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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, 2000
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)
OHIO 31-0958666
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
7000 CARDINAL PLACE, DUBLIN, OHIO 43017
(Address of principal executive offices) (Zip Code)
(614) 757-5000
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
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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 September 1, 2000 was approximately $22,899,156,785.
The number of Registrant's Common Shares outstanding as of September 1,
2000, was as follows: Common shares, without par value: 277,899,377.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement to be filed for its
2000 Annual Meeting of Shareholders are incorporated by reference into Part III
of this Annual Report on Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
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Information Regarding Forward-Looking Statements..................................... 3
PART I
1. Business............................................................................. 3
2. Properties........................................................................... 7
3. Legal Proceedings.................................................................... 8
4. Submission of Matters to a Vote of Security Holders.................................. 8
Senior Officers of the Company....................................................... 9
PART II
5. Market for the Registrant's Common Shares and Related Shareholder Matters............ 12
6. Selected Financial Data.............................................................. 12
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
7a. Quantitative and Qualitative Disclosures About Market Risk........................... 19
8. Financial Statements and Supplementary Data.......................................... 20
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 50
PART III
10. Directors and Executive Officers of the Registrant................................... 50
11. Executive Compensation............................................................... 50
12. Security Ownership of Certain Beneficial Owners and Management....................... 50
13. Certain Relationships and Related Transactions....................................... 51
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 51
Signatures............................................................................ 56
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Portions of this Annual Report on Form 10-K (including information
incorporated by reference) include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"believe", "expect", "anticipate", "project", and similar expressions, among
others, identify "forward looking statements", which speak only as of the date
the statement was made. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to materially
differ from those projected, anticipated or implied. The most significant of
such risks, uncertainties and other factors are described in this Form 10-K and
in Exhibit 99.01 to this Form 10-K. The Company undertakes no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
PART I
ITEM 1: BUSINESS
GENERAL
Cardinal Health, Inc., an Ohio corporation formed in 1979, is structured as
a holding company conducting business through a number of separate operating
subsidiaries. As used in this report, the "Registrant" and the "Company" refer
to Cardinal Health, Inc. and its subsidiaries, unless the context requires
otherwise. Except as otherwise specified, information in this report is provided
as of June 30, 2000. The Company is a leading provider of products and services
to healthcare providers and manufacturers to help them improve the efficiency
and quality of healthcare. These services and products include Pharmaceutical
Distribution and Provider Services, Medical-Surgical Products and Services,
Pharmaceutical Technologies and Services and Automation and Information
Services.
BUSINESS SEGMENTS
A description of the Company's reporting industry segments, which have been
expanded from those previously reported, is as follows(1):
PHARMACEUTICAL DISTRIBUTION AND PROVIDER SERVICES
Through its Pharmaceutical Distribution and Provider Services segment, the
Company distributes a broad line of pharmaceutical and other healthcare
products and provides pharmacy management and related consulting services to
hospital, retail and alternate-site pharmacies. Cardinal Distribution, the
Company's pharmaceutical distribution business, is one of the country's leading
wholesale distributors of pharmaceutical and related healthcare 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. As a full-service wholesale distributor, Cardinal
Distribution 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 sales volumes. These support services include
online procurement, fulfillment and information through cardinal.com,
computerized order entry and order confirmation systems, 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
distribution customers order more efficiently, contain costs, and monitor their
purchases.
The Company also operates several specialty healthcare distribution
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 and distribution program for both independent and chain drugstore
customers. In addition, the Company serves as a distributor of therapeutic
plasma products, oncology 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. The Company
also operates a third party logistics company that distributes and tracks
products for pharmaceutical and bio-technology manufacturers.
Also within this segment, the Company provides services to healthcare
providers through integrated pharmacy management and consulting, as well as
operating as a franchisor of apothecary-style retail pharmacies. The Company
also provides temporary staffing and related services, in a collaborative
relationship with hospital pharmacy and administration.
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(1) For additional information concerning the Company's industry segments, see
Note 12 of "Notes to Consolidated Financial Statements".
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MEDICAL-SURGICAL PRODUCTS AND SERVICES
The Company's subsidiary, Allegiance Corporation ("Allegiance"), is a
provider of non-pharmaceutical healthcare products and cost-saving services for
hospitals and other healthcare providers. Allegiance offers a broad range of
medical and laboratory products, representing more than 2,600 suppliers in
addition to its own line of surgical and respiratory therapy products. It also
manufactures sterile and non-sterile procedure kits, single-use surgical drapes,
gowns and apparel, medical and surgical gloves, fluid suction and collection
systems, respiratory therapy products, surgical instruments, instrument
reprocessing products, special procedure products and other products. Allegiance
assists its customers in reducing costs while improving the quality of patient
care in a variety of ways, including online procurement, fulfillment and
information through cardinal.com, supply-chain management, instrument repair and
other professional consulting services.
PHARMACEUTICAL TECHNOLOGIES AND SERVICES
Through its Pharmaceutical Technologies and Services segment, the Company
provides services to the pharmaceutical manufacturing industry through a broad
spectrum of complementary services. The Company provides manufacturers with
unique drug delivery systems and related manufacturing capabilities. It is also
a leading provider of diversified custom packaging services both in the United
States and Europe. The Company is a leading provider of contract manufacturing
and packaging of sterile liquid pharmaceuticals and other healthcare products in
topical, oral, inhaled and ophthalmic formulations, and also provides contract
manufacturing services to pharmaceutical companies. The Company's contract sales
organization assists healthcare companies in launching and marketing products by
providing strategic planning, product management, vendor evaluation and related
services. The Company also operates a reimbursement consulting firm, which helps
manufacturers obtain insurance coverage and payment for new drugs.
AUTOMATION AND INFORMATION SERVICES
The Company, within its Automation and Information Services segment,
operates businesses focusing on meeting customer needs through unique and
proprietary automation and information products and services, including Pyxis
Corporation ("Pyxis"), which develops, manufactures, leases, sells and services
point-of-use pharmacy systems which automate the distribution and management of
medications and supplies in hospitals and other healthcare facilities. Through
its Cardinal Information group of companies, the Company provides information
systems that analyze clinical outcomes and assist pharmacies in obtaining
reimbursement from third party payors.
ACQUISITIONS
Over the last five years, the Company has completed the following business
combinations. On November 13, 1995, the Company completed a merger transaction
with Medicine Shoppe International, Inc. ("Medicine Shoppe"), a St. Louis,
Missouri-based franchisor of independent, apothecary-style retail pharmacies in
the United States and abroad. The Company issued approximately 14.4 million(2)
Common Shares to Medicine Shoppe shareholders in the transaction. On May 7,
1996, the Company completed a merger transaction with Pyxis, a San Diego,
California-based developer, 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 healthcare facilities. The
Company issued approximately 33.9 million Common Shares to Pyxis shareholders in
the transaction. On October 11, 1996, the Company completed a merger transaction
with PCI Services, Inc. ("PCI"), a Philadelphia, Pennsylvania-based provider of
diversified packaging services to the pharmaceutical industry in the United
States and abroad. The Company issued approximately 4.7 million Common Shares to
PCI shareholders in the transaction. On March 18, 1997, the Company completed a
merger transaction with Owen Healthcare, Inc. ("Owen"), a Houston, Texas-based
provider of pharmacy management and information services to hospitals. The
Company issued approximately 11.6 million Common Shares to Owen shareholders in
the transaction. On February 18, 1998, the Company completed a merger
transaction with MediQual Systems, Inc. ("MediQual"), a Westborough,
Massachusetts-based supplier of clinical information management systems and
services to the healthcare industry. On August 7, 1998, the Company completed a
merger transaction with R.P. Scherer Corporation ("Scherer"), an international
developer and manufacturer of drug delivery systems. On February 3, 1999, the
Company completed a merger transaction with Allegiance, a McGaw Park,
Illinois-based distributor and manufacturer of medical, surgical and laboratory
products and a provider of cost-saving services. On September 10, 1999 the
Company completed a merger transaction with Automatic Liquid Packaging, Inc.
("ALP"), a Woodstock, Illinois-based custom manufacturer of sterile liquid
pharmaceuticals and other healthcare products. The Company has also completed a
number of smaller acquisition transactions during the last five years, including
the acquisitions of Comprehensive Reimbursement Consultants, Inc.; Pharmacists:
prn, Inc.; The Enright Group, Inc.; Pharmaceutical Packaging Specialties, Inc.;
Pacific Surgical Innovations, Inc.; Herd Mundy Richardson Limited; TriMaras
Printing Company, Inc.; Helpmate Robotics, Inc.; and Contract Health
Professionals, Inc.
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(2) All share references in this paragraph are adjusted to reflect all stock
splits and stock dividends effected since the time of the applicable
acquisition.
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The Company continually evaluates possible candidates for merger or
acquisition and intends to continue to seek opportunities to expand its
healthcare operations and services in all reporting industry segments. For
additional information concerning the transactions described above, see Notes 1,
2, and 16 of "Notes to Consolidated Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CUSTOMERS AND SUPPLIERS
The Company distributes pharmaceuticals, healthcare and beautycare
products, and related products and services to hospitals, independent and chain
drugstores, alternate care centers and the pharmacy departments of supermarkets
and mass merchandisers located throughout the United States. Through Medicine
Shoppe, the Company franchises retail pharmacies in the United States and
abroad. Owen provides pharmacy management and information services to hospitals
throughout the United States. The Company also provides consulting services and
resources to hospitals in the areas of pharmaceutical and clinical operations,
and temporary staffing. The Company provides services to pharmaceutical
manufacturing customers in the United States and abroad through Scherer, which
provides unique drug delivery systems to such customers, and PCI and ALP, which
provide integrated packaging services to such customers. The Company markets
Pyxis' automated dispensing systems to hospitals and alternate care centers in
the United States and abroad. Allegiance distributes non-pharmaceutical
healthcare products and provides cost-saving services to hospitals and other
healthcare providers in the United States and abroad.
The Company's largest retail distribution customer in its Pharmaceutical
Distribution and Provider Services segment accounted for approximately 8% of the
Company's operating revenues (by dollar volume) for fiscal year 2000. This
segment could be adversely affected if the business of this customer were lost.
The largest retail bulk distribution customer in the Pharmaceutical Distribution
and Provider Services segment accounted for approximately 52% of all bulk
deliveries. Due to the lack of margin generated through bulk deliveries,
fluctuations in their amount would have no significant impact on the segment's
earnings. The members of the two largest group purchasing organizations (each, a
"GPO") having business arrangements with the Company accounted for approximately
14%, and 12%, respectively, of the Company's operating revenues (by dollar
volume) in fiscal 2000 through the Company's Pharmaceutical Distribution and
Provider Services and Medical-Surgical Products and Services segments. Each of
these two segments could be adversely affected if the business arrangements with
either of such GPO customers were lost, although the loss of the business
arrangement with either such GPO would not necessarily mean the loss of sales
from all members of the GPO.
Effective August 10, 2000, the Company renewed and expanded its
pharmaceutical distribution relationship with CVS, one of the largest retail
pharmacy chains in the United States, by executing a five-year wholesale supply
agreement with CVS. The agreement represents a significant expansion of the
Company's bulk deliveries and direct-to-store distribution business with CVS.
The Company obtains its products from many different suppliers, the largest
of which accounted for approximately 2.1% (by dollar volume) of its operating
revenue in fiscal 2000. The Company's five largest suppliers accounted for
approximately 7.3% (by dollar volume) of its operating revenue during fiscal
2000 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 markets in which the Company operates are highly competitive. As a
pharmaceutical wholesale distributor, the Company competes directly with
numerous other national and regional wholesale distributors, direct selling
manufacturers, self-warehousing chains, and specialty distributors on the basis
of price, breadth of product lines, marketing programs, and support services.
The Company's pharmaceutical wholesale distribution 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 support services. Several smaller franchisors compete with
Medicine Shoppe in the franchising of pharmacies, with competition being based
primarily upon price, benefits offered to both the pharmacist and the customer,
access to third party programs, and the reputation of the franchise. Medicine
Shoppe also needs to be competitive with a pharmacist's ongoing option to remain
self-employed at his or her current position rather than becoming a franchisee.
Medicine Shoppe's Managed Pharmacy Benefits subsidiary also faces competition
from other pharmacy benefit management companies. With its Owen subsidiary, the
Company competes with both national and regional hospital pharmacy management
firms, and self-managed hospitals and hospital
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systems on the basis of price and services offered, its established base of
business, the effective use of information systems, the development of clinical
programs, and the quality of the services it provides to its customers. Through
Scherer, the Company's drug delivery technologies compete with a growing number
of new drug delivery technologies and with continued refinements to existing
delivery technologies of both pharmaceutical companies and companies formed to
develop new technologies. Through PCI and ALP, the Company competes with
companies that provide many types of packaging services and those that provide
one or a few types of packaging services, based primarily upon quality, variety
of available packaging services, customer service, responsiveness and price. As
a marketer of automated pharmaceutical dispensing and supply systems through
Pyxis, the Company competes based upon price, its installed base of systems,
relationships with customers, customer service and support capabilities, patents
and other intellectual property, and its ability to interface with customer
information systems. Actual and 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. Through Allegiance, the Company has substantial competition in all of
its non-pharmaceutical healthcare product and service markets, with competition
focusing primarily on product performance, service levels and price.
EMPLOYEES
As of September 1, 2000, the Company had approximately 42,200 employees in
the U.S. and abroad, of which approximately 1,300 are subject to collective
bargaining agreements. Overall, the Company considers its employee relations to
be good.
INTELLECTUAL PROPERTY
The Company has applied in the United States and certain foreign countries
for registration of a number of trademarks and service marks, certain of which
have been registered, and also holds common law rights in various trademarks and
service marks. There can be no assurance that the Company will obtain the
registrations for trademarks and service marks for which it has applied.
The Company holds patents relating to certain aspects of its automated
pharmaceutical dispensing systems, automated medication management systems,
medication packaging, medical devices, processes, products, drug delivery
systems and sterile liquid packaging. The Company has a number of pending patent
applications in the United States and certain foreign countries, 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), a manager of pharmacy operations, a
pharmaceutical packager, a contract pharmaceutical manufacturer, and a
manufacturer of drug delivery systems and surgical and respiratory care
products, is required to register for permits and/or licenses with, and comply
with 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, as well as foreign agencies depending
upon the type of operations and location of product distribution and sale. In
addition, the Company is subject to requirements of the Controlled Substances
Act and the Prescription Drug Marketing Act of 1987, 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
pre-market 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. In its capacity as a distributor of prescription pharmaceuticals,
the Company is also subject to Medicare, Medicaid and state healthcare fraud
and abuse and anti-kickback laws and regulations.
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 or
pending 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.
Owen's pharmacy operations and its pharmacies are subject to comprehensive
regulation by state and federal authorities, including state boards of pharmacy
and federal authorities with responsibility for monitoring the storage,
handling, and dispensing
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of narcotics and other controlled substances. Owen's contractual arrangements
with pharmaceutical manufacturers and healthcare providers also subject it to
certain provisions of the federal Social Security Act which (a) prohibit
financial arrangements between providers of healthcare services to government
healthcare program (including Medicare and Medicaid) beneficiaries and
potential referral sources that are designed to induce patient referrals or the
purchasing, leasing, ordering or arranging for any good, service or item paid
for by such government programs, and (b) impose a number of restrictions upon
referring physicians and providers of designated health services under Medicare
and Medicaid programs.
Services and products provided by the Company's information businesses
include healthcare data and other drug-related information gathered and assessed
for the benefit of healthcare clients. Greater scrutiny is being placed on a
federal and state level regarding how such information should be handled and
identifying the appropriate parties to do so. Future changes in regulations
and/or legislation may affect how some of these information services or products
are provided.
In the United States, products manufactured or sold by the Company's
Allegiance, Scherer, PCI, ALP and National PharmPak Services, Inc. operations
are subject to regulation by the FDA, as well as by other federal and state
agencies, including those governing Medicare and Medicaid issues. The FDA
regulates the introduction and advertising of new medical products and related
manufacturing procedures, labeling, and record keeping. Product regulatory laws
also exist in most other countries where PCI, Allegiance and Scherer conduct
business. In addition, the Company's PCI and Scherer operations in the United
Kingdom, France, Italy and Germany are subject to state and local certification
requirements, including compliance with the Good Manufacturing Practices adopted
by the European Community.
The Company is also subject to various federal, state and local laws,
regulations and recommendations, both in the United States and abroad, relating
to safe working conditions, laboratory and manufacturing practices, and the use
and disposal of hazardous or potentially hazardous substances. The Company's
environmental policies mandate compliance with all applicable regulatory
requirements concerning environmental quality and contemplate, among other
things, appropriate capital expenditures for environmental protection for each
of its businesses. In addition, U.S. and international import and export laws
and regulations require that the Company abide by certain standards relating to
the importation and exportation of finished goods, raw materials and supplies.
ITEM 2: PROPERTIES
In the United States, the Company has 25 principal pharmaceutical
distribution facilities and two specialty distribution facilities utilized by
the Pharmaceutical Distribution and Provider Services segment. In the U.S., the
Company has five PCI packaging facilities (one of which is located in Puerto
Rico), four PCI printing facilities (two of which are located in Puerto Rico),
three Scherer manufacturing facilities and one ALP manufacturing facility in its
Pharmaceutical Technologies and Services segment. In addition, the Company has
two Pyxis assembly operations in its Automation and Information Services
segment. Domestically, the Company also has 48 medical-surgical distribution
facilities and 18 medical-surgical manufacturing facilities utilized by the
Medical-Surgical Products and Services segment. The Company's domestic
facilities are located in a total of 37 states and Puerto Rico.
Internationally, the Company owns, leases or operates through its
Pharmaceutical Technologies and Services segment, 12 Scherer manufacturing
facilities which are located in the United Kingdom, France, Germany, Italy,
Australia, Japan, Argentina, Brazil and Canada. Within this segment the Company
also has three PCI packaging facilities and one analytical services facility
which are located in the United Kingdom and Germany. The Company owns, leases or
operates through its Medical-Surgical Products and Services segment 13
medical-surgical distribution facilities located in Canada and the Netherlands,
and 12 medical-surgical manufacturing facilities located in the Netherlands,
Malaysia, Thailand, Malta, Mexico, the Dominican Republic, Germany and France.
The Company's international facilities are located in a total of 16 countries.
The Company owns 67 of the domestic and international facilities described
above, and the balance are leased. The Company's principal executive offices are
located in a leased four-story building located at 7000 Cardinal Place in
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 4 and 8 of "Notes to Consolidated Financial Statements".
