1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-12591 CARDINAL HEALTH, INC. (Exact name of Registrant as specified in its charter) <TABLE> <CAPTION> <S> <C> OHIO 31-0958666 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 5555 GLENDON COURT, DUBLIN, OHIO 43016 (Address of principal executive offices) (Zip Code) </TABLE> (614) 717-5000 Registrant's telephone number, including area code Securities Registered Pursuant to Section 12(b) of the Act: COMMON SHARES (WITHOUT PAR VALUE) NEW YORK STOCK EXCHANGE (Title of Class) (Name of each exchange on which registered) Securities Registered Pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the Registrant as of August 20, 1996, was approximately $4,346,376,000. The number of Registrant's Common Shares outstanding as of August 20, 1996, was as follows: Common shares, without par value: 64,396,040 Class B common shares, without par value: 0 --------------- DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1996 are incorporated by reference into Part I of this Annual Report on Form 10-K. Portions of the Registrant's Definitive Proxy Statement to be filed for its 1996 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
2 TABLE OF CONTENTS <TABLE> <CAPTION> ITEM PAGE PART I <S> <C> <C> 1. Business................................................................................ 3 2. Properties.............................................................................. 6 3. Legal Proceedings....................................................................... 6 4. Submission of Matters to a Vote of Security Holders..................................... 6 Executive Officers of the Registrant.................................................... 7 PART II 5. Market for the Registrant's Common Shares and Related Stockholder Matters............... 8 6. Selected Financial Data................................................................. 9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... 10 8. Financial Statements and Supplementary Data............................................. 12 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................................ 33 PART III 10. Directors and Executive Officers of the Registrant...................................... 33 11. Executive Compensation.................................................................. 33 12. Security Ownership of Certain Beneficial Owners and Management.......................... 33 13. Certain Relationships and Related Transactions.......................................... 33 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 34 Signatures.............................................................................. 38 </TABLE> 2
3 PART I ITEM 1: BUSINESS GENERAL Cardinal Health, Inc., an Ohio corporation formed in 1979, is structured as a holding company operating through separate operating subsidiaries. These operating subsidiaries are sometimes collectively referred to as the "Cardinal Health" companies. As used in this report, the "Registrant" and the "Company" refer to Cardinal Health, Inc. and its subsidiaries, unless the context requires otherwise. The Company is a leading health care service provider which offers an array of value-added pharmaceutical distribution services to a broad base of customers. It is one of the country's largest wholesale distributors of pharmaceutical and related health care products to independent and chain drugstores, hospitals, alternate care centers and the pharmacy departments of supermarkets and mass merchandisers located throughout the continental United States. Through its Pyxis Corporation subsidiary ("Pyxis"), the Company develops and manufactures unique point-of-use systems which automate the distribution, management and control of medications and supplies in hospitals and alternate care facilities. The Company is also the largest franchisor of independent retail pharmacies in the United States through its Medicine Shoppe International, Inc. subsidiary ("Medicine Shoppe"). In addition, through its Allied Pharmacy Service division ("Allied"), the Company is one of the country's largest providers of pharmacy management services to hospitals. As a full-service wholesale distributor, the Company complements its distribution activities by offering a broad range of value-added support services to assist the Company's 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. 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. The Company operates several specialty health care businesses which offer value-added services to the Company's customers and suppliers while providing the Company with additional opportunities for growth and profitability. For example, the Company operates a pharmaceutical repackaging program for both independent and chain drugstore customers and serves as a distributor of therapeutic plasma products and other specialty pharmaceuticals to hospitals, clinics and other managed care facilities on a nationwide basis through the utilization of telemarketing and direct mail programs. These specialty distribution activities are part of the Company's overall strategy of developing diversified products and services to enhance the profitability of its business and that of its customers and suppliers. ACQUISITIONS In the last five years, the Company has completed the following business combinations. In October 1991, the Company expanded its markets into the mid-South by acquiring Chapman Drug Company, based in Knoxville, Tennessee, for $16.8 million in cash. In May 1993, the Company purchased Solomons Company, a Savannah, Georgia based pharmaceutical wholesaler servicing customers located primarily in the southeastern region of the United States, in exchange for approximately 1,062,000 Common Shares. In December 1993, a subsidiary of the Company merged with PRN Services, Inc., a distributor of oncology and other specialty products to clinics and physician groups across the United States. In February 1994, the Company merged with Whitmire Distribution Corporation ("Whitmire"), a Folsom, California based pharmaceutical wholesaler (the "Whitmire Merger"). The majority of Whitmire's sales were concentrated in the western and central United States, complementing the Company'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. As a result of the Whitmire Merger, the Company now maintains a network of distribution centers enabling it to routinely serve the entire population of the continental U.S. on a next-day basis. 3
4 The Company has completed several additional business combinations since the Whitmire Merger. On July 1, 1994, the Company purchased Humiston-Keeling, Inc., a Calumet City, Illinois based pharmaceutical wholesaler serving customers located primarily in the upper midwest region of the United States. On July 18, 1994, the Company merged with Behrens Inc., a Waco, Texas based pharmaceutical wholesaler servicing customers located primarily in Texas and adjoining states. On November 13, 1995, the Company merged with Medicine Shoppe, a St. Louis, Missouri based franchisor of independent, apothecary-style retail pharmacies in the United States and abroad. On May 7, 1996, the Company merged with Pyxis, a San Diego, California based designer, manufacturer, marketer and servicer of unique point-of-use systems which automate the distribution, management and control of medications and supplies in hospitals and other health care facilities. Pyxis had previously acquired Allied in August 1995, as well as the Access automated medication management system which Pyxis acquired from Lionville Systems, Inc. in January 1996. On July 24, 1996, the Company announced that it had entered into a definitive merger agreement with PCI Services, Inc. ("PCI"), a provider of diversified packaging services to the pharmaceutical industry in the United States and Europe. Under the terms of the transaction, PCI will become a wholly owned subsidiary of the Company in a stock-for-stock merger. Subject to adjustment upon certain events described in the merger agreement, the shareholders of PCI will receive 0.336 Common Shares of the Company in exchange for each common share of PCI. The Company will issue approximately 2.1 million Common Shares in the acquisition of PCI. The transaction is expected to be accounted for as a pooling-of-interests for financial reporting purposes and is subject to certain conditions, including approval by PCI stockholders. The Company continually evaluates possible candidates for acquisition and intends to continue to seek opportunities to expand its health care operations and services. For additional information concerning the acquisitions described above, see Notes 2 and 17 of "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." CUSTOMERS AND SUPPLIERS The Company regularly distributes pharmaceuticals, surgical and hospital supplies, health and beauty care products, and related products and services to hospitals, independent and chain drugstores, alternate care centers, and pharmacy departments of supermarkets and mass merchandisers located throughout the continental United States. In addition, the Company markets Pyxis' automated dispensing systems to hospitals and alternate care centers in the U.S. and Canada. Through Medicine Shoppe, the Company franchises retail pharmacies in the U.S. and abroad. In fiscal 1996, the Company's largest customer, Kmart Corporation ("Kmart"), accounted for approximately 12% of net revenues (by dollar volume). The Company's business could be adversely affected if Kmart were lost as a customer. The Company obtains its products from many different suppliers, the largest of which accounted for approximately 5.9% (by dollar volume) of its net revenues in fiscal 1996. The Company's five largest suppliers accounted for approximately 22.5% (by dollar volume) of its net revenues during fiscal 1996, and the Company's relationships with its suppliers are generally very good. The Company's arrangements with its pharmaceutical suppliers typically may be canceled by either the Company or the supplier upon 30 to 90 days prior notice, although many of these arrangements are not governed by formal agreements. The loss of certain suppliers could adversely affect the Company's business if alternative sources of supply were unavailable. While the Company's operations may show quarterly fluctuations, the Company does not consider its business to be seasonal in nature on a consolidated basis. COMPETITION The Company's markets are highly competitive. As a pharmaceutical wholesaler, 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 pharmaceutical wholesaling operations 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 4
5 support services. As a marketer of automated pharmaceutical dispensing systems, the Company competes based upon its installed base of systems, its relationships with customers, its customer service and support capabilities, its patents and other intellectual property, and its ability to interface with customer information systems. Potential competitors to the Pyxis system include both existing domestic and foreign companies, as well as emerging companies that supply products for specialized markets and other outside service providers. Several smaller franchisors compete with Medicine Shoppe in the franchising of pharmacies, where competition is based primarily upon price, benefits offered to both the pharmacist and customer, access to third party programs, and the reputation of the franchise. With its Allied subsidiary, the Company competes with both national and regional hospital pharmacy management firms on the basis of its established base of business, the effective use of automation equipment, the development of clinical programs, and the quality of the services it provides to its customers. EMPLOYEES At August 20, 1996, the Company had approximately 4,800 employees, of whom approximately 350 are subject to collective bargaining agreements. The Company considers its employee relations to be good. INTELLECTUAL PROPERTY The Company has applied to the United States Patent and Trademark Office for registration of a number of trademarks, certain of which have been issued, and also holds common law rights in various trademarks. The Company has also applied for trademark registration for certain of its trademarks in certain foreign jurisdictions. There can be no assurance that the Company will obtain the registrations for which it has applied. The Company's principal trademarks include CardinalCHOICE(TM), LEADER(R) DRUGSTORES, PYXIS(R), MEDSTATION(R), SUPPLYSTATION(R), and THE MEDICINE SHOPPE(R). The Company's Pyxis subsidiary holds certain United States patents relating to certain aspects of its automated pharmaceutical dispensing systems and intends to pursue additional patents as appropriate. The Company also owns certain software, including software used for pharmaceutical purchasing and inventory control, which is copyrighted and subject to the protection of