1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 3, 1999
-------------------------------
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
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Item 2. ACQUISITION OR DISPOSITION OF ASSETS
------------------------------------
On February 3, 1999, Cardinal Health, Inc., an Ohio corporation (the
"Registrant"), completed its merger (the "Allegiance Merger") of a wholly owned
subsidiary ("Sub") with and into Allegiance Corporation ("Allegiance").
Allegiance was the surviving corporation of the Allegiance Merger and is now a
wholly owned subsidiary of the Registrant. Pursuant to the Agreement and Plan of
Merger dated as of October 9, 1998, by and among, the Registrant, Sub and
Allegiance (the "Allegiance Merger Agreement"), each outstanding share of
Allegiance common stock was converted into 0.6225 Common Shares of the
Registrant (the "Allegiance Exchange Ratio"). Pursuant to the terms of the
Allegiance Merger Agreement, approximately 81.0 million common shares of the
Registrant ("Common Shares") were issued in exchange for Allegiance common stock
and outstanding options to purchase Allegiance common stock. The Allegiance
Exchange Ratio was determined by arms'-length negotiations between Allegiance
and its advisors and the Registrant and its advisors. Additional information
concerning the Allegiance Merger and the transactions related thereto (including
pro forma financial information and historical Allegiance financial information)
is contained in the Registrant's Registration Statement on Form S-4
(Registration Number 333-68819) previously filed with the Securities and
Exchange Commission on December 14, 1998 and amended on December 14, 1998.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Supplemental consolidated financial statements of the Registrant
and Allegiance prepared under the pooling-of-interests method of
accounting:
- INDEPENDENT AUDITORS' REPORTS
- SUPPLEMENTAL FINANCIAL STATEMENTS AND SCHEDULES
Supplemental Consolidated Statements of Earnings for the Six
Months Ended December 31, 1998 and 1997 (unaudited) and the
Fiscal Years Ended June 30, 1998, June 30, 1997 and June 30,
1996
Supplemental Consolidated Balance Sheets at December 31, 1998
(unaudited), June 30, 1998, and June 30, 1997
Supplemental Consolidated Statements of Shareholders' Equity for
the Six Months Ended December 31, 1998 (unaudited) and the
Fiscal Years Ended June 30, 1998, June 30, 1997, and June
30, 1996
Supplemental Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1998 and 1997 (unaudited) and the
Fiscal Years Ended June 30, 1998, June 30, 1997 and June 30,
1996
Notes to Supplemental Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
- MANAGEMENT'S DISCUSSION AND ANALYSIS
- SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The foregoing are included in Annex A to this Form 8-K.
(c) Exhibits
2.01 Agreement and Plan of Merger, dated as of October 8,
1998, among the Registrant, Boxes Acquisition Corp.
and Allegiance Corporation. (1)
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of Ernst & Young LLP.
23.03 Consent of PricewaterhouseCoopers LLP.
23.04 Consent of Arthur Andersen LLP.
23.05 Consent of PricewaterhouseCoopers LLP.
27.01 Financial Data Schedule.
99.01 Statement Regarding Forward-Looking Information. (2)
-----------------------
(1) Included as an exhibit to the Registrant's Registration
Statement on Form S-4 (No. 333-68819) and incorporated
herein by reference.
(2) Filed as Exhibit 99.01 to the Annual Report on Form 10-Q of
the Registrant for the quarter ended December 31, 1998, and
incorporated herein by reference.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this amendment to this report to be signed
on its behalf by the undersigned hereunto duly authorized.
CARDINAL HEALTH, INC.
March 16, 1999 By: /s/ Richard J. Miller
------------------------
Richard J. Miller
Corporate Vice President and
Chief Financial Officer
2
4
ANNEX A
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Cardinal Health, Inc:
We have audited the accompanying supplemental consolidated balance sheets of
Cardinal Health, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related supplemental consolidated statements of earnings, shareholders' equity,
and cash flows for each of the three years in the period ended June 30, 1998.
Our audits also included the supplemental consolidated financial statement
schedule listed in the Index at Item 7. These supplemental 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 supplemental consolidated financial statements and consolidated
financial statement schedule based on our audits. We did not audit the financial
statements of Allegiance Corporation ("Allegiance"), a wholly owned subsidiary
of Cardinal Health, Inc., as of June 30, 1998 and December 31, 1997, and for the
years ended June 30, 1998 and December 31, 1997 and 1996. We also did not audit
the financial statements of R.P. Scherer Corporation ("Scherer"), a wholly owned
subsidiary of Cardinal Health, Inc., as of March 31, 1998 and 1997, and for each
of the three years in the period ended March 31, 1998. The combined financial
statements of Allegiance and Scherer reflect combined assets of $3.5 billion and
$3.4 billion as of June 30, 1998 and 1997, respectively, combined revenues of
$5.1 billion, $4.9 billion and $5.0 billion for the years ended June 30, 1998,
1997, and 1996, respectively, and combined net earnings (loss) of $176.6
million, $147.9 million , and $(447.0) million for the years ended June 30,
1998, 1997, and 1996, respectively. In addition, we did not audit the financial
statements of Owen Healthcare, Inc. ("Owen") and of Pyxis Corporation ("Pyxis"),
both wholly owned subsidiaries of Cardinal Health, Inc., for the year ended June
30, 1996. The combined financial statements of Owen and Pyxis reflect combined
revenue and net earnings of $.6 billion and $ 43.7 million, respectively, for
the year 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 Allegiance, Scherer, Owen, and Pyxis, is based
solely on the reports of such other auditors.
The supplemental 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 Allegiance on February 3,
1999, which business combination has been accounted for as a
pooling-of-interests as described in Note 2 to the supplemental consolidated
financial statements. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the
pooling-of-interests method in financial statements that do not include the date
of consummation. These supplemental consolidated financial statements do not
extend through the date of consummation, however, they will become the
historical consolidated financial statements of Cardinal Health, Inc. and
subsidiaries after financial statements covering the date of consummation of the
business combination are issued.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the supplemental consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the supplemental
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall supplemental financial statement presentation. We
believe that our audits and the 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
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Cardinal Health, Inc. and
subsidiaries at June 30, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1998
in conformity with generally accepted accounting principles applicable after
consolidated financial statements are issued for a period which includes the
date of consummation of the Allegiance business combination. Also, in our
opinion, such supplemental consolidated financial statement schedule, when
considered in relation to the basic supplemental consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
August 12, 1998, except for the second paragraph of Note 11 as to which the date
is November 23, 1998 and the first paragraph of Note 2 and of Note 18 as to
which the date is March 16, 1999
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5
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Cardinal Health, Inc.
We have audited the consolidated statements of income, shareholder's equity, and
cash flows of Pyxis Corporation for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Pyxis Corporation for the year ended June 30, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
August 2, 1996
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6
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of
Owen Healthcare, Inc.
In our opinion, the 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 results of
their operations and their cash flows for the year ended November 30, 1995 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Owen Healthcare, Inc. management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit in accordance with generally accepted auditing
standards 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
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICE WATERHOUSE LLP
Houston, Texas
January 30, 1997
5
7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To R. P. Scherer Corporation:
We have audited the accompanying consolidated statement of financial position of
R. P. SCHERER CORPORATION (a Delaware corporation) and subsidiaries as of March
31, 1998 and 1997 and the related consolidated statements of income, cash flows
and shareholders' equity for each of the three years in the period ended March
31, 1998 (not presented separately herein). These financial statements and the
schedule referred to below are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements and
this schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of R.P. Scherer Corporation and
subsidiaries as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation allowances (not
presented separately herein) is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Detroit, Michigan
April 27, 1998 (except with respect to the matter
discussed in Note 16, as to which the date is
May 17, 1998).
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8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Stockholders of Allegiance Corporation
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of cash flows and of equity of Allegiance Corporation
and its subsidiaries (not presented separately herein) present fairly, in all
material respects, the financial position of Allegiance Corporation and its
subsidiaries at June 30, 1998 and December 31, 1997, and the results of their
operations and their cash flows for the year ended June 30, 1998 and for the
years ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Allegiance Corporation'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.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 16, 1999
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9
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Stockholders of Allegiance Corporation
Our audits of the consolidated financial statements of Allegiance Corporation
and its subsidiaries referred to in our report dated March 16, 1999 appearing on
page 7 of the Cardinal Health, Inc. Current Report on Form 8-K/A (Amendment No.
1) dated February 3, 1999 also included an audit of the Financial Statement
Schedule II -- Valuation and Qualifying Accounts ("Financial Statement
Schedule") of Allegiance Corporation and its subsidiaries (not presented
separately herein). In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
March 16, 1999
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10
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF EARNINGS
(In Millions, Except Per Share Amounts)
Six Months Ended December 31, Fiscal Year Ended June 30,
------------------------------ ------------------------------------
1998 1997 1998 1997 1996
------------------------------ ------------------------------------
(unaudited)
Revenue:
Operating revenue $ 10,268.6 $ 8,523.3 $ 18,004.0 $ 15,924.8 $ 14,383.9
Bulk deliveries to customer warehouses 1,781.5 1,431.8 2,991.4 2,469.1 2,178.5
---------- ---------- ---------- ---------- ----------
Total revenue 12,050.1 9,955.1 20,995.4 18,393.9 16,562.4
Cost of products sold:
Operating cost of products sold 9,041.5 7,478.4 15,783.4 13,904.8 12,455.0
Cost of products sold - bulk deliveries 1,781.5 1,431.8 2,991.4 2,469.1 2,178.1
---------- ---------- ---------- ---------- ----------
Total cost of products sold 10,823.0 8,910.2 18,774.8 16,373.9 14,633.1
Gross margin 1,227.1 1,044.9 2,220.6 2,020.0 1,929.3
Selling, general and administrative expenses 766.6 672.8 1,390.3 1,304.3 1,333.0
Special charges:
Merger-related costs (37.5) (5.4) (49.2) (50.9) (49.2)
Other special charges -- -- (8.6) -- (679.3)
---------- ---------- ---------- ---------- ----------
Total special charges (37.5) (5.4) (57.8) (50.9) (728.5)
Other income (expense):
Interest expense (48.5) (45.6) (94.5) (107.2) (62.1)
Other, net (includes minority interests) (7.0) (5.3) (18.3) (17.9) 34.8
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes 367.5 315.8 659.7 539.7 (159.5)
Provision for income taxes 142.6 118.2 234.6 204.9 161.7
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 224.9 $ 197.6 $ 425.1 $ 334.8 $ (321.2)
========== ========== ========== ========== ==========
Net earnings (loss) per Common Share:
Basic $ 0.84 $ 0.73 $ 1.57 $ 1.26 $ (1.24)
Diluted $ 0.81 $ 0.71 $ 1.53 $ 1.23 $ (1.24)
Weighted average number of
Common Shares outstanding:
Basic 270.7 271.1 271.2 265.8 258.1
Diluted 278.1 276.9 277.9 272.0 258.1
The accompanying notes are an integral part of these statements.
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11
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In Millions)
December 31, June 30, June 30,
1998 1998 1997
-------- -------- --------
(unaudited)
ASSETS
Current assets:
Cash and equivalents $ 290.3 $ 373.3 $ 302.1
Trade receivables, net 1,595.1 1,436.3 1,291.3
Current portion of net investment in sales-type leases 122.2 91.4 61.4
Merchandise inventories 3,064.8 2,608.1 2,082.4
Prepaid expenses and other 278.4 277.0 239.8
-------- -------- --------
Total current assets 5,350.8 4,786.1 3,977.0
-------- -------- --------
Property and equipment, at cost:
Land, buildings and improvements 715.5 761.6 728.3
Machinery and equipment 1,879.5 1,735.7 1,650.2
Furniture and fixtures 92.7 104.4 84.9
-------- -------- --------
Total 2,687.7 2,601.7 2,463.4
Accumulated depreciation and amortization (1,163.8) (1,134.0) (1,071.1)
-------- -------- --------
Property and equipment, net 1,523.9 1,467.7 1,392.3
Other assets:
Net investment in sales-type leases, less current portion 354.0 233.1 159.8
Goodwill and other intangibles 910.8 850.5 844.7
Other 199.7 140.6 148.0
-------- -------- --------
Total $8,339.2 $7,478.0 $6,521.8
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 106.4 $ 24.7 $ 22.8
Current portion of long-term obligations 10.4 7.3 7.1
Accounts payable 2,390.6 2,142.7 1,620.4
Other accrued liabilities 561.2 550.7 566.1
-------- -------- --------
Total current liabilities 3,068.6 2,725.4 2,216.4
-------- -------- --------
Long-term obligations, less current portion 1,534.9 1,330.0 1,320.9
Deferred income taxes and other liabilities 547.1 467.7 357.5
Shareholders' equity:
Common Shares, without par value 1,098.0 1,063.6 1,024.8
Retained earnings 2,218.6 2,006.9 1,651.6
Common Shares in treasury, at cost (97.8) (82.3) (31.6)
Cumulative foreign currency adjustment (24.7) (27.9) (12.5)
Other (5.5) (5.4) (5.3)
-------- -------- --------
Total shareholders' equity 3,188.6 2,954.9 2,627.0
-------- -------- --------
Total $8,339.2 $7,478.0 $6,521.8
======== ======== ========
The accompanying notes are an integral part of these statements.
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12
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Millions)
Common Shares
-------------- Treasury Shares
Shares Retained --------------- Adjustment
Issued Amount Earnings Shares Amount for ESOP
------ --------- --------- ------- ------- ----------
BALANCE, JUNE 30, 1995 93.8 $ 752.4 $ 425.0 (1.4) $ (16.0) $ (21.3)
Comprehensive income (loss):
Net earnings (loss) (439.0)
Foreign currency translation adjustments
Total comprehensive income (loss)
Employee stock plans activity, including tax benefits of $13.5 1.3 35.8 0.1 0.9
Treasury shares acquired and shares retired (0.2) (5.7) 0.2 3.5
Dividends paid (13.2)
Adjustment for ESOP 21.3
Payments to Baxter International Inc.
Distribution of Common Stock (September 30, 1996) 34.1 54.8 1,370.3
Shares issued in connection with stock offering 2.1 50.7
Conversion of subordinated debt, net 1.0 9.8
Other
----- -------- ---------- ---- ------- ---------
BALANCE, JUNE 30, 1996 132.1 $ 897.8 $ 1,343.1 (1.1) $ (11.6) $ 0.0
Comprehensive income:
Net earnings 334.8
Foreign currency translation adjustments
Total comprehensive income
Employee stock plans activity, including tax benefits of $21.0 3.5 123.4 (0.6) 10.6
Treasury shares acquired and shares retired (0.7) (7.1) 0.9 (30.7)
Dividends paid (32.0)
3-for-2 stock split effected as a stock dividend and cash
paid in lieu of fractional shares 33.4
Adjustment for change in fiscal year of an acquired subidiary
(see Note 1) 0.2 5.7 0.1 0.1
Stock issued for acquisitions and other 0.1 10.5
----- -------- ---------- ---- ------- ---------
BALANCE, JUNE 30, 1997 168.4 $1,024.8 $ 1,651.6 (0.7) $ (31.6) $ 0.0
Comprehensive income:
Net earnings 425.1
Foreign currency translation adjustments
Total comprehensive income
Employee stock plans activity, including tax benefits of $35.2 2.0 65.0 (0.3) 29.0
Treasury shares acquired and shares retired (0.4) (25.4) (0.8) (104.9)
Dividends paid (34.8)
Other adjustments
Adjustment for change in fiscal year of an acquired subidiary
(see Note 1) (0.1) (0.8) (35.0) 0.4 25.2
----- -------- ---------- ---- ------- ---------
BALANCE, JUNE 30, 1998 169.9 $1,063.6 $ 2,006.9 (1.4) $ (82.3) $ 0.0
Comprehensive income:
Net earnings 224.9
Foreign currency translation adjustments
Total comprehensive income
Employee stock plans activity, including tax benefits of $25.1 0.6 33.9 0.8 25.7
Treasury shares acquired and shares retired (0.8) (41.2)
Dividends paid (21.5)
Stock split effected as a stock dividend and cash
paid in lieu of fractional shares 103.1 (0.3)
Adjustment for change in fiscal year of an acquired subidiary
(see Note 1) 0.1 0.5 8.6
----- -------- ---------- ---- ------- ---------
BALANCE, DECEMBER 31, 1998 (unaudited) 273.7 $1,098.0 $ 2,218.6 (1.4) $ (97.8) $ 0.0
===== ======== ========== ==== ======= =========
Cumulative
Division Foreign Total
Retained Currency Shareholders
Earnings Adjustment Other Equity
---------- ---------- ------- --------------
BALANCE, JUNE 30, 1995 $ 1,767.5 $ 3.0 $ 807.5 $3,718.1
Comprehensive income (loss):
Net earnings (loss) 117.8
Foreign currency translation adjustments (6.8)
Total comprehensive income (loss) (328.0)
Employee stock plans activity, including tax benefits of $13.5 (1.2) 35.5
Treasury shares acquired and shares retired 0.3 (1.9)
Dividends paid (13.2)
Adjustment for ESOP 21.3
Payments to Baxter International Inc. (460.2) (810.0) (1,270.2)
Distribution of Common Stock (September 30, 1996) (1,425.1)
Shares issued in connection with stock offering 50.7
Conversion of subordinated debt, net 9.8
Other 0.4 0.4
--------- ----------- ------- -----------
BALANCE, JUNE 30, 1996 $ 0.0 $ (3.8) $ (3.0) 2,222.5
Comprehensive income:
Net earnings
Foreign currency translation adjustments (8.7)
Total comprehensive income 326.1
Employee stock plans activity, including tax benefits of $21.0 (1.1) 132.9
Treasury shares acquired and shares retired (37.8)
Dividends paid (32.0)
3-for-2 stock split effected as a stock dividend and cash
paid in lieu of fractional shares
Adjustment for change in fiscal year of an acquired subidiary
(see Note 1) 6.0
Stock issued for acquisitions and other (1.2) 9.3
--------- ----------- ------- -----------
BALANCE, JUNE 30, 1997 $ 0.0 $ (12.5)$ (5.3) 2,627.0
Comprehensive income:
Net earnings
Foreign currency translation adjustments (16.0)
Total comprehensive income 409.1
Employee stock plans activity, including tax benefits of $35.2 (0.4) 93.6
Treasury shares acquired and shares retired (130.3)
Dividends paid (34.8)
Other adjustments (0.5) (0.5)
Adjustment for change in fiscal year of an acquired subidiary
(see Note 1) 0.6 0.8 (9.2)
--------- ----------- ------- -----------
BALANCE, JUNE 30, 1998 $ 0.0 $ (27.9)$ (5.4)$ 2,954.9
Comprehensive income:
Net earnings
Foreign currency translation adjustments 3.2
Total comprehensive income 228.1
Employee stock plans activity, including tax benefits of $25.1 (0.2) 59.4
Treasury shares acquired and shares retired 0.1 (41.1)
Dividends paid (21.5)
Stock split effected as a stock dividend and cash
paid in lieu of fractional shares (0.3)
Adjustment for change in fiscal year of an acquired subidiary
(see Note 1) 9.1
--------- ----------- ------- -----------
BALANCE, DECEMBER 31, 1998 (unaudited) $ 0.0 $ (24.7)$ (5.5)$ 3,188.6
========= =========== ======= ===========
The accompanying notes are an integral part of these statements.
