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) June 10, 1997
-----------------------------
Cardinal Health, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 0-12591 31-0958666
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification
Number)
5555 Glendon Court, Dublin, Ohio 43016
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 717-5000
---------------
2
Item 5. Other Events
------------
On March 18, 1997 the Registrant completed its merger of a wholly
owned subsidiary with and into Owen Healthcare, Inc. ("Owen"). The
restated consolidated financial statements of the Registrant, filed
herewith, give effect to the merger with Owen, which was accounted
for as a pooling-of-interests business combination.
Item 7. Financial Statements, Schedules and Exhibits
--------------------------------------------
(a) Consolidated financial statements of Cardinal Health, Inc.
and Owen Healthcare, Inc. prepared under the
pooling-of-interests method of accounting:
- INDEPENDENT AUDITORS' REPORTS
- FINANCIAL STATEMENTS AND SCHEDULES
Consolidated Statements of Earnings for the Nine Months Ended
March 31, 1997 and 1996 (unaudited), and the Fiscal Years
Ended June 30, 1996, June 30, 1995 and June 30, 1994
Consolidated Balance Sheets at March 31, 1997 (unaudited),
June 30, 1996, and June 30, 1995
Consolidated Statements of Shareholders' Equity for the Nine
Months Ended March 31, 1997 (unaudited) and for the
Fiscal Years Ended June 30, 1996, June 30, 1995, and June
30, 1994
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1997 and 1996 (unaudited), and the Fiscal
Years Ended June 30, 1996, June 30, 1995 and June 30,
1994
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
- MANAGEMENT'S DISCUSSION AND ANALYSIS
(c) Exhibits
11.01 Computation of Per Share Earnings.
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 Schedule.
99.01 Statement Regarding Forward-Looking Information. (1)
(1) Filed as Exhibit 99.01 to the Quarterly Report on Form
10-Q of the Registrant for the quarter ended September 30,
1996, and incorporated herein by reference.
2
3
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.
June 10, 1997 By /s/ DAVID BEARMAN
-------------------------------
David Bearman
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
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4
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 1995, and the related consolidated statements of income,
shareholder's equity, and cash flows for each of the three 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 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 30, 1996,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
August 2, 1996
5
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, 1996 and 1995, and the related
statements of earnings, shareholders' equity, and cash flows for each of the
three years ended in the period ended June 30, 1996. Our audits also included
the consolidated financial statement schedule listed in the Index at Item 7.
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. The consolidated
financial statements and consolidated financial statement schedule give
retroactive effect to the merger of a wholly owned subsidiary of Cardinal
Health, Inc. with and into Owen Healthcare, Inc. ("Owen") on March 18, 1997,
which business combination has been accounted for as a pooling-of-interests as
described in Note 2 to the consolidated financial statements. We did not audit
the financial statements of Owen nor did we audit those of Pyxis Corporation
("Pyxis"), a wholly owned subsidiary of Cardinal Health, Inc., for any year.
The combined financial statement amounts of Owen and Pyxis represent
approximately 13% and 15%, respectively, of consolidated total assets at June
30, 1996 and 1995, and represent combined revenues and net income constituting
approximately 6%, 6% and 7%, and 37%, 29% and 43%, respectively, of
consolidated amounts for each of the three 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 Healthcare, Inc. and Pyxis Corporation, 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 reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports 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, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1996
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
June 5, 1997
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Owen Healthcare, Inc.
In our opinion, the consolidated balance sheets 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 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended November 30, 1996, 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.
Owen entered into an agreement in November 1996 to merge with a subsidiary of
Cardinal Health, Inc.
PRICE WATERHOUSE LLP
Houston, Texas
January 30, 1997
7
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED MARCH 31, FISCAL YEAR ENDED JUNE 30,
-------------- -------------- --------------------------------------
1997 1996 1996 1995 1994
------------------------------ --------------------------------------
(UNAUDITED) (UNAUDITED)
Net revenues $ 8,177,382 $ 6,824,765 $ 9,246,420 $ 8,342,517 $ 6,253,557
Cost of products sold 7,513,038 6,255,285 8,473,186 7,673,044 5,724,909
-------------- -------------- ------------------------ -------------
Gross margin 664,344 569,480 773,234 669,473 528,648
Selling, general and administrative expenses 381,171 356,604 479,440 413,630 324,181
Unusual items (56,963) (17,552) (67,250) - (35,880)
-------------- -------------- -------------------------- -------------
Operating earnings 226,210 195,324 226,544 255,843 168,587
Other income (expense):
Interest expense (22,388) (19,838) (26,903) (22,110) (20,727)
Other, net-- primarily interest income 5,308 8,630 12,422 8,386 7,190
-------------- -------------- -------------------------- -------------
Earnings before income taxes 209,130 184,116 212,063 242,119 155,050
Provision for income taxes 89,901 77,496 94,429 99,604 69,217
-------------- -------------- -------------------------- -------------
Earnings before preferred dividends declared 119,229 106,620 117,634 142,515 85,833
Preferred dividends declared - - - - (1,205)
-------------- -------------- -------------------------- -------------
Net earnings available for Common $ 119,229 $ 106,620 $ 117,634 $ 142,515 $ 84,628
Shares
============== ============== ========================== =============
Earnings per Common Share:
Primary $ 1.10 $ 1.05 $ 1.14 $ 1.42 $ 0.88
Fully diluted $ 1.10 $ 1.04 $ 1.14 $ 1.40 $ 0.88
Weighted average number of Common Shares
outstanding:
Primary 108,711 101,763 102,922 100,566 95,908
Fully diluted 108,809 102,902 103,832 101,756 97,008
The accompanying notes are an integral part of these statements.
