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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1997 Commission File Number 0-12591
CARDINAL HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 GLENDON COURT, DUBLIN, OHIO 43016
(Address of principal executive offices and zip code)
(614) 717-5000
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
The number of Registrant's Common Shares outstanding at the close of
business on January 31, 1998 was as follows:
Common Shares, without par value: 109,663,304
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
----------------------
Item 1. Financial Statements:
Consolidated Statements of Earnings for the Fiscal Quarter and Six
Months Ended December 31, 1997 and 1996............................................ 3
Consolidated Balance Sheets at December 31, 1997 and
June 30, 1997...................................................................... 4
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1997 and 1996......................................................... 5
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 8
Part II. Other Information:
------------------
Item 1. Legal Proceedings.................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders................................ 12
Item 6. Exhibits and Reports on Form 8-K................................................... 12
* Items deleted are inapplicable.
</TABLE>
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PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Quarter Ended Six Months Ended
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $3,130,505 $2,816,406 $6,000,476 $5,351,882
Cost of products sold 2,881,607 2,592,548 5,525,713 4,934,196
---------- ---------- ---------- ----------
Gross margin 248,898 223,858 474,763 417,686
Selling, general and administrative expenses 135,211 127,413 270,265 251,569
Merger-related costs (3,189) (18,016) (5,372) (18,174)
---------- ---------- ---------- ----------
Operating earnings 110,498 78,429 199,126 147,943
Other income (expense):
Interest expense (5,160) (7,368) (10,165) (13,974)
Other, net--primarily interest income 3,099 1,684 8,061 4,521
---------- ---------- ---------- ----------
Earnings before income taxes 108,437 72,745 197,022 138,490
Provision for income taxes 42,258 31,419 76,804 57,838
---------- ---------- ---------- ----------
Net earnings $ 66,179 $ 41,326 $ 120,218 $ 80,652
========== ========== ========== ==========
Net earnings per Common Share:
Basic $ 0.60 $ 0.38 $ 1.10 $ 0.76
Diluted $ 0.60 $ 0.38 $ 1.08 $ 0.75
Weighted average number of Common
Shares outstanding:
Basic 109,422 107,543 109,257 105,914
Diluted 111,122 109,339 110,956 107,642
</TABLE>
See notes to consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 111,654 $ 243,061
Trade receivables, net 752,331 672,164
Current portion of net investment in sales-type leases 46,837 40,997
Merchandise inventories 1,938,526 1,436,220
Prepaid expenses and other 105,210 94,668
---------- ----------
Total current assets 2,954,558 2,487,110
---------- ----------
Property and equipment, at cost 514,221 477,420
Accumulated depreciation and amortization (210,075) (199,949)
---------- ----------
Property and equipment, net 304,146 277,471
Other assets:
Net investment in sales-type leases, less current portion 141,174 118,563
Goodwill and other intangibles 121,230 122,104
Other 81,383 86,502
---------- ----------
Total $3,602,491 $3,091,750
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 119,747 $ 22,159
Current portion of long-term obligations 6,333 6,158
Accounts payable 1,433,465 1,135,951
Other accrued liabilities 209,783 225,165
---------- ----------
Total current liabilities 1,769,328 1,389,433
---------- ----------
Long-term obligations, less current portion 275,615 277,766
Deferred income taxes and other liabilities 85,988 89,821
Shareholders' equity:
Common Shares, without par value 667,858 645,051
Retained earnings 816,661 701,896
Common Shares in treasury, at cost (7,356) (6,373)
Other (5,603) (5,844)
---------- ----------
Total shareholders' equity 1,471,560 1,334,730
---------- ----------
Total $3,602,491 $3,091,750
========== ==========
</TABLE>
See notes to consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 120,218 $ 80,652
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 30,910 25,280
Provision for bad debts 5,856 4,427
Change in operating assets and liabilities:
Increase in trade receivables (86,023) (109,258)
Increase in merchandise inventories (502,306) (450,167)
Increase in net investment in sales-type leases (28,451) (35)
Increase in accounts payable 297,514 241,842
Other operating items, net (26,555) (2,972)
--------- ---------
Net cash used in operating activities (188,837) (210,231)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 1,365 1,949
Additions to property and equipment (54,012) (34,175)
Purchase of marketable securities available-for-sale -- (3,400)
Proceeds from sale of marketable securities available-for-sale -- 20,550
