1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 10, 1996
------------------------------
Cardinal Health, Inc.
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(Exact name of registrant as specified in its charter)
Ohio 0-12591 31-0958666
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification
Number)
5555 Glendon Court, Dublin, Ohio 43016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 717-5000
--------------
655 Metro Place South, Suite 925, Dublin, Ohio 43017
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(Former name or former address, if changed since last report) (Zip Code)
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Item 5. Other Events
------------
On November 13, 1995 the Registrant announced that it completed
its merger of a wholly-owned subsidiary with and into Medicine
Shoppe International, Inc. The restated supplemental consolidated
financial statements of the Registrant are filed herein pursuant to
Part I, Item 11 (b)(iii) of Form S-3 in conjunction with the
Registrant's shelf registration statements previously filed on Form
S-3 (file No. 33-57223 and No. 33-62198).
Item 7. Financial Statements and Exhibits
---------------------------------
(a) Supplemental consolidated financial statements of Cardinal
Health, Inc. and Medicine Shoppe International, Inc. prepared
under the pooling-of-interests method of accounting:
- INDEPENDENT AUDITORS' REPORTS
- FINANCIAL STATEMENTS
Supplemental Consolidated Statements of Earnings for the Fiscal
Quarters Ended September 30, 1995 and September 30,
1994, and the Fiscal Years Ended June 30, 1995, June 30, 1994
and March 31, 1993
Supplemental Consolidated Balance Sheets at September 30, 1995,
June 30, 1995, and June 30, 1994
Supplemental Consolidated Statements of Shareholders' Equity for
the Fiscal Quarter Ended September 30, 1995 and for the
Fiscal Years Ended June 30, 1995, June 30, 1994, and March
31, 1993
Supplemental Consolidated Statements of Cash Flows for the
Fiscal Quarters Ended September 30, 1995 and September
30, 1994, and the Fiscal Years Ended June 30, 1995, June 30,
1994 and March 31, 1993
Notes to Supplemental Consolidated Financial Statements
(c) Exhibits
23.01 Consent Of DELOITTE & TOUCHE LLP
23.02 Consent of Arthur Andersen LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CARDINAL HEALTH, INC.
January 10, 1996 By /s/ David Bearman
-------------------------
David Bearman
Executive Vice President
and Chief Financial Officer
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INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Cardinal Health, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Cardinal Health, Inc. and subsidiaries as of June 30, 1995 and 1994, and the
related supplemental consolidated statements of earnings, shareholders' equity,
and cash flows for the years ended June 30, 1995 and 1994, and March 31, 1993.
These supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements based on our audits. The supplemental financial
statements give retroactive effect to the merger of a wholly owned subsidiary
of Cardinal Health, Inc. with and into Medicine Shoppe International, Inc. on
November 13, 1995, which business combination has been accounted for as a
pooling-of-interests as described in Note 3 to the supplemental financial
statements. Generally accepted accounting principles proscribe giving effect
to a consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These supplemental financial statements do not extend through the date of
consummation, however, they will become the historical consolidated financial
statements of Cardinal Health, Inc. and subsidiaries after financial statements
covering the date of consummation of the business combination are issued. We
did not audit the statements of earnings, shareholder's equity, and cash flows
of Whitmire Distribution Corporation for the year ended July 3, 1993, which
statements reflect shareholders' equity of $2,223,000 as of July 3, 1993; net
sales of $2,666,829,000 and net earnings available for common shares before
cumulative effect of change in accounting principle of $4,039,000 for the year
ended July 3, 1993. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Whitmire Distribution Corporation in the March 31, 1993
financial statements, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the supplemental financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the supplemental
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall supplemental financial statement presentation. We
believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cardinal Health,
Inc. and subsidiaries at June 30, 1995 and 1994, and the results of their
operations and their cash flows for the years ended June 30, 1995 and 1994 and
March 31, 1993 in conformity with generally accepted accounting principles
applicable after consolidated financial statements are issued for a period
which includes the date of consummation of the business combination.
As discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for income taxes to conform with Statement of
Financial Accounting Standards No. 109 by applying it retroactively effective
April 1, 1992.
DELOITTE & TOUCHE LLP
Columbus, Ohio
January 5, 1996
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Report of Independent Public Accountants
To the Board of Directors of
Whitmire Distribution Corporation:
We have audited the statement of operations of Whitmire Distribution
Corporation (a Delaware corporation), for the year ended July 3, 1993, and the
related statements of stockholders' equity and cash flows for the year ended
July 3, 1993 (not presented herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the results of operations and cash flows of Whitmire
Distribution Corporation for the year ended July 3, 1993, in conformity with
generally accepted accounting principles.
Arthur Andersen & Co.
Sacramento, California
September 3, 1993
(Except with respect to the matter discussed in Note 10, as to which date is
October 11, 1993)
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Per Share Amounts)
Fiscal Quarter Ended Fiscal Year Ended
---------------------------- ------------------------------------
September 30, September 30, June 30, June 30, March 31,
1995 1994 1995 1994 1993
------------ ------------ ---------- ---------- ----------
(Unaudited) (Unaudited)
Net revenues $2,047,138 $1,832,128 $7,859,919 $5,838,574 $4,676,277
Cost of products sold 1,917,126 1,718,046 7,350,709 5,443,020 4,343,289
---------- ---------- ---------- ---------- ----------
Gross margin 130,012 114,082 509,210 395,554 332,988
Selling, general and administrative expenses 87,217 77,358 321,513 252,438 221,496
Unusual items:
Merger costs (35,880)
Termination fee 13,466
Restructuring and other charges (18,904)
---------- ---------- ---------- ---------- ----------
Operating earnings 42,795 36,724 187,697 107,236 106,054
Other income (expense):
Interest expense (4,140) (3,856) (19,341) (18,140) (26,623)
Other, net-primarily interest income 1,368 599 3,214 3,563 5,826
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and cumulative
effect of change in accounting principle 40,023 33,467 171,570 92,659 85,257
Provision for income taxes 16,531 13,757 70,570 43,464 32,152
---------- ---------- ---------- ---------- ----------
Earnings before cumulative effect of
change in accounting principle 23,492 19,710 101,000 49,195 53,105
Preferred dividends declared/accretion (1,205) (2,876)
---------- ---------- ---------- ---------- ----------
Earnings available for Common Shares before
cumulative effect of change in accounting principle 23,492 19,710 101,000 47,990 50,229
Cumulative effect of change in accounting principle (10,000)
---------- ---------- ---------- ---------- ----------
Net earnings available for Common Shares $ 23,492 $ 19,710 $ 101,000 $ 47,990 $ 40,229
========== ========== ========== ========== ==========
Primary earnings per Common Share:
Before cumulative effect of change in accounting principle $ 0.48 $ 0.42 $ 2.07 $ 1.04 $ 1.22
Cumulative effect of change in accounting principle (0.24)
---------- ---------- ---------- ---------- ----------
Net $ 0.48 $ 0.42 $ 2.07 $ 1.04 $ 0.98
========== ========== ========== ========== ==========
Fully diluted earnings per Common Share:
Before cumulative effect of change in accounting principle $ 0.48 $ 0.42 $ 2.07 $ 1.04 $ 1.18
Cumulative effect of change in accounting principle (0.22)
---------- ---------- ---------- ---------- ----------
Net $ 0.48 $ 0.42 $ 2.07 $ 1.04 $ 0.96
========== ========== ========== ========== ==========
Weighted average number of Common Shares outstanding:
Primary 49,269 47,114 48,698 46,004 41,046
Fully diluted 49,352 47,193 48,748 46,091 45,355
The accompanying notes are an integral part of these statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, June 30, June 30,
1995 1995 1994
-------------- -------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 48,115 $ 42,525 $ 58,053
Marketable securities available for sale 40,256 40,695 11,105
Trade receivables 581,709 529,672 354,983
Merchandise inventories 1,120,739 1,071,811 868,210
Prepaid expenses and other 27,610 25,472 28,650
-------------- -------------- --------------
Total current assets 1,818,429 1,710,175 1,321,001
-------------- -------------- --------------
Property and equipment, at cost:
Land, buildings and improvements 48,546 47,149 28,890
Machinery and equipment 120,189 113,123 81,925
Furniture and fixtures 24,107 23,015 14,078
-------------- -------------- --------------
Total 192,842 183,287 124,893
Accumulated depreciation and amortization (91,084) (86,205) (63,091)
-------------- -------------- --------------
Property and equipment, net 101,758 97,082 61,802
Marketable securities available for sale 5,827 7,118 5,576
Finance notes and accrued interest receivable, net 28,079 27,278 24,522
Other assets 76,489 78,023 54,237
-------------- -------------- --------------
Total $ 2,030,582 $ 1,919,676 $ 1,467,138
============== ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 19,800 $ 3,000 $ 25,000
Current portion of long-term obligations 2,102 2,083 2,929
Accounts payable 1,025,397 952,206 697,853
Other accrued liabilities 115,818 116,789 93,373
-------------- -------------- --------------
Total current liabilities 1,163,117 1,074,078 819,155
-------------- -------------- --------------
Long-term obligations, less current portion 208,179 209,202 210,038
Other liabilities 12,905 12,710 2,330
Shareholders' equity:
Common Shares, without par value 362,261 360,468 269,031
Retained earnings 291,509 270,363 173,947
Common Shares in treasury, at cost (4,189) (4,011) (3,390)
Unamortized restricted stock awards (3,200) (3,134) (3,973)
-------------- -------------- --------------
Total shareholders' equity 646,381 623,686 435,615
-------------- -------------- --------------
Total $ 2,030,582 $ 1,919,676 $ 1,467,138
============== ============== ==============
The accompanying notes are an integral part of these statements.