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13
CARDINAL HEALTH INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
Six Months
Ended December 31, Fiscal Year Ended June 30,
-------------------- ----------------------------
1998 1997 1998 1997 1996
-------- -------- -------- -------- --------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 224.9 $ 197.6 $ 425.1 $ 334.8 $ (321.2)
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 112.2 108.8 214.5 209.1 224.5
Provision for deferred income taxes (15.1) 11.9 90.1 32.9 (0.3)
Provision for bad debts 5.1 5.9 15.5 8.6 14.0
Goodwill write-down, benefit curtailment gain and
other non-recurring charges -- -- -- -- 609.6
Change in operating assets and liabilities,
net of effects from acquisitions:
Increase in trade receivables (142.0) (142.7) (204.9) (15.3) (93.0)
Increase in merchandise inventories (452.7) (459.8) (473.7) (106.6) (101.2)
Increase in net investment in sales-type leases (151.7) (28.5) (103.3) (5.1) (27.6)
Increase in accounts payable 238.4 308.7 523.3 (33.2) 230.8
Other operating items, net 77.3 (6.1) 65.5 63.8 (1.3)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities (103.6) (4.2) 552.1 489.0 534.3
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (69.6) (17.5) (45.8) (43.7) (77.5)
Proceeds from sale of property and equipment 2.5 4.2 10.7 21.0 (9.4)
Additions to property and equipment (171.3) (153.0) (278.8) (227.9) (266.7)
Purchase of marketable securities available for sale -- -- -- (3.4) (163.7)
Proceeds from sale of marketable securities available for sale -- -- -- 57.7 218.0
Other -- 1.7 (4.7) 2.5 (2.9)
-------- -------- -------- -------- --------
Net cash used in investing activities (238.4) (164.6) (318.6) (193.8) (302.2)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 142.7 72.1 (89.2) (185.4) 502.5
Reduction of long-term obligations (19.2) (43.3) (49.1) (277.8) (83.8)
Proceeds from long-term obligations, net of issuance costs 161.1 54.1 111.4 94.7 821.6
Payments to Baxter -- -- -- -- (1,270.2)
Proceeds from issuance of Common Shares 34.6 23.3 59.1 108.2 69.4
Dividends on common shares, minority interests and
cash paid in lieu of fractional shares (20.1) (17.4) (51.4) (40.0) (21.1)
Purchase of treasury shares (41.3) (34.2) (130.7) (37.7) (1.8)
Other (1.3) (10.8) (10.8) (10.8) --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 256.5 43.8 (160.7) (348.8) 16.6
-------- -------- -------- -------- --------
EFFECT OF CURRENCY TRANSLATION
ON CASH AND EQUIVALENTS 2.5 (0.6) (1.6) (1.2) (1.8)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (83.0) (125.6) 71.2 (54.8) 246.9
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 373.3 302.1 302.1 356.9 110.0
-------- -------- -------- -------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 290.3 $ 176.5 $ 373.3 $ 302.1 $ 356.9
======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
12
14
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Health, Inc., together with its subsidiaries (collectively the
"Company"), is a provider of services to the healthcare industry offering an
array of value-added pharmaceutical and other healthcare products distribution
services and pharmaceutical-related products and services to a broad base of
customers. The Company distributes a broad line of pharmaceuticals, surgical and
hospital supplies, therapeutic plasma and other specialty pharmaceutical
products, health and beauty care products, and other items typically sold by
hospitals, retail drug stores, and other healthcare providers. The Company also
operates a variety of related healthcare service and manufacturing businesses,
including Pyxis Corporation ("Pyxis") (which develops, manufactures, leases,
sells and services point-of-use pharmacy systems which automate the distribution
and management of medications and supplies in hospitals and other healthcare
facilities); Medicine Shoppe International, Inc. ("Medicine Shoppe") (a
franchisor of apothecary-style retail pharmacies); PCI Services, Inc. ("PCI")
(an international provider of integrated packaging services to pharmaceutical
manufacturers); Owen Healthcare, Inc. ("Owen") (a provider of pharmacy
management and information services to hospitals); Cardinal Information
Corporation ("CIC") (a developer and provider of clinical information systems);
R.P. Scherer Corporation ("Scherer") (an international developer and
manufacturer of drug delivery systems); and Allegiance Corporation
("Allegiance") (a distributor and manufacturer of non-pharmaceutical health care
products and other related services). See "Basis of Presentation" below. The
Company is currently operating in one business segment.
The consolidated financial statements as of December 31, 1998 and for the
six months ended December 31, 1998 and 1997 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 Supplemental Consolidated
Financial Statements" related to such interim periods are unaudited.
BASIS OF PRESENTATION
The supplemental consolidated financial statements of the Company include
the accounts of all majority-owned subsidiaries and all significant intercompany
accounts and transactions have been eliminated. In addition, the supplemental
consolidated financial statements give retroactive effect to the mergers with
Medicine Shoppe on November 13, 1995; Pyxis on May 7, 1996; PCI on October 11,
1996; Owen on March 18, 1997; MediQual Systems, Inc. ("MediQual") on February
18, 1998; Scherer on August 7, 1998; and Allegiance on February 3, 1999 (see
Note 2). Such business combinations were accounted for under the
pooling-of-interests method.
The supplemental consolidated financial statements of the Company have been
prepared to give retroactive effect to the merger with Allegiance. Generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they become
the historical financial statements of the Company after financial statements
covering the date of consummation of the business combination are issued.
The Company's fiscal year end is June 30 and Owen's, MediQual's, Scherer's
and Allegiance's fiscal year ends were November 30, December 31, March 31, and
December 31, respectively. For the fiscal year ended June 30, 1996, the
supplemental consolidated financial statements combine the Company's fiscal year
ended June 30, 1996 with the financial results for Owen's fiscal year ended
November 30, 1995, MediQual's fiscal year ended December 31, 1995, Scherer's
fiscal year ended March 31, 1996, and Allegiance's fiscal year ended December
31, 1996. For the fiscal year ended June 30, 1997, the supplemental consolidated
financial statements combine the Company's fiscal year ended June 30, 1997 with
Owen's financial results for the period of June 1, 1996 to June 30, 1997
(excluding Owen's financial results for December 1996 in order to change Owen's
November 30 fiscal year end to June 30) and with the financial results for
MediQual's fiscal year ended December 31, 1996, Scherer's fiscal year ended
March 31, 1997, and Allegiance's fiscal year ended December 31, 1997. For the
fiscal year ended June 30, 1998, the supplemental consolidated financial
statements combine the Company's fiscal year ended June 30, 1998 with MediQual's
twelve months ended June 30, 1998, Scherer's fiscal year ended March 31, 1998,
and Allegiance's twelve months ended June 30, 1998. For the six-month period
ended December 31, 1998, the supplemental consolidated financial statements
combine the Company's six months ended December 31, 1998 results with Scherer's
six months ended December 31, 1998 results. Due to the change in Owen's fiscal
year from November 30 to conform with the Company's June 30 fiscal year end,
Owen's results of operations for the periods from December 1, 1995 through May
31, 1996 and the month of December 1996 will not be included in the combined
results of operations but are reflected as an adjustment in the Supplemental
Consolidated Statements of Shareholders'
13
15
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
Equity. As a result of changing MediQual's fiscal year end from December 31 to
June 30, the six months ended June 30, 1997 will not be included in the combined
results of operations but are reflected as an adjustment in the Supplemental
Consolidated Statements of Shareholders' Equity. MediQual's total revenue and
net earnings for this period were $6.0 million and $1.7 million, respectively.
MediQual's cash flows from operating activities for this period were $1.2
million, while cash flows used in investing and financing activities were $0.3
million and $0.1 million, respectively. Due to the change in Scherer's fiscal
year end from March 31 to conform with the Company's June 30 fiscal year end,
Scherer's results of operations for the three months ended June 30, 1998 will
not be included in the combined results of operations but will be reflected as
an adjustment in the Supplemental Consolidated Statements of Shareholders'
Equity. Scherer's net revenue and net earnings for this period were $161.6
million and $8.6 million, respectively. Scherer's cash flows from operating and
financing activities for this period were $12.6 million and $32.6 million,
respectively, while cash flows used in investing activities were $12.2 million.
As a result of changing Allegiance's fiscal year end from December 31 to June
30, the six months ended December 31, 1997 will be included in the combined
results of operations for both the fiscal years ended June 30, 1997 and 1998 and
are reflected as an adjustment in the Supplemental Consolidated Statements of
Shareholders' Equity. Allegiance's total revenue and net earnings for this
period were $2.2 billion and $47.9 million, respectively. Allegiance's cash
flows from operating activities for this period were $147.2 million, while cash
flows used in investing and financing activities were $63.7 million and $83.8
million, respectively.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual amounts may differ from these estimated amounts.
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.
RECEIVABLES
Trade receivables are primarily comprised of amounts owed to the Company
through its pharmaceutical and other healthcare distribution activities and are
presented net of an allowance for doubtful accounts of $64.6 million and $62.8
million at June 30, 1998 and 1997, respectively.
The Company provides financing to various customers. Such financing
arrangements range from one year to ten years, at interest rates which generally
fluctuate with the prime rate. The financings may be collateralized, guaranteed
by third parties or unsecured. Finance notes and accrued interest receivable are
$66.6 million and $52.5 million at June 30, 1998 and 1997, respectively (the
current portion was $29.4 million and $12.1 million, respectively), and are
included in other assets. These amounts are reported net of an allowance for
doubtful accounts of $6.4 million and $8.2 million at June 30, 1998 and 1997,
respectively.
MERCHANDISE INVENTORIES
A majority of merchandise inventories (60% in 1998 and 61% in 1997) are
stated at lower of cost, using the last-in, first-out ("LIFO") method, or
market. The remaining inventory is primarily stated at the lower of cost using
the first-in, first-out ("FIFO") method or market. If the Company had used the
FIFO method of inventory valuation, which approximates current replacement cost,
inventories would have been higher than the LIFO method reported at June 30,
1998 and 1997 by $54.6 million and $69.6 million, respectively.
The Company continues to consolidate locations, automate selected
distribution facilities and invest in management information systems in order to
achieve efficiencies in inventory management processes. As a result of the
facility and related inventory consolidations, and the operational efficiencies
achieved in fiscal 1998 and 1997, the Company had partial inventory liquidations
in certain LIFO pools which reduced the LIFO provision by approximately $2.3
million and $2.0 million, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
for financial reporting purposes are computed using the straight-line method
over the estimated useful lives of the assets which range from one to fifty
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. At each balance sheet date, the Company
assesses the recoverability of its long-lived property, based on a review of
projected undiscounted cash flows associated with these assets.
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
14
16
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
to forty years. Accumulated amortization was $529.8 million and $504.3 million
at June 30, 1998 and 1997, respectively. At each balance sheet date, a
determination is made by management to ascertain whether there is an indication
that the intangible assets may have been impaired based on undiscounted
operating cash flows for each subsidiary, except Allegiance. In fiscal 1996,
based upon the market value of its stock being substantially below its book
value and management's expectations of continued intense competition, Allegiance
adopted a new policy for assessing goodwill impairment based upon a fair value
approach. As such, in 1996, Allegiance recorded a charge to operations of $550.0
million.
REVENUE RECOGNITION
The Company records distribution revenue when merchandise is shipped to its
customers and the Company has no further obligation to provide services related
to such merchandise. Along with other companies in the drug distribution
industry, the Company reports as revenue bulk deliveries made to customers'
warehouses, whereby the Company acts as an intermediary in the ordering and
subsequent delivery of pharmaceutical products. Fluctuations in bulk deliveries
result largely from circumstances that are beyond the control of the Company,
including consolidation within the chain drugstore industry, decisions by chains
to either begin or discontinue warehousing activities, and changes in policy by
manufacturers related to selling directly to chain drugstore customers. Due to
the insignificant margins generated through bulk deliveries, fluctuations in
their amount have no significant impact on earnings.
Revenue is recognized from sales-type leases of point-of-use pharmacy
systems when the systems are delivered, the customer accepts the system, and the
lease becomes noncancellable. Unearned income on sales-type leases is recognized
using the interest method. Sales of point-of-use pharmacy systems are recognized
upon delivery and customer acceptance. Revenue for systems installed under
operating lease arrangements is recognized over the lease term as such amounts
become receivable according to the provisions of the lease.
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 revenue when they are earned.
Origination fees from signing new franchise agreements are recognized as revenue
when the new franchise store is opened. Master franchise origination fees are
recognized as revenue when all significant conditions relating to the master
franchise agreement have been satisfied by the Company.
Pharmacy management and other service revenue is recognized as the related
services are rendered according to the contracts established. A fee is charged
under such contracts through either 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.
Revenue is adjusted to reflect the estimated effects of such contractual
guarantees and risk-sharing provisions.
Packaging revenue is recognized from services provided upon the completion
of such services.
System license revenue is recognized upon shipment of the system to the
customer. The portion of the license fee related to system maintenance is
deferred and recognized over the annual maintenance period.
Drug delivery system revenue is recognized upon shipment of products to the
customer. Non-product revenue related to option, milestone and exclusivity fees
are recognized when earned and all obligations of performance have been
completed.
TRANSLATION OF FOREIGN CURRENCIES
The financial position and the results of operations of the Company's
foreign operations, excluding the Company's Malaysian and Mexican manufacturing
operations which are denominated in U.S. dollars, are measured using the local
currencies of the countries in which they operate and are translated into U.S.
dollars. Although the effects of foreign currency fluctuations are mitigated by
the fact that expenses of foreign subsidiaries are generally incurred in the
same currencies in which sales are generated, the reported results of operations
of the Company's foreign subsidiaries are affected by changes in foreign
currency exchange rates and, as compared to prior periods, will be higher or
lower depending upon a weakening or strengthening of the U.S. dollar. In
addition, the net assets of foreign subsidiaries are translated into U.S.
dollars at the foreign currency exchange rates in effect at the end of each
period. Accordingly, the Company's consolidated shareholders' equity will
fluctuate depending upon the relative strengthening or weakening of the U.S.
dollar versus relevant foreign currencies.