--------- ---------
Net cash used in investing activities (52,647) (15,076)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 97,588 2,272
Reduction of long-term obligations (4,109) (27,734)
Proceeds from long-term obligations 526 --
Proceeds from issuance of Common Shares 19,270 24,984
Tax benefit of stock options 3,238 6,825
Dividends paid on Common Shares and cash paid in lieu
of fractional shares (5,453) (3,882)
Purchase of treasury shares (983) (1,728)
--------- ---------
Net cash provided by financing activities 110,077 737
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (131,407) (224,570)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 243,061 312,030
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 111,654 $ 87,460
========= =========
</TABLE>
See notes to consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. The consolidated financial statements of Cardinal Health Inc. (the
"Company") include the accounts of all majority-owned subsidiaries and
all significant intercompany amounts have been eliminated. These
consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and include all of the information
and disclosures required by generally accepted accounting principles
for interim reporting. In the opinion of management, all adjustments
necessary for a fair presentation have been included. All such
adjustments are of a normal and recurring nature.
The consolidated financial statements included herein should be read
in conjunction with the audited consolidated financial statements and
related notes contained in the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1997, as amended by the Form 10K/A
(Amendment No.1) filed on January 7, 1998.
Note 2. The Company arranges for bulk deliveries to be made to customer
warehouses. Revenues for these deliveries are excluded from net
revenues and totaled $0.8 billion and $0.6 billion for the quarters
ending December 31, 1997 and 1996, respectively, and $1.4 billion and
$1.2 billion during the six months ended December 31, 1997 and 1996,
respectively. The service fees related to bulk deliveries are included
in net revenues and were not significant in any of the periods
presented.
Note 3. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," in the quarter ended December
31, 1997. In accordance with the provisions of the Standard, all prior
periods presented have been restated to comply with SFAS No. 128.
Basic earnings per Common Share ("Basic")is computed by dividing net
earnings (the numerator) by the weighted average number of Common
Shares outstanding during each period (the denominator). Diluted
earnings per Common Share is similar to the computation for Basic,
except that the denominator is increased by the dilutive effect of
stock options outstanding, computed using the treasury stock method.
Note 4. Costs related to various mergers effected in fiscal 1997 and 1996,
totaling approximately $3.2 million ($1.9 million, net of tax) and
$5.4 million ($3.3 million, net of tax), were recorded during the
three and six months ended December 31, 1997, respectively, related to
integrating the operations of the merged companies. During the three
and six months ended December 31, 1996, merger related costs totaling
$18.0 million ($13.1 million, net of tax) and $18.2 million ($13.1
million, net of tax), respectively, were recorded. These costs include
approximately $13.8 million for transaction and employee related costs
associated with the Company's merger with PCI Services, Inc. ("PCI"),
which was completed on October 11, 1996 (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), with the
remaining amount in each period related to integrating the operations
of the various merged companies.
The Company estimates that it will incur additional merger related
costs related to various mergers it has completed of approximately
$6.3 million ($3.8 million, net of tax) in future periods (primarily
fiscal 1998) 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.
Note 5. On May 27, 1997, the Company announced that it had entered
into a definitive merger agreement with MediQual Systems, Inc.
("MediQual"), pursuant to which MediQual will become a wholly owned
subsidiary of the Company in a stock-for-stock merger expected to be
accounted for as a pooling-of-interests for financial reporting
purposes. In connection with the merger, the Company estimates that it
will issue approximately 0.6 million Common Shares. Upon consummation
of the merger, the Company will record a merger-related charge to
reflect transaction and other costs incurred as a result of the
merger. The amount of this charge is estimated to be approximately $4
million. The merger is expected to be completed in the first quarter
of calendar 1998, subject to the satisfaction of certain conditions,
including approval by
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shareholders of MediQual. A Special Meeting of MediQual Shareholders
to vote on this transaction is scheduled for February 18, 1998.