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ITEM 3: LEGAL PROCEEDINGS
The Company and Whitmire Distribution Corporation ("Whitmire"), one of
the Company's wholly-owned subsidiaries, as well as other pharmaceutical
wholesalers, were named as defendants in a series of purported class action
lawsuits regarding the sale of brand name prescription drugs 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. On
November 30, 1998, the Court ordered judgment as a matter of law in favor of the
defendants. On February 22, 2000, the United States Supreme Court denied the
plaintiffs' final attempt to appeal the ruling, refusing to grant the
plaintiffs' Petition for Writ of Certiorari. The wholesaler defendants,
including the Company and Whitmire, entered into a Judgment Sharing Agreement
whereby the total exposure for the Company and its subsidiaries is limited to
the lesser of $1 million or 1% of any judgment against the wholesalers and the
manufacturers and provides for a reimbursement mechanism for legal fees and
expenses. The Company and Whitmire have also been named as defendants in a
series of related antitrust lawsuits brought by chain drug stores and
independent pharmacies who opted out of the federal class action lawsuits, and
in a series of state court cases alleging similar claims under various state
laws regarding the sale of brand name prescription drugs. The Judgment Sharing
Agreement applies to these related cases as well.
On September 30, 1996, Baxter International, Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries their U.S.
healthcare distribution business, surgical and respiratory therapy business and
healthcare cost-saving business, as well as certain foreign operations (the
"Allegiance Business") in connection with a spin-off of the Allegiance Business
by Baxter. In connection with this spin-off, Allegiance, which was acquired by
the Company on February 3, 1999, assumed the defense of litigation involving
claims related to the Allegiance Business from Baxter Healthcare Corporation
("BHC"), including certain claims of alleged personal injuries as a result of
exposure to natural rubber latex gloves. Allegiance will be defending and
indemnifying BHC, as contemplated by the agreements between Baxter and
Allegiance, for all expenses and potential liabilities associated with claims
pertaining to the litigation assumed by Allegiance. As of June 30, 2000, there
were approximately 533 lawsuits involving BHC and/or Allegiance containing
allegations of sensitization to natural rubber latex products. Some of these
cases are now beginning to proceed to trial. Because of the increase in claims
filed and the ongoing defense costs that will be incurred, the Company believes
it is probable that it will continue to incur significant expenses related to
the defense of cases involving natural rubber latex gloves. At this time, the
Company is unable to evaluate the extent of total potential liability, and
unable to estimate total potential loss. The Company believes that a substantial
portion of any liability will be covered by insurance, subject to self-insurance
retentions, exclusions, conditions, coverage gaps, policy limits and insurer
solvency.
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including without limitation inclusion of certain of
its subsidiaries as a potentially responsible party for environmental cleanup
costs. Although the ultimate resolution of the litigation referenced in this
Item 3 cannot be forecast with certainty, the Company intends to vigorously
defend itself and does not believe that the outcome of these lawsuits will have
a material adverse effect on the Company's consolidated financial statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fiscal quarter ended June 30, 2000.
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SENIOR OFFICERS OF THE COMPANY
The following is a list of certain elected senior officers of the Company. The
list includes all, but is not limited to, the executive officers of the Company
(information provided as of September 6, 2000):
NAME AGE POSITION
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Robert D. Walter 55 Chairman and Chief Executive Officer
John C. Kane 60 Vice Chairman, President and Chief Operating Officer
Joseph F. Damico 46 Executive Vice President; Group President -
Medical-Surgical Products and Services
George L. Fotiades 46 Executive Vice President; Group President -
Pharmaceutical Technologies and Services
James F. Millar 52 Executive Vice President; Group President -
Pharmaceutical Distribution and Provider Services
Stephen S. Thomas 45 Executive Vice President; Group President -
Automation and Information Services
Steven Alan Bennett 47 Executive Vice President, Chief Legal Officer and
Secretary
Brendan A. Ford 42 Executive Vice President - Corporate Development
Richard J. Miller 43 Executive Vice President and Chief Financial Officer
Anthony J. Rucci 49 Executive Vice President and Chief Administrative
Officer
Kathy Brittain White 51 Executive Vice President and Chief Information Officer
Michael E. Beaulieu 42 Senior Vice President, Controller and Principal Accounting
Officer
Donna Brandin 43 Senior Vice President and Treasurer
Donald V. Freiert, Jr. 53 Senior Vice President - Enterprise Services
Gary S. Jensen 46 Senior Vice President - Audit and Financial Services
Bruce D. McWhinney 55 Senior Vice President - Quality and Clinical Affairs
James M. Simon 49 Senior Vice President and Chief Communications Officer
Stephanie A. Wagoner 41 Senior Vice President; President - Cardinal Health Capital
Corporation
Carole S. Watkins 40 Senior Vice President - Human Resources
Connie R. Woodburn 45 Senior Vice President - Professional and Government Relations
Unless indicated to the contrary, the business experience summaries
provided below for the Company's senior officers describe positions held by the
named individuals during the last five years but exclude other positions held
with subsidiaries of the Company.
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ROBERT D. WALTER has been a Director, Chairman of the Board and Chief
Executive Officer of the Company since its formation in 1979. Mr. Walter also
serves as a director of Bank One Corporation, Infinity Broadcasting Corporation
and Viacom, Inc.
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. Mr. Kane was elected Vice Chairman of the Company in
February 2000. Mr. Kane also serves as a director of Connetics Corporation and
Greif Bros. Corporation.
JOSEPH F. DAMICO has been an Executive Vice President and Group President -
Medical-Surgical Products and Services of the Company since September 2000.
Prior to that, he was an Executive Vice President and Group President-Allegiance
Corporation since February 1999 and President of Allegiance since June 1996.
From 1992 to September 1996, he was a Corporate Vice President of Baxter.
GEORGE L. FOTIADES has been an Executive Vice President and Group President
- - Pharmaceutical Technologies and Services of the Company since September 2000.
Prior to that, he was an Executive Vice President and Group President - R.P.
Scherer Corporation since August 1998 and President of Scherer since January
1998. Previously, Mr. Fotiades served as Group President, Americas and Asia
Pacific, of Scherer from June 1996 to January 1998. Prior to that, Mr. Fotiades
was employed by Warner-Lambert Company (a pharmaceutical and consumer health
products manufacturer), where he served most recently as President, Warner
Wellcome Consumer Healthcare division.
JAMES F. MILLAR has been an Executive Vice President of the Company since
February 1994. He was named as Group President of the Company's Cardinal
Distribution business in June 1996, and was named as Group President -
Pharmaceutical Distribution and Provider Services in February 2000. Prior to
1994, Mr. Millar served in various positions of increasing responsibility within
the Company's pharmaceutical distribution business.
STEPHEN S. THOMAS has been an Executive Vice President and Group President
- - Automation and Information Services since September 2000. Prior to that, he
was an Executive Vice President and Group President - Pharmacy Automation,
Information Systems and International Operations of the Company since July 1999.
Mr. Thomas joined the Company in October 1997, as an Executive Vice President
and President of Pyxis. Prior to that, Mr. Thomas served as President of Datapro
Information Services Group, a provider of global information services, and a
division of McGraw-Hill Companies.
STEVEN ALAN BENNETT joined the Company in January 1999, as Executive Vice
President, Chief Legal Officer and Secretary. Previously, Mr. Bennett served as
Senior Vice President and General Counsel of Banc One Corporation, since August
1994.
BRENDAN A. FORD has been the Company's Executive Vice President - Corporate
Development since November 1999. Previously, Mr. Ford served as Senior Vice
President - Corporate Development from February 1996 to November 1999, and as
Vice President - Corporate Development from July 1993 to February 1996.
RICHARD J. MILLER has been the Company's Chief Financial Officer since
March 1999. Mr. Miller served as the Company's Acting Chief Financial Officer
from August 1998 to March 1999. Mr. Miller was named an Executive Vice President
of the Company in November 1999. Prior to that, he held the title of Corporate
Vice President since April 1999. From August 1995 through March 1999, Mr. Miller
served as the Company's Vice President and Controller. Upon joining the Company
in July 1994, and until August 1995, he served as Vice President, Auditing.
ANTHONY J. RUCCI joined the Company in November 1999, as Executive Vice
President - Human Resources. In January 2000, Mr. Rucci was named Executive Vice
President and Chief Administrative Officer of the Company. Prior to joining the
Company, Mr. Rucci served as Dean of the University of Illinois at Chicago's
College of Business Administration, since 1998. From 1993 to 1998, Mr. Rucci was
Executive Vice President for Administration of Sears, Roebuck & Co., a
multi-line retailer of merchandise, and Chairman of the Board of Sears de Mexico
from 1995 to 1997.
KATHY BRITTAIN WHITE has been the Company's Executive Vice President and
Chief Information Officer since February 1999. Previously, Ms. White served as
Executive Vice President and Chief Information Officer for Allegiance
Corporation from 1996 until Allegiance merged with the Company in February 1999.
From 1995 to 1996, Ms. White served as Chief Information Officer of Baxter.
MICHAEL E. BEAULIEU has been the Company's Senior Vice President and
Controller since April 1999. From August 1996 through April 1999 Mr. Beaulieu
served as Senior Vice President - Finance of Cardinal Distribution. Prior to
that, Mr. Beaulieu served as Vice President - Accounting of Cardinal
Distribution, since August 1994.
DONNA BRANDIN joined the Company in June 2000 as Senior Vice President and
Treasurer. Previously, Ms. Brandin served as Assistant Treasurer of The Campbell
Soup Company from November 1997 until May 2000. Prior to that, Ms. Brandin
served as Assistant Treasurer of Emerson Electric Company from 1989 until
November 1997.
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DONALD V. FREIERT, JR. joined the Company in November 1999 as Senior Vice
President - Enterprise Services. From September 1996 until October 1999 Mr.
Freiert served as Senior Vice President of Corporate Real Estate Services at
Bank One Corporation. From September 1994 through September 1996, Mr. Freiert
served as Senior Vice President of National Real Estate Services at Nations
Bank.
GARY S. JENSEN has been the Company's Senior Vice President, Audit and
Financial Services, since March 2000. Mr. Jensen previously served as the
Company's Vice President of Corporate Audit from February 1999, when Allegiance
merged with the Company, until March 2000. Prior to that, Mr. Jensen was Vice
President of Corporate Audit at Allegiance Corporation since September 1996.
Previously, Mr. Jensen served as Director, Financial Best Practices of Cummins
Engine Company from 1988 to September 1996.
BRUCE D. MCWHINNEY, PHARM. D., has been the Company's Senior Vice President
- - Quality and Clinical Affairs since May 1997. From September 1996 to May 1997,
he served as President of Allied Healthcare, Inc., a former subsidiary of the
Company which is now a part of Owen. From September 1994 to September 1996, Mr.
McWhinney served as Director of Pharmacy of The Cleveland Clinic Foundation, a
multi-specialty academic medical center.
JAMES M. SIMON joined the Company in August 2000 as Senior Vice President
and Chief Communications Officer. From August 1998 to July 2000, Mr. Simon
served as Partner & Executive Director of Communications for KPMG LLP, an
accounting and consulting firm. From February 1997 to August 1998 Mr. Simon was
self-employed as an investor and public relations consultant. Prior to that, Mr.
Simon served as Executive Vice President - External Affairs of National
Westminster Bancorp in its Fleet Financial Group, since January 1995.
STEPHANIE A. WAGONER has been the Company's Senior Vice President and
President - Cardinal Health Capital Corporation, since April 1999. From October
1997 to April 1999, Ms. Wagoner served as the Company's Vice President and
Treasurer. From January 1995 to October 1997, Ms. Wagoner served as Vice
President and Treasurer of Avnet, Inc., a distributor of electronic components.
CAROLE S. WATKINS was named Senior Vice President - Human Resources of the
Company in August 2000. From February 2000 until August 2000, Ms. Watkins served
as the Company's Senior Vice President, Human Resources - Pharmaceutical
Distribution and Provider Services. Ms. Watkins was Vice President - Human
Resources - Cardinal Distribution, from November 1996 to February 2000. Prior to
that, since 1989, Ms. Watkins was employed by The Limited, Inc., a retailer of
apparel, where she held various human resources positions.
CONNIE R. WOODBURN has served as the Company's Senior Vice President -
Professional and Government Relations, since April 1999. Prior to that, Ms.
Woodburn served as Senior Vice President - Corporate Sales since joining the
Company in March 1997. Previously, Ms. Woodburn served as Executive Vice
President of Premier, Inc. a healthcare provider network, since 1987.
11
12
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
The Common Shares are quoted on the New York Stock Exchange under the
symbol "CAH." 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 and the per share dividends declared thereon for the
fiscal years ended June 30, 2000 and 1999. The information in the table has been
adjusted to reflect retroactively all prior stock splits.
HIGH LOW DIVIDENDS
------------ ----------- -----------
Fiscal 1999:
Quarter Ended
September 30, 1998 $ 71.00 $ 55.67 $ 0.0250
December 31, 1998 75.88 54.83 0.0250
March 31, 1999 80.50 66.00 0.0250
June 30, 1999 71.88 56.88 0.0250
Fiscal 2000:
Quarter Ended
September 30, 1999 $ 69.94 $ 52.00 $ 0.0250
December 31, 1999 56.38 37.50 0.0250
March 31, 2000 59.38 37.19 0.0250
June 30, 2000 74.00 45.88 0.0300
Through September 1, 2000 $ 84.22 $ 67.91 $ 0.0300
As of September 1, 2000, there were approximately 21,800 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.
ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company was
prepared giving retroactive effect to the business combinations with Medicine
Shoppe International, Inc. on November 13, 1995; Pyxis Corporation on May 7,
1996; PCI Services, Inc. ("PCI") on October 11, 1996; Owen Healthcare, Inc.
("Owen") on March 18, 1997; MediQual Systems, Inc. ("MediQual") on February 18,
1998; R.P. Scherer Corporation ("Scherer") on August 7, 1998; Allegiance
Corporation ("Allegiance") on February 3, 1999; Pacific Surgical Innovations,
Inc. ("PSI") on May 21, 1999; and Automatic Liquid Packaging, Inc. ("ALP") on
September 10, 1999, all of which were accounted for as pooling-of-interests
transactions (see Note 2 of "Notes to Consolidated Financial Statements"). The
consolidated financial data includes all purchase transactions that occurred
during these periods.
For the fiscal year ended June 30, 1996, the information presented is
derived from consolidated financial statements which combine data from Cardinal
for the fiscal year ended June 30, 1996 with data from PCI for the fiscal year
ended September 30, 1996, Owen for the fiscal year ended November 30, 1995,
MediQual for the fiscal year ended December 31, 1995, Scherer for the fiscal
year ended March 31, 1996, Allegiance for the fiscal year ended December 31,
1996, PSI for the fiscal year ended September 30, 1996 and ALP for the fiscal
year ended March 31, 1996.
For the fiscal year ended June 30, 1997, the information presented is
derived from the consolidated financial statements which combine Cardinal for
the fiscal year ended June 30, 1997 with PCI's financial results for the nine
months ended June 30, 1997, Owen's financial results for the period of June 1,
1996 to June 30, 1997 (excluding Owen's financial results for December 1996 in
order to change Owen's November 30 fiscal year end to June 30), MediQual's
financial results for the fiscal year ended December 31, 1996, Scherer's
financial results for the fiscal year ended March 31, 1997, Allegiance's
financial results for the fiscal year ended December 31, 1997, and PSI's
financial results for the fiscal year ended September 30, 1997.
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13
For the fiscal year ended June 30, 1998, the information presented is
derived from the consolidated financial statements which combine Cardinal for
the fiscal year ended June 30, 1998 with Scherer's financial results for the
fiscal year ended March 31, 1998 and PSI's financial results for the fiscal year
ended September 30, 1998.
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."
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
At or For the Fiscal Year Ended
June 30, (1)
---------------------------------------------------------------------------
2000 1999 (2) 1998 (2) 1997 1996
---------------------------------------------------------------------------
EARNINGS DATA:
Revenue:
Operating revenue $ 25,246.9 $ 21,558.5 $ 18,084.6 $ 15,995.9 $ 14,449.6
Bulk deliveries to
customer warehouses 4,623.7 3,553.0 2,991.4 2,469.1 2,178.5
---------------------------------------------------------------------------
Total revenue $ 29,870.6 $ 25,111.5 $ 21,076.0 $ 18,465.0 $ 16,628.1
Net earnings (loss) $ 679.7 $ 481.0 $ 448.5 $ 351.0 $ (310.2)
Earnings (loss) per
Common Share: (3)
Basic $ 2.44 $ 1.73 $ 1.61 $ 1.29 $ (1.17)
Diluted $ 2.39 $ 1.68 $ 1.58 $ 1.26 $ (1.17)
Cash dividends declared
per Common Share (3) $ 0.105 $ 0.100 $ 0.073 $ 0.063 $ 0.053
BALANCE SHEET DATA:
Total assets $ 10,264.9 $ 8,404.5 $ 7,596.6 $ 6,636.9 $ 6,555.7
Long-term obligations,
less current portion $ 1,485.8 $ 1,223.9 $ 1,330.0 $ 1,321.0 $ 1,593.3
Shareholders' equity $ 3,981.2 $ 3,569.6 $ 3,055.1 $ 2,717.9 $ 2,294.2
(1) Amounts reflect business combinations in all periods presented. Fiscal
2000, 1999, 1998, 1997 and 1996 amounts reflect the impact of
merger-related costs and other special charges. See Note 2 of "Notes to
Consolidated Financial Statements" for a further discussion of
merger-related costs and other special charges affecting fiscal 2000, 1999,
and 1998. Fiscal 1997 amounts reflect the impact of merger-related charges
of $50.9 million ($36.6 million, net of tax). Fiscal 1996 amounts reflect
the impact of the write-down of goodwill of $550.0 million ($550.0 million,
net of tax) due to the change by Allegiance in its method of assessing
goodwill. In addition, fiscal 1996 amounts reflect the impact of
merger-related charges and facility rationalizations of $178.5 million
($122.8 million, net of tax).
(2) Amounts above do not reflect the impact of pro forma adjustments related to
ALP taxes (see Notes 1 and 2 of "Notes to Consolidated Financial
Statements"). For the fiscal years ended June 30, 1999 and 1998, the pro
forma adjustment for ALP taxes would have reduced net earnings by $9.3
million and $4.6 million, respectively. The pro forma adjustment would have
decreased diluted earnings per Common Share by $0.03 to $1.65 for fiscal
year 1999 and by $0.02 to $1.56 for fiscal year 1998.
(3) Net earnings and cash dividends per Common Share have been adjusted to
retroactively reflect all stock dividends and stock splits through June 30,
2000.
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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 MediQual Systems,
Inc. ("MediQual") on February 18, 1998, R.P. Scherer Corporation ("Scherer") on
August 7, 1998, Allegiance Corporation ("Allegiance") on February 3, 1999,
Pacific Surgical Innovations, Inc. ("PSI") on May 21, 1999 and Automatic Liquid
Packaging, Inc. ("ALP") on September 10, 1999.
The discussion and analysis presented below should be read in conjunction
with the consolidated financial statements and related notes appearing elsewhere
in this Form 10-K. See "Information Regarding Forward-Looking Statements".