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CARDINAL HEALTH INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (In Thousands)
Common Shares
------------------------ Treasury Shares
Shares Retained -----------------------
Issued Amount Earnings Shares Amount
----------- ----------- ----------- ---------- -----------
BALANCE, MARCH 31, 1992 30,432 $ 176,428 $ 94,006 (148) $ (2,384)
Earnings before cumulative effect of change in accounting
principle and preferred dividends 53,105
Cumulative effect of change in accounting principle (10,000)
Shares issued in connection with stock options 304 2,628
Stock option compensation 5,247
Restricted stock awards 40 1,054
Amortization of restricted stock awards
Treasury shares acquired (24) (690)
Shares repurchased and retired (221) (555) (4,683)
Dividends paid and preferred stock accretion (7,724)
Tax benefits related to restricted stock and stock options 1,984
Miscellaneous other (840) 840
----------- ----------- ----------- ---------- -----------
BALANCE, MARCH 31, 1993 30,555 185,946 125,544 (172) (3,074)
Earnings before preferred dividends 49,195
Shares issued pursuant to the conversion of $75 million of
convertible debentures 3,423 73,140
Shares issued pursuant to the acquisition of Solomons Company 849 18,006
Shares repurchased and retired (716) (15,662) (3,238)
Shares issued in connection with stock options and warrants 2,542 1,308
Restricted stock awards 47 1,984
Amortization of restricted stock awards
Treasury shares acquired and restricted stock forfeitures (8) (316)
Dividends paid (7,645)
5-for-4 stock split effected as a stock dividend and cash
paid in lieu of fractional shares 7,564 (16)
Adjustment to change fiscal year of Cardinal Health, Inc. 9,759
Equity of PRN Services, Inc. on merger date (see Note 3) 237 34 348
Tax benefits related to restricted stock and stock options 4,275
----------- ----------- ----------- ---------- -----------
BALANCE, JUNE 30, 1994 44,501 269,031 173,947 (180) (3,390)
Net earnings 101,000
Shares issued in connection with stock options 1,405 2,618
Restricted stock awards 2 64
Amortization of restricted stock awards
Tax benefits related to restricted stock and stock options 18,136
Treasury shares acquired (13) (621)
Shares repurchased and retired (186) (300) (4,805)
Dividends paid (9,107)
Equity of Behrens, Inc. on merger date (See Note 3) 944 451 9,328
Shares issued in connection with stock offering 1,867 70,468
----------- ----------- ----------- ---------- -----------
BALANCE, JUNE 30, 1995 48,533 360,468 270,363 (193) (4,011)
Net earnings 23,492
Shares issued in connection with stock options 256 1,536
Restricted stock awards 5 257
Amortization of restricted stock awards
Treasury shares acquired and restricted stock forfeitures (4) (178)
Dividends paid (2,346)
----------- ----------- ----------- ---------- -----------
BALANCE, SEPTEMBER 30, 1995 (Unaudited) 48,794 $ 362,261 $ 291,509 (197) $ (4,189)
=========== =========== =========== ========== ===========
Unamortized Total
Restricted Shareholders'
Stock Awards Equity
--------------- ---------------
BALANCE, MARCH 31, 1992 $ (2,651) $ 265,399
Earnings before cumulative effect of change in accounting
principle and preferred dividends 53,105
Cumulative effect of change in accounting principle (10,000)
Shares issued in connection with stock options 2,628
Stock option compensation 5,247
Restricted stock awards (1,054)
Amortization of restricted stock awards 701 701
Treasury shares acquired (690)
Shares repurchased and retired (5,238)
Dividends paid and preferred stock accretion (7,724)
Tax benefits related to restricted stock and stock options 1,984
Miscellaneous other
--------------- ---------------
BALANCE, MARCH 31, 1993 (3,004) 305,412
Earnings before preferred dividends 49,195
Shares issued pursuant to the conversion of $75 million of
convertible debentures 73,140
Shares issued pursuant to the acquisition of Solomons Company 18,006
Shares repurchased and retired (18,900)
Shares issued in connection with stock options and warrants 1,308
Restricted stock awards (1,984)
Amortization of restricted stock awards 985 985
Treasury shares acquired and restricted stock forfeitures 30 (286)
Dividends paid (7,645)
5-for-4 stock split effected as a stock dividend and cash
paid in lieu of fractional shares (16)
Adjustment to change fiscal year of Cardinal Health, Inc. 9,759
Equity of PRN Services, Inc. on merger date (see Note 3) 382
Tax benefits related to restricted stock and stock options 4,275
--------------- ---------------
BALANCE, JUNE 30, 1994 (3,973) 435,615
Net earnings 101,000
Shares issued in connection with stock options 2,618
Restricted stock awards (64)
Amortization of restricted stock awards 903 903
Tax benefits related to restricted stock and stock options 18,136
Treasury shares acquired (621)
Shares repurchased and retired (5,105)
Dividends paid (9,107)
Equity of Behrens, Inc. on merger date (See Note 3) 9,779
Shares issued in connection with stock offering 70,468
--------------- ---------------
BALANCE, JUNE 30, 1995 (3,134) 623,686
Net earnings 23,492
Shares issued in connection with stock options 1,536
Restricted stock awards (257)
Amortization of restricted stock awards 177 177
Treasury shares acquired and restricted stock forfeitures 14 (164)
Dividends paid (2,346)
--------------- ---------------
BALANCE, SEPTEMBER 30, 1995 (Unaudited) $ (3,200) $ 646,381
=============== ===============
The accompanying notes are an integral part of these statements.