On August 23, 1997, the Company signed a definitive merger agreement
with Bergen Brunswig Corporation ("Bergen"), a distributor of
pharmaceuticals and medical-surgical supplies, pursuant to which
Bergen will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a
pooling-of-interests for financial reporting purposes. Under the terms
of the proposed merger, shareholders of Bergen will receive .775 of a
Company Common Share in exchange for each outstanding common share of
Bergen. The Company will issue approximately 41 million Common Shares
in the transaction and will also assume approximately $646 million in
long-term debt. In connection with the merger, the companies expect to
incur investment banking, legal, accounting, and other related
transaction costs and fees. Additionally, the companies expect to
incur other merger related costs associated with the integration of
the separate companies and institution of efficiencies anticipated as
a result of the merger. Based on information currently available, the
total amount of merger related charges to be recognized in connection
with the merger is estimated to be between $100 and $130 million,
after tax. These merger related expenses will be charged to expense in
the period in which the merger is consummated, or in subsequent
periods, when incurred. Merger related costs incurred prior to
consummation of the merger will be deferred and expensed upon
consummation. Since the merger has not yet been consummated, the
merger expenses can only be estimated at this time, and are subject to
revision as further information becomes available. The merger is
expected to be completed in the first quarter of calendar 1998,
subject to the satisfaction of certain conditions, including approvals
by the stockholders of Bergen and the Company's shareholders, and the
receipt of certain regulatory approvals. Shareholders of both
companies will vote on the transaction at Special Meetings of
Shareholders scheduled for February 20, 1998.
Note 6. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," both of which will require
adoption in fiscal 1999. These new statements will not impact the
Company's financial statements, but may require additional
disclosures. The Company is presently evaluating the applicability of
SFAS No.'s 130 and 131 to its operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis presented below is concerned with
material changes in financial condition and results of operations for the
Company's consolidated balance sheets as of December 31, 1997 and June 30, 1997,
and for the consolidated statements of earnings for the three and six month
periods ended December 31, 1997 and 1996. This should be read together with
management's discussion and analysis included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997, as amended by the Form 10K/A
(Amendment No. 1) filed on January 7, 1998.
Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
materially differ from those projected or implied. The most significant of such
risks, uncertainties and other factors are described in Exhibit 99.01 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 and
are incorporated herein by reference. The Company disclaims any obligation to
update any forward-looking statement.
RESULTS OF OPERATIONS
Net Revenues. Net revenues for the second quarter of fiscal 1998 and for
the six month period ended December 31, 1997 increased 11% and 12%,
respectively, as compared to the prior year. Distribution businesses (those
whose primary operations involve the wholesale distribution of pharmaceuticals,
representing 91% of total revenues) grew at a rate of 12% during the three and
six months ended December 31, 1997, while Service businesses (those that provide
services to the healthcare industry through pharmacy franchising, pharmacy
automation equipment, pharmacy management, and pharmaceutical packaging) grew at
a rate of 17% and 18% during the three and six months ended December 31, 1997,
respectively, primarily on the strength of the Company's pharmacy automation and
pharmacy management businesses. The majority of the revenue increase
(approximately 80% for the three and six month periods ended December 31, 1997)
came from existing customers in the form of increased volume and price
increases. The remainder of the growth came from the addition of new customers.
