ITEM 1: BUSINESS - - -----------------
GENERAL - - -------
The Company is a national, full-service wholesaler distributing a broad line of pharmaceuticals, surgical and hospital supplies, health and beauty care products, and other items typically sold by hospitals, retail drug stores, and other health care providers. An important component of the Company's distribution activities is the broad range of support services it offers to its customers, which are designed to assist the Company's customers in maintaining and improving their market positions. These support services foster strong relationships between the Company and its customers by positioning the Company as a valuable resource capable of offering the centralized services which are increasingly important in today's competitive market place. The Company believes that in most instances it would not be economically feasible for its customers to develop and maintain these services independently.
Cardinal Health, Inc. is a holding company with sixteen principal operating subsidiaries: Whitmire Distribution Corporation ("Whitmire"); James W. Daly, Inc. ("Daly"); Ellicott Drug Company ("Ellicott"); Cardinal Syracuse, Inc. ("Syracuse"); Marmac Distributors, Inc. ("Marmac"); Bailey Drug Company ("Bailey"); Ohio Valley-Clarksburg, Inc. ("Ohio Valley"); Chapman Drug Company ("Chapman"); Solomons Company ("Solomons"); Cardinal Florida, Inc. ("Florida"); Cardinal Mississippi, Inc. ("Mississippi"); Humiston-Keeling, Inc. ("H-K"); Behrens Inc. ("Behrens"); National PharmPak Services, Inc. ("PharmPak"); National Specialty Services, Inc. ("NSS"); and PRN Services, Inc. ("PRN"). These separate operating subsidiaries are sometimes collectively referred to as the "Cardinal Health" companies. As used in this report, the "Registrant" and the "Company" refers to Cardinal Health, Inc. and subsidiaries, unless the context requires otherwise. Prior to February 7, 1994, the Company was known as Cardinal Distribution, Inc. The term "Cardinal," as used herein, refers to Cardinal Health, Inc. and its subsidiaries prior to the business combination with Whitmire on February 7, 1994.
The Company distributes products to hospitals, drug stores, alternate care centers, and the pharmacy departments of supermarkets and mass merchandisers located throughout the continental United States. The Company obtains its products from many different suppliers, the largest of which accounted for approximately 7% (by dollar volume) of its net sales in fiscal 1994. The Company's five largest suppliers accounted for approximately 29% (by dollar volume) of its net sales during fiscal 1994. The loss of certain pharmaceutical or medical/surgical product suppliers could adversely affect the Company's business because many suppliers are the sole source of certain pharmaceuticals and medical/surgical products under exclusive patents or processes. The Company has agreements with many of its suppliers which generally require the Company to maintain an adequate quantity of the supplier's products in inventory. These agreements typically have a term of one year and may be canceled by either the Company or the supplier, without cause, upon specified prior notice. Management believes that the Company's relationships with its suppliers are excellent.
SUPPORT SERVICES - - ----------------
As a full-service wholesale distributor, the Company complements its distribution activities by offering a broad range of value-added support services to assist customers and suppliers in maintaining and improving their market positions and to strengthen the Company's role in the channel of distribution. These support services include computerized order entry and order confirmation systems, customized invoicing, generic sourcing programs, product movement and management reports, consultation on store operation and merchandising, and customer training.
Most customers transmit merchandise orders directly to the Company's data processing system through computerized order entry devices. The Company's proprietary software systems feature customized databases specially designed to help its customers order more efficiently, contain costs, and monitor their purchases which are covered by group contract purchasing arrangements. Upon receipt of the customer's order at a distribution center, the Company's warehouse management system processes the order and provides customized price information to facilitate the customer's pricing of items. Customer orders are routinely processed for next-day delivery, enabling the Company's customers to minimize the size and carrying cost of their own inventories. In addition, the Company's AccuNet(R), Otis(R), and Network(TM) proprietary software systems facilitate primary supply relationships between the Company and its customers and enable the Company's customers to reduce their costs. These systems provide a variety of information which assist the customer to identify the best price available under group purchasing contracts with pharmaceutical manufacturers, maintain formulary compliance, and better manage their own inventories. Over 2,800 of these systems have been placed with hospital, managed care, and chain drug customers located throughout the United States.
SPECIALTY WHOLESALING - - ---------------------
In addition to the comprehensive support services provided in connection with its core drug wholesaling activities, the Company also offers diversified "specialty wholesaling" enhancements to its customers and suppliers. For example, the Company's PharmPak subsidiary operates a pharmaceutical repackaging program for both independent and chain customers. In January 1992, the Company formed National Specialty Services, Inc. ("NSS"). NSS is a distributor of therapeutic plasma products and other specialty pharmaceuticals to hospitals and other managed care facilities on a nationwide basis through the utilization of telemarketing and direct mail programs. In December 1993, the Company expanded its specialty wholesaling business through the acquisition of PRN Services, Inc., a distributor of pharmaceuticals and medical supplies to oncologists and oncology clinics across the United States. These specialty wholesaling activities are part of the Company's overall strategy, which combines competitive pricing with diversified offerings in order to enhance the profitability of its core business and that of its customers and suppliers
CUSTOMERS - - ---------
The Company regularly supplies pharmaceuticals, surgical and hospital supplies, health and beauty care products, and other items to hospitals, independent and chain drug stores, alternate care centers, and pharmacy departments of supermarkets and mass merchandisers located throughout the continental United States. In fiscal 1994, approximately 50% of the Company's net sales were to hospitals and managed care facilities, approximately 23% of the Company's net sales were to chain drug stores and the pharmacy departments of supermarkets and mass merchandisers, approximately 21% of the Company's net sales were to independently owned drug stores, and approximately 6% of the Company's net sales were to specialty wholesaling customers.
COMPETITION - - -----------
The Company's markets and those of its customers are highly competitive. The Company competes directly with other national and regional wholesalers, direct selling manufacturers, mail-order houses, and specialty distributors on the basis of price, breadth of product lines, marketing programs, and support services. The Company's businesses have narrow profit margins and accordingly, the Company's earnings depend significantly on its ability to distribute a large volume and variety of products efficiently and to provide quality support services.
RECENT ACQUISITIONS - - -------------------
Since March 31, 1993, the Company has completed five business combinations. On May 4, 1993, the Company purchased Solomons Company, a Savannah, Georgia based drug wholesaler serving customers located primarily in the southeastern region of the United States. On December 17, 1993, the Company merged with PRN (see "Specialty Wholesaling" above). On February 7, 1994, the Company completed its largest business combination to date when it merged with Whitmire Distribution Corporation, a Folsom, California based drug wholesaler (the "Whitmire Merger"). The majority of Whitmire's sales were concentrated in the western and central United States, complementing Cardinal's former concentration of sales in the eastern United States and positioning the combined company to service both customers and suppliers on a national basis. Whitmire's customer base was weighted toward hospital, managed care, and large retail chain customers, complementing Cardinal's rapidly expanding presence in these customer categories and Cardinal's well-developed programs and services for independent retail pharmacies.
The Company has completed two additional business combinations since the Whitmire Merger. On July 1, 1994, the Company purchased Humiston-Keeling, Inc., a Calumet City, Illinois based drug wholesaler serving customers located primarily in the upper midwest region of the Unites States. On July 18, 1994, the Company completed its merger with Behrens Inc., a Waco, Texas based drug wholesaler serving customers located primarily in Texas and adjoining states.
The Company continually evaluates possible candidates for acquisition and intends to continue to seek opportunities to expand its healthcare distribution operations and services. For additional information concerning the acquisitions described above see Notes 3 and 16 of "Notes to Consolidated Financial Statements."
EMPLOYEES - - ---------
At August 1, 1994, the Company had approximately 3,500 employees, of which approximately 300 are subject to collective bargaining agreements. The Company considers its employee relations to be good.
REGULATORY MATTERS - - ------------------
The Company, as a distributor of prescription drugs, including certain controlled substances, is required to register for permits and/or licenses with appropriate federal and state agencies and comply with certain operating and security standards. In addition, the Company is subject to the Prescription Drug Marketing Act of 1987, an amendment to the Food, Drug and Cosmetic Act which requires each state to regulate certain aspects of the purchase and distribution of prescription drugs. The Company believes that it is in substantial compliance with all federal and state statutes and regulations applicable to its activities.
INDUSTRY CONSIDERATIONS - - -----------------------
An aging population, new product introductions, and a higher concentration of distribution through wholesalers are all factors which have created favorable growth patterns for the drug wholesaling industry. At the same time, it is also a very competitive industry undergoing rapid change and consolidation. A number of factors have in the recent past affected and are expected to continue to affect the business equation for the Company, including: (a) a greater mix of higher volume customers, where the lower cost of distribution and better asset management and cash flow enable the Company to offer lower pricing to the customer; (b) reduced inventory gains associated with lower drug price inflation, which are partially offset by corresponding decreases in last-in, first-out (LIFO) earnings charges and inventory carrying costs; (c) increased merchandising funding from manufacturers, particularly related to the growth in generic pharmaceuticals; (d) improved selling, general and administrative cost absorption due to significant productivity investments and the operating leverage associated with sales growth and acquisitions; and (e) increased sales and earnings from specialty distribution services.
