirement benefits and incentive fees to two executives of PCI, which vested
and became payable upon consummation of the merger) and $2.9 million related to
other integration activities, including exit costs.
The effect of the merger related costs recorded in fiscal 1997 was to
reduce reported net earnings by $40.2 million to $181.1 million and to reduce
reported fully diluted earnings per common share by $.37 per share to $1.66 per
share. Certain merger related costs are based upon estimates, and actual
amounts paid may ultimately differ from these estimates. If additional costs
are incurred, such items will be expensed in subsequent periods.
The table below presents a reconciliation of net revenues and net earnings
as reported in the accompanying consolidated financial statements with those
previously reported by the Company. The term "Cardinal" as used in this
footnote refers to Cardinal Health, Inc. and subsidiaries prior to the Owen
Merger.
(In Thousands) Cardinal Owen Combined
---------------- ---------------- ----------------
Fiscal year ended June 30, 1995:
Net revenues $ 8,022,108 $ 320,409 $ 8,342,517
Net earnings $ 137,534 $ 4,981 $ 142,515
Fiscal Year Ended June 30, 1996:
Net revenues $ 8,862,425 $ 383,995 $ 9,246,420
Net earnings $ 111,864 $ 5,770 $ 117,634
Six Months Ended December 31, 1996
Net revenues $ 5,116,996 $ 234,886 $ 5,351,882
Net earnings $ 78,251 $ 4,750 $ 83,001
Adjustments affecting net income and shareholders' equity resulting from
the merger to adopt the same accounting practices were not material for the
periods presented herein.
24
25
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 7, 1996, the Company completed a merger with Pyxis (the "Pyxis
Merger"). The Pyxis Merger was accounted for as a pooling-of-interests business
combination, and the Company issued approximately 22.6 million Common Shares to
Pyxis shareholders. In addition, Pyxis' outstanding stock options were converted
into options to purchase approximately 2.3 million additional Common Shares. The
Company recorded costs totaling approximately $50.7 million ($35.3 million, net
of tax) related to the Pyxis Merger. These costs include $30 million for
transaction and employee related costs associated with the merger (including
$7.6 million for vested stay bonuses covering substantially all Pyxis
employees), $17.6 million related to certain exit and lease termination costs
(including $17.2 million to exit a long term contract with a financing company,
see Note 3), and $3.1 million related to asset impairments and other integration
activities.
On November 13, 1995, the Company completed a merger with Medicine Shoppe
(the "Medicine Shoppe Merger"). The Medicine Shoppe Merger was accounted for as
a pooling-of-interests business combination and the Company issued
approximately 9.6 million Common Shares to Medicine Shoppe shareholders. In
addition, Medicine Shoppe's outstanding stock options were converted into
options to purchase approximately 0.2 million Common Shares. The Company
recorded costs totaling approximately $16.6 million ($12.5 million, net of tax)
related to the Medicine Shoppe Merger. These costs include $6.7 million for
transaction and employee related costs associated with the Medicine Shoppe
Merger, $7.4 million for unconditional commitments to franchisees, and $2.5
million related to other integration activities.
The effect of the merger related costs recorded in fiscal 1996 was to
reduce reported net earnings by $47.8 million to $117.6 million and to reduce
reported fully diluted earnings per common share by $.46 per share to $1.14 per
share. Certain merger related costs are based upon estimates, and actual
amounts paid may ultimately differ from these estimates. If additional costs
are incurred, such items will be expensed in subsequent periods.
As of June 30, 1997 and 1996, the Company had incurred approximately
$101.9 million and $22.1 million, respectively, related to the costs recorded
at the time of the various mergers. The Company's current estimates of the
merger related costs ultimately to be incurred are not materially different
from the amounts originally recorded.
During fiscal 1996, the Company completed two business combinations which
were accounted for under the purchase method of accounting. These business
combinations were primarily related to the Company's point-of-use pharmacy
systems and pharmacy management services. The aggregate purchase price, which
was paid primarily in cash, including fees and expenses, was $40.0 million.
Liabilities of the operations assumed were approximately $33.2 million,
consisting primarily of debt of $27.8 million. Had the purchases occurred at
the beginning of fiscal 1995, operating results for fiscal 1996 and 1995 on a
pro forma basis would not have been significantly different.
On July 18, 1994, the Company issued approximately 1.4 million Common
Shares in a merger transaction for all of the common shares of Behrens Inc.
("Behrens"), a pharmaceutical wholesaler based in Waco, Texas. The transaction
was accounted for as a pooling-of-interests business combination. The
historical cost of Behrens assets combined was approximately $25.4 million, and
the total liabilities assumed (including total debt of approximately $1.3
million) were approximately $15.6 million. Because the impact of the Behrens
merger, on both an historical and pro forma basis, was not significant, prior
periods have not been restated.