Gross Margin. For the three months ended December 31, 1997 and 1996, gross
margin as a percentage of net revenues remained stable at 7.95% for both
periods. For the six month periods ended December 31, 1997 and 1996, gross
margin as a percentage of revenue was 7.91% and 7.80%, respectively. The
increase in the gross margin percentage for the six month period is a result of
a higher mix of Services revenues during the six months ended December 31, 1997
compared to the same period of a year ago (9% in fiscal 1998 versus 8% in fiscal
1997). The Service businesses gross margin as a percentage of revenues for the
second quarter of fiscal 1998 and fiscal 1997 was 31.27% and 32.63%,
respectively, and 31.01% and 33.33% for the six months ended December 31, 1997
and 1996, respectively. The decrease is primarily a function of the relatively
higher revenue growth experienced in the pharmacy management operations, which
have lower margins relative to the other Service businesses. The Distribution
businesses gross margin as a percentage of revenues decreased for the second
quarter of the current fiscal year from 5.56% a year ago to 5.40%. During the
six month period ended December 31, 1997, the Distribution businesses gross
margin percentage rate decreased from 5.56% a year ago to 5.47%. These decreases
are primarily due to the impact of lower selling margins, as a result of a
highly competitive market, and a greater mix of high volume customers, where a
lower cost of distribution and better asset management enable the Company to
offer lower selling margins to its customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of net revenues improved to 4.32% in the
second quarter of fiscal 1998 compared to 4.52% in the prior year, and 4.50% for
the six month period ended December 31, 1997 compared to 4.70% in the prior
year. The improvements in the second quarter and the six month period reflect
economies associated with the Company's revenue growth, as well as significant
productivity gains resulting from continued cost control efforts and the
consolidation and selective automation of operating facilities. The growth in
the business, combined with a shift towards a greater mix of service business
(Service businesses had a 15.49% and 16.66% ratio of expenses to revenues for
the three and six month periods ending December 31, 1997, respectively, compared
to Distribution businesses with a ratio of 2.95% and 3.00%, during the same
periods) has caused the increase in expense in the current periods. The 6% and
7% growth in selling, general and administrative expenses experienced in the
second quarter of fiscal 1998 and in the six months ended December 31, 1997,
respectively, were due primarily to increases in personnel costs and
depreciation expense.
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Merger Related Costs. Costs of effecting mergers and subsequently
integrating the operations of the various merged companies are recorded as
merger costs when incurred. Costs related to various mergers effected in fiscal
1997 and 1996 totaling approximately $3.2 million ($1.9 million, net of tax) and
$5.4 million ($3.3 million, net of tax), were recorded during the three and six
months ended December 31, 1997, respectively, related to integrating the
operations of the merged companies. During the three and six months ended
December 31, 1996, merger related costs totaling $18.0 million ($13.1 million,
net of tax) and $18.2 million ($13.1 million, net of tax), respectively, were
recorded. These costs include approximately $13.8 million for transaction and
employee related costs associated with the Company's merger with PCI, which was
completed on October 11, 1996 (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), with the remaining amount in each period
related to integrating the operations of the various merged companies.
The effect of the merger related costs recorded during the three months
ended December 31, 1997 and 1996 was to reduce net earnings by $1.9 million to
$66.2 million and $13.1 million to $41.3 million, respectively, and to reduce
reported diluted earnings per common share by $0.01 per share to $0.60 per share
and by $0.12 per share to $0.38 per share, respectively. The effect of the
merger related costs recorded during the six months ended December 31, 1997 and
1996 was to reduce net earnings by $3.3 million to $120.2 million and $13.1
million to $80.7 million, respectively, and to reduce reported diluted earnings
per common share by $0.03 per share to $1.08 per share and by $0.12 per share to
$0.75 per share, respectively.
The Company estimates that it will incur additional merger related costs
related to the various mergers it has completed of approximately $6.3 million
($3.8 million, net of tax) in future periods (primarily fiscal 1998) 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.
Other Income (Expense). The decrease in interest expense of $2.2 million in
the second quarter of fiscal 1998 compared to fiscal 1997 and $3.8 million for
the six month period ended December 31, 1997 compared to the prior year is
primarily due to extinguishment of the Company's $100 million 8% Notes on March
1, 1997. The increase in other income is due to higher investment income, in
part due to better asset management in the six month period ended December 31,
1997 when only $131 million of cash was used, compared to a use of $225 million
in the six month period ended December 31, 1996.
