1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998 Commission File Number 0-12591
CARDINAL HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 GLENDON COURT, DUBLIN, OHIO 43016
(Address of principal executive offices and zip code)
(614) 717-5000
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
The number of Registrant's Common Shares outstanding at the close of
business on April 30, 1998 was as follows:
Common Shares, without par value: 110,507,970
-----------
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
Page No.
--------
Part I. Financial Information:
----------------------
Item 1. Financial Statements:
Consolidated Statements of Earnings for the Fiscal Quarter and Nine
Months Ended March 31, 1998 and 1997............................................... 3
Consolidated Balance Sheets at March 31, 1998 and
June 30, 1997...................................................................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1998 and 1997............................................................ 5
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 8
Part II. Other Information:
------------------
Item 1. Legal Proceedings.................................................................. 12
Item 2. Changes in Securities and Use of Proceeds.......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................................ 13
Item 6. Exhibits and Reports on Form 8-K................................................... 13
* Items deleted are inapplicable.
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PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Fiscal Quarter Ended Nine Months Ended
-------------------------------- --------------------------------
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
Net revenues $ 3,381,479 $ 2,825,500 $ 9,381,955 $ 8,177,382
Cost of products sold (3,102,103) (2,578,842) (8,627,913) (7,513,038)
--------------- --------------- --------------- ---------------
Gross margin 279,376 246,658 754,042 664,344
Selling, general and administrative expenses (142,205) (131,502) (412,372) (383,071)
Special charges:
Mergers-related costs (21,157) (30,882) (26,529) (49,056)
Facilities closures and employee severance (8,634) -- (8,634) --
--------------- --------------- --------------- ---------------
Operating earnings 107,380 84,274 306,507 232,217
Other income (expense):
Interest expense (7,096) (8,414) (17,261) (22,388)
Other, net-- primarily interest income 459 787 8,520 5,308
--------------- --------------- --------------- ---------------
Earnings before income taxes 100,743 76,647 297,766 215,137
Provision for income taxes (44,431) (34,466) (121,234) (92,304)
--------------- --------------- --------------- ---------------
Net earnings $ 56,312 $ 42,181 $ 176,532 $ 122,833
=============== =============== =============== ===============
Net earnings per Common Share:
Basic $ 0.51 $ 0.39 $ 1.61 $ 1.15
Diluted $ 0.50 $ 0.38 $ 1.58 $ 1.13
Weighted average number of Common
Shares outstanding:
Basic 109,982 108,194 109,495 106,646
Diluted 111,602 110,246 111,183 108,711
Cash dividends declared per Common Share $ 0.03 $ 0.025 $ 0.08 $ 0.07
See notes to consolidated financial statements
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
March 31, June 30,
1998 1997
--------------- ----------------
ASSETS
Current assets:
Cash and equivalents $ 90,151 $ 243,061
Trade receivables, net 811,332 672,164
Current portion of net investment in sales-type leases 70,779 40,997
Merchandise inventories 2,157,814 1,436,220
Prepaid expenses and other 173,304 94,668
--------------- ----------------
Total current assets 3,303,380 2,487,110
--------------- ----------------
Property and equipment, at cost 537,672 477,420
Accumulated depreciation and amortization (222,825) (199,949)
--------------- ----------------
Property and equipment, net 314,847 277,471
Other assets:
Net investment in sales-type leases, less current portion 155,500 118,563
Goodwill and other intangibles 120,745 122,104
Other 78,557 86,502
--------------- ----------------
Total $ 3,973,029 $ 3,091,750
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 85,941 $ 22,159
Current portion of long-term obligations 6,847 6,158
Accounts payable 1,613,095 1,135,951
Other accrued liabilities 297,192 225,165
--------------- ----------------
Total current liabilities 2,003,075 1,389,433
--------------- ----------------
Long-term obligations, less current portion 273,267 277,766
Deferred income taxes and other liabilities 149,285 89,821
Shareholders' equity:
Common Shares, without par value 700,603 645,051
Retained earnings 861,454 701,896
Common Shares in treasury, at cost (8,626) (6,373)
Other (6,029) (5,844)
--------------- ----------------
Total shareholders' equity 1,547,402 1,334,730
--------------- ----------------
Total $ 3,973,029 $ 3,091,750
=============== ================
See notes to consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
--------------------------------
March 31, March 31,
1998 1997
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 176,532 $ 122,833
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 47,538 38,945
