<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended September 30, 1998 Commission File Number 0-12591
CARDINAL HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 GLENDON COURT, DUBLIN, OHIO 43016
(Address of principal executive offices and zip code)
(614) 717-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of Registrant's Common Shares outstanding at the close of
business on October 31, 1998 was as follows:
Common Shares, without par value: $200,731,408
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
<TABLE>
Index *
<CAPTION>
Page No.
--------
Part I. Financial Information:
----------------------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Statements of Earnings for the Three
Months Ended September 30, 1998 and 1997 ......................................... 3
Condensed Consolidated Balance Sheets at September 30, 1998 and
June 30, 1998 .................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1998 and 1997....................................................... 5
Notes to Condensed Consolidated Financial Statements ............................. 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................ 11
Part II. Other Information:
------------------
Item 1. Legal Proceedings................................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............................... 12
Item 5. Other Information................................................................. 13
Item 6. Exhibits and Reports on Form 8-K.................................................. 13
* Items not listed are inapplicable.
</TABLE>
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<TABLE>
PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------- ----------
<S> <C> <C>
Revenue:
Operating revenue $3,851,015 $3,022,409
Bulk deliveries to customer warehouses 781,680 681,155
---------- ----------
Total revenue 4,632,695 3,703,564
Cost of products sold:
Operating cost of products sold 3,529,908 2,744,763
Cost of products sold - bulk deliveries 781,680 681,155
---------- ----------
Total cost of products sold 4,311,588 3,425,918
Gross margin 321,107 277,646
Selling, general and administrative expenses 178,215 160,323
Merger-related costs (34,370) (2,183)
---------- ----------
Operating earnings 108,522 115,140
Other income (expense):
Interest expense (8,713) (7,243)
Other, net 2,454 2,572
---------- ----------
Earnings before income taxes 102,263 110,469
Provision for income taxes 44,437 41,147
---------- ----------
Net earnings $ 57,826 $ 69,322
========== ==========
Earnings per Common Share:
Basic $ 0.29 $ 0.35
Diluted $ 0.28 $ 0.34
Weighted average number of Common Shares outstanding:
Basic 200,475 198,605
Diluted 203,966 202,172
Cash dividends declared per Common Share $ 0.025 $ 0.017
</TABLE>
See notes to condensed consolidated financial statements.
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<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 332,666 $ 338,263
Trade receivables, net 1,039,198 989,583
Current portion of net investment in sales-type leases 86,856 75,450
Merchandise inventories 2,062,315 1,964,382
Prepaid expenses and other 149,032 137,417
---------- ----------
Total current assets 3,670,067 3,505,095
---------- ----------
Property and equipment, at cost 1,114,685 1,046,405
Accumulated depreciation and amortization (377,781) (347,468)
---------- ----------
Property and equipment, net 736,904 698,937
Other assets:
Net investment in sales-type leases, less current portion 251,382 195,013
Goodwill and other intangibles 281,291 285,571
Other 103,470 98,490
---------- ----------
Total $5,043,114 $4,783,106
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 25,784 $ 24,653
Current portion of long-term obligations 10,123 7,294
Accounts payable 1,696,751 1,714,108
Other accrued liabilities 282,103 247,661
---------- ----------
Total current liabilities 2,014,761 1,993,716
---------- ----------
Long-term obligations, less current portion 642,475 441,170
Deferred income taxes and other liabilities 285,222 324,145
Shareholders' equity:
Common Shares, without par value 956,954 944,833
Retained earnings 1,186,285 1,122,230
Common Shares in treasury, at cost (10,066) (9,469)
Cumulative foreign currency adjustment (27,622) (28,034)
Other (4,895) (5,485)
---------- ----------
Total shareholders' equity 2,100,656 2,024,075
---------- ----------
Total $5,043,114 $4,783,106
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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<TABLE>
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 57,826 $ 69,322
Net earnings
Adjustments to reconcile net earnings to net cash from operating activities: 25,045 22,763
Depreciation and amortization 2,505 3,057
Provision for bad debts
Change in operating assets and liabilities:
Increase in trade receivables (46,926) (33,451)