applicable copyright laws. No assurances can be given that any intellectual property rights of the Company will provide meaningful protection against competitive products or otherwise be commercially valuable or that the Company will be successful in obtaining additional patents or enforcing its proprietary rights against others. REGULATORY MATTERS The Company, as a distributor of prescription pharmaceuticals (including certain controlled substances) and operator of pharmacy operations, is required to register for permits and/or licenses with, and comply with certain operating and security standards of, the United States Drug Enforcement Administration, the Food and Drug Administration (the "FDA") and various state boards of pharmacy or comparable agencies. In addition, the Company is subject to requirements of the Controlled Substances Act and the Prescription Drug Marketing Act of 1987, an amendment to the Food, Drug and Cosmetic Act (the "FDCA") which requires each state to regulate the purchase and distribution of prescription drugs under prescribed minimum standards. The Company is not currently required to register or submit premarket notifications to the FDA for its automated pharmaceutical dispensing systems. There can be no assurance, however, that FDA policy in this regard will not change. The Company is also subject to various Federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, and the use and disposal of hazardous or potentially hazardous substances. Through its Medicine Shoppe subsidiary, the Company is subject to laws adopted by certain states which regulate franchise operations and the franchisor-franchisee relationship, and similar legislation is proposed in additional states. The most common provisions of such laws establish restrictions on the ability of franchisors to terminate or to refuse to renew franchise agreements. Federal Trade Commission rules also require franchisors to make certain disclosures to prospective franchisees prior to the offer or sale of franchises. 5
6 ITEM 2: PROPERTIES Due to the nature of the Company's business, its office, distribution, assembly, and warehousing facilities are operated in widely dispersed locations across the United States. At August 20, 1996, the Company had twenty-eight principal pharmaceutical distribution facilities, four specialty distribution facilities, and the Pyxis assembly operation located in an aggregate of twenty-three states, seven of which are owned by the Company and the balance of which are leased. The Company's principal executive offices are located in a leased four-story building located at 5555 Glendon Court, 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 of its properties as the Company's business continues to expand. For certain financial information regarding the Company's facilities, see Notes 5 and 9 of "Notes to Consolidated Financial Statements." ITEM 3: LEGAL PROCEEDINGS In November 1993, the Company and Whitmire, as well as other pharmaceutical wholesalers, 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 was filed which included allegations that the wholesaler defendants, including the Company and Whitmire, conspired with manufacturers to inflate prices by using a chargeback pricing system. In addition to the Federal court cases described above, the Company and Whitmire have also been named as defendants in a series of state court cases alleging similar claims under various state laws regarding the sale of brand name prescription drugs. These lawsuits are described in "Item 1 - Legal Proceedings" of Part II of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, which was filed with the Securities and Exchange Commission and is incorporated herein by reference. On November 9, 1995, the Company, along with the other wholesaler defendants, filed a motion for summary judgment in the Brand Name Prescription Drug Litigation. On April 4, 1996, summary judgment was granted in favor of the Company and the other wholesaler defendants. The plaintiffs have appealed this decision. The Company believes that the allegations against Cardinal and Whitmire in such litigation are without merit, and it intends to contest such allegations vigorously. The Company does not believe that the outcome of these lawsuits will have a material adverse effect on the Company's financial condition or results of operations. The Company also becomes involved from time to time in routine litigation incidental to its business, none of which is expected to have any material adverse effect on the Company's financial condition or results of operations. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) A Special Meeting of the Company's shareholders was held on April 26, 1996. (b) Not applicable. (c) The following matter was voted on at the Special Meeting: Approval and adoption of the Agreement and Plan of Merger dated as of February 7, 1996, by and among the Company, Aztec Merger Corp. ("Aztec"), and Pyxis providing for the merger of Aztec with and into Pyxis. The results of the shareholder vote on this proposal were: 38,529,233 votes for; 70,204 votes against; 56,744 votes abstained; and 0 broker non-votes. 6
7 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows (information provided as of August 20, 1996): <TABLE> <CAPTION> NAME AGE POSITION <S> <C> <C> Robert D. Walter 51 Chairman and Chief Executive Officer Melburn G. Whitmire 56 Vice Chairman John C. Kane 56 President and Chief Operating Officer David A. Abrahamson 56 Executive Vice President; President -- Medicine Shoppe David Bearman 50 Executive Vice President and Chief Financial Officer George H. Bennett, Jr. 43 Executive Vice President, General Counsel and Secretary James F. Millar 48 Executive Vice President; President -- Cardinal Distribution Lisa M. Dolin 37 Senior Vice President -- Specialty Companies Richard J. Miller 39 Vice President, Controller and Principal Accounting Officer </TABLE> Unless indicated to the contrary, the business experience summaries provided below for the Company's 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, Westinghouse Electric Corporation and Karrington Health, Inc. 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. 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 A. ABRAHAMSON has been an Executive Vice President of the Company since August 1996 and President of Medicine Shoppe since May 1990. 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 of the Company from October 1989. Mr. Bearman has also served as the Company's Chief Financial Officer since joining the Company in October 1989. Prior to joining the Company, Mr. Bearman was employed by General Electric Company (a diversified manufacturing, technology and services 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. 7
8 JAMES F. MILLAR has served as an Executive Vice President of the Company since February 1994, and was named as President of the Company's Cardinal Distribution pharmaceutical wholesaling business in June 1996. Prior to February 1994, Mr. Millar served in a series of increasingly senior regional operating positions within the Company's pharmaceutical wholesaling business since he was hired in 1987. LISA M. DOLIN has been the Company's Senior Vice President -- Specialty Companies since June 1996. She has served as President of the Company's National PharmPak Services, Inc. subsidiary ("National PharmPak") since February 1995. Prior to that, Ms. Dolin served as National PharmPak's Vice President and General Manager beginning in October 1990. RICHARD J. MILLER has been the Company's Principal Accounting Officer since August 1996 and has served as Vice President, Controller since August 1995. Upon joining the Company in July 1994, and until August 1995, he served as Vice President, Auditing. Prior to that, Mr. Miller was a partner at Deloitte & Touche LLP (an international accounting firm). PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS The Company's common shares, without par value (the "Common Shares") are quoted on the New York Stock Exchange under the symbol "CAH." Prior to listing on the New York Stock Exchange, the Common Shares were quoted on the Nasdaq National Market System under the symbol "CDIC." The following table reflects the range of the reported high and low last sale prices of the Common Shares as reported on the New York Stock Exchange Composite Tape from September 7, 1994 through August 20, 1996 and on the Nasdaq National Market System prior to September 7, 1994, and the per share dividends declared thereon. <TABLE> <CAPTION> HIGH LOW DIVIDENDS --------- -------- ----------- <S> <C> <C> <C> Fiscal 1995: Quarter Ended September 30, 1994 $42.13 $36.63 $0.03 December 31, 1994 48.25 41.13 0.03 March 31, 1995 50.88 44.25 0.03 June 30, 1995 47.50 42.25 0.03 Fiscal 1996: Quarter Ended September 30, 1995 $56.50 $43.75 $0.03 December 31, 1995 57.88 51.13 0.03 March 31, 1996 64.25 52.50 0.03 June 30, 1996 75.25 60.25 0.03 Fiscal 1997: Through August 20, 1996 $72.50 $67.00 $0.03 </TABLE> As of August 20, 1996, there were approximately 2,400 shareholders of record 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. 8
9 ITEM 6: SELECTED FINANCIAL DATA The following selected consolidated financial data of the Company was prepared giving retroactive effect to the business combinations with Whitmire Distribution Corporation ("Whitmire") on February 7, 1994, Medicine Shoppe International, Inc. ("Medicine Shoppe") on November 13, 1995, and Pyxis Corporation ("Pyxis") on May 7, 1996, all of which were accounted for as pooling-of-interests transactions. On March 1, 1994, the Company changed its fiscal year end from March 31 to June 30. As a result, for the fiscal years ended March 31, 1993 and 1992, the information presented is derived from consolidated financial statements which combine data from Cardinal, Medicine Shoppe and Pyxis for the fiscal years ended March 31, 1993 and 1992, with data from Whitmire for fiscal years ended July 3, 1993 and June 27, 1992, respectively. For the fiscal years ended June 30, 1996, 1995 and 1994, the information presented is derived from consolidated financial statements which combine data from Cardinal, Whitmire, Medicine Shoppe and Pyxis for the fiscal years ended June 30, 1996, 1995 and 1994. 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." <TABLE> <CAPTION> CARDINAL HEALTH, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FISCAL YEAR ENDED ----------------------------------------------------------------------------------- JUNE 30, June 30, June 30, March 31, March 31, 1996 1995 1994 1993 1992 --------------- --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> <C> Earnings Statement Data: Net revenues $8,862,425 $8,022,108 $5,963,280 $4,734,636 $3,739,700 Earnings available for Common Shares before cumulative effect of change in accounting principle $ 111,864 $ 137,534 $ 79,825 $ 65,086 $ 38,560 Cumulative effect of change in accounting principle (10,000) --------------- --------------- --------------- --------------- --------------- Net earnings available for Common Shares $ 111,864 $ 137,534 $ 79,825 $ 55,086 $ 38,560 =============== =============== =============== =============== =============== Primary earnings per Common Share: Before cumulative effect of change in accounting principle $ 1.73 $ 2.14 $ 1.30 $ 1.19 $ 0.83 Cumulative effect of change in accounting principle (0.18) --------------- --------------- --------------- --------------- --------------- Net $ 1.73 $ 2.14 $ 1.30 $ 1.01 $ 0.83 =============== =============== =============== =============== =============== Fully diluted earnings per Common Share: Before cumulative effect of change in accounting principle $ 1.73 $ 2.14 $ 1.30 $ 1.16 $ 0.83 Cumulative effect of change in accounting principle (0.17) --------------- --------------- --------------- --------------- --------------- Net $ 1.73 $ 2.14 $ 1.30 $ 0.99 $ 0.83 =============== =============== =============== =============== =============== Balance Sheet Data: Total assets $2,681,095 $2,160,961 $1,636,382 $1,265,861 $1,023,485 Long-term obligations 265,144 209,214 210,196 276,748 306,066 Redeemable preferred stock 20,400 19,560 Convertible preferred stock 109 Shareholders' equity 930,710 799,559 567,345 395,762 281,651 Cash dividends declared per Common Share $ 0.12 $ 0.12 $ 0.10 $ 0.07 $ 0.06 </TABLE> 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 1996, 1995, 1994 and 1992. Fiscal 1996, 1994 and 1993 amounts reflect the impact of unusual items primarily related to mergers. See Note 2 of "Notes to Consolidated Financial Statements" for a further discussion of unusual items affecting fiscal 1996 and 1994. 9