During fiscal 1995, the Company completed two business combinations which
were accounted for under the purchase method of accounting. These business
combinations were primarily related to the Company's drug distribution and
point-of-use pharmacy systems. The aggregate purchase price was $54.5 million
($8.9 million was assumed debt), which included approximately 0.8 million
Common Shares valued at $11.2 million. Liabilities of the operations assumed
were approximately $98.9 million, consisting of $1.7 million of debt. Had the
purchases occurred at the beginning of fiscal 1995, operating results for
fiscal 1995 on a pro forma basis would not have been significantly different.
25
26
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LEASES
Sales-Type Leases
The Company's sales-type leases are for terms generally ranging up to five
years. Lease receivables are generally collateralized by the underlying
equipment. The components of the Company's net investment in sales-type leases
are as follows (in thousands):
June 30, June 30,
1997 1996
--------------- --------------
Future minimum lease payments receivable $ 189,810 $ 176,963
Unguaranteed residual values 1,333 1,457
Unearned income (27,817) (25,637)
Allowance for uncollectible minimum lease payments
receivable (3,074) (3,226)
--------------- --------------
Net investment in sales-type leases $ 160,252 $ 149,557
Less: current portion 40,720 37,953
--------------- --------------
Net investment in sales-type leases, less current portion $ 119,532 $ 111,604
=============== ==============
Future minimum lease payments to be received pursuant to sales-type leases
are as follows at June 30, 1997
1998 $ 52,104
1999 51,166
2000 41,511
2001 28,246
2002 15,813
Thereafter 970
-------------
Total $ 189,810
=============
Lease Related Financing Arrangements
Prior to the Pyxis Merger, Pyxis had financed its working capital needs
through the sale of certain lease receivables to a non-bank financing company.
In March 1994, Pyxis entered into a five-year financing and servicing agreement
with the financing company, whereby the financing company agreed to purchase a
minimum of $500 million of Pyxis' lease receivables under certain conditions,
provided that the total investment in the lease receivables at any one time did
not exceed $350 million. As of June 30, 1997, $203 million of lease receivables
were owned by the financing company. The aggregate lease receivables sold under
this arrangement totaled approximately $312 million and $233 million at June 30,
1997 and 1996, respectively. As a result of the Pyxis Merger, the Company
entered into negotiations with the financing company to amend and terminate this
arrangement. In June 1997, the agreement with the financing company was amended
to modify financing levels over the remaining term of the agreement and to
terminate the lease portfolio servicing responsibilities of the financing
company. The Company made provision for the estimated costs associated with the
exiting of this arrangement at the time of the Pyxis Merger.
4. NOTES PAYABLE, BANKS
The Company has entered into various unsecured, uncommitted line-of-credit
arrangements which allow for borrowings up to $279 million at June 30, 1997, at
various money market rates. At June 30, 1997, $22.2 million, at a weighted
average interest rate of 6.26%, was outstanding under such arrangements and no
amounts were outstanding as of June 30, 1996. In addition, the Company has
revolving credit agreements, which have a maturity of less than one year, with
seven banks. These credit agreements are renewable on a quarterly basis and
allow the Company to borrow up to $95 million (none of which was in use at June
30, 1997). The Company is required to pay a
26
27
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
commitment fee at the annual rate of .125% on the average daily unused amounts
of the total credit allowed under the revolving credit agreements. The total
available but unused lines of credit at June 30, 1997 were $352 million.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
June 30, June 30,
1997 1996
--------------- --------------
Notes; 6.0% due 2006 $ 150,000 $ 150,000
Notes; 6.5% due 2004 100,000 100,000
Notes; 8% paid in 1997 - 100,000
Other obligations; interest averaging 6.38% in 1997 and
7.14% in 1996, due in varying installments
through 2011 33,924 21,154
--------------- --------------
Total $ 283,924 $ 371,154
Less: current portion 6,158 106,008
--------------- --------------
Long-term obligations, less current portion $ 277,766 $ 265,146
=============== ==============
On January 23, 1996, the Company sold $150 million of 6% Notes due 2006
(the "6% Notes") in a public offering. The 6% 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 $1.3 million
incurred in connection with the offering are being amortized on a straight-line
basis over the period the 6% Notes will be outstanding.
During fiscal 1996, holders of the $10 million, 9.53% convertible
subordinated notes due 2002, originally issued by Owen, converted the notes
into the equivalent of approximately 1.1 million Common Shares. Additionally,
Owen repaid $34.8 million of debt with proceeds from a common stock offering.
If the previously mentioned conversion and retirement of debt had occurred at
the beginning of all periods presented, the changes to primary earnings per
share would be less than 3%.