Increase in merchandise inventories (95,603) (184,350)
Increase in net investment in sales-type leases (67,775) (17,642)
Increase (decrease) in accounts payable (22,016) 109,417
Other operating items, net (19,905) (4,516)
--------- ---------
Net cash used in operating activities (166,849) (35,400)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 1,881 315
Additions to property and equipment (54,801) (41,888)
Other -- (2,088)
--------- ---------
Net cash used in investing activities (52,920) (43,661)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 1,133 3,924
Reduction of long-term obligations (12,468) (3,170)
Proceeds from long-term obligations, net of issuance costs 214,256 2,167
Proceeds from issuance of Common Shares 10,612 17,116
Tax benefit of stock options 1,509 2,842
Dividends on Common Shares and cash paid
in lieu of fractional shares (3,321) (3,074)
Purchase of treasury shares (597) (43)
--------- ---------
Net cash provided by financing activities 211,124 19,762
EFFECT OF CURRENCY TRANSLATION ON CASH AND EQUIVALENTS 3,048 (307)
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (5,597) (59,606)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 338,263 270,536
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 332,666 $ 210,930
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. The condensed 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. The condensed consolidated financial statements contained
herein have been restated to give retroactive effect to the merger
transactions with MediQual Systems, Inc. ("MediQual") on February 18,
1998 and R.P. Scherer Corporation ("Scherer") on August 7, 1998, both
of which were accounted for as pooling of interests business
combinations (see Note 5).
These condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and include all of the
information and disclosures required by generally accepted accounting
principles for interim reporting. In the opinion of management, all
adjustments necessary for a fair presentation have been included.
Except as disclosed elsewhere herein, all such adjustments are of a
normal and recurring nature.
The condensed 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, 1998, and in the
Company's current report on Form 8-K/A (Amendment No. 1) filed on
September 28, 1998.
Note 2. 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 3. On August 12, 1998, the Company declared a three-for-two stock split
which was effected as a stock dividend and distributed on October 30,
1998 to shareholders of record at the close of business on October 9,
1998. All share and per share amounts included in the condensed
consolidated financial statements have been adjusted to retroactively
reflect the stock split.
Note 4. As of September 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires the presentation of comprehensive income and
its components in a full set of general purpose financial statements.
The Company's comprehensive income consists of net earnings and foreign
currency translation adjustments. For the three months ended September
30, 1998, total comprehensive income was $58.2 million, comprised of
$57.8 million of net earnings and $0.4 million of gain on foreign
currency translation. Total comprehensive income for the comparable
period of fiscal year 1997 was $68.1 million, comprised of $69.3
million of net earnings offset by $1.2 million of loss on foreign
currency translation.
Note 5. On August 7, 1998, the Company completed a merger transaction with R.P.
Scherer Corporation (the "Scherer Merger"). The Scherer Merger was
accounted for as a pooling of interests. The Company issued
approximately 34.2 million Common Shares to Scherer stockholders and
Scherer's outstanding stock options were converted into options to
purchase approximately 3.5 million Common Shares.
The Company's fiscal year end is June 30 and Scherer's fiscal year end
was March 31. The condensed consolidated financial statements for the
quarter ended September 30, 1998, combine the Company's and Scherer's
results for the same periods. For the three months ended September 30,
1997, the condensed consolidated financial statements combine the
Company's three months ended September 30, 1997 results with Scherer's
three months ended June 30, 1997 results. Due to the change in
Scherer's fiscal year end from March 31 to conform with the Company's
June 30 fiscal year end, Scherer's results of operations for the three
months ended June 30, 1998 will not be included in the combined results
of operations but will be reflected as an adjustment to combined
retained earnings. Scherer's net revenue and net earnings for this
period were $161.6 million and $8.6 million, respectively. Scherer's
cash flows from operating and financing activities for this period were
$12.6 million and $32.6 million, respectively, while cash flows used in
investing activities were $12.2 million.