Provision for bad debts 9,648 5,923
Change in operating assets and liabilities:
Increase in trade receivables (147,729) (133,469)
Increase in merchandise inventories (721,594) (283,324)
Increase in net investment in sales-type leases (66,719) (3,660)
Increase/(decrease) in accounts payable 476,887 (114,543)
Other operating items, net 61,922 27,880
--------------- ----------------
Net cash used in operating activities (163,515) (339,415)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 1,491 2,148
Additions to property and equipment (77,698) (52,613)
Purchase of marketable securities available-for-sale -- (3,400)
Proceeds from sale of marketable securities available-for-sale -- 57,735
--------------- ----------------
Net cash (used in) provided by investing activities (76,207) 3,870
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 63,782 127,684
Reduction of long-term obligations (6,669) (129,501)
Proceeds from long-term obligations 552 604
Proceeds from issuance of Common Shares 25,661 34,516
Tax benefit of stock options 13,913 10,500
Dividends paid on Common Shares and cash paid in lieu
of fractional shares (8,193) (6,388)
Purchase of treasury shares (2,234) (1,379)
--------------- ----------------
Net cash provided by financing activities 86,812 36,036
--------------- ----------------
NET DECREASE IN CASH AND EQUIVALENTS (152,910) (299,509)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 243,061 312,030
--------------- ----------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 90,151 $ 12,521
=============== ================
See notes to consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. The consolidated financial statements of Cardinal Health, Inc. (the
"Company") include the accounts of all majority-owned subsidiaries and
all significant intercompany amounts have been eliminated. These
consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q 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. Except as
disclosed elsewhere herein, all such adjustments are of a normal and
recurring nature.
The consolidated financial statements included herein should be read
in conjunction with the audited consolidated financial statements and
related notes contained in the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1997, as amended by the Form 10K/A
(Amendment No.1) filed on January 7, 1998.
Note 2. The Company arranges for bulk deliveries to be made to customer
warehouses. Revenues for these deliveries are excluded from net
revenues and totaled $0.7 billion and $0.6 billion for the quarters
ending March 31, 1998 and 1997, respectively, and $2.1 billion and
$1.8 billion during the nine months ended March 31, 1998 and 1997,
respectively. The service fees related to bulk deliveries are included
in net revenues and were not significant in any of the periods
presented.
Note 3. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," in the quarter ended December
31, 1997. In accordance with the provisions of the Standard, all prior
periods presented have been restated to comply with SFAS No. 128.
Basic earnings per Common Share ("Basic") is computed by dividing net
earnings (the numerator) by the weighted average number of Common
Shares outstanding during each period (the denominator). Diluted
earnings per Common Share is similar to the computation for Basic,
except that the denominator is increased by the dilutive effect of
stock options outstanding, computed using the treasury stock method.
Note 4. On February 18, 1998, the Company completed a merger with MediQual
Systems, Inc. ("MediQual"). The merger was accounted for as a
pooling-of-interests. In the merger, the Company issued approximately
600,000 Common Shares to MediQual shareholders and MediQual's
outstanding stock options were converted into options to purchase
approximately 20,000 Common Shares of the Company. The historical cost
of MediQual's assets combined was approximately $7.3 million and the
total liabilities assumed were approximately $1.6 million. The impact
of the MediQual merger, on a historical basis, is not significant.
Accordingly, prior period financial statements have not been restated
for the MediQual merger.
Note 5. Costs of effecting mergers and subsequently integrating the
operations of the various merged companies are recorded as merger
costs when incurred. During the three and nine months ended March 31,
1998, the Company recorded $21.2 million ($18.5 million, net of tax)
and $26.5 million ($21.8 million, net of tax), respectively, related
to various mergers. Of the amount recorded during the third quarter of
fiscal 1998, $13.3 million ($13.1 million, net of tax) related to
transaction costs incurred to date in connection with the pending
merger transaction with Bergen Brunswig Corporation ("Bergen") (see
Note 7), $2.3 million ($2.1 million, net of tax) related to
transaction costs incurred in connection with the MediQual merger (see
Note 4), with the remaining $5.6 million ($3.3 million, net of tax) in
the three-month period and $10.9 million ($6.6 million, net of tax) in
the nine-month period, related to integrating the operations of
companies that previously merged with Cardinal.