The 6.5% 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 these Notes are
being amortized on a straight-line basis over the period the 6.5% Notes will be
outstanding.
The 8% Notes represented unsecured obligations of the Company, were not
redeemable prior to their maturity on March 1, 1997 and were not subject to a
sinking fund.
Certain long-term obligations are collateralized by property and equipment
of the Company with an aggregate book value of approximately $33.5 million at
June 30, 1997.
Maturities of long-term obligations for future fiscal years are as follows
(in thousands):
1998 $ 6,158
1999 6,706
2000 3,985
2001 3,016
2002 1,890
Thereafter 262,169
-------------
Total $ 283,924
=============
27
28
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company filed a shelf debt registration statement on Form S-3 with the
Securities and Exchange Commission, which was declared effective on April 21,
1997. The registration increases the Company's shelf debt capacity by $350
million to a total of $400 million. No securities have been sold under this
registration statement.
6. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and equivalents, marketable securities, trade
receivables, accounts payables, notes payable--banks and other accrued
liabilities at June 30, 1997 and 1996, approximate their fair value because of
the short-term maturities of these items.
The estimated fair value of the Company's long-term obligations was $270.1
million and $354.2 million as compared to the carrying amounts of $283.9
million and $371.2 million at June 30, 1997 and 1996, respectively. 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.
7. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Fiscal Year Ended
------------------------------------------------
June 30, June 30, June 30,
1997 1996 1995
--------------- -------------- ---------------
Current:
Federal $ 101,877 $ 64,480 $ 45,654
State 13,387 8,447 5,496
--------------- -------------- ---------------
Total 115,264 72,927 51,150
Deferred 15,897 21,502 48,454
--------------- -------------- ---------------
Total provision $ 131,161 $ 94,429 $ 99,604
=============== ============== ==============
A reconciliation of the provision based on the Federal statutory income
tax rate to the Company's income tax provision is as follows:
Fiscal Year Ended
--------------------------------------------------
June 30, June 30, June 30,
1997 1996 1995
--------------- --------------- ---------------
Provision at Federal
statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal benefit 4.3 4.8 4.7
Nondeductible expenses 2.4 4.3 0.1
Other 0.3 0.4 1.3
--------------- --------------- ---------------
Effective income tax rate 42.0% 44.5% 41.1%
=============== =============== ===============
28
29
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes arise from temporary differences between financial
reporting and tax reporting bases of assets and liabilities, and operating loss
and tax credit carryforwards for tax purposes. Amounts for fiscal 1996 have
been reclassified to conform to the fiscal 1997 presentation. The components of
the deferred income tax assets and liabilities are as follows (in thousands):
June 30, June 30,
1997 1996
-------------- --------------
Deferred income tax assets:
Allowance for doubtful accounts $ 18,669 $ 19,020
Accrued liabilities 32,017 23,775
Net operating loss carryforwards 30,978 35,023
Other 38,285 48,281
-------------- --------------
Total deferred income tax assets 119,949 126,099
Valuation allowance for deferred income tax assets (2,696) (3,008)
-------------- --------------
Net deferred income tax assets 117,253 123,091
-------------- --------------
Deferred income tax liabilities:
Inventory basis differences (58,077) (55,431)
Property related (63,171) (55,962)
Revenues on lease contracts (89,101) (91,996)
Other (13,128) (10,029)
-------------- --------------
Total deferred income tax liabilities (223,477) (213,418)
-------------- --------------
Net deferred income tax liabilities $ (106,224) $ (90,327)
============== ==============
The above amounts are classified in the consolidated balance sheets as
follows (in thousands):
June 30, June 30,
1997 1996
-------------- --------------
Other current assets (liabilities) $ (30,858) 3,335
Deferred income taxes and other liabilities (75,366) (93,662)
-------------- --------------
Net deferred income tax liabilities $ (106,224) $ (90,327)
============== ==============
The Company had Federal net operating loss carryforwards of $91 million as
of June 30, 1997 and 1996. Also at June 30, 1997 and 1996, the Company had state
net operating loss carryforwards of $56 million and $63 million, respectively. A
valuation allowance of $2.7 million and $3.0 million at June 30, 1997 and 1996,
respectively, has been provided for the state net operating loss carryforwards,
as utilization of such carryforwards within the applicable statutory periods is
uncertain. In addition, use of the Company's net operating loss carryforwards
will be limited due to the Pyxis Merger and the carryforwards are also only
available to offset future taxable income of Pyxis. However, with the exception
of the valuation allowance described above, the Company anticipates that no
limitations will apply. The Federal net operating loss carryforwards begin
expiring in 2001 and the state net operating loss carryforwards began expiring
in 1994.