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CARDINAL HEALTH INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Fiscal Quarter Ended Fiscal Year Ended
---------------------------- ------------------------------------
September 30, September 30, June 30, June 30, March 31,
1995 1994 1995 1994 1993
------------ ------------ ---------- ---------- ----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings before cumulative effect of change in
accounting principle $23,492 $ 19,710 $101,000 $ 49,195 $ 53,105
Adjustments to reconcile earnings before cumulative effect of
change in accounting principle to net cash from operations:
Depreciation and amortization 6,065 5,334 21,837 17,611 18,878
Stock option compensation 5,247
Provision for deferred income taxes 24,037 (11,616) (10,285)
Provision for bad debts 2,174 2,117 12,170 11,629 6,176
Change in operating assets and liabilities net of effects
from acquisitions:
Increase in trade and finance notes receivables (55,012) (79,414) (133,985) (91,315) (11,516)
Increase in merchandise inventories (48,928) (48,552) (159,036) (232,178) (51,343)
Increase in accounts payable 73,191 140,061 153,059 170,114 128,655
Other operating items, net (1,671) (1,471) 6,888 21,755 8,279
------- -------- -------- -------- --------
Net cash provided by (used in) operating activities (689) 37,785 25,970 (64,805) 147,196
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired (15,784) (16,447)
Proceeds from sale of property and equipment 91 1,079 111
Additions to property and equipment (10,273) (6,904) (43,523) (11,812) (15,093)
Purchase of marketable securities available for sale (25,485) (3,589) (169,599) (128,432) (338,442)
Proceeds from sale of marketable securities available for sale 27,215 3,128 138,467 197,404 306,632
------- -------- -------- -------- --------
Net cash provided by (used in) investing activities (8,543) (23,149) (91,011) 58,239 (46,792)
------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 16,800 (25,000) (22,000) 25,000
Reduction of short-term borrowing of an acquired subsidiary (5,226)
Reduction of long-term obligations (1,004) (1,012) (4,876) (92,701) (30,495)
Proceeds from long-term obligations 100,000
Issuance costs of long-term obligations and other (873)
Proceeds from issuance of Common Shares 1,536 71,345 73,086 1,302 2,628
Tax benefit of stock options 16,872 18,136 4,275 1,984
Dividends on common and preferred shares and cash paid
in lieu of fractional shares (2,346) (2,074) (9,107) (7,661) (6,884)
Redemption of preferred stock (20,400)
Purchase of treasury shares (164) (48) (5,726) (2,730) (5,928)
------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 14,822 60,083 49,513 986 (38,695)
------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5,590 74,719 (15,528) (5,580) 61,709
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 42,525 58,053 58,053 63,633 9,066
------- -------- -------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR $48,115 $132,772 $ 42,525 $ 58,053 $ 70,775
======= ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Health, Inc. and subsidiaries (the "Company") is a full service
wholesaler distributing 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 health care providers. The Company is also a
franchisor of apothecary-style pharmacies through its newly acquired subsidiary
Medicine Shoppe International, Inc. (see "Basis of Presentation" below). The
Company is currently operating in only one business segment.
The supplemental consolidated financial statements as of September 30, 1995
and for the three months ended September 30, 1995 and 1994 have been prepared
in accordance with Securities and Exchange Commission Regulation S-X as it
relates to interim period financial statements, and include all of the
information and disclosures required by generally accepted accounting
principles for interim reporting. In the opinion of management, all
adjustments necessary for a fair presentation have been included, and are of a
normal and recurring nature. All amounts disclosed throughout the "Notes to
the Supplemental Consolidated Financial Statements" for periods or dates
subsequent to June 30, 1995 are unaudited.
BASIS OF PRESENTATION
The supplemental consolidated financial statements of the Company include
the accounts of all majority-owned subsidiaries and all significant
intercompany accounts and transactions have been eliminated.
The Company's consolidated financial statements have been restated for
the business combination with Medicine Shoppe International, Inc. ("Medicine
Shoppe"), which was accounted for pursuant to the pooling-of-interests method.
On November 13, 1995, a wholly-owned subsidiary of the Company merged with and
into Medicine Shoppe (the "Medicine Shoppe Merger"). Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These supplemental
consolidated financial statements will become the historical consolidated
financial statements of the Company after financial statements covering the
date of the consummation of the business combination with Medicine Shoppe are
issued. Previously, on February 7, 1994, Whitmire Distribution Corporation
("Whitmire") merged with and into a wholly-owned subsidiary of the Company (the
"Whitmire Merger"), which business combination was accounted for pursuant to
the pooling-of-interests method. The term "Cardinal" as used herein refers to
Cardinal Health, Inc. and its subsidiaries prior to the Whitmire Merger.
On March 1, 1994, the Company changed its fiscal year end from March 31
to June 30. The accompanying supplemental consolidated statement of earnings
and statement of cash flows for the fiscal year ended March 31, 1993 combine
information for Cardinal's and Medicine Shoppe's fiscal years (twelve months)
ended March 31, 1993 with Whitmire's fiscal year ended July 3, 1993. The
supplemental consolidated balance sheets as of June 30, 1995 and 1994 and the
consolidated statements of earnings and cash flows for the fiscal years ended
June 30, 1995 and 1994 combine the information of Cardinal, Medicine Shoppe and
Whitmire as of those dates.
Due to the change in fiscal year end, Cardinal's and Medicine Shoppe's
results of operations for the three months ended June 30, 1993, are not
included in the supplemental consolidated statement of earnings but have been
included as an adjustment in the supplemental consolidated statement of
shareholders' equity. For the three months ended June 30, 1993, Cardinal's and
Medicine Shoppe's net revenues, net earnings and dividends paid were
$561,363,000, $11,113,000 and $1,354,000, respectively.
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.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
MARKETABLE SECURITIES AVAILABLE FOR SALE
Effective July 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). Pursuant to SFAS No. 115, the
Company has classified its investment in municipal bonds as available-for-sale.
The fair value of the bonds at June 30, 1995 approximates the original cost
determined on a specific identification basis and, accordingly, no net
unrealized gain or loss has been recorded as a separate component of
shareholders' equity. Gross realized and unrealized gains and losses are not
significant at June 30, 1995. The current portion of marketable securities
available for sale matures on various dates in fiscal 1996 and the long-term
portion of marketable securities available for sale matures on various dates
through 2025.
Prior to the adoption of SFAS No. 115, the Company accounted for marketable
securities using the lower-of-cost or market rule. The adoption of SFAS No.
115 did not have a material effect on the Company's supplemental consolidated
financial statements.
RECEIVABLES
Trade receivables are primarily comprised of amounts owed to the Company
through its wholesaling activities and are presented net of an allowance for
doubtful accounts of approximately $31,422,000 and $24,832,000 at June 30,
1995, and June 30, 1994, respectively.
The Company provides financing to selected franchisees primarily for
acquisition and conversion costs, exclusive of origination fees. Such
financing arrangements generally require repayment in seven to ten years, at
interest rates which fluctuate with the prime rate. Most of these financings
are collateralized by property of the franchisees or by third-party guarantors.
Finance notes and accrued interest receivable are reported net of allowance for
doubtful accounts of approximately $7,385,000 and $7,275,000 at June 30, 1995
and 1994, respectively.