During the three and nine months ended March 31, 1997, mergers-related
costs totaling $30.9 million ($22.3 million, net of tax) and $49.1
million ($35.4 million, net of tax), respectively, were recorded. Of
the amount recorded during the third quarter of fiscal 1997,
approximately $13.1 million related to transaction and employee
related costs, and $13.2 million to asset impairments, associated with
the
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Company's merger with Owen Healthcare, Inc. ("Owen"), which was
completed on March 18, 1997. Additionally, approximately $13.8 million
for transaction and employee related costs associated with the
Company's merger with PCI Services, Inc. ("PCI"), which was completed
on October 11, 1996, were recorded during the nine month period ended
March 31, 1997. The remaining amounts recorded in each of the
respective periods related to integrating the operations of companies
that previously merged with Cardinal.
The Company estimates that it will incur additional mergers-related
costs associated with the various mergers it has completed to date
(excluding the Bergen merger - see Note 7) of approximately $6.2
million ($3.8 million, net of tax) in future periods (primarily fiscal
1998 and 1999) in order to properly integrate operations and implement
efficiencies. Such amounts will be charged to expense when incurred.
Note 6. During the three months ended March 31, 1998, the Company recorded a
special charge of $8.6 million ($5.2 million, net of tax) related to
the rationalization of its distribution operations. Approximately $6.1
million related to asset impairments and lease exit costs resulting
primarily from the Company's decision to accelerate the consolidation
of a number of distribution facilities and the relocation to more
modern facilities for certain others. The remaining amount related to
employee severance costs for plans announced prior to March 31, 1998,
including approximately $2.0 million incurred in connection with the
final settlement of a labor dispute with former employees of the
Company's Boston distribution facility, resulting in termination of
the union relationship.
Note 7. On August 23, 1997, the Company signed a definitive merger agreement
with Bergen, a distributor of pharmaceuticals and medical-surgical
supplies, pursuant to which Bergen 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. Under the terms of the proposed merger, shareholders of
Bergen will receive .775 of a Company Common Share in exchange for
each outstanding common share of Bergen. The Company expects to issue
approximately 42 million Common Shares in the transaction and also
expects to assume approximately $603 million in long-term debt.
Shareholders of both companies approved the transaction on February
20, 1998. On March 9, 1998, the U.S. Federal Trade Commission (the
"FTC") filed a complaint in the United States District Court for the
District of Columbia seeking a preliminary injunction to halt the
merger. On March 17, 1998, the companies announced that they would
contest the FTC's attempt to challenge the transaction. A court
hearing is currently scheduled to begin on June 10, 1998. The
companies have agreed not to consummate the merger pending a decision
on the preliminary injunction, which is expected by the end of July
1998.
In connection with the pending merger transaction with Bergen, the
companies have incurred investment banking, legal, accounting, and
other related transaction costs and fees. During the three months
ended March 31, 1998, the Company expensed $13.3 million ($13.1
million, net of tax) related to transaction costs incurred to date
(see Note 5). Based on information currently available, the total
amount of merger-related charges to be recognized in connection with
the merger (including those recorded to date) is estimated to be
between $100 and $130 million, after tax. These merger-related
expenses will be charged to expense in the period when incurred. Since
the merger has not yet been consummated, the merger expenses can only
be estimated at this time, and are subject to revision as further
information becomes available.
Note 8. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," both of which will require
adoption in fiscal 1999. These new statements will not impact the
Company's financial statements, but may require additional
disclosures. The Company is presently evaluating the applicability of
SFAS No.'s 130 and 131 to its operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis presented below is concerned with
material changes in financial condition and results of operations for the
Company's consolidated balance sheets as of March 31, 1998 and June 30, 1997,
and for the consolidated statements of earnings for the three and nine month
periods ended March 31, 1998 and 1997. On February 18, 1998, the Company
completed a merger with MediQual, which was accounted for as a
pooling-of-interests. The impact of the MediQual merger, on a historical basis,
is not significant. Accordingly, prior period financial statements have not been
restated for the MediQual merger (see Note 4 of "Notes to Consolidated Financial
Statements"). This discussion and analysis should be read together with
management's discussion and analysis included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997, as amended by the Form 10K/A
(Amendment No. 1) filed on January 7, 1998.
Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
materially differ from those projected or implied. The most significant of such
risks, uncertainties and other factors are described in the Company's Form 10-K,
Form 8-K and Form 10-Q and exhibits and amendments to those reports and are
incorporated herein by reference. The Company disclaims any obligation to update
any forward-looking statement.
RESULTS OF OPERATIONS
Net Revenues. Net revenues for the third quarter of fiscal 1998 and for the
nine-month period ended March 31, 1998 increased 20% and 15%, respectively, as
compared to the prior year. Distribution businesses (those whose primary
operations involve the wholesale distribution of pharmaceuticals, representing
91% of total revenues) grew at a rate of 22% and 15% during the three and nine
months ended March 31, 1998, respectively, while Service businesses (those that
provide services to the healthcare industry primarily through pharmacy
franchising, pharmacy automation equipment, pharmacy management, and
pharmaceutical packaging) grew at a rate of 19% and 25% during the three and
nine months ended March 31, 1998, respectively, primarily on the strength of the
Company's pharmacy automation and pharmacy management businesses. The majority
of the revenue increase (approximately 80% for the three and nine month periods
ended March 31, 1998) came from existing customers in the form of increased
volume and price increases. The remainder of the growth came from the addition
of new customers.
Gross Margin. For the three months ended March 31, 1998 and 1997, gross
margin as a percentage of net revenues was 8.26% and 8.73%, respectively. For
the nine-month periods ended March 31, 1998 and 1997, gross margin as a
percentage of revenue was 8.04% and 8.12%, respectively. The current year
decreases in the gross margin percentages are due to a greater mix of lower
margin Distribution business in the quarter ended March 31, 1998, as well as
declines in the Distribution businesses gross margin, and to a lesser extent,
declines in the Service businesses gross margin.
The Distribution businesses gross margin as a percentage of revenues
decreased for the third quarter of the current fiscal year from 6.39% a year ago
to 5.80%. During the nine month period ended March 31, 1998, the Distribution
businesses' gross margin percentage rate decreased from 5.84% a year ago to
5.59%. These decreases are primarily due to the impact of lower selling margins,
as a result of a highly competitive market and a greater mix of high volume
customers, where a lower cost of distribution and better asset management enable
the Company to offer lower selling margins to its customers. These factors were
particularly relevant in the three months ended March 31, 1998 as the
Distribution businesses achieved 22% revenue growth, primarily through the
addition or expansion of business with large, high volume customers.
The Service businesses' gross margin as a percentage of revenues for the
third quarter of fiscal 1998 and fiscal 1997 was 30.88% and 31.49%,
respectively, and 30.96% and 32.64% for the nine months ended March 31, 1998 and
1997, respectively. The slight decline in gross margin rates experienced by the
Service businesses is a function of the mix of the various businesses. Revenue
growth has been greater in the relatively lower margin pharmacy management and
pharmaceutical packaging businesses than it has been in the higher margin
pharmacy franchising business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of net revenues improved to 4.20% in the
third quarter of fiscal 1998 compared to 4.66% in the prior year, and 4.40%
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for the nine-month period ended March 31, 1998 compared to 4.68% in the prior
year. The improvements in the third quarter and the nine month period reflect
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. The growth in
the business, combined with a shift towards a greater mix of Service business
(Service businesses had a 16.28% and 16.52% ratio of expenses to revenues for
the three and nine month periods ending March 31, 1998, respectively, compared
to Distribution businesses with a ratio of 2.78% and 2.92%, during the same
periods) has caused the increase in expense in the current periods. The 8%
growth in selling, general and administrative expenses experienced in the third
quarter of fiscal 1998 and in the nine months ended March 31, 1998 was due
primarily to increases in personnel costs and depreciation expense.
Special Charge - Mergers-Related. Costs of effecting mergers and
subsequently integrating the operations of the various merged companies are
recorded as merger costs when incurred. During the three and nine months ended
March 31, 1998, the Company recorded $21.2 million ($18.5 million, net of tax)
and $26.5 million ($21.8 million, net of tax), respectively, related to various
mergers. Of the amount recorded during the third quarter of fiscal 1998, $13.3
million ($13.1 million, net of tax) related to transaction costs incurred to
date in connection with the pending merger transaction with Bergen Brunswig
Corporation ("Bergen") (see Note 7 of "Notes to Consolidated Financial
Statements"), $2.3 million ($2.1 million, net of tax) related to transaction
costs incurred in connection with the MediQual merger (see Note 4 of "Notes to
Consolidated Financial Statements"), with the remaining $5.6 million ($3.3
million, net of tax) in the three-month period and $10.9 million ($6.6 million,
net of tax) in the nine-month period, related to integrating the operations of
companies that previously merged with Cardinal.