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Note 6. Costs of effecting mergers and subsequently integrating the operations
of the various merged companies are recorded as merger-related costs
when incurred. During the three months ended September 30, 1998,
merger-related costs totaling $34.4 million ($27.8 million, net of tax)
were recorded. Of this amount, approximately $22.3 million related to
transaction and employee-related costs, and $12.5 million related to
business restructuring and asset impairment costs associated with the
Company's merger transaction with Scherer. In addition, the Company
recorded costs of $1.8 million related to integrating the operations of
companies that previously engaged in merger transactions with the
Company. Partially offsetting the charge recorded during the first
quarter of fiscal 1999 was a $2.2 million credit to adjust the
estimated Bergen Brunswig Corporation ("Bergen") transaction and
termination costs previously recorded (see Note 7). This adjustment
relates primarily to services provided by third parties engaged by the
Company in connection with the terminated Bergen transaction. The cost
of such services was estimated and recorded in the prior periods when
the services were performed. Actual billings were less than the
estimate originally recorded, resulting in a reduction of the current
period merger-related costs.
During the three months ended September 30, 1997, merger-related costs
totaling $2.2 million ($1.3 million, net of tax) were recorded, related
to integrating the operations of companies that previously merged with
the Company.
The net effect of the various merger-related costs recorded during the
three months ended September 30, 1998 and 1997 was to reduce net
earnings by $27.8 million to $57.8 million and by $1.3 million to $69.3
million, respectively, and to reduce reported diluted earnings per
Common Share by $0.14 per share to $0.28 per share and by $0.01 per
share to $0.34 per share, respectively.
Note 7. On August 24, 1997, the Company and Bergen announced that they had
entered into a definitive merger agreement, as amended, pursuant to
which a wholly owned subsidiary of the Company would be merged with and
into Bergen (the "Bergen Merger Agreement"). On July 31, 1998, the
United States District Court for the District of Columbia granted the
Federal Trade Commission's request for a preliminary injunction to halt
the proposed merger. On August 7, 1998, the Company and Bergen jointly
terminated the Bergen Merger Agreement and, in accordance with the
terms of the Bergen Merger Agreement, the Company reimbursed Bergen for
$7 million of transaction costs. Additionally, the termination of the
Bergen Merger Agreement caused the costs incurred by the Company (that
would not have been deductible had the merger been consummated) to
become tax deductible for federal income tax purposes, resulting in a
tax benefit of $12.2 million. The obligation to reimburse Bergen and
the additional tax benefit were recorded in the fourth quarter of the
fiscal year ended June 30, 1998.
Note 8. On October 9, 1998, the Company announced that it had entered into a
definitive merger agreement with Allegiance Corporation ("Allegiance"),
pursuant to which Allegiance will become a wholly owned subsidiary of
the Company in a stock-for-stock merger transaction expected to be
accounted for as a pooling of interests for financial reporting
purposes. Under the terms of the proposed merger, shareholders of
Allegiance will receive 0.6225 of a Company Common Share in exchange
for each outstanding common share of Allegiance. The Company will issue
approximately 73.5 million Common Shares in the transaction and will
also assume approximately $838 million in long-term debt. The Company
will record merger-related charges to reflect transaction and other
costs incurred as a result of the proposed merger transaction with
Allegiance. Since the merger has not yet been consummated and
transition plans currently are being developed, the amount of these
charges cannot be estimated at this time. The merger is expected to be
completed in the first half of calendar 1999, subject to satisfaction
of certain conditions, including approvals by the stockholders of both
Allegiance and the Company and the receipt of certain regulatory
approvals.
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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 has been prepared to
give retroactive effect to the pooling of interests business combinations with
MediQual Systems, Inc. ("MediQual") on February 18, 1998 and R.P. Scherer
Corporation ("Scherer") on August 7, 1998. The discussion and analysis is
concerned with material changes in financial condition and results of operations
for the Company's condensed consolidated balance sheets as of September 30, 1998
and June 30, 1998, and for the condensed consolidated statements of earnings for
the three month periods ended September 30, 1998 and 1997.
This discussion and analysis should be read together with management's
discussion and analysis included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 and in the Company's Current Report on Form
8-K/A (Amendment No. 1) filed with the Securities and Exchange Commission on
September 28, 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. 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 report and exhibits and amendments to
such report and is incorporated herein by reference. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise.
