<PAGE> 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) August 7, 1998
-------------------------------
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
--------------
<PAGE> 2
Item 2. Acquisition or Disposition of Assets
------------------------------------
On August 7, 1998, Cardinal Health, Inc. , an Ohio Corporation (the
"Registrant"), completed its merger (the "Scherer Merger") of a
wholly owned subsidiary with and into R.P. Scherer Corporation
("Scherer"). Scherer was the surviving corporation of the Scherer
Merger and is now a wholly owned subsidiary of the Registrant.
Pursuant to the merger agreement (the "Scherer Merger Agreement")
relating to the Scherer Merger, each outstanding share of Scherer
common stock was converted into 0.95 Common Shares of the Registrant
(the "Scherer Exchange Ratio"). Pursuant to the terms of the Scherer
Merger Agreement, approximately 25.2 million common shares of the
Registrant were issued in exchange for Scherer common stock and
outstanding options to purchase Scherer common stock. The Scherer
Exchange Ratio was determined by arms'-length negotiations between
Scherer and its advisors and the Registrant and its advisors. Scherer
is currently developing and commercializing a variety of advanced
drug delivery systems. Scherer's proprietary drug delivery systems
improve the efficacy of drugs by regulating the dosage so as to ease
administration, increase absorption, enhance bio-availability and
control time and place of release. Additional information concerning
the Scherer Merger and the transactions related thereto (including
proforma financial information and historical Scherer financial
information) is contained in the Registrant's Registration Statement
on Form S-4 (Registration Number 333-56655) previously filed with the
Securities and Exchange Commission on June 12, 1998 and amended on
June 23, 1998.
Item 5. Other Events
------------
On August 7, 1998, the Registrant and Bergen Brunswig Corporation, a
New Jersey corporation ("Bergen"), mutually terminated the Agreement
and Plan of Merger, dated as of August 23, 1997, by and among the
Registrant, Bruin Merger Corp., a New Jersey corporation and a wholly
owned subsidiary of the Registrant ("Bruin"), and Bergen, as amended
by the First Amendment, dated as of March 16, 1998, by and among the
Registrant, Bruin and Bergen (collectively, the "Merger Agreement").
The Merger Agreement was terminated following the decision rendered
on July 31, 1998 by the United States District Court for the District
of Columbia granting the Federal Trade Commission's request to halt
the proposed merger transaction between the Registrant and Bergen.
On September 3, 1998, a civil complaint was filed in United States
District Court in the District of Massachusetts against the
Registrant in an action entitled United States of America v. Cardinal
Health, Inc. (Civil Action No. 11817GA0) alleging that a facility
owned and operated by a subsidiary of the Registrant in Peabody,
Massachusetts, willfully violated the Controlled Substances Act by
accepting facsimiles of forms required by the Drug Enforcement
Administration for the distribution of controlled substances,
improperly processing such forms, and for other record-keeping
violations involving such forms and their retention. The civil
complaint contains no allegation that any controlled substance was
actually diverted or came into the possession of anyone other than
the Registrant's duly licensed customers. In the civil complaint,
pursuant to provisions of the Controlled Substances Act, the federal
government has requested judgment of up to $25,000 per violation. To
the extent the litigation against the Registrant is pursued, the
Registrant intends to vigorously defend its position on the basis
that it believes that no violation of the Controlled Substances Act
occurred as alleged.
On February 18, 1998, the Registrant completed its merger (the
"MediQual Merger") of a wholly owned subsidiary with and into
MediQual Systems, Inc. ("MediQual"). MediQual was the surviving
corporation of the MediQual Merger and is now a wholly owned
subsidiary of the Registrant. Pursuant to the merger agreement (the
"MediQual Merger Agreement") relating to the MediQual Merger, each
outstanding share of MediQual common stock was converted into Common
Shares of the Registrant pursuant to the exchange formulas set forth
in the MediQual Merger Agreement (the "MediQual Exchange Ratio").
Pursuant to the terms of the MediQual Merger Agreement, approximately
600,000 Common Shares of the Registrant have been issued in the
MediQual Merger in exchange for MediQual common stock and outstanding
options and warrants to purchase MediQual common stock. The MediQual
Exchange Ratio was determined by arms'-length negotiations between
MediQual and its advisors and the Registrant and its advisors.
Additional information concerning the MediQual Merger and the
transactions related thereto is contained in the Registrant's
Registration Statement on Form S-4 (Registration Number 333-30889)
previously filed with the Securities and Exchange Commission on July
8, 1997 and as subsequently amended.
The restated supplemental consolidated financial statements of the
Registrant, filed herewith, give effect to the Scherer Merger and the
MediQual Merger, which were accounted for as pooling-of-interests
business combinations. Because the impact of the merger transaction
with MediQual was not significant on a historical basis, the
financial statements were not restated upon completion of the
MediQual Merger.
<PAGE> 3
Item 7. Financial Statements, Schedules and Exhibits
--------------------------------------------
(a) Supplemental consolidated financial statements of the
Registrant, MediQual and Scherer prepared under the
pooling-of-interests method of accounting:
o INDEPENDENT AUDITORS' REPORTS
o SUPPLEMENTAL FINANCIAL STATEMENTS AND SCHEDULES
Supplemental Consolidated Statements of Earnings for the
Fiscal Years Ended June 30, 1998, June 30, 1997 and June
30, 1996
Supplemental Consolidated Balance Sheets at June 30, 1998,
and June 30, 1997
Supplemental Consolidated Statements of Shareholders' Equity
for the Fiscal Years Ended June 30, 1998, June 30, 1997,
and June 30, 1996
Supplemental Consolidated Statements of Cash Flows for 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
o MANAGEMENT'S DISCUSSION AND ANALYSIS
The foregoing are included in Annex A to this Form 8-K/A (Amendment
No. 1).
(c) Exhibits
2.01 Agreement and Plan Merger, dated as of May 17, 1998,
among the Registrant, GEL Acquisition Corp. and R.P.
Scherer 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.
27.01 Financial Data Schedule.
99.01 Statement Regarding Forward-Looking Information. (2)
(1) Included as an exhibit to the Registrants' Registration
Statement on Form S-4 (No. 333-56655) and incorporated
herein by reference.
(2) Filed as Exhibit 99.01 to the Annual Report on Form
10-K of the Registrant for the fiscal year ended June
30, 1998, and incorporated herein by reference.
2
<PAGE> 4
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.
September 28, 1998 By /s/ Richard J. Miller
-------------------------------------------
Richard J. Miller
Vice President, Controller and Acting Chief
Financial Officer
3
<PAGE> 5
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 supplemental 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 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, which statements reflect
total assets constituting 17% and 19% of the consolidated amounts as of June 30,
1998 and 1997, respectively, total revenues constituting 4%, 4%, and 5% of the
consolidated amounts for the years ended June 30, 1998, 1997, and 1996,
respectively, and net income constituting 22%, 23%, and 20% of the consolidated
amounts 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
statement amounts of Owen and Pyxis represent combined revenue and net income of
approximately 5% and 28%, respectively, of the consolidated amounts 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 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 Scherer on August 7, 1998,
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 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
4
<PAGE> 6
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
5
<PAGE> 7
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
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
January 30, 1997
6
<PAGE> 8
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
included 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).