During the three and nine months ended March 31, 1997, mergers-related
costs totaling $30.9 million ($22.3 million, net of tax) and $49.1 million
($35.4 million, net of tax), respectively, were recorded. Of the amount recorded
during the third quarter of fiscal 1997, approximately $13.1 million related to
transaction and employee related costs, and $13.2 million to asset impairments
associated with the Company's merger with Owen Healthcare, Inc. ("Owen"), which
was completed on March 18, 1997. Additionally, approximately $13.8 million for
transaction and employee related costs associated with the Company's merger with
PCI Services, Inc. ("PCI"), which was completed on October 11, 1996, were
recorded during the nine-month period ended March 31, 1997. The remaining
amounts recorded in each of the respective periods related to integrating the
operations of companies that previously merged with Cardinal.
The Company estimates that it will incur additional mergers-related
costs associated with the various mergers it has completed to date (excluding
the Bergen merger - see Note 7) of approximately $6.2 million ($3.8 million, net
of tax) in future periods (primarily fiscal 1998 and 1999) in order to properly
integrate operations and implement efficiencies. Such amounts will be charged to
expense when incurred.
Special Charge - Facilities Closures and Employee Severance. During the
three months ended March 31, 1998, the Company recorded approximately $8.6
million ($5.2 million, net of tax) related to the rationalization of its
distribution operations. Approximately $6.1 million related to asset impairments
and lease exit costs resulting primarily from the Company's decision to
accelerate the consolidation of a number of distribution facilities and the
relocation to more modern facilities for certain others. The remaining amount
related to employee severance costs for plans announced prior to March 31, 1998,
including approximately $2.0 million incurred in connection with the final
settlement of a labor dispute with former employees of the Company's Boston
distribution facility, which resulted in termination of the union relationship.
The effect of Special Charges, including mergers-related costs and
facilities closures and employee severance, recorded during the three months
ended March 31, 1998 and 1997 was to reduce net earnings by $23.7 million to
$56.3 million and $22.3 million to $42.2 million, respectively, and to reduce
reported diluted earnings per common share by $0.22 per share to $0.50 per share
and by $0.20 per share to $0.38 per share, respectively. The effect of Special
Charges recorded during the nine months ended March 31, 1998 and 1997 was to
reduce net earnings by $27.0 million to $176.5 million and $35.4 million to
$122.8 million, respectively, and to reduce reported diluted earnings per common
share by $0.25 per share to $1.58 per share and by $0.32 per share to $1.13 per
share, respectively.
Other Income (Expense). The decrease in interest expense of $1.3 million in
the third quarter of fiscal 1998 compared to fiscal 1997 and $5.1 million for
the nine-month period ended March 31, 1998 compared to the prior year is
primarily due to extinguishment of the Company's $100 million 8% Notes on March
1, 1997. The increase in other income for the nine-month period ended March 31,
1998, as compared to the prior year, is primarily due to higher investment
income. This is in part due to better asset management. Only $152.9 million of
cash was used
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during the nine month period ended March 31, 1998, compared to a use of cash of
$299.5 million in the same period of the prior year.
Provision for Income Taxes. The Company's provision for income taxes
relative to pretax earnings was 44% and 45% for the third quarter of fiscal 1998
and 1997, respectively, and 41% and 43% for the nine-month periods ended March
31, 1998 and 1997, respectively. The decrease in the effective tax rate is due
to a reduction in the state effective tax rate as a result of the change in the
Company's business mix and the impact of recording certain non-deductible
mergers-related costs during various periods.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $1,300 million at March 31, 1998 from $1,098
million at June 30, 1997. This increase included additional investments in
merchandise inventories and trade receivables of $721 million and $139 million,
respectively. Offsetting the increases in working capital was a decrease in cash
and equivalents of $153 million and an increase in accounts payable of $477
million. The increase in merchandise inventories reflects normal seasonal
purchases of pharmaceutical inventories and the higher level of current and
anticipated business volume in pharmaceutical distribution activities. The
increase in trade receivables is consistent with the Company's net revenues
growth (see "Net Revenues" above). The change in cash and equivalents and
accounts payable is due primarily to the timing of inventory purchases and
related payments.