In response to cost containment pressure from private and governmental payers and the current focus on healthcare reform in the United States, customers are consolidating into super-regional and national affiliations while manufacturers are under increased pressure to slow the rate of drug price inflation and to seek more cost-effective methods of marketing and distributing their products. In this regard, drug wholesalers, including the Company, will be challenged to service customers over a wider geographic base, offer manufacturers innovative marketing and distribution services, and provide both manufacturers and customers with the common system and reporting links necessary to streamline the efficient flow of product and information among distribution partners. Another consideration associated with healthcare reform is the wide variety of legislation which has been proposed at both the federal and state level. The Company is unable to predict which, if any, of the current legislative proposals may be adopted or what impact, if any, such legislation would have upon the Company's business.
ITEM 2:
ITEM 2: PROPERTIES - - -------------------
Because of the nature of the Company's business, office and warehousing facilities are operated in widely dispersed locations across the United States. At August 19, 1994, the Company distributed products from forty principal operating facilities located in twenty-six states, eight of which are owned by the Company and the balance of which are leased. The Company's principal executive offices consist of leased office space located at 655 Metro Place South, Dublin, Ohio. The Company considers its operating properties to be in satisfactory condition and adequate to meet its present needs. However, the Company expects to make further additions, improvements, and consolidations to its properties as the Company's business continues to expand.
For certain financial information regarding the Company's office and warehousing facilities, see Notes 5 and 9 of "Notes to Consolidated Financial Statements."
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS - - --------------------------
In November 1993, Cardinal and Whitmire were each 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 ("amended complaint") was filed which included allegations that the wholesaler defendants, including Cardinal and Whitmire, conspired with manufacturers to inflate prices by using a chargeback pricing system. Cardinal and Whitmire have filed an answer denying the allegations in the amended complaint. Subsequent to the filing of the answer, the wholesaler defendants filed a motion for summary judgment. The Court has not yet ruled on the motion for summary judgment. In addition to the federal court case described above, Whitmire has been named as a defendant in a series of state court cases alleging similar claims under various state laws regarding the sale of Brand Name Prescription Drugs. The Company believes that both the federal and state court allegations against Cardinal and Whitmire are without merit, and it intends to contest such allegations vigorously.
The Company also becomes involved from time-to-time in ordinary routine litigation incidental to its business, none of which is expected to have any material adverse effect on the Company's financial condition.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - ------------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT - - ------------------------------------
There is hereby incorporated by reference information with respect to the executive officers of the Registrant set forth in Item 10 of this Annual Report on Form 10-K.
PART II
ITEM 5:
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER - - -------------------------------------------------------------------------- MATTERS - - -------
The Company's common shares, without par value (the "Class A Common Shares") are quoted on the Nasdaq National Market under the symbol "CDIC." Application has been made, however, to list the Class A Common Shares on the New York Stock Exchange under the symbol "CAH" and such listing is expected to occur in September 1994.
The following table reflects, for the periods indicated, the range of the reported high and low last sale prices of the Class A Common Shares as reported on the Nasdaq National Market, and the per share dividends declared thereon. The information in the table has been adjusted to reflect all stock splits and stock dividends and also to reflect the Company's decision, as of March 1, 1994, to change its fiscal year end from March 31 to June 30.
At August 19, 1994, there were approximately 1,150 shareholders of record of the Company's Class A Common Shares.
In connection with the Whitmire Merger in February 1994, the Company issued Class B common shares, without par value (the "Class B Common Shares"), to a former Whitmire stockholder. Holders of Class B Common Shares are entitled to one-fifth of one vote per share in the election of Directors and upon all matters on which shareholders are entitled to vote. At August 19, 1994, all 2,971,375 Class B Common Shares issued and outstanding were held by one holder. There is no established public trading market for the Class B Common Shares.
All holders of Class A Common Shares and Class B Common Shares (collectively, "Common Shares") participate equally in dividends when and as declared by the Company's Board of Directors. The Company paid a 25% stock dividend on June 30, 1994, to effect a five-for-four stock split of the Company's Common Shares. The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Company's Board of Directors and will depend upon the Company's future earnings, financial condition, capital requirements, and other factors.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA - - --------------------------------
The following selected consolidated financial data of the Company has been prepared giving retroactive effect to the business combination with Whitmire Distribution Corporation ("Whitmire") on February 7, 1994 (the "Whitmire Merger" ), which has been accounted for as a pooling-of-interests transaction. The term "Cardinal," as used herein, refers to Cardinal Health, Inc. and its subsidiaries prior to the Whitmire Merger. Cardinal's fiscal year has historically ended on March 31, while Whitmire's fiscal year has ended on the Saturday closest to the end of June. On March 1, 1994, the Company changed its fiscal year end from March 31 to June 30. As a result, for the fiscal year ended March 31, 1993, and prior years, the information presented is derived from consolidated financial statements which combine data from Cardinal for the fiscal years ended March 31, 1993, March 31, 1992, March 31, 1991, and March 31, 1990, with data from Whitmire for fiscal years ended July 3, 1993, June 27, 1992, June 29, 1991, and June 30, 1990, respectively. For the fiscal year ended June 30, 1994, and the twelve months ended June 30, 1993, the information presented is derived from consolidated financial statements which combine data from Cardinal for the fiscal year ended June 30, 1994, and the twelve months ended June 30, 1993, with data from Whitmire for the fiscal years ended June 30, 1994, and July 3, 1993. Due to the different fiscal year ends of the merged companies, Whitmire's results of operations for the three months ended July 3, 1993, have been included in both the twelve months ended June 30, 1993, and the fiscal year ended March 31, 1993. The selected consolidated financial data below should be read in conjunction with the Company's consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Net earnings and cash dividends per Common Share have been adjusted to reflect all stock dividends and stock splits.
Amounts reflect business combinations in fiscal 1994, the twelve months ended June 30, 1993, fiscal 1992 and 1991.
Fiscal 1994, the twelve months ended June 30, 1993, and fiscal 1993 and 1992 amounts reflect the impact of Unusual Items (See Note 2 of "Notes to Consolidated Financial Statements").
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - - ------------------------------------------------------------------------------- OF OPERATIONS - - -------------
Management's discussion and analysis presented below has been prepared giving retroactive effect to the pooling-of-interests business combination with Whitmire on February 7, 1994 (see Note 3 of "Notes to Consolidated Financial Statements"). The term "Cardinal," as used herein, refers to Cardinal Health, Inc. and its subsidiaries prior to the Whitmire Merger. Cardinal's fiscal year has historically ended on March 31, while Whitmire's fiscal year has ended on the Saturday closest to the end of June. On March 1, 1994, the Company changed its fiscal year end from March 31 to June 30. Accordingly, the Company's consolidated financial statements for the fiscal year ended June 30, 1994, and for the twelve months ended June 30, 1993, combine the information for Cardinal and Whitmire as of June 30, 1994, and for each of the two years then ended. The Company's consolidated financial statements for earlier fiscal years combine information for Cardinal's March year end with Whitmire's subsequent fiscal June year end. The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and related notes appearing in this report.
NET SALES. Net sales in fiscal 1994 increased 25% compared to fiscal 1993 due to internal business growth of 20%, the merger with PRN Services, Inc. in December 1993, and the acquisition of Solomons Company in May 1993 (see Note 3 of "Notes to Consolidated Financial Statements"). The 26% increase in net sales in fiscal 1993 compared to fiscal 1992 was due to internal business growth of 22%, sales resulting from the acquisition of Chapman Drug Company in October 1991 (see Note 3 of "Notes to Consolidated Financial Statements"), and the full consolidation of the Company's repackaging operation. The internal business growth in both fiscal 1994 and fiscal 1993 resulted primarily from the addition of new customers (partially as a result of expanded sales territories), increased sales to existing customers, and price increases.
GROSS MARGIN. As a percentage of net sales, gross margin declined to 6.13% in fiscal 1994 from 6.42% in fiscal 1993 and 6.98% in fiscal 1992. The decreases in the gross margin percentages were due to (a) lower selling margin rates, reflecting a more competitive market and a greater mix of higher volume customers, where a lower cost of distribution and better asset management and cash flow enabled the Company to offer lower selling margins, and (b) reduced purchasing gains associated with lower drug price inflation. The reduced purchasing gains were partially offset by a lower LIFO charge. The Company expects the decline in gross margin rates to continue, but at a more moderate rate.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and administrative expenses as a percentage of net sales have improved consistently from 5.01% in fiscal 1992 to 4.40% in fiscal 1993 and 4.03% in fiscal 1994. The improvements are due primarily to economies associated with the Company's significant sales growth, particularly with major customers where support costs are generally lower, and to productivity improvements.
UNUSUAL ITEMS. In February 1994, the Company recorded a nonrecurring charge to reflect estimated Whitmire Merger costs of approximately $35.9 million ($28.2 million net of tax), including (a) fees and other transaction costs related to the combination, and (b) other nonrecurring costs expected to be incurred in connection with the integration of Cardinal's and Whitmire's business operations. These estimated costs include approximately $7 million for investment banking, legal, accounting, and other related transaction fees and costs associated with the combination; $13 million for corporate restructuring and distribution rationalization; $6 million for integration of information systems; and $2 million for restructuring Whitmire's revolving credit agreement. Of these estimated costs, approximately $7 million pertain to the revaluation of certain operating assets and $2 million pertain to employee relocation, retraining and termination costs. Certain of these amounts are based on a preliminary estimate of costs to be incurred by the Company, and actual costs may differ from such estimate. At June 30, 1994, the Company had incurred actual costs aggregating approximately $11.7 million relative to the Whitmire Merger. The current estimates of merger costs ultimately to be incurred are not materially different than the amounts originally recorded.