GENERAL
- -------
The Company operates within four operating business segments:
Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and
Services, Pharmaceutical Technologies and Services and Automation and Informa-
tion Services. See Note 12 of "Notes to Consolidated Financial Statements" for a
description of these segments and a discussion of the Company's change in
operating segments.
RESULTS OF OPERATIONS
- ---------------------
OPERATING REVENUE
Percent of Total
Growth (1) Operating Revenues
Years ended June 30 2000 1999 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 22% 24% 75% 72% 69%
Medical-Surgical Products and Services 5% 6% 19% 22% 24%
Pharmaceutical Technologies and Services 15% 6% 4% 4% 5%
Automation and Information Services (2)% 52% 2% 2% 2%
Total Company 17% 19% 100% 100% 100%
- --------------------------------------------------------------------------------------------------------------------
(1) The growth rate applies to the respective fiscal year as compared
to the prior fiscal year.
The majority of the Company's overall operating revenue increase of 17%
came from existing customers in the form of increased volume and pharmaceutical
price increases. The remainder of the growth came from the addition of new
customers, some of which was a result of cross selling opportunities amongst the
various businesses.
The Pharmaceutical Distribution and Provider Services segment's operating
revenue growth in 2000 and 1999 was primarily due to strong sales to pharmacy
chain stores and through the Company's specialty distribution businesses. All
operating revenue growth for this segment was internal. In addition, several new
contracts involving multiple operating segments have boosted revenues.
Offsetting the growth in 2000 was the impact of the pharmacy management business
continuing to exit unprofitable accounts, an initiative that began in late
fiscal 1999.
The increase in the Medical-Surgical Products and Services segment's
operating revenue in 2000 was due to an increase in sales across virtually all
product lines. In addition, revenue growth was further enhanced by an increase
in international demand over fiscal 1999. The increase in operating revenues for
this segment in 1999 was due to strong sales of self-manufactured products and
higher margin distributed products.
The growth in the Pharmaceutical Technologies and Services segment in 2000
and in 1999 was primarily the result of strong sales volume in the
pharmaceutical-packaging and liquid fill contract manufacturing businesses
within this segment. The pharmaceutical packaging business' growth was
attributable to a mix of new customers and increased volume from existing
customers. The liquid fill contract manufacturing business' revenue growth was a
result of increased volume. An increase in the drug delivery system business'
sales volume in North America and the health and nutrition market also
contributed to the revenue growth for fiscal 2000. In addition, cross-selling
opportunities amongst the businesses within this segment has contributed to an
increase in operating revenues.
The slight decrease in the operating revenues for the Automation and
Information Services segment in fiscal 2000 as compared to 1999 was primarily
due to timing of customers' purchases related to the Year 2000. Fiscal 1999
operating revenue growth was a result of general increases in customer demand as
well as customers purchasing products early in anticipation of the Year 2000.
14
15
This segment continues to have strong demand for its new pharmacy automation
products from the domestic hospital sector and non-acute care customers.
BULK DELIVERIES TO CUSTOMER WAREHOUSES. The Company reports as revenue bulk
deliveries made to customers' warehouses, whereby the Company acts as an
intermediary in the ordering and subsequent delivery of pharmaceutical products.
Fluctuations in bulk deliveries result largely from circumstances that are
beyond the control of the Company, including consolidation within the customers'
industries, decisions by customers to either begin or discontinue warehousing
activities, and changes in policies by manufacturers related to selling directly
to customers. Due to the lack of margin generated through bulk deliveries,
fluctuations in their amount have no significant impact on the Company's
earnings.
GROSS MARGIN
( as a percentage of operating revenue)
Years ended June 30 2000 1999 1998
- ----------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 5.9% 6.0% 6.4%
Medical-Surgical Products and Services 23.2% 23.4% 21.7%
Pharmaceutical Technologies and Services 33.1% 33.0% 34.0%
Automation and Information Services 69.2% 68.5% 69.6%
Total Company 11.4% 12.2% 12.5%
- ----------------------------------------------------------------------------------------------------
The overall decrease in gross margin in 2000 and 1999 was due primarily to
a greater mix of lower margin pharmaceutical distribution in 2000 and 1999 as
compared to the prior years. The Pharmaceutical Distribution and Provider
Services segment represented 75% of 2000 operating revenues, up from 72% and 69%
of 1999 and 1998 operating revenues, respectively.
The decrease in the gross margin of the Pharmaceutical Distribution and
Provider Services segment in 2000 and 1999 was primarily due to the impact of
lower selling margins, as a result of a highly competitive market and greater
mix of high volume customers where a lower cost of distribution and better asset
management enabled the Company to offer lower selling margins to its customers.
Offsetting this decrease was an increase in vendor incentives and a positive
impact related to the rationalization program for the pharmacy management
business (see discussion in "Operating Revenues").
The decrease in the Medical-Surgical Products and Services segment's gross
margin in 2000 was due to increased pricing pressures in certain
self-manufactured product lines, including the exam glove business, as well as a
slight shift in revenue growth towards lower margin distributed products. In
1999, the improvement in this segment's gross margin was primarily the result of
improvements in the segment's product mix, including the growth of
self-manufactured products sales in both domestic and international markets, as
well as the impact of manufacturing and other cost efficiencies.
The Pharmaceutical Technologies and Services segment's gross margin
increase in 2000 was a result of revenue growth in the higher margin liquid fill
contract manufacturing and drug delivery system businesses. The drug delivery
system business' shift to higher margin pharmaceutical products from lower
margin health and nutrition products has also contributed to the improvement in
gross margin. The decrease in gross margin in 1999 was a result of the business
mix within this segment.
The Automation and Information Services segment's gross margin increase in
2000 was mainly a result of price increases during the year and product mix. In
1999, the Automation and Information Services segment experienced a slight
decrease in gross margin mainly due to product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
( as a percentage of operating revenue)
Years ended June 30 2000 1999 1998
- ----------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 2.8% 3.0% 3.3%
Medical-Surgical Products and Services 15.8% 16.9% 16.2%
Pharmaceutical Technologies and Services 14.5% 15.9% 15.9%
Automation and Information Services 34.9% 34.2% 39.2%
Total Company 6.5% 7.3% 7.8%
- ----------------------------------------------------------------------------------------------------
15
16
The decline in selling, general and administrative expenses as a percentage
of operating revenue for fiscal years 2000 and 1999 reflects economies
associated with the Company's revenue growth, in addition to significant
productivity gains resulting from continued cost control efforts in all segments
and the continuation of consolidation and selective automation of operating
facilities in the Pharmaceutical Distribution and Provider Services and the
Pharmaceutical Technologies and Services segments. Offsetting the improvements
noted was an increase in selling, general and administrative expenses as a
percentage of operating revenue for the Automation and Information Services
segment for fiscal year 2000, primarily resulting from a slight decrease in
operating revenue from fiscal 1999 to fiscal 2000. In addition, the
Medical-Surgical Products and Services segment's selling, general and
administrative expenses as a percentage of operating revenues increased in
fiscal year 1999 as compared to fiscal year 1998. This increase was primarily
due to the acquisition of businesses during fiscal 1999, which were accounted
for under the purchase method of accounting. As such the historical financial
statements have not been restated for these acquisitions. These acquired
businesses have a higher selling, general and administrative expense rate than
the Medical-Surgical Products and Services segment's normal rate, resulting in
an increase during fiscal 1999 compared to 1998. The 3% and 13% overall growth
in selling, general and administrative expenses experienced in fiscal years 2000
and 1999, respectively, was due primarily to increases in personnel costs and
depreciation expense, and compares favorably to the 17% and 19% growth in
operating revenue for the same periods.
SPECIAL CHARGES
The following is a summary of the special charges for the fiscal years ended
June 30, 2000, 1999 and 1998.
Fiscal Year Ended
June 30,
-----------------------------------
(in millions, except per share amounts) 2000 1999 1998
- -----------------------------------------------------------------------------------------
Transaction and employee-related costs $ (3.8) $ (95.4) $ (35.7)
ALP transaction bonus (20.3) - -
Exit costs (11.7) (9.4) (3.8)
Scherer restructuring costs (9.6) (26.7) -
Inventory write-offs - (4.0) -
Owen Healthcare, Inc. employee-related costs - (1.1) -
Canceled merger transaction - 3.7 -
Other integration costs (19.3) (13.7) (9.7)
- -----------------------------------------------------------------------------------------
Total merger-related costs $ (64.7) $ (146.6) $ (49.2)
- -----------------------------------------------------------------------------------------
Other special charges:
Facilities closures $ - $ - $ (6.1)
Employee severance - - (2.5)
- -----------------------------------------------------------------------------------------
Total other special charges $ - $ - $ (8.6)
- -----------------------------------------------------------------------------------------
Total special charges $ (64.7) $ (146.6) $ (57.8)
Tax effect of special charges 14.9 29.0 22.0
Tax benefit for change in tax status - - 11.7
Pro forma ALP taxes - 9.3 4.6
- -----------------------------------------------------------------------------------------
Net effect of special charges $ (49.8) $ (108.3) $ (19.5)
=========================================================================================
Net effect on diluted earnings per share $ (0.18) $ (0.38) $ (0.06)
=========================================================================================
Merger-Related Charges. Costs of effecting mergers and subsequently
integrating the operations of the various merged companies are recorded as
merger-related costs when incurred. The merger-related costs are primarily a
result of the merger transactions with ALP, Allegiance and Scherer.
During the fiscal years presented in the table herein, the Company incurred
direct transaction costs related to its merger transactions. These expenses
primarily include investment banking, legal, accounting and other professional
fees associated with the respective merger transactions. In addition, the
Company incurred employee-related costs, which consist primarily of severance
and transaction/stay bonuses as a result of the ALP, Allegiance and Scherer
merger transactions. Partially offsetting the transaction and employee-related
costs recorded during the fiscal year ended June 30, 2000 was a $10.3 million
credit to adjust the estimated transaction and employee-related costs previously
recorded in connection with the Allegiance merger transaction. Actual billings
and employee-related costs were less than the amounts originally anticipated,
resulting in a reduction of the merger-related costs. Exit costs relate
primarily to costs associated with lease terminations and moving expenses as a
direct result of the merger
16
17
transactions with ALP, Allegiance and Scherer. Other integration costs include
charges related to integrating the operations of previous merger transactions.
The Company recorded charges of $9.6 million and $26.7 million during the
fiscal years ended June 30, 2000 and 1999, respectively, associated with the
business restructuring as a result of the Company's merger transaction with
Scherer. As part of the business restructuring, the Company is closing certain
facilities. In connection with such closings, the Company has incurred
employee-related costs, asset impairment charges and exit costs related to the
termination of contracts and lease agreements.
Charges of $4.0 million related to the write-down of impaired inventory
associated with the merger transaction with Owen Healthcare, Inc. ("Owen") were
recorded during the fiscal year ended June 30, 1999. Also, during fiscal 1999,
the Company recorded $1.1 million related to severance costs for a restructuring
associated with the change in management that resulted from the merger
transaction with Owen. Partially offsetting the total merger-related charges for
fiscal 1999 was a credit recorded to adjust the estimated transaction and
termination costs previously recorded in connection with the canceled merger
transaction with Bergen Brunswig Corporation ("Bergen") (see Note 15 of "Notes
to Consolidated Financial Statements"). The actual billings for services
provided by third parties engaged by the Company were less than the estimate,
resulting in a reduction of the merger-related costs.
Other Special Charges. During fiscal 1998, the Company recorded a special
charge of $8.6 million related to the rationalization of its pharmaceutical
distribution operations. Approximately $6.1 million related to asset impairments
and lease exit costs resulting primarily from the Company's decision to
accelerate the consolidation of a number of distribution facilities and the
relocation to more modern facilities for certain others. The remaining amount
related to employee severance costs, including approximately $2.0 million
incurred in connection with the settlement of a labor dispute with former
employees of the Company's Boston pharmaceutical distribution facility,
resulting in termination of the union relationship.
During fiscal 1998, Scherer, along with its joint venture partner,
converted the legal ownership structure of Scherer's 51% owned subsidiary in
Germany from a corporation to a partnership. As a result of this change in tax
status, the Company's tax basis in the German subsidiary was adjusted, resulting
in a one-time tax refund of approximately $4.6 million, as well as a reduction
in the cash taxes to be paid in the current and future years. Combined, these
factors reduced fiscal 1998 income tax expense by $11.7 million.
Pro Forma Impact. Since April 1998, ALP has been organized as an
S-Corporation for tax purposes. Accordingly, ALP was not subject to federal
income tax from April 1998 up to the date of the merger transaction. For the
fiscal years ended 1999 and 1998, net earnings would have been reduced by $9.3
million and $4.6 million, respectively, if ALP had been subject to federal
income taxes.
The effects of the merger-related costs and other special charges recorded,
as well as the pro forma adjustments related to ALP tax treatment was to reduce
net earnings by $49.8 million to $679.7 million in fiscal 2000, by $108.3
million to $481.0 million in fiscal 1999, and by $19.5 million to $448.5 million
in fiscal 1998. The effect of such charges reduced reported diluted earnings per
Common Share by $0.18 to $2.39 in fiscal 2000, by $0.38 to $1.68 in fiscal 1999
and by $0.06 to $1.58 in fiscal 1998.
The Company estimates that it will incur additional merger-related costs
associated with the various merger transactions it has completed to date
totaling approximately $69.4 million ($45.1 million, net of tax) in future
periods in order to properly integrate operations, of which a portion represents
facility rationalizations, and implement efficiencies with regard to, among
other things, information systems, customer systems, marketing programs and
administrative functions. Such amounts will be charged to expense when incurred.
The Company's trend with regard to acquisitions has been to expand its role
as a provider of services to the healthcare industry. This trend has resulted
in expansion into service areas which (a) complement the Company's core
pharmaceutical distribution business; (b) provide opportunities for the Company
to develop synergies with, and thus strengthen, the acquired business; and (c)
generally generate higher margins as a percentage of operating revenue than
pharmaceutical distribution. As the healthcare industry continues to change,
the Company continually evaluates possible candidates for merger or acquisition
and intends to continue to seek opportunities to expand its healthcare
operations and services in all reporting segments. There can be no assurance
that it will be able to successfully pursue any such opportunity or consummate
any such transaction, if pursued. If additional transactions are entered into or
consummated, the Company would incur additional merger-related costs.
INTEREST EXPENSE AND OTHER. The increase in interest expense and other of $3.0
million during fiscal 2000 compared to fiscal 1999 is attributable to the
combination of higher average interest rates on debt and higher average levels
of borrowing during fiscal 2000. Additional borrowings were used to fund working
capital needs as well as the Company's stock buyback program during fiscal 2000
(see Note 9 of the "Notes to Consolidated Financial Statements"). The increase
in interest expense and other of $5.3
17
18
million during fiscal 1999 compared to fiscal 1998 is primarily due to the
Company's issuance of $150 million of 6.25% Notes due 2008, in a public offering
in July 1998 (see "Liquidity and Capital Resources"). The effect of the issuance
of the 6.25% Notes during fiscal 1999 was partially offset by a decrease in
other debt instruments with higher interest rates.
PROVISION FOR INCOME TAXES. The provisions for income taxes relative to pretax
earnings were 37% of pretax earnings in fiscal 2000 compared with 39% in fiscal
1999 and 35% for fiscal 1998. The fluctuation in the tax rate is primarily due
to the impact of recording certain non-deductible merger-related costs during
various periods and the change in ALP tax status, as well as fluctuating state
and foreign effective tax rates as a result of the Company's business mix for
all three fiscal years. In addition, a change in tax status of a 51% owned
German subsidiary resulted in a lower tax provision during fiscal 1998. The
provisions for income taxes excluding the impact of merger-related charges, the
tax status of the German subsidiary and including the pro forma impact of the
change in ALP tax status were 36%, 37%, and 38% for fiscal years 2000, 1999, and
1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital increased to $2.6 billion at June 30, 2000 from $2.3
billion at June 30, 1999. This increase resulted from additional investments in
inventories, trade receivables, and cash and equivalents of $925.3 million,
$74.9 million and $319.2 million, respectively. Offsetting the increases in
current assets was an increase in accounts payable and other accrued liabilities
of $667.0 million and $641.0 million, respectively. Increases in inventories
reflect the higher level of business volume in Pharmaceutical Distribution and
Provider Services' activities, especially in the fourth quarter of fiscal 2000
when operating revenue for this segment grew 24% over the same period in the
prior year. The increase in trade receivables is slightly lower than the
Company's revenue growth (see "Operating Revenue" above) due to effective asset
management resulting in the increase in cash and equivalents. The change in
accounts payable is due primarily to the timing of inventory purchases.
Property and equipment, at cost, increased by $138.9 million from June 30,
1999 to June 30, 2000. The increase was primarily due to ongoing plant expansion
and manufacturing equipment purchases in certain manufacturing businesses, as
well as additional investments made for management information systems and
upgrades to distribution facilities. The Company has several operating lease
agreements for the construction of new facilities. See further discussion in
Note 8 of "Notes to Consolidated Financial Statements."
Shareholders' equity increased to $4.0 billion from $3.6 billion at June
30, 1999, primarily due to net earnings of $679.7 million and the investment of
$133.1 million by employees of the Company through various stock incentive
plans, offset by treasury share repurchases of $333.9 million and dividends paid
of $28.0 million.
The Company has a commercial paper program, providing for the issuance of
up to $1.0 billion in aggregate maturity value of commercial paper. The Company
had $509.2 million outstanding under this program at June 30, 2000. The Company
also has uncommitted short-term credit facilities with various bank sources
aggregating $250.0 million. At June 30, 2000, $54.2 million was outstanding
related to these short-term credit facilities. The Company has an unsecured bank
credit facility which provides for up to an aggregate of $1.5 billion in
borrowings of which $750 million expires on March 31, 2001 and $750 million
expires on March 31, 2004. At expiration, these facilities can be extended upon
mutual consent of the Company and the lending institutions. This credit facility
exists largely to support issuances of commercial paper as well as other
short-term borrowings and remains unused at June 30, 2000. At June 30, 2000, the
commercial paper and other short-term borrowings of $563.4 million were
reclassified as long-term, reflecting the Company's intent and ability, through
the existence of the unused credit facility, to refinance these borrowings. The
Company also has line-of-credit agreements with various bank sources aggregating
$49.3 million, of which $19.1 million is outstanding as of June 30, 2000 (see
Note 4 of "Notes to Consolidated Financial Statements").
During fiscal 1999, the Company issued $150 million of 6.25% Notes due
2008, the proceeds of which were used for working capital needs due to growth in
the Company's business. The Company currently has the capacity to issue $250
million of additional debt securities pursuant to a shelf registration statement
filed with the Securities and Exchange Commission.
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements, including those
related to business combinations.
See Notes 1 and 5 of the "Notes to Consolidated Financial Statements" for
information regarding the use of financial instruments and derivatives thereof,
including foreign currency hedging instruments. As a matter of policy, the
Company does not engage in "speculative" transactions involving derivative
financial instruments.