7
<PAGE> 9
<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Operating revenue $13,555,359 $11,567,743 $ 9,990,275
Bulk deliveries to customer warehouses 2,991,360 2,469,138 2,178,532
----------- ----------- -----------
Total revenue 16,546,719 14,036,881 12,168,807
Cost of products sold:
Operating cost of products sold 12,296,456 10,462,151 8,975,865
Cost of products sold - bulk deliveries 2,991,360 2,469,086 2,178,077
----------- ----------- -----------
Total cost of products sold 15,287,816 12,931,237 11,153,942
Gross margin 1,258,903 1,105,644 1,014,865
Selling, general and administrative expenses 675,364 614,339 620,672
Special charges:
Mergers-related costs:
Transaction and employee-related costs (35,696) (27,100) (31,755)
Other (13,448) (23,829) (17,445)
----------- ----------- -----------
Total mergers-related costs (49,144) (50,929) (49,200)
Facilities closures and employee severance (8,634) -- (33,804)
----------- ----------- -----------
Operating earnings 525,761 440,376 311,189
Other income (expense):
Interest expense (32,285) (39,667) (43,206)
Other, net-- primarily interest income 11,126 8,297 14,690
----------- ----------- -----------
Earnings before income taxes and minority interests 504,602 409,006 282,673
Provision for income taxes 171,500 152,871 111,917
Minority interests 14,883 12,269 14,274
----------- ----------- -----------
Net earnings $ 318,219 $ 243,866 $ 156,482
=========== =========== ===========
Earnings per Common Share:
Basic $ 2.39 $ 1.88 $ 1.24
Diluted $ 2.35 $ 1.83 $ 1.20
Weighted average number of Common Shares outstanding:
Basic 133,009 129,953 126,520
Diluted 135,407 133,048 130,588
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE> 10
<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 338,263 $ 270,536
Trade receivables, net 989,583 800,906
Current portion of net investment in sales-type leases 75,450 40,997
Merchandise inventories 1,964,382 1,495,500
Prepaid expenses and other 137,417 106,665
---------- ----------
Total current assets 3,505,095 2,714,604
---------- ----------
Property and equipment, at cost:
Land, buildings and improvements 314,611 272,311
Machinery and equipment 627,428 562,728
Furniture and fixtures 104,366 84,883
---------- ----------
Total 1,046,405 919,922
Accumulated depreciation and amortization (347,468) (322,247)
---------- ----------
Property and equipment, net 698,937 597,675
Other assets:
Net investment in sales-type leases, less current portion 195,013 118,563
Goodwill and other intangibles 285,571 290,876
Other 98,490 103,477
---------- ----------
Total $4,783,106 $3,825,195
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 24,653 $ 22,850
Current portion of long-term obligations 7,294 7,071
Accounts payable 1,714,108 1,197,209
Other accrued liabilities 247,661 275,666
---------- ----------
Total current liabilities 1,993,716 1,502,796
---------- ----------
Long-term obligations, less current portion 441,170 420,167
Deferred income taxes and other liabilities 324,145 212,427
Shareholders' equity:
Common Shares, without par value 944,833 900,295
Retained earnings 1,122,230 814,328
Common Shares in treasury, at cost (9,469) (6,392)
Other (33,519) (18,426)
---------- ----------
Total shareholders' equity 2,024,075 1,689,805
---------- ----------
Total $4,783,106 $3,825,195
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE> 11
<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<CAPTION>
COMMON SHARES
---------------- TREASURY SHARES TOTAL
SHARES RETAINED ---------------- ADJUSTMENT SHAREHOLDERS'
ISSUED AMOUNT EARNINGS SHARES AMOUNT FOR ESOP OTHER EQUITY
------ -------- ---------- ------ -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 93,769 $752,399 $ 424,965 (1,354) $(16,026) $(21,296) $ 577 $1,140,619
Net earnings 156,482 156,482
Employee stock plans activity, including tax
benefits of $13,495 1,153 34,093 134 922 (1,173) 33,842
Treasury shares acquired and shares retired (240) (5,662) (170) 3,522 307 (1,833)
Change in unrealized loss on marketable
securities available-for-sale, net of tax 446 446
Dividends paid (7,616) (7,616)
Foreign currency translation and other adjustments (9,039) (9,039)
Adjustment for ESOP 21,296 21,296
Shares issued in connection with stock offering 2,069 50,654 50,654
Conversion of subordinated debt, net 1,071 9,787 9,787
------- -------- ---------- ------ -------- -------- -------- ----------
BALANCE, JUNE 30, 1996 97,822 841,271 573,831 (1,390) (11,582) -- (8,882) 1,394,638
Net earnings 243,866 243,866
Employee stock plans activity, including tax
benefits of $19,964 1,786 65,932 (1,098) 64,834
Treasury shares acquired and shares retired (748) (7,051) 728 5,117 (1,934)
Dividends paid (9,045) (9,045)
Foreign currency translation and other adjustments (8,446) (8,446)
3-for-2 stock split effected as a stock dividend
and cash paid in lieu of fractional shares 33,411 (30) (30)
Adjustment for change in fiscal year of an
acquired subsidiary (see Note 1) 143 5,706 84 73 5,922
------- -------- ---------- ------ -------- -------- -------- ----------
BALANCE, JUNE 30, 1997 132,271 900,295 814,328 (578) (6,392) -- (18,426) 1,689,805
Net earnings 318,219 318,219
Employee stock plans activity, including tax
benefits of $30,006 1,865 69,887 (39) (3,077) (407) 66,403
Treasury shares acquired and shares retired (415) (25,349) (25,349)
Dividends paid (11,507) (11,507)
Foreign currency translation and other adjustments (15,382) (15,382)
Adjustment for change in fiscal year of an
acquired subsidiary (see Note 1) 1,190 696 1,886
------- -------- ---------- ------ -------- -------- -------- ----------
BALANCE, JUNE 30, 1998 133,721 $944,833 $1,122,230 (617) $ (9,469) $ -- $(33,519) $2,024,075
======= ======== ========== ====== ======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE> 12
<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 318,219 $ 243,866 $ 156,482
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 91,689 83,058 79,296
Provision for deferred income taxes 91,974 17,911 13,367
Minority interests in net earnings 14,883 12,269 14,274
Provision for bad debts 15,518 8,584 14,017
Change in operating assets and liabilities, net of effects from acquisitions:
Increase in trade receivables (210,943) (51,304) (80,144)
Increase in merchandise inventories (468,882) (163,670) (149,332)
Increase in net investment in sales-type leases (110,903) (11,803) (34,125)
Increase (decrease) in accounts payable 516,874 (7,894) 156,064
Increase in accrued other 75,650 21,967 59,806
Other operating items, net (89,798) (11,694) (25,947)
--------- --------- ---------
Net cash provided by operating activities 244,281 141,290 203,758
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (4,000) -- (53,722)
Proceeds from sale of property and equipment 2,547 2,986 1,833
Additions to property and equipment (198,630) (146,592) (164,156)
Purchase of marketable securities available-for-sale -- (3,400) (163,719)
Proceeds from sale of marketable securities available-for-sale -- 57,735 218,019
Other (4,678) 2,488 (2,906)
--------- --------- ---------
Net cash used in investing activities (204,761) (86,783) (164,651)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 1,803 2,618 (4,860)
Reduction of long-term obligations (14,082) (192,769) (83,768)
Proceeds from long-term obligations, net of issuance costs 34,120 32,438 217,958
Proceeds from issuance of Common Shares 34,601 40,140 67,679
Tax benefit of stock options 30,006 18,964 13,495
Dividends on Common Shares and cash paid
in lieu of fractional shares (11,507) (9,075) (7,616)
Dividends paid to minority shareholders of subsidiaries (16,677) (8,214) (13,504)
Purchase of treasury shares (28,430) (1,934) (1,833)
--------- --------- ---------
Net cash provided by (used in) financing activities 29,834 (116,832) 187,551
EFFECT OF CURRENCY TRANSLATION ON CASH AND EQUIVALENTS (1,627) (1,183) (1,833)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 67,727 (63,508) 224,825
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 270,536 334,044 109,219
--------- --------- ---------
CASH AND EQUIVALENTS AT END OF YEAR $ 338,263 $ 270,536 $ 334,044
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE> 13
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Health, Inc. and subsidiaries (the "Company") is a provider of
services to the healthcare industry offering an array of value-added
pharmaceutical distribution services and pharmaceutical-related products and
services to a broad base of customers. The Company distributes a broad line of
pharmaceuticals, surgical and hospital supplies, therapeutic plasma and other
specialty pharmaceutical products, health and beauty care products, and other
items typically sold by hospitals, retail drug stores, and other healthcare
providers. The Company also operates a variety of related healthcare service
businesses, including Pyxis Corporation ("Pyxis") (which develops, manufactures,
leases, sells and services point-of-use pharmacy systems which automate the
distribution and management of medications and supplies in hospitals and other
healthcare facilities); Medicine Shoppe International, Inc. ("Medicine Shoppe")
(a franchisor of apothecary-style retail pharmacies); PCI Services, Inc. ("PCI")
(an international provider of integrated packaging services to pharmaceutical
manufacturers); Owen Healthcare, Inc. ("Owen") (a provider of pharmacy
management and information services to hospitals); MediQual Systems, Inc.