MERCHANDISE INVENTORIES
Substantially all merchandise inventories 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, 1995, by $79,365,000 and at June 30, 1994, by $61,852,000.
The June 30, 1994 difference between replacement costs and LIFO values,
restated to reflect the pooling-of-interests combination with Behrens, Inc.
(see Note 3), was $77,465,000.
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 three years.
OTHER ASSETS
Other assets 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 $18,670,000 and $16,571,000 at June
30, 1995, and June 30, 1994, respectively. At each balance sheet date, a
determination is made by management to ascertain whether the intangible assets
have been impaired based on several criteria, including, but not limited to,
sales trends, undiscounted operating cash flows, and other operating factors.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
The Company records 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 direct deliveries to be made to
customer warehouses which are excluded from net revenues and totaled
$1,779,000,000, $562,000,000 and $467,000,000 in fiscal 1995, 1994 and 1993,
respectively. The service fees related to direct deliveries are included in
net revenues and were not significant in fiscal 1995, 1994 or 1993.
The Company also 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.
INCOME TAXES
Effective as of the beginning of fiscal 1993, Cardinal began accounting for
income taxes under the liability method by adopting Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
The cumulative effect of adopting this statement ($10,000,000) has been
reported as a change in accounting principle retroactive to the beginning of
fiscal 1993. Prior to the adoption of SFAS No. 109, income taxes were
accounted for in accordance with Accounting Principles Board Opinion No. 11.
EARNINGS PER COMMON SHARE
Primary earnings per Common Share are based on the weighted average number
of Common Shares outstanding during each period and the dilutive effect of
stock options and warrants from the date of grant computed using the treasury
stock method.
Fully diluted earnings per Common Share reflect: (a) the dilutive effect
of stock options and warrants from the date of grant computed using the
treasury stock method; and (b) the full conversion of the 7.25% Convertible
Subordinated Debentures due 2015 through their conversion and redemption in
July 1993 (see Note 11).
Prior to the business combination with Medicine Shoppe, the Company paid
cash dividends per Common Share of $0.12, $0.09 and $0.07 for the fiscal years
ended June 30, 1995 and 1994, and March 31, 1993, respectively. As adjusted
for the shares issued in the pooling-of-interests business combination,
Medicine Shoppe paid cash dividends per common share of $0.65, $0.57 and $0.48
for the fiscal years ended June 30, 1995 and 1994, and March 31, 1993,
respectively.
STOCK SPLIT
The Company paid a 25% stock dividend on June 30, 1994, to effect a
five-for-four stock split of the Company's Common Shares. All share and per
share amounts included in the supplemental consolidated financial statements,
except the Supplemental Consolidated Statements of Shareholders' Equity, have
been adjusted to reflect this stock split.
2. UNUSUAL ITEMS
In February 1994, the Company recorded a charge to reflect estimated
Whitmire Merger costs of approximately $35.9 million ($28.2 million net of
tax), including (a) fees and other transaction costs related to the
combination, and (b) other costs expected to be incurred in connection with the
integration of Cardinal's and Whitmire's business operations. These estimated
costs included approximately $7 million for investment banking, legal,
accounting, and
11
12
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
other related transaction fees and costs associated with the combination; $13
million for corporate integration and distribution rationalization; $6 million
for integration of information systems; and $2 million for restructuring
Whitmire's revolving credit agreement. Of these estimated costs, approximately
$7 million pertained to the revaluation of certain operating assets and $2
million pertained to employee relocation, retraining and termination costs. At
June 30, 1995, the Company had incurred actual costs aggregating approximately
$26.9 million relating to the Whitmire Merger. During the three months ended
September 30, 1995, the Company incurred Whitmire merger costs of approximately
$3.0 million and as of September 30, 1995 has incurred aggregate costs of
approximately $29.9 million. The estimated remaining merger costs to be
incurred totaled $6.0 million at September 30, 1995, and the Company's current
estimates of the merger costs ultimately to be incurred are not materially
different than the amounts originally recorded. The Company anticipates that
the remainder of these costs will be expended during fiscal 1996. The
modification of the terms of certain Whitmire stock options in fiscal 1993 also
resulted in a one-time stock option compensation charge of approximately $5.2
million (see Note 11).
During fiscal 1993, the Company received a termination fee of approximately
$13.5 million, resulting from the termination by Durr-Fillauer Medical, Inc. of
its agreement to merge with the Company.
Also during fiscal 1993, the Company recorded charges totaling
approximately $13.7 million, primarily related to the closing of certain
non-core operations and the rationalization, standardization and improvement of
selected distribution operations, information systems and support functions.
The charges included the write-down of certain assets, moving costs and other
costs associated with the affected operations, and modification costs necessary
to centralize and standardize certain information systems and support
functions. At June 30, 1995, the initiatives contemplated had been
substantially completed in accordance with the original plan and all related
funds have been expended.
The following supplemental information (presented in thousands, except
per share amounts), which is presented for purposes of facilitating meaningful
comparisons to ongoing operations and to other companies in the drug
distribution industry, summarizes the results of operations of the Company,
adjusted on a pro forma basis to reflect (a) the elimination of the effect of
the unusual items discussed above, and (b) the redemption of Whitmire's
preferred stock pursuant to the terms of the Reorganization Agreement. Solely
for purposes of the summary presented below, such redemption is assumed to have
been funded from the liquidation of investments in tax-exempt marketable
securities. See Note 3 for additional information regarding Medicine Shoppe
Merger costs and the Whitmire Merger.
Fiscal Year Ended
----------------------------------------------
June 30, June 30, March 31,
1995 1994 1993
-------------- -------------- -------------
Operating earnings, excluding unusual items $ 187,697 $ 143,116 $ 111,492
Earnings before cumulative effect of change
in accounting principle, excluding unusual items 101,000 77,103 55,423
Earnings per Common Share before
cumulative effect of change in accounting
principle, excluding unusual items:
Primary $ 2.07 $ 1.68 $ 1.35
Fully diluted $ 2.07 $ 1.67 $ 1.29
Operating earnings and earnings available for Common Shares before
cumulative effect of change in accounting principle ("Earnings") as reported in
the Company's supplemental consolidated financial statements are reconciled to
the respective amounts in the preceding table as follows (in thousands):
12
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Year Fiscal Year
Ended June 30, 1994 Ended March 31, 1993
--------------------------- ----------------------------
Operating Operating
Earnings Earnings Earnings Earnings
------------ ------------- ------------- -------------
As reported $ 107,236 $ 47,990 $ 106,054 $ 50,229
Supplemental adjustments:
Merger costs 35,880 28,180
Preferred stock redemptions 1,205 2,876
Interest adjustment on preferred stock (272) (575)
Termination fee (13,466) (7,163)
Restructuring charge 13,657 7,265
Stock option charge 5,247 2,791
------------ ------------- ------------- -------------
As supplementally adjusted $ 143,116 $ 77,103 $ 111,492 $ 55,423
============ ============= ============= =============
3. BUSINESS COMBINATIONS
Effective November 13, 1995, a wholly owned subsidiary of the Company was
merged with and into Medicine Shoppe. The Medicine Shoppe Merger was accounted
for as a pooling-of-interests business combination. The Company issued
6,425,717 Common Shares to Medicine Shoppe shareholders. In addition, Medicine
Shoppe's outstanding stock options were converted into options to purchase
approximately 121,000 additional Common Shares.
The table below presents a reconciliation of net revenues and net earnings
available for Common Shares as reported in the accompanying supplemental
consolidated financial statements with those previously reported by the Company
(in thousands).