Property and equipment, at cost, increased by $60 million from June 30,
1997. The property acquired included increased investment in management
information systems and customer support systems.
Shareholders' equity increased to $1,547.4 million at March 31, 1998 from
$1,334.7 million at June 30, 1997, primarily due to net earnings of $176.5
million and the investment of $25.7 million by employees of the Company through
various stock incentive plans during the nine-month period ended March 31, 1998.
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements, including those
related to pending business combinations. See "Other" below.
OTHER
On August 23, 1997, the Company signed a definitive merger agreement with
Bergen, a distributor of pharmaceuticals and medical-surgical supplies, pursuant
to which Bergen 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. Under the terms of the proposed merger,
shareholders of Bergen will receive .775 of a Company Common Share in exchange
for each outstanding common share of Bergen. The Company expects to issue
approximately 42 million Common Shares in the transaction and also expects to
assume approximately $603 million in long-term debt. Shareholders of both
companies approved the transaction on February 20, 1998. On March 9, 1998, the
U.S. Federal Trade Commission (the "FTC") filed a complaint in the United States
District Court for the District of Columbia seeking a preliminary injunction to
halt the merger. On March 17, 1998, the companies announced that they would
contest the FTC's attempt to challenge the transaction. A court hearing is
currently scheduled to begin on June 10, 1998. The companies have agreed not to
consummate the merger pending a decision on the preliminary injunction, which is
expected by the end of July 1998.
In connection with the pending merger transaction with Bergen, the
companies have incurred investment banking, legal, accounting, and other related
transaction costs and fees. During the three months ended March 31, 1998, the
Company expensed $13.3 million ($13.1 million, net of tax) related to
transaction costs incurred to date (see Note 5 of "Notes to Consolidated
Financial Statements"). Based on information currently available, the total
amount of merger-related charges to be recognized in connection with the merger
(included those recorded to date) is estimated to be between $100 and $130
million, after tax. These merger-related expenses will be charged to expense in
the period when incurred. Since the merger has not yet been consummated, the
merger expenses can only be estimated at this time, and are subject to revision
as further information becomes available
The Company utilizes computer technologies throughout its business to
effectively carry out its day-to-day operations. Similar to most companies, the
Company must determine whether its systems are capable of recognizing and
processing date sensitive information properly as the year 2000 approaches. The
Company has completed a preliminary assessment of its year 2000 requirements and
is currently correcting and replacing those
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systems which are not year 2000 compliant in order to continue to meet its
internal needs and those of its suppliers and customers. The Company currently
believes it will be able to modify or replace its affected systems in time to
avoid any detrimental impact on its operations. The Company estimates that the
costs of its year 2000 project will be approximately $20 million. A significant
portion of these costs are not likely to be incremental costs, but rather will
represent the redeployment of existing resources. The anticipated impact and
costs of the project, as well as the date on which the Company expects to
complete the project, are based on management's best estimates using information
currently available and numerous assumptions about future events. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Based on its current estimates, the
Company does not anticipate that the costs associated with this project will
have a material adverse effect on the Company's consolidated financial
statements in future periods.
The Company has initiated formal communications with its significant
suppliers and customers to determine the extent to which the Company may be
vulnerable in the event that those parties fail to properly remediate their own
year 2000 issues. While the Company is not presently aware of any such
significant exposure, there can be no guarantee that the systems of third
parties on which the Company relies will be converted in a timely manner, or
that a failure to properly convert by another company would not have a material
adverse effect on the Company.
Along with other companies in its industry, the Company has been advised
that bulk deliveries to be made to its customers' warehouses should be reported
as revenues, rather than reporting as revenues only the service fees related to
such bulk deliveries. Such service fees were not significant in any of the
periods presented (see Note 2 of "Notes to Consolidated Financial Statements").
The Company is currently evaluating its options in this matter, and intends to
adopt the revised presentation beginning with its audited financial statements
for its fiscal year ending June 30, 1998.