OTHER
- -----
SUBSEQUENT BUSINESS COMBINATIONS. On August 16, 2000, the Company completed the
purchase of Bergen Brunswig Medical Corporation for approximately $180 million,
subject to post-closing adjustments. On July 26, 2000, the Company completed the
18
19
purchase of a manufacturing facility and the rights to two proprietary, topical
drug delivery technologies from Advanced Polymer Systems, Inc. for $25.0 million
at closing and contingent future payments totaling potentially an additional
$26.5 million. On July 19, 2000, the Company completed the purchase of Rexam
Healthcare Packaging's folding-carton manufacturing operations in Guaynabo,
Puerto Rico for $32.5 million, subject to post-closing adjustments. All three
acquisitions will be accounted for as purchase transactions for financial
reporting purposes.
TERMINATION AGREEMENT. On August 24, 1997, the Company and Bergen announced that
they had entered into a definitive merger agreement, as amended, pursuant to
which a wholly owned subsidiary of the Company would be merged with and into
Bergen (the "Bergen Merger Agreement"). On July 31, 1998, the United States
District Court for the District of Columbia granted the Federal Trade
Commission's request for a preliminary injunction to halt the proposed merger.
On August 7, 1998, the Company and Bergen jointly terminated the Bergen Merger
Agreement and, in accordance with the terms of the Bergen Merger Agreement, the
Company reimbursed Bergen for $7.0 million of transaction costs. Additionally,
the termination of the Bergen Merger Agreement caused the costs incurred by the
Company (that would not have been deductible had the merger been consummated) to
become tax deductible for federal income tax purposes, resulting in a tax
benefit of $12.2 million. The obligation to reimburse Bergen and the additional
tax benefit were recorded in the fourth quarter of the fiscal year ended June
30, 1998.
RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS. As of July 1, 1999, the Company
adopted the Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for costs of computer software developed or obtained for
internal use. The adoption of this statement did not have a material impact on
the Company's consolidated financial statements.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. In June 1998, the FASB issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," as amended in June 2000 by
Statement of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting
for Certain Derivative Instruments and Certain Hedging Activities," which
requires companies to recognize all derivatives as either assets or liabilities
in the balance sheet and measure such instruments at fair value. As amended by
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," the provisions of SFAS 133 will require
adoption no later than the beginning of the Company's fiscal year ending June
30, 2001. Adoption of SFAS 133, as amended by SFAS 138, is not expected to have
a material impact on the Company's consolidated financial statements.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" which requires adoption
during the fourth quarter of fiscal 2001. At this time, the Company does not
anticipate that the adoption of SAB 101 will have a material impact on the
consolidated financial statements. The Company will continue to analyze the
impact of SAB 101, including any amendments or further interpretation, based
upon the relevant facts and circumstances at the time of adoption.
ITEM 7a: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S.
interest rates, changes in foreign currency exchange rates as measured against
the U.S. dollar and changes in commodity prices.
INTEREST RATES. The Company utilizes a mix of debt maturities along with both
fixed-rate and variable-rate debt to manage its exposures to changes in interest
rates. The Company does not expect changes in interest rates to have a material
effect on income or cash flows in fiscal 2001, although there can be no
assurances that interest rates will not significantly change.
As of June 30, 2000, the Company had total long-term obligations
outstanding of $1,495.1 million of which $895.3 million represented Notes and
Debentures with fixed interest rates and maturity dates beginning in fiscal
2004. As of June 30, 1999, the Company had total long-term obligations
outstanding of $1,235.5 million of which $1,008.0 million represented Notes and
Debentures with fixed interest rates and maturity dates beginning in fiscal
2004. The average interest rate related to these obligations was 6.7% and 6.8%
as of June 30, 2000 and 1999, respectively. The majority of the remaining
outstanding long-term obligations and credit facilities have variable interest
rates that fluctuate with the LIBOR or prime rates. As of June 30, 2000 and
1999, the fair value of the total long-term obligations was $1,455.9 million and
$1,233.3 million, respectively. Maturities of long-term obligations for future
fiscal years are: 2001 - $9.3 million; 2002 - $568.1 million; 2003 - $2.9
million; 2004 - $201.2 million; 2005 - $1.6 million and 2006 and thereafter -
$712.0 million.
The Company periodically enters into interest rate swap agreements when
existing conditions and market situations dictate. The Company does not enter
into interest rate swap agreements for trading or speculative purposes. The
impact of interest rate swaps is not significant. See Note 5 of "Notes to
Consolidated Financial Statements".
19
20
FOREIGN EXCHANGE. The Company conducts business in several major international
currencies. The Company periodically uses financial instruments, principally
foreign currency options, to attempt to manage the impact of foreign exchange
rate changes on anticipated sales. In addition, the Company periodically enters
into forward foreign currency exchange contracts to hedge certain exposures
related to selected transactions that are relatively certain as to both timing
and amount. The purpose of entering into these hedge transactions is to minimize
the impact of foreign currency fluctuations on the results of operations and
cash flows. Gains and losses on the hedging activities are recognized
concurrently with the gains and losses from the underlying transactions. The
Company does not enter into forward exchange contracts or foreign currency
options for trading or speculative purposes.
In addition, the Company uses commodity contracts to hedge raw material
costs expected to be denominated in foreign currency. These contracts generally
cover a one-year period and all gains and losses are deferred and recognized in
cost of goods sold with the underlying product costs.
As of June 30, 2000, the notional amount of the forward exchange contracts
outstanding was $17.2 million and the related fair value gain on these contracts
was $0.1 million. As of June 30, 1999, the Company did not have any material
foreign currency options or forward exchange contracts outstanding. As of June
30, 2000 and 1999, the notional amounts of the commodity hedge contracts were
$3.9 million and $9.6 million and the fair value gain/(loss) on these contracts
were $0.1 million and $(0.3) million, respectively. The unrealized gains or
losses on these options or contracts represent hedges of foreign exchange gains
and losses on a portion of the Company's foreign earnings, cash flows and
selected transactions. As a result, the Company does not expect future gains and
losses on these contracts to have a material impact on the Company's
consolidated financial statements.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Reports
Financial Statements and Schedules
Consolidated Statements of Earnings for the Fiscal Years Ended June
30, 2000, 1999 and 1998
Consolidated Balance Sheets at June 30, 2000 and 1999
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
20
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Directors of Cardinal Health, Inc.:
We have audited the accompanying consolidated balance sheet of Cardinal Health,
Inc. and subsidiaries as of June 30, 2000 and the related consolidated
statements of earnings, shareholders' equity and cash flows for the year then
ended. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cardinal Health, Inc. and subsidiaries as of June 30, 2000 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation allowances is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Columbus, Ohio
July 21, 2000
21
22
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of Cardinal Health, Inc.:
We have audited the accompanying consolidated balance sheet of Cardinal Health,
Inc. and subsidiaries as of June 30, 1999, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the two
years in the period ended June 30, 1999. Our audits also included the
consolidated financial statement schedule, as it relates to the years ended June
30, 1999 and 1998, listed in the Index at Item 14. These consolidated financial
statements and consolidated financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and consolidated financial statement
schedule based on our audits. We did not audit the financial statements of
Allegiance Corporation ("Allegiance"), a wholly owned subsidiary of Cardinal
Health, Inc., as of June 30, 1999, and for the years ended June 30, 1999 and
1998. We also did not audit the financial statements of R.P. Scherer Corporation
("Scherer"), a wholly owned subsidiary of Cardinal Health, Inc., as of June 30,
1999, and for years ended June 30, 1999 and March 31, 1998. The combined
financial statements of Allegiance and Scherer represent approximately 44% of
consolidated total assets at June 30, 1999, and represent combined revenues and
net income of approximately 25% and 28% and 35% and 39%, respectively, of
consolidated amounts for each of the two years in the period ended June 30,
1999. These statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Allegiance and Scherer, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cardinal Health, Inc. and
subsidiaries at June 30, 1999, and the results of their operations and their
cash flows for each of the two years in the period ended June 30, 1999 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial statement schedule,
as it relates to the years ended June 30, 1999 and 1998, when considered in
relation to the basic fiscal 1999 and 1998 consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
August 10, 1999, except for the first paragraph of Note 2
as to which the date is May 26, 2000 and the fiscal 1999
and 1998 amounts in Note 12 as to which the date is
September 5, 2000.
22
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To R.P. Scherer Corporation:
We have audited the accompanying consolidated statement of financial position of
R.P. SCHERER CORPORATION (a Delaware corporation and a wholly-owned subsidiary
of Cardinal Health, Inc.) and subsidiaries as of June 30, 1999 and the related
consolidated statements of income, comprehensive income, cash flows and
shareholders' equity for the year ended June 30, 1999 and the year ended March
31, 1998 (not presented separately herein). These financial statements and the
schedule referred to below are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements and
this schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of R.P. Scherer Corporation and
subsidiaries as of June 30, 1999, and the results of their operations and their
cash flows for the year ended June 30, 1999 and for the year ended March 31,
1998, in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation allowances is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements
(not presented separately herein). This schedule has been subjected to the
auditing procedures applied in our audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/Arthur Andersen LLP
Roseland, New Jersey
August 9, 1999
23
24
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Stockholders of Allegiance Corporation
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of cash flows and of equity of Allegiance Corporation
and its subsidiaries (not presented separately herein) present fairly, in all
material respects, the financial position of Allegiance Corporation, a
wholly-owned subsidiary of Cardinal Health Inc., and its subsidiaries at June
30, 1999, and the results of their operations and their cash flows for the years
ended June 30, 1999 and 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Allegiance
Corporation's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
July 29, 1999
24
25
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
-----------------------------------------------------------------
To the Stockholders of Allegiance Corporation
Our audits of the consolidated financial statements of Allegiance Corporation
and its subsidiaries referred to in our report dated July 29, 1999 appearing on
page 24 of the Cardinal Health, Inc. Annual Report on Form 10-K for the year
ended June 30, 2000 also included an audit of the Financial Statement Schedule
II - Valuation and Qualifying Accounts ("Financial Statement Schedule") of
Allegiance Corporation and its subsidiaries (not presented separately herein).
In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
July 29, 1999
25
26
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
---------------------------------------
Revenue:
Operating revenue $ 25,246.9 $ 21,558.5 $ 18,084.6
Bulk deliveries to customer warehouses 4,623.7 3,553.0 2,991.4
---------- ---------- ----------
Total revenue 29,870.6 25,111.5 21,076.0
Cost of products sold:
Operating cost of products sold 22,360.1 18,931.5 15,823.5
Cost of products sold - bulk deliveries 4,623.4 3,553.0 2,991.4
Merger-related costs -- 4.0 --
---------- ---------- ----------
Total cost of products sold 26,983.5 22,488.5 18,814.9
Gross margin 2,887.1 2,623.0 2,261.1
Selling, general and administrative expenses 1,627.4 1,580.9 1,403.0
Special charges:
Merger-related costs 64.7 142.6 49.2
Other special charges -- -- 8.6
---------- ---------- ----------
Total special charges 64.7 142.6 57.8
Operating earnings 1,195.0 899.5 800.3
Interest expense and other (117.2) (114.2) (108.9)
---------- ---------- ----------
Earnings before income taxes 1,077.8 785.3 691.4
Provision for income taxes 398.1 304.3 242.9
---------- ---------- ----------
Net earnings $ 679.7 $ 481.0 $ 448.5
========== ========== ==========
Net earnings per Common Share:
Basic $ 2.44 $ 1.73 $ 1.61
Diluted $ 2.39 $ 1.68 $ 1.58
Weighted average number of Common Shares outstanding:
Basic 279.1 277.7 277.9
Diluted 284.4 285.2 284.6
Net earnings $ 679.7 $ 481.0 $ 448.5
Pro forma adjustment for income taxes (See Note 2) -- (9.3) (4.6)
---------- ---------- ----------
Pro forma net earnings $ 679.7 $ 471.7 $ 443.9
========== ========== ==========
Pro forma net earnings per Common Share:
Basic $ 2.44 $ 1.70 $ 1.60
Diluted $ 2.39 $ 1.65 $ 1.56
The accompanying notes are an integral part of these consolidated statements.
26
27
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30, JUNE 30,
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and equivalents $ 504.6 $ 185.4
Trade receivables, net 1,677.0 1,602.1
Current portion of net investment in sales-type leases 187.7 152.5
Inventories 3,865.3 2,940.0
Prepaid expenses and other 636.0 358.8
--------- ---------
Total current assets 6,870.6 5,238.8
--------- ---------
Property and equipment, at cost:
Land, buildings and improvements 761.0 717.3
Machinery and equipment 2,068.7 1,999.8
Furniture and fixtures 108.1 81.8
--------- ---------
Total 2,937.8 2,798.9
Accumulated depreciation and amortization (1,310.9) (1,237.4)
--------- ---------
Property and equipment, net 1,626.9 1,561.5
Other assets:
Net investment in sales-type leases, less current portion 578.6 454.3
Goodwill and other intangibles, net 961.7 942.1
Other 227.1 207.8
--------- ---------
Total $10,264.9 $ 8,404.5
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 19.1 $ 28.6
Current portion of long-term obligations 9.3 11.6
Accounts payable 3,030.9 2,363.9
Other accrued liabilities 1,202.2 561.2
--------- ---------
Total current liabilities 4,261.5 2,965.3
--------- ---------
Long-term obligations, less current portion 1,485.8 1,223.9
Deferred income taxes and other liabilities 536.4 645.7
Shareholders' equity:
Common Shares, without par value 1,227.9 1,091.7
Retained earnings 3,173.4 2,544.0
Common Shares in treasury, at cost (329.1) (17.2)
Cumulative foreign currency adjustment (81.9) (44.0)
Other (9.1) (4.9)
--------- ---------
Total shareholders' equity 3,981.2 3,569.6
--------- ---------
Total $10,264.9 $ 8,404.5
========= =========
The accompanying notes are an integral part of these consolidated statements.
27
28
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
COMMON SHARES CUMULATIVE
--------------- TREASURY SHARES FOREIGN TOTAL
SHARES RETAINED --------------- CURRENCY SHAREHOLDERS'
ISSUED AMOUNT EARNINGS SHARES AMOUNT ADJUSTMENT OTHER EQUITY
------ ------ -------- ------ ------ ---------- ----- -------------
BALANCE, JUNE 30, 1997 175.3 $1,026.2 $1,741.1 (0.7) $ (31.6) $(12.5) $(5.3) $2,717.9
Comprehensive income:
Net earnings 448.5 448.5
Foreign currency translation adjustments (16.0) (16.0)
--------
Total comprehensive income 432.5
Employee stock plans activity,
including tax benefits of $35.2 million 2.0 64.9 (0.3) 29.0 (0.5) 93.4
Treasury shares acquired and shares retired (1.3) (25.7) (12.7) (0.8) (104.9) (143.3)
Dividends paid (35.7) (35.7)
Other adjustments (0.5) (0.5)
Adjustment for change in fiscal year
of an acquired subsidiary (see Note 1) (0.1) (0.8) (35.0) 0.4 25.2 0.6 0.8 (9.2)
----- -------- -------- ---- ------- ------ ----- --------
BALANCE, JUNE 30, 1998 175.9 $1,064.6 $2,106.2 (1.4) $ (82.3) $(27.9) $(5.5) $3,055.1
Comprehensive income:
Net earnings 481.0 481.0
Foreign currency translation adjustments (17.0) (17.0)
--------
Total comprehensive income 464.0
Employee stock plans activity,
including tax benefits of $55.8 million 2.7 100.5 (0.7) 34.8 (2.9) 132.4
Treasury shares acquired and shares retired (1.9) (73.8) (2.9) 1.7 30.3 3.5 (42.9)
Dividends paid (47.5) (47.5)
Stock split effected as a stock dividend and
cash paid in lieu of fractional shares 103.1 (0.3) (0.3)
Adjustment for change in fiscal year
of an acquired subsidiary (see Note 1) 0.1 0.5 8.6 0.9 10.0
Stock issued for acquisitions and other 0.2 (0.1) (1.1) (1.2)
----- -------- -------- ---- ------- ------ ----- --------
BALANCE, JUNE 30, 1999 280.1 $1,091.7 $2,544.0 (0.4) $ (17.2) $(44.0) $(4.9) $3,569.6
Comprehensive income:
Net earnings 679.7 679.7
Foreign currency translation adjustments (37.9) (37.9)
--------
Total comprehensive income 641.8
Employee stock plans activity,
including tax benefits of $42.4 million 4.0 137.5 (0.2) (4.2) 133.1
Treasury shares acquired and shares retired (22.2) (7.2) (311.7) (333.9)
Dividends paid (28.0) (28.0)
Stock issued for acquisitions and other (1.3) (0.1) (1.4)
----- -------- -------- ---- ------- ------ ----- --------
BALANCE, JUNE 30, 2000 284.1 $1,227.9 $3,173.4 (7.6) $(329.1) $(81.9) $(9.1) $3,981.2
===== ======== ======== ==== ======= ====== ===== ========
The accompanying notes are an integral part of these consolidated statements.
28
29
CARDINAL HEALTH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------
2000 1999 1998
----------------- ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 679.7 $ 481.0 $ 448.5
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 245.9 238.2 218.4
Provision for deferred income taxes 127.6 132.4 90.1
Provision for bad debts 34.4 29.7 23.4
Change in operating assets and liabilities,
net of effects from acquisitions:
Increase in trade receivables (110.3) (214.5) (211.7)
Increase in inventories (926.3) (317.9) (474.3)
Increase in net investment in sales-type leases (159.5) (282.3) (103.3)
Increase in accounts payable 678.8 229.7 520.9
Other operating items, net 67.9 81.3 60.0
----------------- ------------------ ------------------
Net cash provided by operating activities 638.2 377.6 572.0
----------------- ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition/divestiture of subsidiaries, net of cash acquired (67.5) (147.5) (45.8)
Proceeds from sale of property and equipment 39.7 57.9 10.8
Additions to property and equipment (307.8) (326.0) (286.3)
Purchase of marketable securities available for sale (7.7) (15.6) (14.2)
Proceeds from sale of marketable securities available for sale 56.0 13.5 10.6
Other - - (4.7)
----------------- ------------------ ------------------
Net cash used in investing activities (287.3) (417.7) (329.6)
----------------- ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt 400.7 (207.4) (89.2)
Reduction of long-term obligations (157.9) (118.5) (49.1)
Proceeds from long-term obligations, net of issuance costs 0.5 223.7 111.4
Proceeds from issuance of Common Shares 87.2 62.1 59.2
Dividends on common shares, minority interests and
cash paid in lieu of fractional shares (28.0) (75.7) (52.3)
Purchase of treasury shares and other (334.2) (47.8) (155.0)
----------------- ------------------ ------------------
Net cash used in financing activities (31.7) (163.6) (175.0)
----------------- ------------------ ------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 319.2 (203.7) 67.4
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 185.4 389.1 321.7
----------------- ------------------ ------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 504.6 $ 185.4 $ 389.1
================= ================== ==================
The accompanying notes are an integral part of these consolidated statements.