("MediQual") (a developer and provider of clinical information systems); and
R.P. Scherer Corporation ("Scherer") (an international developer and
manufacturer of drug delivery systems). See "Basis of Presentation" below. The
Company is currently operating in one business segment.
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 on February 18, 1998 and Scherer on
August 7, 1998 (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 Scherer. 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 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 and
Scherer's fiscal year ends were November 30, December 31 and March 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 and Scherer's fiscal year
ended March 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 and Scherer's fiscal
year ended March 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 and
Scherer's fiscal year ended March 31, 1998. 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' 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.
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.
12
<PAGE> 14
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
CASH EQUIVALENTS
The Company considers all liquid investments purchased with a maturity of
three months or less to be cash equivalents. The carrying value of cash
equivalents approximates their fair value.
RECEIVABLES
Trade receivables are primarily comprised of amounts owed to the Company
through its pharmaceutical wholesaling activities and are presented net of an
allowance for doubtful accounts of $37.4 million and $38.7 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
Substantially all merchandise inventories (79% in 1998 and 83% in 1997) are
stated at lower of cost, using the last-in, first-out ("LIFO") method, or
market. If the Company had used the first-in, first-out ("FIFO") method of
inventory valuation, which approximates current replacement cost, inventories
would have been higher than reported at June 30, 1998, by $54.6 million and at
June 30, 1997, by $69.6 million.
The Company continues to consolidate locations, automate selected
distribution facilities and invest in management information systems which
achieve efficiencies in inventory management processes. As a result of the
facility and related inventory consolidations, and the operational efficiencies
achieved in fiscal 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 three to forty
years, including capital lease assets which are amortized over the terms of
their respective leases. Amortization of capital lease assets is included in
depreciation and amortization expense. Certain software costs related to
internally developed or purchased software are capitalized and amortized using
the straight-line method over the useful lives, not exceeding five years. 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 to forty years. Accumulated amortization was $77.6 million
and $63.9 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.
13
<PAGE> 15
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 its 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 operating 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 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 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.
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
14
<PAGE> 16
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 $36.1 million in
fiscal 1998 and $26.2 million in 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 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, and in
fiscal 1996 by the dilutive effect of convertible debentures ($270,000 impact on
diluted net earnings and an increase of 717,000 diluted shares).
Excluding dividends paid by all entities with which the Company has merged,
the Company paid cash dividends per Common Share of $0.105, $0.09 and $0.08 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. 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 this stock split.
On August 12, 1998, the Company declared a three-for-two stock split which
will be effected as a stock dividend and distributed on October 30, 1998 to
shareholders of record at the end of business on October 9, 1998. Giving
retroactive effect to the stock split, the diluted earnings per Common Share for
the fiscal years ended June 30, 1998, 1997 and 1996 will be $1.57, $1.22 and
$0.80 per Common Share, respectively.
2. BUSINESS COMBINATIONS, MERGERS-RELATED COSTS AND OTHER SPECIAL ITEMS
On August 7, 1998, the Company completed the merger transaction with
Scherer (the "Scherer Merger") which was accounted for as a
pooling-of-interests. The Company issued approximately 22.8 million Common
Shares to Scherer stockholders and Scherer's outstanding stock options were
converted into options to purchase approximately 2.4 million Common Shares. The
Company expects to record 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.
On February 18, 1998, the Company completed the merger transaction with
MediQual (the "MediQual Merger") which was accounted for as a
pooling-of-interests. The Company issued approximately 576,000 Common Shares to
MediQual shareholders and MediQual's outstanding stock options were converted
into options to purchase approximately 24,000 Common Shares of the Company.
15
<PAGE> 17
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
On May 15, 1998, the Company completed a business combination with
Comprehensive Reimbursement Consultants, Inc. ("CRC"), which was accounted for
as a purchase. The aggregate purchase price, which was paid primarily in cash,
was approximately $6 million, which included the issuance of Common Shares
valued at approximately $1.3 million. The financial results of CRC are included
in the consolidated financial results of the Company since the date of the
acquisition. Had the purchase occurred at the beginning of fiscal 1997,
operating results on a pro forma basis would not have been significantly
different.
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 Scherer Merger and MediQual Merger. See Note 1 for
periods combined.
<TABLE>
<CAPTION>
Cardinal
Health Scherer MediQual Combined
----------- -------- -------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Fiscal year ended June 30, 1996:
Total revenue $11,586,123 $571,710 $ 10,974 $12,168,807
Net earnings (loss) available for Common Shares $ 127,240 $ 30,703 $ (1,461) $ 156,482
Fiscal year ended June 30, 1997:
Total revenue $13,437,180 $588,699 $ 11,002 $14,036,881
Net earnings available for Common Shares $ 184,599 $ 56,968 $ 2,299 $ 243,866
Fiscal year ended June 30, 1998:
Total revenue $15,918,138 $620,716 $ 7,865 $16,546,719
Net earnings available for Common Shares $ 247,081 $ 69,746 $ 1,392 $ 318,219
</TABLE>
Adjustments affecting net earnings and shareholders' equity resulting from
the MediQual and Scherer 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 recorded mergers-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 mergers-related costs, related to
asset impairments ($3.8 million) and integrating the operations of companies
that previously merged with the Company ($9.6 million), 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.
16
<PAGE> 18
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 7.7 million Common
Shares to Owen shareholders and Owen's outstanding stock options were converted
into options to purchase approximately 0.7 million Common Shares. 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 3.1 million Common
Shares to PCI shareholders and PCI's outstanding stock options were converted
into options to purchase approximately 0.2 million Common Shares. 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.
In addition to the mergers-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.
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 22.6 million Common
Shares to Pyxis shareholders. In addition, Pyxis' outstanding stock options were
converted into options to purchase approximately 2.3 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 9.6 million Common Shares to Medicine Shoppe shareholders.
In addition, Medicine Shoppe's outstanding stock options were converted into
options to purchase approximately 0.2 million Common Shares. During fiscal 1996,
the Company recorded costs totaling 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 $33.8 million
($23.1 million, net of tax) 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 the exit from contractual obligations.
The net effect of the various mergers-related costs and other special items
recorded in fiscal 1998 was to reduce reported net earnings by $24.1 million to
$318.2 million and to reduce reported diluted earnings per Common Share by $0.18
per share to $2.35 per share. The effect of the various mergers-related costs
recorded in fiscal 1997 was to reduce reported net earnings by $36.6 million to
$243.9 million and to reduce reported diluted earnings per Common
17
<PAGE> 19
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Share by $0.28 per share to $1.83 per share. The effect of the various
mergers-related costs and other special items recorded in fiscal 1996 was to
reduce reported net earnings by $60.0 million to $156.5 million and to reduce
reported diluted earnings per Common Share by $0.46 per share to $1.20 per
share.
Certain mergers-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 primarily of debt of $29.7 million. Had the purchases occurred at the
beginning of fiscal 1996, operating results for fiscal 1996 on a pro forma basis
would not have been significantly different.