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PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In November 1993, the Company and Whitmire Distribution Corporation (which
is now a subsidiary of the Company) ("Whitmire"), as well as other
pharmaceutical wholesalers, were named as defendants in a series of purported
class action antitrust lawsuits which were later consolidated and transferred by
the Judicial Panel for Multi-District Litigation to the United States District
Court for the Northern District of Illinois (the "Brand Name Prescription Drug
Litigation"). Subsequent to the consolidation, a new consolidated complaint was
filed which included allegations that the wholesaler defendants, including the
Company and Whitmire conspired with manufacturers to inflate prices by using a
chargeback pricing system. Most recently, the wholesaler defendants also have
been added as defendants in a series of related antitrust lawsuits brought by
certain independent pharmacies who have opted out of the class action cases and
by certain chain drug and grocery stores. In addition to the federal court cases
described above, the Company and Whitmire have also been named as defendants in
a series of state court cases alleging similar claims under various state laws
regarding the sale of brand name prescription drugs. These lawsuits are
described in "Item 1 - Legal Proceedings" of Part II of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, which was filed with
the Securities and Exchange Commission and is incorporated herein by reference.
Effective October 26, 1994, the Company entered into a Judgment Sharing
Agreement in the Brand Name Prescription Drug Litigation with other wholesaler
and pharmaceutical manufacturer defendants. Under the Judgment Sharing
Agreement: (a) the manufacturer defendants agreed to reimburse the wholesaler
defendants for litigation costs incurred, up to an aggregate of $9 million; and
(b) if a judgment is entered against both manufacturers and wholesalers, the
total exposure for joint and several liability of the Company is limited to the
lesser of 1% of such judgment or one million dollars. In addition, the Company
has released any claims which it might have had against the manufacturers for
the claims presented by the plaintiffs in the Brand Name Prescription Drug
Litigation. The Judgment Sharing Agreement covers the federal court litigation
as well as the cases which have been filed in various state courts. On December
15, 1994, the plaintiffs filed a motion to declare the Judgment Sharing
Agreement unenforceable. On April 10, 1995, the court denied that motion and
ruled that the Judgment Sharing Agreement is valid and enforceable. The
plaintiffs filed a motion for reconsideration of the court's April 10, 1995
ruling, and the court denied that motion and reaffirmed its earlier decision on
April 24, 1995.
On November 9, 1995, the Company, along with the other wholesaler
defendants, filed a motion for summary judgment in the Brand Name Prescription
Drug Litigation. On April 4, 1996, summary judgment was granted in favor of the
Company and the other wholesaler defendants. The plaintiffs appealed this
decision. On August 15, 1997, the Court of Appeals for the Seventh Circuit,
along with other rulings, reversed the District Court's decision granting
summary judgment to the wholesaler defendants. On September 5, 1997, the
wholesaler defendants filed a motion for this decision to be reconsidered by the
Court of Appeals en banc. On October 8, 1997, the motion to reconsider was
denied by the Court of Appeals. The wholesaler defendants filed a petition
seeking review of the Court of Appeals decision by the United States Supreme
Court, which petition was denied. Trial has been set for the Brand Name
Prescription Drug Litigation in September 1998. The Company continues to believe
that the allegations against Cardinal and Whitmire in such litigation are
without merit, and it intends to contest such allegations vigorously.
On March 9, 1998, the U.S. Federal Trade Commission (the "FTC") filed two
complaints in the United States District Court for the District of Columbia
seeking preliminary injunctions blocking consummation of the Company's proposed
merger involving Bergen Brunswig Corporation and the proposed merger of McKesson
Corporation and AmeriSource Healthcare Corporation. The two lawsuits have been
consolidated and will be heard together. On March 17, 1998, the Company and
Bergen announced that they would contest the FTC's challenge to the proposed
merger; subsequently, McKesson and AmeriSource announced that they would also
contest the FTC's challenge to their proposed merger transaction. The District
Court has established a schedule for the consolidated action pursuant to which
expedited discovery is presently on-going and the hearing on the FTC's
preliminary injunction request is scheduled to commence on June 10, 1998. It is
anticipated that the hearing will take approximately three weeks. The parties
have agreed not to consummate their proposed mergers pending a decision on the
preliminary injunction, which is expected by the end of July 1998. The Company
believes that the FTC's suit is without merit, and intends to vigorously contest
the FTC's request for a preliminary injunction, although there can be no
assurance that the Company will succeed in its efforts, that a decision will be
rendered before the end of July 1998 or that the proposed merger transaction
with Bergen will be consummated.