8. EMPLOYEE RETIREMENT BENEFIT PLANS
Substantially all of the Company's non-union employees are eligible to be
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 Company matching and profit sharing
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.
29
30
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Qualified union employees are covered by 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 total expense for employee retirement benefit plans was as follows
(in thousands):
Fiscal Year Ended
-----------------------------------------------
June 30, June 30, June 30,
1997 1996 1995
-------------- --------------- --------------
Defined contribution plans $ 10,765 $ 8,107 $ 6,033
Multiemployer plans 947 711 637
ESOP compensation -- 257 533
-------------- --------------- --------------
Total $ 11,712 $ 9,075 $ 7,203
============== =============== ==============
Prior to the Owen Merger, Owen established an Employee Stock Ownership
Plan (ESOP). Costs for the ESOP debt service were recognized for additional
contributions to satisfy ESOP obligations and plan operating expenses. As of
January 2, 1996, contributions to the ESOP were suspended and all participants
became fully vested.
9. COMMITMENTS AND CONTINGENT LIABILITIES
The future minimum rental payments for operating leases having initial or
remaining noncancelable lease terms in excess of one year at June 30, 1997, are
as follows (in thousands):
1998 $ 17,083
1999 12,626
2000 7,655
2001 6,339
2002 5,601
Thereafter 22,341
-------------
Total $ 71,645
=============
Rental expense relating to operating leases was approximately $23 million,
$22.6 million and $16.4 million in fiscal 1997, 1996, and 1995, respectively.
Sublease rental income was not material for any period presented herein.
The Company has entered into operating lease agreements with several banks
for the construction of various new facilities. The initial terms of the lease
agreements extend through April 2003, with optional five year renewal periods.
In the event of termination, the Company is required to either purchase the
facility or vacate the property and make reimbursement for a portion of the
uncompensated price of the property cost. The instruments provide for maximum
fundings of $159 million, which is the total estimated cost of the construction
projects. As of June 30, 1997, the amount expended was $32.5 million. Currently,
the Company's minimum annual lease payments under the agreements are
approximately $2.2 million.
As of June 30, 1997, amounts outstanding on customer notes receivable sold
with full recourse to a commercial bank totaled approximately $12.9 million.
The Company also has outstanding guarantees of indebtedness and financial
assistance commitments which totaled approximately $3 million at June 30, 1997.
The Company becomes involved from time-to-time in litigation incidental to
its business. 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. Although the
ultimate resolution of litigation cannot be forecast with certainty, the
Company does not believe that the outcome of any pending litigation would have
a material adverse effect on the Company's financial statements.
30
31
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SHAREHOLDERS' EQUITY
At June 30, 1997, the Company's authorized capital shares consisted of (a)
150,000,000 Class A common shares, without par value; (b) 5,000,000 Class B
common shares, without par value; and (c) 500,000 non-voting preferred shares
without par value. At June 30, 1996, the Company's authorized capital shares
consisted of (a) 100,000,000 Class A common shares, without par value; (b)
5,000,000 Class B common shares, without par value; and (c) 500,000 non-voting
preferred shares without par value. The Class A common shares and Class B
common shares are collectively referred to as Common Shares. Holders of Class A
and Class B common shares are entitled to share equally in any dividends
declared by the Company's Board of Directors and to participate equally in all
distributions of assets upon liquidation. Generally, the holders of Class A
common shares are entitled to one vote per share and the holders of Class B
common shares are entitled to one-fifth of one vote per share on proposals
presented to shareholders for vote. Under certain circumstances, the holders of
Class B common shares are entitled to vote as a separate class. Only Class A
common shares were outstanding as of June 30, 1997 and 1996.
On September 26, 1994, approximately 12.1 million of the Company's Common
Shares were sold pursuant to a public offering. Approximately 2.8 million
Common Shares were sold by the Company, and approximately 9.3 million Common
Shares (the "Existing Shares") were sold by certain shareholders of the
Company. The Company did not receive any of the proceeds from the sale of the
Existing Shares.
11. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company's trade receivables, finance notes and accrued interest
receivable, and lease receivables are exposed to a concentration of credit risk
with customers in the retail and healthcare sectors. Credit risk can be
affected by changes in reimbursement and other economic pressures impacting the
acute care portion of the healthcare industry. However, the credit risk is
limited due to supporting collateral and the diversity of the customer base,
including its wide geographic dispersion. The Company performs ongoing credit
evaluations of its customers' financial conditions and maintains reserves for
credit losses. Such losses historically have been within the Company's
expectations.
During fiscal 1997, the Company's two largest customers individually
accounted for 13% of net revenues and 62% of bulk deliveries, respectively.