RESULTS OF OPERATIONS
Operating Revenue. Operating revenue for the first quarter of fiscal 1999
increased 27% as compared to the prior year. Distribution businesses (those
whose primary operations involve the wholesale distribution of pharmaceuticals,
representing 88% of total operating revenue) grew at a rate of 32% during the
three months ended September 30, 1998, while Service businesses (those that
provide services to the healthcare industry, primarily through pharmacy
franchising, pharmacy automation equipment, pharmacy management, pharmaceutical
packaging, drug delivery systems development and healthcare information systems
development) grew at a rate of 15% during the three months ended September 30,
1998, primarily on the strength of the Company's pharmacy automation business.
The majority of the operating revenue increase (approximately 77% for the three
month period ended September 30, 1998) came from existing customers in the form
of increased volume and price increases. The remainder of the growth came from
the addition of new customers.
Bulk Deliveries to Customer Warehouses. The Company reports as revenue bulk
deliveries made to customers' warehouses, whereby the Company acts as an
intermediary in the ordering and subsequent delivery of pharmaceutical products.
Fluctuations in bulk deliveries result largely from circumstances that are
beyond the control of the Company, including consolidation within the chain
drugstore industry, decisions by chains to either begin or discontinue
warehousing activities, and changes in 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 the Company's operating earnings.
Gross Margin. For the three months ended September 30, 1998 and 1997, gross
margin as a percentage of operating revenue was 8.34% and 9.19%, respectively.
The decrease in the gross margin percentage is due primarily to a greater mix of
lower margin Distribution business in the quarter ended September 30, 1998, and
a general decline in the Distribution businesses gross margin.
The Distribution businesses gross margin as a percentage of operating
revenue decreased for the first quarter of the current fiscal year from 5.56% a
year ago to 5.05%. This decrease was primarily due to the impact of lower
selling margins, as a result of a highly competitive market and a greater mix of
high volume customers, where a lower cost of distribution and better asset
management enable the Company to offer lower selling margins to its customers.
These factors were particularly relevant in the three months ended September 30,
1998 as the Distribution businesses achieved 32% operating revenue growth,
primarily through the addition or expansion of business with large, high volume
customers.
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The Service businesses' gross margin as a percentage of operating revenue
for the first quarter of fiscal 1999 and fiscal 1998 was 31.04% and 31.54%,
respectively. The decline in gross margin rates experienced by the Service
businesses is a function of the mix of the various businesses. Operating revenue
growth has been greater in the relatively lower margin pharmacy management,
pharmaceutical packaging and drug delivery systems development businesses than
it has been in the higher margin pharmacy franchising business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of operating revenue declined to 4.63%
in the first quarter of fiscal 1999 compared to 5.30% in the prior year. The
improvements in the first quarter 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 11% growth in selling, general and
administrative expenses experienced in the first quarter of fiscal 1999 was due
primarily to increases in personnel costs and depreciation expense, and compares
favorably to the 27% growth in operating revenue for the same period.
Merger-Related Costs. Costs of effecting mergers and subsequently
integrating the operations of the various merged companies are recorded as
merger-related costs when incurred. During the three months ended September 30,
1998, the Company recorded $34.4 million ($27.8 million, net of tax) related to
various mergers. Of this amount, approximately $22.3 million related to
transaction and employee-related costs, and $12.5 million related to business
restructuring and asset impairment costs associated with the Company's merger
transaction with Scherer. In addition, the Company recorded costs of $1.8
million related to integrating the operations of companies that previously
merged with Cardinal. Partially offsetting the amount recorded during the first
quarter of fiscal 1999 was a $2.2 million credit to adjust the estimated Bergen
Brunswig Corporation ("Bergen") transaction and termination costs previously
recorded (see Note 7 of "Notes to Condensed Consolidated Financial Statements").
This adjustment relates primarily to services provided by third parties engaged
by the Company in connection with the terminated Bergen transaction. The cost of
such services was estimated and recorded in the prior periods when the services
were performed. Actual billings were less than the estimate originally recorded,
resulting in a reduction of the current period merger-related costs. During the
three months ended September 30, 1997, merger-related costs totaling $2.2
million ($1.3 million, net of tax) were recorded, which related to integrating
the operations of companies that previously engaged in merger transactions with
Cardinal.