10 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis has been prepared giving retroactive effect to the pooling-of-interests business combinations with Medicine Shoppe which was completed on November 13, 1995 and Pyxis which was completed on May 7, 1996 (see Note 2 of "Notes to Consolidated Financial Statements"). The discussion and analysis presented below should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report. RESULTS OF OPERATIONS NET REVENUES. Net revenues in fiscal 1996 increased 10% compared with fiscal 1995 primarily due to the internal revenue growth from pharmaceutical wholesaling activities, including the addition of new customers, increased sales to existing customers and price increases. The 35% increase in net revenues in fiscal 1995 compared to fiscal 1994 was due to internal business growth of 25%, primarily in pharmaceutical wholesaling activities, the acquisition of Humiston-Keeling, Inc. in July 1994, and the merger transaction with Behrens Inc. in July 1994 (see Note 2 of "Notes to Consolidated Financial Statements"). The internal business growth in fiscal 1995 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 revenues, gross margin increased to 8.07% for fiscal 1996 from 7.79% in fiscal 1995. This increase is primarily due to the gross margin generated from the acquisition of pharmacy management operations in fiscal 1996 (see Notes 1 and 2 of "Notes to Consolidated Financial Statements"). Pharmacy management operations generally provide a higher gross margin than pharmaceutical wholesaling activities. The gross margin ratio in fiscal 1995 decreased from 8.17% in fiscal 1994 primarily due to decreases in pharmaceutical selling margin rates, reflecting a more competitive market and a greater mix of high volume customers, offset by a slight increase in purchasing gains associated with pharmaceutical price inflation. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of net revenues increased to 4.89% in fiscal 1996 compared to 4.72% in fiscal 1995. The increase in the selling, general and administrative expenses as a percentage of net revenues in fiscal 1996 is due to the inclusion of pharmacy management services in current year operations (see "Gross Margin" above). This increase was partially offset by economies associated with the Company's revenue growth from pharmaceutical wholesaling activities, as well as productivity gains resulting in part from warehouse consolidations and management information system enhancements. The decrease in the selling, general and administrative expenses as a percentage of net revenues in fiscal 1995 from 4.90% in fiscal 1994 is due to economies associated with the Company's revenue growth as well as consolidating distribution centers and administrative functions, and selectively automating facilities. UNUSUAL ITEMS. During fiscal 1996, the Company recorded costs totaling $67.3 million ($47.8 million, net of tax) related primarily to the mergers with Medicine Shoppe and Pyxis (see Note 2 of "Notes to Consolidated Financial Statements"). These costs included approximately $22.4 million for investment advisor, legal, accounting, internal personnel and other transaction fees associated with the business combinations; $14.7 million related to costs to exit and restructure certain activities, including operating lease terminations and asset impairment charges; $7.8 million related to employee retention, employee severance, and other personnel costs; and $2.9 million for other activities related to integrating operations and implementing efficiencies of the merged companies. Certain of these amounts are based upon estimates and actual amounts paid may ultimately differ from these estimates. As of June 30, 1996, the Company had paid approximately $22.1 million related to these charges. If additional costs are incurred, such items will be expensed in subsequent periods. In fiscal 1994, the Company recorded a charge to reflect Whitmire Merger costs of approximately $35.9 million ($28.2 million net of tax). These costs included approximately $7 million for investment banking, legal, accounting, and other related transaction fees and costs associated with the combination; $13 million for corporate integration and distribution rationalization; $6 million for integration of information systems; and $2 million for restructuring Whitmire's revolving credit agreement. At June 30, 1996, the Company had disbursed all amounts related to these liabilities, with the actual amounts paid approximating the original amounts recorded. 10
11 These items are considered unusual in nature in that the costs would generally not have been incurred in the absence of the business combinations. INTEREST EXPENSE. The increase in interest expense of $4.5 million in fiscal 1996 compared to fiscal 1995 is due to the Company's issuance of $150 million, 6% Notes due 2006, in a public offering in January 1996. The increase in interest expense of $1.1 million in fiscal 1995 compared to fiscal 1994 is due to higher average short-term borrowings resulting from increased working capital requirements associated with the Company's growth. The Company has entered into various interest rate swap agreements (see Note 5 of "Notes to Consolidated Financial Statements"). PROVISION FOR INCOME TAXES. The Company's provision for income taxes relative to pretax earnings was 44.6%, 41.1% and 44.8% for fiscal years 1996, 1995 and 1994, respectively. The fluctuation in the tax rate is primarily due to certain nondeductible costs associated with the business combinations in fiscal 1996 and 1994 (see Note 7 of "Notes to Consolidated Financial Statements"). LIQUIDITY AND CAPITAL RESOURCES Working capital increased $88.4 million to $854.1 million at June 30, 1996, from $765.7 million at June 30, 1995, and included increased investments in merchandise inventories and trade receivables of $151.4 million and $42.7 million, respectively, and increased holdings of cash and equivalents and marketable securities of $176.8 million. The increase was offset primarily by an increase in accounts payable and the current portion of long-term debt of $170.0 million and $102.8 million, respectively, and an increase in other accrued liabilities of $29.8 million. The increases in inventories and accounts payable are due to the Company's revenue growth, the procurement of pharmaceutical inventory relative to an anticipated increase in business with a large mass merchandising customer, and pharmaceutical price increases. The increase in cash and equivalents, and marketable securities available-for-sale reflect the timing of inventory purchases and payments noted above and a partial use of proceeds from the Company's $150 million 6% Note offering (see "Interest Expense," above). The increase in trade receivables was due primarily to increased sales (see "Net Revenues", above). The increase in the current portion of long-term debt is due to the Company's $100 million 8% Notes which are due March 1997. Liabilities incurred in connection with the fiscal 1996 business combinations were the primary cause of the increase in the other accrued liabilities. Property and equipment, at cost increased by $69.7 million in fiscal 1996. The property acquired included increased investment in management information systems and customer support systems, as well as the construction and automation of distribution facilities. Goodwill and other intangibles increased by approximately $31.7 million to $92.4 million due to purchase business combinations completed in the current year, primarily related to the Company's point-of-use pharmacy systems and pharmacy management services (see Note 2 of "Notes to Consolidated Financial Statements"). Shareholders' equity increased to $930.7 million at June 30, 1996 from $799.6 million at June 30, 1995 due primarily to net earnings of the Company of approximately $111.9 million and proceeds and tax benefits from the exercise of options under employee stock plans of $27.6 million, offset primarily by dividends paid by the Company of approximately $7.6 million in fiscal 1996. The Company has line-of-credit agreements with various bank sources aggregating $345 million, of which $95 million is represented by committed line-of-credit agreements and the balance is uncommitted. The Company had no amounts outstanding under these lines at June 30, 1996. The Company believes that it has adequate capital resources at its disposal to meet currently anticipated capital expenditures, routine business growth and expansion, and current and projected debt service requirements. OTHER PENDING BUSINESS COMBINATION. On July 24, 1996, the Company announced that it had entered into a definitive merger agreement with PCI Services, Inc. ("PCI") pursuant to which PCI will become a wholly owned subsidiary of the Company in a stock-for-stock merger expected to be accounted for as a pooling-of-interests for financial reporting 11
12 purposes. In connection with the merger, the Company estimates that it will issue approximately 2.1 million Common Shares. Under the terms of the merger agreement, shareholders of PCI will receive 0.336 Common Shares for each share of PCI that they own at the time the transaction is consummated, subject to adjustment under specified circumstances. In addition, pursuant to the terms of the merger agreement, options for PCI common stock will be converted into equivalent options for approximately 158,000 Common Shares, based upon the exchange ratio. Upon consummation of the merger, the Company will record a one-time charge to reflect transaction and other costs incurred as a result of the merger. The merger is expected to be completed in the fall of 1996, subject to satisfaction of certain conditions, including approval by shareholders of PCI. The Company's trend with regard to acquisitions in fiscal 1996, and continuing with the pending PCI transaction described above, has been to expand its role as a health care service provider. This trend has resulted in diversification into health care services which (a) complement the Company's core pharmaceutical distribution business; (b) provide opportunities for the Company to develop synergies with, and thus strengthen, the acquired business; and (c) generally generate higher gross margins as a percentage of net revenues than pharmaceutical distribution. As the health care industry continues to consolidate, the Company expects to continually evaluate acquisition candidates in both pharmaceutical distribution as well as other opportunities that would expand its role as a health care service provider; however, there can be no assurance that it will be able to successfully pursue any such opportunity or consummate any such transaction. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which requires adoption no later than the Company's fiscal 1997. The new standard defines a fair value method of accounting for stock options and similar equity instruments, under which compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to the new standard, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in the financial statements pro forma net income and earnings per share as if the new method of accounting had been applied. The accounting requirements of the new method are effective for all employee awards granted after the beginning of the fiscal year of adoption. The Company has not yet determined if it will elect to change to the fair value method, nor has it determined the effect the new standard will have on net income and earnings per share should it elect to make such a change. Adoption of the new standard will have no effect on the Company's cash flows. In addition, in March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting For the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires adoption no later than the Company's fiscal 1997. SFAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when an indication of impairment is present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses accounting for long-lived assets that are expected to be disposed of. The Company does not believe, based on current circumstances, the adoption of SFAS No. 121 will have a material effect on financial condition or results of operations. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Independent Auditors' Reports Financial Statements: Consolidated Statements of Earnings for the Fiscal Years Ended June 30, 1996, 1995 and 1994 Consolidated Balance Sheets at June 30, 1996 and 1995 Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 12
13 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, 1996 and 1995, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. 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 Pyxis Corporation on May 7, 1996, as described in Note 2 to the consolidated financial statements. We did not audit the financial statements of Pyxis Corporation for any year, which statements reflect total assets constituting 10.5% and 11.2%, respectively, of consolidated total assets at June 30, 1996 and 1995, and total revenues and net income constituting 2.5%, 2.0% and 2.1%, and 31.7%, 26.6% and 39.9%, respectively, for each of the three years in the period ended June 30, 1996. 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 Pyxis Corporation, 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996 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. DELOITTE & TOUCHE LLP Columbus, Ohio August 13, 1996 13