During fiscal 1996, the Company's two largest customers individually accounted
for 12% of net revenues and 70% of bulk deliveries, respectively. During fiscal
1995, the Company's two largest customers individually accounted for 11% of net
revenues and 82% of bulk deliveries, respectively. Trade receivables due from
these two customers aggregated approximately 23% of total trade receivables at
June 30, 1997 and 1996.
12. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains stock incentive plans (the "Plans") for the benefit
of certain officers, directors and employees. Options granted generally vest
over three years and are exercisable for periods up to ten years from the date
of grant at a price which equals fair market value at the date of grant.
The Company accounts for the Plans in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost
for the Plans been determined consistent with the Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", the Company's net income and earnings per share would have been
reduced by $2.3 million and $.02 per share, respectively, for fiscal 1997 and
$6.4 million and $.07 per share, respectively, for fiscal 1996.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The following summarizes all stock option transactions for the Company
(excluding Whitmire, see below) under the Plans from June 30, 1994, through
June 30, 1997, giving retroactive effect to conversions of options in
connection with merger transactions and stock splits (in thousands, except per
share amounts):
31
32
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal 1997 Fiscal 1996 Fiscal 1995
--------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Options average Options average Options average
exercise price exercise price exercise price
--------------------------- ---------------------------- -----------------------------
Outstanding,
beginning of
year 6,432 $24.15 5,737 $20.98 4,675 $18.22
Granted 840 54.88 1,382 36.82 1,196 31.04
Exercised (2,284) 19.87 (527) 21.10 (92) 9.43
Canceled (240) 27.27 (160) 29.93 (42) 25.19
--------------------------- ---------------------------- -----------------------------
Outstanding,
end of year 4,748 $ 31.49 6,432 $24.15 5,737 $20.98
=========================== ============================ =============================
Exercisable, end
of year 2,718 $23.15 4,076 $20.89 1,816 $10.25
--------------------------- ---------------------------- -----------------------------
The weighted average fair value of options granted during fiscal 1997 and
1996 was $14.48 and $14.50, respectively. The fair value of the options granted
were estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions for grants in both fiscal 1997 and 1996: risk
free interest rate of 6.23%, expected life of 3 years, expected volatility of
.25% and dividend yield of .17%.
Information relative to stock options outstanding as of June 30, 1997:
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Weighted
average
remaining Weighted Weighted
Range of contractual average average
exercise prices Options life in years exercise price Options exercise price
- ------------------------------------------------------------------------ ------------------------------
$ .08-$23.07 1,737 4.99 $15.35 1,584 $15.30
$23.27-$39.92 1,905 7.76 33.11 842 30.20
$40.00-$63.00 1,106 8.84 54.02 292 45.39
----------------------------------------------------- ------------------------------
4,748 7.00 $31.49 2,718 $23.15
===================================================== ==============================
As of June 30, 1997, there remained approximately 1.5 million additional
shares available to be issued pursuant to the Plans.
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 2.6 million additional Common Shares. Under the terms of their
original issuance, the exercise price for substantially all of the Cardinal
Exchange Options is remitted to certain former investors of Whitmire. Cardinal
Exchange Options to purchase 0.3 million and 1.9 million Common Shares, with an
average option price of $1.37 and $1.01 were exercised in fiscal 1996 and 1995,
respectively. At June 30, 1996, all Cardinal Exchange Options had been
exercised.
The market value of restricted shares awarded by the Company is recorded
in the "Other" component of shareholders' equity in the accompanying balance
sheets. The compensation awards are amortized to expense over the period in
which participants perform services, generally one to six years. As of June 30,
1997, approximately 0.7
32
33
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million restricted shares had been issued, of which approximately 0.2 million
shares remained restricted and subject to forfeiture and approximately 67,000
shares had been forfeited.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (in thousands, except per
share amounts) for fiscal 1997 and 1996 has been restated to reflect the
pooling-of-interests business combinations (see Note 2):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- -------------- ------------- -------------
Fiscal 1997:
Net revenues $ 2,535,476 $ 2,816,406 $ 2,825,500 2,790,660
Gross margin 197,128 223,558 243,658 240,614
Selling, general and administrative
expenses 124,156 127,313 129,702 132,446
Operating earnings 72,972 78,886 74,352 108,168
Net earnings 41,401 41,600 36,228 61,890
Net earnings per Common Share:
Primary $ .39 $ .38 $ .33 $ .56
Fully diluted .39 .38 .33 .56
- -----------------------------------------------------------------------------------------------------
Fiscal 1996:
Net revenues $ 2,187,518 $ 2,284,993 $ 2,352,254 $ 2,421,655
Gross margin 177,420 188,473 203,587 203,754
Selling, general and administrative
expenses 116,899 117,323 122,382 122,836
Operating earnings 60,521 53,598 81,205 31,220
Net earnings 33,775 28,154 44,691 11,014
Net earnings per Common Share:
Primary $ .33 $ .28 $ .43 $ .10
Fully diluted .33 .28 .43 .10
As more fully discussed in Note 2, merger related costs were recorded in
various quarters in fiscal 1997 and 1996. The following table summarizes the
impact of such costs on net earnings and fully diluted earnings per share in
the quarters in which they were recorded:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- -------------- ------------- -------------
Fiscal 1997:
Net earnings $ 0 $ (12,655) $ (27,522) $ 0
Fully diluted net earnings per
Common Share $ 0 $ (.12) $ (.25) $ 0
- -----------------------------------------------------------------------------------------------------
Fiscal 1996:
Net earnings $ 0 $ (12,495) $ 0 $ (35,338)
Fully diluted net earnings per
Common Share $ 0 $ (.12) $ 0 $ (.34)
14. SUPPLEMENTAL CASH FLOW INFORMATION
Income tax and interest payments for the fiscal years ended June 30, 1997,
1996 and 1995 were as follows (in thousands):
Fiscal Year Ended
------------------------------------------------
June 30, June 30, June 30,
1997 1996 1995
--------------- -------------- --------------
Interest paid $ 30,487 $ 21,619 $ 23,002
Income taxes paid $ 83,639 $ 61,897 $ 25,262
See Notes 2 and 5 for additional information regarding non cash investing and
financing activities.
15. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In February 1997, FASB issued Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), "Earnings per Share," which will require retroactive
adoption in the Company's fiscal quarter ending December 31, 1997. The new
standard simplifies the computation of earnings per share and requires the
presentation of basic and diluted earnings per share. In light of the present
capital structure, the impact of adopting SFAS 128 will not be significant.
In June 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which will require adoption no later than the Company's
fiscal quarter ending September 30, 1998. This new statement defines
comprehensive income as "all changes in equity during a period, with the
exception of stock issuances and dividends." The new pronouncement establishes
standards for reporting and display of comprehensive income and its components
in the financial statements.
33
34
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), " Disclosures about
Segments of an Enterprise and Related Information," which will require adoption
no later than fiscal 1999. SFAS 131 requires companies to define and report
financial and descriptive information about its operating segments. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers.
The Company is presently evaluating the applicability of SFAS 130 and 131
to its operations.
16. PENDING MERGERS
On May 27, 1997, the Company announced that it had entered into a
definitive merger agreement with MediQual Systems, Inc. ("MediQual"), pursuant
to which MediQual will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a pooling-of-interests
for financial reporting purposes. Upon consummation of the merger, the Company
will record a merger related charge to reflect transaction and other costs
incurred as a result of the merger. The amount of this charge is not expected to
be significant. In connection with the merger, the Company estimates that it
will issue approximately 0.6 million Common Shares. The merger is expected to be
completed in the first half of fiscal 1998, subject to satisfaction of certain
conditions, including approval by shareholders of MediQual.
On August 23, 1997, the Company signed a definitive merger agreement with
Bergen Brunswig Corporation ("Bergen"), a distributor of pharmaceuticals and
medical-surgical supplies. Under the terms of the transaction, shareholders of
Bergen will receive a fixed exchange ratio of .775 of the Company' s Common
Shares in exchange for each common share of Bergen. The Company will issue
approximately 40 million Common Shares in the transaction and will also assume
approximately $386 million in long-term debt. The merger is expected to be
completed by the end of the third quarter of fiscal 1998, subject to certain
conditions, including approval by shareholders and receipt of certain
regulatory approvals. The transaction is expected to be accounted for as a
pooling-of-interests.
34
35
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G(3) to Form 10-K, the information
called for in this Item 10 relating to Directors is incorporated herein by
reference to the Company's Definitive Proxy Statement, to be filed with the
Securities and Exchange Commission (the "SEC"), pursuant to Regulation 14A of
the General Rules and Regulations under the Securities Exchange Act of 1934
(the "Exchange Act"), relating to the Company's Annual Meeting of Shareholders
(the "Annual Meeting") under the caption "ELECTION OF DIRECTORS". Certain
information relating to Executive Officers of the Company appears at pages 7
and 8 of this Form 10-K, which is hereby incorporated by reference.
ITEM 11: EXECUTIVE COMPENSATION
In accordance with General Instruction G(3) to Form 10-K, the information
called for by this Item 11 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the General Rules and Regulations under the Exchange Act, relating to the
Company's Annual Meeting under the caption "EXECUTIVE COMPENSATION" (other than
information set forth under the caption "Compensation Committee Report").
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G(3) to Form 10-K, the information
called for by this Item 12 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the General Rules and Regulations under the Exchange Act, relating to the
Company's Annual Meeting under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT".