The Company estimates that it will incur additional merger-related costs
associated with the various mergers it has completed to date of approximately
$32.3 million ($19.8 million, net of tax) in future periods (primarily fiscal
1999 and 2000) in order to properly integrate operations and implement
efficiencies. Such amounts will be charged to expense when incurred. The
estimate does not include merger-related costs associated with the Company's
proposed transaction with Allegiance (see Note 8 of "Notes to Condensed
Consolidated Financial Statements" and "Other-Merger Agreement").
The effect of merger-related costs recorded during the three months ended
September 30, 1998 and 1997 was to reduce net earnings by $27.8 million to $57.8
million and by $1.3 million to $69.3 million, respectively, and to reduce
reported diluted earnings per Common Share by $0.14 per share to $0.28 per share
and by $0.01 per share to $0.34 per share, respectively.
Other Income (Expense). The increase in interest expense of $1.5 million in
the first quarter of fiscal 1999 compared to the same period of fiscal 1998 is
primarily due to the Company's issuance of $150 million, 6.25% Notes due 2008,
in a public offering in July 1998 (see "Liquidity and Capital Resources").
Provision for Income Taxes. The Company's provision for income taxes
relative to pre-tax earnings was 43% and 36% for the first quarter of fiscal
1999 and 1998, respectively. The increase in the effective tax rate is due to
nondeductible items associated with the current year's business combinations
(see Note 6 of "Notes to Condensed Consolidated Financial Statements").
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $1,655 million at September 30, 1998 from
$1,511 million at June 30, 1998. This increase included additional investments
in merchandise inventories and trade receivables of $97.9 million and $49.6
million, respectively, as well as a decrease in accounts payable of $17.4
million. Offsetting the increases in working capital was a decrease in cash and
equivalents of $5.6 million. The increase in merchandise inventories reflects
normal seasonal purchases of pharmaceutical inventories and the higher level of
current and anticipated business volume in pharmaceutical distribution
activities. The increase in trade receivables is consistent with the Company's
operating revenue growth (see "Operating Revenue" above). The change in cash and
equivalents and accounts payable is due primarily to the timing of inventory
purchases and related payments.
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On July 13, 1998, the Company issued $150 million of 6.25% Notes due 2008,
the proceeds of which are expected to be used for working capital needs due to
the growth in the Company's business. The Company currently has the capacity to
issue $250 million of additional debt securities pursuant to a shelf
registration statement filed with the Securities and Exchange Commission.
Property and equipment, at cost, increased by $68.3 million from June 30,
1998. The increase was primarily due to Scherer's ongoing plant expansion and
manufacturing equipment purchases and additional investments made for management
information systems and upgrades to distribution facilities.
Shareholders' equity increased to $2.1 billion at September 30, 1998 from
$2.0 billion at June 30, 1998, primarily due to net earnings of $57.8 million,
the investment of $10.6 million by employees of the Company through various
stock incentive plans and the adjustment related to the change in Scherer's
fiscal year of $8.6 million during the three month period ended September 30,
1998 (See Note 5 to the "Notes to Condensed Consolidated Financial Statements").
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
Merger Agreement. On October 9, 1998, the Company announced that it had
entered into a definitive merger agreement with Allegiance Corporation
("Allegiance"), pursuant to which Allegiance 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 Allegiance will receive 0.6225 of a
Company Common Share in exchange for each outstanding common share of
Allegiance. The Company will issue approximately 73.5 million Common Shares in
the transaction and will also assume approximately $838 million in long-term
debt. The Company will record merger-related charges to reflect transaction and
other costs incurred as a result of the proposed merger transaction with
Allegiance. Since the merger has not yet been consummated and transition plans
currently are being developed, the amount of these charges cannot be estimated
at this time. The merger is expected to be completed in the first half of
calendar 1999, subject to satisfaction of certain conditions, including
approvals by the stockholders of both Allegiance and the Company and the receipt
of certain regulatory approvals.
Termination Agreement. On August 24, 1997, the Company and Bergen
announced that they had entered into a definitive merger agreement, as amended,
pursuant to which a wholly owned subsidiary of the Company would be merged with
and into Bergen (the "Bergen Merger Agreement"). On July 31, 1998, the United
States District Court for the District of Columbia granted the Federal Trade
Commission's request for a preliminary injunction to halt the proposed merger.