Cardinal Medicine
Health Shoppe Combined
-------------- -------------- ---------------
Fiscal year ended March 31, 1993:
Net revenues $ 4,633,375 $ 42,902 $ 4,676,277
Net earnings available for Common Shares $ 27,671 $ 12,558 $ 40,229
Fiscal year ended June 30, 1994:
Net revenues $ 5,790,411 $ 48,163 $ 5,838,574
Net earnings available for Common Shares $ 33,931 $ 14,059 $ 47,990
Fiscal year ended June 30, 1995:
Net revenues $ 7,806,092 $ 53,827 $ 7,859,919
Net earnings available for Common Shares $ 84,973 $ 16,027 $ 101,000
Fiscal Quarter ended September 30, 1994:
Net revenues $ 1,818,687 $ 13,441 $ 1,832,128
Net earnings available for Common Shares $ 16,025 $ 3,685 $ 19,710
Fiscal Quarter ended September 30, 1995:
Net revenues $ 2,033,034 $ 14,104 $ 2,047,138
Net earnings available for Common Shares $ 20,527 $ 2,965 $ 23,492
13
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Adjustments affecting net income and shareholders' equity resulting from
the Medicine Shoppe Merger to adopt the same accounting practices were not
material for any periods presented herein. There were no material intercompany
transactions.
In December 1995 the Company recorded a nonrecurring charge to reflect
estimated Medicine Shoppe Merger costs of approximately $11.2 million, net of
tax, which include approximately $5.7 million for anticipated investment
advisor, banking, legal, accounting, and other related transaction fees and
costs associated with the Medicine Shoppe Merger and $5.5 million for
integrating operations and implementing efficiencies with regard to information
systems, customer systems, marketing programs and administrative functions.
Certain Medicine Shoppe Merger costs amounts are based upon estimates of costs
to be incurred and actual costs may differ from these estimates.
On July 18, 1994, the Company issued approximately 944,000 Common Shares in
a merger transaction for all of the common shares of Behrens, Inc., a drug
wholesaler based in Waco, Texas. The transaction was accounted for as a
pooling-of-interests business combination. The impact of the Behrens merger,
on both an historical and pro forma basis, is not significant. Accordingly,
prior periods have not been restated for the Behrens merger.
On July 1, 1994, the Company acquired all of the outstanding stock of
Humiston-Keeling, Inc., a drug wholesaler based in Calumet City, Illinois, for
cash of $33,334,000 in a transaction accounted for by the purchase method. Had
the purchase occurred at the beginning of fiscal 1994, operating results on a
pro forma basis would not have been significantly different.
On January 27, 1994, shareholders of Cardinal and Whitmire approved and
adopted the Agreement and Plan of Reorganization dated October 11, 1993 (the
"Reorganization Agreement"), pursuant to which a wholly owned subsidiary of
Cardinal was merged with and into Whitmire effective February 7, 1994. In the
Whitmire Merger holders of outstanding Whitmire common stock received an
aggregate of approximately 6,802,000 Class A common shares and approximately
1,861,000 Class B common shares in exchange for all of the previously
outstanding common stock of Whitmire. In addition, Whitmire's outstanding
stock options were converted into options to purchase an aggregate of
approximately 1,721,000 additional Common Shares pursuant to the terms of such
options and the Reorganization Agreement.
On December 17, 1993, the Company issued approximately 296,000 Common
Shares in a merger transaction for all of the capital stock of PRN Services,
Inc., a distributor of pharmaceuticals and medical supplies to oncologists and
oncology clinics. The transaction was accounted for as a pooling-of-interests
business combination. The impact of the PRN merger, on both an historical and
pro forma basis, is not significant. Accordingly, prior periods have not been
restated for the PRN merger.
On May 4, 1993, the Company acquired all of the outstanding capital stock
of Solomons Company, a wholesale drug distributor based in Savannah, Georgia,
in exchange for approximately 1,062,000 Common Shares. The transaction was
accounted for by the purchase method. Had the acquisition occurred at the
beginning of fiscal 1993, operating results on a pro forma basis would not have
been significantly different.
4. NOTES PAYABLE, BANKS
The Company has entered into various uncommitted line-of-credit
arrangements which allow for borrowings up to $225,000,000 and $221,000,000 at
June 30, 1995 and 1994, respectively, at various money market rates. The
amount outstanding under such arrangements was $3,000,000 and $25,000,000, at
weighted average interest rates of 6.89% and 4.28%, at June 30, 1995 and 1994,
respectively.
In addition to the aforementioned credit arrangements, at June 30, 1995,
the Company has revolving credit agreements with eight banks which have a
maturity of less than one year, are renewable on a quarterly basis, and allow
the Company to borrow up to $100,000,000 (none of which was in use at either
June 30, 1995 or 1994). The
14
15
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Company is required to pay a commitment fee at the annual rate of .125% on the
average daily unused amounts of the total credit allowed under the revolving
credit agreements.
Total available but unused lines of credit at June 30, 1995 and June 30,
1994 were $322,000,000 and $296,000,000, respectively.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
June 30, June 30,
1995 1994
------------- -------------
Notes; 6.5% due 2004 $ 100,000 $ 100,000
Notes; 8% due 1997 100,000 100,000
Primarily mortgage revenue bonds, notes and capital
leases; 3.70% to 14.07%, and rates that fluctuate
based on prime, due in varying installments
through 2002 11,285 12,967
------------- -------------
Total 211,285 212,967
Less: current portion (2,083) (2,929)
------------- -------------
Long-term obligations, less current portion $ 209,202 $ 210,038
============= =============
On February 23, 1994, the Company sold $100,000,000 of 6.5% Notes due
2004 (the "6.5% Notes") in a public offering. 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 the offering are being amortized on a straight-line
basis over the period the 6.5% Notes will be outstanding. The Company used the
proceeds of this sale for general corporate purposes, including the repayment
of bank lines of credit incurred as part of the Whitmire Merger (see Note 3).
In anticipation of the sale of the 6.5% Notes, the Company entered into an
interest rate hedge agreement, which was terminated at the approximate time of
the issuance of the 6.5% Notes, resulting in a deferred gain of approximately
$1.3 million which is being amortized as a reduction of interest expense over
the period the 6.5% Notes are outstanding.
On March 11, 1992, the Company sold $100,000,000 of 8% Notes due 1997
(the "8% Notes") in a public offering. The 8% Notes represent unsecured
obligations of the Company, are not redeemable prior to maturity and are not
subject to a sinking fund. Issuance costs of approximately $718,000 incurred
in connection with the offering, are being amortized on a straight-line basis
over the period the 8% Notes will be outstanding.
The Company has entered into various interest rate swap agreements,
which serve to hedge the Company's aggregate interest cost on the 8% Notes, in
response to falling interest rates subsequent to the issuance of the 8% Notes.
The net effect of the swap agreements is that the Company exchanged its fixed
rate position on the 8% Notes for a fixed rate of 5.1% for the period July 15,
1992, through March 1, 1993, a fixed rate of 6.5% for the period March 2, 1993,
through March 1, 1994, and, thereafter, a fixed rate of 8.1% through March 1,
1997 (the maturity date of the 8% Notes). In May 1993, two of the offsetting
swap agreements were canceled at no gain or loss to the Company. The notional
principal in each of the four swap agreements outstanding at June 30, 1995 is
$100 million. Due to the offsetting nature of the swaps, the market value of
those in a net receivable position approximates the market value of those in a
net payable position. The risk of accounting loss, based on discounted cash
flows, in the event of nonperformance by counterparties with whom the Company
is in a net receivable position is approximately $3 million as of June 30,
1995; however, based on the credit quality of the counterparties, the Company
believes the
15
16
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
likelihood of such a credit loss to be remote. The Company recognizes in
income the periodic net cash settlements under the matched swap agreements as
they accrue.