15
17
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
DERIVATIVE FINANCIAL INSTRUMENT RISK
The Company uses derivative financial instruments to minimize the impact of
foreign exchange rate changes on earnings and cash flows. The Company also
periodically enters into foreign currency exchange contracts to hedge certain
exposures related to selected transactions that are relatively certain as to
both timing and amount. The Company does not use derivative financial
instruments for trading or speculative purposes (see Note 6 for further
discussion).
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with the development of new products and
manufacturing methods are charged to expense as incurred. Research and
development expenses, net of customer reimbursements, were $45.7 million in
fiscal 1998 and $35.4 million in each of fiscal 1997 and 1996. Customer
reimbursements in the amount of $13.0 million, $8.0 million and $4.7 million
were received for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.
INCOME TAXES
No provision is made for U.S. income taxes on earnings of foreign
subsidiary companies which the Company controls but does not include in the
consolidated federal income tax return since it is management's practice and
intent to permanently reinvest the earnings.
EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
("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.
Excluding dividends paid by all entities with which the Company has
merged, the Company paid cash dividends per Common Share of $0.07, $0.06 and
$0.05 for the fiscal years ended June 30, 1998, 1997 and 1996, respectively.
STOCK SPLITS
On October 29, 1996, the Company declared a three-for-two stock split which
was effected as a stock dividend and distributed on December 16, 1996 to
shareholders of record on December 2, 1996. On August 12, 1998, the Company
declared a three-for-two stock split which was effected as a stock dividend and
distributed on October 30, 1998 to shareholders of record on October 9, 1998.
All share and per share amounts included in the supplemental consolidated
financial statements, except the Supplemental Consolidated Statements of
Shareholders' Equity, have been adjusted to retroactively reflect these stock
splits.
ALLEGIANCE SPIN-OFF
On September 30, 1996 (the "Distribution Date"), Baxter International Inc.
("Baxter") and its subsidiaries transferred to Allegiance and its subsidiaries
their U.S. healthcare distribution business, surgical and respiratory therapy
business and healthcare cost-saving business, as well as certain foreign
operations (the "Allegiance Business") in connection with a spin-off of the
Allegiance Business by Baxter. The spin-off occurred on the Distribution Date
through a distribution of Allegiance common stock to Baxter stockholders (the
"Distribution") based on a distribution ratio of one Allegiance share for each
five Baxter shares held. The Distribution of approximately 68.4 million
equivalent Cardinal common shares of Allegiance common stock was made to Baxter
stockholders of record on September 26, 1996.
2. BUSINESS COMBINATIONS, MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS
On February 3, 1999, the Company completed a merger transaction with
Allegiance (the "Allegiance Merger") which was accounted for as a
pooling-of-interests. The Company issued approximately 70.7 million Common
Shares to Allegiance stockholders and Allegiance's outstanding stock options
were converted into options to purchase approximately 10.3 million Company
Common Shares. The Company expects to record a merger-related charge to reflect
transaction and other costs incurred as a result of the Allegiance Merger in the
third quarter of fiscal 1999. Additional merger-related
16
18
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
costs associated with integrating the separate companies and instituting
efficiencies will be charged to expense in subsequent periods when incurred.
On August 7, 1998, the Company completed a merger transaction with Scherer
(the "Scherer Merger") which was accounted for as a pooling-of-interests. The
Company issued approximately 34.2 million Common Shares to Scherer stockholders
and Scherer's outstanding stock options were converted into options to purchase
approximately 3.5 million Common Shares. The Company recorded a merger-related
charge to reflect transaction and other costs incurred as a result of the
Scherer Merger in the first quarter of fiscal 1999. Additional merger-related
costs associated with integrating the separate companies and instituting
efficiencies will be charged to expense in subsequent periods when incurred.
During the six months ended December 31, 1998, merger-related costs
totaling $37.5 million ($29.7 million, net of tax) were recorded. Of this
amount, approximately $22.3 million related to transaction and employee-related
costs, and $12.5 million related to business restructuring and asset impairment
costs associated with the Company's merger transaction with Scherer. In
addition, the Company recorded costs of $1.1 million related to severance costs
for a restructuring associated with the change in management that resulted from
the merger with Owen Healthcare, Inc. and $4.8 million related to integrating
the operations of companies that previously engaged in merger transactions with
the Company. Partially offsetting the charge recorded was a $3.2 million credit
to adjust the estimated transaction and termination costs previously recorded in
connection with the canceled merger transaction with Bergen Brunswig Corporation
("Bergen") (see Note 19). This adjustment relates primarily to services provided
by third parties engaged by the Company in connection with the terminated Bergen
transaction. The cost of such services was estimated and recorded in the prior
periods when the services were performed. Actual billings were less than the
estimate originally recorded, resulting in a reduction of the current period
merger-related costs.
On February 18, 1998, the Company completed a merger transaction with
MediQual (the "MediQual Merger") which was accounted for as a
pooling-of-interests. The Company issued approximately 860,000 Common Shares to
MediQual shareholders and MediQual's outstanding stock options were converted
into options to purchase approximately 36,000 Common Shares of the Company.
The table below presents a reconciliation of total revenue and net earnings
available for Common Shares as reported in the accompanying supplemental
consolidated financial statements with those previously reported by the Company.
The term "Cardinal Health" as used herein refers to Cardinal Health, Inc. and
subsidiaries prior to the MediQual, Scherer and Allegiance mergers. See Note 1
for periods combined.
(in millions) Cardinal
Health Scherer MediQual Allegiance Combined
------------ ---------- --------- ----------- -------------
Fiscal year ended June 30, 1996
Total revenue $ 11,586.1 $ 571.7 $ 11.0 $ 4,393.6 $ 16,562.4
Net earnings (loss) $ 127.2 $ 30.7 $ (1.4) $ (477.7) $ (321.2)
Fiscal year ended June 30, 1997
Total revenue $ 13,437.2 $ 588.7 $ 11.0 $ 4,357.0 $ 18,393.9
Net earnings $ 184.6 $ 57.0 $ 2.3 $ 90.9 $ 334.8
Fiscal year ended June 30, 1998
Total revenue $ 15,918.1 $ 620.8 $ 7.9 $ 4,448.6 $ 20,995.4
Net earnings $ 247.1 $ 69.7 $ 1.4 $ 106.9 $ 425.1
Six months ended December 31, 1997
Total revenue $ 7,731.9 $ 2,223.2 $ 9,955.1
Net earnings $ 149.8 $ 47.8 $ 197.6
Six months ended December 31, 1998
Total revenue $ 9,695.2 $ 2,354.9 $ 12,050.1
Net earnings $ 157.5 $ 67.4 $ 224.9
17
19
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
Adjustments affecting net earnings and shareholders' equity resulting
from the MediQual, Scherer and Allegiance mergers to adopt the same accounting
practices were not material for any periods presented herein. There were no
material intercompany transactions.
During fiscal 1998, the Company made a number of individually immaterial
acquisitions for an aggregate purchase price of $47.8 million and exchanged
nonmonetary assets with a value of approximately $10.5 million to acquire an
interest in Source Medical Corporation, a new venture in Canada. All of these
acquisitions were accounted for as purchase transactions. Had the acquisitions
taken place July 1, 1997, consolidated results would not have been materially
different from reported results.
During fiscal 1998, the Company recorded merger-related charges associated
with transaction costs incurred in connection with the MediQual Merger ($2.3
million) and transaction costs incurred in connection with the proposed merger
transaction with Bergen Brunswig Corporation ("Bergen") ($33.4 million) which
was terminated subsequent to June 30, 1998 (see Note 19). In accordance with the
terms of the Agreement and Plan of Merger between the Company, a wholly owned
subsidiary of the Company, and Bergen, as amended, its termination required the
Company to reimburse Bergen for $7 million of transaction costs upon termination
of such Agreement (See Note 19). Additional merger-related costs, related to
asset impairments ($3.8 million) and integrating the operations of companies
that previously merged with the Company ($9.6 million), of which $5.4 million
was recorded during the six months ended December 31, 1997, were incurred and
recorded during fiscal 1998.
During fiscal 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, 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.
During fiscal 1998, Scherer finalized part of its long-term tax planning
strategy by converting, with its joint venture partner, the legal ownership
structure of Scherer's 51% owned subsidiary in Germany from a corporation to a
partnership. As a result of this change in tax status, the Company's tax basis
in the German subsidiary was adjusted, resulting in a one-time tax refund of
approximately $4.6 million, as well as a reduction in cash taxes to be paid in
the current and future years. Combined, these factors resulted in a one-time
reduction of fiscal 1998 income tax expense by approximately $11.7 million.
On March 18, 1997, the Company completed a merger transaction with Owen
(the "Owen Merger"). The Owen Merger was accounted for as a pooling-of-interests
business combination and the Company issued approximately 11.6 million Common
Shares to Owen shareholders and Owen's outstanding stock options were converted
into options to purchase approximately 1.0 million Common Shares. During fiscal
1997, the Company recorded costs of approximately $31.1 million ($22.4 million,
net of tax) related to the Owen Merger. These costs include $13.1 million for
transaction and employee-related costs associated with the merger, $13.2 million
for asset impairments ($10.6 million of which related to MediTROL, as discussed
below), and $4.8 million related to other integration activities, including the
elimination of duplicate facilities and certain exit and restructuring costs. At
the time of the Owen Merger, Owen had a wholly owned subsidiary, MediTROL, that
manufactured, marketed, sold and serviced point-of-use medication distribution
systems similar to Pyxis. Upon consummation of the Owen Merger, management
committed to merge the operations of MediTROL into Pyxis, and phase-out
production of the separate MediTROL product line. As a result of this decision,
a MediTROL patent ($7.4 million) and certain other operating assets ($3.2
million) were written off as impaired.
On October 11, 1996, the Company completed a merger transaction with PCI
(the "PCI Merger"). The PCI Merger was accounted for as a pooling-of-interests
business combination and the Company issued approximately 4.7 million Common
Shares to PCI shareholders and PCI's outstanding stock options were converted
into options to purchase approximately 0.3 million Common Shares. During fiscal
1997, the Company recorded costs totaling approximately $15.1 million ($11.4
million, net of tax) related to the PCI Merger. These costs include $13.8
million for transaction and employee-related costs associated with the PCI
Merger (including $7.6 million for retirement benefits and incentive fees to two
executives of PCI, which vested and became payable upon consummation of the
merger) and $1.3 million related to other integration activities, including exit
costs.
18
20
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
In addition to the merger-related costs recorded in fiscal 1997 for the
Owen Merger and the PCI Merger (as discussed above), the Company recorded $4.7
million ($2.8 million, net of tax) related to integrating the operations of
companies that previously merged with the Company.
During fiscal 1997, the Company acquired West Hudson & Co. Inc., a
privately owned health-care consulting firm for $30.5 million in cash and $10.5
million in stock, with possible contingent payments through 2000. In addition,
the Company made individually immaterial acquisitions, accounted for under the
purchase method of accounting, totaling $30.4 million during fiscal 1997. Had
the acquisitions occurred at the beginning of fiscal 1997, consolidated results
would not have been materially different from reported results.
On May 7, 1996, the Company completed a merger transaction with Pyxis (the
"Pyxis Merger"). The Pyxis Merger was accounted for as a pooling-of-interests
business combination, and the Company issued approximately 33.9 million Common
Shares to Pyxis shareholders. In addition, Pyxis' outstanding stock options were
converted into options to purchase approximately 3.5 million Common Shares.
During fiscal 1996, the Company recorded costs totaling approximately $42.0
million ($30.6 million, net of tax) related to the Pyxis Merger. These costs
include $25.4 million for transaction and employee-related costs associated with
the merger (including $7.6 million for vested stay bonuses covering
substantially all Pyxis employees), $15.6 million related to certain exit and
lease-termination costs (pertaining to cancellation of a long-term contract with
a financing company in connection with the servicing of the accounts receivable
from Pyxis customers at the time of the Pyxis Merger, see Note 3), and $1.0
million related to asset impairments and other integration activities.
On November 13, 1995, the Company completed a merger transaction 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 14.4 million Common Shares to Medicine Shoppe shareholders.
In addition, Medicine Shoppe's outstanding stock options were converted into
options to purchase approximately 0.3 million Common Shares. During fiscal 1996,
the Company recorded costs totaling approximately $7.2 million ($6.4 million,
net of tax) related to the Medicine Shoppe Merger. These costs include $6.3
million for transaction and employee-related costs associated with the Medicine
Shoppe Merger and $0.9 million related to other integration activities.
During fiscal 1996, the Company recorded a special charge of $679.3
million. In fiscal 1996, the Company's subsidiary, Allegiance, changed its
method of assessing goodwill impairment, resulting in a charge of $550.0 million
($550.0 million, net of tax). In addition, $33.8 million ($23.1 million, net of
tax) was recorded related to the rationalization of its manufacturing and
overhead structures which were primarily servicing non-pharmaceutical markets.
Approximately $12.0 million of these charges related to retirement or severance
costs, $16.6 million related to asset impairments and $5.2 million related to
contractual obligations. Lastly, $95.5 million ($62.8 million, net of tax) was
recorded primarily due to Allegiance's facility consolidations and other asset
write-downs ($62.8 million), costs related to Allegiance's spin-off from Baxter
(see Note 1) ($13.2 million) and legal defense costs related to natural rubber
latex litigation cases ($19.5 million) (see Note 10).
The net effect of the various merger-related costs and other special items
recorded during the first six months of fiscal 1999 was to reduce reported net
earnings by $29.7 million to $224.9 million and to reduce reported diluted
earnings per Common Share by $0.11 per share to $0.81 per share. The fiscal 1998
effect of various merger-related charges and other special items was to reduce
reported net earnings by $24.1 million to $425.1 million and to reduce reported
diluted earnings per Common Share by $0.10 per share to $1.53 per share. The
effect of the various merger-related costs recorded in fiscal 1997 was to reduce
reported net earnings by $36.6 million to $334.8 million and to reduce reported
diluted earnings per Common Share by $0.13 per share to $1.23 per share. The
effect of the various merger-related costs and other special items recorded in
fiscal 1996 was to reduce reported net earnings by $672.8 million to $(321.2)
million and to reduce reported diluted earnings per Common Share by $2.55 per
share to $(1.24) per share.
Certain merger-related costs are based upon estimates, and actual amounts
paid may ultimately differ from these estimates. If additional costs are
incurred, such items will be expensed as incurred.
During fiscal 1996, the Company completed three 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 $58.8 million.
Liabilities of the operations assumed were approximately $41.7 million,
consisting
19
21
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
primarily of debt of $29.7 million. In addition, the Company made
individually immaterial acquisitions, accounted for under the purchase method of
accounting, totaling $23.8 million in fiscal 1996. Had the purchases occurred at
the beginning of fiscal 1996, operating results on a pro forma basis would not
have been significantly different.
Restructuring Program
In fiscal 1993, Baxter (see Note 1) announced a restructuring plan designed
in part to make Allegiance more efficient and responsive in addressing the
changes in the U.S. healthcare system. Charges totaling $560.0 million were
recorded to cover costs associated with these restructuring initiatives. During
fiscal 1998, 1997 and 1996, the Company had cash outflows related to the
restructuring program of $15.8 million, $15.6 million and $61.6 million,
respectively and noncash charges against the restructuring program of $9.1
million, $0.9 million and $25.0 million, respectively. Prior to fiscal 1996, the
total cash outflows and noncash charges related to the restructuring program
were $180.8 million and $226.5 million, respectively. During the six months
ended December 31, 1998, spending against the reserves amounted to $7.3 million
and $7.9 million of unnecessary restructuring reserves were reversed. The
reversal of unnecessary reserves was principally the result of facility closures
and consolidations being finalized at costs lower than originally anticipated.
The cash outflows pertain primarily to employee-related costs for
severance, outplacement assistance, relocation, implementation teams and
facility consolidations. Since the inception of the restructuring program,
approximately 2,500 positions have been eliminated. As of June 30, 1998 and
December 31, 1998, the remaining restructuring reserve balance was $24.7 million
and $9.5 million, respectively, both of which are classified as current
liabilities. The remaining expenditures to be charged against the restructuring
program will occur in fiscal 1999, as implementation projects are completed as
planned.
3. LEASES
Sales-Type Leases
The Company's sales-type leases are for terms generally ranging up to five
years. Lease receivables are generally collateralized by the underlying
equipment. The components of the Company's net investment in sales-type leases
are as follows (in millions):
June 30, June 30,
1998 1997
--------------- --------------
Future minimum lease payments receivable $ 387.5 $ 264.4
Unguaranteed residual values 1.3 1.3
Unearned income (55.5) (39.7)
Allowance for uncollectible minimum lease payments
receivable (8.8) (4.8)
--------------- --------------
Net investment in sales-type leases 324.5 221.2
Less: current portion 91.4 61.4
--------------- --------------
Net investment in sales-type leases, less current portion $ 233.1 $ 159.8
=============== ==============
Future minimum lease payments to be received pursuant to sales-type leases
are as follows at June 30, 1998 (in millions):
1999 $ 107.2
2000 96.0
2001 78.1
2002 61.0
2003 39.2
Thereafter 6.0
--------------
Total $ 387.5
==============
20
22
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
Lease Related Financing Arrangements
Prior to the Pyxis Merger, Pyxis had financed its working capital needs
through the sale of certain lease receivables to a non-bank financing company.