On August 7, 1998, the Company and Bergen jointly terminated the Bergen Merger
Agreement and, in accordance with the terms of the Bergen Merger Agreement, the
Company reimbursed Bergen for $7 million of transaction costs. Additionally, the
termination of the Bergen Merger Agreement caused the costs incurred by the
Company (that would not have been deductible had the merger been consummated) to
become tax deductible for federal income tax purposes, resulting in a tax
benefit of $12.2 million. The obligation to reimburse Bergen and the additional
tax benefit were recorded in the fourth quarter of the fiscal year ended June
30, 1998.
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
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
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mitigate its affected systems in time to avoid any material detrimental impact
on its operations. If the Company determines that it is unable to remediate and
properly test affected systems on a timely basis, the Company intends to develop
appropriate contingency plans for any such mission-critical systems at the time
such determination is made. While the Company is not presently aware of any
significant probability that its systems will not be properly remediated on a
timely basis, there can be no assurances that all year 2000 remediation
processes will be completed and properly tested before the year 2000, or that
contingency plans will sufficiently mitigate the risk of a year 2000 readiness
problem.
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $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 $1.3 million were
incurred by the Company for this project during the three months ended September
30, 1998, of which approximately $0.4 million represented incremental costs.
Total accumulated costs of approximately $7 million have been incurred by the
Company through September 30, 1998, of which approximately $2 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
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 is in the process of
developing appropriate contingency plans in the event that a significant
exposure is identified relative to the dependencies on third-party systems.
Although the Company is not presently aware of any such significant exposure,
there can be no guarantee that the systems of third parties on which the Company
relies will be converted in a timely manner, or that a failure to properly
convert by another company would not have a material adverse effect on the
Company.
The potential risks associated with the year 2000 issues include, but are
not limited, to: temporary disruption of the Company's operations, loss of
communication services and loss of other utility services. The Company believes
that the most reasonably likely worst-case year 2000 scenario would be a loss of
communication services which could result in problems with receiving,
processing, tracking and billing customer orders, problems receiving, processing
and tracking orders placed with suppliers, and problems with banks and other
financial institutions. Currently, as part of the Company's normal business
contingency planning, a plan has been developed for business disruptions due to
natural disasters and power failures. The Company is in the process of enhancing
these contingency plans to include provisions for year 2000 issues, although it
will not be possible to develop contingency plans for all potential disruption.
Although the Company anticipates that minimal business disruption will occur as
a result of the year 2000 issues, based upon currently available information,
incomplete or untimely resolution of Year 2000 issues by either the Company or
significant suppliers, customers and critical business partners could have a
material adverse impact on the Company's consolidated financial position,
results of operations and/or cash flows in future periods.
The Euro Conversion. On January 1, 1999, certain member countries of the
European Union are scheduled to irrevocably fix the conversion rates between
their national currencies and a common currency, the "Euro", which will become
their legal currency on that date. The participating countries' former national
currencies will continue to exist as denominations of the Euro between January
1, 1999 and January 1, 2002. The Company is currently addressing the business
implications of conversion to the Euro, including the need to adapt internal
systems to accommodate Euro-denominated transactions, the competitive
implications of cross-border price transparency, and other strategic
implications. The Company does not expect the conversion to the Euro to have a
material impact on its consolidated financial position, results of operations or
cash flows in future periods.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has been no material change in its exposure
to market risk from that discussed in the Company's Form 8-K/A (Amendment No. 1)
filed on September 28, 1998.
Page 11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In November 1993, the Company and Whitmire Distribution Corporation
("Whitmire"), one of the Company's wholly owned subsidiaries, as well as other
pharmaceutical wholesalers, were named as defendants in a series of purported
class action 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. Subsequent to the consolidation, a new
consolidated complaint was filed which included allegations that the wholesaler
defendants, including the Company and Whitmire, conspired with manufacturers to
inflate prices 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. The
wholesaler defendants, including the Company and Whitmire, entered into a
Judgment Sharing Agreement whereby the total exposure for the Company and its
subsidiaries is limited to $1,000,000 or 1% of any judgment against the
wholesalers and the manufacturers, whichever is less, and provided for the
reimbursement mechanism of legal fees and expenses. The Judgment Sharing
Agreement covers the federal court litigation as well as the cases which have
been filed in various state courts. On April 10, 1995, the Court ruled that the
Judgment Sharing Agreement was valid. On April 4, 1996, summary judgment was
granted in favor of the wholesaler defendants. The plaintiffs appealed this
decision and 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. Trial for the prescription drug
litigation began in September 1998 and is continuing. In recent months, the
wholesaler defendants also have been added as defendants in a series of related
antitrust lawsuits brought by independent pharmacies who have opted out of the
class action cases and by certain chain drug and grocery stores. Although the
ultimate resolution of the litigation referenced herein cannot be forecast with
certainty, the Company and Whitmire believe that the allegations are without
merit, and they intend to contest such allegations vigorously.