Certain long-term obligations are collateralized by property and
equipment of the Company with an aggregate book value of approximately
$11,480,000 at June 30, 1995.
Maturities of long-term obligations for future fiscal years are as follows (in thousands):
1996 $ 2,083
1997 101,844
1998 1,043
1999 923
2000 873
Thereafter 104,519
-------------
Total $ 211,285
=============
6. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and equivalents, marketable securities, notes
payable--banks and other accrued liabilities at June 30, 1995, and June 30,
1994, 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
$211,160,000 and $206,068,000 as compared to the carrying amounts of
$211,285,000 and $212,967,000 at June 30, 1995, and June 30, 1994,
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
Effective the beginning of fiscal 1993, Cardinal adopted SFAS No. 109.
Under the provisions of SFAS No. 109, income taxes are recorded under the
liability method. SFAS No. 109 results in the recognition of deferred tax
assets and liabilities for the expected future tax consequences of existing
differences between financial reporting and tax reporting bases of assets and
liabilities (temporary differences), and operating loss and tax credit
carryforwards for tax purposes. The cumulative effect of adopting SFAS No. 109
($10,000,000) has been reported as a change in accounting principle retroactive
to the beginning of fiscal 1993.
16
17
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The provision (credit) for income taxes consists of the following (in thousands):
Fiscal Year Ended
---------------------------------------------
June 30, June 30, March 31,
1995 1994 1993
------------- ------------- -------------
Current:
Federal $ 41,882 $ 49,707 $ 36,254
State 4,651 5,373 6,183
------------- ------------- -------------
Total 46,533 55,080 42,437
Deferred 24,037 (11,616) (10,285)
------------- ------------- -------------
Total provision $ 70,570 $ 43,464 $ 32,152
============= ============= =============
A reconciliation of the Company's income tax provision and the provision based on the Federal statutory income tax rate
follows:
Fiscal Year Ended
---------------------------------------------
June 30, June 30, March 31,
1995 1994 1993
------------- ------------- -------------
Provision at Federal
statutory rate 35.0% 35.0 % 34.0 %
State income taxes, net of
Federal benefit 4.1 3.8 4.2
Nondeductible expenses 7.3
Other 2.0 0.8 (0.5)
------------- ------------- -------------
Effective income tax rate 41.1% 46.9 % 37.7 %
============= ============= =============
The components of the deferred income tax assets and liabilities are as follows (in thousands):
June 30, June 30,
1995 1994
-------------- --------------
Deferred income tax assets:
Allowance for doubtful accounts $ 14,305 $ 11,159
Accrued liabilities 16,343 24,141
Stock option compensation 2,240
Other 14,103 2,612
-------------- --------------
Total deferred income tax assets 44,751 40,152
-------------- --------------
Deferred income tax liabilities:
Inventory basis differences (46,471) (25,095)
Property related (4,773) (3,063)
Other (16,330) (3,624)
-------------- --------------
Total deferred income tax liabilities (67,574) (31,782)
-------------- --------------
Net deferred income tax assets (liabilities) $ (22,823) $ 8,370
============== ==============
17
18
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The above amounts are classified in the supplemental consolidated balance sheets as follows (in thousands):
June 30, June 30,
1995 1994
------------- -------------
Prepaid expenses and other $ $ 8,721
Other accrued liabilities (11,364)
Other liabilities (11,459) (351)
------------- -------------
Net deferred income tax assets (liability) $ (22,823) $ 8,370
============= =============
8. EMPLOYEE RETIREMENT BENEFIT PLANS
Substantially all of the Company's non-union employees are enrolled in
Company-sponsored contributory profit sharing and retirement savings plans
which include features under Section 401(k) of the Internal Revenue Code, and
provide for 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.
Qualified union employees are covered by Company-sponsored and
multiemployer defined benefit pension plans under the provisions of collective
bargaining agreements. Benefits under these plans are generally based on the
employee's years of service and average compensation at retirement.
The effect of the Company-sponsored defined benefit plans on the Company's
supplemental consolidated financial statements is not material.
Employee retirement benefit plans expense was as follows (in thousands):
Fiscal Year Ended
---------------------------------------------
June 30, June 30, March 31,
1995 1994 1993
------------- ------------- -------------
Defined contribution plans $ 5,611 $ 4,053 $ 3,514
Multiemployer plans 637 522 538
------------- ------------- -------------
Total $ 6,248 $ 4,575 $ 4,052
============= ============= =============
The adoption of Financial Accounting Standards Board Statement No. 112,
"Employer's Accounting for Postemployment Benefits" in 1995 had no material
effect on the supplemental consolidated financial statements of the Company.
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases certain warehouse and office facilities, vehicles, and
data processing equipment under operating leases. The leases expire at various
dates over the next twelve years. Certain of these leases provide for renewal
options and/or contingent rentals based on various factors.
18
19
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The future minimum rental payments for operating leases having initial
or remaining non-cancelable lease terms in excess of one year at June 30, 1995,
are as follows (in thousands):
1996 $13,042
1997 11,293
1998 9,287
1999 7,584
2000 3,868
Thereafter 10,461
-------
Total $55,535
=======
The minimum rental payments above have been reduced by sublease rentals of
approximately $438,000 in 1996 and $353,000 in 1997. Rental expense (net of
sublease rental income) relating to operating leases and short-term cancelable
leases was approximately $13,740,000, 12,217,000 and $11,167,000 in fiscal
1995, 1994, and 1993, respectively.
In connection with its supplier relationship with various customers, the
Company has guaranteed certain indebtedness and lease payments. As of June 30,
1995, these guarantees total approximately $1,633,000. Additionally, the
Company has committed to provide approximately $3,400,000 of financial
assistance to third parties.
During fiscal 1994, the Company began a program whereby certain customer
notes receivables were sold, with full recourse, to a commercial bank. As of
June 30, 1995, amounts outstanding on customer notes receivables sold to the
commercial bank under this program totaled approximately $6,860,000.
The Company becomes involved from time-to-time in litigation arising out of
its normal business activities. In addition, in November 1993, Cardinal,
Whitmire, five other pharmaceutical wholesalers, and twenty-four pharmaceutical
manufacturers were named as defendants in a series of purported class action
antitrust lawsuits alleging violations of various antitrust laws associated
with the chargeback pricing system. The Company believes that the allegations
set forth against Cardinal and Whitmire in these lawsuits are without merit.
In the opinion of management, the Company's liability, if any, under any
pending litigation would not have a material adverse effect on the Company's
financial condition or results of operations.
10. REDEEMABLE PREFERRED STOCK
Prior to February 7, 1994, Whitmire had authorized 360,000 shares of
redeemable preferred $.01 par value stock. Whitmire would have been required
to redeem, at $100.00 per share plus accrued but unpaid dividends, all shares
of its Senior and Series A Preferred Stock commencing in October 1994 through
July 1996. Stockholders' equity was charged $840,000 in fiscal 1993 for
accretion relative to this mandatory redemption obligation. As of March 31,
1993, a total of $4,200,000 had been credited to redeemable preferred stock
through accretion. Pursuant to the terms of the Reorganization Agreement
between Cardinal and Whitmire (see Note 3), all of the outstanding shares of
Whitmire Senior and Series A Preferred Stock were redeemed as of February 7,
1994, the date of the Whitmire Merger.