3. LEASES
Sales-Type Leases
The Company's sales-type leases are for terms generally ranging up to five
years. Lease receivables are generally collateralized by the underlying
equipment. The components of the Company's net investment in sales-type leases
are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
--------- ---------
<S> <C> <C>
Future minimum lease payments receivable $ 320,064 $ 190,918
Unguaranteed residual values 1,267 1,333
Unearned income (46,296) (27,817)
Allowance for uncollectible minimum lease payments
receivable (4,572) (4,874)
--------- ---------
Net investment in sales-type leases 270,463 159,560
Less: current portion 75,450 40,997
--------- ---------
Net investment in sales-type leases, less current portion $ 195,013 $ 118,563
========= =========
</TABLE>
Future minimum lease payments to be received pursuant to sales-type leases
are as follows at June 30, 1998 (in thousands):
1999 $ 79,800
2000 75,758
2001 65,208
2002 55,729
2003 37,577
Thereafter 5,992
--------
Total $320,064
========
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
18
<PAGE> 20
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 $22.9
million, at a weighted average interest rate of 6.4% was outstanding at June 30,
1997. In addition, the Company has revolving credit agreements, which have a
maturity of less than one year, with seven banks. These credit agreements are
renewable on a quarterly basis and allow the Company to borrow up to $95 million
(none of which was in use at June 30, 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 thousands):
June 30, June 30,
1998 1997
-------- --------
6.0% Notes due 2006 $150,000 $150,000
6.5% Notes due 2004 100,000 100,000
6.75% Notes due 2004 100,000 100,000
Borrowings under bank credit agreement 51,306 28,504
Other obligations; interest averaging
6.05% in 1998 and 6.16% in 1997, due
in varying installments through 2015 47,158 48,734
-------- --------
Total 448,464 427,238
Less: current portion 7,294 7,071
-------- --------
Long-term obligations, less current portion $441,170 $420,167
======== ========
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. These obligations are not redeemable prior to
maturity and are not subject to a sinking fund. Issuance costs of approximately
$3.4 million incurred in connection with the offerings are being amortized on a
straight-line basis over the period the respective Notes will be outstanding.
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.
19
<PAGE> 21
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 1996, holders of $10 million, 9.53% convertible subordinated
notes due 2002, originally issued by Owen, converted the notes into the
equivalent of approximately 1.1 million Common Shares. Additionally, Owen repaid
$34.8 million of debt with proceeds from a common stock offering. If the
previously mentioned conversion and retirement of debt had occurred at the
beginning of all periods presented, the changes to 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
thousands):
1999 $ 7,294
2000 5,418
2001 4,478
2002 3,288
2003 49,954
Thereafter 378,032
--------
Total $448,464
========
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 notional principal amount related to
this agreement was $8.3 million and $2.5 million at June 30, 1998 and 1997,
respectively. The Company recognizes in income the periodic net cash settlements
under the swap agreement as it accrues. The estimated fair value of the
Company's interest rate swap was $(1.0) million and $(0.3), June 30, 1998 and
1997, respectively.
Foreign Exchange Risk Management. Beginning in fiscal 1998, 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 subsidiary's earnings.
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 and premiums on these contracts are
recognized in other income upon occurrence. As of June 30, 1998, the Company was
party to foreign currency options of approximately $3 million (notional amount).
The estimated fair value of these options at June 30, 1998 was $0.1 million. The
fair value is based upon the estimated amount the Company would receive to
terminate the 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. As June 30, 1998 and 1997,
the Company was party to forward currency exchange contracts of $35.6 million
and $65.4 million (notional amounts), respectively, denominated in various
European countries.
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.
20
<PAGE> 22
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of the Company's long-term obligations was $449.0
million and $407.5 million as compared to the carrying amounts of $448.5 million
and $427.2 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 estimated fair value of the Company's forward foreign exchange
contracts is $(0.4) million and $0.6 million, at June 30, 1998 and 1997,
respectively. The fair value of the forward foreign exchange contracts is based
upon the estimated amount that the Company would receive or (pay) to terminate
the contracts at the reporting date.
7. INCOME TAXES
Consolidated U.S. income before taxes and minority interests was $442.5
million, $346.3 million and $249.6 million in fiscal 1998, 1997 and 1996,
respectively. The corresponding amounts for non-U.S.-based operations were $62.1
million, $62.7 million and $33.1 million in fiscal 1998, 1997 and 1996,
respectively. The provision for income taxes consists of the following (in
thousands):
Fiscal Year Ended June 30,
-------------------------------
1998 1997 1996
-------- -------- --------
Current:
Federal $ 55,386 $103,617 $ 71,913
State 10,008 13,459 9,263
Foreign 14,132 17,884 17,374
-------- -------- --------
Total 79,526 135,960 98,550
Deferred 91,974 17,911 13,367
-------- -------- --------
Total provision $171,500 $152,871 $111,917
======== ======== ========
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 3.8 3.3 3.8
Foreign tax rates (3.2) (1.1) (1.2)
Nondeductible expenses 0.7 1.8 3.1
Other (2.3) (1.6) (1.1)
---- ---- ----
Effective income tax rate 34.0 % 37.4 % 39.6 %
==== ==== ====
Provision has not been made for U.S. or additional foreign taxes on $117.8
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.
21
<PAGE> 23
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes arise from temporary differences between financial
reporting and tax reporting bases of assets and liabilities, and operating loss
and tax credit carryforwards for tax purposes. The components of the deferred
income tax assets and liabilities are as follows (in thousands):
June 30, June 30,
1998 1997
--------- ---------
Deferred income tax assets:
Receivable basis difference $ 21,576 $ 24,957
Accrued liabilities 29,283 41,980
Net operating loss carryforwards 48,721 40,554
Other 14,468 52,329
--------- ---------
Total deferred income tax assets 114,048 159,820
Valuation allowance for deferred income
tax assets (21,730) (22,687)
--------- ---------
Net deferred income tax assets 92,318 137,133
--------- ---------
Deferred income tax liabilities:
Inventory basis differences (90,027) (58,077)
Property-related (114,860) (108,814)
Revenues on lease contracts (110,986) (89,101)
Other 68 (14,000)
--------- ---------
Total deferred income tax liabilities (315,805) (269,992)
--------- ---------
Net deferred income tax liabilities $(223,487) $(132,859)
========= =========
The above amounts are classified in the supplemental consolidated balance sheets
as follows (in thousands):
June 30, June 30,
1998 1997
--------- ---------
Other current liabilities $ 16,831 (24,896)
Deferred income taxes and other liabilities (240,318) (107,963)
--------- ---------
Net deferred income tax liabilities $(223,487) $(132,859)
========= =========
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 $15.2
million and $15.1 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 began
expiring in 1994, 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.
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
22
<PAGE> 24
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 thousands):
June 30,
----------------------------------
1998 1997 1996
-------- ------- --------
Beginning of year $(13,147) (5,890) $ 4,359
Translation adjustment (14,887) (7,257) (10,249)
-------- ------- -------
End of year $(28,034) (13,147) $(5,890)
======== ======= =======
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.
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 thousands):
Fiscal Year Ended June 30,
-----------------------------
1998 1997 1996
------- ------- -------
Defined contribution plans $15,663 $10,965 $ 9,332
Multiemployer plans 531 947 1,216
ESOP -- -- 257
------- ------- -------
Total $16,194 $11,912 $10,805
======= ======= =======
23
<PAGE> 25
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Defined Benefit Plans. The Company's 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 thousands):
Fiscal Year Ended June 30,
---------------------------
1998 1997 1996
------- ------- -------
Service cost of benefits earned during the year $ 4,906 $ 4,499 $ 3,994
Interest cost on projected benefit obligation 5,383 5,166 4,800
Actual return on plan assets (5,040) (4,074) (4,536)
Net amortization and deferral 1,069 1,028 1,889
------- ------- -------
Total net pension expense $ 6,318 $ 6,619 $ 6,147
======= ======= =======
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 thousands):
<TABLE>
<CAPTION>
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
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 1,108 $ 71,348 $23,947 $35,071
Non-vested benefit obligation 103 4,482 125 5,250
------- -------- ------- -------
Accumulated benefit obligation 1,211 75,830 24,072 40,321
Effects of anticipated future
compensation increases 53 9,559 985 7,586
------- -------- ------- -------
Projected benefit obligation 1,264 85,389 25,057 47,907
Plan assets at fair value 1,595 40,626 25,612 8,927
------- -------- ------- -------
Projected benefit obligation in
excess of (less than) plan
assets (331) 44,763 (555) 38,980
Unamortized net loss (1,513) (11,187) (549) (4,844)
Unrecognized prior service cost -- (129) (202) 58
------- -------- ------- -------
Accrued pension (asset) liability
recorded in the supplemental
consolidated balance sheet $(1,844) $ 33,447 $(1,306) $34,194
======= ======== ======= =======
</TABLE>
Plan assets consist primarily of marketable securities, equity securities,
cash equivalents, U.S. and foreign governmental securities and corporate bonds.