On January 17, 1995, Burlington Drug Company ("Burlington Drug") filed
a complaint in the United States District Court for the District of Vermont
alleging that certain agreements between VHA, Inc. ("VHA") and the Company
violated federal antitrust statutes and that the Company had tortiously
interfered with Burlington Drug's contractual relations. The Company filed an
answer denying the allegations contained in the Complaint. The District Court
granted Burlington Drug's leave to file an amended and supplemental complaint on
July 10, 1997. On March 28, 1998, the Company and VHA each filed motions for
summary judgment. On September 3, 1998, the District Court denied these motions
for summary judgment. The trial, originally set for November 2, 1998, has been
continued by the District Court and is now set to begin on February 8, 1999. The
Company continues to believe that the allegations made against it in this
litigation are without merit, and it intends to contest such allegations
vigorously.
The Company also becomes involved from time-to-time in other litigation
incidental to its business. Although the ultimate resolution of the litigation
referenced in this Item 1 cannot be forecast with certainty, the Company does
not believe that the outcome of these lawsuits will have a material adverse
effect on the Company's financial statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) A Special Meeting of the Company's shareholders was held on July
28, 1998.
(b) Not applicable.
(c) Matters voted upon at the Special Meeting were as follows:
(1) Approval, authorization and adoption of Agreement and Plan
of Merger by and among Registrant, GEL Acquisition Corp. and
R.P. Scherer Corporation ("Scherer"). The results of the
shareholder vote were as follows: 85,842,486 in favor, 107,635
against, and 99,159 withheld.
(2) Adjournment of the Registrant's Special Meeting, if
necessary, to permit further solicitation of proxies in the
event there were not sufficient votes at the time of the
regularly scheduled meeting to approve the proposal referenced
in item (1) above. This vote was not necessary.
(d) Not applicable.
Page 12
<PAGE> 13
ITEM 5: OTHER INFORMATION:
In connection with the Company's Annual Meeting of shareholders to be
held on November 23, 1998, the Company has modified the proposed
changes to its Code of Regulations by deleting the proposed addition of
Section 1.5 to Article I (a portion of Proposal 3 in the Company's
proxy statement dated September 28, 1998).
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------- -------------------
<S> <C>
2.01 Agreement and Plan of Merger dated as of October 8, 1998, among the
Registrant, Boxes Merger Corp. and Allegiance Corporation (1)
10.01 Second Amendment to Employment Agreement dated as of September 30,
1998 to the June 1, 1994 Employment Agreement among Aleksandar
Erdeljan, Scherer, and the Registrant, as previously amended on May
17, 1998*
27.01 Financial Data Schedule
99.01 Statement Regarding Forward-Looking Information (2)
</TABLE>
- ------------------
(1) Included as an exhibit to the Schedule 13D dated October 8, 1998
filed by the Registrant with regard to its holdings of stock of
Allegiance Corporation and incorporated herein by reference.
(2) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 (No. 0-12591) and
incorporated herein by reference.
* Management contract or compensation plan or arrangement
(b) Reports on Form 8-K:
On July 29, 1998, the Company filed a Current Report on Form 8-K under
Item 5 which reported the approval by the Company's shareholders of the proposed
merger of R.P. Scherer Corporation and GEL Acquisition Corp. (the "Scherer
Merger").