11. SHAREHOLDERS' EQUITY
At June 30, 1995 the Company's authorized capital shares consisted of
(a) 60,000,000 Class A common shares, without par value, of which 48,339,477
and 41,349,307 (as adjusted to reflect the business combination with Medicine
Shoppe) were outstanding and 193,292 and 179,878 were held in treasury at cost
at June 30, 1995, and June 30, 1994, respectively; (b) 5,000,000 Class B common
shares, without par value, of which none and 2,971,375 were outstanding at June
30, 1995 and June 30, 1994, respectively; and (c)
19
20
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
500,000 non-voting preferred shares without par value, none of which have been
issued. The Class A common shares and Class B common shares are collectively
referred to as Common Shares. On November 14, 1995, at the Company's annual
meeting of shareholders, a resolution was passed which increased the Company's
authorized Class A common shares to 100 million.
The Class B common shares were issued to a former Whitmire stockholder in
February 1994 in connection with the Whitmire Merger. All of the Class B
common shares outstanding at June 30, 1994 were converted to Class A common
shares during the year ended June 30, 1995. Prior to the conversion of Class B
common shares, all holders of Class A common shares and Class B common shares
participated equally in dividends when and as declared by the Company's Board
of Directors. Holders of Class A common shares were entitled to one vote per
share for the election of Directors and upon all matters on which shareholders
were entitled to vote. Holders of Class B common shares were entitled to
one-fifth of one vote per share in the election of Directors and upon all
matters which shareholders were entitled to vote.
On September 26, 1994, 8,050,000 of the Company's Common Shares were sold
pursuant to a public offering. Approximately 1,867,000 Common Shares (the
"Issued Shares") were sold by the Company, and approximately 6,183,000 Common
Shares (the "Existing Shares") were sold by certain shareholders of the
Company. The Existing Shares included all of the issued and outstanding Class
B common shares, which were converted to Class A common shares prior to their
sale to the public. Net proceeds received by the Company of approximately $70
million from the sale of the Issued Shares were used to finance working capital
growth and for other general corporate purposes. The Company did not receive
any of the proceeds from the sale of the Existing Shares.
On June 11, 1993, the Company called its 7.25% convertible Subordinated
Debentures due 2015 (the "Subordinated Debentures") for redemption, effective
as of July 2, 1993. Following this call, $74,920,000 of Subordinated
Debentures were converted into Common Shares of the Company. The remaining
$80,000 of Subordinated Debentures outstanding were redeemed for cash. The
amount credited to shareholders' equity as a result of the conversion of the
Subordinated Debentures was reduced by unamortized offering costs of
approximately $1,767,000 and costs directly related to the conversion of
approximately $13,000.
During fiscal 1993, Whitmire canceled adjustment share rights,
previously granted to outside investors, representing rights to purchase shares
of Whitmire common stock (a defined percentage of the adjustment share rights
were cancelable annually up to 100% based upon the achievement of certain
financial targets). Additionally, certain conditions relative to the exercise
of Whitmire options were eliminated. For financial reporting purposes, the
modification of the terms of these options previously granted to key employees
has been treated as if the options were issued on the date that the terms were
modified. Accordingly, a compensation charge totaling approximately $5.2
million was recorded relative to these changes. The compensation charge is
equal to the fair value (as determined by an independent appraisal) of the
options on the date that the terms of the options were modified. Pursuant to
the terms of the Reorganization Agreement (see Note 3), warrants to purchase
shares of Whitmire common stock which, upon exercise became convertible into
approximately 2,831,000 Common Shares at an average price of $0.08 per share,
were exercised prior to the consummation of the pooling-of-interests business
combination of Cardinal and Whitmire.
On April 14, 1993, the Company repurchased all of the Common Shares
(approximately 725,000) owned by subsidiaries of North American National
Corporation, the former Chairman of which is also a Director of the Company, at
a price of $21.20 per share. Nearly all of these shares were subject to
certain restrictions contained in a Shareholders Agreement among North American
National Corporation and other individual shareholders, which restrictions were
released as part of the repurchase transaction.
12. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains stock incentive plans (the "Plans") for the benefit
of certain officers, directors and key employees.
20
21
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Options granted are generally 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. On November 14, 1995 the Company's shareholders approved a new equity
incentive plan (the "New Plan") which authorized the issuance of up to an
aggregate of 2,000,000 Common Shares in the form of incentive stock options,
nonqualified stock options, performance shares and restricted shares. The
Common Shares authorized for issuance under the New Plan are in addition to
1,766,000 Common Shares which were issuable pursuant to stock options
outstanding immediately prior to the approval of the New Plan.
The following summarizes all stock option transactions for the Company and
Medicine Shoppe (excluding Whitmire, see below) under the Plans from March 31,
1992, through June 30, 1995, giving retroactive effect to stock splits (in
thousands, except per share amounts):
Number Exercise Prices
of Options Per Share Total
---------- --------------------- ------------
Balance Outstanding, March 31, 1992 954 $ 4.00 - $ 30.16 $ 12,430
Granted 297 20.80 - 32.87 6,780
Exercised (373) 4.00 - 27.14 (2,625)
Canceled (19) 11.14 - 30.46 (362)
---------- ------------
Balance Outstanding, March 31, 1993 859 7.78 - 32.87 16,223
Granted 775 23.20 - 38.60 26,959
Exercised (69) 7.78 - 28.96 (1,070)
Canceled (38) 17.04 - 38.60 (997)
---------- ------------
Balance Outstanding, June 30, 1994 1,527 7.78 - 38.60 41,115
Granted 484 36.23 - 49.50 22,959
Exercised (155) 7.78 - 38.60 (2,541)
Canceled (19) 21.00 - 49.50 (678)
---------- ------------
Balance Outstanding, June 30, 1995 1,837 $ 7.78 - $ 49.50 $ 60,855
========== ============
At June 30, 1995, approximately 478,000 option shares under the Plans were
exercisable.
In connection with the Whitmire Merger, outstanding Whitmire stock options
granted to current or former Whitmire officers or employees were automatically
converted into options ("Cardinal Exchange Options") to purchase an aggregate
of approximately 1,721,000 additional Common Shares pursuant to the terms of
such options and the Reorganization Agreement (see Note 3). Under the terms of
their original issuance and as reflected in the Reorganization Agreement, the
exercise price for substantially all of the Cardinal Exchange Options is
remitted to certain former investors of Whitmire. Cardinal Exchange Options to
purchase 1,250,000 and 271,000 Common Shares, with an average option price of
$1.52 and $1.60, were exercised in fiscal 1995 and 1994, respectively. At June
30, 1995, Cardinal Exchange Options to purchase approximately 200,000 shares
were outstanding with an average exercise price of $2.08 per share. At
December 31, 1995, approximately 15,000 Cardinal Exchange Options remained
outstanding.
The market value of restricted shares awarded by the Company is recorded as
unamortized restricted stock awards and shown as a separate component of
shareholders' equity. The compensation awards are amortized to expense over
the period in which participants perform services, generally one to six years.
As of June 30, 1995, approximately 440,000 restricted shares have been issued,
of which approximately 168,000 shares remain restricted and subject to
forfeiture and approximately 16,000 shares have been forfeited.