24
<PAGE> 26
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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%
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 thousands):
1999 $21,011
2000 14,018
2001 11,189
2002 8,868
2003 8,373
Thereafter 31,913
-------
Total $95,372
=======
Rental expense relating to operating leases was approximately $32.0
million, $31.4 million and $33.3 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. Trial has been set for the prescription drug litigation to begin
September 1998. 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.
25
<PAGE> 27
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The trial date for this action has been set for November 2, 1998. The Company
believes that allegations made against it in this litigation are without merit.
Although the ultimate resolution of litigation cannot be forecast with
certainty, the Company does not believe that the outcome of any pending
litigation would have a material adverse effect on the Company's 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.
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 11% of operating revenue and 62% of bulk deliveries, respectively.
During fiscal 1997, the Company's two largest customers individually accounted
for 12% of operating revenue and 62% of bulk deliveries, respectively. During
fiscal 1996, the Company's two largest customers individually accounted for 11%
of operating revenue and 70% of bulk deliveries, respectively. Trade receivables
due from these two customers aggregated approximately 14% and 19% of total trade
receivables at June 30, 1998 and 1997, respectively.
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 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
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 $9.9 million and $0.07 per share, respectively, for fiscal 1998, $4.0
million and $0.03 per share, respectively, for fiscal 1997 and $7.2 million and
$0.06 per share, respectively, for fiscal 1996.
26
<PAGE> 28
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997 Fiscal 1996
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
average average average
Options exercise price Options exercise price Options exercise price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 7,630 $31.48 9,045 $25.17 8,276 $22.01
Granted 1,366 80.19 1,211 54.98 1,593 40.28
Exercised (2,077) 21.31 (2,386) 20.17 (663) 20.84
Canceled (295) 37.48 (240) 27.27 (160) 29.93
------ ------ ------ ------ ------ ------
Outstanding,
end of year 6,624 $44.44 7,630 $31.40 9,046 $25.17
====== ====== ====== ====== ====== ======
Exercisable, end
of year 3,014 $22.82 4,176 $19.82 5,631 $19.13
------ ------ ------ ------ ------ ------
</TABLE>
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 $24.05, $14.13 and $14.50, respectively. The fair
values of the options granted were estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for grants in
fiscal 1998: risk-free interest rate of 5.53%, expected life of 3 years,
expected volatility of 0.27% and dividend yield of 0.16%. The fair values of the
options granted were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for grants in both fiscal
1997 and 1996: risk-free interest rate of 6.23%, expected life of 3 years,
expected volatility of 0.25% and dividend yield of 0.17%.
Information relative to stock options outstanding as of June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted
average
remaining Weighted Weighted
Range of Options contractual average Options average
exercise prices (000s) life in years exercise price (000s) exercise price
- ------------------ -------- ------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ .08-$23.07 1,689 3.77 $13.83 1,636 $13.78
$23.07-$33.00 848 6.45 29.32 781 29.50
$33.51-$54.33 2,213 5.89 47.18 585 38.57
$54.38-$81.69 1,858 8.63 74.46 11 74.45
$88.19-$94.13 16 9.66 88.58 1 94.13
----- ---- ------ ----- ------
6,624 6.20 $44.44 3,014 $22.82
===== ==== ====== ===== ======
</TABLE>
As of June 30, 1998, there remained approximately 650,000 additional shares
available to be issued pursuant to the Plans.
In connection with the Whitmire Merger, outstanding Whitmire stock options
granted to current or former Whitmire officers or employees were automatically
converted into options ("Cardinal Exchange Options") to purchase an aggregate of
approximately 2.6 million additional Common Shares. Under the terms of their
original issuance, the
27
<PAGE> 29
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
exercise price for substantially all of the Cardinal Exchange Options is
remitted to certain former investors of Whitmire. Cardinal Exchange Options to
purchase 0.3 million Common Shares, with an average option price of $1.37 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 0.2 million shares remained restricted
and subject to forfeiture.
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 and Germany. Other International consists of
operations in Canada, the Pacific and Latin America.
(In thousands) For the Fiscal Year Ended June 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Total revenue:
United States $16,083,693 $13,578,780 $11,705,358
Europe 358,489 352,098 352,379
Other International 104,537 106,003 111,070
----------- ----------- -----------
Total revenue $16,546,719 $14,036,881 $12,168,807
=========== =========== ===========
Operating earnings:
United States $ 496,231 $ 383,287 $ 300,666
Europe 68,463 63,748 37,675
Other International 18,094 20,743 12,960
Unallocated (1) (57,027) (27,402) (40,112)
----------- ----------- -----------
Total operating earnings $ 525,761 $ 440,376 $ 311,189
=========== =========== ===========
June 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Identifiable assets
United States $ 3,742,480 $ 2,908,889 $ 2,637,566
Europe 544,473 439,197 435,448
Other International 143,464 133,488 134,102
Unallocated (2) 352,689 343,621 463,473
----------- ----------- -----------
Total identifiable assets $ 4,783,106 $ 3,825,195 $ 3,670,589
=========== =========== ===========
(1) Unallocated operating earnings includes special charges associated with
transaction costs of $35.7 million, $14.5 million and $21.3 million in
fiscal 1998, 1997 and 1996, respectively (see Note 2). In addition,
unallocated operating earnings 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.
(2) Unallocated identifiable assets are principally cash, cash equivalents,
short-term investments and other assets.
28
<PAGE> 30
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (in thousands, except per
share amounts) for fiscal 1998 and 1997 has been restated to reflect the
pooling-of-interests business combinations as discussed in Note 2.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1998
Revenue:
Operating revenue $3,022,409 $3,277,748 $3,539,028 $3,716,174
Bulk deliveries to customer
warehouses 681,155 750,590 720,101 839,514
---------- ---------- ---------- ----------
Total revenue $3,703,564 $4,028,338 $4,259,129 $4,555,688
Gross margin 277,646 299,043 330,654 351,560
Selling, general and administrative
expenses 160,323 160,337 168,646 186,058
Operating earnings 115,140 135,517 132,217 142,887
Net earnings $ 69,322 $ 80,440 $ 80,952 $ 87,505
Net earnings per Common Share:
Basic $ 0.52 $ 0.60 $ 0.61 $ 0.66
Diluted $ 0.51 $ 0.60 $ 0.60 $ 0.64
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1997
Revenue:
Operating revenue $2,683,512 $2,962,828 $2,978,254 $2,943,149
Bulk deliveries to customer
warehouses 571,704 623,883 624,368 649,183
---------- ---------- ---------- ----------
Total revenue $3,255,216 $3,586,711 $3,602,622 $3,592,332
Gross margin 244,998 270,526 299,937 290,183
Selling, general and administrative
expenses 147,565 151,568 157,486 157,720
Operating earnings 97,275 100,942 111,569 130,590
Net earnings $ 53,506 $ 53,559 $ 58,011 $ 78,790
Net earnings per Common Share:
Basic $ 0.42 $ 0.41 $ 0.44 $ 0.60
Diluted $ 0.41 $ 0.40 $ 0.43 $ 0.59
</TABLE>
On August 12, 1998, the Company declared a three-for-two stock split which
will be effected as a stock dividend and distributed on October 30, 1998 to
shareholders of record at the close of business on October 9, 1998 (see Note 1).