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8
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, JUNE 30, JUNE 30,
1997 1996 1995
--------------- -------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents $ 12,521 $ 304,281 $ 70,660
Marketable securities available-for-sale - 54,335 100,760
Trade receivables 759,206 612,277 555,595
Current portion of net investment in sales-type leases 47,608 37,953 30,119
Merchandise inventories 1,570,482 1,272,616 1,110,070
Prepaid expenses and other 76,605 62,826 52,257
--------------- -------------- --------------
Total current assets 2,466,422 2,344,288 1,919,461
--------------- -------------- --------------
Property and equipment, at cost:
Land, buildings and improvements 111,180 62,534 47,573
Machinery and equipment 296,974 182,999 131,473
Furniture and fixtures 58,887 54,795 41,869
--------------- -------------- --------------
Total 467,041 300,328 220,915
Accumulated depreciation and amortization (200,815) (133,472) (105,772)
--------------- -------------- --------------
Property and equipment, net 266,226 166,856 115,143
Other assets:
Net investment in sales-type leases, less current portion 104,527 111,604 85,313
Goodwill and other intangibles 128,497 114,901 84,269
Other 85,994 87,526 60,540
--------------- -------------- --------------
Total $ 3,051,666 $ 2,825,175 $ 2,264,726
=============== ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 146,496 $ - $ 3,000
Current portion of long-term obligations 6,890 106,008 4,665
Accounts payable 1,034,415 1,138,368 969,981
Other accrued liabilities 233,825 175,498 139,096
--------------- -------------- --------------
Total current liabilities 1,421,626 1,419,874 1,116,742
--------------- -------------- --------------
Long-term obligations, less current portion 279,539 265,146 240,469
Deferred income taxes and other liabilities 91,713 104,317 69,431
ESOP Common Shares - - 21,046
Shareholders' equity:
Common Shares, without par value 629,879 558,598 469,475
Retained earnings 640,157 492,762 382,743
Common Shares in treasury, at cost (5,867) (11,522) (10,304)
Adjustment for ESOP - - (21,296)
Other (5,381) (4,000) (3,580)
--------------- -------------- --------------
Total shareholders' equity 1,258,788 1,035,838 817,038
--------------- -------------- --------------
Total $ 3,051,666 $ 2,825,175 $ 2,264,726
=============== ============== ==============
The accompanying notes are an integral part of these statements.
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CARDINAL HEALTH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON SHARES
-------------------- TREASURY SHARES
SHARES RETAINED --------------------
ISSUED AMOUNT EARNINGS SHARES AMOUNT
-------- ---------- ---------- ------- ---------
BALANCE, JUNE 30, 1993 49,425 $275,000 $168,524 (1,056) $(8,641)
Earnings before preferred dividends 85,833
Shares issued pursuant to the conversion of $75 million of
convertible debentures 3,423 73,140
Employee stock plans activity, including tax benefits of $7,969 2,834 12,069 11 67
Treasury shares acquired and shares retired (92) (191) (2,232) (30) (590)
Cumulative effect of change in accounting principle
Dividends paid (7,645)
Adjustment for ESOP
5-for-4 stock split effected as a stock dividend and cash paid in 7,564 (16)
lieu of fractional shares
Acquisition of subsidiary (See Note 2) 237 34 348
-------- --------- ----------- ------- ---------
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, 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, 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 119,229
Employee stock plans activity, including tax benefits of $10,500 1,273 47,311 (10) (1,469)
Treasury shares acquired and shares retired (748) (7,051) 748 7,051
Dividends paid (6,364)
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 0 143 5,706 84 73
Note 1)
======== ========= =========== ======= =========
BALANCE, MARCH 31, 1997 (Unaudited) 108,690 $629,879 $640,157 (230) $(5,867)
======== ========= =========== ======= =========
TOTAL
ADJUSTMENT SHAREHOLDERS'
FOR ESOP OTHER EQUITY
------------ ---------- -------------
BALANCE, JUNE 30, 1993 $(16,825) $(3,066) $414,992
Earnings before preferred dividends 85,833
Shares issued pursuant to the conversion of $75 million of
convertible debentures 73,140
Employee stock plans activity, including tax benefits of $7,969 (907) 11,229
Treasury shares acquired and shares retired (3,013)
Cumulative effect of change in accounting principle (1,271) (1,271)
Dividends paid (7,465)
Adjustment for ESOP (911) (911)
5-for-4 stock split effected as a stock dividend and cash paid in
lieu of fractional shares (16)
Acquisition of subsidiary (See Note 2) 382
--------- --------- ----------
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, 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, 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 0 (4,000) 1,035,838
Net earnings 119,229
Employee stock plans activity, including tax benefits of $10,500 (1,106) 44,736
Treasury shares acquired and shares retired 0
Dividends paid (6,364)
Foreign currency translation adjustment (902) (902)
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, MARCH 31, 1997 (Unaudited) $0 $(5,381) $1,258,788
========= ========= ==========
The accompanying notes are an integral part of these statements.
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CARDINAL HEALTH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED MARCH 31, FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------
1997 1996 1996 1995 1994
---------- ------------ ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings before preferred dividends declared $ 119,239 $ 106,620 $ 117,634 $ 142,515 $ 85,833
Adjustments to reconcile earnings before preferred
dividends declared to net cash from operating activities:
Depreciation and amortization 38,945 28,594 39,501 29,455 22,532
Provision for deferred income taxes - - 21,502 48,454 10,931
Provision for bad debts 5,923 7,129 10,111 14,659 13,757
Change in operating assets and liabilities, net of effects
from acquisitions:
Increase in trade receivables (133,469) (60,377) (62,646) (140,336) (92,836)
Increase in merchandise inventories (283,324) (171,104) (159,616) (161,558) (233,997)
Increase in net investment in sales-type leases (2,578) (23,731) (34,125) (40,584) (40,710)
Increase (decrease) in accounts payable (114,543) 48,231 162,996 156,687 172,739
Other operating items, net 37,540 32,660 19,031 (11,467) 13,212
----------- ------------ ----------- ----------- ----------
Net cash provided by (used in) operating activities (332,277) (31,978) 114,388 37,825 (48,539)
----------- ------------ ----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired - (36,244) (36,244) (19,632) -
Proceeds from sale of property and equipment 2,148 717 1,038 764 1,130
Additions to property and equipment (52,002) (63,048) (83,385) (56,377) (18,182)
Purchase of marketable securities available-for-sale (3,400) (88,034) (163,719) (169,599) (652,347)
Proceeds from sale of marketable securities
available-for-sale 57,735 121,565 218,019 143,501 682,300
----------- ------------ ----------- ----------- ----------
Net cash provided by (used in) investing activities 4,481 (65,044) (64,291) (101,343) 12,901
----------- ------------ ----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 127,684 (3,000) (3,000) (22,500) 14,700
Reduction of long-term obligations (129,501) (23,252) (33,075) (7,393) (101,370)
Proceeds from long-term obligations, net of issuance costs 604 148,960 148,960 76 109,498
Proceeds from issuance of Common Shares 34,516 57,895 68,919 75,818 2,384
Tax benefit of stock options 10,500 7,455 11,168 22,236 7,969
Dividends on common and preferred shares and cash paid
in lieu of fractional shares (6,388) (6,163) (7,615) (9,107) (7,661)
Redemption of preferred stock - - - - (20,400)
Purchase of treasury shares (1,379) (1,304) (1,833) (6,290) (3,013)
----------- ------------ ----------- ----------- ----------
Net cash provided by financing activities 36,036 180,591 183,524 52,840 2,107
----------- ------------ ----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (291,760) 83,569 233,621 (10,678) (33,531)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 304,281 70,660 70,660 81,338 114,869
----------- ------------ ----------- ----------- ----------
CASH AND EQUIVALENTS AT END OF YEAR $ 12,521 $ 154,229 $ 304,281 $ 70,660 $ 81,338
=========== ============ =========== =========== ==========
The accompanying notes are an integral part of these statements.