In March 1994, Pyxis entered into a five-year financing and servicing agreement
with the financing company, whereby the financing company agreed to purchase a
minimum of $500 million of Pyxis' lease receivables under certain conditions,
provided that the total investment in the lease receivables at any one time did
not exceed $350 million. As of June 30, 1998, $198 million of lease receivables
were owned by the financing company. The aggregate lease receivables sold under
this arrangement totaled approximately $382 million and $312 million at June 30,
1998 and 1997, respectively. As a result of the Pyxis Merger, the Company
entered into negotiations with the financing company to amend and terminate this
arrangement. In June 1997, the agreement with the financing company was amended
to modify financing levels over the remaining term of the agreement and to
terminate the lease portfolio servicing responsibilities of the financing
company. In June 1998, the agreement with the financing company was further
amended to terminate Pyxis' obligation to sell lease receivables to the
financing company. The Company made provision for the estimated costs associated
with the exiting of this arrangement at the time of the Pyxis Merger (see Note
2).
4. NOTES PAYABLE, BANKS
The Company has entered into various unsecured, uncommitted line-of-credit
arrangements which allow for borrowings up to $437.1 million at June 30, 1998,
at various money market rates. At June 30, 1998, $24.7 million, at a weighted
average interest rate of 7.2%, was outstanding under such arrangements and $22.8
million, at a weighted average interest rate of 6.4% was outstanding at June 30,
1997. The Company also 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 $95.0 million (none of
which was in use at June 30, 1998). The Company is required to pay a commitment
fee at the annual rate of 0.125% 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, 1998 was $507.4 million.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in millions):
June 30, June 30,
1998 1997
------------- -------------
6.0% Notes due 2006 $ 150.0 $ 150.0
6.5% Notes due 2004 100.0 100.0
6.75% Notes due 2004 100.0 100.0
7.3% Notes due 2006 199.6 199.6
7.8% Debentures due 2016 149.4 149.4
7.0% Debentures due 2026 (7 year put option in 2003) 199.9 199.9
Commercial paper 142.0 -
Borrowings under credit facilities 248.8 380.0
Other obligations; interest averaging 6.1% in 1998 and
6.2% in 1997, due in varying installments
through 2020 47.6 49.1
------------ ------------
Total 1,337.3 1,328.0
Less: current portion 7.3 7.1
------------ ------------
Long-term obligations, less current portion $ 1,330.0 $ 1,320.9
============ ============
The 6% and the 6.5% Notes represent unsecured obligations of the Company,
and the 6.75% Notes represent unsecured obligations of Scherer which are
guaranteed by the Company. The 7.3% Notes and the 7.8% and 7.0%
21
23
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
Debentures represent unsecured obligations of Allegiance which are guaranteed by
the Company. These obligations are not redeemable prior to maturity and are not
subject to a sinking fund.
In June 1998, the Company commenced a commercial paper program, providing
for the issuance of up to $750.0 million in aggregate maturity value of
commercial paper. At June 30, 1998, commercial paper with an effective interest
rate of 5.85% and an aggregate maturity value of $142.0 million was outstanding.
The Company also has an unsecured revolving credit agreement, expiring in
2001, that provides for up to an aggregate of $900.0 million in borrowings (none
of which was in use at June 30, 1998). At June 30, 1997, $80.0 million was
outstanding under this facility. The Company maintains other short-term credit
facilities. At June 30, 1998 and 1997, $197.5 million and $271.5 million,
respectively, was outstanding under these uncommitted facilities. The effective
interest rate as of June 30, 1998 was 6.23%. The amounts outstanding under the
commercial paper program and short-term credit facilities have been classified
as long-term debt, as amounts are supported by a long-term credit facility and
will continue to be refinanced.
During fiscal 1998, the Company extended the term of its existing unsecured
bank credit facility by five years and amended certain provisions within the
agreement. The amended credit facility: (i) expires October 29, 2002; (ii)
maintains the previous aggregate borrowing limit of up to $175 million in
various currencies; (iii) sets interest rates on outstanding borrowings at LIBOR
plus 0.350%, or the bank's prime rate; (iv) and includes an annual facility fee
of 0.125% of the total credit facility. At June 30, 1998 and 1997, borrowing
under this facility was $51.3 million and $28.5 million, respectively.
During fiscal 1996, holders of $10 million of 9.53% convertible
subordinated notes due 2002, originally issued by Owen, converted the notes into
the equivalent of approximately 1.7 million Common Shares. Additionally, Owen
repaid $34.8 million of debt with proceeds from a common stock offering. If the
previously mentioned conversion and retirement of debt had occurred at the
beginning of all periods presented, the changes to diluted earnings per share
would not have been material.
Certain long-term obligations are collateralized by property and
equipment of the Company with an aggregate book value of approximately $31.8
million at June 30, 1998.
Maturities of long-term obligations for future fiscal years are as follows
(in millions):
1999 $ 7.3
2000 5.6
2001 344.0
2002 3.3
2003 50.0
Thereafter 927.1
-------------
Total $ 1,337.3
=============
On July 13, 1998, the Company issued $150 million of 6.25% Notes due 2008 ,
the proceeds of which will be used for working capital needs due to growth in
the Company's business. The 6.25% Notes represent unsecured obligations of the
Company, are redeemable, in whole or, from time to time, in part at the option
of the Company prior to maturity and are not subject to a sinking fund.
Subsequent to issuing the 6.25% Notes, the Company has the capacity to issue
$250 million of additional long-term debt pursuant to a shelf debt registration
statement filed with the Securities and Exchange Commission.
6. FINANCIAL INSTRUMENTS
Interest Rate Management. The Company has entered into an interest rate
swap agreement which matures November 2002 to hedge against variable interest
rates. The Company exchanged its variable rate position related to a lease
agreement for a fixed rate of 7.08%. The Company recognizes in income the
periodic net cash settlements under the swap agreement as it accrues.
22
24
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
Foreign Exchange Risk Management. The Company has purchased various
foreign currency options expiring through June 30, 1999 to partially protect the
Company from the risk that fluctuations in the foreign currency rates could have
an adverse effect on foreign subsidiaries' earnings. In addition, the Company
had foreign currency forward and option contracts that hedged a portion of
anticipated production costs expected to be denominated in the Malaysian
ringgit. When the dollar strengthens against foreign currencies, the decline in
the value of the foreign currency cash flows is partially offset by the
recognition of gains in value of purchased currency options. Conversely, when
the dollar weakens against foreign currencies, the increase in the value of
foreign currency cash flows is reduced only by the recognition of the premium
paid to acquire the options. Market value gains, losses and premiums on these
contracts are recognized in other income upon occurrence. The fair value is
based upon the estimated amount the Company would receive to terminate the
options. Net expense during fiscal 1998 was $11.6 million related to these
foreign currency forward contracts and options.
In addition, the Company periodically enters into forward foreign currency
exchange contracts to hedge certain exposures related to identifiable foreign
currency transactions that are relatively certain as to both timing and amount.
Gains and losses on the forward contracts are recognized concurrently with the
gains and losses from the underlying transactions.
The Company also uses commodity contracts to hedge raw materials expected
to be denominated in foreign currency. These contracts generally cover a
one-year period and all gains and losses are deferred and recognized in cost of
goods sold with the underlying product costs. The contracts qualify as hedges
for accounting purposes in accordance with the criteria established in SFAS No.
80 "Accounting for Futures Contracts." Cash flows resulting from these commodity
contracts are classified in the same category as the items being hedged.
The counterparties to these contracts are major financial institutions and
the Company does not have significant exposure to any one counterparty.
Management believes the risk of loss is remote and in any event would not be
material.
Fair Value of Financial Instruments. The carrying amounts of cash and
equivalents, trade receivables, accounts payables, notes payable-banks and other
accrued liabilities at June 30, 1998 and 1997, 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
$1,365.3 million and $1,336.8 million as compared to the carrying amounts of
$1,337.3 million and $1,328.0 million at June 30, 1998 and 1997, 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.
The following is a summary of the fair value of the Company's derivative
instruments, based upon the estimated amount that the Company would receive or
(pay) to terminate the contracts at the reporting date. The fair values are
based on quoted market prices for the same or similar instruments.
(in millions) Fiscal Year ended June 30,
1998 1998 1997 1997
------------------------------ ------------------------------
Notional Fair Notional Fair
Amount Value (Loss) Amount Value (Loss)
-------------- --------------- -------------- --------------
Foreign currency exchange
contract $ 35.6 $ (0.4) 88.6 (7.2)
Foreign currency options 3.0 0.1 17.7 2.2
Commodity contracts 14.2 (1.7) 9.2 (3.4)
Interest Rate Swaps 8.3 (1.0) 2.5 (0.3)
7. INCOME TAXES
Consolidated U.S. income (loss) before taxes was $550.6 million, $437.4
million and $(256.6) million in fiscal 1998, 1997 and 1996, respectively. The
corresponding amounts for non-U.S.-based operations were $109.1 million, $102.3
23
25
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
million and $97.1 million in fiscal 1998, 1997 and 1996, respectively. The
provision for income taxes consists of the following (in millions):
24
26
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
Fiscal Year Ended June 30,
------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
Current:
Federal $ 106.1 $ 131.9 $ 120.5
State 22.6 21.3 20.7
Foreign 15.8 18.8 20.8
--------------- -------------- ---------------
Total 144.5 172.0 162.0
Deferred (credit) 90.1 32.9 (0.3)
--------------- -------------- ---------------
Total provision $ 234.6 $ 204.9 $ 161.7
=============== ============== ===============
A reconciliation of the provision based on the Federal statutory income tax
rate to the Company's effective income tax rate is as follows:
Fiscal Year Ended June 30,
--------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Provision at Federal
statutory rate 35.0 % 35.0 % 35.0 %
State income taxes, net of
Federal benefit 4.1 3.9 (10.8)
Foreign tax rates (4.8) (3.8) 15.6
Nondeductible expenses 1.5 2.5 (139.4)
Other (0.2) 0.4 (1.8)
--------------- --------------- ---------------
Effective income tax rate 35.6 % 38.0 % (101.4) %
=============== =============== ===============
Provision has not been made for U.S. or additional foreign taxes on $322.8
million of undistributed earnings of foreign subsidiaries because those earnings
are considered to be permanently reinvested in the operations of those
subsidiaries. It is not practicable to estimate the amount of tax that might be
payable on the eventual remittance of such earnings.
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 millions):
June 30, June 30,
1998 1997
-------------- --------------
Deferred income tax assets:
Receivable basis difference $ 21.6 $ 25.0
Accrued liabilities 156.7 144.4
Net operating loss carryforwards 48.7 40.5
Other 26.5 73.7
------------- -------------
Total deferred income tax assets 253.5 283.6
Valuation allowance for deferred income tax assets (21.7) (22.7)
-------------- --------------
Net deferred income tax assets 231.8 260.9
-------------- --------------
Deferred income tax liabilities:
Inventory basis differences (90.0) (58.0)
Property-related (237.0) (222.0)
Revenues on lease contracts (111.0) (89.1)
Other - (14.0)
-------------- --------------
Total deferred income tax liabilities (438.0) (383.1)
-------------- --------------
Net deferred income tax liabilities $ (206.2) $ (122.2)
============== ==============
25
27
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
The above amounts are classified in the supplemental consolidated balance
sheets as follows (in millions):
June 30, June 30,
1998 1997
-------------- --------------
Other current assets $ 133.3 84.9
Deferred income taxes and other liabilities (339.5) (207.1)
-------------- --------------
Net deferred income tax liabilities $ (206.2) $ (122.2)
============== ==============
The Company had Federal net operating loss carryforwards of $95.4 million
and $91.0 million, state net operating loss carryforwards of $95.1 million and
$56 million and foreign tax credit and capital loss carryforwards of $24.6
million and $23.3 million as of June 30, 1998 and 1997, respectively. A
valuation allowance of $21.7 million and $22.7 million at June 30, 1998 and
1997, respectively, has been provided for the state net operating loss, foreign
tax credit and capital loss carryforwards, as utilization of such carryforwards
within the applicable statutory periods is uncertain. The Company's Federal tax
operating loss carryforwards and a portion of the state net operating loss
carryforwards are subject to a change in ownership limitation calculation under
Internal Revenue Code Section 382. After application of the valuation allowance
described above, the Company anticipates no limitations will apply with respect
to utilization of these assets. The Federal net operating loss carryforward
begins expiring in 2001, the state net operating loss carryforward expires
through 2012, the capital loss carryforward expires in 2001 and the foreign tax
credit carryforwards expire through 2002. Expiring state net operating loss
carryforwards and the required valuation allowances have been adjusted annually.
Under a tax-sharing agreement with Baxter, Allegiance will pay for
increases and be reimbursed for decreases to the net deferred tax assets
transferred on the Distribution Date. Such increases or decreases may result
from audit adjustments to Baxter's prior period tax returns.
8. FOREIGN CURRENCY TRANSLATION
In consolidating foreign subsidiaries, balance sheet currency effects are
recorded as a part of other shareholders' equity. This equity account includes
the results of translating all balance sheet assets and liabilities at current
exchange rates. The following table provides an analysis of the changes during
fiscal 1998, 1997 and 1996 in other shareholders' equity for cumulative currency
translation adjustments (in millions):
June 30,
-------------------------------------------
1998 1997 1996
------------- ------------- ---------------
Beginning of year $ (12.5) (3.8) $ 4.4
Translation adjustment (15.4) (8.7) (8.2)
------------- ------------- ---------------
End of year $ (27.9) (12.5) $ (3.8)
============= ============= ===============
9. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company sponsors various retirement and pension plans, including
defined benefit and defined contribution plans. Substantially all of the
Company's domestic non-union employees are eligible to be enrolled in
Company-sponsored contributory profit sharing and retirement savings plans which
include features under Section 401(k) of the Internal Revenue Code, and provide
for Company matching and profit sharing contributions. The Company's
contributions to the plans are determined by the Board of Directors subject to
certain minimum requirements as specified in the plans.
Qualified domestic 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.
Certain Allegiance employees who participated in Baxter-sponsored defined
benefit plans prior to the Distribution (see Note 1) are eligible to receive a
contribution to their qualified 401(k) account in an amount ranging from 2 to 8
percent of
26
28
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
their annual compensation, depending on years of service. This
transitional benefit will be provided to eligible employees through 2003.
Prior to the Owen Merger, Owen established an Employee Stock Ownership Plan
(the "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.
The total expense for employee retirement benefit plans (excluding defined
benefit plans (see below)) was as follows (in millions):
Fiscal Year Ended June 30,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Defined contribution plans $ 37.9 $ 34.4 $ 18.7
Multiemployer plans 0.5 0.9 1.2
ESOP - - 0.3
------------ -------------- --------------
Total $ 38.4 $ 35.3 $ 20.2
============== ============== ==============
Defined Benefit Plans. The Company has several defined benefit plans
covering substantially all salaried and hourly Scherer employees. The Company's
domestic defined benefit plans provide defined benefits based on years of
service and level of compensation. Foreign subsidiaries provide for pension
benefits in accordance with local customs or law. The Company funds its pension
plans at amounts required by the applicable regulations. Net pension expense
related to the defined benefit plans included the following (in millions):
Fiscal Year Ended June 30,
-----------------------------------
1998 1997 1996
--------- ------- -------
Service cost of benefits earned during the year $ 4.9 $ 4.5 $ 4.0
Interest cost on projected benefit obligation 5.4 5.2 4.8
Actual return on plan assets (5.1) (4.1) (4.6)
Net amortization and deferral 1.1 1.0 1.9
--------- ------- -------
Total net pension expense $ 6.3 $ 6.6 $ 6.1
========= ======= ========
27
29
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
The following table shows the status of the various plans and amounts
included in the Company's supplemental consolidated balance sheets as of June
30, 1998 and 1997 (based upon a measurement date of March 31, 1998 and 1997,
respectively) (in millions):
June 30,
------------------------------------------------------------------------------
1998 1997
------------------------------------- ----------------------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
----------------- ------------------- -------------------- -------------------
Actuarial present value of:
Vested benefit obligation $ 1.1 $ 71.3 $ 23.9 $ 35.1
Non-vested benefit obligation 0.1 4.5 0.1 5.2
--------------- ----------------- ----------------- ----------------
Accumulated benefit obligation 1.2 75.8 24.0 40.3
Effects of anticipated future
compensation increases 0.1 9.6 1.0 7.6
--------------- ----------------- ----------------- ----------------
Projected benefit obligation 1.3 85.4 25.0 47.9
Plan assets at fair value 1.6 40.6 25.6 8.9
--------------- ----------------- ----------------- ----------------
Projected benefit obligation in
excess of (less than) plan
assets (0.3) 44.8 (0.6) 39.0
Unamortized net loss (1.5) (11.2) (0.5) (4.8)
Unrecognized prior service cost - (0.1) (0.2) -
--------------- ----------------- ----------------- ----------------
Accrued pension (asset) liability
recorded in the supplemental
consolidated balance sheet $ (1.8) $ 33.5 $ (1.3) $ 34.2
=============== ================= ================= ================
Plan assets consist primarily of marketable securities, equity securities,
cash equivalents, U.S. and foreign governmental securities and corporate bonds.