29
30
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardinal Health, Inc., together with its subsidiaries (collectively the
"Company"), is a provider of services to the healthcare industry offering an
array of value-added pharmaceutical and other healthcare products distribution
services and pharmaceutical-related products and services to a broad base of
customers. The Company currently conducts its business within four business
segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical
Products and Services, Pharmaceutical Technologies and Services and Automation
and Information Services. See Note 12 for discussion related to the Company's
operating segments.
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 mergers with
MediQual Systems, Inc. ("MediQual") on February 18, 1998; R.P. Scherer
Corporation ("Scherer") on August 7, 1998; Allegiance Corporation ("Allegiance")
on February 3, 1999; Pacific Surgical Innovations, Inc. ("PSI") on May 21, 1999;
and Automatic Liquid Packaging, Inc. ("ALP") on September 10, 1999 (see Note 2).
Such business combinations were accounted for under the pooling-of-interests
method.
The Company's fiscal year end is June 30 and Scherer's and PSI's fiscal
year ends were March 31 and September 30, respectively. For the fiscal year
ended June 30, 1998, the consolidated financial statements combine the Company's
fiscal year ended June 30, 1998 with Scherer's fiscal year ended March 31, 1998
and PSI's fiscal year ended September 30, 1998.
Due to the change in Scherer's fiscal year end from March 31 to conform
with the Company's June 30 fiscal year end, Scherer's results of operations for
the three months ended June 30, 1998 are not included in the combined results of
operations but are reflected as an adjustment in the Consolidated Statements of
Shareholders' Equity. Scherer's net revenue and net earnings for this period
were $161.6 million and $8.6 million, respectively. Scherer's cash flows from
operating and financing activities for this period were $12.6 million and $32.6
million, respectively, while cash flows used in investing activities were $12.2
million. As a result of changing Allegiance's fiscal year end from December 31
to June 30, the results of operations for the six months ended December 31, 1997
are included in the combined results of operations for both the fiscal years
ended June 30, 1997 and 1998 and are reflected as an adjustment in the
Consolidated Statements of Shareholders' Equity. Allegiance's total revenue and
net earnings for this period were $2.2 billion and $47.9 million, respectively.
Allegiance's cash flows from operating activities for this period were $147.2
million, while cash flows used in investing and financing activities were $63.7
million and $83.8 million, respectively.
In addition, the Company completed several individually immaterial
acquisitions during fiscal 2000, 1999 and 1998, which were accounted for under
the purchase method of accounting. The consolidated financial statements include
the results of operations from each of these business combinations as of the
date of acquisition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual amounts may differ from these estimated amounts.
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. Cash payments for interest were
$113.5 million, $105.5 million, and $97.4 million and cash payments for income
taxes were $106.4 million, $80.0 million, and $157.9 million for fiscal 2000,
1999, and 1998, respectively. See Notes 2 and 4 for additional information
regarding non-cash investing and financing activities.
RECEIVABLES. Trade receivables are primarily comprised of amounts owed to the
Company through its pharmaceutical and other healthcare distribution activities
and are presented net of an allowance for doubtful accounts of $61.6 million and
$53.9 million at June 30, 2000 and 1999, respectively.
The Company provides financing to various customers. Such financing
arrangements range from one year to ten years, at interest rates that generally
fluctuate with the prime rate. The financings may be collateralized, guaranteed
by third parties or unsecured. Finance notes and accrued interest receivable are
$24.0 million and $19.8 million at June 30, 2000 and 1999, respectively (the
current portions are $9.3 million and $9.2 million, respectively), and are
included in other assets. These amounts are reported net of an allowance for
doubtful accounts of $4.6 million and $4.9 million at June 30, 2000 and 1999,
respectively.
30
31
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has formed Medicine Shoppe Capital Corporation ("MSCC"), Pyxis
Capital Corporation ("PCC") and Cardinal Health Funding LLC ("CHF") as wholly
owned subsidiaries of Medicine Shoppe, Pyxis and Griffin Capital Corporation
("Griffin"), respectively. MSCC, PCC and CHF were organized for the sole purpose
of buying receivables and selling those receivables to certain financial
institutions or to other investors. They are designed to be special purpose,
bankruptcy remote entities. Although consolidated to the extent required by
generally accepted accounting principles, MSCC, PCC and CHF are separate legal
entities from the Company, Medicine Shoppe, Pyxis and Griffin; they each
maintain separate financial statements; and their assets will be available first
and foremost to satisfy the claims of their creditors.
INVENTORIES. A majority of inventories (approximately 63% in 2000 and 59% in
1999) are stated at lower of cost, using the last-in, first-out ("LIFO") method,
or market and are primarily merchandise inventories. The remaining inventory is
primarily stated at the lower of cost using the first-in, first-out ("FIFO")
method or market. If the Company had used the FIFO method of inventory
valuation, which approximates current replacement cost, inventories would have
been higher than the LIFO method reported at June 30, 2000 and 1999 by $46.0
million and $50.4 million, respectively.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation
and amortization for financial reporting purposes are primarily computed using
the straight-line method over the estimated useful lives of the assets which
range from one to fifty 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. At each
balance sheet date, the Company assesses the recoverability of its long-lived
property, based on a review of projected undiscounted cash flows associated with
these assets.
GOODWILL AND OTHER INTANGIBLES. Goodwill and other intangibles primarily
represent intangible assets related to the excess of cost over net assets of
subsidiaries acquired. Intangible assets are being amortized using the
straight-line method over lives that range from ten to forty years. Accumulated
amortization was $637.2 million and $599.9 million at June 30, 2000 and 1999,
respectively. At each balance sheet date, a determination is made by management
to ascertain whether there is an indication that the intangible assets may have
been impaired based primarily on a review of projected undiscounted operating
cash flows for each subsidiary.
REVENUE RECOGNITION. The Company records distribution revenue when merchandise
is shipped to its customers and the Company has no further obligation to provide
services related to such merchandise. The Company also acts as an intermediary
in the ordering and subsequent delivery of bulk shipments of pharmaceutical
products, which are classified as bulk deliveries to customer warehouses and are
included in total revenue.
The Company earns franchise and origination fees from its apothecary-style
pharmacy franchisees. Franchise fees represent monthly fees based upon
franchisees' sales and are recognized as revenue when they are earned.
Origination fees from signing new franchise agreements are recognized as revenue
when the new franchise store is opened.
Pharmacy management and other service revenues are recognized as the
related services are rendered according to the contracts established. A fee is
charged under such contracts through a capitated fee, a dispensing fee, a
monthly management fee, or an actual costs-incurred arrangement. Under certain
contracts, fees for services are guaranteed by the Company not to exceed
stipulated amounts or have other risk-sharing provisions. Revenue is adjusted to
reflect the estimated effects of such contractual guarantees and risk-sharing
provisions.
Packaging and liquid fill contract manufacturing revenues are recognized
from services provided upon the completion of such services.
Drug delivery system revenue is recognized upon shipment of products to the
customer. Non-product revenue related to option, milestone and exclusivity fees
are recognized when earned and all obligations of performance have been
completed.
Revenue is recognized from sales-type leases of point-of-use pharmacy
systems when the systems are delivered, the customer accepts the system, and the
lease becomes noncancellable. Unearned income on sales-type leases is recognized
using the interest method. Sales of point-of-use pharmacy systems are recognized
upon delivery and customer acceptance. Revenue for systems installed under
operating lease arrangements is recognized over the lease term as such amounts
become receivable according to the provisions of the lease.
31
32
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Clinical information system license revenue is recognized upon delivery
of the software to the customer and the completion of implementation/set up
training necessary to operate the software. The portion of the license fee
related to system support is deferred and recognized over the annual license
period.
TRANSLATION OF FOREIGN CURRENCIES. The financial position and the results of
operations of the Company's foreign operations, excluding the Company's
Malaysian and Mexican manufacturing operations which are denominated in U.S.
dollars, are measured using the local currencies of the countries in which they
operate and are translated into U.S. dollars. Although the effects of foreign
currency fluctuations are mitigated by the fact that expenses of foreign
subsidiaries are generally incurred in the same currencies in which sales are
generated, the reported results of operations of the Company's foreign
subsidiaries are affected by changes in foreign currency exchange rates and, as
compared to prior periods, will be higher or lower depending upon a weakening or
strengthening of the U.S. dollar. In addition, the net assets of foreign
subsidiaries are translated into U.S. dollars at the foreign currency exchange
rates in effect at the end of each period. Accordingly, the Company's
consolidated shareholders' equity will fluctuate depending upon the relative
strengthening or weakening of the U.S. dollar versus relevant foreign
currencies.
DERIVATIVE FINANCIAL INSTRUMENT RISK. The Company uses derivative financial
instruments to minimize the impact of foreign exchange rate changes on earnings
and cash flows. The Company also periodically enters into foreign currency
exchange contracts to hedge certain exposures related to selected transactions
that are relatively certain as to both timing and amount. The Company does not
use derivative financial instruments for trading or speculative purposes (see
Note 5 for further discussion).
RESEARCH AND DEVELOPMENT COSTS. Costs incurred in connection with the
development of new products and manufacturing methods are charged to expense as
incurred. Research and development expenses, net of customer reimbursements,
were $48.5 million, $49.7 million, and $45.7 million in fiscal 2000, 1999, and
1998, respectively. Customer reimbursements in the amount of $10.4 million,
$11.8 million, and $13.0 million were received for the fiscal years ended June
30, 2000, 1999, and 1998, respectively.
INCOME TAXES. No provision is made for U.S. income taxes on earnings of foreign
subsidiary companies which the Company controls but does not include in the
consolidated federal income tax return since it is management's practice and
intent to permanently reinvest the earnings.
PRO FORMA ADJUSTMENT FOR INCOME TAXES. On September 10, 1999, the Company
completed a merger transaction with ALP (the "ALP Merger"). As of April 1998,
ALP had elected S-Corporation status for income tax purposes. As a result of the
merger, ALP terminated its S-Corporation election. The pro forma adjustment for
income taxes presents the pro forma tax expense of ALP as if ALP had been
subject to federal income taxes during the periods presented (see Note 2).
EARNINGS PER COMMON SHARE. Basic earnings per Common Share ("Basic") is computed
by dividing net earnings (the numerator) by the weighted average number of
Common Shares outstanding during each period (the denominator). Diluted earnings
per Common Share is similar to the computation for Basic, except that the
denominator is increased by the dilutive effect of stock options outstanding,
computed using the treasury stock method.
Excluding dividends paid by all entities with which the Company has merged,
the Company paid cash dividends per Common Share of $0.100, $0.095, and $0.070
for the fiscal years ended June 30, 2000, 1999, and 1998, respectively.
STOCK SPLITS. On August 12, 1998, the Company declared a three-for-two stock
split which was effected as a stock dividend and distributed on October 30, 1998
to shareholders of record on October 9, 1998. All share and per share amounts
included in the consolidated financial statements, except the Consolidated
Statements of Shareholders' Equity, have been adjusted to retroactively reflect
these stock splits.
NEW ACCOUNTING PRONOUNCEMENT. As of July 1, 1999, the Company adopted the
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for costs of computer software developed or obtained for internal
use. The adoption of this statement did not have a material impact on the
Company's consolidated financial statements.
32
33
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS, MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS
BUSINESS COMBINATIONS. On September 10, 1999, the Company completed the ALP
Merger, which was accounted for as a pooling-of-interests. In the ALP Merger,
the Company issued approximately 5.8 million Common Shares to ALP stockholders.
On May 21, 1999, the Company completed a merger transaction with PSI. The
Company issued approximately 233,000 Common Shares to PSI shareholders and has
accounted for the merger transaction as a pooling-of-interests in the
accompanying financial statements.
In addition to the merger transactions described above, during fiscal 2000,
the Company completed several individually immaterial acquisitions, which were
accounted for under the purchase method of accounting. These business
combinations were primarily related to the Company's medical-surgical
distribution, point-of-use pharmacy systems and pharmaceutical-packaging
services. The aggregate purchase price, which was paid primarily in cash,
including fees and expenses, was approximately $63.5 million. Liabilities of the
operations assumed were approximately $7.0 million, including debt of $4.0
million. Had the acquisitions taken place July 1, 1999, consolidated results
would not have been materially different from reported results.
On February 3, 1999, the Company completed a merger transaction with
Allegiance that was accounted for as a pooling-of-interests transaction. The
Company issued approximately 70.7 million Common Shares to Allegiance
stockholders and Allegiance's outstanding stock options were converted into
options to purchase approximately 10.3 million Common Shares. In addition, on
August 7, 1998, the Company completed a merger transaction with Scherer that was
accounted for as a pooling-of-interests. The Company issued approximately 34.2
million Common Shares to Scherer stockholders and Scherer's outstanding stock
options were converted into options to purchase approximately 3.5 million Common
Shares. The Company recorded a merger-related charge to reflect transaction and
other costs incurred as a result of these merger transactions in fiscal 1999.
Additional merger-related costs associated with integrating the separate
companies and instituting efficiencies are charged to expense in subsequent
periods when incurred.
In addition to the merger transactions described above, during fiscal 1999,
the Company completed several individually immaterial acquisitions, which were
accounted for under the purchase method of accounting. These business
combinations were primarily related to the Company's medical-surgical
distribution, point-of-use pharmacy systems and pharmaceutical-packaging
services. The aggregate purchase price, which was paid primarily in cash,
including fees and expenses, was approximately $160.8 million. Liabilities of
the operations assumed were approximately $18.9 million, including debt of $3.2
million. Had the acquisitions taken place July 1, 1998, consolidated results
would not have been materially different from reported results.
On February 18, 1998, the Company completed a merger transaction with
MediQual (the "MediQual Merger") which was accounted for as a
pooling-of-interests. The Company issued approximately 860,000 Common Shares to
MediQual shareholders and MediQual's outstanding stock options were converted
into options to purchase approximately 36,000 Common Shares of the Company.
During fiscal 1998, the Company made a number of individually immaterial
acquisitions for an aggregate purchase price of $47.8 million and exchanged
non-monetary assets with a value of approximately $10.5 million to acquire an
interest in Source Medical Corporation, a new venture in Canada. All of these
acquisitions were accounted for as purchase transactions. Had the acquisitions
taken place July 1, 1997, consolidated results would not have been materially
different from reported results.
33
34
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPECIAL CHARGES
The following is a summary of the special charges for the fiscal years ended
June 30, 2000, 1999 and 1998.
Fiscal Year Ended
June 30,
-----------------------------------
(in millions, except per share amounts) 2000 1999 1998
- -----------------------------------------------------------------------------------------
Transaction and employee-related costs $ (3.8) $ (95.4) $ (35.7)
ALP transaction bonus (20.3) - -
Exit costs (11.7) (9.4) (3.8)
Scherer restructuring costs (9.6) (26.7) -
Inventory write-offs - (4.0) -
Owen Healthcare, Inc. employee-related costs - (1.1) -
Canceled merger transaction - 3.7 -
Other integration costs (19.3) (13.7) (9.7)
- -----------------------------------------------------------------------------------------
Total merger-related costs $ (64.7) $ (146.6) $ (49.2)
- -----------------------------------------------------------------------------------------
Other special charges:
Facilities closures $ - $ - $ (6.1)
Employee severance - - (2.5)
- -----------------------------------------------------------------------------------------
Total other special charges $ - $ - $ (8.6)
- -----------------------------------------------------------------------------------------
Total special charges $ (64.7) $ (146.6) $ (57.8)
Tax effect of special charges 14.9 29.0 22.0
Tax benefit for change in tax status - - 11.7
Pro forma ALP taxes - 9.3 4.6
- -----------------------------------------------------------------------------------------
Net effect of special charges $ (49.8) $ (108.3) $ (19.5)
=========================================================================================
Net effect on diluted earnings per share $ (0.18) $ (0.38) $ (0.06)
=========================================================================================
Merger-Related Charges. Costs of effecting mergers and subsequently
integrating the operations of the various merged companies are recorded as
merger-related costs when incurred. The merger-related costs are primarily a
result of the merger transactions with ALP, Allegiance and Scherer.
During the fiscal years presented in the table herein, the Company incurred
direct transaction costs related to its merger transactions. These expenses
primarily include investment banking, legal, accounting and other professional
fees associated with the respective merger transactions. In addition, the
Company incurred employee-related costs, which consist primarily of severance
and transaction/stay bonuses as a result of the ALP, Allegiance and Scherer
merger transactions. Partially offsetting the transaction and employee-related
costs recorded during the fiscal year ended June 30, 2000 was a $10.3 million
credit to adjust the estimated transaction and employee-related costs previously
recorded in connection with the Allegiance merger transaction. Actual billings
and employee-related costs were less than the amounts originally anticipated,
resulting in a reduction of the merger-related costs. Exit costs relate
primarily to costs associated with lease terminations and moving expenses as a
direct result of the merger transactions with ALP, Allegiance and Scherer. Other
integration costs include charges related to integrating the operations of
previous merger transactions.
The Company recorded charges of $9.6 million and $26.7 million during the
fiscal years ended June 30, 2000 and 1999, respectively, associated with the
business restructuring as a result of the Company's merger transaction with
Scherer. As part of the business restructuring, the Company is closing certain
facilities. In connection with such closings, the Company has incurred
employee-related costs, asset impairment charges and exit costs related to the
termination of contracts and lease agreements.
Charges of $4.0 million related to the write-down of impaired
inventory associated with the merger transaction with Owen Healthcare, Inc.
("Owen") were recorded during the fiscal year ended June 30, 1999. Also, during
fiscal 1999, the
34
35
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company recorded $1.1 million related to severance costs for a restructuring
associated with the change in management that resulted from the merger
transaction with Owen. Partially offsetting the total merger-related charges for
fiscal 1999 was a credit recorded to adjust the estimated transaction and
termination costs previously recorded in connection with the canceled merger
transaction with Bergen Brunswig Corporation ("Bergen") (see Note 15). The
actual billings for services provided by third parties engaged by the Company
were less than the estimate, resulting in a reduction of the merger-related
costs.
Other Special Items. During fiscal 1998, the Company recorded a special
charge of $8.6 million ($5.2 million, net of tax) related to the rationalization
of its pharmaceutical distribution operations. Approximately $6.1 million
related to asset impairments and lease exit costs resulting primarily from the
Company's decision to accelerate the consolidation of a number of distribution
facilities and the relocation to more modern facilities for certain others. The
remaining amount related to employee severance costs, including approximately
$2.0 million incurred in connection with the final settlement of a labor dispute
with former employees of the Company's Boston pharmaceutical distribution
facility, resulting in termination of the union relationship.