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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 health care
service provider which offers 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 health care
providers. The Company also operates a variety of related health care 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 health care facilities); Medicine Shoppe International, Inc.
("Medicine Shoppe") (a franchisor of apothecary-style 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 only one business
segment, primarily in the continental United States.
The consolidated financial statements as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 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. All such adjustments are of a normal and recurring nature.
All amounts disclosed throughout the "Notes to the Consolidated Financial
Statements" related to such interim periods are unaudited.
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 Whitmire Distribution
Corporation ("Whitmire") on February 7, 1994, 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 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
herein 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, 1995 and 1994, the
consolidated financial statements combine Cardinal's fiscal year ended June 30,
1996, 1995 and 1994 with the financial results for Owen's fiscal years ended
November 30, 1995, 1994 and 1993, respectively. For the nine months ended March
31, 1997, the consolidated financial statements combine Cardinal's nine months
ended March 31, 1997 with Owen's financial results for the period of June 1,
1996 to March 31, 1997 (excluding Owen's financial results for December 1996 in
order to change Owen's fiscal year end to June 30). For the nine months ended
March 31, 1996, the consolidated financial statements combine Cardinal's March
31, 1996 period end results with Owen's financial results for the nine months
ended August 31, 1995. 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 is
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.
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. The historical cost of PCI assets
combined was approximately $147.6 million and the total liabilities
11
12
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assumed (including total debt of approximately $62.0 million) were approximately
$87.2 million. 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.
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 amounts.
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
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 original costs 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. The Company's marketable securities
available-for-sale mature on various dates in fiscal 1997.
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 $36.2 million and $34.4 million at June 30,
1996 and 1995, respectively.
The Company provides financing to various customers. Such financing
arrangements range from one year to ten years, at interest rates which
fluctuate with the prime rate. The financings may be collateralized, guaranteed
by third parties or unsecured. Finance notes and accrued interest receivable
were $59.1 million and $55.6 million at June 30, 1996 and 1995, respectively
(the current portion was $14.8 million and $21.3 million, respectively), and are
included in other assets. These amounts are reported net of an allowance for
doubtful accounts of $9.1 million and $9.3 million at June 30, 1996 and 1995,
respectively.
MERCHANDISE INVENTORIES
Substantially all merchandise inventories (81% in 1996 and 89% in 1995) 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, 1996, by $76.3 million and at June 30,
1995, by $79.4 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 1996, the Company had partial inventory liquidations in
certain LIFO pools which reduced the LIFO provision by approximately $7 million.
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.
12
13
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $25.6 million
and $19.5 million at June 30, 1996 and 1995, 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.
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 direct deliveries to
be made to customer warehouses which are excluded from net revenues and totaled
$2.2 billion, $1.8 billion and $562 million in fiscal 1996, 1995 and 1994,
respectively. The service fees related to direct 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 installed, and/or 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 installation/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 $0.08, $0.08 and $0.07 for
the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
STOCK SPLITS
On October 29, 1996, the Board of Directors of 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.
13
14
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, the Company paid a 25% stock dividend on June 30, 1994, to effect
a five-for-four stock split of the Company's Common Shares. All share and per
share amounts included in the consolidated financial statements, except the
Consolidated Statements of Shareholders' Equity, have been adjusted to
retroactively reflect these stock splits.
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.
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. 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.
During the nine month period ended March 31, 1997, the Company recorded
one-time costs totaling approximately $57 million ($40.2 million, net of tax)
related to the Owen and PCI mergers. These costs included approximately $23.6
million for transaction fees and employee costs associated with the mergers;
$10.1 million related to certain asset impairments and exit costs; and $6.5
million for other integration and restructuring costs. Certain of these amounts
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.
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 table below presents a reconciliation of net revenues and net
earnings available for Common Shares as reported in the accompanying
consolidated financial statements with those previously reported by the Company.
The term "Cardinal" as used herein refers to Cardinal Health, Inc. and
subsidiaries prior to the Pyxis Merger. The term "Cardinal Health" as used
herein refers to Cardinal Health, Inc. and subsidiaries prior to the Owen
Merger.
Cardinal
(In Thousands) Cardinal Pyxis Health
---------------- ---------------- ----------------
Fiscal year ended June 30, 1994:
Net revenues $ 5,838,574 $ 124,706 $ 5,963,280
Net earnings available for Common Shares $ 47,990 $ 31,835 $ 79,825
Fiscal year ended June 30, 1995:
Net revenues $ 7,859,919 $ 162,189 $ 8,022,108
Net earnings available for Common Shares $ 101,000 $ 36,534 $ 137,534
Nine Months Ended March 31, 1996
Net revenues $ 6,381,569 $ 160,376 $ 6,541,945
Net earnings available for Common Shares $ 79,003 $ 24,804 $ 103,807
14
15
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cardinal
(In Thousands) Health Owen Combined
-------------- ------------- ----------------
Fiscal year ended June 30, 1994:
Net revenues $ 5,963,280 $ 290,277 $ 6,253,557
Net earnings available for Common Shares $ 79,825 $ 4,803 $ 84,628
Fiscal year ended June 30, 1995:
Net revenues $ 8,022,108 $ 320,409 $ 8,342,517
Net earnings available for Common Shares $ 137,534 $ 4,981 $ 142,515
Fiscal Year Ended June 30, 1996:
Net revenues $ 8,862,425 $ 383,995 $ 9,246,420
Net earnings available for Common Shares $ 111,864 $ 5,770 $ 117,634
Six Months Ended December 31, 1996
Net revenues $ 5,116,996 $ 234,886 $ 5,351,882
Net earnings available for Common Shares $ 78,251 $ 4,750 $ 83,001
Adjustments affecting net income and shareholders' equity resulting from
the Pyxis and Owen mergers to adopt the same accounting practices were not
material for the periods presented herein. The conforming adjustments primarily
related to deferral of costs associated with initiating customer contracts,
inventory valuation and the recognition of equipment installation obligations.
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.