During fiscal 1993, the Company received a termination fee of approximately $13.5 million resulting from the termination by Durr-Fillauer Medical, Inc. of its agreement to merge with the Company. Also during fiscal 1993, the Company recorded nonrecurring charges totaling approximately $13.7 million, primarily related to the closing of certain non-core operations and the rationalization, standardization and improvement of selected distribution operations, information systems and support functions. The charges included the write-down of certain assets, moving costs and other costs associated with the affected operations, and modification costs necessary to centralize and standardize certain information systems and support functions. At June 30, 1994, the Company had incurred actual costs aggregating approximately $9.1 million related to these charges and expects most of the remaining amounts to be incurred in fiscal 1995. The modification of the terms of certain Whitmire stock options in fiscal 1993 also resulted in a one-time stock option compensation charge of approximately $5.2 million (see Note 11 of "Notes to Consolidated Financial Statements").
In fiscal 1992, the completion by Whitmire of certain equity transactions resulted in the recording of an unusual expense of approximately $2.0 million (see Note 11 of "Notes to Consolidated Financial Statements").
INTEREST EXPENSE. The decrease in interest expense in fiscal 1994 compared to fiscal 1993 is due primarily to the following: (a) the conversion of debt to equity following the call for redemption, effective July 2, 1993, of the Company's $75 million face amount of 7.25% Convertible Debentures due 2015 (the "Subordinated Debentures") (see Note 5 of "Notes to Consolidated Financial Statements"), and (b) reduced borrowings under Whitmire's revolving credit agreements. The reductions in interest expense as discussed above were partially offset by (a) increased interest expense resulting from the sale by the Company of $100 million of 6.5% Notes due 2004 (the "New Notes") on February 23, 1994 (see Note 5 of "Notes to Consolidated Financial Statements"), and (b) increased average short-term borrowings (see Note 4 of "Notes to Consolidated Financial Statements"). The increased average short-term borrowings were a result of (a) increased working capital requirements, (b) the repayment of amounts outstanding under Whitmire's revolving credit agreements at the time of the Whitmire Merger (see Note 5 of "Notes to Consolidated Financial Statements"), and (c) the redemption of Whitmire's preferred stock (see Note 10 of "Notes to Consolidated Financial Statements").
Additional interest expense recognized in fiscal 1993 compared to fiscal 1992 relating to the issuance of the Company's $100 million 8% Notes due 1997 (the "Notes") on March 11, 1992, was primarily offset by (a) the use of the proceeds of the Notes to reduce short-term borrowings, and (b) lower average interest rates on amounts borrowed under Whitmire's revolving credit agreements. Fiscal 1992 interest expense also includes a charge of approximately $1.8 million associated with the replacement of a Whitmire credit agreement (see Note 5 of "Notes to Consolidated Financial Statements").
The Company has entered into various interest rate swap agreements which serve to hedge the Notes (see Note 5 of "Notes to Consolidated Financial Statements"). The net effect of the swap agreements is that the Company exchanged its 8% fixed rate position on the Notes for a fixed rate of 5.1% for the period July 15, 1992, through March 1, 1993, a fixed rate of 6.5% for the period March 2, 1993, through March 1, 1994, and, thereafter, a fixed rate of 8.1% through March 1, 1997 (the maturity date of the Notes). In May 1993, two of the offsetting swap agreements were canceled at no gain or loss to the Company.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes relative to pretax earnings increased significantly in fiscal 1994 compared to fiscal 1993 due primarily to (a) certain nondeductible costs associated with the Whitmire Merger recorded in the third quarter of fiscal 1994 (see Note 2 of "Notes to Consolidated Financial Statements"), (b) the reduction of income from tax-advantaged investments, and (c) the 1993 Omnibus Budget Reconciliation Act's 1% tax rate increase enacted on August 11, 1993, retroactive to January 1, 1993.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Effective at the beginning of fiscal 1993, Cardinal adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109). The cumulative effect of adopting SFAS No. 109 ($10 million) by Cardinal has been reported as a change in accounting principle retroactive to the beginning of fiscal 1993. The $10 million cumulative effect recorded by Cardinal resulted primarily from the fact that SFAS No. 109 modifies the accounting for business combinations recorded using the purchase method. The cumulative effect of adopting SFAS No. 109 by Whitmire was not material and has been included in the fiscal 1992 provision for income taxes, and not presented separately in the consolidated statement of earnings.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased to $471.1 million at June 30, 1994, from $440.7 million at March 31, 1993, and included increased investments in merchandise inventories and trade receivables of $233.1 million and $92.5 million respectively, offset primarily by (a) an increase in accounts payable of $219.7 million, (b) a reduction in cash and equivalents and marketable securities of $49.1 million, and (c) an increase in notes payable-banks of $25.0 million. The increases in merchandise inventories and accounts payable primarily reflect the timing of seasonal purchases and related payments. The increase in trade receivables was due primarily to increased sales (see "Net Sales", above). The decrease in cash and marketable securities and the increase in notes payable-banks resulted primarily from (a) the increased investments in merchandise inventories and trade receivables (net of the increase in accounts payable) as described above, (b) the repayment of amounts outstanding under Whitmire's revolving credit arrangements at the time of the Whitmire Merger (approximately $120 million, including a prepayment penalty of approximately $1.2 million), and (c) the redemption of Whitmire's preferred stock (approximately $20.4 million).
Long-term obligations decreased from $275.8 million at March 31, 1993, to $210.1 million at June 30, 1994, due primarily to (a) the issuance by the Company of additional Class A Common Shares upon the conversion of $74.9 million of the Subordinated Debentures, and (b) the repayment of amounts outstanding under Whitmire's revolving credit arrangements, offset primarily by the sale of the $100 million New Notes described above.
Shareholders' equity increased to $368.5 million at June 30, 1994 from $247.9 million at March 31, 1993 due primarily to (a) the issuance of additional Class A Common Shares upon conversion of $74.9 million of the Subordinated Debentures, offset by approximately $1.8 million of unamortized debenture offering costs charged to shareholders' equity, (b) net earnings of the Company of approximately $35.1 million in fiscal 1994 and net earnings of approximately $7.8 million by Cardinal (exclusive of Whitmire) in the three months ended June 30, 1993 (see Note 1 of "Notes to Consolidated Financial Statements"), and (c) the issuance of approximately 1,062,000 Class A Common Shares to acquire all of the outstanding stock of Solomons Company (see Note 3 of "Notes to Consolidated Financial Statements"), offset primarily by (i) the repurchase of approximately 725,000 Class A Common Shares owned by subsidiaries of North American National Corporation (see Note 15 of "Notes to Consolidated Financial Statements"), and (ii) dividends paid by the Company of approximately $3.9 million in fiscal 1994.
The Company has line-of-credit agreements with various bank sources aggregating $321 million, of which $100 million is represented by committed line-of-credit agreements and the balance is uncommitted. The Company had drawn upon $25 million of the available lines-of-credit at June 30, 1994, leaving $296 million available under the Company's existing line-of-credit agreements.
On May 6, 1993, the Company filed with the Securities and Exchange Commission a Registration Statement for the public offering, from time-to-time, of its debt securities (the "Debt Securities") issuable in one or more series in an aggregate principal amount not to exceed $150 million. On February 23, 1994, the Company sold $100 million of the New Notes (see Note 5 of "Notes to Consolidated Financial Statements"), the net proceeds of which were used for general corporate purposes, including the repayment of the bank lines of credit incurred as part of the Whitmire Merger. At June 30, 1994, $50 million of the Debt Securities remain issuable.
On August 17, 1994, the Company filed with the Securities and Exchange Commission a registration statement for an underwritten public offering of 5,250,000 Class A Common Shares. Of the 5,250,000 shares, 1,600,000 are being sold by the Company and 3,650,000 are being sold by certain shareholders of the Company. The underwriters have been granted an option to purchase up to 787,500 additional Class A Common Shares to cover overallotments, if any, including up to 266,949 such shares from the Company.
The Company believes that it has adequate capital resources at its disposal (exclusive of the anticipated proceeds from the proposed public offering of Class A Common Shares described above) to meet currently anticipated capital expenditures, routine business growth and expansion, and current and projected debt service, including the additional liquidity and capital requirements associated with recent and prospective business combinations (see Notes 3 and 16 of "Notes to Consolidated Financial Statements").