Provision for Income Taxes. The Company's provision for income taxes
relative to pretax earnings was 39% and 43% for the second quarter of fiscal
1998 and 1997, respectively and 39% and 42% for the six month periods ended
December 31, 1997 and 1996, respectively. The decrease in the effective tax rate
is primarily due to the impact of certain non-deductible merger related costs
recorded in the second quarter of fiscal 1997, and a reduction in the state
effective tax rate as a result of the change in the Company's business mix.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $1,185 million at December 31, 1997 from
$1,098 million at June 30, 1997. This increase included additional investments
in merchandise inventories and trade receivables of $502 million and $80
million, respectively. Offsetting the increases in working capital was a
decrease in cash and equivalents of $131 million and an increase in accounts
payable of $298 million. The increase in merchandise inventories reflects normal
seasonal purchases of pharmaceutical inventories and the higher level of current
and anticipated business volume in pharmaceutical distribution activities. The
increase in trade receivables is consistent with the Company's net revenues
growth (see "Net Revenues" above). The change in cash and equivalents and
accounts payable is due primarily to the timing of inventory purchases and
related payments.
Property and equipment, at cost, increased by $36.8 million from June 30,
1997. The property acquired included increased investment in management
information systems and customer support systems.
Shareholders' equity increased to $1,471.6 million at December 31, 1997
from $1,334.7 million at June 30, 1997, primarily due to net earnings of $120.2
million and the investment of $19.3 million by employees of the Company through
various stock incentive plans during the six month period ended December 31,
1997.
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The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements, including those
related to pending business combinations. See "Other" below.
OTHER
On May 27, 1997, the Company announced that it had entered into a
definitive merger agreement with MediQual Systems, Inc. ("MediQual"), pursuant
to which MediQual will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a pooling-of-interests
for financial reporting purposes. In connection with the merger, the Company
estimates that it will issue approximately 0.6 million Common Shares. Upon
consummation of the merger, the Company will record a merger related charge to
reflect transaction and other costs incurred as a result of the merger. The
amount of this charge is estimated to be approximately $4 million. The merger is
expected to be completed in the first quarter of calendar 1998, subject to the
satisfaction of certain conditions, including approval by shareholders of
MediQual. A Special Meeting of MediQual Shareholders to vote on this transaction
is scheduled for February 18, 1998.
On August 23, 1997, the Company signed a definitive merger agreement
with Bergen Brunswig Corporation ("Bergen"), a distributor of pharmaceuticals
and medical-surgical supplies, pursuant to which Bergen will become a wholly
owned subsidiary of the Company in a stock-for-stock merger expected to be
accounted for as a pooling-of-interests for financial reporting purposes. Under
the terms of the proposed merger, shareholders of Bergen will receive .775 of a
Company Common Share in exchange for each outstanding common share of Bergen.
The Company will issue approximately 41 million Common Shares in the transaction
and will also assume approximately $646 million in long-term debt. In connection
with the merger, the companies expect to incur investment banking, legal,
accounting, and other related transaction costs and fees. Additionally, the
companies expect to incur other merger related costs associated with the
integration of the separate companies and institution of efficiencies
anticipated as a result of the merger. Based on information currently available,
the total amount of merger related charges to be recognized in connection with
the merger is estimated to be between $100 and $130 million, after tax. These
merger related expenses will be charged to expense in the period in which the
merger is consummated, or in subsequent periods, when incurred. Merger related
costs incurred prior to consummation of the merger will be deferred and expensed
upon consummation. Since the merger has not yet been consummated, the merger
expenses can only be estimated at this time, and are subject to revision as
further information becomes available. The merger is expected to be completed in
the first quarter of calendar 1998, subject to the satisfaction of certain
conditions, including approvals by Bergen's and the Company's shareholders, and
the receipt of certain regulatory approvals. Shareholders of both companies will
vote on the transaction at Special Meetings of Shareholders scheduled for
February 20, 1998.