During fiscal 1996, the Company recorded costs totaling $67.3 million
($47.8 million, net of tax) related to the mergers with Medicine Shoppe and
Pyxis. These costs included approximately $22.4 million for investment advisor,
legal, accounting, internal personnel and other transaction fees associated with
the business combinations; $14.7 million related to costs to exit and
restructure certain activities, including operating lease terminations and asset
impairment charges; $7.8 million related to employee retention, employee
severance, and other personnel costs; and $2.9 million for other activities
related to integrating operations and implementing efficiencies of the merged
companies. Certain of these amounts 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, 1996 and March 31, 1997, the Company incurred approximately
$22.1 million and $50.1 million, respectively, related to the costs recorded at
the time of the various mergers. The Company's current estimates of the merger
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. 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.
15
16
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 approximatley 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
1996 and 1995 on a pro forma basis would not have been significantly different.
On February 7, 1994, the Company completed a merger with Whitmire (the
"Whitmire Merger"). In the Whitmire Merger, holders of outstanding Whitmire
common stock received an aggregate of approximately 10.2 million Class A common
shares and approximately 2.8 million Class B common shares in exchange for all
of the previously outstanding common stock of Whitmire (all Class B common
shares were converted into Class A common shares in fiscal 1995). In addition,
Whitmire's outstanding stock options were converted into options to purchase
approximately 2.6 million Common Shares.
In fiscal 1994, the Company recorded costs totaling approximately $35.9
million ($28.2 million net of tax) related to the Whitmire Merger. These costs
included approximately $7 million for investment banking, legal, accounting, and
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. At June 30, 1996, the Company had
disbursed all amounts related to these liabilities, with the actual amounts paid
approximating the original amounts recorded.
On December 17, 1993, the Company issued approximately 0.4 million Common
Shares in a merger transaction for all of the capital stock of PRN Services,
Inc. ("PRN"), 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 historical cost of PRN assets
combined was approximately $16.9 million, and the total liabilities assumed
(including total debt of approximately $5.8 million) were approximately $16.6
million. 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.
The following supplemental information, which is presented for purposes of
facilitating meaningful comparisons to ongoing operations and to other
companies, summarizes the results of operations of the Company, adjusted to
reflect the elimination of the effect of the merger costs discussed above and
the redemption of Whitmire's preferred stock pursuant to the terms of the
Whitmire Merger. 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.
Nine Months Ended Fiscal Year Ended
March 31, June 30, June 30, June 30,
(In thousands, except per share amounts) 1997 1996 1996 1995 1994
------------- ------------ ------------- ------------ -------------
Operating earnings, excluding unusual items $ 283,173 $ 212,876 $ 293,794 $ 255,843 $ 204,467
Earnings available for Common Shares 159,406 119,115 165,467 142,515 113,741
Earnings per Common Share, excluding
unusual items:
Primary $ 1.47 $ 1.17 $ 1.61 $ 1.42 $ 1.19
Fully diluted $ 1.47 $ 1.16 $ 1.60 $ 1.40 $ 1.18
16
17
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating earnings and net earnings available for Common Shares ("Earnings") as
reported in the Company's consolidated financial statements are reconciled to
the respective amounts in the preceding table as follows:
Nine Months Nine Months
Ended March 31, 1997 Ended March 31, 1996
-------------------------- --------------------------
Operating Operating
(In Thousands) Earnings Earnings Earnings Earnings
------------ ------------ ------------ ------------
As Reported $ 226,210 $ 119,229 $ 195,324 $ 106,620
Supplemental adjustments:
Unusual items, primarily merger costs 56,963 40,177 17,552 12,495
------------ ------------ ------------ ------------
As supplementally adjusted $ 283,173 $ 159,406 $ 212,876 $ 119,115
============ ============ ============ ============
Fiscal Year Fiscal Year
Ended June 30, 1996 Ended June 30, 1994
-------------------------- --------------------------
Operating Operating
(In Thousands) Earnings Earnings Earnings Earnings
------------ ------------ ------------ ------------
As Reported $ 226,544 $ 117,634 $ 168,587 $ 84,628
Supplemental adjustments:
Unusual items, primarily merger costs 67,250 47,833 35,880 28,180
Preferred stock redemptions 1,205
Interest adjustment on preferred (272)
stock
------------ ------------ ------------ ------------
As supplementally adjusted $ 293,794 $ 165,467 $ 204,467 $ 113,741
============ ============ ============ ============
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 with the underlying
equipment. The components of the Company's net investment in sales-type leases
are as follows (in thousands):
June 30, June 30,
1996 1995
--------------- --------------
Future minimum lease payments receivable $ 176,963 $ 139,305
Unguaranteed residual values 1,457 1,302
Unearned income (25,637) (22,275)
Allowance for uncollectible minimum lease payments
receivable (3,226) (2,900)
--------------- --------------
Net investment in sales-type leases $ 149,557 $ 115,432
Less: current portion 37,953 30,119
--------------- --------------
Net investment in sales-type leases, less current portion $ 111,604 $ 85,313
=============== ==============
17
18
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments to be received pursuant to sales-type leases
are as follows at June 30, 1996:
1997 $ 47,981
1998 44,918
1999 39,755
2000 28,566
2001 15,155
Thereafter 588
----------
Total $ 176,963
==========
Lease Related Financing Arrangements
Prior to the merger on May 7, 1996, 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 does not exceed $350 million. The aggregate lease receivables sold
under this arrangement totaled approximately $233 million and $154 million at
June 30, 1996 and 1995, respectively. As a result of the merger, the Company
intends to amend the agreement with the financing company and has made provision
for the estimated cost of exiting the arrangement.
4. NOTES PAYABLE, BANKS
The Company has entered into various uncommitted line-of-credit
arrangements which allow for borrowings up to $250 million at June 30, 1996, at
various money market rates. No amounts were outstanding under such arrangements
at June 30, 1996, and $3 million, at a weighted average interest rate of 6.89%,
was outstanding at June 30, 1995. 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, 1996). The
Company is required to pay a commitment fee at the annual rate of .125% on the
average daily unused amounts of the total credit allowed under the revolving
credit agreements. The total available but unused lines of credit at June 30,
1996 were $345 million.
Prior to the Owen Merger, Owen had revolving credit agreements which
allowed for borrowings at the bank's prime rate or other negotiated rate and
there was a quarterly commitiment fee of .125% on the unused portion. The
maximum amount available pursuant to the credit agreements was $20 million at
June 30, 1996.