The average of the assumptions used as of June 30, 1998, 1997 and 1996 in
determining the pension expense and benefit obligation information shown above
were as follows:
1998 1997 1996
------------- -------------- --------------
Discount rate 7.5 % 7.5 % 7.4 %
Rate of compensation increase 4.6 % 4.3 % 4.5 %
Long-term rate of return on plan
assets 10.1 % 10.0 % 9.8 %
Allegiance Discontinued Defined Benefit Plans.
Prior to the Distribution (See Note 1), Allegiance participated in
Baxter-sponsored non-contributory, defined benefit pension plans covering
substantially all domestic employees as well as Baxter-sponsored contributory
health-care and life-insurance benefit plans for substantially all domestic
retired employees. Subsequent to the Distribution, Allegiance did not replace
these Baxter plans. The pension liability related to Allegiance employees'
service prior to the Distribution remained with Baxter. Additionally, the
post-retirement liabilities for Allegiance employees who retired before the
Distribution also remained with Baxter. As a result, in the third quarter of
1996, Allegiance recognized curtailment gains of $35.9 million related to these
plans. Pension expense associated with the Baxter-sponsored plans prior to its
being frozen was $17.2 million in fiscal 1996.
28
30
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
10. 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, 1998
are as follows (in millions):
1999 $ 49.4
2000 37.1
2001 27.5
2002 21.5
2003 18.3
Thereafter 42.3
--------------
Total $ 196.1
==============
Rental expense relating to operating leases was approximately $64.8
million, $68.2 million and $59.3 million in fiscal 1998, 1997, and 1996,
respectively. Sublease rental income was not material for any period presented
herein.
The Company has entered into operating lease agreements with several
banks for the construction of various new facilities. The initial terms of the
lease agreements extend through April 2003, with optional five year renewal
periods. In the event of termination, the Company is required to either purchase
the facility or vacate the property and make reimbursement for a portion of the
uncompensated price of the property cost. The instruments provide for maximum
fundings of $181.2 million, which is the total estimated cost of the
construction projects. As of June 30, 1998, the amount expended was $108.2
million. Currently, the Company's minimum annual lease payments under the
agreements are approximately $7.0 million.
As of June 30, 1998, the Company has capital expenditure commitments
related primarily to plant expansions amounting to approximately $37.6 million.
As of June 30, 1998, amounts outstanding on customer notes receivable sold
with full recourse to a commercial bank totaled approximately $13.4 million. The
Company also has outstanding guarantees of indebtedness and financial assistance
commitments which totaled approximately $4.2 million at June 30, 1998.
The Company becomes involved from time-to-time in litigation incidental to
its business. 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 trial of this matter began on September 23, 1998. On November 19,
1998, after the close of plaintiffs' case-in-chief, both the wholesaler
defendants and the manufacturer defendants moved for a Judgment as a Matter of
Law in their favor. On November 30, 1998, the Court granted both of these
motions and ordered judgment as a matter of law in favor of both the wholesaler
and the manufacturer defendants. On January 25, 1999, the class plaintiffs filed
a notice of appeal of the District Court's decision with the Court of Appeals
for the Seventh Circuit. The Company believes that the allegations set forth
against Cardinal and Whitmire in these lawsuits are without merit.
In January 1995, the Company was named as a defendant in a lawsuit alleging
violations of various antitrust statutes and that the Company had tortiously
interfered with another pharmaceutical wholesaler's contractual relations. The
trial date for this action was set to begin on February 8, 1998. On January 13,
1999, the District Court dismissed this action based upon a tentative settlement
agreement among the parties, allowing Burlington Drug to petition, upon good
cause shown within 60 days, to reopen the action if a settlement is not
consummated. The Company believes that allegations made against it in this
litigation are without merit.
On September 3, 1998, the United States Attorney for the District of
Massachusetts filed a civil complaint against the Company in the United States
District Court for the District of Massachusetts. The Complaint sought civil
penalties for allegedly multiple violations of the Controlled Substance Abuse
Act. On December 17, 1998, the parties entered into a settlement agreement
pursuant to which all claims contained in the complaint were withdrawn, without
admission of liability by the Company, in exchange for a payment of $487,500.
Allegiance assumed the defense of litigation involving claims related to
the Allegiance Business from Baxter (see Note 1), including certain claims of
alleged personal injuries as a result of exposure to natural rubber latex
gloves. Since none of the cases involving natural rubber latex gloves has
proceeded to a hearing on merits, the Company is unable to evaluate the extent
of any potential liability, and unable to estimate any potential loss. The
Company believes a substantial portion of any potential liability and remaining
defense costs, excluding defense costs already reserved, related to natural
latex gloves
29
31
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
cases and claims will be covered by insurance, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy limits
and insurer solvency.
Although the ultimate resolution of litigation cannot be forecast with
certainty, the Company does not believe that the outcome of any pending
litigation would have a material adverse effect on the Company's supplemental
consolidated financial statements.
11. SHAREHOLDERS' EQUITY
At June 30, 1998, the Company's authorized capital shares consisted of (a)
300,000,000 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, 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. The Class A common shares and Class B common
shares are collectively referred to as Common Shares. Holders of Class A and
Class B common shares are entitled to share equally in any dividends declared by
the Company's Board of Directors and to participate equally in all distributions
of assets upon liquidation. Generally, the holders of Class A common shares are
entitled to one vote per share and the holders of Class B common shares are
entitled to one-fifth of one vote per share on proposals presented to
shareholders for vote. Under certain circumstances, the holders of Class B
common shares are entitled to vote as a separate class. Only Class A common
shares were outstanding as of June 30, 1998 and 1997.
On November 23, 1998, the shareholders of the Company adopted an amendment
to the Company's Article of Incorporation increasing the number of authorized
Company common shares, without par value, from 300 million to 500 million. The
amendment to the Company's Articles of Incorporation was filed with the Ohio
Secretary of State on November 23, 1998.
12. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company invests cash in deposits with major banks throughout the world
and in high quality short-term liquid instruments. Such investments are made
only in instruments issued or enhanced by high quality institutions. These
investments mature within three months and the Company has not incurred any
related losses.
The Company's trade receivables, finance notes and accrued interest
receivable, and lease receivables are exposed to a concentration of credit risk
with customers in the retail and healthcare sectors. Credit risk can be affected
by changes in reimbursement and other economic pressures impacting the acute
care portion of the healthcare industry. However, such 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 1998, the Company's two largest customers individually
accounted for 14% and 11% of operating revenue, respectively. During fiscal
1997, the same two customers individually accounted for 13% and 10% of operating
revenue, respectively. During fiscal 1996, the Company's two largest customers
each accounted for 9% of operating revenue. During fiscal years 1998 and 1997,
one customer accounted for 62% of bulk deliveries. During fiscal 1996, the same
customer accounted for 70% of bulk deliveries.
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 generally vest
over two or three years and are exercisable for periods up to ten years from the
date of grant at a price which equals fair market value at the date of grant.
The Company accounts for the Plans in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
the Plans been determined consistent with Statement of Financial Accounting
30
32
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the
Company's net income and diluted earnings per Common Share would have been
reduced by $33.6 million and $0.12 per share, respectively, for fiscal 1998,
$19.2 million and $0.07 per share, respectively, for fiscal 1997, and $10.0
million and $0.04 per share, respectively, for fiscal 1996.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma compensation cost may not
be representative of that to be expected in future years.
The following summarizes all stock option transactions for the Company
(excluding Whitmire, see below) under the plans from June 30, 1995 through June
30, 1998, giving retroactive effect to conversions of options in connection with
merger transactions and stock splits (in millions, except per share amounts):
Fiscal 1998 Fiscal 1997 Fiscal 1996
--------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
average average average
Options exercise price Options exercise price Options exercise price
---------- ---------------- ----------- ---------------- ------------ ----------------
Outstanding
beginning of year 20.1 $19.25 21.7 $16.50 12.4 $14.67
Granted 3.0 43.70 6.2 24.84 10.6 18.47
Exercised (3.7) 14.62 (6.7) 15.81 (1.0) 13.89
Canceled (0.9) 21.46 (1.1) 17.07 (0.3) 19.03
Change in fiscal
year (0.6) 28.26 - - - -
---------- ---------------- ----------- ---------------- ------------ ----------------
Outstanding,
end of year 17.9 $23.96 20.1 $19.25 21.7 $16.50
========== ================ =========== ================ ============ ================
Exercisable, end
of year 6.6 $15.45 8.7 $13.98 8.4 $12.75
---------- ---------------- ----------- ---------------- ------------ ----------------
Giving retroactive effect to conversion of stock options related to mergers
and stock splits, the weighted average fair value of options granted during
fiscal 1998, 1997 and 1996 was $14.19, $9.57 and $7.04, respectively.
The fair values of the options granted to Company employees and directors,
except Allegiance, were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for grants in the respective
periods:
As of June 30,
-------------------------------------------------------
1998 1997 1996
------------------ ----------------- ------------------
Risk-free interest rate 5.53% 6.23% 6.23%
Expected Life 3 years 3 years 3 years
Expected Volatility 0.27 0.25 0.25
Dividend Yield 0.16% 0.17% 0.17%
In connection with the merger with Allegiance, outstanding Allegiance stock
options granted to current or former Allegiance officers and employees were
automatically converted into equivalent Cardinal options to purchase an
aggregate of approximately 10.3 million additional Common Shares. The fair
values of these options granted to Allegiance employees and directors were
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions for grants in the respective periods:
31
33
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
As of June 30,
---------------------------------------------------------
1998 1997 1996
------------------ ------------------- ------------------
Risk-free interest rate 5.1%-6.0% 4.9%-6.6% 5.1%-6.5%
Expected Life 1 month- 7 years 1 month- 7 years 1 month- 7 years
Expected Volatility 30.5%-62.8% 28.8%-62.8% 29.8%-32.9%
Dividend Yield 0.78%-1.51% 1.13%-1.45% 1.45%
Information relative to stock options outstanding as of June 30, 1998:
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Weighted
average
remaining Weighted Weighted
Range of Options contractual average Options average
exercise prices (in millions) life in years exercise price (in millions) exercise price
- ------------------ ----------------- ----------------- ----------------- -------------- -----------------
$ .05-$15.38 7.0 6.66 $12.76 3.8 $11.15
$15.51-$22.00 3.7 7.73 18.93 1.8 19.28
$22.34-$36.22 4.3 6.66 29.69 0.9 25.63
$36.25-$54.46 2.8 8.63 49.64 0.1 49.63
$58.79-$62.75 0.1 9.66 59.05 - -
================= ================= ================= ============== =================
17.9 7.19 $23.96 6.6 $15.45
================= ================= ================= ============== =================
As of June 30, 1998, there remained approximately 1.5 million additional
shares available to be issued pursuant to the Plans.
In connection with the Whitmire Merger, outstanding Whitmire stock options
granted to current or former Whitmire officers or employees were automatically
converted into options ("Cardinal Exchange Options") to purchase an aggregate of
approximately 3.9 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 0.5 million Common Shares, with an average option
price of $0.91 were exercised in fiscal 1996. At June 30, 1996, all Cardinal
Exchange Options had been exercised.
The market value of restricted shares awarded by the Company is recorded in
the "Other" component of shareholders' equity in the accompanying supplemental
consolidated balance sheets. The compensation awards are amortized to expense
over the period in which participants perform services, generally one to seven
years. As of June 30, 1998, approximately 0.3 million shares remained restricted
and subject to forfeiture.
Prior to the Allegiance Merger, Allegiance had an employee stock purchase
plan under which the sale of 4.0 million of Allegiance's common stock had been
authorized. The purchase price was the lower of 85 percent of the closing market
price on the date of subscription or 85 percent of the closing market price on
the date of purchase. Under this plan, Allegiance sold to its employees 1.2
million shares at an average price per share of $10.88 in 1998. At June 30,
1998, subscriptions of approximately 0.7 million shares were outstanding. The
weighted average fair value of the purchase rights was $3.32.
On May 2, 1997, Allegiance received $54.8 million in cash from 141 members
of its management who purchased approximately 3.0 million equivalent Cardinal
common shares. Allegiance granted one-day options for the shares, which were
immediately exercised. This Shared Investment Plan was designed to align
management and stockholders interests. Under the terms of this voluntary
program, Allegiance managers used personal full-course loans to purchase the
newly issued shares at the closing price per share on May 2, 1997 of $18.67. The
loans, borrowed from several banks, are at market interest rates and are the
personal obligations of the participants. Allegiance has agreed to guarantee
repayment to the banks in the event of default by a participant. Allegiance may
take all actions necessary to obtain full reimbursement from the participant for
amounts paid by Allegiance, if any, to the banks in the future under its
guarantee.
32
34
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
14. GEOGRAPHIC SEGMENT DATA
The Company's operations are divided into three geographical areas: United
States, Europe and Other International. Europe represents operations in the
United Kingdom, France, Italy, Germany, Spain, Switzerland, Malta, the
Netherlands and Belgium. Other International consists of operations in Canada,
the Pacific and Latin America.
(In millions) For the Fiscal Year Ended June 30,
-------------------------------------------------
1998 1997 1996
--------------- ---------------- --------------
Total revenue:
United States $ 20,255.7 $ 17,646.1 $ 15,808.8
Europe 453.1 422.9 373.9
Other International 286.6 324.9 379.7
-------------- ------------ -------------
Total revenue $ 20,995.4 $ 18,393.9 $ 16,562.4
=============== ============= ==============
Earnings (loss) before income taxes:
United States $ 678.0 $ 591.5 $ (109.7)
Europe 67.8 62.1 39.5
Other International 65.6 20.7 13.0
Unallocated (1) (151.7) (134.6) (102.3)
=============== ================ ==============
Total earnings (loss) before income taxes $ 659.7 $ 539.7 $ (159.5)
=============== ================ ==============
June 30,
-------------------------------------------------
1998 1997 1996
--------------- ---------------- --------------
Identifiable assets
United States $ 6,072.6 $ 5,275.9 $ 5,150.5
Europe 603.3 480.5 459.1
Other International 414.5 390.2 373.8
Unallocated (2) 387.6 375.2 486.4
=============== ================ ==============
Total identifiable assets $ 7,478.0 $ 6,521.8 $ 6,469.8
=============== ================ ==============
(1) Unallocated earnings before income taxes include special charges associated
with transaction costs, research and development expenses and interest
expense. Special charges included in unallocated earnings before income
taxes were $35.7 million, $14.5 million and $21.3 million in fiscal 1998,
1997 and 1996, respectively (see Note 2). Unallocated earnings before
income taxes includes $11.8 million, $8.0 million and $8.8 million of
research and development expenses associated with Scherer's advanced
therapeutic products group in fiscal year 1998, 1997 and 1996,
respectively. Interest expense included in unallocated earnings before
income taxes was $94.5 million, $107.2 million and $62.1 million for fiscal
years 1998, 1997 and 1996, respectively.
(2) Unallocated identifiable assets are principally cash, cash equivalents,
short-term investments and other assets.
33
35
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (in millions, except per
share amounts) for fiscal 1999, 1998 and 1997 has been restated to reflect the
pooling-of-interests business combinations as discussed in Note 2.