14 Report of Ernst & Young LLP, Independent Auditors Board of Directors Cardinal Health, Inc. We have audited the consolidated balance sheets of Pyxis Corporation as of June 30, 1996 and 1995, and the related consolidated statements of income, shareholder's equity, and cash flows for each of the three years in the period ended June 30, 1996 (not included herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 consolidated financial position of Pyxis Corporation at June 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30,1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Diego, California August 2, 1996 14
15 <TABLE> <CAPTION> CARDINAL HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FISCAL YEAR ENDED JUNE 30, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- <S> <C> <C> <C> Net revenues $8,862,425 $8,022,108 $5,963,280 Cost of products sold 8,147,148 7,397,557 5,476,361 ----------- ----------- ---------- Gross margin 715,277 624,551 486,919 Selling, general and administrative expenses 433,255 378,579 291,975 Unusual items (67,250) (35,880) ----------- ----------- ---------- Operating earnings 214,772 245,972 159,064 Other income (expense): Interest expense (23,868) (19,403) (18,316) Other, net-- primarily interest income 11,161 7,066 6,160 ----------- ----------- ---------- Earnings before income taxes 202,065 233,635 146,908 Provision for income taxes 90,201 96,101 65,878 ----------- ----------- ---------- Earnings before preferred dividends declared 111,864 137,534 81,030 Preferred dividends declared (1,205) ----------- ----------- ---------- Net earnings available for Common Shares $ 111,864 $ 137,534 $ 79,825 =========== =========== =========== Earnings per Common Share: Primary $ 1.73 $ 2.14 $ 1.30 Fully diluted $ 1.73 $ 2.14 $ 1.30 Weighted average number of Common Shares outstanding: Primary 64,669 64,119 61,380 Fully diluted 64,743 64,170 61,399 The accompanying notes are an integral part of these statements. </TABLE> 15
16 <TABLE> <CAPTION> CARDINAL HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) JUNE 30, JUNE 30, 1996 1995 ----------- ----------- <S> <C> <C> ASSETS Current assets: Cash and equivalents $ 287,802 $ 64,589 Marketable securities available-for-sale 54,335 100,760 Trade receivables 564,881 522,230 Current portion of net investment in sales-type leases 37,953 30,119 Merchandise inventories 1,238,238 1,086,877 Prepaid expenses and other 56,568 47,107 ----------- ----------- Total current assets 2,239,777 1,851,682 ----------- ----------- Property and equipment, at cost: Land, buildings and improvements 62,367 47,406 Machinery and equipment 162,525 119,122 Furniture and fixtures 40,692 29,398 ----------- ----------- Total 265,584 195,926 Accumulated depreciation and amortization (112,122) (89,267) ----------- ----------- Property and equipment, net 153,462 106,659 Other assets: Net investment in sales-type leases, less current portion 111,604 85,313 Goodwill and other intangibles 92,428 60,695 Other 83,824 56,612 ----------- ----------- Total $2,681,095 $2,160,961 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable, banks $ $ 3,000 Current portion of long-term obligations 106,007 3,162 Accounts payable 1,126,065 956,073 Other accrued liabilities 153,585 123,764 ----------- ----------- Total current liabilities 1,385,657 1,085,999 ----------- ----------- Long-term obligations, less current portion 265,144 209,214 Deferred income taxes and other liabilities 99,584 66,189 Shareholders' equity: Common Shares, without par value 484,446 455,709 Retained earnings 455,690 351,441 Common Shares in treasury, at cost (5,426) (4,011) Other (4,000) (3,580) ----------- ----------- Total shareholders' equity 930,710 799,559 ----------- ----------- Total $2,681,095 $2,160,961 =========== =========== The accompanying notes are an integral part of these statements. </TABLE> 16
17 <TABLE> <CAPTION> CARDINAL HEALTH INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In Thousands) COMMON SHARES ------------------- SHARES RETAINED ISSUED AMOUNT EARNINGS ------- --------- ----------- <S> <C> <C> <C> BALANCE, JUNE 30, 1993 44,925 $272,460 $147,006 Earnings before preferred dividends declared 81,030 Shares issued pursuant to the conversion of $75 million of convertible debentures 3,423 73,140 Employee stock plans activity and issuance of Common Shares for cash, including tax benefits of $7,969 2,834 12,045 Treasury shares acquired and shares retired (92) (191) (2,232) Cumulative effect of adjustment for unrealized loss on marketable securities available-for-sale Dividends paid (7,645) 5-for-4 stock split effected as a stock dividend and cash paid in lieu of fractional shares 7,564 (16) Equity of PRN Services, Inc. on merger date (see Note 2) 237 34 348 ------- --------- --------- BALANCE, JUNE 30, 1994 58,891 357,488 218,491 Net earnings 137,534 Employee stock plans activity and issuance of Common Shares for cash, including tax benefits of $22,236 1,684 27,602 Treasury shares acquired and shares retired (186) (300) (4,805) Change in unrealized loss on marketable securities available-for-sale, net of tax Dividends paid (9,107) Equity of Behrens Inc. on merger date (see Note 2) 944 451 9,328 Shares issued in connection with stock offering 1,867 70,468 ------- --------- --------- BALANCE, JUNE 30, 1995 63,200 455,709 351,441 Net earnings 111,864 Employee stock plans activity and issuance of Common Shares for cash, including tax benefits of $11,168 982 28,737 Treasury shares acquired and restricted stock forfeitures Change in unrealized loss on marketable securities available-for-sale, net of tax Dividends paid (7,615) ======= ========= ========= BALANCE, JUNE 30, 1996 64,182 $484,446 $455,690 ======= ========= ========= </TABLE> <TABLE> <CAPTION> TREASURY SHARES TOTAL --------------- SHAREHOLDERS' SHARES AMOUNT OTHER EQUITY -------- ------- ---------- ---------- <S> <C> <C> <C> <C> BALANCE, JUNE 30, 1993 (173) $(3,083) $(3,066) $ 413,317 Earnings before preferred dividends declared 81,030 Shares issued pursuant to the conversion of $75 million of convertible debentures 73,140 Employee stock plans activity and issuance of Common Shares for cash, including tax benefits of $7,969 (907) 11,138 Treasury shares acquired and shares retired (7) (307) (2,730) Cumulative effect of adjustment for unrealized loss on marketable securities available-for-sale (1,271) (1,271) Dividends paid (7,645) 5-for-4 stock split effected as a stock dividend and cash paid in lieu of fractional shares (16) Equity of PRN Services, Inc. on merger date (see Note 2) 382 -------- ------- ---------- --------- BALANCE, JUNE 30, 1994 (180) (3,390) (5,244) 567,345 Net earnings 137,534 Employee stock plans activity and issuance of Common Shares for cash, including tax benefits of $22,236 839 28,441 Treasury shares acquired and shares retired (13) (621) (5,726) Change in unrealized loss on marketable securities available-for-sale, net of tax 825 825 Dividends paid (9,107) Equity of Behrens Inc. on merger date (see Note 2) 9,779 Shares issued in connection with stock offering 70,468 -------- ------- ---------- --------- BALANCE, JUNE 30, 1995 (193) (4,011) (3,580) 799,559 Net earnings 111,864 Employee stock plans activity and issuance of Common Shares for cash, including tax benefits of $11,168 (1,173) 27,564 Treasury shares acquired and restricted stock forfeitures (29) (1,415) 307 (1,108) Change in unrealized loss on marketable securities available-for-sale, net of tax 446 446 Dividends paid (7,615) ======== ======= ========== ========= BALANCE, JUNE 30, 1996 (222) $(5,426) $ (4,000) $ 930,710 ======== ======= ========== ========= The accompanying notes are an integral part of these statements. </TABLE> 17
18 <TABLE> <CAPTION> CARDINAL HEALTH INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) FISCAL YEAR ENDED JUNE 30, ------------------------------------ 1996 1995 1994 ---------- ---------- ---------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Earnings before preferred dividends declared $ 111,864 $ 137,534 $ 81,030 Adjustments to reconcile earnings before preferred dividends declared to net cash from operating activities: Depreciation and amortization 32,488 24,342 18,650 Provision for deferred income taxes 20,530 49,568 10,798 Provision for bad debts 9,450 12,479 12,172 Change in operating assets and liabilities, net of effects from acquisitions: Increase in trade receivables (47,355) (137,476) (89,217) Increase in merchandise inventories (148,431) (159,036) (232,178) Increase in net investment in sales-type leases (34,125) (40,584) (40,710) Increase in accounts payable 164,601 154,137 170,682 Other operating items, net 13,200 (10,048) 13,355 ---------- ---------- ---------- Net cash provided by (used in) operating activities 122,222 30,916 (55,418) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiaries, net of cash acquired (36,244) (19,345) Proceeds from sale of property and equipment 796 91 1,079 Additions to property and equipment (73,094) (50,654) (14,195) Purchase of marketable securities available-for-sale (163,719) (169,599) (652,347) Proceeds from sale of marketable securities available-for-sale 218,019 143,501 682,300 ---------- ---------- ---------- Net cash provided by (used in) investing activities (54,242) (96,006) 16,837 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net short-term borrowing activity (3,000) (22,500) 25,000 Reduction of long-term obligations (10,570) (5,424) (99,403) Proceeds from long-term obligations, net of issuance costs 148,960 99,498 Proceeds from issuance of Common Shares 17,398 75,770 2,293 Tax benefit of stock options 11,168 22,236 7,969 Dividends on common and preferred shares and cash paid in lieu of fractional shares (7,615) (9,107) (7,661) Redemption of preferred stock (20,400) Purchase of treasury shares (1,108) (5,726) (2,730) ---------- ---------- ---------- Net cash provided by financing activities 155,233 55,249 4,566 ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 223,213 (9,841) (34,015) CASH AND EQUIVALENTS AT BEGINNING OF YEAR 64,589 74,430 108,445 ---------- ---------- ---------- CASH AND EQUIVALENTS AT END OF YEAR $ 287,802 $ 64,589 $ 74,430 ========== ========== ========== The accompanying notes are an integral part of these statements. </TABLE> 18
19 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cardinal Health, Inc. and subsidiaries (the "Company") is a health care service provider which distributes a broad line of pharmaceuticals, surgical and hospital supplies, therapeutic plasma and other specialty pharmaceutical products, health and beauty care products, and other items typically sold by hospitals, retail drug stores, and other health care providers. Through the Company's subsidiary Pyxis Corporation ("Pyxis"), the Company manufactures, leases, sells and services point-of-use pharmacy systems which automate the distribution and management of medications and supplies in hospitals and other health care facilities. Pharmacy management services are provided by the Company's subsidiary Allied Pharmacy Service, Inc. ("Allied"). The Company is also a franchisor of apothecary-style pharmacies through its subsidiary Medicine Shoppe International, Inc. ("Medicine Shoppe"). See "Basis of Presentation" and Note 2 below. The Company is currently operating in only one business segment, primarily in the continental United States. BASIS OF PRESENTATION The consolidated financial statements of the Company include the accounts of all majority-owned subsidiaries and all significant intercompany accounts and transactions have been eliminated. In addition, the consolidated financial statements give retroactive effect to the pooling-of-interests business combinations with Whitmire Distribution Corporation ("Whitmire") on February 7, 1994, Medicine Shoppe on November 13, 1995, and Pyxis on May 7, 1996. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts may differ from these amounts. CASH EQUIVALENTS The Company considers all liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying value of cash equivalents approximates their fair value. MARKETABLE SECURITIES AVAILABLE-FOR-SALE The Company has classified its investment in municipal bonds and U.S. Treasury obligations as available-for-sale. The fair value of the marketable securities approximates the original costs determined on a specific identification basis at June 30, 1996. Gross and net realized and unrealized holding gains and losses were not material in any period presented in the accompanying financial statements. The Company's marketable securities available-for-sale mature on various dates in fiscal 1997. RECEIVABLES Trade receivables are primarily comprised of amounts owed to the Company through its pharmaceutical wholesaling activities and are presented net of an allowance for doubtful accounts of $32,414,000 and $31,529,000 at June 30, 1996 and 1995, respectively. Medicine Shoppe provides financing to selected franchisees primarily for development, acquisition and conversion costs, exclusive of origination fees. Such financing arrangements generally require repayment in seven to ten years, at interest rates which fluctuate with the prime rate. Most of these financings are collateralized by property of the franchisees or by third-party guarantors. Finance notes and accrued interest receivable were $36,438,000 and $32,340,000 at June 30, 1996 and 1995, respectively (the current portion was $5,827,000 and $5,062,000, respectively), and are included in other assets. These amounts are reported net of an allowance for doubtful accounts of $8,042,000 and $7,385,000 at June 30, 1996 and 1995, respectively. 19