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G(3) to Form 10-K, the information
called for by this Item 13 is incorporated herein by reference to the Company's
Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A
of the General Rules and Regulations under the Exchange Act, relating to the
Company's Annual Meeting under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS".
35
36
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:
PAGE
----
Independent Auditors' Reports..................................... 14
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 1997, 1996 and 1995.................................... 17
Consolidated Balance Sheets at June 30, 1997 and 1996............. 18
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 1997, 1996 and 1995........................ 19
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 1997, 1996 and 1995.................................... 20
Notes to Consolidated Financial Statements........................ 21
(a)(2) The following Supplemental Schedule is included in this report:
PAGE
----
Schedule II - Valuation and Qualifying Accounts................... 41
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 Item 601 of Regulation S-K:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
2.01 Amended and Restated Agreement and Plan of Merger dated as of July
7, 1997, among MediQual Systems, Inc., Hub Merger Corp., and
Registrant (1)
2.02 Agreement and Plan of Merger dated as of August 23, 1997, among the
Registrant, Bruin Merger Corp., and Bergen Brunswig Corporation (14)
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. (3)
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 6-1/2% Notes Due 2004 and 6% Notes Due
2006. (3)
4.03 Indenture between the Registrant and Bank One, Columbus, NA, Trustee
dated as of April 18, 1997 (as of the date hereof, no securities
have been issued pursuant to the Indenture). (4)
36
37
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 SEC
upon its request.
10.01 Stock Incentive Plan of the Registrant, as amended. (10)*
10.02 Directors' Stock Option Plan of the Registrant, as amended and
restated. (10)
10.03 Equity Incentive Plan of the Registrant (5)*
10.04 1990 Stock Option Plan of Medicine Shoppe International, Inc. (12)*
10.05 Employee Incentive Stock Option Plan of Medicine Shoppe
International, Inc. (12)*
10.06 Executive Choice Plan of Medicine Shoppe International, Inc. (12)*
10.07 PCI Services, Inc. Stock Option Plan, as amended (11)*
10.08 Employment Agreement dated August 26, 1995, among Medicine Shoppe,
David A. Abrahamson and the Registrant. (13)*
10.09 Employment Agreement dated July 23, 1996, among PCI Services, Inc.,
Daniel F. Gerner, and the Registrant. (15)*
10.10 Form of Indemnification Agreement between the Registrant and
individual directors. (6)
10.11 Form of Indemnification Agreement between the Registrant and
individual officers. (7)*
10.12 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)*
10.13 Lease for portions of the Registrant's Columbus Investment Property
dated July 7, 1958, as amended. (8)
10.14 Cardinal Health, Inc. Incentive Deferred Compensation Plan, Amended
and Restated Effective November 13, 1995. (13)*
10.15 Cardinal Health, Inc. Performance-Based Incentive Compensation
Plan. (16)*
10.16 Shareholders Agreement dated July 13, 1984, as amended. (9)
10.17 Master Agreement and related documents, dated as of July 16, 1996
among the Registrant and/or its subsidiaries, SunTrust Banks, Inc.,
PNC Leasing Corp. and SunTrust Bank, Atlanta. (13)
10.18 Vendor Program Agreement dated as of October 10, 1991 by and between
General Electric Capital Corporation and Pyxis Corporation, as
amended on December 13, 1991, January 15, 1993, March 10, 1994, and
June 23, 1997. (13, except for Rider 5, which is included in this
Annual Report on Form 10-K).
10.19 Participation Agreement and related documents, dated as of June 23,
1997, among the Registrant and certain of its subsidiaries, Bank of
Montreal and BMO Leasing (U.S.), Inc.
10.20 Pharmaceutical Services Agreement, dated as of August 1, 1996,
between Kmart Coporation and Cardinal Health. (15).
11.01 Statement concerning computation of per share earnings.
21.01 List of subsidiaries of the Registrant.
37
38
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of Ernst & Young LLP.
23.03 Consent of Price Waterhouse LLP.
27.01 Financial Data Table
99.01 Statement Regarding Forward-Looking Information.
- ------------------
(1) Filed as an annex to the Registrant's Registration Statement on Form
S-4 (No. 333-30889) and incorporated herein by reference.
(2) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 (No. 0-12591) and
incorporated herein by reference.
(3) 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.
(4) Included as an exhibit to the Registrant's Current Report on Form
8-K filed with the SEC on April 21, 1997, 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, 1995 (No. 0-12591) and
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 Registration Statement on
Form S-1 (No. 2-84444) and incorporated herein by reference.
(9) 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.
(10) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1994 (No. 0-12591) and
incorporated herein by reference.
(11) Included as an exhibit to the Registrant's Post-Effective Amendment
No. 1 on Form S-8 to Form S-4 Registration Statement (No.