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - - -----------------------------------------------------
Independent Auditors' Reports
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Year Ended June 30, 1994, Twelve Months Ended June 30, 1993, and Fiscal Years Ended March 31, 1993, and March 31, 1992 Consolidated Balance Sheets at June 30, 1994, and March 31, 1993 Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended June 30, 1994, March 31, 1993, and March 31, 1992 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1994, March 31, 1993, and March 31, 1992 Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Cardinal Health, Inc.:
We have audited the accompanying consolidated balance sheets of Cardinal Health, Inc. and subsidiaries as of June 30, 1994 and March 31, 1993, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the years ended June 30, 1994, March 31, 1993 and March 31, 1992. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. The consolidated financial statements and financial statement schedule give retroactive effect to the pooling-of-interests business combination of Cardinal Health, Inc. and Whitmire Distribution Corporation on February 7, 1994, as described in Note 1 to the consolidated financial statements. We did not audit the balance sheet of Whitmire Distribution Corporation as of July 3, 1993, or the related statements of earnings, shareholders' equity and cash flows of Whitmire Distribution Corporation for the years ended July 3, 1993 and June 27, 1992, which statements reflect total assets of $451,855,000 as of July 3, 1993; net sales of $2,666,829,000 and $2,033,067,000 for the years ended July 3, 1993 and June 27, 1992, respectively; and net earnings available for common shares before cumulative effect of change in accounting principle of $4,039,000 and $330,000 for the years ended July 3, 1993 and June 27, 1992, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Whitmire Distribution Corporation in the March 31, 1993 and 1992 financial statements, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cardinal Health, Inc. and subsidiaries at June 30, 1994 and March 31, 1993, and the results of their operations and their cash flows for the years ended June 30, 1994, March 31, 1993, and March 31, 1992 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 7 to the consolidated financial statements, the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109 by applying it retroactively effective April 1, 1992.
DELOITTE & TOUCHE LLP
Columbus, Ohio August 16, 1994
Report of Independent Public Accountants
To the Board of Directors of Whitmire Distribution Corporation:
We have audited the balance sheet of Whitmire Distribution Corporation (a Delaware corporation), as of July 3, 1993, and the related statements of operations, stockholders' equity and cash flows for each of the two years in the period ended July 3, 1993 (not presented herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Whitmire Distribution Corporation as of July 3, 1993, and the results of its operations and its cash flows for each of the two years in the period ended July 3, 1993, in conformity with generally accepted accounting principles.
Arthur Andersen & Co.
Sacramento, California September 3, 1993 (Except with respect to the matter discussed in Note 10, as to which date is October 11, 1993.)
CARDINAL HEALTH INC. AND SUBSIDIARIES - - -------------------------------------
The accompanying notes are an integral part of these statements.
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - ------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a full service wholesaler distributing a broad line of pharmaceuticals, surgical and hospital supplies, health and beauty care products, and other items typically sold by hospitals, retail drug stores, and other health care providers. The Company is currently operating in only one business segment.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of all majority-owned subsidiaries and all significant intercompany amounts have been eliminated. The consolidated financial statements have been prepared to give retroactive effect to the pooling-of-interests business combination with Whitmire Distribution Corporation (the "Whitmire Merger") on February 7, 1994 (see Note 3). The term "Cardinal," as used herein, refers to Cardinal Health, Inc. and its subsidiaries prior to the Whitmire Merger. Cardinal's fiscal year has historically ended on March 31, while Whitmire's fiscal year has ended on the Saturday closest to the end of June. On March 1, 1994, the Company changed its fiscal year end from March 31 to June 30. Accordingly, the accompanying consolidated financial statements for the fiscal year ended June 30, 1994, and for the twelve months ended June 30, 1993, combine the information for Cardinal and Whitmire as of June 30, 1994, and for each of the two years then ended. The accompanying consolidated financial statements for earlier fiscal years combine information for Cardinal's March year end with Whitmire's subsequent fiscal June year end. The consolidated statement of earnings for the twelve months ended June 30, 1993, is unaudited and is presented for the purpose of supplemental analysis.
Due to the different fiscal period ends of the merged companies, the results of Whitmire for the three months ended July 3, 1993, have been included in the consolidated statements of earnings for both the periods ended June 30, 1993, and March 31, 1993. Cardinal's results of operations (exclusive of Whitmire) for the three months ended June 30, 1993, are not included in the consolidated statement of earnings but have been included as an adjustment in the consolidated statement of shareholders' equity. Such amounts, along with certain cash flow information, are summarized as follows (in thousands):
CASH EQUIVALENTS
The company considers all liquid investments purchased with a maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities are recorded at cost, which approximates market value.
TRADE RECEIVABLES
Trade receivables are presented net of the related allowance for doubtful accounts of approximately $21,594,000 and $13,428,000 at June 30, 1994, and March 31, 1993, respectively.
MERCHANDISE INVENTORIES
Substantially all merchandise inventories are stated at lower of cost, last-in, first-out (LIFO) method, or market. If the Company had used the first-in, first-out (FIFO) method of inventory valuation, which approximates current replacement cost, inventories would have been higher than reported at June 30, 1994, by $61,852,000 and at March 31, 1993, by $55,374,000. The impact of partial inventory liquidations in certain LIFO pools reduced the LIFO provision by approximately $2,500,000 in fiscal 1993.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization for financial reporting purposes are computed using the straight-line method over the estimated useful lives of the assets which range from three to forty years, including capital lease assets which are amortized over the terms of their respective leases. Amortization of capital lease assets is included in depreciation and amortization expense.
OTHER ASSETS
Other assets primarily represent intangible assets related to the excess of cost over net assets of subsidiaries acquired and noncurrent deferred tax assets (see Note 7). Intangible assets are being amortized using the straight-line method over lives which range from ten to forty years. Accumulated amortization was $16,571,000 and $15,369,000 at June 30, 1994, and March 31, 1993, respectively. At each balance sheet date, a determination is made by management to ascertain whether the intangible assets have been impaired based on several criteria, including, but not limited to, sales trends, undiscounted operating cash flows, and other operating factors.
SALES RECOGNITION
The Company records sales when merchandise is delivered to its customers and the Company has no further obligation to provide services related to merchandise delivered. Service fees related to bulk sales of pharmaceuticals are included in net sales. Such amounts are not significant in fiscal 1994, 1993 and 1992.
INCOME TAXES
Effective as of the beginning of fiscal 1993, Cardinal began accounting for income taxes under the liability method by adopting Statement of Financial Accounting Standards SFAS No. 109, "Accounting for Income Taxes" (SFAS No. 109). The cumulative effect of adopting this statement ($10,000,000) has been reported as a change in accounting principle retroactive to the beginning of fiscal 1993. The cumulative effect of adopting SFAS No. 109 by Whitmire was not material and has been included in the fiscal 1992 provision for income taxes, and not separately presented in the accompanying consolidated financial statements. Prior to the adoption of SFAS No. 109, both Cardinal and Whitmire accounted for income taxes in accordance with Accounting Principles Board Opinion No. 11.
CAPITAL STOCK
The Company's authorized capital shares consist of: (a) 60,000,000 common shares, without par value ("Class A Common Shares"), of which at June 30, 1994, 34,862,835 were outstanding; (b) 5,000,000 Class B common shares, without par value ("Class B Common Shares"), of which at June 30, 1994, 2,971,375 were outstanding; and (c) 500,000 non-voting preferred shares without par value ("Preferred Shares"), none of which has been issued. The Class B Common Shares were issued to a former Whitmire stockholder in February 1994 in connection with the Whitmire Merger. All of the outstanding Class B Common Shares are held by one holder.
All holders of Class A Common Shares and Class B Common Shares (collectively, "Common Shares") participate equally in dividends when and as declared by the Company's Board of Directors. Holders of Class A Common Shares are entitled to one vote per share for the election of Directors and upon all matters on which shareholders are entitled to vote. Holders of Class B Common Shares are entitled to one-fifth of one vote per share in the election of Directors and upon all matters which shareholders are entitled to vote.
EARNINGS PER COMMON SHARE
Primary earnings per Common Share are based on the weighted average number of Common Shares outstanding during each period and the dilutive effect of stock options and warrants from the date of grant computed using the treasury stock method.
Fully diluted earnings per Common Share reflect: (a) the dilutive effect of stock options and warrants from the date of grant computed using the treasury stock method; and (b) the full conversion of the 7.25% Convertible Subordinated Debentures due 2015 through their conversion and redemption in July 1993 (see Note 5).
STOCK SPLIT
The Company paid a 25% stock dividend on June 30, 1994, to effect a five-for-four stock split of the Company's Common Shares. All share and per share amounts included in the Consolidated Financial Statements, except the Consolidated Statements of Shareholders' Equity, have been adjusted to reflect this stock split.
2. UNUSUAL ITEMS
In February 1994, the Company recorded a nonrecurring charge to reflect estimated Whitmire Merger costs of approximately $35.9 million ($28.2 million net of tax), including (a) fees and other transaction costs related to the combination, and (b) other nonrecurring costs expected to be incurred in connection with the integration of Cardinal's and Whitmire's business operations. These estimated costs include approximately $7 million for investment banking, legal, accounting, and other related transaction fees and costs associated with the combination; $13 million for corporate restructuring and distribution rationalization; $6 million for integration of information systems; and $2 million for restructuring Whitmire's revolving credit agreement. Of these estimated costs, approximately $7 million pertain to the revaluation of certain operating assets and $2 million pertain to employee relocation, retraining and termination costs. Certain of these amounts are based on a preliminary estimate of costs to be incurred by the Company, and actual costs may differ from such estimate. At June 30, 1994, the Company had incurred actual costs aggregating approximately $11.7 million relating to the Whitmire Merger. The Company's current estimates of merger costs ultimately to be incurred are not materially different than the amounts originally recorded.