18
19
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
June 30, June 30,
1996 1995
--------------- -----------
Notes; 6.0% due 2006 $ 150,000 $ --
Notes; 6.5% due 2004 100,000 100,000
Notes; 8% due 1997 100,000 100,000
Bank term loan due 1999, interest at bank's prime rate
or other negotiated rate (effective rate 6.6%) -- 17,500
Convertible subordinated notes, 9.53% due 2002 -- 10,000
Primarily mortgage revenue bonds, notes and capital leases;
interest averaging 7.14% in 1996 and 9.02% in 1995, due in
varying installments
through 2002 21,154 17,634
------------ -----------
Total $ 371,154 $ 245,134
Less: current portion 106,008 4,665
------------ -----------
Long-term obligations, less current portion $ 265,146 $ 240,469
============ ===========
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 convertible subordinated notes converted
the notes into approximately 1.1 million Common Shares. Additionally, Owen
repaid $34.8 million of debt with proceeds from its 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%.
On February 23, 1994, the Company sold $100 million 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 8% Notes represent unsecured obligations of the Company, were not
redeemable prior to their maturity on March 1, 1997 and were not subject to a
sinking fund. The 8% Notes were fully redeemed as of March 31, 1997.
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 in
1992. 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, 1996 was
$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 was approximately $777,000 as of June 30, 1996;
however, based on the credit quality of the counterparties, the Company believes
the likelihood of such a credit loss to be remote. The Company recognizes in
income the periodic net cash settlements
19
20
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
under the matched swap agreements as they accrue. The swap agreements were fully
extinguished upon the maturity of the 8% Notes.
Certain long-term obligations are collateralized by property and equipment
of the Company with an aggregate book value of approximately $10.5 million at
June 30, 1996.
Maturities of long-term obligations for future fiscal years are as follows
(in thousands):
1997 $ 106,008
1998 4,935
1999 2,836
2000 1,897
2001 1,547
Thereafter 253,931
--------------
Total $ 371,154
==============
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, notes
payable--banks and other accrued liabilities at June 30, 1996 and 1995,
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 $354.2
million and $240.8 million as compared to the carrying amounts of $371.2 million
and $245.1 million at June 30, 1996 and 1995, 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,
1996 1995 1994
------------- ------------ -------------
Current:
Federal $ 64,480 $ 45,654 $ 52,420
State 8,447 5,496 5,866
------------- ------------ -------------
Total 72,927 51,150 58,286
Deferred 21,502 48,454 10,931
------------- ------------ -------------
Total provision $ 94,429 $ 99,604 $ 69,217
============= ============ =============
20
21
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1996 1995 1994
--------------- --------------- ---------------
Provision at Federal
statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal benefit 4.8 4.7 4.6
Nondeductible expenses 4.3 0.1 4.5
Other 0.4 1.3 0.5
-------------- -------------- --------------
Effective income tax rate 44.5% 41.1% 44.6%
============== ============== ==============
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. The components of the deferred
income tax assets and liabilities are as follows (in thousands):
June 30, June 30,
1996 1995
-------------- --------------
Deferred income tax assets:
Allowance for doubtful accounts $ 10,643 $ 15,844
Accrued liabilities 25,018 22,275
Property related 14,233 9,458
Net operating loss carryforwards 27,270 28,550
Other 20,442 15,587
-------------- --------------
Total deferred income tax assets 97,606 91,714
Valuation allowance for deferred income tax assets (2,373) (2,747)
-------------- --------------
Net deferred income tax assets 95,233 88,967
-------------- --------------
Deferred income tax liabilities:
Inventory basis differences (41,765) (46,234)
Revenues on lease contracts (124,030) (93,713)
Other (19,765) (20,628)
-------------- --------------
Total deferred income tax liabilities (185,560) (160,575)
-------------- --------------
Net deferred income tax liabilities $ (90,327) $ (71,608)
============== ==============
The above amounts are classified in the consolidated balance sheets as
follows (in thousands):
June 30, June 30,
1996 1995
-------------- --------------
Other current assets $ 3,335 --
Other accrued liabilities -- (7,898)
Deferred income taxes and other liabilities (93,662) (63,710)
-------------- --------------
Net deferred income tax liabilities $ (90,327) $ (71,608)
============== ==============
At June 30, 1996 and 1995, as a result of the Pyxis Merger, the Company had
Federal net operating loss carryforwards of $73 million. Also at June 30, 1996
and 1995, the Company had state net operating loss carryforwards of $50 million
and $56 million, respectively. A valuation allowance of $2.4 million and $2.7
million at June 30, 1996 and 1995, 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
21
22
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
operating loss carryforwards will be limited due to the change in control of
Pyxis. 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 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 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,
1996 1995 1994
-------------- --------------- --------------
Defined contribution plans $ 8,107 $ 6,033 $ 4,656
Multiemployer plans 711 637 522
ESOP compensation 257 533 555
-------------- --------------- --------------
Total $ 9,075 $ 7,203 $ 5,733
============== =============== ==============
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. At June 30, 1996 the ESOP held approximately 1.3 million
Common Shares.
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, 1996, are
as follows (in thousands):
1997 $ 16,469
1998 14,552
1999 10,777
2000 5,313
2001 2,942
Thereafter 9,867
----------
Total $ 59,920
==========
Rental expense relating to operating leases was approximately $22.6
million, $16.4 million and $14.3 million in fiscal 1996, 1995, and 1994,
respectively. Sublease rental income was not material for any period presented
herein.
22
23
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1996, amounts outstanding on customer notes receivable sold
with full recourse to a commercial bank totaled approximately $13.9 million. The
Company also has outstanding guarantees of indebtedness and financial assistance
commitments which totaled approximately $2.8 million at June 30, 1996.
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. 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 outstanding 0.4 million 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. 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 March 31, 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.
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.
12. 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 health care 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 1996, the Company's two largest customers individually
accounted for 12% of net revenues and 70% of direct deliveries, respectively.
During fiscal 1995, the Company's two largest customers individually accounted
for 11% of net revenues and 82% of direct deliveries, respectively. Trade
receivables due from these two customers aggregated approximately 23% of total
trade receivables at June 30, 1996 and 1995.
13. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains stock incentive plans (the "Plans") for the benefit
of certain officers, directors and employees. 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.