Giving retroactive effect to the stock split, the earnings per Common Share for
the selected quarterly financial data in fiscal 1998 and 1997 will be restated
as follows upon distribution on October 30, 1998:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net earnings per Common Share:
Fiscal 1998:
Basic $0.35 $0.40 $0.40 $0.44
Diluted $0.34 $0.40 $0.40 $0.43
Fiscal 1997:
Basic $0.28 $0.27 $0.30 $0.40
Diluted $0.27 $0.27 $0.29 $0.39
As more fully discussed in Note 2, mergers-related costs and special
charges were recorded in various quarters in fiscal 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:
29
<PAGE> 31
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- -------- -------- -------
<S> <C> <C> <C> <C>
Fiscal 1998:
Net earnings $(1,332) $ (1,945) $(11,987) $(8,841)
Diluted net
earnings per Common Share $ (0.01) $ (0.01) $ (0.09) $ (0.07)
- ---------------------------------------------------------------------------------------
Fiscal 1997:
Net earnings $ (95) $(13,053) $(22,285) $(1,124)
Diluted net
earnings per Common Share $ -- $ (0.10) $ (0.17) $ (0.01)
</TABLE>
Giving retroactive effect to the stock split declared on August 12, 1998
(see above and Note 1), the impact of mergers-related costs and special charges
recorded in various quarters in fiscal 1998 and 1997 on diluted net earnings per
Common Share will be restated as follows upon distribution on October 30, 1998:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 1998 $(0.01) $(0.01) $(0.06) $(0.04)
Fiscal 1997 $ -- $(0.06) $(0.11) $(0.01)
The above selected quarterly financial data differs from amounts
previously reported by the Company due to the MediQual Merger and the Scherer
Merger. Amounts reported by the Company prior to the MediQual Merger (completed
February 18, 1998) and the Scherer Merger (completed on August 7, 1998) are
presented below and differ from the above selected quarterly financial data
solely due to the addition of MediQual and Scherer amounts pursuant to the
pooling-of-interests accounting method for business combinations (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1998
Revenue:
Operating revenue $2,869,971 $3,130,505 $3,381,479 $3,544,823
Bulk deliveries to customer
warehouses 681,155 750,590 720,101 839,514
---------- ---------- ---------- ----------
Total revenue $3,551,126 $3,881,095 $4,101,580 $4,384,337
Gross margin 225,865 248,898 279,376 287,411
Selling, general and administrative
expenses 135,054 135,211 142,205 155,286
Operating earnings 88,628 110,498 107,380 109,510
Net earnings $ 54,040 $ 66,179 $ 56,312 $ 70,550
Net earnings per Common Share:
Basic $ 0.50 $ 0.60 $ 0.51 $ 0.64
Diluted $ 0.49 $ 0.60 $ 0.50 $ 0.63
- ----------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 32
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1997
Revenue:
Operating revenue $2,535,476 $2,816,406 $2,825,500 $2,790,660
Bulk deliveries to customer
warehouses 571,704 623,883 624,368 649,183
---------- ---------- ---------- ----------
Total revenue $3,107,180 $3,440,289 $3,449,868 $3,439,843
Gross margin 193,828 223,858 246,658 235,314
Selling, general and administrative
expenses 124,156 127,413 131,502 132,480
Operating earnings 69,514 78,429 84,274 100,961
Net earnings $ 39,326 $ 41,326 $ 42,181 $ 61,766
Net earnings per Common Share:
Basic $ 0.38 $ 0.38 $ 0.39 $ 0.57
Diluted $ 0.37 $ 0.38 $ 0.38 $ 0.56
</TABLE>
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 thousands):
Fiscal Year Ended June 30,
------------------------------
1998 1997 1996
-------- -------- -------
Interest paid $ 35,188 $44,296 $40,401
Income taxes paid $116,795 $86,808 $92,222
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.
18. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which will require adoption no later than the Company's
fiscal quarter ending September 30, 1998. This new statement defines
comprehensive income as "all changes in equity during a period, with the
exception of stock issuances and dividends." The new pronouncement establishes
standards for reporting and display of comprehensive income and its components
in the financial statements.
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 psotretirement
benefit plans. The new statement does not change the existing method of expense
recognition.
31
<PAGE> 33
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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, 1999. 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 which 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.
32
<PAGE> 34
<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) OF PERIOD
- ----------------------------------------- ---------- ---------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal Year 1998:
Accounts receivable $38,684 $15,414 $3,333 $(20,035) $37,396
Finance notes receivable 8,179 104 111 (1,965) 6,429
Net investment in sales-type leases 4,874 -- -- (302) 4,572
------- ------- ------ -------- -------
$51,737 $15,518 $3,444 $(22,302) $48,397
======= ======= ====== ======== =======
Fiscal Year 1997:
Accounts receivable $41,827 $ 8,584 $ 410 $(12,137) $38,684
Finance notes receivable 9,081 -- -- (902) 8,179
Net investment in sales-type leases 5,026 -- -- (152) 4,874
------- ------- ------ -------- -------
$55,934 $ 8,584 $ 410 $(13,191) $51,737
======= ======= ====== ======== =======
Fiscal Year 1996:
Accounts receivable $38,740 $11,241 $1,452 $ (9,606) $41,827
Finance notes receivable 9,274 650 -- (843) 9,081
Net investment in sales-type leases 2,900 2,126 -- -- 5,026
------- ------- ------ -------- -------
$50,914 $14,017 $1,452 $(10,449) $55,934
======= ======= ====== ======== =======
</TABLE>
(1) During fiscal 1998, 1997 and 1996 recoveries of amounts provided for or
written off in prior years were $3,444,000, $410,000 and $332,000,
respectively. Increase in the reserves as a result of acquisitions
accounted for as purchases was $1,120,000 in fiscal 1996.
(2) Write-off of uncollectible accounts.
33
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion and analysis has been prepared giving retroactive
effect to the pooling-of-interests business combinations with Medicine Shoppe on
November 13, 1995, Pyxis on May 7, 1996, PCI on October 11, 1996, Owen on March
18, 1997, MediQual on February 18, 1998 and Scherer on August 7, 1998. 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 fiscal 1998 increased 17% as
compared to the prior year. Distribution businesses' (those whose primary
operations involve the wholesale distribution of pharmaceuticals, representing
87% 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' (those that
provide services to the healthcare industry, primarily through pharmacy
franchising, pharmacy automation equipment, pharmacy management, pharmaceutical
packaging, and drug delivery systems) operating revenue grew at a rate of 15%
during the fiscal year ended June 30, 1998, primarily on the strength of the
Company's pharmacy automation and pharmacy management businesses. The majority
of the 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 16%, 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 grew at a rate of
7%, primarily on the strength of the Company's pharmacy management business. The
increase 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.
BULK DELIVERIES TO CUSTOMER WAREHOUSES. Along with other companies in its
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 chain
drugstores to either begin or discontinue warehousing activities, and changes in
policies 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 operating earnings.
GROSS MARGIN. For fiscal 1998 and 1997, gross margin as a percentage of
operating revenue was 9.29% and 9.56%, respectively. The fiscal 1998 decrease in
the gross margin as a percentage of operating revenue is due to declines in the
Distribution businesses' gross margin, and to a lesser extent, declines in the
Service businesses' gross margin. The Distribution businesses' gross margin as a
percentage of 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 32.55% and
33.22% in fiscal 1998 and 1997, respectively. The slight decline in gross margin
rates experienced by the Service businesses is primarily a function of the mix
of the
34
<PAGE> 36
various businesses. Revenue growth has been greater in the relatively lower
margin pharmacy management and pharmaceutical packaging businesses than it has
been in the higher margin pharmacy franchising business.
For fiscal 1997 and 1996, gross margin as a percentage of operating revenue
was 9.56% and 10.16%, 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 improved to 4.98%
in fiscal 1998 compared to 5.31% in fiscal 1997. The improvements reflect
economies associated with the Company's revenue growth, as well as significant
productivity gains resulting from continued cost control efforts and the
consolidation and selective automation of operating facilities. The 10% growth
in selling, general and administrative expenses experienced during fiscal 1998
was due primarily to increases in personnel costs and depreciation expense, and
compares favorably to the 17% growth in operating revenue for the same period.
Selling, general and administrative expenses as a percentage of operating
revenue improved to 5.31% in fiscal 1997 compared to 6.21% 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. During fiscal 1998, the Company recorded mergers-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 the 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) were incurred and recorded during fiscal 1998. During
fiscal 1997, the Company recorded mergers-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 mergers-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 "mergers-related
costs." It should be noted that the amounts presented may not be comparable to
similarly titled amounts reported by other companies.
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 a special charge of $33.8 million
($23.1 million, net of tax) 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.