333-11803-01) and incorporated herein by reference.
(12) Included as an exhibit to the Registrant's Post-Effective Amendment
No. 1 on Form S-8 to Form S-4 Registration Statement (No.
33-63283-01) and incorporated herein by reference.
(13) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1996 (No. 0-12591) and
incorporated herein by reference.
(14) Included as an exhibit to the Registrant's current report on Form
8-K/A filed with the SEC on August 27, 1997, and incorporated herein
by reference.
(15) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 (No. 0-12591) and
incorporated herein by reference.
38
39
(16) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 (No. 0-12591) and
incorporated herein by reference.
* Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K:
On April 21, 1997, the Company filed a Report on Form 8-K under Item 7
which filed as an exhibit an Indenture dated as of April 18, 1997, between the
Company and Bank One Columbus, NA, Trustee.
On June 10, 1997, the Company filed a Report on Form 8-K under Item 5
announcing that it was filing under Item 7 restated consolidated financial
statements of the Company giving effect to the merger with Owen.
On August 26 and 27, 1997, the Company filed a report on Form 8-K and
8-K/A, respectively, under Items 5 and 7 which reported that it had signed an
Agreement and Plan of Merger, dated as of August 23, 1997, among the Company,
Bruin Merger Corporation and Bergen Brunswig Corporation.
39
40
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 29, 1997 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 Officer and September 29, 1997
- --------------------------------------- Director (principal executive officer)
Robert D. Walter
/s/ DAVID BEARMAN Executive Vice President and Chief Financial September 29, 1997
- --------------------------------------- Officer (principal financial officer)
David Bearman
/s/ RICHARD J. MILLER Vice President, Controller and Principal September 29, 1997
- --------------------------------------- Accounting Officer
Richard J. Miller
/s/ JOHN C. KANE President, Chief Operating Officer September 29, 1997
- --------------------------------------- and Director
John C. Kane
/s/ JOHN F. FINN Director September 29, 1997
- ---------------------------------------
John F. Finn
/s/ ROBERT L. GERBIG Director September 29, 1997
- ---------------------------------------
Robert L. Gerbig
/s/ JOHN F. HAVENS Director September 29, 1997
- ---------------------------------------
John F. Havens
/s/ REGINA E. HERZLINGER Director September 29, 1997
- ---------------------------------------
Regina E. Herzlinger
/s/ J. MICHAEL LOSH Director September 29, 1997
- ---------------------------------------
J. Michael Losh
/s/ GEORGE R. MANSER Director September 29, 1997
- ---------------------------------------
George R. Manser
/s/ JOHN B. McCOY Director September 29, 1997
- ---------------------------------------
John B. McCoy
/s/ JERRY E. ROBERTSON Director September 29, 1997
- ---------------------------------------
Jerry E. Robertson
/s/ L. JACK VAN FOSSEN Director September 29, 1997
- ---------------------------------------
L. Jack Van Fossen
/s/ MELBURN G. WHITMIRE Director September 29, 1997
- ---------------------------------------
Melburn G. Whitmire
40
41
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(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
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) OF PERIOD
- ------------------------------------------- --------------- ---------------- --------------- ---------------- ---------------
Fiscal Year 1997:
Accounts receivable $ 36,176 $ 8,073 $ 1,038 $ (10,335) $ 34,952
Finance notes receivable 9,081 (902) 8,179
Net investment in sales-type leases 3,226 (152) 3,074
--------------- ---------------- --------------- ---------------- ---------------
$ 48,483 $ 8,073 $ 1,038 $ (11,389) $ 46,205
=============== ================ =============== ================ ===============
Fiscal Year 1996:
Accounts receivable $ 34,395 $ 9,135 $ 1,452 $ (8,806) $ 36,176
Finance notes receivable 9,274 650 (843) 9,081
Net investment in sales-type leases 2,900 326 3,226
--------------- ---------------- --------------- ---------------- ---------------
$ 46,569 $ 10,111 $ 1,452 $ (9,649) $ 48,483
=============== ================ =============== ================ ===============
Fiscal Year 1995:
Accounts receivable $ 27,078 $ 12,740 $ 2,025 $ (7,448) $ 34,395
Finance notes receivable 8,661 1,766 (1,153) 9,274
Net investment in sales-type leases 2,747 153 2,900
--------------- ---------------- --------------- ---------------- ---------------
$ 38,486 $ 14,659 $ 2,025 $ (8,601) $ 46,569
=============== ================ =============== ================ ===============
1 During fiscal 1997, 1996 and 1995 recoveries of amounts provided for or
written off in prior years were $410,000, $332,000 and $197,000,
respectively, and increases from acquisitions were $628,000, $1,120,000
and $1,828,000, respectively.
2 Write-off of uncollectible accounts.
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