During fiscal 1993, the Company received a termination fee of approximately $13.5 million, resulting from the termination by Durr-Fillauer Medical, Inc. of its agreement to merge with the Company. Also during fiscal 1993, the Company recorded nonrecurring charges totaling approximately $13.7 million, primarily related to the closing of certain non-core operations and the rationalization, standardization and improvement of selected distribution operations, information systems and support functions. The charges included the write-down of certain assets, moving costs and other costs associated with the affected operations, and modification costs necessary to centralize and standardize certain information systems and support functions. At June 30, 1994, the Company had incurred actual costs aggregating approximately $9.1 million related to these charges and expects most of the remaining amounts to be incurred in fiscal 1995. The modification of the terms of certain Whitmire stock options in fiscal 1993 also resulted in a one-time stock option compensation charge of approximately $5.2 million (see Note 11).
In fiscal 1992, the completion by Whitmire of certain equity transactions resulted in the recording of an unusual expense of approximately $2.0 million (see Note 11).
The following supplemental information summarizes the results of operations of the Company, adjusted on a pro forma basis to reflect (a) the elimination of the effect of the unusual items discussed above, and (b) the redemption of Whitmire's preferred stock pursuant to the terms of the Reorganization Agreement. Solely for purposes of the summary presented below, such redemption is assumed to have been funded from the liquidation of investments in tax-exempt marketable securities.
3. BUSINESS COMBINATIONS
On January 27, 1994, shareholders of Cardinal and Whitmire approved and adopted the Agreement and Plan of Reorganization dated October 11, 1993 (the "Reorganization Agreement"), pursuant to which Cardinal Merger Corp., a wholly owned subsidiary of Cardinal, was merged with and into Whitmire effective February 7, 1994. In the merger, which was accounted for as a pooling-of-interests business combination, holders of outstanding Whitmire common stock received an aggregate of approximately 6,802,000 Class A Common Shares and approximately 1,861,000 Class B Common Shares in exchange for all of the previously outstanding common stock of Whitmire. In addition, Whitmire's outstanding stock options were converted into options to purchase an aggregate of approximately 1,721,000 additional Class A Common Shares pursuant to the terms of such options and the Reorganization Agreement.
The following presents a reconciliation of amounts of net sales and net earnings available for Common Shares as reported in the accompanying consolidated financial statements with those previously reported by Cardinal as well as such information for the interim period before the combination occurred (in thousands):
On December 17, 1993, the Company issued approximately 296,000 Class A Common Shares in a merger transaction for all of the capital stock of PRN Services, Inc., a distributor of pharmaceuticals and medical supplies to oncologists and oncology clinics. The transaction was accounted for as a pooling-of-interests business combination. The impact of the PRN merger, on both an historical and pro forma basis, is not significant. Accordingly, prior periods have not been restated for the PRN merger.
On May 4, 1993, the Company acquired all of the outstanding capital stock of Solomons Company, a wholesale drug distributor based in Savannah, Georgia, in exchange for approximately 1,062,000 Class A Common Shares. The transaction was accounted for by the purchase method. Had the acquisition occurred at the beginning of fiscal 1993, operating results on a pro forma basis would not have been significantly different.
On October 15, 1991, the Company acquired all of the issued and outstanding shares of Chapman Drug Company, a drug wholesaler based in Knoxville, Tennessee, for cash of $16,800,000 in a transaction accounted for by the purchase method. Had the acquisition occurred at the beginning of fiscal 1992, operating results on a pro forma basis would not have been significantly different.
4. NOTES PAYABLE - BANKS
The Company has entered into various uncommitted line-of-credit arrangements which allow for borrowings up to $221,000,000 at various money market rates. The amount outstanding under such arrangements as of June 30, 1994 was $25,000,000.
In addition to the aforementioned credit arrangements, at June 30, 1994, the Company has revolving credit agreements with eight banks which have a maturity of less than one year, are renewable on a quarterly basis, and allow the Company to borrow up to $100,000,000 (none of which was in use at June 30, 1994) at either the prime rate, eurodollar rates plus .5%, or a mutually agreed upon rate. The Company is required to pay a commitment fee at the annual rate of .125% on the average daily unused amounts of the total credit allowed under the revolving credit agreements.
Total unused lines of credit at June 30, 1994 and March 31, 1993 were $296,000,000 and $176,000,000, respectively.
The following summarizes notes payable - banks activity (in thousands, except interest rate data):
The weighted average interest rates during the periods represent annualized rates computed based on the number of days the borrowings were outstanding. The average amounts borrowed were computed based on the average of the daily amounts outstanding during the respective periods.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
On February 23, 1994, the Company sold $100,000,000 of 6.5% Notes due 2004 (the "New Notes") in a public offering. The New Notes represent unsecured obligations of the Company, are not redeemable prior to maturity and are not subject to a sinking fund. Issuance costs of approximately $860,000 incurred in connection with the offering are being amortized on a straight-line basis over the period the New Notes will be outstanding. The Company used the proceeds of this sale for general corporate purposes, including the repayment of bank lines of credit incurred as part of the Whitmire Merger (see Note 3). In anticipation of the sale of the New Notes, the Company entered into an interest rate hedge agreement, which was terminated at the approximate time of the issuance of the New Notes, resulting in a deferred gain of approximately $1.3 million which will be amortized as a reduction of interest expense over the period the New Notes are outstanding.
On March 11, 1992, the Company sold $100,000,000 of 8% Notes due 1997 (the "Notes") in a public offering. The Notes represent unsecured obligations of the Company, are not redeemable prior to maturity and are not subject to a sinking fund. Issuance costs of approximately $718,000 incurred in connection with the offering, are being amortized on a straight-line basis over the period the Notes will be outstanding.
The Company has entered into various interest rate swap agreements which serve to hedge the Notes. The net effect of the swap agreements is that the Company exchanged its 8% fixed rate position on the Notes for a fixed rate of 5.1% for the period July 15, 1992, through March 1, 1993, a fixed rate of 6.5% for the period March 2, 1993, through March 1, 1994, and, thereafter, a fixed rate of 8.1% through March 1, 1997 (the maturity date of the Notes). In May 1993, two of the offsetting swap agreements were canceled at no gain or loss to the Company. Due to the offsetting nature of the swaps, the market value of those in a net receivable position approximates the market value of those in a net payable position. The risk of accounting loss in the event of nonperformance by counterparties is approximately $4 million as of June 30, 1994; however, based on the credit quality of the counterparties, the Company believes the likelihood of such a credit loss to be remote.
During fiscal 1992, the Company, through Whitmire, entered into a revolving credit agreement under which it could borrow up to $210,000,000. During fiscal 1993, the agreement was amended to provide for seasonal increases in the availability up to $235,000,000. Interest was payable monthly at 1.5% over the prime rate or, at Whitmire's election, 3.25% over the London Interbank Offered Rate (LIBOR). The average interest rate under the revolving credit agreement at the end of fiscal 1993 was 6.9%. This agreement replaced a $175,000,000 credit agreement, and interest expense in fiscal 1992 includes a charge of $1,837,000 associated with this replacement. On February 7, 1994, the revolving credit agreement was terminated.
The Subordinated Debentures outstanding at March 31, 1993, were convertible into the Company's Class A Common Shares at any time on or before July 1, 2015, unless previously redeemed, at a conversion price of $17.51 per share. Issuance costs of approximately $2,000,000 incurred in connection with the offering were being amortized on a straight-line basis over the original period the Subordinated Debentures were to be outstanding. On June 11, 1993, the Company called the Subordinated Debentures for redemption, effective as of July 2, 1993. Following this call, $74,920,000 of Subordinated Debentures outstanding as of March 31, 1993, were converted into Class A Common Shares of the Company. The remaining $80,000 of Subordinated Debentures outstanding as of March 31, 1993, were redeemed for cash. The pro forma primary earnings per share of the Company, as if the above conversion and redemption had occurred as of the beginning of fiscal 1992, would have been $0.80 and $0.74 in fiscal 1993 and 1992, respectively.
The amount credited to shareholders' equity as a result of the conversion of the Subordinated Debentures was reduced by unamortized offering costs of approximately $1,767,000 and costs directly related to the conversion of approximately $13,000.
Certain long-term obligations are collateralized by property and equipment of the Company with an aggregate book value of approximately $13,500,000 at June 30, 1994.
Maturities of long-term obligations for future fiscal years are as follows (in thousands):
6. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each material class of financial instruments for which estimates are practicable:
CASH AND EQUIVALENTS, MARKETABLE SECURITIES, AND OTHER ACCRUED LIABILITIES
The carrying amount at June 30, 1994, and March 31, 1993, approximates the fair value because of the short-term maturities of these items.
LONG-TERM OBLIGATIONS
The Company's long-term obligations are composed of notes, a long-term revolving credit agreement, convertible debentures, and various mortgage revenue bonds, notes and capital leases. The fair value of the Company's long-term obligations is estimated based on the quoted market prices for the same or similar issues and the current interest rates offered for debt of the same remaining maturities.
Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The fair values do not include early redemption premiums, underwriter's fees and commissions, and refunding costs (legal and registration fees).
The estimated value of the Company's long-term obligations was $206,116,000 and $313,704,000, as compared to the carrying amounts of $213,015,000 and $281,225,000 at June 30, 1994, and March 31, 1993, respectively.