During fiscal 1998, Scherer finalized part of its long-term tax planning
strategy by converting, with its joint venture partner, the legal ownership
structure of Scherer's 51% owned subsidiary in Germany from a corporation to a
partnership. As a result of this change in tax status, the Company's tax basis
in the German subsidiary was adjusted, resulting in a one-time tax refund of
approximately $4.6 million, as well as a reduction in cash taxes to be paid in
the current and future years. Combined, these factors resulted in a one-time
reduction of fiscal 1998 income tax expense by approximately $11.7 million.
Pro Forma Impact. Since April 1998, ALP has been organized as an
S-Corporation for tax purposes. Accordingly, ALP was not subject to federal
income tax from April 1998 up to the date of the merger transaction. For the
fiscal years ended 1999 and 1998, net earnings would have been reduced by $9.3
million and $4.6 million, respectively, if ALP had been subject to federal
income taxes.
In fiscal 2000, the net effect of various merger-related charges reduced
reported net earnings by $49.8 million to $679.7 million and reduced reported
diluted earnings per Common Share by $0.18 per share to $2.39 per share. The net
of tax effect of the various merger-related costs recorded and pro forma
adjustments related to ALP taxes during fiscal 1999 was to reduce reported net
earnings by $108.3 million to $481.0 million and to reduce reported diluted
earnings per Common Share by $0.38 per share to $1.68 per share. The fiscal 1998
effect of various merger-related charges and other special items recorded and
pro forma adjustments related to ALP taxes during fiscal 1998 was to reduce
reported net earnings by $19.5 million to $448.5 million and to reduce reported
diluted earnings per Common Share by $0.06 per share to $1.58 per share.
Certain merger-related costs are based upon estimates, and actual amounts
paid may ultimately differ from these estimates. If additional costs are
incurred, such items will be expensed as incurred.
3. LEASES
SALES-TYPE LEASES. The Company's sales-type leases are for terms generally
ranging up to five years. Lease receivables are generally collateralized by the
underlying equipment. The components of the Company's net investment in
sales-type leases are as follows (in millions):
June 30, June 30,
2000 1999
------------- ---------------
Future minimum lease payments receivable $ 890.3 $ 717.7
Unguaranteed residual values 11.1 1.0
Unearned income (120.1) (100.1)
Allowance for uncollectible minimum lease payments
receivable (15.0) (11.8)
------------- --------------
Net investment in sales-type leases 766.3 606.8
Less: current portion 187.7 152.5
------------- --------------
Net investment in sales-type leases, less current
portion $ 578.6 $ 454.3
============= ==============
35
36
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments to be received pursuant to sales-type leases
during the next five years are: 2001 - $219.9 million; 2002 - $214.4 million;
2003 - $200.6 million; 2004 - $157.9 million; 2005 - $85.6 million and 2006 and
thereafter - $11.9 million.
LEASE RELATED FINANCING ARRANGEMENTS. Pyxis has previously financed its working
capital needs through the sale of certain lease receivables to a non-bank
financing company. As of June 30, 2000, $22.5 million of lease receivables were
owned by the financing company. The agreement with the financing company was
amended to terminate Pyxis' obligation to sell lease receivables to the
financing company. Due to Pyxis customers upgrading the Pyxis machines or
expanding the number of units being leased under the original lease agreements
that have been sold to the financing company, Pyxis has been converting the
original lease agreements with customers to updated lease agreements. Pyxis has
been maintaining these revised leases and not selling them to the financing
company to replace the original lease receivables. As a result, Pyxis entered
into an agreement with the financing company to pay the financing company the
remaining portion of the original lease receivables outstanding at the time of
revision over the original terms. The future minimum payments for these notes at
June 30, 2000 are: 2001 - $36.2 million; 2002 - $20.1 million and 2003 - $5.4
million, which are classified as part of other liabilities.
4. SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS
NOTES PAYABLE, BANKS. The Company has entered into various unsecured,
uncommitted line-of-credit arrangements that allow for borrowings up to $49.3
million at June 30, 2000, at various money market rates. At June 30, 2000, $19.1
million, at a weighted average interest rate of 7.4%, was outstanding under such
arrangements and $28.6 million, at a weighted average interest rate of 6.4%, was
outstanding at June 30, 1999. The total available but unused lines of credit at
June 30, 2000 was $30.2 million.
LONG-TERM OBLIGATIONS. Long-term obligations consist of the following (in
millions):
June 30, June 30,
2000 1999
-------------- --------------
6.0% Notes due 2006 $ 150.0 $ 150.0
6.25% Notes due 2008 150.0 150.0
6.5% Notes due 2004 100.0 100.0
6.75% Notes due 2004 99.7 99.7
7.3% Notes due 2006 127.9 183.2
7.8% Debentures due 2016 75.7 125.2
7.0% Debentures due 2026 (7 year put option in 2003) 192.0 199.9
Commercial paper 509.2 49.2
Short-term borrowings, reclassified 54.2 35.3
Borrowings under credit agreement; interest averaging
6.8% in 1999 - 96.9
Other obligations; interest averaging 4.0% in 2000 and
6.7% in 1999, due in varying installments
through 2020 36.4 46.1
------------ ------------
Total 1,495.1 1,235.5
Less: current portion 9.3 11.6
------------ ------------
Long-term obligations, less current portion $ 1,485.8 $ 1,223.9
============ ============
The 6.0%, 6.25% and 6.5% Notes represent unsecured obligations of the
Company, and the 6.75% Notes represent unsecured obligations of Scherer, which
are guaranteed by the Company. The 7.3% Notes and the 7.8% and 7.0% Debentures
represent unsecured obligations of Allegiance, which are guaranteed by the
Company. These obligations are not redeemable prior to maturity and are not
subject to a sinking fund.
The Company has a commercial paper program, providing for the issuance of
up to $1.0 billion in aggregate maturity value of commercial paper. The Company
had $509.2 million outstanding under this program at June 30, 2000 with a market
interest rate based upon LIBOR. The Company also maintains other short-term
credit facilities that allow for borrowings up to $250.0 million. At June 30,
2000 and 1999, $54.2 million and $35.3 million were outstanding under these
36
37
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
uncommitted facilities. The effective interest rate as of June 30, 2000 and 1999
was 6.3% and 6.0%, respectively. The Company also has an unsecured bank credit
facility, which provides for up to an aggregate of $1.5 billion in borrowings of
which $750 million expires on March 31, 2001 and $750 million expires on March
31, 2004. At expiration, these facilities can be extended upon mutual consent of
the Company and the lending institutions. This credit facility exists largely to
support issuances of commercial paper as well as other short-term borrowings and
remains unused at June 30, 2000. At June 30, 2000 and 1999, the commercial paper
and other short-term borrowings totaling $563.4 million and $84.5 million,
respectively, were reclassified as long-term, reflecting the Company's intent
and ability, through the existence of the unused credit facility, to refinance
these borrowings.
During fiscal 1999, the Company issued $150 million of 6.25% Notes due
2008, the proceeds of which were used for working capital needs due to growth in
the Company's business. At June 30, 2000, the Company currently has the capacity
to issue $250 million of additional debt securities pursuant to a shelf
registration statement filed with the Securities and Exchange Commission.
Certain long-term obligations are collateralized by property and equipment
of the Company with an aggregate book value of approximately $27.5 million at
June 30, 2000. Maturities of long-term obligations for future fiscal years are
2001 - $9.3 million; 2002 - $568.1 million; 2003 - $2.9 million; 2004 - $201.2
million; 2005 - $1.6 million and 2006 and thereafter - $712.0 million.
5. FINANCIAL INSTRUMENTS
INTEREST RATE MANAGEMENT. The Company has entered into an interest rate swap
agreement with a notional amount of $20.0 million that matures November 2002 to
hedge against variable interest rates. The Company exchanged its variable rate
position related to a lease agreement for a fixed rate of 7.08%. The Company
recognizes in income the periodic net cash settlements under the swap agreement
as it accrues.
FOREIGN EXCHANGE RISK MANAGEMENT. In the normal course of business, operations
of the Company are exposed to fluctuations in foreign exchange rates. In order
to reduce the uncertainty of the impact of foreign exchange rate movements on
operations, the Company periodically enters into foreign currency options and
forward contracts (principally European currencies and Japanese yen) to hedge
certain anticipated sales and firm commitments denominated in foreign
currencies. These option and forward contracts typically mature within one year.
The Company's forward contracts do not subject it to material risks due to the
exchange rate movements because gains and losses on these contracts offset
losses and gains and the assets, liabilities, and transactions being hedged. The
risk of loss associated with the foreign currency option contracts is limited to
the premium paid for the option contracts. Gains and losses on the forward and
option contracts are recognized concurrently with the gains and losses from the
underlying transactions. Premiums paid on the option contract are amortized in
other income/expense over the life of the underlying hedged transactions.
The Company also uses commodity contracts to hedge raw material costs
expected to be denominated in foreign currency. These contracts generally cover
a one-year period and all gains and losses are deferred and recognized in cost
of goods sold with the underlying product costs. The contracts qualify as hedges
for accounting purposes in accordance with the criteria established in SFAS No.
80 "Accounting for Futures Contracts." Cash flows resulting from these commodity
contracts are classified in the same category as the items being hedged.
The counterparties to these contracts are major financial institutions and
the Company does not have significant exposure to any one counterparty.
Management believes the risk of loss is remote and in any event would not be
material.
37
38
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and
equivalents, trade receivables, accounts payables, notes payable-banks and other
accrued liabilities at June 30, 2000 and 1999, 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
$1,455.9 million and $1,233.3 million as compared to the carrying amounts of
$1,495.1 million and $1,235.5 million at June 30, 2000 and 1999, respectively.
The fair value of the Company's long-term obligations is estimated based on
either the quoted market prices for the same or similar issues and the current
interest rates offered for debt of the same remaining maturities or estimated
discounted cash flows. The following is a summary of the fair value gain/(loss)
of the Company's derivative instruments, based upon the estimated amount that
the Company would receive (or pay) to terminate the contracts at the reporting
date. The fair values are based on quoted market prices for the same or similar
instruments.
(in millions)
2000 1999
-------------------------- ----------------------------
Notional Fair Value Notional Fair Value
Amount Gain/(Loss) Amount Gain/(Loss)
------------ ------------- ------------ --------------
Foreign currency forward contracts $ 17.2 $0.1 $ - $ -
Commodity contracts $ 3.9 $0.1 $ 9.6 $(0.3)
Interest Rate Swaps $ 20.0 $ - $ 20.0 $(0.7)
6. INCOME TAXES
Consolidated U.S. income before taxes (in millions)
Fiscal Year Ended June 30,
-----------------------------------------
2000 1999 1998
------------- ------------ ------------
U.S. Based Operations $ 952.3 $ 710.9 $ 582.3
Non-U.S. Based Operations 125.5 74.4 109.1
------------- ------------ ------------
$ 1,077.8 $ 785.3 $ 691.4
============= ============ ============
The provision for income taxes consists of the following (in millions):
Fiscal Year Ended June 30,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Current:
Federal $ 221.1 $ 123.9 $ 113.9
State 21.1 26.3 23.1
Foreign 28.3 21.7 15.8
-------------- -------------- --------------
Total $ 270.5 $ 171.9 $ 152.8
Deferred 127.6 132.4 90.1
-------------- -------------- --------------
Total provision $ 398.1 $ 304.3 $ 242.9
============== ============== ==============
38
39
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the provision based on the Federal statutory income tax
rate to the Company's effective income tax rate is as follows:
Fiscal Year Ended June 30,
--------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Provision at Federal
statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal benefit 3.0 3.9 4.1
Foreign tax rates (2.2) (3.0) (4.8)
Nondeductible expenses 1.4 4.5 1.5
Other (0.3) (1.7) (0.7)
--------------- --------------- ---------------
Effective income tax rate 36.9% 38.7% 35.1%
=============== =============== ===============
Provision has not been made for U.S. or additional foreign taxes on $303.2
million of undistributed earnings of foreign subsidiaries because those earnings
are considered permanently reinvested in the operations of those subsidiaries.
It is not practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings.
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 millions):
June 30, June 30,
2000 1999
--------------- ---------------
Deferred income tax assets:
Receivable basis difference $ 37.0 $ 27.8
Accrued liabilities 35.5 101.0
Net operating loss carryforwards 8.3 9.1
Foreign tax and other credit carryforwards 10.5 16.5
Other 8.9 35.0
--------------- ---------------
Total deferred income tax assets $ 100.2 $ 189.4
Valuation allowance for deferred income tax assets (2.7) (7.0)
--------------- ---------------
Net deferred income tax assets $ 97.5 $ 182.4
--------------- ---------------
Deferred income tax liabilities:
Inventory basis differences (180.4) (138.9)
Property-related (199.7) (218.9)
Revenues on lease contracts (178.7) (165.9)
Other (4.9) 2.7
--------------- ---------------
Total deferred income tax liabilities $ (563.7) $ (521.0)
--------------- ---------------
Net deferred income tax liabilities $ (466.2) $ (338.6)
=============== ===============
39
40
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The above amounts are classified in the consolidated balance sheets as
follows (in millions):
June 30, June 30,
2000 1999
--------------- ---------------
Other current assets/(liabilities) $ (124.3) $ 82.5
Deferred income taxes and other liabilities (341.9) (421.1)
--------------- ---------------
Net deferred income tax liabilities $ (466.2) $ (338.6)
=============== ===============
The Company had Federal net operating loss carryforwards of $2.3 million
and state net operating loss carryforwards of $166.9 million at June 30, 2000. A
valuation allowance of $2.7 million at June 30, 2000 has been provided for the
state net operating loss, as utilization of such carryforwards within the
applicable statutory periods is uncertain. The Company's Federal net operating
loss carryforwards and a portion of the state net operating loss carryforwards
are subject to a change in ownership limitation calculation under Internal
Revenue Code Section 382. After application of the valuation allowance described
above, the Company anticipates no limitations will apply with respect to
utilization of these assets. The Federal net operating loss carryforward begins
expiring in 2005 and the state net operating loss carryforward expires through
2020. Expiring state net operating loss carryforwards and the required valuation
allowances have been adjusted annually. At June 30, 2000, the Company did not
have any foreign tax credit carryforwards.
Under a tax-sharing agreement with Baxter International, Inc. ("Baxter"),
Allegiance will pay for increases and be reimbursed for decreases to the net
deferred tax assets transferred on the date of the Baxter spin-off of
Allegiance. Such increases or decreases may result from audit adjustments to
Baxter's prior period tax returns.
7. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company sponsors various retirement and pension plans, including
defined benefit and defined contribution plans. Substantially all of the
Company's domestic non-union employees are eligible to be enrolled in
Company-sponsored contributory profit sharing and retirement savings plans which
include features under Section 401(k) of the Internal Revenue Code, and provide
for Company matching and profit sharing contributions. The Company's
contributions to the plans are determined by the Board of Directors subject to
certain minimum requirements as specified in the plans.
Qualified domestic union employees are covered by multi-employer 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 (excluding defined
benefit plans (see below)) was as follows (in millions):
Fiscal Year Ended June 30,
-------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Defined contribution plans $ 40.6 $ 44.3 $ 37.9
Multi-employer plans 0.4 0.5 0.5
--------------- --------------- ---------------
Total $ 41.0 $ 44.8 $ 38.4
=============== =============== ===============
40
41
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFINED BENEFIT PLANS. The Company has several defined benefit plans covering
substantially all salaried and hourly Scherer employees. The Company's domestic
defined benefit plans provide defined benefits based on years of service and
level of compensation. Foreign subsidiaries provide for pension benefits in
accordance with local customs or law. The Company funds its pension plans at
amounts required by the applicable regulations.
The following tables provide a reconciliation of the change in benefit
obligation, the change in plan assets and the net amount recognized in the
consolidated balance sheets (based on a measurement date of March 31, in
millions):
June 30,
----------------------------------------
2000 1999
------------------- --------------------
Change in benefit obligation:
Benefit obligation at
beginning of year $ 98.7 $ 86.7
Service cost 4.6 6.5
Interest cost 5.7 6.7
Plan participant contributions 0.5 0.7
Amendments - 0.2
Actuarial loss 6.1 4.6
Benefits paid (2.8) (3.7)
Translation and other adjustments (12.5) (3.0)
Curtailments (0.3) -
------------------- --------------------
Benefit obligation at end of year $ 100.0 $ 98.7
------------------- --------------------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 55.7 $ 42.2
Actual return on plan assets 6.3 12.2
Employer contributions 3.5 4.9
Plan participant contributions 0.5 0.7
Benefits paid (2.3) (2.6)
Translation and other adjustment 1.2 (1.7)
------------------- --------------------
Fair value of plan assets
at end of year $ 64.9 $ 55.7
=================== ====================
Funded status $ (35.1) $ (43.0)
Unrecognized net actuarial loss 8.0 7.5
Unrecognized net transition
asset (0.4) (2.0)
Unrecognized prior service cost 0.2 0.2
Translation and other adjustment 0.5 -
------------------- --------------------
Net amount recognized $ (26.8) $ (37.3)
=================== ====================
Amounts recognized in the
Consolidated Balance Sheet:
Prepaid benefit cost $ - $ 1.6
Accrued benefit liability (26.8) (38.9)
------------------- --------------------
Net amount recognized $ (26.8) $ (37.3)
=================== ====================
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $98.7 million, $94.9 million, and $63.5 million,
respectively, as of June 30, 2000 and $89.4 million, $85.1 million and $47.8
million, respectively, as of June 30, 1999.
41
42
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of the Company's net periodic benefit costs are as follows (in
millions):
For the Fiscal Year Ended June 30,
--------------------------------------------------------
2000 1999 1998
------------------ -------------------- ----------------
Components of net periodic benefit cost:
Service cost $ 4.6 $ 6.5 $ 4.9
Interest cost 5.7 6.7 5.4
Expected return on plan assets (6.2) (6.9) (5.1)
Amortization of actuarial loss 0.1 1.9 1.0
Amortization of transition obligation 1.9 - 0.1
Amortization of prior service cost - 0.3 -
------------------ -------------------- ----------------
Net amount recognized $ 6.1 $ 8.5 $ 6.3
================== ==================== ================
For fiscal 2000 and 1999, the weighted-average actuarial assumptions used
in determining the funded status information and net periodic benefit cost
information were: discount rate of 6.5% and 6.4%, expected return on plan assets
of 7.4% and 6.2% and rate of compensation increase of 4.0% and 3.7%,
respectively.
8. COMMITMENTS AND CONTINGENT LIABILITIES
The future minimum rental payments for operating leases having initial or
remaining non-cancelable lease terms in excess of one year at June 30, 2000 are:
2001 - $47.0 million; 2002 - $34.3 million; 2003 - $27.7 million; 2004 - $23.3
million; 2005 - $18.7 million and 2006 and thereafter - $35.9 million.
In addition, the Company has entered into operating lease agreements with
several banks for the construction of various new facilities. The initial terms
of the lease agreements extend through May 2005, with optional five-year renewal
periods. In the event of termination, the Company is required to either purchase
the facility or vacate the property and make reimbursement for a portion of
unrecovered property cost. The instruments provide for maximum fundings of
$406.2 million, which is the total estimated cost of the construction projects.