The Company utilizes computer technologies throughout its business to
effectively carry out its day-to-day operations. Similar to most companies, the
Company must determine whether its systems are capable of recognizing and
processing date sensitive information properly as the year 2000 approaches. The
Company has completed a preliminary assessment of its year 2000 requirements and
is currently correcting and replacing those systems which are not year 2000
compliant, in order to continue to meet its internal needs and those of its
customers. The Company currently believes it will be able to modify or replace
its affected systems in time to avoid any detrimental impact on its operations,
and expects this process to be substantially completed by the end of calendar
year 1998. The Company estimates that the costs of its year 2000 project will be
approximately $20 million. A significant portion of these costs are not likely
to be incremental costs, but rather will represent the redeployment of existing
resources. The anticipated impact and costs of the project, as well as the date
on which the Company expects to complete the project, are based on management's
best estimates using information currently available and numerous assumptions
about future events. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Based on its current estimates, the Company does not anticipate that the costs
associated with this project will have a material adverse effect on the
Company's consolidated financial statements in future periods.
The Company has initiated formal communications with its significant
suppliers and customers to determine the extent to which the Company may be
vulnerable in the event that those parties fail to properly remediate their own
year 2000 issues. While the Company is not presently aware of any such
significant exposure, there can be no guarantee that the systems of third
parties on which the Company relies will be timely converted, or that a failure
to properly convert by another company would not have a material adverse effect
on the Company.
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Along with other companies in its industry, the Company has been advised
that bulk deliveries to be made to its customers' warehouses should be reported
as revenues, rather than reporting as revenues only the service fees related to
such bulk deliveries. Such service fees were not significant in any of the
periods presented (see Note 2 of "Notes to Consolidated Financial Statements").
The Company will adopt such presentation beginning with its audited financial
statements for its fiscal year ending June 30, 1998.
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PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In November 1993, the Company and Whitmire Distribution Corporation
("Whitmire"), as well as other pharmaceutical wholesalers, were named as
defendants in a series of purported class action antitrust lawsuits which were
later consolidated and transferred by the Judicial Panel for Multi-District
Litigation to the United States District Court for the Northern District of
Illinois (the "Brand Name Prescription Drug Litigation"). Subsequent to the
consolidation, a new consolidated complaint was filed which included allegations
that the wholesaler defendants, including the Company and Whitmire (which is now
a subsidiary of the Company), conspired with manufacturers to inflate prices by
using a chargeback pricing system. In addition to the Federal court cases
described above, the Company and Whitmire have also been named as defendants in
a series of state court cases alleging similar claims under various state laws
regarding the sale of brand name prescription drugs. These lawsuits are
described in "Item 1 - Legal Proceedings" of Part II of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, which was filed with
the Securities and Exchange Commission and is incorporated herein by reference.
Effective October 26, 1994, the Company entered into a Judgment Sharing
Agreement in the Brand Name Prescription Drug Litigation with other wholesaler
and pharmaceutical manufacturer defendants. Under the Judgment Sharing
Agreement: (a) the manufacturer defendants agreed to reimburse the wholesaler
defendants for litigation costs incurred, up to an aggregate of $9 million; and
(b) if a judgment is entered against both manufacturers and wholesalers, the
total exposure for joint and several liability of the Company is limited to the
lesser of 1% of such judgment or one million dollars. In addition, the Company
has released any claims which it might have had against the manufacturers for
the claims presented by the plaintiffs in the Brand Name Prescription Drug
Litigation. The Judgment Sharing Agreement covers the federal court litigation
as well as the cases which have been filed in various state courts. On December
15, 1994, the plaintiffs filed a motion to declare the Judgment Sharing
Agreement unenforceable. On April 10, 1995, the court denied that motion and
ruled that the Judgment Sharing Agreement is valid and enforceable. The
plaintiffs filed a motion for reconsideration of the court's April 10, 1995
ruling, and the court denied that motion and reaffirmed its earlier decision on
April 24, 1995.