The fair value estimates presented herein are based on pertinent information available to management as of the dates indicated. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair values may differ significantly from the amounts presented herein.
7. INCOME TAXES
Effective the beginning of fiscal 1993, Cardinal adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109). Under the provisions of SFAS No. 109, income taxes are recorded under the liability method. SFAS No. 109 results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of existing differences between financial reporting and tax reporting bases of assets and liabilities (temporary differences), and operating loss and tax credit carryforwards for tax purposes. The cumulative effect of adopting SFAS No. 109 ($10,000,000) by Cardinal has been reported as a change in accounting principle retroactive to the beginning of fiscal 1993. The cumulative effect of adopting SFAS No. 109 by Whitmire was not material and has been included in the fiscal 1992 provision for income taxes, and not separately presented in the accompanying consolidated statements of earnings.
The provision for income taxes consists of the following (in thousands):
8. EMPLOYEE RETIREMENT BENEFIT PLANS
Substantially all of the Company's non-union employees are enrolled in Company-sponsored contributory profit sharing and retirement savings plans which include features under Section 401(k) of the Internal Revenue Code, and provide for matching Company contributions. The Company's contributions to the plans are determined by the Board of Directors subject to certain minimum requirements as specified in the plans.
Qualified union employees are covered by Company-sponsored and multiemployer defined benefit pension plans under the provisions of collective bargaining agreements. Benefits under these plans are generally based on the employee's years of service and average compensation at retirement.
The effect of the Company-sponsored defined benefit plans on the Company's consolidated financial statements is not material.
Employee retirement benefit plans expense was as follows (in thousands):
The Financial Accounting Standards Board has issued Statement No. 112, "Employer's Accounting for Postemployment Benefits" which requires employers to accrue for certain postemployment benefits provided to former or inactive employees, their beneficiaries, and covered dependents after employment, but before retirement. This change must be implemented by the Company in fiscal 1995. Based upon preliminary estimates, management does not believe that the new statement will have a material effect on the consolidated financial statements of the Company.
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases certain warehouse and office facilities, vehicles, and data processing equipment under operating leases. The leases expire at various dates over the next thirteen years. Certain of these leases provide for renewal options and/or contingent rentals based on various factors.
The future minimum rental payments for operating leases having initial or remaining non-cancelable lease terms in excess of one year at June 30, 1994, are as follows (in thousands):
The minimum rental payments above have been reduced by sublease rentals of approximately $582,000 in 1995, $215,000 in 1996, $79,000 in 1997, and $12,000 in 1998. Rental expense (net of sublease rental income) relating to operating leases and short-term cancelable leases was approximately $11,189,000, $10,316,000 and $8,990,000 in fiscal 1994, 1993, and 1992, respectively.
In connection with its supplier relationship with various customers, the Company has guaranteed certain indebtedness and lease payments. As of June 30, 1994, these guarantees total approximately $2,251,000.
During fiscal 1994, the Company began a program whereby certain customer notes receivables were sold, with full recourse, to a commercial bank. As of June 30, 1994, amounts outstanding on customer notes receivables sold to the commercial bank under this program totaled approximately $6.7 million.
The Company becomes involved from time-to-time in litigation arising out of its normal business activities. In addition, in November 1993, Cardinal, Whitmire, five other pharmaceutical wholesalers, and twenty-four pharmaceutical manufacturers were named as defendants in a series of purported class action antitrust lawsuits alleging violations of various antitrust laws associated with the chargeback pricing system. The Company believes that the allegations set forth against Cardinal and Whitmire in these lawsuits are without merit. In the opinion of management, the Company's liability, if any, under any pending litigation would not have a material adverse effect on the Company's financial condition.
10. REDEEMABLE PREFERRED STOCK
The Company had authorized 360,000 shares of redeemable preferred $.01 par value stock in Whitmire. The redeemable preferred stock was divided into two series: 350,000 shares designated as Senior Preferred Stock and 10,000 shares designated as Series A Preferred Stock.
The holders of the Whitmire redeemable preferred stock were entitled to cumulative annual dividends of $10.00 per share for Senior Preferred Stock and $10.125 for Series A Preferred Stock when and as declared by Whitmire's board of directors. In lieu of paying cash dividends to the holders of Senior Preferred Stock and Series A Preferred Stock, Whitmire could, at its election, pay scheduled dividends with additional shares of Senior Preferred Stock or Series A Preferred Stock, as appropriate.
Whitmire would have been required to redeem, at $100.00 per share plus accrued but unpaid dividends, all shares of its Senior and Series A Preferred Stock commencing in October 1994 through July 1996. Stockholders' equity was charged $840,000 in each of fiscal 1993 and 1992 for accretion relative to this mandatory redemption obligation. As of March 31, 1993, a total of $4,200,000 had been credited to redeemable preferred stock through accretion. Pursuant to the terms of the Reorganization Agreement between Cardinal and Whitmire (see Note 3), all of the outstanding shares of Senior and Series A Preferred Stock were redeemed as of February 7, 1994, the date of the Whitmire Merger.
11. STOCKHOLDERS' EQUITY
During fiscal 1992, the Company, through Whitmire, completed a series of transactions which affected its capitalization as follows: warrants for the purchase of Whitmire common stock were returned and canceled; options were granted for the benefit of key employees to purchase shares of Whitmire common stock; outside investors were granted adjustment share rights representing rights to purchase shares of Whitmire common stock (a defined percentage of the adjustment share rights were cancelable annually, up to 100%, based upon the achievement of certain financial targets); shares of Whitmire's Series A Preferred Stock were issued to certain outside investors as reimbursement of expenses incurred in connection with their ownership interest; and put and call provisions of certain outstanding warrants were canceled. The fiscal 1992 consolidated statement of earnings reflects an expense associated with the above transactions of approximately $2.0 million.
During fiscal 1993, the adjustment share rights were canceled and certain conditions relative to the exercise of options were eliminated. For financial reporting purposes, the modification of the terms of these options has been treated as if the options were issued on the date that the terms were modified. Accordingly, a compensation charge totaling approximately $5.2 million was recorded relative to these changes. The compensation charge is equal to the fair value (as determined by an independent appraisal) of the options on the date that the terms of the options were modified.
Pursuant to the terms of the Reorganization Agreement (see Note 3), warrants to purchase shares of Whitmire common stock which, upon exercise became convertible into approximately 2,831,000 Common Shares at an average price of $.08 per share, were exercised prior to the consummation of the pooling-of-interests business combination of Cardinal and Whitmire.
12. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains stock incentive plans (the "Plans") for the benefit of certain officers, directors and key employees. Under the Plans, at June 30, 1994, the Company was authorized to issue up to an aggregate of approximately 3,875,000 Class A Common Shares in the form of incentive stock options, nonqualified stock options, and restricted shares. Options granted are generally exercisable for periods up to ten years from the date of grant at a price approximating fair market value at the date of grant.
At June 30, 1994, approximately 389,000 option shares under the Plans were exercisable and approximately 2,919,000 Class A Common Shares were reserved for issuance under the Plans.
In connection with a 1988 acquisition, the Company issued options for approximately 133,000 Class A Common Shares at $7.45 per share. All of these options were exercised in fiscal 1993.
In connection with the Whitmire Merger, outstanding Whitmire stock options granted to current or former Whitmire officers or employees were automatically converted into options ("Cardinal Exchange Options") to purchase an aggregate of approximately 1,721,000 additional Cardinal Class A Common Shares pursuant to the terms of such options and the Reorganization Agreement (see Note 3). Under the terms of their original issuance and as reflected in the Reorganization Agreement, the exercise price for substantially all of the Cardinal Exchange Options is remitted to certain former investors of Whitmire. During fiscal 1994, Cardinal Exchange Options to purchase approximately 271,000 shares were exercised with an average option price of $1.60 per share. At June 30, 1994, Cardinal Exchange Options to purchase approximately 1,450,000 shares were outstanding with an average exercise price of $1.60 per share. Substantially all of the Cardinal Exchange Options outstanding at June 30, 1994, are 100% vested and are exercisable through October 25, 1995.
The market value of restricted shares awarded by the Company is recorded as unamortized restricted stock awards and shown as a separate component of shareholders' equity. The compensation awards are amortized to expense over the period in which participants perform services, generally four to seven years. As of June 30, 1994, approximately 414,000 restricted shares have been issued, of which approximately 195,000 shares remain restricted and subject to forfeiture and approximately 16,000 shares have been forfeited.
13. SUPPLEMENTAL INFORMATION REGARDING NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $906,000, $648,000 and $2,130,000 were incurred in 1994, 1993 and 1992, respectively, as a result of the Company entering into leases for equipment.
In conjunction with the acquisitions of Solomons and Chapman (see Note 3), liabilities were assumed as follows (in thousands):
Total debt assumed by the Company as a result of these acquisitions was $6,275,000 in fiscal 1992 and $4,315,000 in the three months ended June 30, 1993, and is included as part of the amount of liabilities assumed.
In conjunction with the pooling-of-interests combination with PRN (see Note 3) in fiscal 1994, the historical cost of PRN assets combined was approximately $16,946,000, and the total PRN liabilities assumed (including total debt of approximately $5,847,000) were approximately $16,564,000.