23
24
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes all stock option transactions for the Company
(excluding Whitmire, see below) under the Plans from June 30, 1993, through June
30, 1996, giving retroactive effect to conversions of options in connection with
merger transactions and stock splits (in thousands, except per share amounts):
Number Exercise Prices
of Options Per Share Total
------------ ---------------------- -------------
Balance Outstanding, June 30, 1993 3,617 $ 0.08 - $ 38.53 $ 29,198
Granted 2,668 12.44 - 61.29 78,845
Exercised (476) 0.08 - 42.43 (1,704)
Canceled (65) 0.08 - 56.06 (1,235)
------------ -------------
Balance Outstanding, June 30, 1994 5,744 0.08 - 61.29 105,104
Granted 1,266 16.00 - 42.84 41,095
Exercised (626) 0.08 - 40.17 (4,495)
Canceled (180) 0.08 - 61.29 (5,163)
------------ -------------
Balance Outstanding, June 30, 1995 6,204 0.08 - 61.29 136,541
Granted 1,547 17.11 - 48.25 52,951
Exercised (1,122) 0.08 - 45.91 (16,428)
Canceled (647) 3.91 - 61.29 (23,634)
------------ ----------
Balance Outstanding, June 30, 1996 5,982 $ 0.08 - $ 56.06 $ 149,430
============ =============
On November 14, 1995, the Company's shareholders approved a new equity
incentive plan which authorized the issuance of up to an aggregate of 3 million
Common Shares in the form of incentive stock options, nonqualified stock
options, performance shares and restricted shares. The remaining options
outstanding represented options converted at the time of the various mergers. At
June 30, 1996, approximately 3.6 million option shares under the Plans were
exercisable. In addition to the options outstanding and restricted shares
granted, approximately 2.2 million shares were 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, 1.9 million and 0.4 million Common
Shares, with an average option price of $1.37, $1.01 and $1.07, were exercised
in fiscal 1996, 1995 and 1994, respectively. At June 30, 1996, substantially 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, 1996,
approximately 0.7 million restricted shares had been issued, of which
approximately 0.2 million shares remained restricted and subject to forfeiture
and approximately 26,000 shares had been forfeited.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (in thousands, except per
share amounts) for fiscal 1997, 1996 and 1995 has been restated to reflect the
pooling-of-interests business combinations (see Note 2):
24
25
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- -------------- ------------- -------------
Fiscal 1997:
Net revenues $ 2,535,476 $ 2,816,406 $ 2,825,500
Gross margin 197,128 223,558 243,658
Selling, general and administrative
expenses 124,156 127,313 129,702
Operating earnings 72,972 78,886 74,352
Net earnings available for Common Shares 41,401 41,600 36,228
Net earnings per Common Share:
Primary $ .39 $ .38 $ .33
Fully diluted .39 .38 .33
- -----------------------------------------------------------------------------------------------------
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 available for Common Shares 33,775 28,154 44,691 11,014
Net earnings per Common Share:
Primary $ .33 $ .28 $ .43 $ .10
Fully diluted .33 .27 .43 .10
- -----------------------------------------------------------------------------------------------------
Fiscal 1995:
Net revenues $ 1,949,755 $ 2,119,493 $ 2,119,407 $ 2,153,862
Gross margin 152,373 165,180 175,918 176,002
Selling, general and administrative
expenses 98,685 102,442 103,392 109,111
Operating earnings 53,688 62,738 72,526 66,891
Net earnings available for Common Shares 30,024 35,958 39,718 36,815
Net earnings per Common Share:
Primary $ .31 $ .36 $ .39 $ .36
Fully diluted .31 .35 .39 .36
The following supplemental information for fiscal 1997 and 1996 excludes
the impact of unusual items (in thousands, except per share amounts). See Note 2
for additional information.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
Fiscal 1997:
Net revenues $ 2,535,476 $ 2,816,406 $ 2,825,500
Gross margin 197,128 223,558 243,658
Selling, general and administrative
expenses 124,156 127,313 129,702
Operating earnings 72,972 96,245 113,956
Net earnings available for Common Shares 41,401 54,255 63,750
Net earnings per Common Share:
Primary $ .39 $ .50 $ .58
Fully diluted .39 .50 .58
- -------------------------------------------------------------------------------------------------
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 71,150 81,205 80,918
Net earnings available for Common Shares 33,775 40,649 44,691 46,352
Net earnings per Common Share:
Primary $ .33 $ .40 $ .43 $ .44
Fully diluted .33 .40 .43 .44
25
26
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating earnings and net earnings available for Common Shares
("Earnings") as reported in the Company's selected quarterly financial data are
reconciled to the respective amounts in the preceding table as follows (in
thousands):
Second Quarter Third Quarter
---------------------------- ----------------------------
Operating Operating
Earnings Earnings Earnings Earnings
-------------- ------------- -------------- -------------
Fiscal 1997:
As reported $ 78,886 $ 41,600 $ 74,352 $ 36,228
Supplemental adjustments:
Unusual items, primarily
merger
costs 17,359 12,655 39,604 27,522
-------------- ----------- -------------- -----------
As supplementally adjusted $ 96,245 $ 54,255 $ 113,956 $ 63,750
============== =========== ============== ===========
Second Quarter Fourth Quarter
---------------------------- ----------------------------
Operating Operating
Earnings Earnings Earnings Earnings
-------------- ------------- -------------- -------------
Fiscal 1996:
As reported $ 53,598 $ 28,154 $ 31,220 $ 11,014
Supplemental adjustments:
Unusual items, primarily
merger
costs 17,552 12,495 49,698 35,338
-------------- ----------- -------------- -----------
As supplementally adjusted $ 71,150 $ 40,649 $ 80,918 $ 46,352
============== =========== ============== ===========
The above selected quarterly financial data differs from amounts previously
reported by the Company due to the Pyxis and Owen Mergers. Amounts reported by
the Company prior to the Pyxis Merger (completed May 7, 1996) and the Owen
Merger (completed March 18, 1997) are presented below and differ from the above
selected quarterly financial data solely due to the addition of Pyxis and Owen
amounts pursuant to the pooling-of-interests accounting method for business
combinations (in thousands, except per share amounts).