First Second
Quarter Quarter
------------- -------------
Fiscal 1999
Revenue:
Operating revenue $ 4,999.2 $ 5,269.4
Bulk deliveries to customer warehouses 781.7 999.8
----------- -----------
Total revenue $ 5,780.9 $ 6,269.2
Gross margin $ 583.0 $ 644.1
Selling, general and administrative
expenses $ 368.6 $ 398.0
Net earnings $ 90.8 $ 134.1
Comprehensive income $ 89.9 $ 138.2
Net earnings per Common Share:
Basic $ 0.34 $ 0.50
Diluted $ 0.33 $ 0.48
- --------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
Fiscal 1998
Revenue:
Operating revenue $ 4,107.3 $ 4,416.0 $ 4,643.6 $ 4,837.1
Bulk deliveries to customer warehouses 681.2 750.6 720.1 839.5
----------- ----------- ----------- ----------
Total revenue $ 4,788.5 $ 5,166.6 $ 5,363.7 $ 5,676.6
Gross margin $ 505.7 $ 539.2 $ 572.7 $ 603.0
Selling, general and administrative
expenses $ 331.4 $ 341.4 $ 348.2 $ 369.3
Net earnings $ 92.3 $ 105.3 $ 109.2 $ 118.3
Comprehensive income $ 90.7 $ 99.7 $ 102.7 $ 116.0
Net earnings per Common Share:
Basic $ 0.34 $ 0.39 $ 0.40 $ 0.44
Diluted $ 0.33 $ 0.38 $ 0.39 $ 0.43
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
Fiscal 1997
Revenue:
Operating revenue $ 3,741.0 $ 4,039.3 $ 4,063.1 $ 4,081.4
Bulk deliveries to customer warehouses 571.7 623.9 624.4 649.1
----------- ----------- ----------- ----------
Total revenue $ 4,312.7 $ 4,663.2 $ 4,687.5 $ 4,730.5
Gross margin $ 466.3 $ 495.4 $ 528.0 $ 530.3
Selling, general and administrative
expenses $ 315.9 $ 321.1 $ 328.6 $ 338.7
Net earnings $ 74.5 $ 75.6 $ 81.0 $ 103.7
Comprehensive income $ 68.1 $ 75.6 $ 84.0 $ 98.4
Net earnings per Common Share:
Basic $ 0.29 $ 0.28 $ 0.30 $ 0.39
Diluted $ 0.28 $ 0.28 $ 0.29 $ 0.38
- --------------------------------------------------------------------------------------------------------
34
36
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
As more fully discussed in Note 2, merger-related costs and other special
charges were recorded in various quarters in fiscal 1999, 1998 and 1997. The
following table summarizes the impact of such costs on net earnings and diluted
earnings per share in the quarters in which they were recorded (in millions,
except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- ---------------- --------------- ---------------
Fiscal 1999:
Net earnings $ (27.8) (1.9)
Diluted net
earnings per Common Share $ (0.10) (0.01)
- -----------------------------------------------------------------------------------------------------
Fiscal 1998:
Net earnings $ (1.3) $ (1.9) $ (12.0) $ (8.9)
Diluted net
earnings per Common Share $ (0.01) $ (0.01) $ (0.05) $ (0.03)
- -----------------------------------------------------------------------------------------------------
Fiscal 1997:
Net earnings $ (0.1) $ (13.1) $ (22.3) $ (1.1)
Diluted net
earnings per Common Share $ - $ (0.05) $ (0.08) $ -
The above selected quarterly financial data for fiscal 1999, 1998 and 1997
differs from amounts previously reported by the Company due to the MediQual,
Scherer and Allegiance Mergers (See Note 2). Fiscal 1998 and 1997 amounts
reported by the Company prior to the mergers with MediQual, Scherer and
Allegiance are presented below and differ from the above selected quarterly
financial data solely due to the addition of MediQual, Scherer, and Allegiance
amounts pursuant to the pooling-of-interests accounting method for business
combinations. The fiscal 1999 selected quarterly financial data shown below
differs from amounts reported above due solely to the addition of Allegiance
amounts pursuant to the pooling-of-interests accounting method for business
combinations (in millions, except per share amounts).
First Second
Quarter Quarter
------------- --------------
Fiscal 1999
Revenue:
Operating revenue $ 3,851.0 $ 4,062.7
Bulk deliveries to customer
warehouses 781.7 999.8
------------ ------------
Total revenue $ 4,632.7 $ 5,062.5
Gross margin $ 321.1 $ 361.4
Selling, general and administrative
expenses $ 178.2 $ 188.1
Net earnings $ 57.8 $ 99.7
Comprehensive income $ 58.2 $ 106.3
Net earnings per Common Share:
Basic $ 0.29 $ 0.50
Diluted $ 0.28 $ 0.49
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- -------------- ------------- -------------
Fiscal 1998
Revenue:
Operating revenue $ 2,870.0 $ 3,130.5 $ 3,381.5 $ 3,544.8
Bulk deliveries to customer
warehouses 681.2 750.6 720.1 839.5
----------- ----------- ----------- -----------
Total revenue $ 3,551.2 $ 3,881.1 $ 4,101.6 $ 4,384.3
Gross margin $ 225.9 $ 248.9 $ 279.4 $ 287.4
Selling, general and administrative
expenses $ 135.1 $ 135.2 $ 142.2 $ 155.3
Net earnings $ 54.0 $ 66.2 $ 56.3 $ 70.6
Net earnings per Common Share:
Basic $ 0.33 $ 0.40 $ 0.34 $ 0.43
Diluted $ 0.32 $ 0.40 $ 0.34 $ 0.42
35
37
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- -------------- ------------- -------------
Fiscal 1997
Revenue:
Operating revenue $ 2,535.5 $ 2,816.4 $ 2,825.5 $ 2,790.7
Bulk deliveries to customer
warehouses 571.7 623.9 624.4 649.1
----------- ----------- ----------- -----------
Total revenue $ 3,107.2 $ 3,440.3 $ 3,449.9 $ 3,439.8
Gross margin $ 193.8 $ 223.9 $ 246.7 $ 235.3
Selling, general and administrative
expenses $ 124.2 $ 127.4 $ 131.5 $ 132.5
Net earnings $ 39.3 $ 41.3 $ 42.2 $ 61.8
Net earnings per Common Share:
Basic $ 0.25 $ 0.26 $ 0.26 $ 0.38
Diluted $ 0.25 $ 0.25 $ 0.26 $ 0.37
16. SUPPLEMENTAL CASH FLOW INFORMATION
Income tax and interest payments for the fiscal years ended June 30, 1998,
1997 and 1996 were as follows (in millions):
Fiscal Year Ended June 30,
------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Interest paid $ 97.4 $ 111.4 $ 47.8
Income taxes paid $ 146.9 $ 116.8 $ 92.8
See Notes 2 and 5 for additional information regarding non-cash investing
and financing activities.
17. RELATED PARTY TRANSACTIONS
Certain foreign subsidiaries purchase gelatin materials and the Company's
German subsidiary leases plant facilities, purchases other services and receives
loans from time-to-time from a German company which is also the minority partner
of the Company's German and certain other European subsidiaries.
Gelatin purchases, at prices comparable to estimated market prices,
amounted to $25.0 million, $24.6 million and $23.9 million for the fiscal years
ended June 30, 1998, 1997 and 1996, respectively. Rental payments amounted to
$4.8 million, $5.4 million and $5.8 million and purchased services amounted to
$5.2 million, $5.5 million and $5.9 million for each of the respective fiscal
years.
Prior to the Distribution (see Note 1), Baxter provided to Allegiance
certain legal, treasury, insurance and administrative services. Also, Allegiance
was the primary distributor of certain Baxter products and provided other
services to Baxter. Negotiated fees for these distribution services were under
the same terms and conditions granted to third parties. Additionally, these fees
were not materially different than the terms of the distribution agreement
subsequent to the Distribution. Prior to the Distribution Date, Allegiance
participated in a centralized cash-management program administered by Baxter. No
interest was charged on any short-term advances from Baxter or received on any
excess cash sent to Baxter. In fiscal 1996, prior to the Distribution, the total
fee for services provided by Allegiance to Baxter was $179.3 million and the
total fee for services received by Allegiance from Baxter was $55.6 million.
Effective on the Distribution Date (See Note 1), Baxter and Allegiance
entered into a series of administrative-service agreements under which Baxter
and Allegiance would continue to provide, for a specified period of time,
certain administrative services that each entity historically had provided to
the other. These agreements require that both parties pay each other a fee that
approximates the actual cost of these services. Also, Allegiance has continuing
significant relationships with Baxter as a distributor, agent, customer and
supplier for an array of health-care products and services.
36
38
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AS TO SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
18. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
As of September 30, 1998, the Company adopted, on a retroactive basis,
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires the presentation of comprehensive income
and its components in a full set of general purpose financial statements. The
Company's comprehensive income consists of net earnings and foreign currency
translation adjustments.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which will require adoption no later than fiscal 1999. SFAS 131
requires companies to define and report financial and descriptive information
about its operating segments. It also establishes standards for related
disclosure about products and services, geographic areas and major customers.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which will require adoption no later than fiscal 1999.
SFAS 132 revises employers' disclosures about pension and other postretirement
benefit plans. The new statement does not change the existing method of expense
recognition.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which will require adoption no later than the Company's fiscal
quarter ending September 30, 1999. This new statement requires companies to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure such instruments at fair value.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which will
require adoption no later than the beginning of the Company's fiscal year ending
June 30, 2000. This new statement provides guidance on accounting for costs of
computer software developed or obtained for internal use.
Adoption of these statements is not expected to have a material impact on
the Company's supplemental consolidated financial statements.
19. TERMINATED MERGER AGREEMENT
On August 24, 1997, the Company and Bergen announced that they had entered
into a definitive merger agreement (as subsequently amended by the parties on
March 16, 1998), pursuant to which a wholly owned subsidiary of the Company
would be merged with and into Bergen (the "Bergen Merger Agreement"). The Bergen
Merger Agreement was subsequently approved by both companies' shareholders on
February 20, 1998. On March 9, 1998, the FTC filed a complaint in the United
States District Court for the District of Columbia seeking a preliminary
injunction to halt the proposed merger. On July 31, 1998, the District Court
granted the FTC's request for an injunction to halt the proposed merger. On
August 7, 1998, the Company and Bergen jointly terminated the Bergen Merger
Agreement. In accordance with the terms of the Bergen Merger Agreement, the
Company was required to reimburse Bergen for $7 million of transaction costs
upon termination of the Bergen Merger Agreement. Additionally, the termination
of the Bergen Merger Agreement will cause the costs incurred by the Company
(that would not have been deductible had the merger been consummated) to become
tax deductible, resulting in a tax benefit of $12.2 million. The obligation to
reimburse Bergen and the additional tax benefit are reflected in the
supplemental consolidated financial statements in the fourth quarter of the
fiscal year ended June 30, 1998.
37
39
CARDINAL HEALTH INC.AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
BALANCE AT CHARGED TO CHARGED TO CHANGE BALANCE AT
BEGINNING COSTS AND OTHER IN FISCAL END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) YEAR (3) OF PERIOD
- ------------------------ ---------- --------- ------------ ------------ ---------- -----------
Fiscal Year 1998:
Accounts receivable $62.8 $19.0 $ 3.3 $(20.5) $ -- $64.6
Finance notes receivable 8.2 0.1 0.1 (2.0) -- 6.4
Net investment in sales-type leases 4.7 4.2 -- (3.7) 3.6 8.8
----- ----- ----- ----- ----- -----
$75.7 $23.3 $ 3.4 $(26.2) $ 3.6 $79.8
===== ===== ===== ====== ===== =====
Fiscal Year 1997:
Accounts receivable $68.2 $10.0 $ 0.4 $(15.8) -- $62.8
Finance notes receivable 9.1 -- -- (0.9) -- 8.2
Net investment in sales-type leases 8.7 -- -- (4.0) -- 4.7
----- ----- ----- ------ ----- -----
$86.0 $10.0 $ 0.4 $(20.7) $ -- $75.7
===== ===== ===== ====== ===== =====
Fiscal Year 1996:
Accounts receivable $56.9 $21.5 $ 1.5 $(11.7) -- $68.2
Finance notes receivable 9.3 0.6 -- (0.8) -- 9.1
Net investment in sales-type leases 3.1 5.6 -- -- -- 8.7
----- ----- ----- ------ ----- -----
$69.3 $27.7 $ 1.5 $(12.5) $ -- $86.0
===== ===== ===== ====== ===== =====
(1) During fiscal 1998, 1997 and 1996 recoveries of amounts provided for or
written off in prior years were $3.4 million $0.4 million and $0.4 million,
respectively. Increase in the reserves as a result of acquisitions
accounted for as purchases was $1.1 million in fiscal 1996.
(2) Write-off of uncollectible accounts.
(3) Change in fiscal year of acquired subsidiary.
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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, PCI Services, Inc. ("PCI") on October 11, 1996, Owen
Healthcare, Inc. ("Owen") on March 18, 1997, MediQual Systems, Inc. ("MediQual")
on February 18, 1998, R.P. Scherer Corporation ("Scherer") on August 7, 1998 and
Allegiance Corporation ("Allegiance") on February 3, 1999. The discussion and
analysis presented below should be read in conjunction with the supplemental
consolidated financial statements and related notes appearing elsewhere in this
report.
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. The words "believe", "expect", "anticipate",
"project", and similar expressions, among others, identify "forward-looking
statements", which speak only as of the date the statement was made. Such
forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to materially differ from those made, 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 reports and
exhibits and amendments to those reports and are incorporated herein by
reference. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
RESULTS OF OPERATIONS
OPERATING REVENUE
Operating revenue for the six months ended December 31, 1998 increased 20%
as compared to the same period in the prior year. Distribution businesses (those
whose primary operations involve the wholesale distribution of pharmaceuticals,
representing approximately 68% of total operating revenue) grew at a rate of 28%
during the six month period ended December 31, 1998. The Service businesses
(those that provide services to the healthcare industry, primarily through
pharmacy franchising, pharmacy automation equipment, pharmacy management,
pharmaceutical packaging, drug delivery systems development and healthcare
information systems development) grew at a rate of 18% primarily due to the
Company's pharmacy automation and pharmaceutical packaging businesses during
this time period, while the Medical/Surgical Manufacturing and Distribution
("Med/Surg") business (primary operations include manufacturing and the
wholesale distribution of medical surgical supplies representing approximately
23% of total operating revenue) grew at a rate of 6% during the six months ended
December 31, 1998, primarily due to an increase in sales of manufactured
products and additional distribution sales to Canada. The majority of the
overall operating revenue increase (approximately 75% for the six-month period
ended December 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.
Operating revenue for fiscal 1998 increased 13% as compared to the prior
year. Distribution businesses' (representing 66% of total operating revenue)
operating revenue (including approximately $196 million sold to Owen, eliminated
in consolidation) grew at a rate of 19% during the fiscal year ended June 30,
1998, while Service businesses' operating revenue grew at a rate of 16% during
the fiscal year ended June 30, 1998, primarily on the strength of the Company's
pharmacy automation and pharmacy management businesses. Med/Surg business'
(representing 25% of total 1998 operating revenue) operating revenue for fiscal
year 1998 and 1997 grew slightly with an increase of 2% in fiscal 1998 over the
prior year. The majority of the overall operating revenue increase
(approximately 80% for the year ended June 30, 1998) came from existing
customers in the form of increased volume and pharmaceutical price increases.
The remainder of the growth came from the addition of new customers.
Operating revenue for fiscal 1997 increased 11%, as compared to the prior
year. Distribution businesses' operating revenue (including approximately $22
million sold to Owen, eliminated in consolidation) grew at a rate of 17% during
the fiscal year ended June 30, 1997, while Service businesses' operating revenue
grew at a rate of 7%, primarily on the strength of the Company's pharmacy
management business. Med/Surg business' operating revenue for fiscal year 1997
decreased by 1% compared to the prior year. The overall increase in operating
revenue in fiscal 1997 resulted from internal growth generated primarily by the
addition of new customers, and, to a lesser extent, increased volume from
existing customers and price increases. Expansion of the Company's relationship
with Kmart Corporation ("Kmart") and opportunities created by the deterioration
of the financial condition of a major pharmaceutical distribution competitor
also contributed to the increases during fiscal 1997.
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BULK DELIVERIES TO CUSTOMER WAREHOUSES
The Company reports as revenue bulk deliveries made to customers'
warehouses, whereby the Company acts as an intermediary in the ordering and
subsequent delivery of pharmaceutical products. Fluctuations in bulk deliveries
result largely from circumstances that are beyond the control of the Company,
including consolidation within the chain drugstore industry, decisions by chains
to either begin or discontinue warehousing activities, and changes in policies
by manufacturers related to selling directly to chain drugstore customers. Due
to the lack of margin generated through bulk deliveries, fluctuations in their
amount have no significant impact on the Company's earnings.
GROSS MARGIN
For the six month periods ended December 31, 1998 and 1997, gross margin as
a percentage of operating revenue was 11.95% and 12.26%, respectively. The
decrease in the gross margin percentage is due primarily to a greater mix of
lower margin Distribution business in the six months ended December 31, 1998,
and a general decline in the Distribution businesses' gross margin. The
Distribution businesses' gross margin as a percentage of operating revenue was
5.17% and 5.47%, respectively, for the six-month periods ended December 31, 1998
and 1997. These decreases were 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 high volume customers.
The Distribution businesses achieved 28% operating revenue growth during the six
months ended December 31, 1998, compared to the same period a year ago, through
the addition or expansion of business with large, high volume customers. The
Service businesses' gross margin as a percentage of operating revenue was 31.92%
and 31.76% for the six months ended December 31, 1998 and 1997, respectively.