20 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MERCHANDISE INVENTORIES Substantially all merchandise inventories (83% in 1996 and 91% in 1995) are stated at lower of cost, using the last-in, first-out (LIFO) method, or market. If the Company had used the first-in, first-out (FIFO) method of inventory valuation, which approximates current replacement cost, inventories would have been higher than reported at June 30, 1996, by $76,321,000 and at June 30, 1995, by $79,365,000. The Company continues to consolidate locations, automate selected distribution facilities and invest in management information systems which achieve efficiencies in inventory management processes. As a result of the facility and related inventory consolidations and the operational efficiencies achieved in fiscal 1996, the Company had partial inventory liquidations in certain LIFO pools which reduced the LIFO provision by approximately $7 million. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization for financial reporting purposes are computed using the straight-line method over the estimated useful lives of the assets which range from three to forty years, including capital lease assets which are amortized over the terms of their respective leases. Amortization of capital lease assets is included in depreciation and amortization expense. Certain software costs related to internally developed or purchased software are capitalized and amortized using the straight-line method over the useful lives, not exceeding five years. GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles primarily represent intangible assets related to the excess of cost over net assets of subsidiaries acquired. Intangible assets are being amortized using the straight-line method over lives which range from ten to forty years. Accumulated amortization was $23,901,000 and $18,819,000 at June 30, 1996 and 1995, 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. REVENUE RECOGNITION The Company records revenues when merchandise is shipped to its customers and the Company has no further obligation to provide services related to such merchandise. The Company also arranges for direct deliveries to be made to customer warehouses which are excluded from net revenues and totaled $2,179,000,000, $1,779,000,000 and $562,000,000 in fiscal 1996, 1995 and 1994, respectively. The service fees related to direct deliveries are included in net revenues and were not significant in any of the fiscal years presented. Revenues are recognized from sales-type leases of point-of-use pharmacy systems when the systems are installed, and/or the customer accepts the system, and the lease becomes noncancellable. Unearned income on sales-type leases is recognized using the interest method. Sales of point-of-use pharmacy systems are recognized upon installation/delivery and customer acceptance. Revenues for systems installed under operating lease arrangements are recognized over the lease term as it becomes receivable according to the provisions of the lease. The revenue from such operating leases is not significant. The Company earns franchise and origination fees from its apothecary-style pharmacy franchisees. Franchise fees represent monthly fees based upon franchisees' sales and are recognized as revenues when they are earned. Origination fees from signing new franchise agreements are recognized as revenues when the new franchise store is opened. Master franchise origination fees are recognized as revenues when all significant conditions relating to the master franchise agreement have been satisfied by the Company. Pharmacy management revenue is recognized according to the contracts established. A fee is charged under such contracts through a monthly management fee arrangement, a capitated fee arrangement or a portion of the hospital charges to patients. 20
21 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EARNINGS PER COMMON SHARE Primary and fully diluted earnings per Common Share are computed using the treasury stock method and are based on the weighted average number of Common Shares outstanding during each period and the dilutive effect of stock options from the date of grant. Excluding dividends paid by all entities with which the Company has merged, the Company paid cash dividends per Common Share of $0.12, $0.12 and $0.09 for the fiscal years ended June 30, 1996, 1995 and 1994, respectively. 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. BUSINESS COMBINATIONS Effective May 7, 1996, a wholly owned subsidiary of the Company was merged with and into Pyxis (the "Pyxis Merger"). The Pyxis Merger was accounted for as a pooling-of-interests business combination, and the Company issued approximately 15,076,000 Common Shares to Pyxis shareholders. In addition, Pyxis' outstanding stock options were converted into options to purchase approximately 1,562,000 additional Common Shares. The table below presents a reconciliation of net revenues and net earnings available for Common Shares as reported in the accompanying consolidated financial statements with those previously reported by the Company (in thousands). <TABLE> <CAPTION> Cardinal Health Pyxis Combined ---------------- ---------------- ---------------- <S> <C> <C> <C> Fiscal year ended June 30, 1994: Net revenues $ 5,838,574 $ 124,706 $ 5,963,280 Net earnings available for Common Shares $ 47,990 $ 31,835 $ 79,825 Fiscal year ended June 30, 1995: Net revenues $ 7,859,919 $ 162,189 $ 8,022,108 Net earnings available for Common Shares $ 101,000 $ 36,534 $ 137,534 Nine Months Ended March 31, 1996: Net revenues $ 6,381,569 $ 160,376 $ 6,541,945 Net earnings available for Common Shares $ 79,003 $ 24,804 $ 103,807 </TABLE> Adjustments affecting net income and shareholders' equity resulting from the Pyxis Merger to adopt the same accounting practices were not material for any periods presented herein. There were no material intercompany transactions. On November 13, 1995, a wholly owned subsidiary of the Company was merged with and into Medicine Shoppe. The Medicine Shoppe merger was accounted for as a pooling-of-interests business combination. The Company issued approximately 6,426,000 Common Shares to Medicine Shoppe shareholders. In addition, Medicine Shoppe's outstanding stock options were converted into options to purchase approximately 121,000 Common Shares. During fiscal 1996, the Company recorded costs totaling $67.3 million ($47.8 million, net of tax) related primarily to the mergers with Medicine Shoppe and Pyxis. These costs included approximately $22.4 million for investment advisor, legal, accounting, internal personnel and other transaction fees associated with the business combinations; $14.7 million related to costs to exit and restructure certain activities, including operating lease terminations and asset impairment charges; $7.8 million related to employee retention, employee severance, and other personnel costs; and $2.9 million for other activities related to integrating operations and implementing efficiencies of 21
22 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the merged companies. Certain of these amounts are based upon estimates and actual amounts paid may ultimately differ from these estimates. As of June 30, 1996, the Company had paid approximately $22.1 million related to these charges. If additional costs are incurred, such items will be expensed in subsequent periods. During fiscal 1996, the Company completed two business combinations which were accounted for under the purchase method of accounting. These business combinations were primarily related to the Company's point-of-use pharmacy systems and pharmacy management services. The aggregate purchase price, which was paid primarily in cash, including fees and expenses, was $40.0 million. Liabilities of the operations assumed were approximately $33.2 million, consisting primarily of debt of $27.8 million. Had the purchases occurred at the beginning of fiscal 1995, operating results for fiscal 1996 and 1995 on a pro forma basis would not have been significantly different. On July 18, 1994, the Company issued approximately 944,000 Common Shares in a merger transaction for all of the common shares of Behrens Inc. ("Behrens"), a pharmaceutical wholesaler based in Waco, Texas. The transaction was accounted for as a pooling-of-interests business combination. The historical cost of Behrens assets combined was approximately $25,396,000, and the total liabilities assumed (including total debt of approximately $1,336,000) were approximately $15,617,000. The impact of the Behrens merger, on both an historical and pro forma basis, is not significant. Accordingly, prior periods have not been restated for the Behrens merger. On July 1, 1994, the Company acquired all of the outstanding stock of Humiston-Keeling, Inc., a pharmaceutical wholesaler based in Calumet City, Illinois, for cash of $33,334,000 and assumed total liabilities of $94,390,000 (including total debt of approximately $1,670,000) in a transaction accounted for by the purchase method. 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 a wholly owned subsidiary of Cardinal was merged with and into Whitmire effective February 7, 1994. In the Whitmire Merger 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 (all Class B common shares were converted into Class A common shares in fiscal 1995). In addition, Whitmire's outstanding stock options were converted into options to purchase an aggregate of approximately 1,721,000 additional Common Shares pursuant to the terms of such options and the Reorganization Agreement. In fiscal 1994, the Company recorded a charge to reflect Whitmire Merger costs of approximately $35.9 million ($28.2 million net of tax). These costs included approximately $7 million for investment banking, legal, accounting, and other related transaction fees and costs associated with the combination; $13 million for corporate integration and distribution rationalization; $6 million for integration of information systems; and $2 million for restructuring Whitmire's revolving credit agreement. At June 30, 1996, the Company had disbursed all amounts related to these liabilities, with the actual amounts paid approximating the original amounts recorded. On December 17, 1993, the Company issued approximately 296,000 Common Shares in a merger transaction for all of the capital stock of PRN Services, Inc. ("PRN"), 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 historical cost of PRN assets combined was approximately $16,946,000, and the total liabilities assumed (including total debt of approximately $5,847,000) were approximately $16,564,000. 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. 22
23 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following supplemental information, which is presented for purposes of facilitating meaningful comparisons to ongoing operations and to other companies, summarizes the results of operations of the Company, adjusted on a pro forma basis to reflect (a) the elimination of the effect of the merger costs 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. <TABLE> <CAPTION> Fiscal Year Ended ------------------------------------------------ June 30, June 30, June 30, (In thousands, except per share amounts) 1996 1995 1994 --------------- -------------- -------------- <S> <C> <C> <C> Operating earnings, excluding unusual items $ 282,022 $ 245,972 $ 194,944 Earnings available for Common Shares 159,697 137,534 108,938 Earnings per Common Share, excluding unusual items: Primary $ 2.47 $ 2.14 $ 1.77 Fully diluted $ 2.47 $ 2.14 $ 1.77 </TABLE> Operating earnings and net earnings available for Common Shares ("Earnings") as reported in the Company's consolidated financial statements are reconciled to the respective amounts in the preceding table as follows: <TABLE> <CAPTION> Fiscal Year Fiscal Year Ended June 30, 1996 Ended June 30, 1994 ----------------------------- ----------------------------- Operating Operating (In thousands) Earnings Earnings Earnings Earnings ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> As reported $ 214,772 $ 111,864 $ 159,064 $ 79,825 Supplemental adjustments: Unusual items, primarily merger costs 67,250 47,833 35,880 28,180 Preferred stock redemptions 1,205 Interest adjustment on preferred stock (272) ------------- ------------- ------------- ------------- As supplementally adjusted $ 282,022 $ 159,697 $ 194,944 $ 108,938 ============= ============= ============= ============= </TABLE> 3. LEASES Sales-Type Leases The Company's sales-type leases are for terms generally ranging up to five years. Lease receivables are generally collateralized with the underlying equipment. The components of the Company's net investment in sales-type leases are as follows (in thousands): <TABLE> <CAPTION> June 30, June 30, 1996 1995 -------------- --------------- <S> <C> <C> Future minimum lease payments receivable $ 176,963 $ 139,305 Unguaranteed residual values 1,457 1,302 Unearned income (25,637) (22,275) Allowance for uncollectible minimum lease payments receivable (3,226) (2,900) -------------- --------------- Net investment in sales-type leases $ 149,557 $ 115,432 Less: current portion 37,953 30,119 -------------- --------------- Net investment in sales-type leases, less current portion $ 111,604 $ 85,313 ============== =============== </TABLE> 23