On November 9, 1995, the Company, along with the other wholesaler
defendants, filed a motion for summary judgment in the Brand Name Prescription
Drug Litigation. On April 4, 1996, summary judgment was granted in favor of the
Company and the other wholesaler defendants. The plaintiffs appealed this
decision. On August 15, 1997, the Court of Appeals for the Seventh Circuit,
along with other rulings, reversed the District Court's decision granting
summary judgment to the wholesaler defendants. On September 5, 1997, the
wholesaler defendants filed a motion for this decision to be reconsidered by the
Court of Appeals en banc. On October 8, 1997, the motion to reconsider was
denied by the Court of Appeals. The wholesaler defendants have filed a petition
seeking review of the Court of Appeals decision by the United States Supreme
Court. Trial has been set for the Brand Name Prescription Drug Litigation in
September 1998. Most recently, the wholesaler defendants have also been added as
defendants in a series of related antitrust lawsuits brought by certain
independent pharmacies who have opted out of the class action cases and by
certain chain drug and grocery stores. The Company continues to believe that the
allegations against Cardinal and Whitmire in such litigation are without merit,
and it intends to contest such allegations vigorously.
The Company also becomes involved from time to time in litigation
incidental to its business. Although the ultimate resolution of the litigation
referenced herein cannot be forecast with certainty, the Company does not
believe that the outcome of these lawsuits will have a material adverse effect
on the Company's financial statements.
Page 12
<PAGE> 13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) Registrant's 1997 Annual Meeting of Shareholders was held on November
5, 1997.
(b) Proxies were solicited by Registrant's management pursuant to
Regulation 14A under the Securities Exchange Act of 1934; there was no
solicitation in opposition to management's nominees as listed in the
proxy statement; and all director nominees were elected to the class
indicated in the proxy statement pursuant to the vote of the
Registrant's shareholders.
(c) Matters voted upon at the Annual Meeting were as follows:
(1) Election of John F. Finn, John F. Havens, L. Jack Van Fossen, and
Robert D. Walter as directors of the Company. The results of the
shareholder vote were as follows: Mr. Finn- 91,609,872 for, 0
against, 2,309,541 withheld, and 0 broker non-votes; Mr. Havens-
91,582,197 for, 0 against, 2,337,216 withheld, and 0 broker
non-votes; Mr. Van Fossen- 91,604,427 for, 0 against, 2,314,986
withheld, and 0 broker non-votes; Mr. Walter- 91,601,091 for, 0
against, 2,318,322 withheld, and 0 broker non-votes.
(2) Amendment to the Registrant's Equity Incentive Plan to revise
provisions pertaining to outside director options. The results of
the shareholder vote were as follows: 85,414,134 for, 8,222,635
against, 282,644 withheld, and 0 broker non-votes.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit Exhibit Description
------- -------------------
Number
------
2.01 Amended and Restated Agreement and Plan of Merger dated as of July
7, 1997, among MediQual Systems, Inc., Hub Merger Corp., and
Registrant (1)
2.02 Amendment dated as of November 4, 1997 to the Amended and Restated
Agreement and Plan of Merger dated as of July 7, 1997, among
MediQual Systems, Inc., Hub Merger Corp., and Registrant (4)
2.03 Amendment dated as of January 8, 1998 to the Amended and Restated
Agreement and Plan of Merger dated as of July 7, 1997, among
MediQual Systems, Inc., Hub Merger Corp., and Registrant (5)
2.04 Agreement and Plan of Merger dated as of August 23, 1997, among the
Registrant, Bruin Merger Corp., and Bergen Brunswig Corporation (2)
11.01 Computation of Per Share Earnings
27.01 Financial Data Schedule
99.01 Statement Regarding Forward-Looking Information (3)
- ------------------
(1) Included as an annex to the Proxy Statement/Prospectus included in
the Registrant's Registration Statement on Form S-4 (No. 333-30889)
filed with the Commission on July 8, 1997, and incorporated herein
by reference.