Increased operating revenue for the Company's relatively high margin pharmacy
automation business was the primary contributor to the gross margin improvement.
Med/Surg business' gross margin increased from 20.99% to 23.13% for the six
months ended December 31, 1998, compared to the same period a year ago,
primarily as a result of improvements in the Company's product mix, including
the growth of manufactured product sales in both domestic and international
markets and by offsetting pricing pressures with manufacturing and other cost
efficiencies.
For fiscal 1998 and 1997, gross margin as a percentage of operating revenue
was 12.33% and 12.68%, respectively. The fiscal 1998 decrease in the gross
margin as a percentage of operating revenue is due to declines in the
Distribution and Service businesses' gross margin, which were partially offset
by an increase in Med/Surg business' gross margins. The Distribution businesses'
gross margin as a percentage of operating revenue decreased from 5.82% in fiscal
1997 to 5.57% in fiscal 1998. The decrease is 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. The Service businesses' gross margin as a percentage of operating
revenue was 32.37% and 32.88% in fiscal 1998 and 1997, respectively. Operating
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. Med/Surg business' gross margin as
a percentage of operating revenue was 21.62% in fiscal 1998 compared to 20.99%
in fiscal 1997. The increase is primarily the result of improvements in the
Company's product mix, including the growth of manufactured product sales in
both domestic and international markets and by offsetting pricing pressures with
manufacturing and other cost efficiencies.
For fiscal 1997 and 1996, gross margin as a percentage of operating revenue
was 12.68% and 13.41%, respectively. The change in gross margin for the year was
primarily due to the shift in revenue mix caused by significant increases in the
relatively lower margin pharmaceutical distribution activities. The impact of
this shift was partially offset by increased merchandising and marketing
programs with customers and suppliers. The Company's gross margin continues to
be affected by the combination of a highly competitive environment and a greater
mix of high volume customers, where a lower cost of service and better asset
management enable the Company to offer lower selling margins and still achieve
higher operating margins relative to other customer business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of operating
revenue declined to 7.47% for the six-month period ended December 31, 1998
compared to 7.89% for the same period a year ago. In addition, selling, general
and administrative expenses as a percentage of operating revenue improved to
7.72% in fiscal 1998 compared to 8.19% in fiscal 1997. The improvements during
the six-month and full fiscal year periods reflect economies associated with the
Company's revenue growth, in addition to significant productivity gains
resulting from continued cost control efforts and the consolidation and
selective automation of operating facilities. The 14% and 7% growth in selling,
general and administrative expenses experienced in the six months ended December
31, 1998 and the fiscal year 1998, compared to the
40
42
same periods a year ago was due primarily to increases in personnel costs and
depreciation expense, and compares favorably to the 20% and 13% growth in
operating revenue for the same respective periods.
Selling, general and administrative expenses as a percentage of operating
revenue improved to 8.19% in fiscal 1997 compared to 9.27% in fiscal 1996. The
improvements in fiscal 1997 reflect the economies associated with the Company's
revenue growth, as well as significant productivity gains resulting from
continued cost control efforts and the consolidation and selective automation of
operating facilities. Additionally, certain expenses such as employee severance,
asset impairments and lease exit costs, recorded in fiscal 1996 did not recur in
fiscal 1997.
SPECIAL CHARGES
Merger-related charges
Costs of effecting mergers and subsequently integrating the operations
of the various merged companies are recorded as merger-related costs when
incurred. During the six months ended December 31, 1998, merger-related costs
totaling $37.5 million ($29.7 million, net of tax) were recorded. Of this
amount, approximately $22.3 million related to transaction and employee-related
costs, and $12.5 million related to business restructuring and asset impairment
costs associated with the Company's merger transaction with Scherer. In
addition, the Company recorded costs of $1.1 million related to severance costs
for restructuring associated with the change in management that resulted from
the merger transaction with Owen Healthcare, Inc. and $4.8 million related to
integrating the operations of companies that previously engaged in merger
transactions with the Company. Partially offsetting the charge recorded was a
$3.2 million credit, to adjust the estimated transaction and termination costs
previously recorded in connection with the canceled merger transaction with
Bergen Brunswig Corporation ("Bergen") (see Note 19 of "Notes to Supplemental
Consolidated Financial Statements"). This adjustment relates primarily to
services provided by third parties engaged by the Company in connection with the
terminated Bergen transaction. The cost of such services was estimated and
recorded in the prior periods when the services were performed. Actual billings
were less than the estimate originally recorded, resulting in a reduction of the
current period merger-related costs.
During fiscal 1998, the Company recorded merger-related charges associated
with transaction costs incurred in connection with the MediQual Merger ($2.3
million) and transaction costs incurred in connection with the proposed merger
transaction with Bergen ($33.4 million) which was terminated subsequent to
year-end (see Note 19 of "Notes to Supplemental Consolidated Financial
Statements"). Additional costs related to asset impairments ($3.8 million) and
integrating the operations of companies that previously merged with the Company
($9.6 million), of which $5.4 million was recorded during the six months ended
December 31, 1997, were incurred and recorded during fiscal 1998. During fiscal
1997, the Company recorded merger-related charges associated with the PCI and
Owen mergers ($46.2 million) and additional integration costs related to the
Pyxis and Medicine Shoppe mergers ($4.7 million). During fiscal 1996, the
Company recorded charges ($49.2 million) to reflect the estimated Medicine
Shoppe and Pyxis merger-related costs. See further discussion in Note 2 of
"Notes to Supplemental Consolidated Financial Statements." The Company
classifies costs associated with a merger transaction as "merger-related costs."
It should be noted that the amounts presented may not be comparable to similarly
titled amounts reported by other companies.
Other Special Charges
During fiscal 1998, the Company recorded a special charge of $8.6 million
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,
including approximately $2.0 million incurred in connection with the settlement
of a labor dispute with former employees of the Company's Boston distribution
facility, resulting in termination of the union relationship.
During fiscal 1998, the Company, along with its joint venture partner,
converted the legal ownership structure of the Company's 51% owned subsidiary in
Germany from a corporation to a partnership. As a result of this change in tax
status, the Company's tax basis in the German subsidiary was adjusted, resulting
in a one-time tax refund of approximately $4.6 million, as well as a reduction
in the cash taxes to be paid in the current and future years. Combined, these
factors reduced fiscal 1998 income tax expense by $11.7 million.
During fiscal 1996, the Company recorded special charges of $679.3 million.
In fiscal 1996, the Company's wholly owned subsidiary, Allegiance, changed its
method of assessing goodwill impairment, resulting in a charge of $550.0 million
($550.0 million, net of tax). In addition, $33.8 million ($23.1 million, net of
tax) was recorded related to the
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43
rationalization of the Company's manufacturing and overhead structures which
were primarily servicing non-pharmaceutical markets. Approximately $12.0 million
of these charges related to retirement or severance costs, $16.6 million related
to asset impairments and $5.2 million related to contractual obligations.
Lastly, $95.5 million ($62.8 million, net of tax) was recorded primarily due to
Allegiance's facility consolidations and other asset write-downs ($62.8), costs
related to Allegiance's spin-off from Baxter (see Note 1) ($13.2 million) and
legal defense costs related to natural rubber latex litigation cases ($19.5
million) (see Note 10).
The following is a summary of the special charges incurred by the Company
in the six months ended December 31, 1998 and 1997 and in the last three fiscal
years:
Six Months Ended Fiscal Year Ended
December 31, June 30,
---------------------- ----------------------------------------
1998 1997 1998 1997 1996
----------- ---------- ----------- ------------ -------------
(in millions, except per share amounts)
MERGER-RELATED COSTS:
- ---------------------
Transaction and employee-related costs:
Transaction costs $ (14.1) $ - $ (35.7) $ (14.5) $ (21.3)
PCI vested retirement benefits and
incentive fee - - - (7.6) -
Pyxis stay bonuses - - - - (7.6)
Employee severance/termination (6.1) - - (4.4) (2.6)
Other - - - (0.6) (0.3)
--------- --------- ----------- ------------ -------------
Total transaction and employee-related costs (20.2) - (35.7) (27.1) (31.8)
Other merger-related costs:
Asset impairments (4.1) - (3.8) (13.2) (0.4)
Exit and restructuring costs (8.4) - - (2.2) (15.6)
Duplicate facilities elimination - - - (1.7) -
Integration and efficiency implementation (4.8) (5.4) (9.7) (6.7) (1.4)
--------- --------- ----------- ------------ -------------
Total other merger-related costs (17.3) (5.4) (13.5) (23.8) (17.4)
--------- --------- ----------- ------------ -------------
Total merger-related costs $ (37.5) $ (5.4) $ (49.2) $ (50.9) $ (49.2)
--------- --------- ----------- ------------ -------------
OTHER SPECIAL CHARGES:
- ----------------------
Facilities closures $ - $ - $ (6.1) $ - $ (117.3)
Goodwill write-down - - - - (550.0)
Employee severance - - (2.5) - (12.0)
--------- --------- ----------- ------------ -------------
Total other special charges - - (8.6) - (679.3)
--------- --------- ----------- ------------ -------------
TOTAL SPECIAL CHARGES (37.5) (5.4) (57.8) (50.9) (728.5)
- ---------------------
Tax effect of special charges 7.8 2.2 22.0 14.3 55.7
Tax benefit for change in tax status - - 11.7 - -
--------- --------- ----------- ------------ -------------
Effect on net earnings $ (29.7) $ (3.2) $ (24.1) $ (36.6) $ (672.8)
========= ========= =========== ============ =============
Effect on diluted earnings per share $ (0.11) $ (0.01) $ (0.10) $ (0.13) $ (2.55)
========= ========= =========== ============ =============
The effects of the merger-related costs and other special charges are
included in the reported net earnings of $224.9 million and $197.6 million and
in the reported diluted earnings per Common Share of $0.81 and $0.71 during the
six months ended December 31, 1998 and 1997, respectively. The effects of the
merger-related costs and other special charges are included in the reported net
earnings of $425.1 million in fiscal 1998, $334.8 million in fiscal 1997 and
$(321.2) million in fiscal 1996 and in the reported diluted earnings per Common
Share of $1.53 in fiscal 1998, $1.23 in fiscal 1997 and $(1.24) in fiscal 1996.
The Company estimates that it will incur additional merger-related costs
associated with the various mergers it has completed to date totaling
approximately $29.2 million ($17.9 million, net of tax) in future periods
(excluding the Allegiance Merger, see Note 2 of "Notes to Supplemental
Consolidated Financial Statements") in order to properly
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integrate operations and implement efficiencies with regard to, among other
things, information systems, customer systems, marketing programs and
administrative functions. Such amounts will be charged to expense when incurred.
Asset impairments in fiscal 1997 include the write-off of a patent ($7.4
million) and the write-down of certain operating assets ($3.2 million) related
to MediTROL, Inc. ("MediTROL," a subsidiary acquired by the Company in the Owen
merger transaction) as a result of management's decision to merge the operations
of MediTROL into Pyxis and phase-out production of the separate MediTROL product
line.
Exit and restructuring costs in fiscal 1996 include $15.6 million related
to cancellation of a long-term contract with a financing company related to the
servicing and financing of the accounts receivable from Pyxis customers at the
time of the Pyxis Merger (see Note 3 of "Notes to Supplemental Consolidated
Financial Statements").
The Company's trend with regard to acquisitions has been to expand its role
as a provider of services to the healthcare industry. This trend has resulted in
both expansion of its pharmaceutical distribution business and diversification
into related service areas which (a) complement the Company's core
pharmaceutical distribution business; (b) provide opportunities for the Company
to develop synergies with, and thus strengthen, the acquired business; and (c)
generally generate higher margins as a percentage of operating revenue than
pharmaceutical distribution. As the healthcare industry continues to change, the
Company is constantly evaluating merger or acquisition candidates in
pharmaceutical distribution, as well as related sectors of the healthcare
industry that would expand its role as a service provider; however, there can be
no assurance that it will be able to successfully pursue any such opportunity or
consummate any such transaction, if pursued. If additional transactions are
entered into or consummated, additional merger-related costs would be incurred
by the Company.
INTEREST EXPENSE. The increase in interest expense of $2.9 million during
the first six months of fiscal 1999 compared to the same respective periods of
fiscal 1998 is primarily due to the Company's issuance of $150 million of 6.25%
Notes due 2008, in a public offering in July 1998 (see "Liquidity and Capital
Resources").
The decrease in interest expense of $12.7 million in fiscal 1998 compared
to fiscal 1997 is primarily due to the paydown of the Company's $100 million of
8% Notes on March 1, 1997 and a reduction in the overall interest rate on total
debt outstanding during fiscal 1998 compared to fiscal 1997.
Interest expense for fiscal 1997 increased by $45.1 million compared to the
prior year. This increase is attributable to a full year of borrowings in 1997
related to Allegiance debt compared to only one quarter of borrowings in the
prior fiscal year. In 1996, Allegiance participated in a centralized
cash-management program administrated by Baxter (See Note 17 of "Notes to
Supplemental Consolidated Financial Statements"). During this time, Allegiance
was not charged interest expense.
As discussed below under "Liquidity and Capital Resources," the Company
issued $150 million of 6.25% Notes in July 1998.
OTHER INCOME. The decrease in other income of $1.7 million during the first
six months of fiscal 1999 compared to the same period a year ago is primarily
due to the increase in minority interests in the earnings of less than wholly
owned subsidiaries. The increase in minority interests was primarily the result
of increased profitability at the Company's majority owned German subsidiary.
The $0.3 million increase in other income during the first six months of fiscal
1998 compared to the same period a year ago is due to increased interest income.
The decrease in other income of $52.7 million in fiscal 1997 compared to
fiscal 1996 is primarily due to the recording of a non-recurring gain of $35.9
million in fiscal 1996 associated with the curtailment of Baxter-sponsored
benefit plans (see Note 9 of "Notes to Supplemental Consolidated Financial
Statements"). The remaining decrease is due to fluctuations in interest income
earned on marketable securities during fiscal 1997 and fiscal 1996.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
relative to pretax earnings was 38.8% and 37.4% during the six months ended
December 31, 1998 and 1997, respectively. In addition, the Company's provision
for income taxes relative to pretax earnings was 35.6%, 38.0% and (101.4)% for
fiscal years 1998, 1997 and 1996, respectively. The fluctuation in the tax rate
is primarily due to the impact of recording certain non-deductible
merger-related costs during various periods. Also, during fiscal 1998, a change
in tax status of a 51% owned German subsidiary
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45
resulted in lower taxes during the current year. In addition, the reduction in
the state effective tax rate as a result of the change in the Company's business
mix impacted the tax rates for all these fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $2,282.2 million at December 31, 1998 from
$2,060.7 million at June 30, 1998. This increase was primarily due to additional
investments in merchandise inventories and trade receivables of $456.7 million
and $158.8 million, respectively. Offsetting the increases in working capital
were an increase in accounts payable of $247.9 million and a decrease in cash
and cash equivalents of $83.0 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
operating revenue growth (see "Operating Revenue" above). The change in cash and
equivalents and accounts payable is due primarily to the timing of inventory
purchases and related payments.
Working capital increased to $2,060.7 million at June 30, 1998 from
$1,760.6 million at June 30, 1997. This increase included $71.2 million of cash
generated in fiscal 1998, as well as additional investments in merchandise
inventories and trade receivables of $525.7 million and $145.0 million,
respectively. Offsetting the increases in working capital was an increase in
accounts payable of $522.3 million. Increases in merchandise inventories reflect
the higher level of business volume in pharmaceutical distribution activities,
especially in the fourth quarter of fiscal 1998 when distribution revenue grew
31% over the same period in the prior year. The increase in trade receivables is
consistent with the Company's revenue growth (see "Operating Revenue" above).
The change in accounts payable is due to the timing of inventory purchases and
related payments.
On July 13, 1998, the Company issued $150 million of 6.25% Notes due 2008,
the proceeds of which will be used for working capital needs due to growth in
the Company's business. The Company currently has the capacity to issue $250
million of additional debt securities pursuant to a shelf registration statement
filed with the Securities and Exchange Commission (see Note 5 of "Notes to
Supplemental Consolidated Financial Statements"). The Company paid at maturity
$100 million of long-term debt during fiscal 1997.
Property and equipment, at cost, increased by $86.1 million at December 31,
1998 compared to June 30, 1998. The increase was primarily due to ongoing plant
expansion and manufacturing equipment purchases in certain service businesses
and additional investments made for management information systems and upgrades
to distribution facilities. During fiscal 1998, property and equipment, at cost,
increased by $138.3 million compared to fiscal 1997. The increase in property
and equipment included additional investments in management information systems
and customer support systems. The Company has several operating lease agreements
for the construction of new facilities. See further discussion in Note 10 of
"Notes to Supplemental Consolidated Financial Statements."