24 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum lease payments to be received pursuant to sales-type leases are as follows at June 30, 1996: <TABLE> <CAPTION> <S> <C> 1997 $ 47,981 1998 44,918 1999 39,755 2000 28,566 2001 15,155 Thereafter 588 -------------- Total $ 176,963 ============== </TABLE> Lease Related Financing Arrangements Prior to the merger on May 7, 1996, Pyxis had financed its working capital needs through the sale of certain lease receivables to a non-bank financing company. In March 1994, Pyxis entered into a five-year financing and servicing agreement with the financing company, whereby the financing company agreed to purchase a minimum of $500 million of Pyxis' lease receivables under certain conditions, provided that the total investment in the lease receivables at any one time does not exceed $350 million. The aggregate lease receivables sold under this arrangement totaled approximately $233 million and $154 million at June 30, 1996 and 1995, respectively. As a result of the merger, the Company intends to amend the agreement with the financing company and has made provision for the estimated cost of exiting the arrangement. 4. NOTES PAYABLE, BANKS The Company has entered into various uncommitted line-of-credit arrangements which allow for borrowings up to $250,000,000 at June 30, 1996, at various money market rates. No amounts were outstanding under such arrangements at June 30, 1996, and $3,000,000, at a weighted average interest rate of 6.89%, was outstanding at June 30, 1995. In addition, the Company has revolving credit agreements, which have a maturity of less than one year, with seven banks. These credit agreements are renewable on a quarterly basis and allow the Company to borrow up to $95,000,000 (none of which was in use at June 30, 1996). 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. The total available but unused lines of credit at June 30, 1996 were $345,000,000. 5. LONG-TERM OBLIGATIONS Long-term obligations consist of the following (in thousands): <TABLE> <CAPTION> June 30, June 30, 1996 1995 -------------- --------------- <S> <C> <C> Notes; 6.0% due 2006 $ 150,000 $ Notes; 6.5% due 2004 100,000 100,000 Notes; 8% due 1997 100,000 100,000 Primarily mortgage revenue bonds, notes and capital leases; interest averaging 7.14% in 1996 and 8.78% in 1995, due in varying installments through 2002 21,151 12,376 -------------- --------------- Total $ 371,151 $ 212,376 Less: current portion 106,007 3,162 -------------- --------------- Long-term obligations, less current portion $ 265,144 $ 209,214 ============== =============== </TABLE> 24
25 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On January 23, 1996, the Company sold $150 million of 6% Notes due 2006 (the "6% Notes") in a public offering. The 6% 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 $1.3 million incurred in connection with the offering are being amortized on a straight-line basis over the period the 6% Notes will be outstanding. On February 23, 1994, the Company sold $100 million of 6.5% Notes due 2004 (the "6.5% Notes") in a public offering. The 6.5% 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 6.5% Notes will be outstanding. The 8% Notes represent unsecured obligations of the Company, are not redeemable prior to maturity and are not subject to a sinking fund. The Company has entered into various interest rate swap agreements, which serve to hedge the Company's aggregate interest cost on the 8% Notes, in response to falling interest rates subsequent to the issuance of the 8% Notes in 1992. The net effect of the swap agreements is that the Company exchanged its fixed rate position on the 8% 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 8% Notes). In May 1993, two of the offsetting swap agreements were canceled at no gain or loss to the Company. The notional principal in each of the four swap agreements outstanding at June 30, 1996 is $100 million. 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, based on discounted cash flows, in the event of nonperformance by counterparties with whom the Company is in a net receivable position is approximately $777,000 as of June 30, 1996; however, based on the credit quality of the counterparties, the Company believes the likelihood of such a credit loss to be remote. The Company recognizes in income the periodic net cash settlements under the matched swap agreements as they accrue. Certain long-term obligations are collateralized by property and equipment of the Company with an aggregate book value of approximately $10,542,000 at June 30, 1996. Maturities of long-term obligations for future fiscal years are as follows (in thousands): <TABLE> <S> <C> 1997 $ 106,007 1998 4,933 1999 2,836 2000 1,897 2001 1,547 Thereafter 253,931 -------------- Total $ 371,151 ============== </TABLE> 6. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and equivalents, marketable securities, notes payable -- banks and other accrued liabilities at June 30, 1996 and 1995, approximate their fair value because of the short-term maturities of these items. The estimated fair value of the Company's long-term obligations was $354,197,000 and $212,251,000 as compared to the carrying amounts of $371,151,000 and $212,376,000 at June 30, 1996 and 1995, respectively. The fair value of the Company's long-term obligations is estimated based on the quoted market prices for the same or similar issues and the current interest rates offered for debt of the same remaining maturities. 25
26 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. INCOME TAXES The provision for income taxes consists of the following (in thousands): <TABLE> <CAPTION> Fiscal Year Ended ------------------------------------------------ June 30, June 30, June 30, 1996 1995 1994 --------------- -------------- --------------- <S> <C> <C> <C> Current: Federal $ 62,030 $ 41,882 $ 49,707 State 7,641 4,651 5,373 --------------- -------------- --------------- Total 69,671 46,533 55,080 Deferred 20,530 49,568 10,798 --------------- -------------- --------------- Total provision $ 90,201 $ 96,101 $ 65,878 =============== ============== =============== </TABLE> A reconciliation of the provision based on the Federal statutory income tax rate to the Company's income tax provision is as follows: <TABLE> <CAPTION> Fiscal Year Ended -------------------------------------------------- June 30, June 30, June 30, 1996 1995 1994 --------------- --------------- --------------- <S> <C> <C> <C> Provision at Federal statutory rate 35.0 % 35.0 % 35.0 % State income taxes, net of Federal benefit 4.8 4.7 4.6 Nondeductible expenses 4.4 4.6 Other 0.4 1.4 0.6 --------------- --------------- --------------- Effective income tax rate 44.6 % 41.1 % 44.8 % =============== =============== =============== </TABLE> Deferred income taxes arise from temporary differences between financial reporting and tax reporting bases of assets and liabilities, and operating loss and tax credit carryforwards for tax purposes. The components of the deferred income tax assets and liabilities are as follows (in thousands): <TABLE> <CAPTION> June 30, June 30, 1996 1995 --------------- -------------- <S> <C> <C> Deferred income tax assets: Allowance for doubtful accounts $ 8,861 $ 14,305 Accrued liabilities 21,412 19,408 Property related 14,233 9,256 Net operating loss carryforwards 27,270 28,550 Other 20,442 15,587 --------------- -------------- Total deferred income tax assets 92,218 87,106 Valuation allowance for deferred income tax assets (2,373) (2,747) --------------- -------------- Net deferred income tax assets 89,845 84,359 --------------- -------------- Deferred income tax liabilities: Inventory basis differences (42,102) (46,471) Revenues on lease contracts (122,417) (93,713) Other (15,642) (16,744) --------------- -------------- Total deferred income tax liabilities (180,161) (156,928) --------------- -------------- Net deferred income tax liabilities $ (90,316) $ (72,569) =============== ============== </TABLE> 26
27 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The above amounts are classified in the consolidated balance sheets as follows (in thousands): <TABLE> <CAPTION> June 30, June 30, 1996 1995 -------------- -------------- <S> <C> <C> Other accrued liabilities $ (453) $ (11,364) Deferred income taxes and other liabilities (89,863) (61,205) -------------- -------------- Net deferred income tax liabilities $ (90,316) $ (72,569) ============== ============== </TABLE> At June 30, 1996 and 1995, as a result of the Pyxis Merger, the Company had Federal net operating loss carryforwards of $73 million. Also at June 30, 1996 and 1995, the Company had state net operating loss carryforwards of $50 million and $56 million, respectively. A valuation allowance of $2.4 million and $2.7 million at June 30, 1996 and 1995, respectively, has been provided for the state net operating loss carryforwards as utilization of such carryforwards within the applicable statutory periods is uncertain. In addition, use of the Company's net operating loss carryforwards will be limited due to the change in control of Pyxis. The Federal net operating loss carryforwards begin expiring in 2001 and the state net operating loss carryforwards began expiring in 1994. 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 Company matching and profit sharing contributions. The Company's contributions to the plans are determined by the Board of Directors subject to certain minimum requirements as specified in the plans. Qualified union employees are covered by multiemployer defined benefit pension plans under the provisions of collective bargaining agreements. Benefits under these plans are generally based on the employee's years of service and average compensation at retirement. The total expense for employee retirement benefit plans was as follows (in thousands): <TABLE> <CAPTION> Fiscal Year Ended ------------------------------------------------ June 30, June 30, June 30, 1996 1995 1994 --------------- --------------- -------------- <S> <C> <C> <C> Defined contribution plans $ 7,233 $ 5,611 $ 4,053 Multiemployer plans 711 637 522 --------------- --------------- -------------- Total $ 7,944 $ 6,248 $ 4,575 =============== =============== ============== </TABLE> 9. COMMITMENTS AND CONTINGENT LIABILITIES The future minimum rental payments for operating leases having initial or remaining noncancelable lease terms in excess of one year at June 30, 1996, are as follows (in thousands): <TABLE> <S> <C> 1997 $ 14,133 1998 12,151 1999 8,500 2000 4,233 2001 2,551 Thereafter 7,658 -------------- Total $ 49,226 ============== </TABLE> 27