As of June 30, 2000, the amount expended was $279.9 million. Currently, the
Company's minimum annual lease payments under the agreements are approximately
$18.8 million. Neither the facilities' cost or the minimum annual lease payments
are included in the future minimum rental payments disclosed above.
Rental expense relating to operating leases was approximately $73.7
million, $69.6 million, and $64.8 million in fiscal 2000, 1999 and 1998,
respectively. Sublease rental income was not material for any period presented
herein.
As of June 30, 2000, the Company has capital expenditure commitments
related primarily to plant expansions and facility acquisitions of approximately
$18.0 million.
The Company and Whitmire Distribution Corporation ("Whitmire"), one of the
Company's wholly-owned subsidiaries, as well as other pharmaceutical
wholesalers, were named as defendants in a series of purported class action
lawsuits regarding the sale of brand name prescription drugs 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. On
November 30, 1998, the Court ordered judgment as a matter of law in favor of the
defendants. On February 22, 2000, the United States Supreme Court denied the
plaintiffs' final attempt to appeal the ruling, refusing to grant the
plaintiffs' Petition for Writ of Certiorari. The wholesaler defendants,
including the Company and Whitmire, entered into a Judgment Sharing Agreement
whereby the total exposure for the Company and its subsidiaries is limited to
the lesser of $1 million or 1% of any judgment against the wholesalers and the
manufacturers and provides for a reimbursement mechanism for legal fees and
expenses. The Company and Whitmire have also been named as defendants in a
series of related antitrust lawsuits brought by chain drug stores and
independent pharmacies who opted out of the federal class action lawsuits, and
in a series of state court cases alleging similar claims under various state
laws regarding the sale of brand name prescription drugs. The Judgment Sharing
Agreement applies to these related cases as well.
On September 30, 1996, Baxter International, Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries their U.S.
healthcare distribution business, surgical and respiratory therapy business and
healthcare cost-saving business, as well as certain foreign operations (the
"Allegiance Business") in connection with a spin-off of the
42
43
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allegiance Business by Baxter. In connection with this spin-off, Allegiance,
which was acquired by the Company on February 3, 1999, assumed the defense of
litigation involving claims related to the Allegiance Business from Baxter
Healthcare Corporation ("BHC"), including certain claims of alleged personal
injuries as a result of exposure to natural rubber latex gloves. Allegiance will
be defending and indemnifying BHC, as contemplated by the agreements between
Baxter and Allegiance, for all expenses and potential liabilities associated
with claims pertaining to the litigation assumed by Allegiance. As of June 30,
2000, there were approximately 533 lawsuits involving BHC and/or Allegiance
containing allegations of sensitization to natural rubber latex products. Some
of these cases are now beginning to proceed to trial. Because of the increase in
claims filed and the ongoing defense costs that will be incurred, the Company
believes it is probable that it will continue to incur significant expenses
related to the defense of cases involving natural rubber latex gloves. At this
time, the Company is unable to evaluate the extent of total potential liability,
and unable to estimate total potential loss. The Company believes that a
substantial portion of any liability will be covered by insurance, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy limits
and insurer solvency.
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including without limitation inclusion of certain of
its subsidiaries as a potentially responsible party for environmental cleanup
costs. Although the ultimate resolution of the litigation referenced herein
cannot be forecast with certainty, the Company intends to vigorously defend
itself and does not believe that the outcome of any pending litigation will have
a material adverse effect on the Company's consolidated financial statements.
9. SHAREHOLDERS' EQUITY
At June 30, 2000 and 1999, the Company's authorized capital shares
consisted of (a) 500,000,000 Class A common shares, without par value; (b)
5,000,000 Class B common shares, without par value; and (c) 500,000 non-voting
preferred shares without par value. The Class A common shares and Class B common
shares are collectively referred to as Common Shares. Holders of Class A and
Class B common shares are entitled to share equally in any dividends declared by
the Company's Board of Directors and to participate equally in all distributions
of assets upon liquidation. Generally, the holders of Class A common shares are
entitled to one vote per share and the holders of Class B common shares are
entitled to one-fifth of one vote per share on proposals presented to
shareholders for vote. Under certain circumstances, the holders of Class B
common shares are entitled to vote as a separate class. Only Class A common
shares were outstanding as of June 30, 2000 and 1999.
On March 16, 2000, the Company's Board of Directors authorized the
repurchase of up to an aggregate of $750 million of Common Shares. Through June
30, 2000, approximately 7 million Common Shares, having an aggregate cost of
$302.8 million, have been repurchased under an accelerated share repurchase
program and placed into treasury shares. The 7 million shares repurchased under
the program are subject to a future contingent purchase price adjustment to be
settled based upon the difference in the market price of the Company's common
stock at the time of settlement compared to the market price as of March 16,
2000. The forward stock purchase contract allows the Company to determine the
method of settlement. As of June 30, 2000, the cost to settle the transaction
would be approximately $115.1 million; when settled the amount will be charged
to common shares in treasury.
10. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company invests cash in deposits with major banks throughout the world
and in high quality short-term liquid instruments. Such investments are made
only in instruments issued or enhanced by high quality institutions. These
investments mature within three months and the Company has not incurred any
related losses.
The Company's trade receivables, finance notes and accrued interest
receivable, and lease receivables are exposed to a concentration of credit risk
with customers in the retail and healthcare sectors. Credit risk can be affected
by changes in reimbursement and other economic pressures impacting the acute
care portion of the healthcare industry. However, such credit risk is limited
due to supporting collateral and the diversity of the customer base, including
its wide geographic dispersion. The Company performs ongoing credit evaluations
of its customers' financial conditions and maintains reserves for credit losses.
Such losses historically have been within the Company's expectations.
During fiscal 2000, the Company's two largest customers individually
accounted for 12% and 14% of operating revenue, respectively. During fiscal 1999
and fiscal 1998, the same two customers individually accounted for 11% and 13%
of operating revenue, respectively. These two customers are serviced primarily
through the Pharmaceutical Distribution and
43
44
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provider Services and Medical-Surgical Products and Services segments. During
fiscal 2000, 1999 and 1998, one customer accounted for 52%, 57% and 62% of bulk
deliveries, respectively.
11. STOCK OPTIONS AND RESTRICTED SHARES
The Company maintains stock incentive plans (the "Plans") for the benefit
of certain officers, directors and employees. Options granted generally vest
over two or three years and are exercisable for periods up to ten years from the
date of grant at a price which equals fair market value at the date of grant.
The Company accounts for the Plans in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
the Plans been determined consistent with Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the
Company's net income and diluted earnings per Common Share would have been
reduced by $21.6 million and $0.08 per share, respectively, for fiscal 2000,
$83.1 million and $0.29 per share, respectively, for fiscal 1999, and $33.6
million and $0.12 per share, respectively, for fiscal 1998. During fiscal 1999,
stock option grants under the previous Allegiance and Scherer plans vested
immediately on the merger date. These accelerated grants increased the fiscal
1999 pro forma effect on net income and diluted earnings per Common Share by
$32.9 million and by $0.12 per share, respectively. Because the SFAS 123 method
of accounting has not been applied to options granted prior to July 1, 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
The following summarizes all stock option transactions for the Company
under the plans from July 1, 1997 through June 30, 2000, giving retroactive
effect to conversions of options in connection with merger transactions and
stock splits (in millions, except per share amounts):
Weighted
Options Average
Outstanding Exercise Price
----------------------------------------------------------------------
Balance at June 30, 1997 20.1 $ 19.25
Granted 6.3 43.70
Exercised (3.7) 14.62
Canceled (0.9) 21.46
Change in fiscal year (0.7) 28.26
----------------------------------------------------------------------
Balance at June 30, 1998 21.1 23.96
Granted 3.4 69.61
Exercised (3.6) 16.80
Canceled (0.6) 45.60
----------------------------------------------------------------------
Balance at June 30, 1999 20.3 34.51
Granted 6.4 47.02
Exercised (3.9) 22.74
Canceled (1.0) 55.07
----------------------------------------------------------------------
Balance at June 30, 2000 21.8 $ 39.21
======================================================================
Giving retroactive effect to conversion of stock options related to
mergers and stock splits, the weighted average fair value of options granted
during fiscal 2000, 1999, and 1998 was $17.64, $22.55, and $14.19, respectively.
44
45
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the options granted to Company employees and directors
were estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions for grants in the respective periods:
As of June 30,
------------------------------------------------------
2000 1999 1998
----------------- ------------------ -----------------
Risk-free interest rate 6.25% 5.72% 5.53%
Expected life 4 years 4 years 3 years
Expected volatility 37% 30% 27%
Dividend yield 0.18% 0.18% 0.16%
Information relative to stock options outstanding as of June 30, 2000:
Outstanding Exercisable
----------------------------------------------------- -------------------------------
Weighted
average
remaining Weighted Weighted
Range of exercise Options contractual average Options average
prices (in millions) life in years exercise price (in millions) exercise price
------------------- ----------------- ----------------- ----------------- -------------- ----------------
$ 0.05 - $26.61 7.1 5.6 $17.57 7.1 $17.57
$26.78 - $40.58 3.9 6.6 38.24 3.9 38.24
$40.71 - $46.75 6.3 9.1 46.44 0.3 42.24
$47.38 - $71.00 4.4 7.9 64.62 0.1 60.35
$73.38 - $79.56 0.1 8.6 74.70 - -
----------------- ----------------- ----------------- -------------- ----------------
$ 0.05 - $79.56 21.8 7.2 $39.21 11.4 $25.60
================= ================= ================= ============== ================
As of June 30, 2000, there remained approximately 4.8 million additional
shares available to be issued pursuant to the Plans.
The market value of restricted shares awarded by the Company is recorded in
the "Other" component of shareholders' equity in the accompanying consolidated
balance sheets. The compensation awards are amortized to expense over the period
in which participants perform services, generally one to seven years. As of June
30, 2000, approximately 0.3 million shares remained restricted and subject to
forfeiture.
The Company has an employee stock purchase plan under which the sale of 5.0
million of Cardinal's common stock have been authorized. The purchase price is
determined by the lower of 85 percent of the closing market price on the date of
subscription or 85 percent of the closing market price on the last day of the
offering period. At June 30, 2000, subscriptions of 0.3 million were
outstanding, however no shares had been issued to employees under the plan.
12. SEGMENT INFORMATION
In the prior year, the Company was comprised of three reportable segments:
Pharmaceutical Distribution, Pharmaceutical Services and Medical-Surgical
Products. In September 2000, the Company expanded its management reporting
structure from three to four reportable segments by separating the
Pharmaceutical Services segment primarily into two segments: Pharmaceutical
Technologies and Services and Automation and Information Services. Prior period
amounts have been restated for this change.
The Company's operations are principally managed on a products and
services basis and are comprised of four reportable business segments:
Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and
Services, Pharmaceutical Technologies and Services and Automation and
Information Services.
The Pharmaceutical Distribution and Provider Services segment involves the
distribution of a broad line of pharmaceuticals, healthcare and beautycare
products, therapeutic plasma and other specialty pharmaceutical products and
other items typically sold by hospitals, retail drug stores and other healthcare
providers. In addition, this segment provides services to the healthcare
industry through integrated pharmacy management, temporary pharmacy staffing, as
well as franchising of apothecary-style retail pharmacies.
45
46
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Medical-Surgical Products and Services segment involves the manufacture
of medical, surgical and laboratory products and the distribution of these
products to hospitals, physician offices, surgery centers and other healthcare
providers.
The Pharmaceutical Technologies and Services segment provides services to
the healthcare manufacturing industry through the design of unique drug delivery
systems, liquid fill contract manufacturing, comprehensive packaging services,
and reimbursement services.
The Automation and Information Services segment provides services to
hospitals and other healthcare providers through pharmacy automation equipment
and clinical information system services.
The Company evaluates the performance of the segments based on operating
earnings after the corporate allocation of administrative expenses. Information
about interest income and expense, and income taxes is not provided on a segment
level. In addition, special charges are not allocated to the segments. The
accounting policies of the segments are the same as described in the summary of
significant accounting policies.
The following tables include revenue and operating earnings for the fiscal
years ended June 30, 2000, 1999 and 1998 for each segment and reconciling items
necessary to total to amounts reported in the consolidated financial statements:
(in millions) Revenue
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Operating revenue:
Pharmaceutical Distribution and Provider Services $ 18,838.7 $ 15,482.2 $ 12,468.6
Medical-Surgical Products and Services 4,960.2 4,726.3 4,456.1
Pharmaceutical Technologies and Services 1,079.8 938.0 889.0
Automation and Information Services 402.4 411.6 270.6
Other (34.2) 0.4 0.3
--------------------------------------------------
Total operating revenue $ 25,246.9 $ 21,558.5 $ 18,084.6
Bulk deliveries to customer warehouses:
Pharmaceutical Distribution and Provider Services 4,623.7 3,553.0 2,991.4
--------------------------------------------------
Total revenue $ 29,870.6 $ 25,111.5 $ 21,076.0
==================================================
Operating Earnings
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 589.1 $ 466.8 $ 389.2
Medical-Surgical Products and Services 368.0 303.7 247.0
Pharmaceutical Technologies and Services 200.6 160.4 160.8
Automation and Information Services 138.0 141.0 79.5
Corporate (1) (100.7) (172.4) (76.2)
--------------------------------------------------
Total operating earnings $ 1,195.0 $ 899.5 $ 800.3
==================================================
The following tables include depreciation and amortization expense as well
as capital expenditures for the fiscal years ended June 30, 2000, 1999 and 1998
and assets as of June 30, 2000, 1999 and 1998 for each segment and reconciling
items necessary to total to amounts reported in the consolidated financial
statements:
Depreciation and Amortization Expense
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 41.9 $ 37.9 $ 32.6
Medical-Surgical Products and Services 120.5 119.9 122.8
Pharmaceutical Technologies and Services 48.9 57.6 42.5
Automation and Information Services 15.8 9.1 7.4
Corporate (1) 18.8 13.7 13.1
--------------------------------------------------
Total depreciation and amortization expense $ 245.9 $ 238.2 $ 218.4
==================================================
46
47
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital Expenditures
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 75.9 $ 76.7 $ 70.1
Medical-Surgical Products and Services 109.8 108.3 80.2
Pharmaceutical Technologies and Services 105.1 126.2 127.3
Automation and Information Services 17.0 14.8 8.7
--------------------------------------------------
Total capital expenditures $ 307.8 $ 326.0 $ 286.3
==================================================
Assets
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
Pharmaceutical Distribution and Provider Services $ 4,514.1 $ 3,457.6 $ 2,919.7
Medical-Surgical Products and Services 2,899.5 2,823.7 2,731.0
Pharmaceutical Technologies and Services 1,291.7 1,230.4 1,101.5
Automation and Information Services 1,044.5 827.3 444.3
Corporate (2) 341.6 65.5 400.1
--------------------------------------------------
Total assets $ 10,091.4 $ 8,404.5 $ 7,596.6
==================================================
(1) Corporate-operating earnings primarily consist of special charges of $64.7
million, $146.6 million, and $57.8 million for the fiscal years ended June
30, 2000, 1999, and 1998, respectively, and unallocated corporate
depreciation and amortization and administrative expenses.
(2) Corporate-assets include primarily corporate cash and cash equivalents,
corporate property, plant and equipment, net, unallocated deferred taxes
and the elimination of investment in subsidiaries.
The following table presents revenue and long-lived assets by geographic area
(in millions):
Revenue Long-Lived Assets
--------------------------------------------- ------------------------------
For The Fiscal Year Ended June 30, As of June 30,
--------------------------------------------- ------------------------------
2000 1999 1998 2000 1999
--------------------------------------------- ------------------------------
United States $ 28,889.1 $ 24,199.5 $ 20,336.3 $ 1,112.9 $ 1,101.7
International 981.5 912.0 739.7 514.0 459.8
--------------------------------------------- ------------------------------
Total $ 29,870.6 $ 25,111.5 $ 21,076.0 $ 1,626.9 $ 1,561.5
============================================= ==============================
Long-lived assets include property, plant and equipment, net of accumulated
depreciation.
47
48
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data (in millions, except per
share amounts) for fiscal 2000 and 1999 has been restated to reflect the
pooling-of-interests business combinations as discussed in Note 2.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- -------------- ------------- -------------
Fiscal 2000
Revenue:
Operating revenue $ 5,829.3 $ 6,254.3 $ 6,400.6 $ 6,762.7
Bulk deliveries to customer
warehouses 954.4 1,145.2 1,072.5 1,451.6
------------- -------------- ------------- -------------
Total revenue $ 6,783.7 $ 7,399.5 $ 7,473.1 $ 8,214.3
Gross margin $ 654.8 $ 721.9 $ 739.5 $ 770.9
Selling, general and administrative
expenses $ 391.3 $ 415.3 $ 394.7 $ 426.1
Net earnings $ 122.0 $ 173.5 $ 189.5 $ 194.7
Net earnings per Common Share:
Basic $ 0.44 $ 0.62 $ 0.68 $ 0.71
Diluted $ 0.43 $ 0.61 $ 0.67 $ 0.69
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- -------------- ------------- -------------
Fiscal 1999
Revenue:
Operating revenue $ 5,017.4 $ 5,289.5 $ 5,579.5 $ 5,672.1
Bulk deliveries to customer
warehouses 781.7 999.8 874.7 896.8
------------- -------------- ------------- -------------
Total revenue $ 5,799.1 $ 6,289.3 $ 6,454.2 $ 6,568.9
Gross margin $ 591.4 $ 654.6 $ 677.7 $ 699.3
Selling, general and administrative
expenses $ 373.9 $ 401.4 $ 397.1 $ 408.5
Net earnings $ 94.7 $ 141.5 $ 89.2 $ 155.6
Net earnings per Common Share:
Basic $ 0.34 $ 0.51 $ 0.32 $ 0.56
Diluted $ 0.33 $ 0.50 $ 0.31 $ 0.54
- -----------------------------------------------------------------------------------------------------
As more fully discussed in Note 2, merger-related costs and other special
charges were recorded in various quarters in fiscal 2000 and 1999. The following
table summarizes the impact of such costs, as well as the impact of the pro
forma adjustments related to ALP taxes on net earnings and diluted earnings per
share in the quarters in which they were recorded (in millions, except per share
amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
Fiscal 2000
Net earnings $ (29.7) $ (3.4) $ (9.1) $ (7.6)
Diluted net earnings per Common Share $ (0.10) $ (0.01) $ (0.03) $ (0.03)
- ---------------------------------------------------------------------------------------------------------------------
Fiscal 1999
Net earnings $ (26.3) $ 0.9 $ (71.5) $ (11.4)
Diluted net earnings per Common Share $ (0.10) $ 0.01 $ (0.25) $ (0.04)
- ---------------------------------------------------------------------------------------------------------------------
48
49
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," as amended in June 2000 by Statement of Financial Accounting
Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," which requires companies to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
such instruments at fair value. As amended by Statement of Financial Accounting
Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
the provisions of SFAS 133 will require adoption no later than the beginning of
the Company's fiscal year ending June 30, 2001. Adoption of SFAS 133, as amended
by SFAS 138, is not expected to have a material impact on the Company's
consolidated financial statements.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" which requires adoption
during the fourth quarter of fiscal 2001. At this time, the Company does not
anticipate that the adoption of SAB 101 will have a material impact on the
consolidated financial statements. The Company will continue to analyze the
impact of SAB 101, including any amendments or further interpretation, based
upon the relevant facts and circumstances at the time of adoption.