Shareholders' equity increased to $3,188.6 million at December 31, 1998
from $2,954.9 million at June 30, 1998, primarily due to net earnings of $224.9
million and the investment of $59.4 million by employees of the Company through
various stock incentive plans. Shareholders' equity increased to $2,954.9
million at June 30, 1998 from $2,627.0 million at June 30, 1997, primarily due
to net earnings of $425.1 million and the investment of $68.2 million by
employees of the Company through various stock incentive plans.
The Company has line-of-credit agreements with various bank sources
aggregating $532.1 million, of which $95 million is represented by committed
line-of-credit agreements and the balance is uncommitted. The Company had $106.4
million and $24.7 million outstanding under these lines at December 31, 1998 and
June 30, 1998, respectively. In addition, the Company initiated a commercial
paper program, providing for the issuance of up to $750 million in aggregate
maturity value of commercial paper. The Company had $15.0 million and $142.0
million outstanding under this program at December 31, 1998 and June 30, 1998.
The Company also has an unsecured revolving credit agreement and other unsecured
bank credit facilities that provide for up to an aggregate of $1,075.0 million
in borrowings (of which $77.3 million and $51.3 million was in use at December
31, 1998 and June 30, 1998, respectively).
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 business combinations.
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46
See Notes 1 and 6 to the supplemental consolidated financial statements
for information regarding the use of financial instruments and derivatives
thereof, including foreign currency hedging instruments. As a matter of policy,
the Company does not engage in "speculative" transactions involving derivative
financial instruments.
OTHER
- -----
TERMINATED AGREEMENT. On August 24, 1997, the Company and Bergen announced
that they had entered into a definitive merger agreement (as subsequently
amended by the parties on March 16, 1998), pursuant to which a wholly owned
subsidiary of the Company would be merged with and into Bergen (the "Bergen
Merger Agreement"). The Bergen Merger Agreement was subsequently approved by
both companies' shareholders on February 20, 1998. On March 9, 1998, the FTC
filed a complaint in the United States District Court for the District of
Columbia seeking a preliminary injunction to halt the proposed merger. On July
31, 1998, the District Court granted the FTC's request for an injunction to halt
the proposed merger. On August 7, 1998, the Company and Bergen jointly
terminated the Bergen Merger Agreement. In accordance with the terms of the
Bergen Merger Agreement, the Company was required to reimburse Bergen for $7
million of transaction costs upon termination of the Bergen Merger Agreement.
Additionally, the termination of the Bergen Merger Agreement will cause the
costs incurred by the Company (that would not have been deductible had the
merger been consummated) to become tax deductible, resulting in a tax benefit of
$12.2 million. The obligation to reimburse Bergen and the additional tax benefit
are reflected in the supplemental consolidated financial statements in the
fourth quarter of the fiscal year ended June 30, 1998 (See Note 19 of "Notes to
Supplemental Consolidated Financial Statements").
YEAR 2000 PROJECT. The Company utilizes computer technologies in each of
its businesses to carry out its day-to-day operations. Computer technologies
include both information technology in the form of hardware and software, as
well as embedded technology in the Company's facilities and equipment. The
Company is utilizing a multi-phased concurrent approach to determine whether its
systems are capable of recognizing and processing date sensitive information
properly as the year 2000 approaches. The phases included in the Company's
approach are the awareness, assessment, remediation, validation and
implementation phases. The Company has completed the awareness phase of its
project. The Company has also substantially completed the assessment phase and
is well into the remaining phases. The Company is actively correcting and
replacing those systems which are not year 2000 ready in order to ensure the
Company's ability to continue to meet its internal needs and those of its
suppliers and customers. The Company currently intends to substantially complete
the remediation, validation and implementation phases of the year 2000 project
prior to June 30, 1999. This process includes the testing of critical systems to
ensure that year 2000 readiness has been accomplished. The Company currently
believes it will be able to modify, replace, or mitigate its affected systems in
time to avoid any material detrimental impact on its operations. If the Company
determines that it is unable to remediate and properly test affected systems on
a timely basis, the Company intends to develop appropriate contingency plans for
any mission-critical systems at the time such determination is made. While the
Company is not presently aware of any significant probability that its systems
will not be properly remediated on a timely basis, there can be no assurances
that all year 2000 remediation processes will be completed and properly tested
before the year 2000, or that contingency plans will sufficiently mitigate the
risk of a year 2000 readiness problem.
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $27.0 million, including costs incurred to date. A
significant portion of these costs are not likely to be incremental costs, but
rather will represent the redeployment of existing resources. This reallocation
of resources is not expected to have a significant impact on the day-to-day
operations of the Company. During the six-month period ended December 31, 1998
and the fiscal year ended June 30, 1998, total costs of approximately $3.2
million and $5.1 million, respectively, were incurred by the Company for this
project, of which approximately $1.1 million and $1.4 million, respectively,
represented incremental costs. Total accumulated costs of approximately $8.9
million and $5.7 million have been incurred by the Company through December 31,
1998 and June 30, 1998, of which approximately $2.7 million and $1.6 million
represented incremental expense, respectively. 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 and information
currently available, the Company does not anticipate that the costs associated
with this project will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows in future
periods.
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The Company has initiated formal communications with its significant
suppliers, customers, and critical business partners 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. The Company has taken steps to
monitor the progress made by those parties, and intends to test critical system
interfaces as the year 2000 approaches. The Company is in the process of
developing appropriate contingency plans in the event that a significant
exposure is identified relative to the dependencies on third-party systems.
Although 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.
The potential risks associated with the year 2000 issues include, but are
not limited, to: temporary disruption of the Company's operations, loss of
communication services and loss of other utility services. The Company believes
that the most reasonably likely worst-case year 2000 scenario would be a loss of
communication services which could result in problems with receiving,
processing, tracking and billing customer orders; problems receiving, processing
and tracking orders placed with suppliers; and delays and other problems with
banks and other financial institutions. Currently, as part of the Company's
normal business contingency planning, a plan has been developed for business
disruptions due to natural disasters and power failures. The Company is in the
process of enhancing these contingency plans to include provisions for year 2000
issues, although it will not be possible to develop contingency plans for all
potential disruption. Although the Company anticipates that minimal business
disruption will occur as a result of the year 2000 issues, based upon currently
available information, incomplete or untimely resolution of year 2000 issues by
either the Company or significant suppliers, customers and critical business
partners could have a material adverse impact on the Company's consolidated
financial position, results of operations and/or cash flows in future periods.
THE EURO CONVERSION. On January 1, 1999, certain member countries of the
European Union irrevocably fixed the conversion rates between their national
currencies and a common currency, the "Euro", which became their legal currency
on that date. The participating countries' former national currencies will
continue to exist as denominations of the Euro between January 1, 1999 and
January 1, 2002. The Company has addressed the business implications of
conversion to the Euro, including the need to adapt internal systems to
accommodate Euro-denominated transactions, the competitive implications of
cross-border price transparency, and other strategic implications. The Company
does not expect the conversion to the Euro to have a material impact on its
consolidated financial position, results of operations or cash flows in future
periods.
RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS. As of September 30, 1998,
the Company adopted, on a retroactive basis, Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires the presentation of comprehensive income and its components in a full
set of general purpose financial statements. The Company's comprehensive income
consists of net earnings and foreign currency translation adjustments.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. In June 1997, the FASB also
issued Statement of Financial Accounting Standards No. 131 ("SFAS 131")
"Disclosures about Segments of an Enterprise and Related Information," which
will require adoption no later than fiscal 1999. SFAS 131 requires companies to
define and report financial and descriptive information about its operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which will require adoption no later than fiscal 1999.
SFAS 132 revises employers' disclosures about pension and other postretirement
benefit plans. The new statement does not change the existing method of expense
recognition.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which will require adoption no later than the Company's fiscal
quarter ending September 30, 1999. This new statement requires companies to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure such instruments at fair value.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which will
require adoption no later than the beginning of the Company's fiscal year ending
June 30, 2000. This new statement provides guidance on accounting for costs of
computer software developed or obtained for internal use.
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Adoption of these statements is not expected to have a material impact on
the Company's consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S. interest
rates, changes in foreign currency exchange rates as measured against the U.S.
dollar and changes in commodity prices.
Interest Rates. The Company utilizes a mix of debt maturities along with both
fixed-rate and variable-rate debt to manage its exposures to changes in interest
rates. The Company does not expect changes in interest rates to have a material
effect on income or cash flows in fiscal 1999, although there can be no
assurances that interest rates will not significantly change.
As of June 30, 1998, the Company had total long-term obligations outstanding of
$1,337.3 million of which $898.9 million represented Notes and Debentures with
fixed interest rates and maturity dates beginning in fiscal 2004. The average
interest rate related to these obligations is 7.0%. The majority of the
remaining outstanding long-term obligations and credit facilities have variable
interest rates which fluctuate with the LIBOR or prime rates. As of June 30,
1998, the fair value of the total long-term obligations was $1,365.3 million.
The aggregate maturities for each of the next five years commencing in fiscal
1999 are (in millions):
1999 2000 2001 2002 2003 Thereafter
- ----------------- ---------------- ---------------- ---------------- ------------------- -----------------
$7.3 $5.6 $344.0 $3.3 $50.0 $927.1
The Company has entered into an interest rate swap agreement which expires
November 2002 to exchange its variable rate position related to a lease
agreement for a fixed rate of 7.08%. The notional amount, interest payment and
maturity date of the swap match the principal, interest payment and maturity
date of the related lease agreement. Accordingly, any market risk or opportunity
associated with this swap is offset by the opposite market impact on the related
lease agreement. The Company does not enter into interest rate swap agreements
for trading purposes.
Foreign Exchange. The Company conducts business in several major international
currencies. The Company uses financial instruments, principally foreign currency
options to hedge exposure to the impact of foreign exchange rate changes on
earnings. In addition, the Company enters into forward foreign currency exchange
contracts to hedge certain exposures related to selected transactions that are
relatively certain as to both timing and amount and to hedge a portion of the
production costs expected to be denominated in the Malaysian ringgit. The
purpose of entering into these hedge transactions is to minimize the impact of
foreign currency fluctuations on the results of operations. These financial
instruments have maturity dates expiring through June 30, 1999. Gains and losses
on the forward contracts are recognized concurrently with the gains and losses
from the underlying transactions. The Company does not enter into forward
exchange contracts or foreign currency options for trading purposes.
In addition, the Company uses commodity contracts to hedge raw materials
expected to be denominated in foreign currency. These contracts generally cover
a one-year period and all gains and losses are deferred and recognized in cost
of goods sold with the underlying product costs.
As of June 30, 1998, the Company's foreign currency options consisted of the
option to exchange German marks at a fixed exchange rate of 1.722 German marks
per U.S. dollar and British sterling at a fixed exchanged rate of $1.6242 per
sterling. The notional principal amount under these foreign currency option
contracts was approximately $3 million and its related fair value was $0.1
million at June 30, 1998. In addition, as of June 30, 1998, the Company's
forward exchange contracts consisted of forward contracts to sell German marks
and U.S. dollars for British sterling at a fixed exchange rate of 3.05679 German
mark per British sterling and $1.67 per sterling. The notional principal amount
under these foreign exchange contracts was approximately $35.6 million and its
related fair value was $(0.4) million at June 30, 1998. As of June 30, 1998, the
notional amount of the commodity hedge contracts was $14.2 million and the
related fair market value of these contracts was $(1.7) million. The unrealized
gains or losses on these options or contracts represent hedges of foreign
exchange gains and losses on a portion of the Company's foreign earnings and
selected transactions. As a result, the Company does not expect future gains and
losses on these contracts to have a material impact on the Company's financial
results.
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SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following selected supplemental consolidated financial data of the
Company was prepared giving retroactive effect to the business combinations with
Whitmire Corporation ("Whitmire") on February 7, 1994; Medicine Shoppe
International, Inc. ("Medicine Shoppe") on November 13, 1995; Pyxis Corporation
("Pyxis") on May 7, 1996; PCI Services, Inc. ("PCI") on October 11, 1996; Owen
Healthcare, Inc. ("Owen") on March 18, 1997; MediQual Systems, Inc. ("MediQual")
on February 18, 1998; R.P. Scherer Corporation ("Scherer") on August 7, 1998;
and Allegiance Corporation ("Allegiance") on February 3, 1999, all of which were
accounted for as pooling-of-interests transactions (see Note 2 of "Notes to
Supplemental Consolidated Financial Statements").
For the fiscal years ended June 30, 1996, 1995 and 1994, the information
presented is derived from supplemental consolidated financial statements which
combine data from Cardinal, Whitmire, Medicine Shoppe and Pyxis for the fiscal
years ended June 30, 1996, 1995 and 1994 with data from PCI for the fiscal years
ended September 30, 1996, 1995 and 1994, respectively, Owen for the fiscal years
ended November 30, 1995, 1994 and 1993, respectively, MediQual for the fiscal
years end December 31, 1995, 1994 and 1993, respectively, Scherer for the fiscal
years ended March 31, 1996, 1995 and 1994, respectively, and Allegiance for the
fiscal years December 31, 1996, 1995 and 1994, respectively.
For the fiscal year ended June 30, 1997, the information presented is
derived from the supplemental consolidated financial statements which combine
Cardinal for the fiscal year ended June 30, 1997 with PCI's financial results
for the nine months ended June 30, 1997, Owen's financial results for the period
of June 1, 1996 to June 30, 1997 (excluding Owen's financial results for
December 1996 in order to change Owen's November 30, fiscal year end to June
30), MediQual's financial results for the fiscal year ended December 31, 1996,
Scherer's financial results for the fiscal year ended March 31, 1997, and
Allegiance's financial results for the fiscal year ended December 31, 1997.
For the fiscal year ended June 30, 1998, the information presented is
derived from the supplemental consolidated financial statements which combine
Cardinal for the fiscal year ended June 30, 1998 with MediQual's and
Allegiance's financial results for the twelve months ended June 30, 1998 and
Scherer's financial results for the fiscal year ended March 31, 1998.
For the six months ended December 31, 1997, the information presented is
derived from the supplemental consolidated financial statements which combine
Cardinal for the six months ended December 31, 1997 with Scherer's financial
results for the six-month period ended September 30, 1997.
For the six months ended December 31, 1998, the information presented is
derived from the supplemental consolidated financial statements which combine
Cardinal for the six months ended December 31, 1998 with Scherer's financial
results for the six-month period ended December 31, 1998.
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The selected supplemental consolidated financial data below should be read
in conjunction with the Company's supplemental consolidated financial statements
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
At or For the Six
Months Ended
At or for the Fiscal Year Ended June 30, (1) December 31, (1)
----------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- -------- ---------
(In millions, except per share data)
EARNINGS DATA:
Revenue:
Operating Revenue $11,945.7 $13,943.0 $14,383.9 $15,924.8 $18,004.0 $8,523.3 $10,268.6
Bulk deliveries to
customer warehouses 561.8 1,779.5 2,178.5 2,469.1 2,991.4 1,431.8 1,781.5
--------- --------- --------- --------- --------- -------- ---------
Total revenue $12,507.5 $15,722.5 $16,562.4 $18,393.9 $20,995.4 $9,955.1 $12,050.1
Net earnings(loss) 334.5 464.3 (321.2) 334.8 425.1 197.6 224.9
Earnings (loss) per
Common Share: (2)
Basic $ 1.39 $ 1.84 $ (1.24) $ 1.26 $ 1.57 $ 0.73 $ 0.84
Diluted $ 1.33 $ 1.78 $ (1.24) $ 1.23 $ 1.53 $ 0.71 $ 0.81
Cash dividends declared
per Common Share (2) $ 0.05 $ 0.05 $ 0.05 $ 0.06 $ 0.07 $ 0.334 $ 0.05
BALANCE SHEET DATA:
Total assets $ 6,441.5 $ 6,517.3 $ 6,469.8 $ 6,521.8 $ 7,478.0 $7,091.9 $ 8,339.2
Long-term obligations,
less current portion $ 436.7 $ 451.5 $ 1,592.8 $ 1,320.9 $ 1,330.0 $1,339.8 $ 1,534.9
Shareholders' equity $ 3,900.9 $ 3,718.1 $ 2,222.5 $ 2,627.0 $ 2,954.9 $2,798.6 $ 3,188.6
(1) Amounts reflect business combinations in all periods presented. Fiscal
1998, 1997, 1996 and 1994 and the six months ended December 31, 1997
and 1998 amounts reflect the impact of merger-related costs and other
special charges. See Note 2 of "Notes to Supplemental Consolidated
Financial Statements" for a further discussion of merger-related costs
and other special charges affecting fiscal 1998, 1997 and 1996 and the
six-month periods ended December 31, 1998 and 1997.
(2) Net earnings and cash dividends per Common Share have been adjusted to
retroactively reflect all stock dividends and stock splits through
December 31, 1998.
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