35
<PAGE> 37
The following is a summary of the special charges incurred by the Company
in the last three fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C>
MERGERS-RELATED COSTS:
- ----------------------
Transaction and employee-related costs:
Transaction costs $(35,696) $(14,500) $(21,315)
PCI vested retirement benefits and incentive fees -- (7,600) --
Pyxis stay bonuses -- -- (7,600)
Employee severance/termination -- (4,400) (2,540)
Other -- (600) (300)
-------- -------- --------
Total transaction and employee-related costs (35,696) (27,100) (31,755)
-------- -------- --------
Other mergers-related costs:
Asset impairments (3,800) (13,200) (400)
Exit and restructuring costs -- (2,250) (15,600)
Duplicate facilities elimination -- (1,700) --
Integration and efficiency implementation (9,648) (6,679) (1,445)
-------- -------- --------
Total other mergers-related costs (13,448) (23,829) (17,445)
-------- -------- --------
Total mergers-related costs (49,144) (50,929) (49,200)
-------- -------- --------
OTHER SPECIAL CHARGES:
- ----------------------
Facilities closures (6,112) -- (21,804)
Employee severance (2,522) -- (12,000)
-------- -------- --------
Total other special charges (8,634) -- (33,804)
-------- -------- --------
TOTAL SPECIAL CHARGES (57,778) (50,929) (83,004)
Tax effect of special charges 21,931 14,372 22,984
Tax benefit for change in tax status 11,742 -- --
-------- -------- --------
Effect on net earnings $(24,105) $(36,557) $(60,020)
======== ======== ========
Effect on diluted earnings per share $ (0.18) $ (0.28) $ (0.46)
======== ======== ========
</TABLE>
The effects of the mergers-related costs and other special charges are
included in the reported net earnings of $318.2 million in fiscal 1998, $243.9
million in fiscal 1997 and $156.5 million in fiscal 1996 and in the reported
diluted earnings per Common Share of $2.35 in fiscal 1998, $1.83 in fiscal 1997
and $1.20 in fiscal 1996.
The Company estimates that it will incur additional mergers-related costs
associated with the various mergers it has completed to date totaling
approximately $3.7 million in future periods (excluding the Scherer Merger, see
Note 2 of "Notes to the Supplemental Consolidated Financial Statements") in
order to properly 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
36
<PAGE> 38
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 mergers-related costs would be incurred
by the Company.
INTEREST EXPENSE. The decrease in interest expense of $7.4 million in
fiscal 1998 compared to fiscal 1997 is primarily due to extinguishment of the
Company's $100 million 8% Notes on March 1, 1997. The increase in other income
for fiscal 1998 compared to fiscal 1997 of $2.8 million is primarily due to
higher investment income. This is in part due to better asset management. During
fiscal 1998, $67.7 million of cash was generated (including $244.3 million from
operations) compared to use of $63.5 million of cash during fiscal 1997.
Interest expense for fiscal 1997 decreased by $3.5 million compared to the
prior year. This decrease is attributable to the extinguishment of the Company's
$100 million 8% Notes on March 1, 1997 and lower interest rates during fiscal
1997 compared to fiscal 1996. In addition, various outstanding debt instruments
utilized by PCI prior to the merger were extinguished after the merger was
consummated. Partially offsetting this decrease in fiscal 1997 is the impact of
the issuance of $150 million 6% Notes due 2006, in a public offering in January
1996.
As discussed below under "Liquidity and Capital Resources," the Company
issued $150 million of 6.25% Notes in July 1998.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes
relative to pretax earnings was 34%, 37% and 40% 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 mergers-related costs during various
periods. Also, during fiscal 1998, a change in tax status of a 51% owned German
subsidiary 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 rate for fiscal year 1997 and forward.
MINORITY INTERESTS. Minority interests in the earnings of less than wholly
owned subsidiaries was $14.9 million in fiscal 1998 as compared to $12.3 million
in fiscal 1997. The $2.6 million increase in expense is primarily due to a
combination of increased profitability at the Company's majority owned German
subsidiary and the fact that the German tax conversion effectively resulted in
the recording of German minority interest expense on a pre tax basis beginning
in fiscal 1998.
Minority interests in earnings of less than wholly owned subsidiaries was
$12.3 million in fiscal 1997 as compared to $14.3 million in fiscal 1996. The
reduction in minority interests was due primarily to a decline in earnings of
the Company's less than wholly owned subsidiary in Germany.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital increased to $1,511.4 million at June 30, 1998 from
$1,211.8 million at June 30, 1997. This increase included $67.7 million of cash
generated in fiscal 1998, as well as additional investments in merchandise
inventories and trade receivables of $468.9 million and $210.9 million,
respectively. Offsetting the increases in working capital was an increase in
accounts payable of $516.9 million. Increases in merchandise inventories reflect
the higher level of business volume in pharmaceutical distribution activities,
especially in the fourth quarter of fiscal
37
<PAGE> 39
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 long-term debt pursuant to a shelf debt registration
statement filed with the Securities and Exchange Commission (see Note 5 of
"Notes to Supplemental Consolidated Financial Statements"). The Company
extinguished $100 million of long-term debt during fiscal 1997.
Property and equipment, at cost, increased by $126.5 million in fiscal
1998. 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 9 of "Notes to Supplemental Consolidated Financial
Statements."
Shareholders' equity increased to $2,024.1 million at June 30, 1998 from
$1,689.8 million at June 30, 1997, primarily due to net earnings of $318.2
million and the investment of $66.4 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 $24.7
million outstanding under these lines at June 30, 1998.
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements, including those
related to business combinations. See "Other" below.
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 MERGER. 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
proposed 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 have been reflected in the consolidated supplemental financial
statements in the fourth quarter of the fiscal year ended June 30, 1998 (see
Notes 2 and 19 of "Notes to the Supplemental Consolidated Financial
Statements").
YEAR 2000 PROJECT. The Company utilizes computer technologies in each of
its businesses to effectively 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. Similar to most companies, the Company must determine whether its
systems are capable of recognizing and processing date sensitive information
properly as the year 2000 approaches. The Company is utilizing a multi-phased
concurrent approach to address this issue. 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 remediation phase. The Company is actively correcting and
replacing those systems which are not year 2000 ready in order to ensure the
38
<PAGE> 40
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 may be unable to remediate and properly test affected systems
on a timely basis, the Company intends to develop appropriate contingency plans
for any such mission-critical systems at the time such determination is made.
While the Company is not presently aware of any significant exposure 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. An interruption
of the Company's ability to conduct its business due to a year 2000 readiness
problem could have a material adverse effect on the Company.
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $24 million, including costs already incurred. 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. Total costs of approximately $5.1 million were
incurred by the Company for this project during fiscal 1998, of which
approximately $1.4 million represented incremental expense. 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 supplemental consolidated financial position, results of
operations or cash flows in future periods.
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 will develop 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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which will
require adoption no later than the Company's fiscal quarter ending September 30,
1998. This new statement defines comprehensive income as "all changes in equity
during a period, with the exception of stock issuances and dividends." The new
pronouncement establishes standards for the reporting and display of
comprehensive income and its components in the financial statements.
In June 1997, 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 psotretirement
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
39
<PAGE> 41
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, 1999. 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 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 and changes in foreign currency exchange rates as measured
against the U.S. dollar.
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.
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 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. 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.
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
mark per U.S. dollar and British sterling at a fixed 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. 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.
40
<PAGE> 1
Exhibit 23.01
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-24483 of Cardinal Health, Inc. on Form S-3 and Registration Statements No.
33-20895, No. 33-38021, No. 33-38022, No. 33-42357, No. 33-52535, No. 33-52537,
No. 33-52539, No. 33-63283-01, No. 33-64337, No. 333-01927-01, No. 333-11803-01,
No. 333-21631-01, No. 333-21631-02, No. 333-30889-01 and No. 333-56655-01 of
Cardinal Health, Inc. on Form S-8 of our report dated August 12, 1998, (which
report expresses an unqualified opinion and includes an explanatory paragraph
relating to the restatement of the historical consolidated financial statements
for a pooling-of-interests), appearing in this Current Report on Form 8-K/A of
Cardinal Health, Inc.
DELOITTE & TOUCHE LLP
Columbus, Ohio
September 24, 1998
<PAGE> 1
Exhibit 23.02
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
333-24483 of Cardinal Health, Inc. on Form S-3 and Registration Statements No.