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- -------------- ------------- -------------
Fiscal 1997:
Net revenues $ 2,428,225 $ 2,688,771
Gross margin 182,263 205,238
Selling, general and administrative
expenses 111,644 114,158
Operating earnings 70,619 73,721
Net earnings available for Common Shares 39,797 38,454
Net earnings per Common Share:
Primary $ .41 $ .38
Fully diluted .41 .38
- -----------------------------------------------------------------------------------------------------
Fiscal 1996:
Net revenues $ 2,047,138 $ 2,131,627 $ 2,202,804 $ 2,320,480
Gross margin 130,012 136,494 150,926 187,502
Selling, general and administrative
expenses 87,217 83,125 84,117 111,046
Operating earnings 42,795 36,995 66,809 26,758
Net earnings available for Common Shares 23,492 18,714 36,797 8,057
Net earnings per Common Share:
Primary $ .32 $ .25 $ .50 $ .08
Fully diluted .32 .25 .50 .08
- -----------------------------------------------------------------------------------------------------
26
27
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal 1995:
Net revenues $ 1,832,128 $ 1,999,267 $ 2,001,250 $ 2,027,274
Gross margin 114,082 123,627 137,992 133,509
Selling, general and administrative
expenses 77,358 78,824 81,660 83,671
Operating earnings 36,724 44,803 56,332 49,838
Net earnings available for Common Shares 19,710 24,942 29,986 26,362
Net earnings per Common Share:
Primary $ .28 $ .34 $ .41 $ .35
Fully diluted .28 .34 .41 .35
15. SUPPLEMENTAL CASH FLOW INFORMATION
Income tax and interest payments for the fiscal years ended June 30, 1996,
1995 and 1994 were as follows (in thousands):
Fiscal Year Ended
---------------------------------------------
June 30, June 30, June 30,
1996 1995 1994
------------- ------------- --------------
Interest paid $ 21,619 $ 23,002 $ 18,964
Income taxes paid $ 61,897 $ 25,262 $ 47,858
See Notes 2 and 5 for additional information regarding non cash investing and
financing activities.
16. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board 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. The
Company believes that in light of its present capital structure, the impact of
adopting SFAS 128 will not be significant.
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 ("APB 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 determined in fiscal 1997 that it will continue to account for these
transactions in accordance with APB 25, but has not yet determined the effect
the new standard will have on pro forma net income and earnings per share that
will be required to be disclosed in the financial statements. Adoption of the
new standard will have no effect on the Company's cash flows.
In addition, in March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 (SFAS No. 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 No. 121
requires
27
28
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 No. 121 also addresses accounting for long-lived assets
that are expected to be disposed of. Based on current circumstances, the impact
of adopting SFAS No. 121 has an immaterial effect on the Company's financial
condition and results of operations.
17. SUBSEQUENT EVENT
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. Upon
consummation of the merger, the Company will record a one-time charge to reflect
transaction and other costs incurred as a result of the merger. The merger is
expected to be completed in the first quarter of fiscal 1998, subject to
satisfaction of certain conditions, including approval by shareholders of
MediQual.
28
29
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
- --------------------------------------------- -------------- -------------- -------------- ----------------- ------------
Nine Months Ended March 31, 1997:
Account receivable $ 36,176 $ 5,542 $ 914 $ (4,409) $ 38,223
Finance notes receivable 9,081 381 (454) 9,008
Net investment in sales-type leases 3,226 (152) 3,074
-------------- -------------- -------------- ----------------- ------------
$ 48,483 $ 5,923 $ 914 $ (5,015) $ 50,305
============== ============== ============== ================= ============
Fiscal Year 1996:
Account receivable $ 34,395 $ 9,135 $ 1,452 $ (8,806) $ 36,176
Finance notes receivable 9,274 650 9 (852) 9,081
Net investment in sales-type leases 2,900 326 3,226
-------------- -------------- -------------- ----------------- ------------
$ 46,569 $ 10,111 $ 1,461 $ (9,658) $ 48,483
============== ============== ============== ================= ============
Fiscal Year 1995:
Account 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
============== ============== ============== ================= ============
Fiscal Year 1994:
Account receivable $ 20,373 $ 11,784 $ 968 $ (6,047) $ 27,078
Finance notes receivable 9,042 1,314 (1,695) 8,661
Net investment in sales-type leases 2,088 659 2,747
-------------- -------------- -------------- ----------------- ------------
$ 31,503 $ 13,757 $ 968 $ (7,742) $ 38,486
============== ============== ============== ================= ============
<FN>
1 During the nine months ended March 31, 1997 and fiscal 1996, 1995 and 1994
recoveries of amounts provided for or written off in prior years were
$286,000, $332,000, $197,000 and $320,000, respectively and increases from
acquisitions were $628,000, $1,120,000, $1,828,000 and $648,000,
respectively.
2 Write-off of uncollectible accounts.
29
30
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
International, Inc. ("Medicine Shoppe") on November 13, 1995, Pyxis Corporation
("Pyxis") on May 7, 1996 and Owen Healthcare, Inc. ("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 Services Inc. ("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 increased 20% for the nine month period ended
March 31, 1997, as compared to the prior year, primarily due to growth in the
Company's pharmaceutical distribution and pharmacy management service
businesses. The increase resulted primarily from internal growth fueled by the
addition of new customers, increased volume from existing customers and price
increases. Incremental revenues were also provided by the addition of PCI
operations following the merger in October 1996. 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 the nine months ended March
31, 1997 .
Net revenues in fiscal 1996 increased 11% compared with fiscal 1995
primarily due to the internal revenue growth from pharmaceutical wholesaling
activities, including the addition of new customers, increased sales to
existing customers and price increases. The 33% increase in net revenues in
fiscal 1995 compared to fiscal 1994 was due to internal business growth of 25%,
primarily in pharmaceutical wholesaling activities and incremental revenues
provided by the addition of Humiston-Keeling, Inc. and Behrens Inc. operations
in July 1994 (see Note 2 of "Notes to Consolidated Financial Statements"). The
internal business growth in fiscal 1995 resulted primarily from the addition of
new customers (partially as a result of expanded sales territories), increased
sales to existing customers and price increases.
GROSS MARGIN. For the nine months ended March 31, 1997 and 1996, gross
margin was 8.12% and 8.34%, respectively. The change in gross margin in the
nine month period 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,
and the additional gross margin contributed by the PCI operations. 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.
As a percentage of net revenues, gross margin increased to 8.36% for
fiscal 1996 from 8.02% in fiscal 1995. This increase is 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. The gross margin ratio in fiscal 1995
decreased from 8.45% in fiscal 1994 primarily due to decreases in
pharmaceutical distribution selling margin rates, reflecting a more competitive
market and a greater mix of high volume customers, offset by a slight increase
in purchasing gains associated with pharmaceutical price inflation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net revenues improved to 4.66% for
the nine month period ended March 31, 1997 compared to 5.23% in the same period
in the prior year. The improvements in the nine month period 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 current year operations
30
31
(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. The decrease in
the selling, general and administrative expenses as a percentage of net
revenues in fiscal 1995 from 5.18% in fiscal 1994 is due to economies
associated with the Company's revenue growth as well as consolidating
distribution centers and administrative functions, and selectively automating
facilities.