The above amounts differ from amounts reported in previously filed quarterly reports due to the pooling-of-interests transaction between Cardinal and Whitmire consummated February 7, 1994. Amounts originally reported by Cardinal before the pooling-of-interests transaction were as follows:
The following supplemental information, presented to show the seasonal trend of earnings, reflects the selected quarterly financial data on the basis of consolidating the same calendar quarters for Cardinal and Whitmire, excludes the impact of unusual items (see Note 2) and assumes the redemption of Whitmire's preferred stock. Solely for purposes of the supplemental information presented below, such redemption is assumed to have been funded from the liquidation of investments in tax-exempt marketable securities.
15. COMMON SHARES REPURCHASE
On April 14, 1993, the Company repurchased all of the Class A Common Shares (approximately 725,000) owned by subsidiaries of North American National Corporation, the former Chairman of which is also a Director of the Company, at a price of $21.20 per share. Nearly all of these shares were subject to certain restrictions contained in a Shareholders Agreement among North American National Corporation and other individual shareholders, which restrictions were released as part of the repurchase transaction.
16. SUBSEQUENT EVENTS
On July 1, 1994, the Company purchased all of the common stock of Humiston-Keeling, Inc. in a transaction to be accounted for by the purchase method. Humiston-Keeling is a Calumet City, Illinois based wholesale drug distributor with annualized revenues of approximately $330 million.
On July 18, 1994, the Company issued Class A Common Shares in exchange for all of the common shares of Behrens Inc. in a transaction to be accounted for as a pooling-of-interests business combination. The impact of the Behrens combination, on both an historical and pro forma basis, is not significant. Accordingly, prior periods will not be restated for the Behrens combination. Behrens is a Waco, Texas based wholesale drug distributor with annualized revenues of approximately $185 million.
On August 17, 1994, the Company filed with the Securities and Exchange Commission a registration statement for an underwritten public offering of 5,250,000 Class A Common Shares. Of the 5,250,000 shares, 1,600,000 are being sold by the Company and 3,650,000 are being sold by certain shareholders of the Company. The underwriters have been granted an option to purchase up to 787,500 additional Class A Common Shares to cover overallotments, including up to 266,949 such shares from the Company. The net proceeds payable to the Company will be used to finance working capital growth and for other general corporate purposes.
Item 9:
Item 9: Disagreements on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10:
Item 10: Directors and Executive Officers of the Registrant.
The Directors and executive officers of the Company are as follows:
Unless indicated to the contrary, the business experience summaries provided below for the Company's Directors and executive officers describe positions held by the named individuals during the last five years but may exclude other positions held with subsidiaries of the Company.
Robert D. Walter has been a Director, Chairman of the Board and Chief Executive Officer of the Company since its formation in 1979 and has served as a director and officer of certain of the Company's subsidiaries since their formation or acquisition by the Company. Mr. Walter also serves as a director of Banc One Corporation and Columbia/HCA Healthcare Corporation.
Melburn G. Whitmire has been a Director of the Company since January 1994 and was elected Vice Chairman of the Company in February 1994. Prior to that, Mr. Whitmire was Chairman of the Board, Chief Executive Officer and President of Whitmire Distribution Corporation, and he has continued to serve in those capacities for Whitmire following its merger transaction with the Company.
John C. Kane has been a Director of the Company since August 1993 and has been the Company's President and Chief Operating Officer since joining the Company in February 1993. Prior to that, Mr. Kane was employed by Abbott Laboratories (a pharmaceutical and health care manufacturer), where he served most recently as President of the Ross Laboratories Division.
David Bearman has been an Executive Vice President of the Company since February 1994 and, prior to that, served as a Region President from May 1991 to February 1994 and as a Senior Vice President from October 1989. Mr. Bearman has also served as the Company's Chief Financial Officer since joining the Company in October 1989 and serves in similar capacities for subsidiaries of the Company. Prior to joining the Company, Mr. Bearman served as the Chief Finance Executive of the Medical Systems Division of General Electric Company.
George H. Bennett, Jr. has been Secretary of the Company since July 1994 and an Executive Vice President of the Company since February 1994. Prior to that, Mr. Bennett was a Senior Vice President and Chief Administrative Officer of the Company from May 1991. Mr. Bennett has also served as General Counsel of the Company since joining the Company in January 1984, and serves in a similar capacity for subsidiaries of the Company.
James E. Clare has been the Company's Executive Vice President - Southern Group since February 1994. Prior to that, Mr. Clare served as the Vice President - Eastern Region of Whitmire Distribution Corporation and has continued to serve as an officer of Whitmire following its merger transaction with the Company.
Gary E. Close has been the Company's Executive Vice President - Western Group since February 1994. Prior to that, Mr. Close served as the Executive Vice President - Operations of Whitmire Distribution Corporation and has continued to serve as an officer of Whitmire following its merger transaction with the Company.
Daniel P. Finkelman has been the Company's Executive Vice President - Marketing since joining the Company in May 1994. Prior to that, Mr. Finkelman was a principal with McKinsey & Company, Inc. (an international management consulting firm).
James F. Millar has been the Company's Executive Vice President - Northern Group since February 1994. Prior to that, Mr. Millar served as a Region President from May 1991, a Senior Vice President of the Company from November 1992, and President of the Company's Cardinal Syracuse, Inc. subsidiary.
Mitchell J. Blutt has been a Director of the Company since January 1994. Dr. Blutt is an Executive Partner of Chemical Venture Partners (an investment partnership which is the general partner of Chemical Equity Associates). Dr. Blutt also serves as a director of Hanger Orthopedic Group, Inc. and Cyberonics, Inc. See Item 12
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - - ------------------------------------------------------------------------ The following table sets forth certain information regarding the beneficial ownership of the Company's Class A Common Shares as of August 19, 1994, by: (a) Company Directors; (b) each other person who is known by the Company to own beneficially more than 5% of the outstanding Class A Common Shares; (c) the Company's Chief Executive Officer and the other four most highly compensated executive officers named in the Summary Compensation Table; and (d) the Company's executive officers and Directors as a group. Except as otherwise described in the notes below, the following beneficial owners have sole voting power and sole investment power with respect to all Class A Common Shares set forth opposite their names.
(3) Class A Common Shares and the percent of class listed as being beneficially owned by the Company's named executive officers include outstanding options to purchase Class A Common Shares which are exercisable within 60 days of August 19, 1994, as follows: Mr. Walter - 38,125 shares; Mr. Kane - -0- shares; Mr. Whitmire - 532,333 shares; Mr. Bearman - 19,239 shares; and Mr. Millar - 10,264 shares.
(4) The address of Apollo Investment Fund, L.P. ("Apollo") is Two Manhattanville Road, Purchase, New York 10577. Apollo's managing general partner is Apollo Advisors, L.P., whose general partner is Apollo Capital Management, Inc. Michael S. Gross, who also serves as a Director of the Company, is a Vice President of Apollo Capital Management, Inc. Each of the foregoing parties may be deemed to be the beneficial owner of the Class A Common Shares owned by Apollo, although each expressly disclaims beneficial ownership of such shares.
(5) The address of Chemical Equity Associates ("CEA") is c/o Apollo Advisors, L.P., 270 Park Avenue (5th Floor), New York, New York 10017. Class A Common Shares and the percent of class listed as being beneficially owned by CEA include 2,971,375 Class A Common Shares issuable upon the conversion of the same number of Class B Common Shares, which conversion is possible only under the circumstances set forth in the Company's Articles. At August 19, 1994, CEA was the beneficial owner of all of the Company's 2,971,375 Class B Common Shares issued and outstanding. Mitchell J. Blutt, M.D., who serves as a Director of the Company and as an Executive Partner of Chemical Venture Partners, the sole general partner of CEA; Chemical Banking Corporation, whose wholly owned subsidiary is a general partner of Chemical Venture Partners; Jeffrey C. Walker, Managing General Partner of Chemical Venture Partners; and Arnold L. Chavkin, David L. Ferguson, Donald J. Hofmann, Brian J. Richmand and Shahan D. Soghikian, partners of Chemical Venture Partners; may also be deemed to be beneficial owners of the Common Shares held by CEA, although they expressly disclaim beneficial ownership of such shares.
(6) Based on information obtained from a 13G filed by FMR Corp. with the Securities and Exchange Commission on or about February 11, 1994. The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts 02109.
(7) Based on information obtained from a 13G filed by Firstar Corporation with the Securities and Exchange Commission on or about February 11, 1994. The address of Firstar Corporation is 777 E. Wisconsin Avenue, Milwaukee, Wisconsin 53202.
(8) Based on information obtained from a 13G filed by Nicholas Company, Inc. with the Securities and Exchange Commission on or about February 8, 1994. The address of Nicholas Company, Inc. is 700 North Water Street, Milwaukee, Wisconsin 53202.
(9) Includes 4,801 Class A Common Shares held by Mr. Whitmire and his wife as custodian for the benefit of their minor daughter.
(10) Mr. Moritz has sole investment power with respect to all but 10,000 Class A Common Shares listed as being beneficially owned by him in the table above, which 10,000 shares are held by a family partnership of which Mr. Moritz and his spouse are general partners and over which he has shared investment and voting power. As a result of the Shareholders Agreement described in Note (1) above, Mr. Moritz has shared voting power with respect to the Pooled Shares owned by him.