33-20895, No. 33-38021, No. 33-38022, No. 33-42357, No. 33-52535, No. 33-52537,
No. 33-52539, No. 33-63283-01, No. 33-64337, No. 333-01927-01, No. 333-11803-01,
No. 333-21631-01, No. 333-21631-02, No. 333-30889-01 and No. 333-56655-01 of
Cardinal Health, Inc. on Form S-8 of our report, relating to the financial
statements of Pyxis Corporation, dated August 2, 1996, appearing in this Current
Report on Form 8-K/A of Cardinal Health, Inc.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
September 24, 1998
<PAGE> 1
Exhibit 23.03
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement (No. 333-24483) of Cardinal
Health, Inc. on Form S-3 and in Registration Statements No. 33-20895, No.
33-38021, No. 33-38022, No. 33-42357, No. 33-52535, No. 33-52537, No. 33-52539,
No. 33-63283-01, No. 33-64337, No. 333-01927-01, No. 333-11803-01, No.
333-21631-01, No. 333-21631-02, No. 333-30889-01 and No. 333-56655-01 of
Cardinal Health, Inc. on Form S-8 of our report dated January 30, 1997,
appearing in this Amendment No. 1 to the Current Report on Form 8-K of Cardinal
Health, Inc. dated August 7, 1998.
PricewaterhouseCoopers LLP
Houston, Texas
September 24, 1998
<PAGE> 1
Exhibit 23.04
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
with respect to R.P. Scherer Corporation dated April 27, 1998 (except with
respect to the matter discussed in Note 16, as to which the date is May 17,
1998) included in this Current Report on Form 8-K/A (Amendment No. 1) and to the
incorporation by reference in Registration Statement No. 333-24483 of Cardinal
Health, Inc. on Form S-3 and Registration Statements No. 33-20895, No. 33-38021,
No. 33-38022, No. 33-42357, No. 33-52535, No. 3352537, No. 33-52539, No.
33-63283-01, No. 33-64337, No. 333-01927-01, No. 333-11803-01, No. 333-21631-01,
No. 333-21631-02, No. 333-30889-01 and No. 333-56655-01 of Cardinal Health, Inc.
on Form S-8 and to all references to our Firm included in this Form 8-K/A.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Detroit, Michigan
September 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL
HEALTH INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED JUNE
30, 1996, JUNE 30, 1997 AND JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1995 JUL-01-1996 JUL-01-1997
<PERIOD-END> JUN-30-1996 JUN-30-1997 JUN-30-1998
<CASH> 334,043 270,536 338,263
<SECURITIES> 54,335 0 0
<RECEIVABLES> 804,190 839,590 1,026,979
<ALLOWANCES> (41,827) (38,684) (37,396)
<INVENTORY> 1,331,830 1,495,500 1,964,382
<CURRENT-ASSETS> 2,598,826 2,714,604 3,505,095
<PP&E> 825,722 919,922 1,046,405
<DEPRECIATION> (287,493) (322,247) (347,468)
<TOTAL-ASSETS> 3,670,589 3,825,195 4,783,106
<CURRENT-LIABILITIES> 1,551,765 1,502,796 1,993,716
<BONDS> 486,161 420,167 441,170
0 0 0
0 0 0
<COMMON> 841,271 900,295 944,833
<OTHER-SE> 553,367 789,510 1,079,242
<TOTAL-LIABILITY-AND-EQUITY> 3,670,589 3,825,195 4,783,106
<SALES> 12,168,807 14,036,881 16,546,719
<TOTAL-REVENUES> 12,168,807 14,036,881 16,546,719
<CGS> 11,153,942 12,931,237 15,287,816
<TOTAL-COSTS> 11,153,942 12,931,237 15,287,816
<OTHER-EXPENSES> 620,672 614,339 675,364
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (43,206) (39,667) (32,285)
<INCOME-PRETAX> 282,673 409,006 504,602
<INCOME-TAX> 111,917 152,871 171,500
<INCOME-CONTINUING> 156,482 243,866 318,219
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 156,482 243,866 318,219
<EPS-PRIMARY> 1.24 1.88 2.39
<EPS-DILUTED> 1.20 1.83 2.35
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL
HEALTH INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED SEPTEMBER
30, 1996, DECEMBER 31, 1996 AND MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997 JUN-30-1997
<PERIOD-START> JUL-01-1996 JUL-01-1996 JUL-01-1996
<PERIOD-END> SEP-30-1996 DEC-31-1996 MAR-31-1997
<CASH> 152,116 125,865 67,344
<SECURITIES> 57,735 37,185 0
<RECEIVABLES> 838,681 910,438 921,109
<ALLOWANCES> (41,913) (42,505) (42,136)
<INVENTORY> 1,642,697 1,791,920 1,629,156
<CURRENT-ASSETS> 2,758,882 2,955,031 2,711,987
<PP&E> 705,386 887,776 920,560
<DEPRECIATION> (237,810) (327,286) (342,185)
<TOTAL-ASSETS> 3,707,206 4,041,009 3,799,806
<CURRENT-LIABILITIES> 1,610,080 1,784,501 1,510,867
<BONDS> 439,068 475,448 466,000
0 0 0
0 0 0
<COMMON> 834,919 877,379 884,223
<OTHER-SE> 574,566 654,033 719,300
<TOTAL-LIABILITY-AND-EQUITY> 3,707,206 4,041,009 3,799,806
<SALES> 3,255,216 6,841,927 10,444,549
<TOTAL-REVENUES> 3,255,216 6,841,927 10,444,549
<CGS> 3,010,218 6,326,403 9,629,088
<TOTAL-COSTS> 3,010,218 6,326,403 9,629,088
<OTHER-EXPENSES> 147,565 290,133 456,619
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (9,578) (19,947) (30,981)
<INCOME-PRETAX> 90,857 183,993 286,019
<INCOME-TAX> 33,711 70,997 112,122
<INCOME-CONTINUING> 53,506 107,065 165,076
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 53,506 107,065 165,076
<EPS-PRIMARY> 0.42 0.83 1.27
<EPS-DILUTED> 0.41 0.81 1.24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL
HEALTH INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED SEPTEMBER
30, 1997, DECEMBER 31, 1997 AND MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998 JUN-30-1998
<PERIOD-START> JUL-01-1997 JUL-01-1997 JUL-01-1997
<PERIOD-END> SEP-30-1997 DEC-31-1997 MAR-31-1998
<CASH> 210,930 144,910 121,133
<SECURITIES> 0 0 0
<RECEIVABLES> 871,401 937,132 984,243
<ALLOWANCES> (41,736) (41,836) (41,482)
<INVENTORY> 1,679,850 2,005,938 2,224,618
<CURRENT-ASSETS> 2,904,783 3,212,456 3,547,209
<PP&E> 952,289 990,292 1,019,284
<DEPRECIATION> (332,828) (337,615) (351,098)
<TOTAL-ASSETS> 4,025,310 4,395,263 4,755,437
<CURRENT-LIABILITIES> 1,606,770 1,894,820 2,112,130
<BONDS> 421,907 439,139 433,056
0 0 0
0 0 0
<COMMON> 929,179 932,584 950,568
<OTHER-SE> 856,637 928,784 999,194
<TOTAL-LIABILITY-AND-EQUITY> 4,025,310 4,395,263 4,755,437
<SALES> 3,703,564 7,731,902 11,991,031
<TOTAL-REVENUES> 3,703,564 7,731,902 11,991,031
<CGS> 3,425,918 7,155,213 11,083,688
<TOTAL-COSTS> 3,425,918 7,155,213 11,083,688
<OTHER-EXPENSES> 160,323 320,660 489,306
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (7,243) (14,454) (24,059)
<INCOME-PRETAX> 113,393 244,937 368,561
<INCOME-TAX> 41,147 89,673 128,695
<INCOME-CONTINUING> 69,322 149,762 230,714
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 69,322 149,762 230,714
<EPS-PRIMARY> 0.52 1.12 1.73
<EPS-DILUTED> 0.51 1.10 1.70
</TABLE>