On August 10, 1998, the Company filed a Current Report on Form 8-K
under Item 5 which reported that (1) the Company and Bergen Brunswig Corporation
("Bergen") mutually terminated the Agreement and Plan of Merger, dated as of
August 23, 1997, by and among the Company, Bruin Merger Corp. and Bergen, as
amended by the First Amendment, dated as of March 16, 1998, and (2) the Company
had completed the Scherer Merger.
On September 28, 1998, the Company filed a Current Report on Form 8-K/A
(Amendment No. 1) , which amended the Current Report on Form 8-K filed on August
10, 1998. The Form 8-K/A included information under Items 2 and 5. The Form
8-K/A included restated supplemental consolidated financial statements of the
Company giving effect to the merger transaction with MediQual Systems, Inc. and
the Scherer Merger, both of which were accounted for as pooling of interests
business combinations.
Page 13
<PAGE> 14
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: November 12, 1998 By: /s/ Robert D. Walter
---------------------
Robert D. Walter
Chairman and Chief Executive Officer
By: /s/ Richard J. Miller
---------------------
Richard J. Miller
Vice President, Controller and Acting
Chief Financial Officer
Page 14
<PAGE> 1
EXHIBIT 10.01
SECOND AMENDMENT TO
EMPLOYMENT AGREEMENT
This is a Second Amendment dated as of September 30, 1998 to the June
1, 1994 employment agreement among Aleksandar Erdeljan (the "Employee"), R.P.
Scherer Corporation, a Delaware corporation (the "Company"), and Cardinal
Health, Inc., an Ohio corporation ("Parent"), as previously amended (the "First
Amendment") on May 17, 1998 (the employment agreement, with the First Amendment,
collectively referred to herein as the "Employment Agreement").
WHEREAS, the Company, in establishing the terms of the First Amendment,
sought to assure itself of the benefit of the Employee's services and experience
for a period of transition following the August 7, 1998 merger transaction
pursuant to which the Company was acquired by the Parent;
WHEREAS, the parties to this agreement, being satisfied that this
management transition has been successfully accomplished, now wish to effect a
mutually agreed upon termination of the employment relationship between the
Company and the Employee;
NOW, THEREFORE, in consideration of the premises and covenants herein
contained, the parties hereto agree as follows;
1. Termination of Employment . The Employee's employment with the
Company will terminate by mutual agreement effective as of
September 30, 1998. For purposes of the Employment Agreement, this
termination will be treated as a termination of employment by the
Employee for "Good Reason" and by the Company without "Cause,"
despite the fact that this termination will occur before the 90th
day following the Effective Time (as those terms are defined in
the Employment Agreement).
2. Severance. As a termination by the Employee for Good Reason and by
the Company without Cause, the Employee will be eligible to
receive the Termination Benefits and other severance described in
Section 4(d) of the Employment Agreement (including those amounts
described in Section 2 of the First Amendment) plus an amount
equal to his normal base pay from September 30, 1998 through
November 7, 1998.
3. Effect of this Amendment. Except as specifically set forth in this
Second Amendment, the Employment Agreement (including without
limitation the Confidentiality and Non-Competition covenants
contained therein) shall continue in effect without amendment.
This Second Amendment may only be
<PAGE> 2
further amended by a written agreement signed by each party
hereto or his or its duly authorized representatives.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as of the date first above written.
R.P. SCHERER CORPORATION
By:____________________________
Title:_________________________
/s/ Aleksandar Erdeljan
-------------------------------
Aleksandar Erdeljan
CARDINAL HEALTH, INC.
By:____________________________
Title:_________________________
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<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
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<CURRENT-ASSETS> 3,670,067
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<CURRENT-LIABILITIES> 2,014,761
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<COMMON> 956,954
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<ARTICLE> 5
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
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<RECEIVABLES> 787,929
<ALLOWANCES> 41,736
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<CURRENT-ASSETS> 2,904,783
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<TOTAL-ASSETS> 4,025,310
<CURRENT-LIABILITIES> 1,606,770
<BONDS> 421,907
0
0
<COMMON> 929,178
<OTHER-SE> 856,537
<TOTAL-LIABILITY-AND-EQUITY> 4,025,310
<SALES> 3,703,564
<TOTAL-REVENUES> 3,703,564
<CGS> 3,425,918
<TOTAL-COSTS> 3,425,918
<OTHER-EXPENSES> 160,323
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7,243)
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