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The Company also becomes involved from time-to-time in litigation
incidental to its business. Although the ultimate resolution of the litigation
referenced herein cannot be forecast with certainty, the Company does not
believe that the outcome of these lawsuits will have a material adverse effect
on the Company's financial statements.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 20, 1998, the shareholders of the Company adopted an amendment to
Article FOURTH of the Company's Amended and Restated Articles of Incorporation,
as amended, which increased the number of authorized common shares, without par
value, from 150 million to 300 million.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) A Special Meeting of the Company's shareholders was held on February 20,
1998.
(b) Not applicable.
(c) Matters voted upon at the Special Meeting were as follows:
(1) Approval, authorization and adoption of Agreement and Plan of Merger (the
"Merger") by and among Registrant, Bruin Merger Corp. and Bergen Brunswig
Corporation. The results of the shareholder vote were as follows: 87,354,953 in
favor, 966,902 against, 230,694 withheld, and 12,849 broker non-votes.
(2) Amendment of Registrant's Articles of Incorporation to increase the number
of authorized common shares, without par value, from 150 million to 300 million.
The results of the shareholder vote were as follows: 87,168,667 in favor,
1,115,295 against, 273,586 withheld, and 12,850 broker non-votes.
(3) Amendment of Registrant's Articles of Incorporation to change Registrant's
name from "Cardinal Health, Inc." to "Cardinal Bergen Health, Inc." if the
proposal referenced in item (1) above is approved and the Merger is consummated.
The results of the shareholder vote were as follows: 86,996,727 in favor,
1,316,133 against, 244,689 withheld, and 12,849 broker non-votes.
(4) Adjournment of the Registrant's Special Meeting, if necessary, to permit
further solicitation of proxies in the event there were not sufficient votes at
the time of the regularly scheduled meeting to approve either of the proposals
referenced in items (1) or (2) above. The results of the shareholder vote were
as follows: 67,199,429 in favor, 20,494,431 against, 876,538 withheld, and 0
broker non-votes.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit
Number Exhibit Description
- ------ -------------------
2.01 Agreement and Plan of Merger dated as of August 23, 1997, among the
Registrant, Bruin Merger Corp., and Bergen Brunswig Corporation (1)
2.02 First Amendment to the Agreement and Plan of Merger, dated as of
August 23, 1997, by and among Cardinal Health, Inc., Bruin Merger
Corp., and Bergen Brunswig Corporation, made as of March 16, 1998 (3)
3.01 Amended and Restated Articles of Incorporation of the Registrant, as
amended
4.01 Form of Warrant Certificate to purchase Company Common Shares (4)
10.01 Employment Agreement dated February 10, 1998, between Robert J.
Zollars and the Registrant*
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11.01 Computation of Per Share Earnings
27.01 Financial Data Schedule
99.01 Statement Regarding Forward-Looking Information (2)
- ------------------
(1) Included as an exhibit to the Registrant's Current Report on Form
8-K/A, Amendment No. 1 (No. 0-12591) filed with the Commission on
August 27, 1997, and incorporated herein by reference.
(2) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1997 (No. 0-12591), and
incorporated herein by reference.
(3) Included as an exhibit to the Registrant's Current Report on form
8-K (No. 0-12591) filed with the Commission on March 17, 1998, and
incorporated herein by reference.
(4) Included as an exhibit to the Registrant's Amendment No. 2 to Form
S-4 Registration Statement(No. 333-30889),and incorporated herein
by reference.
* Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K:
On February 18, 1998, the Company filed a Current Report on Form 8-K under Item
5 which reported that it had completed its merger of a wholly-owned subsidiary
with and into MediQual Systems, Inc. on February 18, 1998.
On March 17, 1998, the Company filed a Current Report on Form 8-K under Item 5
which reported that it had entered into a First Amendment (the "First
Amendment") to the Agreement and Plan of Merger (without amendment, the
"Original Merger Agreement") by and among the Company, Bruin Merger Corp., and
Bergen Brunswig Corporation, which First Amendment, among other things, amended
certain of the termination provisions of the Original Merger Agreement.
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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 thereunto duly authorized.
CARDINAL HEALTH, INC.
Date: May 13, 1998 By: /s/ ROBERT D. WALTER
---------------------
Robert D. Walter
Chairman and Chief Executive Officer
By: /s/ DAVID BEARMAN
-----------------
David Bearman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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