21
22
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
13. SUPPLEMENTAL CASH FLOW INFORMATION
Income tax and interest payments for the fiscal years ended June 30, 1995
and 1994, and March 31, 1993 were as follows (in thousands):
Fiscal Year Ended
---------------------------------------------
June 30, June 30, March 31,
1995 1994 1993
------------- ------------- -------------
Interest paid $ 20,166 $ 16,412 $ 25,889
Income taxes paid $ 20,416 $ 44,299 $ 33,880
In conjunction with the acquisition of Humiston-Keeling (see Note 3), the
fair value of assets acquired was $127,674,000, cash paid for the issued and
outstanding shares was $33,334,000, and total liabilities assumed were
$94,390,000 (including total debt of approximately $1,670,000).
In conjunction with the pooling-of-interests business combination with
Behrens (see Note 3) in fiscal 1995, the historical cost of Behrens assets
combined was approximately $25,396,000, and the total liabilities assumed
(including total debt of approximately $1,336,000) were approximately
$15,617,000.
In conjunction with the pooling-of-interests business combination with PRN
(see Note 3) in fiscal 1994, the historical cost of PRN assets combined was
approximately $16,946,000, and the total liabilities assumed (including total
debt of approximately $5,847,000) were approximately $16,564,000.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (presented in thousands,
except per share amounts) for fiscal 1995 and 1994 has been restated to reflect
the pooling-of-interests business combination with Medicine Shoppe (see Notes 1
and 3):
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -----
Fiscal 1995:
Net revenues $ 1,832,128 $ 1,999,267 $ 2,001,250 $ 2,027,274 $ 7,859,919
Gross margin 114,082 123,627 137,992 133,509 509,210
Selling, general and administrative
expenses 77,358 78,824 81,660 83,671 321,513
Operating earnings 36,724 44,803 56,332 49,838 187,697
Net earnings available for Common Shares 19,710 24,942 29,986 26,362 101,000
Net earnings per Common Share:
Primary $ 0.42 $ 0.51 $ 0.61 $ 0.53 $ 2.07
Fully diluted 0.42 0.51 0.61 0.53 2.07
- ---------------------------------------------------------------------------------------------------------------------
Fiscal 1994:
Net revenues $ 1,302,510 $ 1,410,049 $ 1,523,157 $ 1,602,858 $ 5,838,574
Gross margin 87,329 93,432 108,676 106,117 395,554
Selling, general and administrative
expenses 58,053 59,628 66,358 68,399 252,438
Operating earnings 29,276 33,804 6,438 37,718 107,236
Net earnings (loss) available for
Common Shares 15,082 18,124 (5,480) 20,264 47,990
Net earnings (loss) per Common Share:
Primary $ 0.33 $ 0.39 $ (0.12) $ 0.44 $ 1.04
Fully diluted 0.33 0.39 (0.12) 0.44 1.04
22
23
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The following supplemental information for fiscal 1994 excludes the impact
of unusual items (see Note 2 for discussion of presentation) and assumes the
redemption of Whitmire's preferred stock. Solely for the purposes of the
supplemental information presented below, such redemption is assumed to have
been funded from the liquidation of investments in tax-exempt marketable
securities (in thousands, except per share amounts).
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------ ------ ------- ------- -----
Fiscal 1994:
Net revenues $ 1,302,510 $ 1,410,049 $ 1,523,157 $ 1,602,858 $ 5,838,574
Gross margin 87,329 93,432 108,676 106,117 395,554
Selling, general and administrative
expenses 58,053 59,628 66,358 68,399 252,438
Operating earnings, excluding unusual items 29,276 33,804 42,318 37,718 143,116
Net earnings available for Common Shares,
excluding unusual items 15,477 18,518 22,844 20,264 77,103
Net earnings per Common Share,
excluding unusual items:
Primary $ 0.34 $ 0.40 $ 0.50 $ 0.44 $ 1.68
Fully diluted 0.34 0.40 0.49 0.44 1.67
Operating earnings and earnings available for Common Shares before
cumulative effect of change in accounting principle ("Earnings") as reported in
the Company's quarterly financial data for fiscal 1994 are reconciled to the
respective amounts in the preceding table as follows (in thousands):
Third Quarter
First Second ---------------------------
Quarter Quarter Operating
Earnings Earnings Earnings Earnings
------------ ------------ -------------- -----------
Fiscal 1994:
As reported $ 15,082 $ 18,124 $ 6,438 $ (5,480)
Supplemental adjustments:
Merger costs 35,880 28,180
Preferred stock 520 520 165
redemptions
Interest adjustment on
preferred stock (125) (126) (21)
------------ ------------ -------------- -----------
As supplementally adjusted $ 15,477 $ 18,518 $ 42,318 $ 22,844
============ ============ ============== ===========
23
24
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The above selected quarterly financial data differs from amounts previously
reported in quarterly reports filed with the Securities and Exchange Commission
due to the merger with Medicine Shoppe on November 13, 1995 (see Note 3).
Amounts reported by the Company prior to the Medicine Shoppe Merger are
presented below and differ from the above selected quarterly financial data
solely due to the addition of Medicine Shoppe amounts pursuant to the
pooling-of-interests accounting method for business combinations (in thousands,
except per share amounts).
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------ ------ ------- ------- -----
Fiscal 1995:
Net revenues $ 1,818,687 $ 1,985,863 $ 1,987,973 $ 2,013,569 $ 7,806,092
Gross margin 103,357 112,475 126,704 121,920 464,456
Selling, general and administrative
expenses 72,201 73,800 76,488 78,328 300,817
Operating earnings 31,156 38,675 50,216 43,592 163,639
Net earnings available for Common Shares 16,025 20,877 25,906 22,165 84,973
Net earnings per Common Share:
Primary $ 0.39 $ 0.49 $ 0.61 $ 0.52 $ 2.01
Fully diluted 0.39 0.49 0.61 0.52 2.01
- ----------------------------------------------------------------------------------------------------------------------
Fiscal 1994:
Net revenues $ 1,291,470 $ 1,397,769 $ 1,510,674 $ 1,590,498 $ 5,790,411
Gross margin 77,775 83,312 98,371 95,714 355,172
Selling, general and administrative
expenses 53,556 54,855 61,531 63,363 233,305
Operating earnings 24,219 28,457 960 32,351 85,987
Net earnings (loss) available for
Common Shares 11,806 14,574 (9,096) 16,647 33,931
Net earnings (loss) per Common Share:
Primary $ 0.30 $ 0.37 $ (0.23) $ 0.42 $ 0.86
Fully diluted 0.30 0.37 (0.23) 0.42 0.86
The Company previously reported the following results for the three months
ended September 30, 1995: net revenues $2,033,034,000; gross margin
$118,247,000; selling, general and administrative expenses $79,840,000;
operating earnings $38,407,000; and net earnings available for Common Shares
$20,527,000. Primary and fully diluted earnings per Common Share were both
$0.48.
15. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company's trade receivables, and finance notes and accrued interest
receivable are exposed to a concentration of credit risk with customers in the
retail and health care sectors. 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 1995, the Company's two largest customers accounted for 11%
of net revenues and 82% of direct deliveries, respectively. Trade receivables
due from these two customers aggregated approximately 22% of total trade
receivables at June 30, 1995.
24
25
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
16. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires adoption no later than the Company's fiscal 1997.
The new standard defines a fair value method of accounting for stock options and
similar equity instruments, under which compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but would be required to disclose in the financial
statements pro forma net income and earnings per share as if the new method of
accounting had been applied.
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
has not yet determined if it will elect to change to the fair value method, nor
has it determined the effect the new standard will have on net income and
earnings per share should it elect to make such a change. Adoption of the new
standard will have no effect on the Company's cash flows.
25