28 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Rental expense relating to operating leases was approximately $20,607,000, $14,637,000 and $12,645,000 in fiscal 1996, 1995, and 1994, respectively. Sublease rental income was not material for any period presented herein. As of June 30, 1996, amounts outstanding on customer notes receivable sold with full recourse to a commercial bank totaled approximately $13,923,000. The Company also has outstanding guarantees of indebtedness and financial assistance commitments which totaled approximately $2,822,000 at June 30, 1996. 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 or results of operations. 10. REDEEMABLE PREFERRED STOCK Prior to February 7, 1994, Whitmire had outstanding 360,000 shares of redeemable preferred $.01 par value stock. 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. Pursuant to the terms of the Reorganization Agreement between Cardinal and Whitmire (see Note 2), all of the outstanding shares of Whitmire Senior and Series A Preferred Stock were redeemed as of February 7, 1994, the date of the Whitmire Merger. 11. SHAREHOLDERS' EQUITY At June 30, 1996, the Company's authorized capital shares consisted of (a) 100,000,000 Class A common shares, without par value, of which 63,959,267 and 63,006,246 (as adjusted to reflect business combinations) were outstanding and 222,626 and 193,292 were held in treasury at cost at June 30, 1996 and 1995, respectively; (b) 5,000,000 Class B common shares, without par value, of which none were outstanding at either balance sheet date; and (c) 500,000 non-voting preferred shares without par value, none of which have been issued. The Class A common shares and Class B common shares are collectively referred to as Common Shares. On September 26, 1994, 8,050,000 of the Company's Common Shares were sold pursuant to a public offering. Approximately 1,867,000 Common Shares were sold by the Company, and approximately 6,183,000 Common Shares (the "Existing Shares") were sold by certain shareholders of the Company. The Company did not receive any of the proceeds from the sale of the Existing Shares. 12. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS The Company's trade receivables, finance notes and accrued interest receivable, and lease receivables are exposed to a concentration of credit risk with customers in the retail and health care sectors. However, the credit risk is limited due to supporting collateral and the diversity of the customer base, including its wide geographic dispersion. The Company performs ongoing credit evaluations of its customers' financial conditions and maintains reserves for credit losses. Such losses historically have been within the Company's expectations. During fiscal 1996, the Company's two largest customers individually accounted for 12% of net revenues and 70% of direct deliveries, respectively. During fiscal 1995, the Company's two largest customers individually accounted for 11% of net revenues and 82% of direct deliveries, respectively. Trade receivables due from these two customers aggregated approximately 25% of total trade receivables at June 30, 1996 and 1995. 28
29 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. STOCK OPTIONS AND RESTRICTED SHARES The Company maintains stock incentive plans (the "Plans") for the benefit of certain officers, directors and key employees. Options granted are generally exercisable for periods up to ten years from the date of grant at a price which equals fair market value at the date of grant. On November 14, 1995, the Company's shareholders approved a new equity incentive plan (the "New Plan") which authorized the issuance of up to an aggregate of 2,000,000 Common Shares in the form of incentive stock options, nonqualified stock options, performance shares and restricted shares. The Common Shares authorized for issuance under the New Plan are in addition to 1,766,000 Common Shares which were issuable pursuant to stock options outstanding immediately prior to the approval of the New Plan and the 1,562,000 stock options which were issuable pursuant to the Pyxis Merger. The following summarizes all stock option transactions for the Company (excluding Whitmire, see below) under the Plans from June 30, 1993, through June 30, 1996, giving retroactive effect to conversions of options in connection with merger transactions and stock splits (in thousands, except per share amounts): <TABLE> <CAPTION> Number Exercise Prices of Options Per Share Total ------------- ---------------------- ------------- <S> <C> <C> <C> <C> Balance Outstanding, June 30, 1993 2,134 $ 0.12 - $ 57.80 $ 26,806 Granted 1,534 24.20 - 91.93 74,258 Exercised (314) 0.12 - 63.64 (1,676) Canceled (41) 0.12 - 84.09 (1,155) ------------- ------------- Balance Outstanding, June 30, 1994 3,313 0.12 - 91.93 98,233 Granted 830 36.23 - 64.26 40,671 Exercised (413) 0.12 - 60.26 (4,465) Canceled (112) 0.12 - 91.93 (4,963) ------------- ------------- Balance Outstanding, June 30, 1995 3,618 0.12 - 91.93 129,476 Granted 958 28.90 - 72.38 51,008 Exercised (661) 0.12 - 68.87 (15,609) Canceled (399) 6.15 - 91.93 (23,403) ------------- ---------- Balance Outstanding, June 30, 1996 3,516 $ 0.12 - $ 84.09 $ 141,472 ============= ============= </TABLE> At June 30, 1996, approximately 2,118,000 option shares under the Plans were exercisable. In addition to the options outstanding and restricted shares granted, approximately 1,472,000 shares are available to be issued pursuant to the Plans. In connection with the Whitmire Merger, outstanding Whitmire stock options granted to current or former Whitmire officers or employees were automatically converted into options ("Cardinal Exchange Options") to purchase an aggregate of approximately 1,721,000 additional Common Shares pursuant to the terms of such options and the Reorganization Agreement (see Note 2). 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. Cardinal Exchange Options to purchase 190,000, 1,250,000 and 271,000 Common Shares, with an average option price of $2.06, $1.52 and $1.60, were exercised in fiscal 1996, 1995 and 1994, respectively. At June 30, 1996, substantially all Cardinal Exchange Options had been exercised. The market value of restricted shares awarded by the Company is recorded in the other component of shareholders' equity in the accompanying balance sheets. The compensation awards are amortized to expense over the period in which participants perform services, generally one to six years. As of June 30, 1996, approximately 467,000 restricted shares have been issued, of which approximately 158,000 shares remain restricted and subject to forfeiture and approximately 26,000 shares have been forfeited. 29
30 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following selected quarterly financial data (in thousands, except per share amounts) for fiscal 1996 and 1995 has been restated to reflect the pooling-of-interests business combinations (see Note 2): <TABLE> <CAPTION> First Second Third Fourth Total Quarter Quarter Quarter Quarter Year -------------- ------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> <C> Fiscal 1996: Net revenues $ 2,096,845 $ 2,188,619 $ 2,256,481 $ 2,320,480 $ 8,862,425 Gross margin 164,046 174,667 189,062 187,502 715,277 Selling, general and administrative expenses 107,358 107,103 107,748 111,046 433,255 Operating earnings 56,688 50,012 81,314 26,758 214,772 Net earnings available for Common Shares 31,916 26,542 45,349 8,057 111,864 Net earnings per Common Share: Primary $ 0.49 $ 0.41 $ 0.70 $ 0.12 $ 1.73 Fully diluted 0.49 0.41 0.70 0.12 1.73 - -------------------------------------------------------------------------------------------------------------------------- Fiscal 1995: Net revenues $ 1,868,932 $ 2,039,393 $ 2,041,440 $ 2,072,343 $ 8,022,108 Gross margin 140,595 153,631 165,986 164,339 624,551 Selling, general and administrative expenses 90,271 93,949 95,553 98,806 378,579 Operating earnings 50,324 59,682 70,433 65,533 245,972 Net earnings available for Common Shares 28,269 34,310 38,846 36,109 137,534 Net earnings per Common Share: Primary $ 0.45 $ 0.53 $ 0.60 $ 0.56 $ 2.14 Fully diluted 0.45 0.53 0.60 0.56 2.14 </TABLE> The following supplemental information for fiscal 1996 excludes the impact of unusual items (in thousands, except per share amounts). See Note 2 for additional information. <TABLE> <CAPTION> First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Fiscal 1996: Net revenues $ 2,096,845 $ 2,188,619 $ 2,256,481 $ 2,320,480 $ 8,862,425 Gross margin 164,046 174,667 189,062 187,502 715,277 Selling, general and administrative expenses 107,358 107,103 107,748 111,046 433,255 Operating earnings, excluding unusual items 56,688 67,564 81,314 76,456 282,022 Net earnings available for Common Shares, excluding unusual items 31,916 39,037 45,349 43,395 159,697 Net earnings per Common Share, excluding unusual items: Primary $ 0.49 $ 0.60 $ 0.70 $ 0.67 $ 2.47 Fully diluted 0.49 0.60 0.70 0.67 2.47 </TABLE> Operating earnings and net earnings available for Common Shares ("Earnings") as reported in the Company's selected quarterly financial data for fiscal 1996 are reconciled to the respective amounts in the preceding table as follows (in thousands): <TABLE> <CAPTION> Second Quarter Fourth Quarter ---------------------------- ---------------------------- Operating Operating Earnings Earnings Earnings Earnings -------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> Fiscal 1996: As reported $ 50,012 $ 26,542 $ 26,758 $ 8,057 Supplemental adjustments: Unusual items, primarily merger costs 17,552 12,495 49,698 35,338 -------------- ----------- -------------- ----------- As supplementally adjusted $ 67,564 $ 39,037 $ 76,456 $ 43,395 ============== =========== ============== =========== </TABLE> The above selected quarterly financial data differs from amounts previously reported by the Company due to the Pyxis Merger. Amounts reported by the Company prior to the Pyxis Merger (completed May 7, 1996) are presented 30
31 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS below and differ from the above selected quarterly financial data solely due to the addition of Pyxis amounts pursuant to the pooling-of-interests accounting method for business combinations (in thousands, except per share amounts). <TABLE> <CAPTION> First Second Third Fourth Total Quarter Quarter Quarter Quarter Year -------------- ------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> <C> Fiscal 1996: Net revenues $ 2,047,138 $ 2,131,627 $ 2,202,804 Gross margin 130,012 136,494 150,926 Selling, general and administrative expenses 87,217 83,125 84,117 Operating earnings 42,795 36,995 66,809 Net earnings available for Common Shares 23,492 18,714 36,797 Net earnings per Common Share: Primary $ 0.48 $ 0.38 $ 0.75 Fully diluted 0.48 0.38 0.75 -------------- ------------- ------------- ------------- -------------- Fiscal 1995: Net revenues $ 1,832,128 $ 1,999,267 $ 2,001,250 $ 2,027,274 $ 7,859,919 Gross margin 114,082 123,627 137,992 133,509 509,210 Selling, general and administrative expenses 77,358 78,824 81,660 83,671 321,513 Operating earnings 36,724 44,803 56,332 49,838 187,697 Net earnings available for Common Shares 19,710 24,942 29,986 26,362 101,000 Net earnings per Common Share: Primary $ 0.42 $ 0.51 $ 0.61 $ 0.53 $ 2.07 Fully diluted 0.42 0.51 0.61 0.53 2.07 </TABLE> 15. SUPPLEMENTAL CASH FLOW INFORMATION Income tax and interest payments for the fiscal years ended June 30, 1996, 1995 and 1994 were as follows (in thousands): <TABLE> <CAPTION> Fiscal Year Ended ------------------------------------------------ June 30, June 30, June 30, 1996 1995 1994 -------------- -------------- --------------- <S> <C> <C> <C> Interest paid $ 18,537 $ 20,259 $ 16,588 Income taxes paid $ 56,659 $ 20,692 $ 44,454 </TABLE> See Note 2 for additional information regarding non cash investing and financing activities. 16. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which requires adoption no later than the Company's fiscal 1997. The new standard defines a fair value method of accounting for stock options and similar equity instruments, under which compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to the new standard, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in the financial statements pro forma net income and earnings per share as if the new method of accounting had been applied. The accounting requirements of the new method are effective for all employee awards granted after the beginning of the fiscal year of adoption. The Company has not yet determined if it will elect to change to the fair value method, 31
32 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS nor has it determined the effect the new standard will have on net income and earnings per share should it elect to make such a change. Adoption of the new standard will have no effect on the Company's cash flows. In addition, in March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting For the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires adoption no later than the Company's fiscal 1997. SFAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when an indication of impairment is present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses accounting for long-lived assets that are expected to be disposed of. The Company does not believe, based on current circumstances, the adoption of SFAS No. 121 will have a material effect on financial condition or results of operations. 17. SUBSEQUENT EVENT On July 24, 1996, the Company announced that it had entered into a definitive merger agreement with PCI Services, Inc. ("PCI") pursuant to which PCI will become a wholly owned subsidiary of the Company in a stock-for-stock merger expected to be accounted for as a pooling-of-interests for financial reporting purposes. In connection with the merger, the Company estimates that it will issue approximately 2.1 million Common Shares. Under the terms of the merger agreement, shareholders of PCI will receive 0.336 Common Shares for each share of PCI that they own at the time the transaction is consummated, subject to adjustment under specified circumstances. In addition, pursuant to the terms of the merger agreement, options for PCI common stock will be converted into equivalent options for approximately 157,920 Common Shares, based upon the exchange ratio. Upon consummation of the merger, the Company will record a one-time charge to reflect transaction and other costs incurred as a result of the merger. The merger is expected to be completed in the fall of 1996, subject to satisfaction of certain conditions, including approval by shareholders of PCI. 32