(2) Included as an exhibit to the Registrant's Current Report on Form
8-K/A, Amendment No. 1 (No. 0-12591) filed with the Commission on
August 27, 1997, and incorporated herein by reference.
Page 13
<PAGE> 14
(3) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1997 (No. 0-12591), and
incorporated herein by reference.
(4) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 (No. 0-12591), and
incorporated herein by reference.
(5) Included as an annex to the Proxy Statement/Prospectus included with
the Registrant's Pre-effective Amendment No. 3 to Registration
Statement on Form S-4 (No. 333-30889), filed with the Commission on
January 14, 1998, and incorporated herein by reference.
(b) Reports on Form 8-K:
None.
Page 14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDINAL HEALTH, INC.
Date: February 11, 1998 By: /s/ Robert D. Walter
--------------------
Robert D. Walter
Chairman and Chief Executive Officer
By: /s/ David Bearman
--------------------
David Bearman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 15
<PAGE> 1
Exhibit 11.01
CARDINAL HEALTH, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Quarter Ended Six Months Ended
---------------------------- --------------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC:
Net earnings $ 66,179 $ 41,326 $120,218 $ 80,652
======== ======== ======== ========
Weighted average number of Common
Shares outstanding 109,422 107,543 109,257 105,914
======== ======== ======== ========
Basic earnings per Common Share $ 0.60 $ 0.38 $ 1.10 $ 0.76
======== ======== ======== ========
DILUTED:
Net earnings $ 66,179 $ 41,326 $120,218 $ 80,652
======== ======== ======== ========
Weighted average number of Common
Shares outstanding 109,422 107,543 109,257 105,914
Dilutive effect of stock options 1,700 1,796 1,699 1,728
-------- -------- -------- --------
Weighted average number of
shares outstanding 111,122 109,339 110,956 107,642
======== ======== ======== ========
Diluted earnings per Common Share $ 0.60 $ 0.38 $ 1.08 $ 0.75
======== ======== ======== ========
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDLUE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL
HEALTH INC.'S FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 111,654
<SECURITIES> 0
<RECEIVABLES> 790,748
<ALLOWANCES> (38,417)
<INVENTORY> 1,938,526
<CURRENT-ASSETS> 2,954,558
<PP&E> 514,221
<DEPRECIATION> (210,075)
<TOTAL-ASSETS> 3,602,491
<CURRENT-LIABILITIES> 1,769,328
<BONDS> 275,615
0
0
<COMMON> 667,858
<OTHER-SE> 803,702
<TOTAL-LIABILITY-AND-EQUITY> 3,602,491
<SALES> 6,000,476
<TOTAL-REVENUES> 6,000,476
<CGS> 5,525,713
<TOTAL-COSTS> 5,525,713
<OTHER-EXPENSES> 270,265
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10,165)
<INCOME-PRETAX> 197,022
<INCOME-TAX> 76,804
<INCOME-CONTINUING> 120,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,218
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.08
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDLUE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL
HEALTH INC.'S FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 87,460
<SECURITIES> 37,185
<RECEIVABLES> 775,122
<ALLOWANCES> (38,351)
<INVENTORY> 1,725,725
<CURRENT-ASSETS> 2,706,346
<PP&E> 456,393
<DEPRECIATION> (192,213)
<TOTAL-ASSETS> 3,299,147
<CURRENT-LIABILITIES> 1,666,946
<BONDS> 297,909
0
0
<COMMON> 623,580
<OTHER-SE> 585,490
<TOTAL-LIABILITY-AND-EQUITY> 3,299,147
<SALES> 5,351,882
<TOTAL-REVENUES> 5,351,882
<CGS> 4,934,196
<TOTAL-COSTS> 4,934,196
<OTHER-EXPENSES> 251,569
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (13,974)
<INCOME-PRETAX> 138,490
<INCOME-TAX> 57,838
<INCOME-CONTINUING> 80,652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,652
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.75
</TABLE>