UNUSUAL ITEMS. The Company recorded certain one-time charges to reflect
the estimated PCI and Owen merger costs during the nine months ended March 31,
1997 and charges to reflect the estimated Medicine Shoppe merger costs during
the nine months ended March 31, 1996. During fiscal 1996, the Company recorded
certain one-time charges to reflect the estimated Medicine Shoppe and Pyxis
merger costs. During fiscal 1994, the Company recorded a one-time charge to
reflect the estimated Whitmire merger costs. See further discussion in Note 2
of "Notes to Consolidated Financial Statements."
These items are considered unusual in nature in that the costs would
generally not have been incurred in the absence of the business combinations.
INTEREST EXPENSE. The increase in interest expense of $2.6 million for the
nine month period ended March 31, 1997, as compared to the prior year, and the
increase in interest expense of $4.8 million in fiscal 1996 compared to fiscal
1995 is primarily due to the Company's issuance of $150 million 6% Notes due
2006, in a public offering in January 1996, the proceeds of which has been used
for working capital purposes (see "Liquidity and Capital Resources"). Partially
offsetting this increase during the nine month period ended March 31, 1997 is
the impact of the extinguishment of the Company's $100 million 8% Notes on
March 1, 1997. The increase in interest expense of $1.4 million in fiscal 1995
compared to fiscal 1994 is due to higher average short-term borrowings
resulting from increased working capital requirements associated with the
Company's growth.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
relative to pretax earnings was 43.0% and 42.1% for the nine months ended March
31, 1997 and March 31, 1996, respectively. In addition, the Company's provision
for income taxes relative to pretax earnings was 44.5%, 41.1% and 44.6% for
fiscal years 1996, 1995 and 1994, respectively. The fluctuation in the tax rate
is primarily due to certain nondeductible costs associated with the business
combinations in fiscal 1997, 1996 and 1994 (see Note 7 of "Notes to
Consolidated Financial Statements").
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $1,044.8 million at March 31, 1997 from
$924.4 million at June 30, 1996. This increase included additional investments
in merchandise inventories and trade receivables of $297.9 million and $146.9
million, respectively, and a decrease in accounts payable of $104.0 million.
Offsetting the increases in working capital were decreases in cash and
equivalents, and marketable securities available-for-sale of $291.8 million and
$54.3 million, respectively. Increases in merchandise inventories reflect the
seasonal increase of inventories and 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.
Working capital increased $121.7 million to $924.4 million at June 30,
1996, from $802.7 million at June 30, 1995, and included increased investments
in merchandise inventories and trade receivables of $162.5 million and $56.7
million, respectively, and increased holdings of cash and equivalents and
marketable securities of $187.2 million. The increase was offset primarily by
an increase in accounts payable and the current portion of long-term debt of
$168.4 million and $101.3 million, respectively, and an increase in other
accrued liabilities of $36.4 million. The increases in inventories and accounts
payable are due to the Company's revenue growth, the procurement of
pharmaceutical inventory relative to an anticipated increase in business with
Kmart and pharmaceutical price increases. The increase in cash and equivalents,
and marketable securities available-for-sale reflect the timing of inventory
purchases and payments noted above and a partial use of proceeds from the
Company's $150 million 6% Note offering (see "Interest Expense" above). The
increase in trade receivables was due primarily to increased sales (see "Net
Revenues" above). The increase in the current portion of long-term debt is due
to the Company's $100
31
32
million 8% Notes which were due March 1997. Liabilities incurred in connection
with the fiscal 1996 business combinations were the primary cause of the
increase in the other accrued liabilities.
The Company 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.
As of March 31, 1997, property and equipment, at cost, increased by $166.7
million from June 30, 1996 . Of this amount, $111.5 million was attributable to
the merger with PCI. During fiscal 1996, property and equipment, at cost
increased by $79.4 million. The additional increase in property and equipment
included increased investments in management information systems and customer
support systems, as well as upgrades to distribution facilities.
Shareholders' equity increased to $1,258.8 million at March 31, 1997 from
$1,035.8 million at June 30, 1996, primarily due to net earnings of $119.2
million and the equity of PCI on the merger date of $60.4 million.
Shareholders' equity increased to $1,035.8 million at June 30, 1996 from $817.0
million at June 30, 1995 due primarily to net earnings of the Company of
approximately $117.6 million and $50.7 million for the issuances of Common
Shares.
The Company has line-of-credit agreements with various bank sources
aggregating $345 million, of which $95 million is represented by committed
line-of-credit agreements and the balance is uncommitted. The Company had no
amounts outstanding under these lines at June 30, 1996. Prior to the Owen
Merger, Owen had revolving credit agreements which allowed for borrowings at
the bank's prime rate or other negotiated rate and there was a quarterly
commitment fee of .125% on the unused portion. The maximum amount available
pursuant to the Owen credit agreements was $20 million at June 30, 1996.
The Company believes that it has adequate capital resources at its
disposal to meet currently anticipated capital expenditures, routine business
growth and expansion, and current and projected debt service requirements.
OTHER
PENDING BUSINESS COMBINATION. 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. Upon consummation of the merger, the Company will record a
one-time charge to reflect transaction and other costs incurred as a result of
the merger. The merger is expected to be completed in the first quarter of
fiscal 1998, subject to satisfaction of certain conditions, including approval
by shareholders of MediQual.
The Company's trend with regard to acquisitions has been to expand its
role as a health care service provider. This trend has resulted in both
expansion of its pharmaceutical distribution business and diversification into
related health care services 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 gross margins as a percentage of net revenues than
pharmaceutical distribution. As the health care industry continues to
consolidate, the Company is constantly evaluating acquisition candidates in
contiguous sectors of the health care industry that would expand its role as a
health care service provider; however, there can be no assurance that it will
be able to successfully pursue any such opportunity or consummate any such
transaction.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. In February 1997, the
Financial Accounting Standards Board 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. The Company believes
that in light of its present capital structure, the impact of adopting SFAS 128
will not be significant.
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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 ("APB 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 determined in fiscal 1997 that it will continue to account for
these transactions in accordance with APB 25, but has not yet determined the
effect the new standard will have on pro forma net income and earnings per
share that will be required to be disclosed in the financial statements.
Adoption of the new standard will have no effect on the Company's cash flows.
In addition, in March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121 (SFAS No. 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 No. 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 No. 121 also addresses accounting for
long-lived assets that are expected to be disposed of. Based on current
circumstances, the impact of adopting SFAS No. 121 has an immaterial effect on
the Company's financial condition and results of operations.
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