33 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In accordance with General Instruction G(3) to Form 10-K, the information called for in this Item 10 relating to Directors is incorporated herein by reference to the Company's Definitive Proxy Statement, to be filed with the Securities and Exchange Commission (the "SEC"), pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 (the "Exchange Act"), relating to the Company's Annual Meeting of Shareholders (the "Annual Meeting") under the caption "ELECTION OF DIRECTORS". Certain information relating to Executive Officers of the Company appears at pages 7 and 8 of this Form 10-K, which is hereby incorporated by reference. ITEM 11: EXECUTIVE COMPENSATION In accordance with General Instruction G(3) to Form 10-K, the information called for by this Item 11 is incorporated herein by reference to the Company's Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A of the General Rules and Regulations under the Exchange Act, relating to the Company's Annual Meeting under the caption "EXECUTIVE COMPENSATION" (other than information set forth under the caption "Compensation Committee Report"). ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT In accordance with General Instruction G(3) to Form 10-K, the information called for by this Item 12 is incorporated herein by reference to the Company's Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A of the General Rules and Regulations under the Exchange Act, relating to the Company's Annual Meeting under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT". ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In accordance with General Instruction G(3) to Form 10-K, the information called for by this Item 13 is incorporated herein by reference to the Company's Definitive Proxy Statement, to be filed with the SEC pursuant to Regulation 14A of the General Rules and Regulations under the Exchange Act, relating to the Company's Annual Meeting under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "EXECUTIVE COMPENSATION--Compensation Committee Interlocks and Insider Participation". 33
34 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following financial statements are included in Item 8 of this report: PAGE ---- Independent Auditors' Reports........................................13 Financial Statements: Consolidated Statements of Earnings for the Fiscal Years Ended June 30, 1996, 1995 and 1994...................................... 15 Consolidated Balance Sheets at June 30, 1996 and 1995............... 16 Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended June 30, 1996, 1995 and 1994.......................... 17 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1996, 1995 and 1994...................................... 18 Notes to Consolidated Financial Statements.......................... 19 (a)(2) The following Supplemental Schedule is included in this report: PAGE ---- Schedule II - Valuation and Qualifying Accounts..................... 39 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 Item 601 of Regulation S-K: EXHIBIT NUMBER EXHIBIT DESCRIPTION - --------- ------------------- 2.01 Agreement and Plan of Merger dated as of August 26, 1995, among the Registrant, Arch Merger Corp., and Medicine Shoppe International, Inc. (1) 2.02 Agreement and Plan of Merger dated as of February 7, 1996, among the Registrant, Aztec Merger Corp., and Pyxis Corporation. (2) 2.03 Agreement and Plan of Merger dated as of July 23, 1996 among the Registrant, Panther Merger Corp., PCI Services, Inc. and MEDIQ Incorporated. (3) 3.01 Amended and Restated Articles of Incorporation of the Registrant, as amended. (4) 3.02 Restated Code of Regulations of the Registrant, as amended. (5) 4.01 Specimen Certificate for the Registrant's Class A Common Shares. (4) 4.02 Indenture between the Registrant and Bank One, Indianapolis, NA relating to the Registrant's 8% Notes Due 1997. (6) 34
35 4.03 Indenture between the Registrant and Bank One, Indianapolis, NA relating to the Registrant's 6 1/2% Notes Due 2004 and 6% Notes Due 2006. (5) 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 SEC upon its request. EXHIBIT NUMBER EXHIBIT DESCRIPTION - -------- ------------------- 10.01 Stock Incentive Plan of the Registrant, as amended. (12)* 10.02 Directors' Stock Option Plan of the Registrant, as amended and restated. (12) 10.03 Equity Incentive Plan of the Registrant. (4)* 10.04 Amended and Restated 1991 Stock Plan of Pyxis Corporation. (13)* 10.05 1990 Stock Option Plan of Medicine Shoppe International, Inc. (14)* 10.06 Employee Incentive Stock Option Plan of Medicine Shoppe International, Inc. (14)* 10.07 Executive Choice Plan of Medicine Shoppe International, Inc. (14)* 10.08 Employment Agreement dated October 11, 1993, among Whitmire, Melburn G. Whitmire and the Registrant, as amended. (7)* 10.09 Employment Agreement dated August 26, 1995, among Medicine Shoppe, David A. Abrahamson and the Registrant. * 10.10 Form of Indemnification Agreement between the Registrant and individual directors. (8) 10.11 Form of Indemnification Agreement between the Registrant and individual officers. (9)* 10.12 Form of Indemnification Agreement between Whitmire and directors and officers of Whitmire. (12)* 10.13 Split Dollar Agreement dated April 16, 1993, among the Registrant, Robert D. Walter, and Bank One Ohio Trust Company, NA, Trustee U/A dated April 16, 1993 FBO Robert D. Walter. (12)* 10.14 Lease for portions of the Registrant's Columbus Investment Property dated July 7, 1958, as amended. (10) 10.15 Cardinal Health, Inc. Incentive Deferred Compensation Plan, Amended and Restated Effective November 13, 1995. 10.16 Shareholders Agreement dated July 13, 1984, as amended. (11) 10.17 Master Agreement and related documents, dated as of July 19, 1996 among the Registrant and/or its subsidiaries, SunTrust Banks, Inc., PNC Leasing Corp. and SunTrust Bank, Atlanta. 10.18 Vendor Program Agreement dated as of October 10, 1991 by and between General Electric Capital Corporation and Pyxis Corporation, as amended on December 13, 1991, January 15, 1993 and March 10, 1994. 11.01 Statement concerning computation of per share earnings. 35
36 21.01 List of subsidiaries of the Registrant. 23.01 Consent of Deloitte & Touche LLP. 23.02 Consent of Ernst & Young LLP. 27.01 Financial Data Table - ------------------ (1) Included as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (No. 0-12591) and incorporated herein by reference. (2) Included as an exhibit to the Registrant's Schedule 13D reporting Registrant's beneficial ownership of shares of Pyxis Corporation (No. 5-43690) and incorporated herein by reference. (3) Included as an exhibit to the Registrant's Schedule 13D reporting Registrant's beneficial ownership of shares of PCI Services, Inc. (No. 5-42666) and incorporated herein by reference. (4) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995 (No. 0-12591) and incorporated herein by reference. (5) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (No. 0-12591) and incorporated herein by reference. (6) Included as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1992 (No. 0-12591) and incorporated herein by reference. (7) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993 (No. 0-12591) and as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995 (No. 0-12591) and incorporated herein by reference. (8) Included as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 29, 1986 (No. 0-12591) and incorporated herein by reference. (9) Included as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 28, 1987 (No. 0-12591) and incorporated herein by reference. (10) Included as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 2-84444) and incorporated herein by reference. (11) Included as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1993 (No. 0-12592) and incorporated herein by reference. (12) Included as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 (No. 0-12591) and incorporated herein by reference. (13) Included as an exhibit to the Registrant's Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement (No. 333-01927-01). (14) Included as an exhibit to the Registrant's Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement (No. 33-63283-01). * Management contract or compensation plan or arrangement. 36
37 (b) Reports on Form 8-K: On April 23, 1996, the Company filed a Report on Form 8-K under Item 5 which set forth the results for the fiscal quarter ended March 31, 1996 as contained in the Company's press release dated April 22, 1996. On May 8, 1996, the Company filed a Report on Form 8-K under Item 2 which reported that it had completed its merger of a wholly owned subsidiary with and into Pyxis Corporation ("Pyxis") on May 7, 1996. Pursuant to Item 7, the Form 8-K included the required audited financial statements of Pyxis and the required combined unaudited pro forma financial information of the Company and Pyxis. 37
38 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. August 26, 1996 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: <TABLE> <CAPTION> NAME TITLE DATE - --------------------------------------- -------------------------------------------- --------------- <S> <C> <C> /s/ ROBERT D. WALTER Chairman, Chief Executive Officer and August 26, 1996 - --------------------------------------- Director (principal executive officer) Robert D. Walter /s/ DAVID BEARMAN Executive Vice President and Chief Financial August 26, 1996 - --------------------------------------- Officer (principal financial officer) David Bearman /s/ RICHARD J. MILLER Vice President, Controller and Principal August 26, 1996 - --------------------------------------- Accounting Officer Richard J. Miller /s/ JOHN C. KANE President, Chief Operating Officer August 26, 1996 - --------------------------------------- and Director John C. Kane /s/ JOHN F. FINN Director August 26, 1996 - --------------------------------------- John F. Finn /s/ ROBERT L. GERBIG Director August 26, 1996 - --------------------------------------- Robert L. Gerbig /s/ JOHN F. HAVENS Director August 26, 1996 - --------------------------------------- John F. Havens /s/ REGINA E. HERZLINGER Director August 26, 1996 - --------------------------------------- Regina E. Herzlinger /s/ J. MICHAEL LOSH Director August 26, 1996 - --------------------------------------- J. Michael Losh /s/ GEORGE R. MANSER Director August 26, 1996 - --------------------------------------- George R. Manser /s/ JOHN B. McCOY Director August 26, 1996 - --------------------------------------- John B. McCoy /s/ JERRY E. ROBERTSON Director August 26, 1996 - --------------------------------------- Jerry E. Robertson /s/ L. JACK VAN FOSSEN Director August 26, 1996 - --------------------------------------- L. Jack Van Fossen /s/ MELBURN G. WHITMIRE Director August 26, 1996 - --------------------------------------- Melburn G. Whitmire </TABLE> 38
39 CARDINAL HEALTH, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) <TABLE> <CAPTION> COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------ ---------- -------------------------- -------------- ---------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) OF PERIOD - ------------------------------------------------ ---------- ----------- ------------ -------------- ---------- <S> <C> <C> <C> <C> <C> Fiscal Year 1996: Account receivable $ 31,529 $ 8,037 $ 1,435 $ (8,587) $ 32,414 Finance notes receivable 7,385 1,087 9 (439) 8,042 Net investment in sales-type leases 2,900 326 3,226 -------- -------- -------- -------- -------- $ 41,814 $ 9,450 $ 1,444 $ (9,026) $ 43,682 ======== ======== ======== ======== ======== Fiscal Year 1995: Account receivable $ 24,876 $ 11,602 $ 2,005 $ (6,954) $ 31,529 Finance notes receivable 7,275 724 (614) 7,385 Net investment in sales-type leases 2,747 153 2,900 -------- -------- -------- -------- -------- $ 34,898 $ 12,479 $ 2,005 $ (7,568) $ 41,814 ======== ======== ======== ======== ======== Fiscal Year 1994: Account receivable $ 18,457 $ 10,560 $ 956 $ (5,097) $ 24,876 Finance notes receivable 6,980 953 (658) 7,275 Net investment in sales-type leases 2,088 659 2,747 -------- -------- -------- -------- -------- $ 27,525 $ 12,172 $ 956 $ (5,755) $ 34,898 ======== ======== ======== ======== ======== </TABLE> 1 During fiscal 1996, 1995 and 1994 recoveries of amounts provided for or written off in prior years were $324,000, $177,000 and $308,000, respectively, and increases from acquisitions of subsidiaries were $1,120,000, $1,828,000 and $648,000, respectively. 2 Write-off of uncollectible accounts. 39