15. TERMINATED MERGER AGREEMENT
On August 24, 1997, the Company and Bergen announced that they had entered
into a definitive merger agreement (as subsequently amended by the parties on
March 16, 1998), pursuant to which a wholly owned subsidiary of the Company
would be merged with and into Bergen (the "Bergen Merger Agreement"). On March
9, 1998, the FTC filed a complaint in the United States District Court for the
District of Columbia seeking a preliminary injunction to halt the proposed
merger. On July 31, 1998, the District Court granted the FTC's request for an
injunction to halt the proposed merger. On August 7, 1998, the Company and
Bergen jointly terminated the Bergen Merger Agreement. In accordance with the
terms of the Bergen Merger Agreement, the Company was required to reimburse
Bergen for $7.0 million of transaction costs upon termination of the Bergen
Merger Agreement. Additionally, the termination of the Bergen Merger Agreement
caused the costs incurred by the Company (that would not have been deductible
had the merger been consummated) to become tax deductible, resulting in a tax
benefit of $12.2 million. The obligation to reimburse Bergen and the additional
tax benefit are reflected in the consolidated financial statements in the fourth
quarter of the fiscal year ended June 30, 1998.
16. SUBSEQUENT EVENTS
On August 16, 2000, the Company completed the purchase of Bergen Brunswig
Medical Corporation for approximately $180 million, subject to post-closing
adjustments. On July 26, 2000, the Company completed the purchase of a
manufacturing facility and the rights to two proprietary, topical drug delivery
technologies from Advanced Polymer Systems, Inc. for $25.0 million at closing
and contingent future payments totaling potentially an additional $26.5 million.
On July 19, 2000, the Company completed the purchase of Rexam Healthcare
Packaging's folding-carton manufacturing operations in Guaynabo, Puerto Rico for
$32.5 million, subject to post-closing adjustments. All three acquisitions will
be accounted for as purchase transactions for financial reporting purposes.
49
50
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company provided the following disclosure in its Annual Report on Form
10-K for the fiscal year ended June 30, 1999. The Company is required to include
this language again in this Form 10-K:
Cardinal Health, Inc. ("Cardinal") and R.P. Scherer Corporation ("Scherer")
completed a merger on August 7, 1998. Cardinal and Allegiance Corporation
("Allegiance") completed a merger on February 3, 1999. Cardinal has historically
engaged Deloitte & Touche LLP ("D&T") as its certifying accountant while Scherer
has historically engaged Arthur Andersen LLP ("AA") and Allegiance has
historically engaged PricewaterhouseCoopers LLP ("PWC") as their certifying
accountants.
For Cardinal's fiscal year ended June 30, 1999, these certifying accountant
relationships were left intact, with D&T serving as the principal certifying
accountant, with reference in its audit opinion to work performed on Scherer by
AA and Allegiance by PWC. This was done to provide management with sufficient
time to conduct a diligent process to select one firm as the certifying
accountant for the merged entity.
Selection of AA as the certifying accountant was recommended to and
approved by the Cardinal Health, Inc. Audit Committee on August 30, 1999.
The reports of D&T on the financial statements of Cardinal and PWC on the
financial statements of Allegiance for the past two fiscal years contained no
adverse opinion or disclaimer of opinion, and were not qualified or modified as
to uncertainty, audit scope, or accounting principles.
In connection with their audits for the two most recent fiscal years and
through August 30, 1999, there have been no disagreements with D&T or PWC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of D&T or PWC would have caused them to make reference thereto in
their reports on the financial statements for such years. In addition, there
were no reportable events (as defined in SEC Regulation S-K, Item 304 (a) (1)
(v)) during the two most recent fiscal years and through August 30, 1999.
Cardinal has requested that D&T and PWC each furnish it with a letter
addressed to the SEC stating whether or not they agree with the above
statements. A copy of D&T's letter, dated September 2, 1999, is filed as Exhibit
16.01 to this Form 10-K. A copy of PWC's letter, dated September 1, 1999, is
filed as Exhibit 16.02 to this Form 10-K.
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, as
amended (the "Exchange Act"), relating to the Company's 2000 Annual Meeting of
Shareholders (the "Annual Meeting") under the caption "ELECTION OF DIRECTORS."
Certain information relating to senior officers of the Company, including but
not limited to, the executive officers of the Company appears at pages 9 through
11 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 Exchange Act, relating to the Company's Annual Meeting under the caption
"EXECUTIVE COMPENSATION" (other than information set forth under the captions
"Human Resources and Compensation Committee Report" and "Shareholder Performance
Graph").
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 Exchange Act, relating to the Company's Annual Meeting under the caption
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
50
51
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 Exchange Act, relating to the Company's Annual Meeting under the caption
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a)(1) The following financial statements are included in Item 8 of this
report:
PAGE
----
Independent Auditors' Reports............................................................ 21
Financial Statements:
Consolidated Statements of Earnings for the Fiscal Years Ended
June 30, 2000, 1999 and 1998........................................................... 26
Consolidated Balance Sheets at June 30, 2000 and 1999.................................... 27
Consolidated Statements of Shareholders' Equity for the Fiscal
Years Ended June 30, 2000, 1999 and 1998............................................... 28
Consolidated Statements of Cash Flows for the Fiscal Years Ended
June 30, 2000, 1999 and 1998........................................................... 29
Notes to Consolidated Financial Statements............................................... 30
(a)(2) The following Supplemental Schedule is included in this report:
PAGE
----
Schedule II - Valuation and Qualifying Accounts.......................................... 57
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 Exhibit Description
-------
Number
-------
3.01 Amended and Restated Articles of Incorporation of the Registrant,
as amended (1)
3.02 Restated Code of Regulations, as amended (1)
4.01 Specimen Certificate for the Registrant's Class A common shares
(4)
4.02 Indenture dated as of May 1, 1993 between the Registrant and Bank
One, Indianapolis, NA, Trustee, relating to the Registrant's 6
1/2% Notes Due 2004 and 6% Notes Due 2006 (2)
4.03 Indenture dated as of April 18, 1997 between the Registrant and
Bank One, Columbus, NA, Trustee, relating to the Registrant's 6
1/4 % Notes due 2008 (3)
4.04 Indenture dated as of October 1, 1996 between Allegiance
Corporation and PNC Bank, Kentucky, Inc. ("PNC"), Trustee; and
First Supplemental Indenture dated as of February 3, 1999 by and
among Allegiance Corporation, the Company and Chase Manhattan
Trust Company National Association (as successor in interest to
PNC), Trustee (4)
51
52
4.05 Indenture dated January 1, 1994 between R.P. Scherer International
Corporation and Comerica Bank; First Supplemental Indenture by and
among R.P. Scherer International Corporation, R.P. Scherer
Corporation and Comerica Bank dated February 28, 1995; and Second
Supplemental Indenture by and among R.P. Scherer Corporation, the
Registrant and Comerica Bank dated as of August 7, 1998 (5)
4.06 Form of Warrant Certificate to Purchase Company Common Shares (6)
10.01 Stock Incentive Plan of the Registrant, as amended (7)*
10.02 Directors' Stock Option Plan of the Registrant, as amended and
restated (7)*
10.03 Amended and Restated Equity Incentive Plan of the Registrant, as
amended (17)*
10.04 Form of Nonqualified Stock Option Agreement, as amended (17)*
10.05 Form of Restricted Shares Agreement, as amended (17)*
10.06 Form of Directors' Stock Option Agreement, as amended (17)*
10.07 Cardinal Health, Inc. Directors Deferred Compensation Plan (18)*
10.08 Allegiance Corporation 1996 Incentive Compensation Program (8)*
10.09 Allegiance Corporation 1998 Incentive Compensation Program (8)*
10.10 Allegiance Corporation 1996 Outside Director Incentive Corporation
Plan (8)*
10.11 R.P. Scherer Corporation 1997 Stock Option Plan (9)*
10.12 R.P. Scherer Corporation 1990 Nonqualified Performance Stock Option
Plans (9)*
10.13 Cardinal Health, Inc. Performance-Based Incentive Compensation Plan
(10)*
10.14 Cardinal Health, Inc. Incentive Deferred Compensation Plan, as
amended (11)*
10.15 Form of Agreement, dated February 9, 2000, between the Registrant
and each of Messrs. Bennett, Ford, Miller and Rucci*
10.16 Agreement, dated February 9, 2000, between the Registrant and
George L. Fotiades*
10.17 Agreement, dated February 9, 2000, between the Registrant and John
C. Kane*
10.18 Agreement, dated February 9, 2000, between the Registrant and James
F. Millar *
10.19 Agreement, dated July 1, 1999, between the Registrant and Stephen
S. Thomas, as amended (21, except for the amendment thereto which
is included as an exhibit to this Annual Report on Form 10-K)*
10.20 Change in Control Severance Agreement, by and among the Company,
Allegiance Corporation and Joseph F. Damico, as amended (12 and 20,
except for the Second Amendment thereto which is included as an
exhibit to this Annual Report on Form 10-K)*
10.21 Form of Indemnification Agreement between the Registrant and
individual Directors (13)*
10.22 Form of Indemnification Agreement between the Registrant and
individual Officers. (13)*
52
53
Exhibit Exhibit Description
------
Number
------
10.23 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 (7)*
10.24 Agreement dated as of March 16, 2000 between the Registrant and
Credit Suisse Financial Products, as amended
10.25 364-Day Credit Agreement dated as of March 30, 2000 among the
Registrant, certain subsidiaries of the Registrant, certain
lenders, and Bank One, NA, as Administrative Agent, Bank of America
NT, as Syndication Agent, Citibank USA, Inc., as Co-Documentation
Agent, and Credit Suisse First Boston, as Co-Documentation Agent
(19)
10.26 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, as amended (14 and
17)
10.27 Participation Agreement and related documents, dated as of June 23,
1997, among the Registrant and certain of its subsidiaries, Bank of
Montreal and BMO Leasing (U.S.), Inc. (15 and 17)
10.28 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, March 10, 1994,
June 23, 1997 and June 1, 1998 (5), (14) and (15)
10.29 Pharmaceutical Services Agreement, dated as of August 1, 1996, as
amended, between Kmart Corporation and Cardinal Distribution (16
and 17)
10.30 Wholesale Supply Agreement dated as of August 10, 2000 between the
Registrant and CVS Meridian, Inc.
10.31 Form of Commercial Paper Dealer Agreement 4(2) Program between The
Company, as Issuer, and certain entities, each as Dealer,
concerning notes to be issued pursuant to Issuing and Paying Agency
Agreement between the Issuer and The First National Bank of
Chicago, as Issuing and Paying Agent (17)
10.32 Partnership Agreement of R.P. Scherer GMBH & Co. KG (5)
10.33 Five-year Credit Agreement dated as of March 31, 1999 among the
Registrant, certain subsidiaries of the Registrant, certain
lenders, The First National Bank of Chicago, as Administrative
Agent, Bank of America NT &SA, as Syndication Agent, Citibank,
N.A., as Co-Documentation Agent, and Credit Suisse First Boston, as
Co-Documentation Agent (17)
16.01 Letter of Deloitte & Touche LLP required by Item 304 of Regulation
S-K (17)
16.02 Letter of PricewaterhouseCoopers LLP required by Item 304 of
Regulation S-K (17)
21.01 List of subsidiaries of the Registrant
53
54
Exhibit Exhibit Description
-------
Number
-------
23.01 Consent of Arthur Andersen LLP
23.02 Consent of Deloitte & Touche LLP
23.03 Consent of Arthur Andersen LLP
23.04 Consent of PricewaterhouseCoopers LLP
27.01 Financial Data Schedule
99.01 Statement Regarding Forward-Looking Information
- ------------------
(1) Included as an exhibit to the Registrant's Current Report on Form
8-K filed November 24, 1998 (File No. 0-12591) and incorporated
herein by reference.
(2) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994 (File No. 0-12591) and
incorporated herein by reference.
(3) Included as an exhibit to the Registrant's Current Report on Form
8-K filed April 21, 1997 (File No. 0-12591) and incorporated herein
by reference.
(4) Included as an exhibit to the Registrant's Registration Statement
on Form S-4 (No. 333-74761) and incorporated herein by reference.
(5) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1998 (File No. 0-12591) and
incorporated herein by reference.
(6) Included as an exhibit to the Registrant's Registration Statement
on Form S-4 (No. 333-30889) and incorporated herein by reference.
(7) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1994 (File No. 0-12591) and
incorporated herein by reference.
(8) Included as an exhibit to the Registrant's Post-Effective Amendment
No. 1 on Form S-8 to Form S-4 Registration Statement (No.
333-68819-01) and incorporated herein by reference.
(9) Included as an exhibit to the Registrant's Post-effective Amendment
No. 1 on Form S-8 to Form S-4 Registration Statement (No.
333-56655) and incorporated herein by reference.
(10) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 (File No. 0-12591) and
incorporated herein by reference.
(11) Included as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 33-90423) and incorporated herein by reference.
(12) Included as an exhibit to the Registrant's Registration Statement
on Form S-4 (No. 333-68819) and incorporated herein by reference.
(13) Included as an exhibit to the Company's Amendment No. 1 to Annual
Report on Form 10-K/A for the fiscal year ended June 30, 1997 (File
No. 0-12591) and incorporated herein by reference.
(14) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal ended June 30, 1996 (File No. 0-12591) and
incorporated herein by reference.
(15) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1997 (File No. 0-12591) and
incorporated herein by reference.
54
55
(16) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 (File No. 0-12591)
and incorporated herein by reference.
(17) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1999 (File No. 0-12591) and
incorporated herein by reference.
(18) Included as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 333-90415) and incorporated herein by reference.
(19) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000 (File No. 0-12591) and
incorporated herein by reference.
(20) Included as an exhibit to Allegiance Corporation's Form S-1/A filed
with the Commission on September 30, 1996 (No. 333-12525) and
incorporated herein by reference.
(21) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1999 (File No. 0-12591) and
incorporated herein by reference.
* Management contract or compensation plan or arrangement
(b) Reports on Form 8-K:
On May 26, 2000, the Registrant filed a Current Report on Form 8-K under Item 5,
which included supplemental consolidated financial statements of the Company to
give retroactive effect to the merger with ALP, which was accounted for as a
pooling-of-interests business combination.
55
56
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.
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:
NAME TITLE DATE
- --------------------------------------- ------------------------------------------------ ------------------
/s/ Robert D. Walter Chairman, Chief Executive Officer and September 6, 2000
- --------------------------------------- Director (principal executive officer)
Robert D. Walter
/s/ Richard J. Miller Executive Vice President and Chief Financial September 6, 2000
- --------------------------------------- Officer (principal financial officer)
Richard J. Miller
/s/ Michael E. Beaulieu Senior Vice President, Controller and Principal September 6, 2000
- --------------------------------------- Accounting Officer
Michael E. Beaulieu
/s/ John C. Kane Vice Chairman, President, Chief Operating Officer September 6, 2000
- --------------------------------------- and Director
John C. Kane
/s/ Dave Bing Director September 6, 2000
- ---------------------------------------
Dave Bing
/s/ Silas S. Cathcart Director September 6, 2000
- ---------------------------------------
Silas S. Cathcart
/s/ George H. Conrades Director September 6, 2000
- ---------------------------------------
George H. Conrades
/s/ John F. Finn Director September 6, 2000
- ---------------------------------------
John F. Finn
/s/ Robert L. Gerbig Director September 6, 2000
- ---------------------------------------
Robert L. Gerbig
/s/ John F. Havens Director September 6, 2000
- ---------------------------------------
John F. Havens
/s/ Regina E. Herzlinger Director September 6, 2000
- ---------------------------------------
Regina E. Herzlinger
/s/ J. Michael Losh Director September 6, 2000
- ---------------------------------------
J. Michael Losh
/s/ John B. McCoy Director September 6, 2000
- ---------------------------------------
John B. McCoy
/s/ Richard C. Notebaert Director September 6, 2000
- ---------------------------------------
Richard C. Notebaert
/s/ Michael D. O'Halleran Director September 6, 2000
- ---------------------------------------
Michael D. O'Halleran
/s/ Melburn G. Whitmire Director September 6, 2000
- ---------------------------------------
Melburn G. Whitmire
56
57
CARDINAL HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
BALANCE AT CHARGED TO CHARGED TO CHANGE BALANCE AT
BEGINNING COSTS AND OTHER IN FISCAL END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) YEAR (3) OF PERIOD
- -------------------------------------------------- ------------ ------------ ------------- -------------- ------------ ------------
Fiscal Year 2000:
Accounts receivable $ 53.9 $ 30.7 $ 1.9 $ (24.9) $ - $ 61.6
Finance notes receivable 4.9 0.5 (0.1) (0.7) - 4.6
Net investment in sales-type leases 11.8 3.2 - - - 15.0
------------ ------------ ------------- ------------- ------------ ------------
$ 70.6 $ 34.4 $ 1.8 $ (25.6) $ - $ 81.2
============ ============ ============= ============= ============ ============
Fiscal Year 1999:
Accounts receivable $ 64.8 $ 29.2 $ 1.3 $ (41.4) $ - $ 53.9
Finance notes receivable 6.4 - - (1.5) - 4.9
Net investment in sales-type leases 8.8 0.5 2.7 (0.2) - 11.8
------------ ------------ ------------- ------------- ------------ ------------
$ 80.0 $ 29.7 $ 4.0 $ (43.1) $ - $ 70.6
============ ============ ============= ============= ============ ============
Fiscal Year 1998:
Accounts receivable $ 62.9 $ 19.1 $ 3.3 $ (20.5) $ - $ 64.8
Finance notes receivable 8.2 0.1 0.1 (2.0) - 6.4
Net investment in sales-type leases 4.7 4.2 - (3.7) 3.6 8.8
------------ ------------ ------------- ------------- ------------ ------------
$ 75.8 $ 23.4 $ 3.4 $ (26.2) $ 3.6 $ 80.0
============ ============ ============= ============= ============ ============
(1) During fiscal 2000, 1999, and 1998 recoveries of amounts provided for or
written off in prior years were $1.5 million, $4.0 million, and $3.4
million, respectively.
(2) Write-off of uncollectible accounts.
(3) Change in fiscal year of acquired subsidiary.
57