(11) Class A Common Shares and the percent of class listed as being beneficially owned by the listed Company Directors (except for Messrs. Kane, Walter and Whitmire) include outstanding options to purchase Class A Common Shares which are exercisable under the Company's Directors' Stock Option Plan as follows: Mr. Moritz - 12,805 shares; Dr. Robertson - 8,056 shares; Messrs. Gross, Blutt, and Finn - 2,865 shares each; and each other listed Director (except for Messrs., Kane, Walter and Whitmire) - 10,120 shares.
(12) Includes 2,827 Class A Common Shares which are held by Mr. McCoy in trust for the benefit of his children, but does not include Class A Common Shares owned by Banc One Corporation and its subsidiaries.
(13) Includes 686 Class A Common Shares held by Mr. Heskett in trust for the benefit of his children.
(14) Includes 625 Class A Common Shares held jointly by Mr. Finn and his wife, 106 Class A Common Shares held in his wife's individual retirement account, and 62 Class A Common Shares held for the benefit of each of Mr. Finn's two minor children.
(15) Does not include Common Shares beneficially owned by Apollo, in the case of Mr. Gross, or by CEA, in the case of Dr. Blutt (see Notes (4) and (5)). As a result of the Company's merger with Whitmire Distribution Corporation in February 1994 (the "Whitmire Merger"), Apollo has the right to designate two nominees for election as Directors of the Company for so long as (A) Apollo, including any of its affiliates and any of its accounts under common management and control (the "Apollo Group"), and (B) any former shareholder of Whitmire (exclusive of Apollo Advisors, L.P. and any such shareholders who were current or former employees of Whitmire as of October 11, 1993, or any family members of such employees or trusts for their benefit ("Management Shareholders")) each continue to have a pecuniary interest in 1,250,000 or more Common Shares issued to such person in the Whitmire Merger (the "Threshold Amount"). Further, Apollo Advisors, L.P. has the right to designate one individual for so long as only one of the Apollo Group or any former shareholder of Whitmire (exclusive of Apollo Advisors, L.P. or Management Shareholders) shall continue to have a pecuniary interest in a number of Common Shares which equals or exceeds the Threshold Amount. In connection with the Whitmire Merger, Apollo designated Messrs. Gross and Blutt as nominees for Directors of the Company and they were elected by the Company's shareholders. In addition, until the Apollo Group no longer has a pecuniary interest in a number of Common Shares equal to or exceeding the Threshold Amount, the Company must include as a member of its Audit Committee one Director designated by the Apollo Group and, if Mr.Whitmire ceases to be a member of the Company's Executive Committee, one Director designated by the Apollo Group on the Company's Executive Committee.
(16) Class A Common Shares and percent of class listed as being beneficially owned by all executive officers and Directors as a group include: (a) all Pooled Shares, including those Pooled Shares owned by the Espings; and (b) outstanding options to purchase Class A Common Shares which are exercisable within 60 days of August 19, 1994, but do not include any Class A Common Shares beneficially owned by Apollo, CEA or Banc One (including the 137,691 Class A Common Shares owned by the Walter Trusts).
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - - ------------------------------------------------------- BUSINESS TRANSACTIONS - - --------------------- A property which includes parts of the Company's former Columbus food distribution center is leased by the Company from a limited partnership in which the general partner is Mr. Walter and the limited partners include certain shareholders and directors of the Company or their affiliates. The Company has subleased this property to third parties at rentals substantially in excess of the rentals it is required to pay. The initial term of the Company's lease expired February 29, 1984, and the lease is currently in its second ten-year renewal term. The Company has options to renew the lease for two additional ten-year terms. The rent payable by the Company is $92,000 per annum during each of the first two renewal terms, and the fair rental value of the premises during each of the last two renewal terms. The Company has a first- refusal option to purchase the premises in the event the lessor proposes to sell the premises to a third party. See also, "Executive Compensation - Compensation Committee Interlocks and Insider Participation."
In the opinion of management, the transactions described above are on terms at least as favorable as could be obtained from unaffiliated third parties.
EMPLOYMENT AGREEMENTS - - --------------------- For a discussion of the employment agreements between the Company and each of Messrs. Whitmire, Close and Clare, see "Executive Compensation - Employment Agreements."
CONVERSION OF OPTIONS
In connection with the Whitmire Merger, options to purchase Whitmire common stock were automatically converted into options to purchase a number of Class A Common Shares equal to the number of shares of Whitmire common stock issuable immediately prior to the Whitmire Merger multiplied by the exchange ratio used for the Whitmire Merger. Accordingly, options to purchase Whitmire common stock held by Messrs. Whitmire, Close and Clare were converted into options to purchase Class A Common Shares of the Company ("Cardinal Exchange Options") at exercise prices ranging from less than $.01 to $2.20 per share as follows: Mr. Whitmire -- 532,333 shares; Mr. Close -- 146,125 shares; Mr. Clare -- 52,187 shares.
REDEMPTION OF WHITMIRE PREFERRED STOCK
Immediately prior to the completion of the Whitmire Merger, and as a condition to such completion, Whitmire redeemed all of its issued and outstanding Senior Preferred Stock and Series A Preferred Stock at the redemption price of $100 per share, plus cumulated and unpaid dividends, resulting in redemption payments to MD and CEA of $13,598,000 and $6,558,000, respectively. As described above, MD was dissolved shortly following the Whitmire Merger. Of the $13,598,000 in redemption payments to MD, $10,200,182 was for the benefit of Apollo and $3,398,248 was for the benefit of CEA.
WHITMIRE REGISTRATION RIGHTS AGREEMENT
In connection with the Whitmire Merger, the Company granted to Apollo, CEA, and Mr. Whitmire (collectively, the "Whitmire Stockholders") certain rights to require the Company to register under the Securities Act of 1933, as amended (the "Securities Act") Class A Common Shares held by them (including Class A Common Shares issuable to CEA upon conversion of Class B Common Shares). These rights include "demand" and "piggyback" registration rights and are contained in the Registration Rights Agreement dated as of October 11, 1993, as amended (the "Registration Rights Agreement"), among the Company, the Whitmire Stockholders, and Robert D. Walter, Chairman of the Company. Under the Registration Rights Agreement, the Whitmire Stockholders are entitled to require the Company to file a registration statement under the Securities Act with the Securities and Exchange Commission covering the sale of their shares (a "Required Registration") up to seven times in the five-year period ending April 25, 1999, unless earlier terminated or extended as provided below. The Whitmire Stockholders may only request up to four Required Registrations during the three-year period ending April 25, 1997. The Company will pay all expenses incurred in connection with up to four Required Registrations, exclusive of the fees and expenses of counsel for selling stockholders. In addition, the selling Whitmire Stockholders will be responsible for any underwriters' discounts and commissions attributable to the sale of their shares.
The Company is not required to effect the first Required Registration under the Registration Rights Agreement unless Whitmire Stockholders (together with certain permitted transferees) making the request hold at least 1,250,000 Common Shares, and the Company is not required to effect subsequent Required Registrations unless such persons hold (i) at least 937,500 Common Shares acquired in the Whitmire Merger, or (ii) Common Shares acquired in the Whitmire Merger with a fair market value of at least $25 million. The Whitmire Stockholders may not make a request for a Required Registration until 180 days have elapsed since the completion of a prior Required Registration. In addition, the Company has the right to delay for up to 90 days the filing of a registration statement with respect to a Required Registration if the Company's Board of Directors determines such action is in the best interests of the Company's shareholders, but the Company may not invoke a delay if at least 12 months have not elapsed from the end of any previous delay period. These delays and certain other events will extend on a day-for-day basis the five-and three-year periods referred to in the preceding and following paragraphs.
The Registration Rights Agreement also provides that the Whitmire Stockholders have the right to include their Class A Common Shares in registration statements filed by the Company in connection with primary or secondary offerings for cash (with certain exceptions). These "piggyback" registration rights also terminate on April 25, 1999, unless earlier terminated or extended.
The demand and piggyback registration rights granted to (i) CEA, its affiliates and successors (the "Chemical Holders"), and (ii) Apollo, its affiliates and successors (the "Apollo Holders"), terminate prior to April 25, 1999, if the Chemical Holders or the Apollo Holders, as the case may be, either (i) shall beneficially own fewer than 312,500 Common Shares or (ii) shall acquire more than an additional 625,000 Common Shares without the Company's consent. The Registration Rights Agreement also limits the grant by the Company of additional registration rights.
All other schedules not listed above have been omitted as not applicable or because the required information is included in the Consolidated Financial Statements or in notes thereto.
(a)(3) Exhibits required by S-K item 601:
Other long-term debt agreements of the Registrant are not filed pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K and the Registrant agrees to furnish copies of such agreements to the Securities and Exchange Commission upon its request.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) 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.
September 2, 1994 By: /s/ Robert D. Walter -------------------------- Robert D. Walter, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
CARDINAL HEALTH, INC. AND SUBSIDIARIES - - --------------------------------------
Schedule VIII - Valuation and Qualifying Accounts For Fiscal Year Ended June 30, 1994, Three Months ended June 30, 1993, Fiscal - - ----------------------------------------------------------------------------- Years March 31, 1993, and March 31, 1992 (In thousands) - - -------------------------------------------------------